Good morning, everyone. Thanks for joining to this Q1 2020 earnings presentation for Banco Santander. First of all, on behalf of the Santander team, I hope you and yours are well under the Extremely challenging current circumstances. The calls will take around, as usual, 1 hour. Our group CEO will address the 1st quarter highlights and then our group Chief Financial Officer will address the group business and areas to review us Every quarter, and then the group CEO will take the mic again to address in a bit on detail and give you a bit of color on what We are seeing in our different markets, well, after the Q1 close before jumping into the Q and A.
So again, thanks for being here with us today. And obviously, right after the call, the entire IR team will be at your disposal for any follow-up you might have. And now please, Jose Antonio?
Thank you, Sergio. Good morning to everyone. I hope you find well in the middle of this Health crisis, you and your families and relatives. Well, this quarter is has been A strange quarter. We've been in business as usual till the late last 2 weeks.
The last few weeks, the COVID-nineteen outbreak has produced an unprecedented worldwide health crisis. This is a health crisis that which is resulting in an economic crisis where the financial system, I think, is more resilient, And banks need to be an important part of the solution of the COVID-nineteen economic situation. Since the crisis started and with some anticipation, we implemented in our geographies specific measures to take care of our employees, shareholders and investors in order to protect them and to mitigate the economic and social impact. I will talk more about this in the last part of my speech. Starting with the quarter, let me to follow how the quarter has The figures have behaved.
In volumes, we grew significantly, more at the end of the quarter than at the beginning. The loan book grew €26,000,000,000 The pickup was basically in the latest part of March due to the drawdown of the Committed lines by the large corporations. Deposit grew 6% with I'll jump also in the 2nd part of the month of March. Our customer digital activity reached record figures. That's not it's not strange.
And the growth in the group digital customer base doubled that compared with the previous quarters. As regard results, we recorded a provision overlay of €1,600,000,000 to cover the expected deterioration of the macroeconomic conditions arising from the health crisis. As a result, attributable profit was only €331,000,000 Excluding this chart, underlying attributable profit amounted £1977,000,000 1% higher than the same period in 2019, 8% excluding the exchange rate impact. In the current environment, our credit quality and liquidity remained solid in all geographic areas you have in the numbers. We continue to generate capital organically.
Although the quarter, the growth in risk weighted assets has been approximately 3x the ordinary growth. The consumption of capital due to growth rate of indebted assets was 21 basis points in the quarter that were offset by the nondividend payment. And the result as a result, the capital the core equity Tier 1 ratio at the end of the quarter was 11.58%. Going to the geographic areas. The resilience of the underlying performance of results is based in our diversification And scale by region, we can see growth in loyal customers, increasing loans and customer funds, notably in the Americas.
In Europe, profit and profitability were dampened by the already complex economic environment before the crisis due to low interest rates have become lower in some geographies, particularly in U. K, and therefore, furthermore, by confinement measures in many European countries in March. North and South America, on the other hand, record strong profit growth and improved profitability. Going to the global business, performance has been stellar. We grew both in CIB and Wealth Management at 21% Profits underlying profit in the quarter.
CIB grew strongly, particularly in the last few months, as well in The funding needs of our customers. These were reflected in a greater utilization of existing credit lines. In March alone, more than €15,000,000,000 an increase in deposits. Swell Management and Insura recorded also very high profits due to strong activity levels early this year, which slowed down at the end of the quarter due to the impact of the crisis in the market. Going to the P and L.
Well, 13 to say is change rates play a significant role, a negative impact of 5 percentage points year on year. If we take a look at cost and euros, we reflect the underlying operating trends. We see Customer revenue growing at 3% with cost management and growth in provisions partly driven by higher volumes, not yet for the economic crisis that we expect from the health crisis. As a result, underlying attributable profit Amounted, as I said before, €1977,000,000 8% higher, excluding the exchange rate impact compared with the Q1 2019. The nonrecurring charge of €1,600,000,000 correspond to the already mentioned provision overlay and the remaining amount of restructuring costs that you have More detail in the appendix.
As regards to disregarded provisions and as acknowledged by the ISB and other regulators and supervisors, is likely to be difficult at this time to know the specific effect of the health crisis and government and central bank support measures. Nevertheless, in the Q1, based on the information and the environment at the quarter end and following the regulatory guidelines based on the expected duration of the macroeconomic conditions, A provision overlay will be recorded, conceptually reflecting the permanent impacts from the COVID-nineteen in the medium long term arising from the expected worsening of the portfolio's credit quality and avoiding the negative effects from profitability and volatility of the IFRS 9 in the very short run. In this environment of extremely high uncertainty, The macro variables considered clear are very much in line with those published by the IMF. It's not exactly IMF on a country by country basis, But we have a scenario country by country where the main items that affect the provision the potential provision 11 going forward are GDP growth, unemployment and house prices, in our case, also the new decar set. So it's important how deep the recession is, but it's probably more important in accounting for how long the recession or the recovery or when the recovery comes.
Going into the revenue. In the 1st quarter customer revenue grew 3%, boosted by the Americas, as I said before, and our global business. Net interest grew due to greater volumes combined with active management of deposit costs in an environment of falling interest rates. In net fee income, where our global business, Wealth Management plus 6%, CIB plus 20%, which account for more than 44% of the group total fees generated. We are confident that we will continue to deliver quality revenue growth.
I will further discuss this at the end of the presentation in the conclusions. On costs, costs, 3% lower in real terms. In Europe, As we were indicating to you in our efficiency plan, costs dropped significantly in all countries, notably in Spain, minus 8% U. K, minus 6 percent. This performance comes from the efficiency plans we are executing in all this geography.
This enabled us to obtain the expected synergies in the quarter needed to deliver our target for the year. Good management in North America where the costs have no material change. In South America, Of particular note, it was Brazil with a 2% fall in real terms. This performance allow us to remain leader in efficiency among our peers with efficiency ratio of 47%. Our goal is to continue to making progress regarding operational environment and cost management adapted to the new environment.
We continue to pursue our targets as we indicated to you in our investor update. Credit quality, while the quarter was in line with the traditional trends Still, the NPLs coverage ratio and cost of credit remain basically stable with the same trends you've seen before. On capital, well, we continue to strengthen our capital ratio. The quarter, we generate we also again generate capital organically combined with the favorable impact from the dividend measures taken resulted in an increase of 36 basis points in the quarter. The increase took place in a context marked by strong growth in risk weighted assets, 21 basis points in the quarter, 3x the ordinary increase, mainly due to the higher lending and some market volatility that affects the risk weighting of the market positions.
On the other hand, we have significant nonrecurring negative impacts. As you can see in the slide, 19 basis for corporate transactions that were already announced, Allianz, Celavon and the minorities of in Brazil, 15 basis points from regulatory impact and more that we were expecting is the majority of what we are expecting for this year and 9 basis points from markets, basically the mark to market of the ALCO portfolios in Mexico and Brazil. We are comfortable with our capital levels. We maintain our 11% to 12% capital target in the scenario we foresee in the coming quarters with the aim of being on the upper side of the range. Finally, before handing to Jose to comment the performance of our main markets, I would like to highlight the resilience of our profitability ratios, both in terms of underlying return on tangible equity and return on risk weighted assets As well as the TINA per share, we remain above €4 per share, although suffer some impact from FX or from the change rates.
I hand over to Jose to elaborate over the different units and regions.
Thank you, Jose Antonio. Good morning, everyone. As for the performance by region and country, the Americas increased their weight as a percentage of total profits to almost 60%, So we remain very well diversified. As previously mentioned by Jose Antonio, North America and South America grew at double digit rates, Well, the performance in Europe was impacted by the economic environment. Also, our global businesses increased our double digit rates, which helped to strengthen our local franchises.
Taking a look at volumes. We also had a positive performance in the quarter and covered our customers' funding needs. Launch grew 7% in nominal in real terms, excluding exchange rate year on year, mostly driven by South and North America, which grew at double digit rates across all markets. In Europe, 4% growth with increases in all countries except Spain, as I will explain later. Customer funds were also up in 9 markets, deposits 6%, while mutual funds fell 2%, mainly driven by the drop in equity and fixed income markets.
In Spain, we had positive commercial trends, especially in March when loans increased by nearly €3,000,000,000 driven by SMEs and corporates. This trend accelerated in April as the ICO, the ECO lines, became available. March was also a month of intense digital activity. We operated most of the month with 50% of our branches open and recorded the highest month in the number of digital customers. Almost 5,000,000 digital customers interacted with the bank.
The number of new contracts signed with digital signatures tripled, accounting for more than 50% of the bank total sales. We had slightly lower net income, although profit before tax was up as cost savings offset the drop in total revenue. Net interest income was down 8% due to smaller ALCO portfolios and lower average Assets, earning assets in Wholesale Banking. We are in line with our cost savings plan, as Jose Antonio said, delivering 8% drop in costs. Nonperforming loans fell 41 basis points year on year, and provisions remained also under control.
In Santander Consumer Finance, the business was the first to be impacted by the health crisis, first in China, where, as you know, we have an operation and later in our units in Italy and Spain. New car sales in Europe dropped 26% in the first quarter while new lending in Santander Consumer Finance fell only 5% due to the strong performance in January February. In the last few weeks of the quarter and driven by the confinement measures, the declines were sharper. New lending in Italy and Spain was at 10% to 20% of the usual volumes, so that drop of 80% to 90%. In Germany, the levels were 50% to 70% of normal levels And only the Nordic countries remained our precrisis levels.
These declines were reflected in our results, especially net fee income, which fell 12%. On the other hand and due to the good performance at the beginning of the quarter, net interest income increased 5%. Costs rose due to the new alliances that we signed in the previous in the quarter and in the previous 12 months. Excluding the change in perimeter, they fell 3%. Provisions were higher, mainly driven by lower portfolio sales compared to the Q1 of last year.
The underlying profit, as you can see here in the upper hand upper left upper right Of the slide, it fell 5%. Moving to the United Kingdom. Volumes grew at good rates. Loans increased 5% year on year. In the quarter and driven by mortgages, loans grew 2%.
However, in April, new mortgage applications fell 80% While the demand for mortgage repayment holidays amounted to around 50% of the total mortgage portfolio, revenue was affected by lower yields and the continued SVR attrition. Also fee income was lower in part due to the reduction in overdrafts. However, we had a good performance in the P and L. Costs were reduced by 5%, provisions fell 20% and cost of risk remained at very low levels. In Brazil, We kept our good momentum going, which continued to show recurring profit generation even in more adverse in the more adverse current circumstances, current environment.
In volumes, lending increased 18% year on year with All segments growing, notably corporates and CIB. Consumer Funds rose boosted by demand and time deposits, up 31% 17% year on year, respectively, both partly favored by foreign currency balances, the depreciation of the real. The return on tangible equity rose to 22% following the 10% increase in profits, as you can see in the P and L. Net interest income increase driven by higher volumes, which offset margin pressures due to the mix effect, the negative impact from the fall in the rates and the limit on the overdraft interest rates. Net fee income grew driven by payments, COMEX and ForEx.
Strong efficiency improvement year on year and the cost of credit remained stable. In the quarter, profit rose 8% due to the strong fall in costs and provisions, seasonally higher in the 4th quarter, which obviously favors the quarter on quarter comparison and which more than offset the fall in net interest income due to lower spreads and net fee income. To finish, in Brazil, let me give you some color of the activity in recent weeks. The acquiring business is down 15% relative to pre crisis levels, cash withdrawals down 30% and auto loans down 40% to 50%. In the United States, we had a strong volume growth in the quarter, driven by both corporates and auto, which do not yet reflect the fall in activity recorded in recent weeks.
Underlying attributable profit rose 46% year on year with an adjusted return on tangible equity of 12%, backed by higher revenue and cost control. As you can see on the page, Profit rose strongly quarter on quarter, driven by seasonally lower provisions and costs in the Q1. In Mexico, loans and customer funds grew at double digit rates. New lending to corporates and CIB more than doubled in March compared to a regular month. They went back to usual levels in the 1st weeks of April.
Profits rose 22% year on year, backed by positive performance of income and lower non controlling interests. Costs were higher due to increased amortizations and technology investments. However, efficiency improved by more than 1 percentage point. We also had good asset quality with all metrics improving. Compared to the Q4 of 2019, Underlying attributable profit fell due to high gains from financial transactions in the previous quarter.
And to finish, I will make some quick comments on the corporate center, where underlying attributable loss decreased 16% compared to 2019, mainly due to the combination of 2 things. On the one hand, in total income, positive impact of around €93,000,000 in gains on financial transactions, mostly coming from foreign exchange foreign currency hedging and 2, costs which improved 13% year on year, reflecting the positive impact from streamlining and simplification of our processes carried out in previous quarters. And with this, I'll turn it back to Jose Antonio for his for the 3rd section of the presentation. Thank you.
Thank you, Jose. I'm going to elaborate basically on the actions we've taken as a result of the COVID-nineteen crisis. And I'm going to provide you with the latest data available to give you to the facts, how the business is performing till the data I'm providing to you in this section, till the 22 April. So starting with the how do we match the crisis, Well, this is crisis has produced an unprecedented situation. So the end of the Q1 was very, very conditioned by the spread of the virus.
We had to match the business in a total different way. We've been monitoring since the beginning the situation and activated all the necessary protocols to ensure business continuity. We implement different measures, taking into consideration also The authorities' recommendations, while the Central Banks have been acting, and we take these measures in order to protect our stakeholders and to fulfill their expectations in our actions. As the pandemic has evolved in each market, The group has reevaluated the situation and rollout measures in line with the specific needs of each country. I would like to explain in more detail how do we March the crisis.
In crisis situation, preserving our critical functions is key in order to provide service of high standards to our customers. Different action plans were implemented in different corporate areas and their counterparties in all the countries. These Actions, plans cover the 4 dimensions included in the slide. Health and prevention, We follow a large scale strategy to work from home. Currently, more than 100 10,000 people is working from home.
This was combined with keeping 70% of our branches open and their employees working Our ATM are fully functioning, and most of our employees in contact centers are also telecommuting. We've been proactive Regarding internal and external communication, to be as transparent as possible, our aim is to keep our people, customers, and investors informed of all the times and providing advice if needed. And we are monitoring risk and liquidity and day by day to day. Well, measures we took also measures for the community in which we are working. Our one of our main priorities is to contribute to the well-being of the society as whole, we have implemented actions and mobilized resources together with governments and institutions to help the society.
We already raised €100,000,000 to combat the pandemic. Some of the main initiatives are the creation of solidarity fund, which already amounts €54,000,000 financed by reduction in remuneration and voluntary contributions from the bank employees. We've been pretty active in Spain, one of the most affected countries In this pandemic, the bank has donated several millions of protest in mass, Respirators, hospital beds, blankets and other things that were in high demand in these days. In Santander University, we reallocate €30,000,000 to fight COVID-nineteen, and various local units are supporting vulnerable goods with £16,000,000 We are working with 3rd parties to facilitate donations and to help where This is needed and is required from us. Let me to talk a little bit one area of the band that has become crucial in this situation and is the TNO has been key through this process, allowing us to continue to run-in the bank and serve our customers remotely.
We increased, as you may expect, our network capacity, our bandwidth And the increase the maximum number of users supported by the VPNs, you have the figures in the slide. In Q1, naturally, as a natural reaction of the Conferment, we had Dramatic increase in the operation through digital channels. We doubled the number of the increase in the digital customer base. The digital sales increased significantly, record quarter in number of assets. The behavior of the group was more accentuated in the countries, in some countries, particularly Spain, Poland and U.
K. Let me to go to the figures. Already, Jose mentioned some of of the figures in relation with the activity. Well, we have also adopted measures to facilitate, Well, our customer life during the crisis in all regions, we provide payment holidays or referrals in most markets. You have in the slide Some figures: temporary option to increase credit card and overdraft limits proactive support for vulnerable customers being proactive on trying to cover their needs reduction and suspension of some fees.
With regards to the payment holidays, we receive applications or requests both relating to the government programs as well as the Santanderon options. On the slide, you can see the number of applications for the largest customers and how they are well above 1,000,000. Also, you can see the weight as a percentage of the total portfolio at as of 22 April. This process is still underway, as you can imagine, and we think that we could end up affecting 15% to 20% of the mortgage book in Europe, 5% to 10% of the consumer book in Europe and 20%, 25% of the consumer book in the U. S.
And another feature of this crisis is the government has been the governments in different countries has been particularly in establishing programs for SMEs and corporates whose aim is to provide liquidity and credit facilities with favorable conditions for business facing hardship. You have in the screen some of the programs established by the different governments in Europe and the U. S. And South America. Perhaps, well, I'm giving you the figures on the right side that related to Spain.
Spain has approved 2 tranches of €20,000,000,000 each. We were assigned with Some of these warranties lines. We already approved 60,000 operations, €9,600,000,000 of which €7,200,000,000 are warranted by the government. The figure is spread across different segments We reached all the sectors, from large corporates to self employed. We provide €7,000,000,000 for the smaller size companies across 59,000 operations.
Additionally, you have granted, we continue with the ordinary activity. Since the mid March, The ordinary activity has been progressing well according with our expectations. In this context, if we look at the loan book In different segments, what you see is kind of stable, slightly up Individual related business, being mortgages and consumer, is too early. So at the end of the March, I will provide you figures for the applications in April. And SMEs incorporate, you see in March a significant increase in the size of the loan books due to Higher demand and drop downs, particularly on the CIB space, where the book grew in the month of March €19,000,000,000 So if you go to the trends, Jose mentioned some of them.
You have here in this slide the new mortgage lending, how it's evolving. When we refer to new mortgage lending, it's payments, actual payments That goes into the stock. We were the daily average in the different regions, well, fell 60% in mortgages, while the applications that you have on the right side, this goes from minus 80% in Spain, U. K. To a smaller impact still in Latin American business.
In consumer lending, you have the same figure there, minus 25 percent in new consumer lending and applications falling differently depending on the Countries and regions and businesses. This is the well, it's a summary of the behavior of the individuals vis a vis in the middle of this crisis. When it goes to the corporates and CIB, we have a total different picture. We have we see the opposite. New SMEs and corporates lending grew already in March Much more in April due to the use of the government programs.
The daily average went from €500,000,000 to €600,000,000 in February, that is probably the normal level, to close to €700,000,000 in March and more than €1,100,000,000 the daily average in APE. In CIB, it happened the same. Well, was The massive drawdowns of existing credit facilities in March, while in April, the balance sheet is fairly stable. This I hope this gives you a sense of what's going on in the business in these days. Just to finish And to allow you to have time to ask the questions you may have, let me to share with you a couple of points.
We think the best way to support our shareholders is to prioritize the health and safety of our employees and our top priority as a way to help customers and communities and ensure profitability for the shareholders. This is the best way to act in this scenario. We are confident Going forward, because we have a strong starting point, both in terms of balance sheet, liquidity, capital And in terms of P and L, our pre provision profit is one of the strongest in the industry. Finally, our business model is very resilient. And you have seen year after year in the stress test that we tend to be less affected because the resilience of the balance sheet.
And we are activating management actions in revenues and costs that could mitigate the negative impacts that will be derived from the COVID-nineteen. Firstly, we reiterate our €1,200,000,000 cost reduction commitment. We'll take additional action on costs, including detailed analysis of our process in the new operating environment. From the revenue side, we are matching cost of funds to reflect the new interest rate environment. The cost of deposits has been reducing over the past few quarters.
We still have some levers to continue this trend going forward. And also, on a case by case, we will try to design an efficient pricing strategy On the asset side, to reflect the deterioration in risk profile. However, it's too early to be conclusive about the macro and financial effect of the current health crisis. As stated during the latest AGM, The medium term strategic objective will be reviewed once the economic impact of the crisis is clear. In the meantime, Considering the high level of uncertainty and lack of visibility, the situation recommend to be prudent.
And at this stage, we are not in a position to provide a guidance that with the levels of certainty required. To conclude, I would like to reassess that the pillars of the group strategy remain unchanged: improving operating performance, optimizing capital allocations to the regions and business that generate the highest returns and accelerate the group transformation, the group digital transformation. That's all on our side, And we will be ready to answer the questions that you may have. Thank you. [SPEAKER JOSE ANTONIO ALVAREZ ALVAREZ:] Thank you, Jose Antonio.
Indeed, we have now the rest of the hour for Q and A. So please, operator, let's proceed with the questions.
Ladies and gentlemen, the Q and A session starts now. The first question comes from Alvaro Serrano from Morgan Stanley.
Thank you very much for the very comprehensive view of the current situation. I have a few follow ups, hopefully very short. Can you give us the breakdown of the €1,600,000,000 provision overlay? I can't reconcile with the divisions. And the two follow ups to that is, if I take the €3,900,000,000 total provisions you've taken in the quarter, Should we annualize that?
I've heard you, Jose Antonio, say that it's very uncertain and you're taking IMF. But at what circumstances should we annualize it? Should we not annualize it? Could it be worse? Maybe some color there.
And the last Points or related is, one of your competitors or peers, yes, in their results, was saying that Their provisions were consistent with saying that 50% of the payment holidays would ultimately result And being a default, can you give us a color I know the provisions don't strictly work like that, but can you give us a color of what do you think The payment holidays today, ultimately, how much of that could result in defaults based on your modeling? What do you think about the quality of those payment holidays?
Okay. So a couple of different questions, Alvaro, to answer at this point at this juncture. The breakdown of the overlay, we don't have a specific breakdown. We went by segments using a global scenario that is not exactly but is close to IMF scenario, and we don't have any specific at this stage, a specific breakdown that I can provide to you on a country by country basis, as you as I understood you were asking. We made EUR 3,900,000,000 provisions in the country in the quarter, sorry.
Should this number Can this number be annualized in these terms? Well, I will say, generally speaking, my thinking of this and Don't take it as written in stone. We are matching the scenarios. We tend to look backward and to try to assess what has happened in different countries in scenarios like this. We have the real estate crisis in Spain.
We have the recession in Brazil in the other side. If you look backwards in the real estate crisis in Spain, the group as a whole, we were running in the 1.4%, 1.4%, 1.5% cost risk at this time. If you look backward in Brazil, when the recession hit the country and the GDP fell by 10%. The cost of risk went from the current A little bit lower than €400,000,000 to €500,000,000 So those are the kind of figures that we have in our mind. Well, the payment holidays and not you mentioned how much of this is going to be default.
Well, you need to look at the book. So 40% of our total book as a group are mortgages, yes? So we do not expect a significant defaults in the payment holidays related with mortgages. The payment holidays, the majority of the payment holidays related with the mortgage have a financial advantage to the customer and make sense from the financial point of view, the customer to take these payment holidays. And we think that many of them are taking some of them because they are facing a difficult situation, some others because it's an advantage.
Having said that, the main factor behind potential defaults here, and when I mentioned before GDP, be unemployment, house prices, the house prices, how did they develop not in 2020, it's more 2021 and 2022, is the most important factor in relation with potential default in mortgages. So I do not expect in mortgage. The majority of payment holidays are in mortgage, and I do not expecting a bad outcome there. In consumer, We need to elaborate on country by country basis. You've seen that Jose provide information.
And in the latest figures I provide to you, In Consumer in Europe, we have like 4 countries that the production collapsed. And the other 4 countries, half of the business Still performing relatively well, Germany, Nordics and countries around this. So we do expect different outcomes according with this kind of situation. So In the particularly in the U. S, that in Escusa, extensions that we provide you the number of extensions is Business as usual.
The number of extensions we do on a normal amount without having a crisis is In the region of 15,000 amount, yes? So now grew dramatically, but it's part of the business as usual, and it's difficult for us to assess how much is going to end up in a higher cost of risk.
Thank you, Alvaro. Next question, please.
And comes from Francisco Riquel from Alantra Equities. Please go ahead.
Yes. Just a follow-up on the previous questions. So you mentioned that the scenarios that you are managing are in line with the past prices in Spain, you mentioned, or the recession In Brazil, so what I mean, this time, the economic recession is going to be bigger Overall, not only in those countries, but worldwide. So what makes you confident that the cost of risk It should not be bigger than what we do have been mentioning for those scenarios in past crisis. So that's a general question.
So and then specifically, wanted to ask you about Brazil. You mentioned that the cost of risk in the past recession, 2015, 2016 went up from 4% to 5%. So at that time, you went through the recession in Brazil in a fairly good shape. What how do you expect now your Brazilian bank to perform in this crisis given that you have grown relatively fast? And how confident are you of the risk taken in the last few years?
Thank
you, Paco. The first question, Why this time is not going to be bigger? As you know, provision is related with expected losses in a medium long term period. What matters here is we have a new kind of crisis this time. It's a crisis that we never seen.
For that reason, it's extremely uncertain the outcome. But if you look at the different scenarios, not necessarily only IMF. Well, overall, all the scenarios have a strong impact in 2020 and relatively rapid recovery in 2021, in 2022. So if that's the case, The level of defaults is not that high. So remember, the last crisis when I spoke before in Brazil, The GDP fell 10% and the recovery is still ongoing, okay?
So 3 years later, still not recovering this. In Spain, The top to the bottom was around also 10%, 9%. I think it took 4, 5 years to recover. The kind of crisis we have in front of us is a crisis in which we have a deep recession with very short duration, Chart, meaning months or maybe 3 months, maybe 6 months, maybe 9 months, depending on the kind of scenario you want to The kind of V or the kind of VUE scenario you want to choose. But in any case, relatively short period of deprocessing that follows a relatively rapid recovery immediately after.
This is not a very bad scenario for If this happens for the cause of risk, the longer the recession lasts Without even if the intensity is lower, the higher penalization I mentioned already, the mortgages in which It's not that what matters is not that much how deep the house prices fall immediately is, how long it takes to recover the prices afterwards, yes? So this is the general thinking on this. And for that reason, we remain relatively confident that If, and it's a big if at this stage, the scenarios behave like the ones we are seeing from the different economies, not And we have a relatively quick and rapid recovery. Afterward, the scenario is workable, I would say. You said Brazil, well, in the last crisis, we had a you suggest that we had a different portfolio that we grew a lot in the last couple of years.
It's true, but well, our franchise now is much better franchise than it was 4 5 years ago, much more resilient with much higher profitability, with much more capacity to take management actions. I'm fairly positive on the trends in Brazil. Naturally, the cost of risk is going to go up, sure. We are suffering right now, and you see NII, the impact of the overdraft, the charges that were reduced significantly, yes. But the underlying trends are pretty good, yes?
We continue to see our strength across the board is significant. And we are I think we are well prepared to face the headwinds that we're going to suffer in the coming quarters. And we I feel confident that we're going to be able Too much in the range. I was telling you, well, not exactly don't take the numbers, take the range as a potential outcome in the coming quarters.
Thanks, Paco. Next question, please.
Thank you. The next question comes from Carlos Cobo from Societe Generale. Please go ahead.
Thank you very much for the presentation. Carlos Porro from Sartain here. The first question would be on the FX hedging policy, if you could update how much of the currencies you've hedged And for how long that set is in place? So what would be if we Steve, we fully seen the impact already in Q1 and what would be the phasing That hedging running off. And secondly, if you could confirm that the EUR 1,000,000,000 cost cutting target for Europe is being Reiterated, I think as Antonio said, and whether you see any risk of missing there Coming from investment related needs in the context of the COVID-nineteen, I would like to understand your thoughts around Any room to beat the previous guidance on costs now?
Or on the contrary, to meet the targets, you now need to make a stronger effort. And finally, on capital, if we should Still maintain the 12% year end 2020 target? Or how should we expect the capital evolving from here?
Well, I will take the second and the third question. I will pass to Jose the first one, the FX hedging policy. Target for €1,000,000,000 cost cut in Europe remains in place. It's reiterated. I'm fairly optimistic.
You see numbers in the Q1, fairly optimistic we're getting there. Probably in the short run, we're going to have, as I mentioned before at the end of the presentation, going to take management actions, management actions on revenues and costs. And costs, we have capacity to reduce the costs further from our targets in this environment, yes? Capital, during 2020 capital, I said that we also Expect to remain inside the range of our target. Remember, our target in capital was is 11% to 12%, and we expect to be in the upper side of the range at the end of 2020, taking into account all that has been said in this presentation.
Jose, thanks, hedging.
So in terms of hedging, we We have 2 different policies for capital. For the capital ratio, we fully hedge the capital ratio, and we do that on a monthly basis. So any exchange rate volatility does not affect the capital ratio directly. And in terms of profits, we hedge basically based on our expectations for exchange rate movements. And to go into the details, this year, we have the Mexican peso, the sterling and the U.
S. Dollar fully hedged. We have the real partially hedged. So we in the next few quarters, if the exchange rates remain where they are today, we will still see some negative impacts on our numbers.
Thank you, Carlos. Next question, please.
Thank you. The next question comes from Jose Abad from Goldman Sachs. Please go ahead.
Hello. Good morning. For the presentation. I have three questions. First one is whether your 1.6 Post bankruptcy impairment taken today, does this include the positive impact from the warranties in the different countries that The second question is on the profitability.
1 of your European peers actually mentioned conference call, which was taking place in parallel to yours, that they expect to take 0 profit from the government guaranteed Lines, is this also the case for you in Spain or in other countries? And the last question is, given that actually only In Spain, 2 tranches have been approved up to actually €40,000,000,000 So you've granted €9,600,000,000 So based on this, should you expect actually this to go up to Potentially €25,000,000,000 in cumulative incremental corporate lending until potentially Q3?
Okay. When you are referring to the €1,600,000,000 including warranties, this include warranties, do not include guarantees because we are assessing the portfolio that was in our books as of 31st March. So and this new lending started in April, so does not include government warranties. How much profits we expect to reap? I understand the profit in the overall lending related with government guarantees.
I don't really, I don't expect to make profits out of this, yes? So we're going to get Some revenues and cost of risk, but overall, it's going to be difficult to make profits. We may make some profits, but not significant at all, yes? The government guarantees, you extrapolate the as you know, in Spain, the government Establish a kind of coupon for each bank based on the Market share in the overall credit market, in our case, was, I think, 18.5% or something like that. And as you know, we have we finished the assignment of the lines we were granted to that were granted to us 1 week ago, and we still have pending demand.
That's something that you may expect, given the fact that although our participation in the overall credit portfolio, the market share is 18.5%, Our participation in the SMEs corporate space that is the ones who are demanding more Loans in these days is in the region of 25%. For that reason, we have significant demand. Well, it's up to the government To give to go from the €40,000,000,000 to €100,000,000,000, they match this. And well, what I can tell to you is we have still demand pending for this kind of facilities.
Thanks, Jose. Next question please.
Thank you. The next question comes from Sophie Petitsson from JPMorgan. Please go ahead.
Yes. Hi. Yaurissa Sythi from JPMorgan. When I look at your Stage 2 and Stage 3 exposures, they fell quarter on quarter, although very marginally. But How much or what movement should we have expected in your Stage 2 and Stage 3 exposures if The EBA couldn't have had the new rules out on forbearance.
Would that have had any impact On your Stage 2 and Stage 3 exposures? And then my second question would be, Clearly, COVID-nineteen has different impacts in different countries. But overall, which countries are you most concerned about in terms of the outlook and which countries are you the least concerned about? And then my final question would be if you could just remind us of your rate sensitivity given that we are seeing lower rates both in Brazil, to go the U. S.
And so on. So if you could remind us of your rate sensitivity.
[SPEAKER JOSE RAFAEL FERNANDEZ:] Well, I will ask the first two questions. I'll pass the third one, the sensitivity to rates to well, Jose is going to take This one?
The first one? Do you want
me to
take it now? Yes. Okay. So the interest rate sensitivity to a drop of 100 basis points is around €500,000,000 £176,000,000 more or less in Spain, very, very small sensitivity in Latin America, But overall for the group is around €500,000,000 more or less.
So the other 2 questions on stage 2, stage 3 is too early to go into this detailed analysis in the next. We have plenty of moving parts there. The first one is the scenario that very likely we're going to have more in the stage 2 and stage 3. 2nd, we have the government guarantees that are going to offset partially what goes to the stage 2 and the stage 3. So the uncertainty is so high that at this stage, I can elaborate a little bit very little on this.
The overall, which countries will be more affected? More than these countries, I will tell you Ex government guarantees, the segments that I see potential higher effect. The first one is All the SMEs, self employed, small corporate segments on top of the traditional sectors that everybody in mind, yes? You know the sectors. Everybody speaks about the sectors, yes?
But by segments, this is the segment that probably is going to be significantly affected. The second one is some pieces of the consumer lending, not necessarily cars, probably direct lending, more much more than car auto lending is the second I see a potential more impact. And at this stage, And I may be wrong because this depends on the how the house price evolve. I don't see a significant impact in the mortgage books Because the interest rates are so low that affordability ratios and the loan to value ratios in our books are relatively low, Interest rate is very low, so affordability ratios are relatively high at this point. You combine the affordability ratios with the loan to value ratios, I do not expect a big impact overall in the mortgage book.
Thanks, Sophie. Next question please.
Thank you. The next question comes from Adrian Tang from Credit Suisse. Please go ahead.
Hi there. This is Adrian Tucci from Credit Suisse. Thank you very much for taking my questions. Three follow-up questions from me. On the Euro provision overlay.
Can you maybe provide us some key sensitivities around your base case scenario? You mentioned GDP unemployment and house prices as the key variables To judge if these get better or worse, what we could expect. On the capital, can you maybe help us think through the potential impact you expect from the risk migration given the increasing PDs and LGDs? And then the third one, just a clarification, thanks for the disclosure on the mortgage and consumer payment holidays on Slide 30. Can I just clarify that you're still accruing net interest income on all the loans in all geographies on these?
Thank you.
Well, the 1 €600,000,000 The question was exactly [SPEAKER UNIDENTIFIED COMPANY REPRESENTATIVE:] The sensitivity to the base case. Well, This €1,600,000,000 comes from the combination of 2 scenarios: 1 scenario that is kind of the scenario that is relatively mild And one scenario that we call internally new scenario that is much, much worse and overall much It takes longer to recover the some of the variables that are behind these expected losses, particularly, as I mentioned before, house prices. So house prices, let's They fall 20% and it takes more than 3 years to recover. The impact is much more intense than if we have GDP fall in the short run and a recovery immediately after than otherwise will be the case. So these are The base case we are using is a combination of beer scenario with your scenario that give us, and I mentioned before, kind of IMF.
On a country by country basis, in some countries, it's more intense than IMF. In some others, it's less. But overall, as an average, We are basically there. Capital impact of the Great Migration. Remember, we have 50% of the portfolio is standard model.
The other 40% is mortgages that while immigration, rate immigration is not significant and is Rate immigration affect volume to 10%, 15% of the portfolio. That is related more with the kind of CIB business and some Corporates. So the impact should be relatively minor, yes? So we're going to have some, but relatively minor in our case, given the fact that the model still plays a big role in our capital numbers that we've been telling you. And the third one is consumer.
Holidays, payment holidays. If we accrue, we don't accrue. We accrue in the majority of the case, although there are some cases that the government initiatives, the payment holidays force us not to accrue for 1 month or 2 months or 3 months not significant, but it has some effect, some in a limited number of cases because it doesn't apply to the overall portfolio. It does apply to specific people that has a very, very low income and with vulnerabilities that we cannot accrue interest, but this is really, really minor. What this has in the other cases is the financial effect because we are translating interest into the future, in the future principal payments, that has some financial advantage for the borrowers, yes.
Thank you. Next question, please.
Thank you. The next question comes from Marta Romero from Bank of America. Please go ahead.
Thank you very much. I've got three questions. The first one on capital. You've mentioned your you aim to be at the upper end of your 11% to 12% target for fully loaded core equity Tier 1. However, given that 2020 is kind of a lost year, dividends are more or less banned And you still have legacies from the previous crisis.
Would it make sense to clean up as much as possible in 2020? Would you be willing to bring You're fully loaded Core Equity Tier 1 just in line with the MDA threshold, so around 9% after CRD 5. The second question is on your Alco strategy. How attracted do you think current sovereign yields in Spain, Italy and Portugal are? Are you willing to increase your exposure to the periphery?
Do you believe the ECB backstop will be effective and hence it makes sense to load up on periphery bonds today? And finally, on Santander Consumer Finance, thank you very much for the color you provided on recent activity levels. How that translates into revenue outlook for the rest of the year. And just to be on cost of risk, you've given us Lots of details and you've tried your best, of course, given the uncertainty. But where do you see the cost of risk in consumer in Santander Consumer Europe Progressing over the next 2 years.
Yes. Okay. So, Marte, it's Jose. I'll take the first question. I'm not sure I understand what you're saying about legacy issues from the previous crisis in terms of capital beyond the IFRS 9 transition period.
So we can take that offline and discuss that, but I don't think we have any legacies whatsoever coming from the previous crisis in terms of capital. Having said that, you have to remember that we no longer have a capital conservation buffer in the U. K, which gives us 20 basis points. So the capital requirement has been lowered by at least 20 basis points. We have fully reached The 81 and Tier 2 buckets.
So any new issuance of 81 we do will go against P2R. So if we issue in the market this year, we will create more space and a higher MDA, And we would expect to demonstrate that our capital continues to be extremely resilient Even in the worst case scenarios, we've in the different stress tests that have been conducted by the EBA and the ECB, we've always come As the least affected bank, those were paper crisis. This is a real crisis. But what we are saying is that our capital, which I would agree that it takes time for us to build up capital because of our model. Our model also eats extremely resilient when withstanding the shocks of crisis.
And we will demonstrate our capital. We'll withstand this crisis again extremely well.
Okay. Second question was related with ARMCO strategy. You said yes, why not if we plan to buy Spanish Italian sovereign bonds in order to hedge the current accounts. Well, what I can well, this ALCO meets monthly. What I can tell you, we are probably at the lowest level in the last 6, 7 years in the portfolio of ALCO in you are referring to the parent company where the lowest level in the last probably 6, 7, 8 years, I don't know, for a long time.
Finally, revenue outlook for consumer finance. This is going to happen immediately affecting the fee income. You saw at the end of the Q1, we mentioned, because fee income in the new origination plays a significant role there. Fee income coming from the loans and fee income coming from insurance business that we do at the origination, this is going to be the main effect in the very short run. You mentioned the cost of risk.
I already elaborate That we do expect much significant higher impact. We are relatively positive in auto lending. We expect higher impact in direct lending. And direct lending, well, the main The biggest portfolio is Germany and somehow Spain, but smaller size, Nordic countries. And Naturally, those are the portfolios.
The business is onethree auto lending sorry, twothree auto lending, onethree other business, Credit cards and direct lending, and this one there is where I do expect higher cost of risk. And the portfolio by countries is Well, Germany is the largest. 2nd is Spain. Italy, we have some lending, although it's guaranteed by the payrolls is The probability of default is relatively low. And not the countries where we have credit cards and direct lending, where I do not expect a significant increase.
Going forward, when you mentioned in the medium term, well, in our scenario, in the medium term, the cost of risk will go up, but not in a dramatic way.
Thanks, Marta. Next question please.
Thank you. The next question comes from Ignacio Ulargui from
Just have two questions. 1 on the capital coming back to how do you see the capital evolving in the coming quarters. I think that the 1Q has been a bit of a trough of the year It's quite uncertain, but if you can give us some color on how do you see the capital moving onwards? The second one is on the Government reactions in Latin America has been a bit lower than what we have seen in Europe and in the U. S.
How do you see this impacting the banks there? Particularly interested on your thoughts in Brazil and Mexico.
To the capital. In the first quarter, we had, as you could see 15 basis points from regulatory and accounting charges and 19 basis points from perimeter changes. We Wouldn't expect to see more significant perimeter changes in the coming quarters. And there might be some regulatory charges, but they are not going to be of the nature and the amount that we saw in the Q1. So going forward, I would expect we would the capital to evolve in line with our capital generation, which we think it could still be in the region of 10 basis points per quarter on average.
Okay. Government reactions. Your question was if the reaction of Brazil and Mexico was lower. Well, this is probably the European view. You take into account how these societies, Where is the in economic terms, where the societies in economic terms are With the informal economy playing a big, very big role and the resilience of the population in terms of The resilience to accompaniment of these populations is much, much lower than it is in Europe.
You will understand a bit better why in some countries, they've been reluctant to take strong measures of confinement. Having said that, they are taking measures. And if this is going to affect our The performance because this is lower reaction of the governments. Well, it will depend basically The kind of actions they will take in protecting or warranting the lending to the SMEs. Having said that, you take the figures.
The figures are pretty small. When I look at the SME book in Mexico, That in our case is more than 50% already has warranty from the government. From an institution called NAFINSA, more than 50% of the book. We already bought warranty for this book at the origination time when the book was originated. And you see in Brazil, the size of this book is relatively small.
So the governments are reacting. In Brazil, there is plenty of measures that the government, the Central Bank already took, And we feel comfortable there. And while in relation with how they are handling the health crisis, I'm not an expert on this and not a there's plenty of controversy about how to match this. Even in the Europe and the States, there has been controversy about this and not in a good position to make you an analysis of this, yes?
We have time for one last question, please.
Thank you. The next question comes from Fernando Hilde Santibanez from Barclays. Please go ahead.
Hi, good morning. Thank you for the presentation. Just a follow-up question on the ALCO portfolio. Just to get through the strategy on the ALCO portfolio, I see that the volume has come down quite significantly in the quarter. What should we expect in terms of size and the disposal on the TLTRO programs on the ECB?
This is one. And the other one is On RWA inflation, I mean, you have disclosed on these pages 30, 31 32, The increase in loans in April so far, how does this affect on the RWA mix and inflation going into quarter 2?
So the ALCO portfolio, the size, while this depends on the Decisions related with interest rate, we reduced the size of the portfolio. And well, it's up to the ALCO to decide if we want to increase or not Is to and I cannot elaborate on this. In terms of TLTRO, well, the draw of TLTRO depends very much on the overall liquidity in the market. At this stage, the overall liquidity is quite good. At this stage, the overall liquidity is quite good.
Our liquidity position, in fact, our LCR, since we started the crisis, had been going up. Deposits are growing fairly rapidly, stable deposits coming from customers. And the liquidity position is, as I said, is improving almost on a daily basis. Risk weighted assets inflation because the lending I showed you there, the lending goes to corporates and CIBs. The lending going to SMEs, the majority of this has government kind of government warranties.
So the weighting is very, very low. Is maybe in the region of 10%, 15%, depending on the country, but it's very low. So I don't see that much inflation there. The other growth that we had was in CIB, but was already in the Q1. We do not expect Another jump in the 2nd quarter in the CIB companies drawing the committed line.
So We expect a more normalized behavior. So overall, with the individuals, I don't think I don't see in this quarter coming back to normalized levels in Europe. And with the majority of the lending going to SMEs being guaranteed by the government and with being fairly stable, I don't see any particular inflation in risk weighted assets. Other some come from ratings. Some of your colleagues have before, it's not that important.
Here, the government guarantees plays a role. Unfortunately, origination with individuals is fairly low. So overall, I do not see and we will stick with our targets, as Jose said before. So
And if I may, the complement, we have very Relative to others, very limited market risk.
So Yes, that's right.
Okay. So that would also not impact our risk weighted asset significantly.
We need to leave it here, guys. Thanks very much for your time today. Obviously, myself and the entire team will be at your disposal for any follow-up from now on.