Good morning, everyone. This is a group of Santander H1 2019 earnings presentation. Well, every quarter, our group CEO, Jose Antonio Alvarez, will address the key highlights of the quarter as well as the group performance and obviously, the concluding remarks and our group CFO, Jose Garcia Cantera, the different business areas performance. We hope to have around 30 minutes for Q and A. With no further delay, Jose Antonio, please.
Thank you, Sergio. Good morning to everyone. Thank you for attending this conference call. So I'm going to follow the usual path of the presentation with a new chapter, including the Restatement we've done to reflect the organizational change we made along with the reinvention in the UK. As usual, I am going to go through the group evolution and Jose Garcia Cantera, our CFO, will speak about the business area.
As a summary, I will say the quarter was good. So good in activity, both the loan growth and customer Funds grew significantly 2% 3%. Underlying profit, 8%. And the capital generation was in line with our expectations, 11 Organic, I mean, organic capital generation was in line with our expectations, 11 basis points in the quarter, yes? So this is relating to results.
Underlying profit was EUR 2,100,000,000 close EUR 2,100,000,000 in the quarter, up 8% quarter on quarter. This quarter, we have, as you know, the Single Resolution Fund contribution. Without taking this into account, the growth was 15% quarter on quarter, so a good dynamic in the profit generation of the group. The capital Tier 1 Core Equity Tier 1 stands at 11:30. Well, as you know, we are progressing according to our targets, with a significant impact of the regulatory effects.
The profitability, we are close to the 12% underlying return on tangible equity. And I'm going to elaborate later on the new organizational structure and the new the restatement we done 1 month ago, and We communicate to you accordingly. So following our way to look at the group In terms of growth, both the customer dynamics and the volume dynamics are progressing well, taking into account the macro scenario. So we are progressing in line with double digit or double digit plus in Latin America and U. S.
And in Europe, the volumes Grow less, particularly on the loan side, where still we have some countries in deleveraging and customer funds are growing also in Europe in a significant way. Profitability, customer revenue is growing accordingly with the volumes. We were The NIM has progressed this quarter on not only in emerging markets due to volumes, also in mature markets due to the good management. And finally, we continue to build capital, as I mentioned before. If we go with the activity, the number of customers keep growing.
Loyal customers, we are growing double digit individuals, 7% in companies. And the number of active the percentage of active customers, loyal customers compared with active customers is already in 30%, with a significant increase in the majority of the countries in which we operate. We are providing you some numbers how the Digital transformation is progressing across the group. The number of digital customers approached 35,000,000. And while the most important I think here is they are growing in line with the 25%.
The accesses to the bank, online and mobile, EUR 3,700,000,000 in the first half of the year is EUR 1,900,000,000 a quarter, growing at 28% year on year. It's a significant growth. [SPEAKER JOSE ANTONIO ALVAREZ PALLETE:] And the active transactions, this means the transactions in which the counter the customer has an access to the bank to do a transaction. So it's in the region of EUR 550,000,000 per quarter and growing at 25%. So those are numbers that tell you about the progression on digitization in the bank.
Going to volumes, As you see, the loans are growing in our own short market, but Spain and Portugal, where we are still in a deleverage mood, this is a combination of Deleveraging the market plus being more demanding on the capital use, particularly in some segments in which the profitability is poor, Mainly, it's related with CIB and institutional lending, where we are not being so aggressive, particularly in Spain. And the customer funds were growing well all across the board. The quarter was good in investment funds, particularly that were not so strong in the previous quarter, we recovered some growth in this quarter. [SPEAKER JOSE ANTONIO ALVAREZ ALVAREZ:] So when it comes to results, so we have a the bottom line, The attributable profit, EUR 3,200,000 1,000,000,000 in the first half. And well, this is the bottom line after the extraordinary charges due to the restructuring costs mainly in Spain but also in UK that we've done in the quarter and that I will explain later on.
Going For the different lines on the P and L, net interest income progressing well according to the volumes I mentioned before. Net fee income is fairly Flat in euros, we are growing 2% in constant euros. Both this line and the capital gains were a bit quicker than we were [SPEAKER
JEAN FRANCOIS VAN BOXMEER:] Due to
the CIB, CIB has been both fee income and capital gains. We saw in the previous quarter is still the case in this quarter, a bit weaker than we were expecting or that in the previous year. And total income, we are growing 1 3% in constant euros, that is the that reflects good cost control. Credit quality under Control according to our expectations, and this leads to a attributable profit underlying attributable profit, Slide above EUR 4,000,000,000 in the quarter, very much in line with what we got last year, 2% more in constant euros and very much in line with the previous year in current euros. Extraordinary charges in the quarter.
So we have this quarter the EUR 600,000,000 slightly above EUR 600,000,000 for Spain is basically restructuring correlated with Popular EUR 26,000,000 in UK. We are closing branches in UK and doing some structure inside UK. And the extra time for PPI in UK represent EUR 80,000,000 charge in the quarter. So this quarter, we have a net negative in this line. So you have the attributable profit, how it's evolving.
This quarter has been one of the highest quarter in terms of profit generation, underlying profit generation in several years. And the growth, the figures speak by themselves compared with the previous quarter. Going by lines, net interest income Progressing well. Basically, quarter on quarter, South America and North America grew significantly, particularly Brazil, Chile, U. S.
And Argentina. The fee income, I mentioned CIB being weaker, but the retail And Wealth Management progressing well quarter on quarter. The other revenue, while we recorded here the Single Resolution Fund contribution in this quarter And well, particularly the Q1 was significantly weaker than last year when we accumulated whole year, we are well below where we were last year. So in NII, net interest income, you have here the numbers I mentioned before, good growth overall. Matured markets growing 2% due to lower deposit costs and developing markets growing due to volumes with some margin pressure in several markets, but not particularly in Brazil, where the volume growth is much higher than the NII growth.
In fee income, activity is growing well. So you have some figures in The main fee generator lines, cars, insurance premiums and mutual fund balances are growing well. Net fee in developing markets, we are growing double digit fee income, mature markets minus 4%. And you have at the bottom what tell you more about the fee income generation by segments we are growing both in retail, banking, wealth management and insurance, but CIB is decreasing 9%. Costs, good cost control, particularly in Europe, Yes.
So you see nominal costs falling in Spain, 7.3% UK falling 0.6% Portugal, 3.8 percent down, nominal cost in real terms. Other markets are going down. And overall, we are decreasing 1.8% [SPEAKER JOSE ANTONIO
ALVAREZ ALVAREZ:] In
real terms, when we compare with inflation, particularly intense, this cost control in Europe, in line with our commitments that we made to you in the Investor Day back in April. Credit quality, no news here. It's good news. The cost of credit remains well under control. NPL ratio trending down.
Coverage is pretty much in line. Capital generation, I mentioned at the very beginning, in line with our expectations. So regulatory impacts continue to have a significant impact. We mentioned to you, 50, 60 basis points we were expecting for the year. Organic generation, 29 basis points.
So we continue to guide you On average, 10 basis points a quarter. This is the run rate, has been 4, and we don't see any reason to change this guidance that we gave to you. Well, we include here natural LNG this quarter has an impact the restructuring costs. I think it's 13 basis points, the restructuring that affected the quarter. On the positive side, the available for sale portfolio, given the trend of the interest rates, particularly in Europe, will represent some help on this regard.
Well, in relation with the MREL and other requirements, we are well above the requirements, much better than the average of our competitors. The ratios, we continue to generate tangible net asset value per share. The underlying return on tangible equity is EUR 11.7 And the RORVA, some increase in the RORVA 1.62 at the group level. Let me just to spend a couple of minutes, yes, explaining the new The restatement we've done. The main changes in this is to reflect on one side the changes in the organizational structure.
We are providing you Europe, North America and South America P and L accounts. Well, The idea of this reorganization we told you in the Investor Day is to have a more convergence in the business model and improved significantly the share service across the group. That is about costs. We don't need to replicate all the things we are doing Market by market, we have plenty of developments, particularly in the IT side, also in operations that we can share across the group, and this is the intention of this restructuring. On top of that, you have the reinvention in the UK that is very well known by you, by all of you and changes in Spain, particularly to split open bank from the Spanish business that previously was included in the Spanish business.
And the second, and probably this tell you more about where are we heading to, indications that undergo our platform that is kind of digital This unit, single unit to be in order to be more transparent what we are doing here. First, let me to go to the new areas. Europe, you have here in this slide the big numbers. Some people, still the balance sheet is skewed towards Europe. So you see both the loans and customer funds, 70% or around 70% is in Europe, while you have you may have in your head the P and L that is fifty-fifty or has been around fifty-fifty while when the balance sheet is more skewed to Europe.
In the coming years, and we mentioned in Investor Day, probably we're going to see more growth in Latin America we're seeing more growth in Latin America and the U. S. Than the one we have seen in Europe, and probably this is going to get more balanced. In relation with the Santander Global Platform, so we have open bank. You have numbers there.
We plan to provide you good numbers. The number of [SPEAKER JOSE ANTONIO
ALVAREZ ALVAREZ:] Customers is growing
well, 1,200,000 customers. This is a really digital fully digital bank for individuals. So this is a band that provide all the traditional banking service in a digital way for individual customers. You can do investments. You can buy insurance.
You can have your credit card. You can have loans, mortgages. [SPEAKER JOSE ANTONIO ALVAREZ ALVAREZ:] Unsecured personal loans is a full bank for individuals. Transnationality is growing well, 29% year on year. Loans and deposits are growing much faster naturally than the traditional banks.
And the business is progressing [SPEAKER JOSE ANTONIO ALVAREZ ALVAREZ:] Well, so you see the number, the balances per customer, per loyal customer are significant are in line with other banks. ODS that is included here is a technology company that developed software for digital banks. That is the service provided for Openbank, but well, we try to have this company to provide the service banking as a service platform to potentially serve 3rd parties in the future. So also inside the Santander Global platform, we have what we call Global Payment Services, Superdigital, You heard about this. It's banking with our bank.
We are providing unbanked population in Latin America, where we already have 500,000 users, active users in Brazil. We have we are expanding into Mexico and Chile in the first phase, and we The goal is to expand all across the region this proposition to unbanked population that has a big space to grow. 2nd, we are developing global merchant services, starting from GetNet in Brazil. Around the world, we have more than 1,000,000 active users. We're going to start in Mexico at the beginning of next year and the rest of Latin in the first phase.
Well, we may translate into other geographies later once we have this up and running in Latin America. The international transfer for open market, the first phase we already launched in 3 European countries. And finally, the Global Trade Services, that is International Trade Products, it's a combination FX, cash management, Trade Finance is the combination of all these things. And while we're going to start with the main countries, we're going to go for rest of Santander Geographies and Open Markets later on. Finally, we have what we call internally digital assets.
That is the centers of digital expertise. When you I mentioned FEA contact center, the number of programs means that we are having 33 activities in 9 markets, so in all our geographies. The conversion rate optimization is the same. So we are developing once and applying to all our geographies in order to not to continue to replicate here and there is about getting higher, bigger access at a lower cost. The digital assets are solutions that we are developing in common.
Global is a mobile platform that we have in common in all the countries, and the majority of the components are common, and we have also this here. Santander in Noventures is probably not better. It's investment in Fintech. We have EUR 100,000,000 invested in 24 countries in for 7 countries. This is the perimeter of this.
We continue in the future quarters to provide you with information about each of these initiatives That, in some cases, is trioner or in some other cases, is improving our traditional banks in some other cases, is launching stand alone initiatives like Open Bank or Superdigital. I hand over to Jose Garcia Cantera to I'll go through the business areas.
Good morning, everyone, and thank you, Jose Antonio. I will start like always looking at the breakdown of our results. You can see that they remain quite balanced between Europe On the Americas, the Americas has increased its share in the quarter around 3 percentage points to 55%, mainly due to the larger contribution from the U. S, while Europe is negatively impacted by in charge of the Single Resolution Fund. In terms of profit, underlying profit growth, we see growth in 7 out of the 10 core markets and double digit growth in Brazil, in the U.
S, Mexico and Portugal. If we turn to the main countries in Brazil, You can see interest rates remain stable. And as a consequence, the yield on loans is gradually Adjusting downwards, we have double digit growth, 10% growth in loans and deposits, and the combination of these is slightly lower margins. And this double digit growth is what is producing this net interest income growing at almost 7% year on year. We are gaining market share in many businesses in retail.
So for instance, in credit cards, we are up 86 basis points year on year in payroll based loans, 117 basis points. So our value proposition continues to be very well regarded by our customer base. Operating expenses rose below inflation, improving the efficiency ratio to a historical low of 32% and provisions were lower, the cost of credit fell to 3.84%. So a very good quarter overall and the trends that we saw in the first half are the ones we would expect to see in the coming quarters. In Spain, we successfully completed the integration of Banco Popular with the migration of all our branches to the new platform.
We also completed the reorganization of our insurance business, the end of the agreement with Allianz and the creation of a new joint venture with Aegon and MAPFRE. In terms of business activity, very strong new origination in loans, which is not being seen in the year on year growth because still the new origination in mortgages it's insufficient to compensate for the amortization of the existing portfolio. We also see deleveraging in CIB. On the other hand, consumer credit grew, for instance, by €600,000,000 in the first half and also SMEs is growing quite well. Customer funds increased around €15,000,000,000 year on year, very good second quarter, which generally is from a seasonal point of view the strongest in the year.
Underlying profit was 5% higher year on year at EUR 694,000,000 excluding the EUR 600,000,000 charge for restructuring, costs fell 7%. So this is already We've been lowering costs at this rate for already a few quarters, and we would expect to see that Once we enter into the new phase of the restructuring, we just agreed with the unions. Net interest income rose 4%, including Excluding the impact of IFRS 16, basically, as you can see, because of improved customer margins that year on year went from 1.7% to 1.9%. Net fee income dropped mainly due to, as Jose Antonio said, lower activity in CIB. Lower profits in the second quarter reflect the EUR 63,000,000 contribution to the Single Resolution Fund.
Without that, profits would have increased 7%. Looking ahead, we would expect to see more or less again the same trends in the second half of this year. In Santander Consumer, despite that the new cash sales in Europe were down 2% as of May, Our revenues, new lending actually was up for last 4%. In Italy, for instance, was up 13% in France, 8% in Spain, 7%. This is due to the good performance of the brands with which Santander Consumer Finance works.
Customer deposits already close to €40,000,000,000 is something that differentiates Santander Consumer from other companies, and it shows the success that we are having in our deposit offering in the different countries where this is actually the case. In the first half, profits was down a little bit year on year, although pretax profit was up 2%. The difference is the good performance in those subsidiaries that we have the agreement with PSA. Customer revenues were up 4% with growth in most countries, notably Spain, Italy, Poland and France and costs that remain very much under control. Quarter on quarter, 2nd quarter profit was up 3%, again based on higher volumes and lower provisions because of portfolio sales.
Moving to the UK. The business was conducted in an environment of tough competition and uncertainty over Brexit. Lending volumes remained stable year on year. The growth in mortgages and consumer credit was Set by the fall in commercial real estate, customer funds rose 2% year on year. Underlying profit was down 13% due to lower total revenues, Same trends as we saw in previous quarters, significant pressure on loan spreads In the mortgage portfolio and lower SVR balances, the fall in net fee income was due to regulatory changes affecting overdrafts and reduced revenue from cards and lower gains from financial transactions.
On the other hand, we saw a very positive trend in costs that were down 1% in nominal terms, 3% in real terms and lower provisions in the quarter. So compared with the Q1, the underlying profit was up close to 30%, which shows a very good improvement again quarter on quarter. Looking ahead, we would expect to see a strong pressure on net interest income, particularly now that no interest rate rises are expected. Costs, however, should be down in real terms in the coming quarters. Going to the other countries more quickly.
In the U. S, another excellent quarter With good evolution of results as well as volumes, the first half attributable profit rose 30% year on year with very good performance in revenues, costs falling in real terms and on lower provisions. Remember that the comparison needs to be adjusted by the TDR change That obviously is affecting net interest income and provisions, but it doesn't affect the bottom line. In short, we expect the good evolution to continue, although there is some seasonality in the consumer finance business that tends to have a better performance in the first half relative to the second half. In Mexico, our strategy continues to yield very positive results significant growth in customer acquisition, loyal customers up 30%, digital customers up 57%.
We saw growth in loans, notably large companies and payrolls and also increasing in funds at a lower rate in deposits because we are focusing on really profitable deposits. Profits up 12% year on year with a very good performance of net interest income. Net interest margin in the quarter was affected by wholesale activities. Retail businesses increased around 4%. So overall, very good quarter with return on tangible equity of 20%.
Portugal, Very strong activity in volumes with gaining market share in all segments. We are producing more or less around 20% in the different businesses in the country. Profit rose 14% year on year due to revenue growth, lower costs and the optimization of the operating structure following the integration of Banco Popular. In Poland, as we mentioned in the previous quarter, these results reflect the integration of the retail business of Deutsche Bank. So the growth year on year figures are somehow distorted.
But again, the integration was concluded Sexually, but now we are seeing net operating income after provisions up 12%, although that doesn't flow all the way down to the bottom line because of higher contribution to the deposit guarantee fund and the banking tax that is gross. So it flows all the way again down to the bottom line. So a strong quarter, the second quarter, where there was also some seasonal effects from dividends. Chile, volumes were up 7%, So very good performance. Although the quarter on quarter and year on year results are distorted by inflation, we have very low inflation in the Q1 that affected results.
Inflation recovery in the Q2, but year on year is still lower, and that is affecting our revenues. Profits increased 4% due to the good results in markets, lower provisions and costs, which are growing below inflation. The second quarter was much better again than the Q1 due to the sharp increase in net interest income from higher inflation and increased volumes. In Argentina, very good performance, although the performance in Argentina continues to be by the economic environment. Inflation stabilized in the quarter and the economic outlook improved.
After a very good performance in the first in the second quarter, when we look at the last 12 months in constant euros, profit was stable as high inflation adjustments, in this case, €74,000,000 was offset by the rise in customer revenues. In Uruguay, Peru and Colombia, significant increase in customer activity and a very positive evolution of profits that increased 16% to €94,000,000 the main contributor obviously being Uruguay. And finally, in the corporate center, the underlying profit was affected by lower gains on financial transactions as a result of higher costs from foreign currency hedging. Net interest income is affected by the higher stock efficiencies and the impact of IFRS Operating expenses fell as we see the positive impact of the ongoing streamlining and simplification measures. And I'll turn it back to Jose Antonio for his concluding remarks.
Thank you.
Thank you, Jose. And I'm going to go to the Presentation, yes, to say a couple to say to you a couple of comments. We are developing the activity in Increasingly demanding macroeconomic scenario that, well, affects both mature markets and emerging markets, also in different extension. To grow revenues in mature markets has become difficult, more difficult due to the lower for longer and a by new competitors coming to the market and reduction in prices, while still we still find good opportunities to grow in emerging markets, both in net interest income and in fee income. Well, We'll see the activity going forward having a good developments due to the increase in our strategy of loyalty, increasing loyalty and number of active customers is proving to be wide and is producing not only increasing volumes, also translating into revenues.
So In some jurisdictions, and we commit to you, particularly in Europe, the main driver is going to be the cost side of the equation, like where we expect to reduce costs, EUR 1,000,000,000 nominal cost in Europe, and this remain our efforts are going in this direction. And you saw in the numbers that we are progressing well. The balance sheet remains pretty strong. Capital ratio continue we continue to build capital quarter on quarter. And the tangible net asset value, Aside from fluctuations on currencies, we continue to get good developments there.
The creation of the Santander global platform is Our intention here is to give you to be as transparent as we can in the old efforts and developments we are doing both in what we call supertankers, the traditional banks, In the digitization of this of the traditional banks, also we provide to you information about the new activities we are developing in this field that will help, in a great measure, the transformation of the bank in the coming years. Finally, if we provide to you information about Europe, North America, new areas, Europe, North America and South America. And there's a slide in page there's a slide In the next page, that translate into the areas, the targets, the medium term targets that we provide to you in the Investor Day. You have there the different targets, the main targets In terms of number of customers, in terms of cost of income, in terms of profitability by the new areas that we define, You have also as a in the final page, the return on tangible equity, country by country more in a traditional That's all on our side. We remain at your disposal for the questions you may have in relation with the results or other topics.
Thanks, Jose Antonio and Jose. And yes, indeed, we can proceed now with the Q and A. So please, operator?
Francisco Reques from Alantra Equities. Please go ahead.
Stios, 2 for me. 1st on top line. The interest rate scenario has changed in the last few months. If you can please update on the outlook for NII in developed markets, particularly Spain and the U. S?
And second, on costs, if you could Please update on the EUR 1,000,000,000 of cost cutting plan in the European operations that you have reiterated to date. I understand that half of the targets comes from Spain, where you have already reached an agreement with the union. So just to check whether you are on track or not. [SPEAKER JOSE RAFAEL FERNANDEZ:] And also, if you can please give more color on the other half, I mean, what countries, what actions shall we expect for you to deliver on these targets? We have seen some progress in the UK.
And also what are the pending restructuring costs?
Okay. Interest rate scenario, I mentioned in the presentation the lower for longer. Naturally, the shape of the yield curve And the yield curve as a whole has decreased pretty significantly in the quarter, and this affecting a significant way our business in Europe. The sensitivity to low rates for 100 basis points is north of EUR 1,000,000,000 So this gives you an idea of the impact. So for that reason, I said in the presentation that the outlook for revenues was difficult in mature markets and Depends very much on the activity, on the levels of activity we are able to develop in the coming years.
On the NIM, on the net interest margin, I'm more optimistic. And if you saw the last couple of quarters and particularly in this quarter, we increased our net interest margin due to the reduction we were able to get in deposit costs. And we still have some room there that we're going to take advantage of this. At the same time, probably due to the situation of the market, I'm a bit more optimistic on the capacity to increase margins on the asset side that are very low at the moment. In relation with the cost cutting plan for Europe, you asked a question.
I mentioned in the presentation also our EUR 1,000,000,000 nominal cost reduction in Europe. And you asked how to split this. I will say, well, by countries, you said Spain is half of this or close to half of this. U. K.
Is 40% of this, so it's significant. And also, we have small numbers in Portugal and shared services. When we create the idea of Europe, one of the main Targets we have is to reduce costs in share services by EUR 150,000,000, Yes, so and this is part of the plan. This is comes from all the countries together, doing the things in a different way, both the IT and operations, [SPEAKER JOSE ANTONIO ALVAREZ ALVAREZ:] Mostly in IT and operations. IT and operations represent 50% of the cost reduction we are planning in the coming U.
S. And finally, you said restructuring costs. Well, We're going to have a the payback in Spain, what is left is EUR 200,000,000 more or less, yes. So from the Popular acquisition, the payback was 2.3 years. In UK, probably the payback is 1 for 1, yes?
So you can expect a number of for restructuring costs in line with the reduction in cost we are pretending there.
Thanks, Paco. Next question, please.
Thank you. The next question comes from Alvaro Serrano from Morgan Stanley. Please go ahead.
Good morning. Thanks It's related to on the NII outlook, just a follow-up there. You mentioned You're more optimistic on asset spreads. I'm thinking Spain and the UK at the moment. What makes you more optimistic on those asset spreads any particular product because it does look pretty challenged, the market, in particular in Spain.
And in your deposits, You've got the 123 account in both countries. I think you've launched a 0123 account, which lowered the remuneration. Maybe you can give us a sense of defining how much that benefit could be, the 1, 2, 3? And the second on the U. S, you've now had year to date 400 and something 1,000,000 versus consensus.
I think consensus is looking for 600,000,000 for the full year. So you did in the first half 4.65,000,000 and consensus is 630,000,000 or so. Is there anything in the second half? You mentioned seasonality already, but provisions looked relatively contained. Is there anything apart from seasonality in terms of the U.
S. Slowdown, anything where you can flag that should produce a slowdown in Q2? Or is consensus just too low?
[SPEAKER JOSE RAFAEL FERNANDEZ:] Okay. So going with the same questions, NII, why I'm not so pessimistic about [SPEAKER CARLOS ALBERTO
PEREIRA DE OLIVEIRA DE OLIVEIRA:]
Spreads, as I said, the revenue the macro environment is difficult. Well, I do think that particularly in Spain, not much in U. K. In U. K, the asset spread, The margin compression comes more from the SBR book.
So it's the back book, who is reducing the size of this book. And the front book, the margin compression, we came from 130 basis points 1 year ago to a 90 basis point now, but it's fairly stable in the last couple of quarters. So I'm not seeing in the front book additional margin compression. The margin compression comes from the back book. While in Spain, I continue to see In an environment in which, due to the difficulties in generating revenues, I see less The traditionally more aggressive entities, less keen to continue with the aggressiveness in the market due to difficulties in generating revenues, [SPEAKER JOSE ANTONIO ALVAREZ ALVAREZ:] Particularly, this is particularly strong for the domestic players, yes.
For that reason, I am not saying that now is the case. But looking forward, this is my view. You mentioned on the deposit side, the 1, 2, 3 account. Naturally, we have all the full range probably we have the 1, 2, 3 account, but we have other accounts just because some customers are more sensitive. They don't care about balances or interest rate that we pay, they care more about the fee, and we have a different accounts that We can adapt to this.
So I still see some room to reduce deposit costs, yes? So both across Europe, including consumer finance, Spain, Portugal and UK, we are talking not a big deal, but 5, 10 basis points is something that I think we can achieve. That given the current levels is significant. So the question about the U. S.
The U. S, the business is, as Jose mentioned, is doing well. Volumes are growing. Finally, We got an agreement with Chrysler to keep working with them the next 4, 5 years in Scusa. Our penetration rate in Chrysler went up to 35%.
The scenario the greatest scenario is early benign. The residual values of the cars in lease activities are holding up, and the last vintages on consumer finance having better behavior. So with lower rates, In the case of the U. S, goes in favor of the consumer activities. It stood at a place against the banking activities.
But overall, In Consumer, we are optimistic. Although, as Jose mentioned, in the Q2 and the Q1, our decisional Guys, the 3rd and the 4th quarter are much weaker in consumer activities. But overall, I remain optimistic about the capacity of Frescosa to keep generating good results. While in the bank, probably as planned in the previous quarters, we are making good progress In the corporate CIB activities, while in retail, we are still working on this and improving the operations in the and improving the branches and everything to improve our competitiveness in the market. So We are going up in the rankings in terms of customer satisfaction and the how the customer value our apps and all these things.
So we are The term goes in the right direction, but still work to do overall. I remain fairly optimistic about our capacity to continue to generate good growth in profits in the U.
S. Activities. Thanks, Alvaro. Next question please.
Thank you. The next question comes from Sophie Petersons from JPMorgan. Please go ahead.
Yes. Hi. Here is Sophie from JPMorgan. I would ask on capital. Your capital progression was good This quarter, could you just remind us what kind of capital headwinds and tailwinds is the incoming quarters that we should take into Are there any more regulatory headwinds that you expect to take and how we should view capital in coming quarters?
And my second question would be on Santander Global Platform. Could you just give a little bit guidance how we should think about the performance and the outlook in this division over the next 2, 3 years. And my last question is on the IRPH Could you just give your view of what you expect from the September rolling?
Okay. So Let me to elaborate in Santander Global Platform IRPH, and I pass To Jose, the capital headwinds to go into what we have in front of us going forward. Overall, I gave you the guidance The organic capital generation, Jose will elaborate about the headwinds. Santander Global Platform, as I said to you, we have Several business there. The most important ones are OpenBank.
We've been providing the financials of this bank, and we keep updating you on this. So this is We plan to expand OpenBank as an activity to several markets in Europe and to several markets in Latin America in the coming years. It's a full banking proposition, and we provide you the results. The other activities I mentioned there that probably are you less aware of, I do expect Superdigital Already has financials. They are making some money already in Brazil, and we expect this activity to start to make money from the very beginning or achieve the breakeven in several countries.
This is not going to be in itself a big P and L generator, but this is going to be extremely important to generate customers for the banks, yes, for the traditional banks because as I said to you, This is for unbanked population, not only for unbanked population, we also reached agreements with the other distribution networks In order to gather their revenues through our superdigital proposition like the one going the agreement we're reaching Brazil with a Large network of sellers called Natura, with 1,000,000 sellers in the street that they use super digital in order to process and to gather the cash they get from the revenues they are doing. So it's a proposition from a banked population but also serve some type of some kind of business. This is the second one. The third one and the 4 that I mentioned in the presentation, the GMS and GTS are more embedded in the traditional banks. GMS is acquiring business.
As you know, we have significant market shares in the majority countries in which we operate, and we try to build a full proposition for all the banks we operate. So we already have the starting point is net in Brazil, where we started 6 years ago, 7 years ago, with 4%, 5% market share. Now we've got 15% market share still growing. And we have Market shares in Spain, 15%, 16% in Mexico, 15% in other geographies, in line with our market And we plan to put all these together in order to have a stand alone, the same proposition all across the board. And eventually, 3rd parties will use the platform, the GMS, the acquiring platform.
You may use the 3rd parties may use the platform in the markets in which we plan to operate this platform. But this is a significant revenue and P and L business. [SPEAKER JOSE ANTONIO ALVAREZ PALLETE:] And finally, GTS. GTS is more an idea of providing middle market and SMEs with the same kind of services the CIB customers are getting already. And we're having a full digital proposition all across the board for these kind of customers.
This is also a potentially we already get significant revenues out of this business, But we plan to improve significantly our proposition in order to accelerate Growth in this space. Those are the most significant pieces. You have all the others and our idea through the Investor Relations department and quarter To provide detailed information of all this is. IERPH, you mentioned, well, the latest news I have is We're going to have a ruling by the end of the year. Our portfolio there, if I'm not wrong, is around EUR 4,000,000,000, yes?
So the 50% came from Popular, 50% was by generic by Santander. And that's It's all I can tell you about this. Well, nothing else on top of this, yes? So Jose, do you want to elaborate capital? [SPEAKER JOSE ANTONIO ALVAREZ ALVAREZ:] On capital,
well, it's always Very, very difficult to estimate the impact of capital inspections, but I would say we would expect to see another 20 to 30 basis points of regulatory headwinds in the second half. But at the same time, we would expect our capital ratio to grow from here until the year end. As we mentioned in our Investor Day, our target is to get to CHF11.50 as soon as possible.
Thanks, Jose. Next question please.
Thank you. The next question comes from Mario Ropero from Finente. Please go ahead.
Hi, good morning. Thank you for taking my question. The first one is a follow-up on what you just said On the 20 to 30 basis, regulatory headwinds are still pending in the second half. Could you please clarify how much is TRIM and what would be the rest? Then the second one is on the ARCO portfolio in Spain.
Could you please tell us what is the average yield, The pace at which you expect this yield to decline given the yield compression that we are seeing very recently. And then finally, just a follow-up on the cost guidance you gave for the UK. If I'm correct, you said that Basically, we can expect a decline in the cost base in the UK equal to the restructuring charges that we have seen. Is that correct? I mean basically the decline that we have seen in the UK in cost this quarter It's not all, no?
I mean, we are still waiting to see more. Thank you.
Thank you. I take the cost a question in UK and Jose will elaborate in the other 2, the capital and the ALCO portfolio. The cost guidance in UK, I said to you that basically in the context of the EUR 1,000,000,000 reduction in cost in Europe, probably around EUR 400,000,000 or something like that comes from the UK. And As we're in the question how much this restructuring cost, I said in UK, normally it's 1 for 1, yes? So is what I said.
This is in the medium term, so you should expect EBITDAX in cars in the U. K. Of this size or the size I mentioned, yes.
Jose? All right. So as I said, it's again very difficult to estimate future impacts from regulatory inspections. But I would say We still have the SME TRIM pending. The conclusions of that exercise.
That could mean around 10 to 15 basis points, I would say. Then we have some other exercises from for corporate activities and market related activities. And then we have the first impacts of FRTB and others. So I would say from 20% to 30%, I would say 2 thirds would be TRIM and the rest would be other smaller impacts. For the ALCO portfolio, the yield is around 1%
right now.
Thank you. Next question please.
Thank you. The next question comes from Jose Abad from Goldman Sachs. The floor is yours, sir.
Yes. Hello, good morning. Thank you very much for the presentation. My first question is on rate cuts and In case of additional rate cuts by the ECB over the coming months, which seems actually likely, what's the rationale for not passing these negative rates through to a broader group of clients. So and in particular, what's the rationale for not passing these negative rates through to retail customers and households?
Now my second question is on dividend policy. So the deputy governor of Banco Spain has been actually very vocal over the last actually 2, 3 months about the need of Spanish banks actually to accelerate the buildup of capital through several channels. 1 is A return of escript dividend, which you've already done. And the other is actually banks changing the way they or you provide guidance. They suggest actually guidance to be linked the payout of our reported earnings rather than to an absolute amount, which is partially actually your case.
So in light of this, should we expect any changes in your dividend policy and or capital plans targets going forward. And if I may, a third question on the countercyclical capital buffer, which remains at [SPEAKER JOSE RAFAEL FERNANDEZ:] 0 in some of your regions, in particular, Spain, whether we should expect actually an increase either in second half or first half of next year.
Okay. The question ECB negative rates is why not to pass to the customers. We are already doing. We've been doing in the most We started with institutional clients. As long as the rates got more and more into the negative territory, we need to rethink our view in relation with this, particularly with the large corporates and corporates.
We need to start to think how we match the deposits, more the deposits that are not operational deposits. Those who are operational probably will remain 0. Those who are not operational, we need to look at this. Your question about retail, probably it's too early to enter into this territory of charging retail customers for holding deposits. It's a discussion that is not on the table right now.
In relation with the dividend policy, So our policy is we set the payout 40% to 50%. You mentioned you relate this with the ECB, Bank of Spain comments and the capital targets, naturally, we every year, we have a ICAP, the capital plan, in which we include our projections for dividends and Capital and building the capital required for the business with the buffers we've seen at DIM. So I do not see a we're going to I don't see any threat to this 40%, 50% payout ratio. When you mentioned to pay dividends based on reported profits
[SPEAKER ANASTASIA ALTOZ DE LA
CHEVARDIERE:] So we noted that we already changed our quarterly dividend policy for the duration. And because we were paying the 1st interim dividend before the first half results were audited, And we concentrate the dividends in 2 payments, but this doesn't mean that we plan to change our payout ratio. So it's a question to accommodate to the requirements that have audited results before we pay any dividend to the shareholders. Finally, the countercyclical buffer, it's true that the Bank of Spain published something, the methodology to estimate the countercyclical buffer. In my view, it's too early to say.
I don't know if you want to Yes.
In any case, legally, any requirement for countercyclical buffers actually enters into force a year later. So even we wouldn't expect anything in the coming quarters. But just to give you sensitivity, a 25 basis point countercyclical buffer in all countries where we operate in Europe would increase our capital requirements at group level by around 8 basis points.
Thank you. The next question comes from Andrea Ungsueta from Credit Suisse. Please go ahead.
Hi, thank you for taking my questions. The first one is on the Brazilian NII. If you could give us the Contribution from the bond portfolio this quarter, I know it was quite stable in previous quarters, But I was wondering what happened this quarter and how should we think about that proportion of NII in Brazil going forward? And the second one is just a clarification. Last quarter, you guided for regulatory impact on capital of around 20 to 30 basis points.
And I had understood that you booked 12 basis points this quarter, but your guidance going forward remains the same. So I was wondering if there is an incremental regulatory impact now.
[SPEAKER JOSE ANTONIO ALVAREZ ALVAREZ:]
So I think in the second part of the I thought we guide you to 50 to 60 basis points regulatory impact for the whole year, yes? And we are still basically within your range, yes? So I don't know if If you made my mistake, but what I have in my head, I always thought 50 to 60 basis points. And In line with what Jose elaborated, what is coming in the next two quarters is the figures Jose mentioned. And NII on the bond?
Yes. We have an ALCO portfolio in Brazil of around EUR 16,000,000,000 with an average yield of 10%. So with this and the average duration of these 3 years.
Thanks, Andrea. Next question please.
Thank you. The next question comes from Darragh Quinn from KBW. Please go ahead.
Hi, good morning. It's Darragh Quinn from KBW. Just On the UK, maybe if you could just give us more detail about that outlook for weaker margins, The net reduction in costs, but also presumably some kind of normalization of provisions. Just trying to understand how the mechanics work to see an improvement in return on equity from the current levels. And then just on capital, you've Reiterated the organic capital generation, but just looking a bit further out, I mean, what kind of impact do you anticipate from operational risk or other areas of Basel IV that could also have an impact that at some stage The market will start wanting to take into account.
Thank you.
Okay. The first question about UK, I mentioned in the margin side was basically the impact is coming from the back book, the standard variable rate that Well, I'll do a review's speed. We'll continue to be there. In the fee income generation overdrafts, As you know, limiting overdraft fees is an issue. So we're going to produce a significant reduction in cost.
They saw the areas in which we can grow revenues, particularly we can grow revenues with more focused activity in the corporate sector. Also, what revenues we get from other areas like related with more with fee income. In provisions, well, normalization, when you call normalization, we are not seeing signs of deterioration of the mortgage book because, well, as you know, 85%, 90% of the book is mortgages. Loan to value is pretty low. And so well, It's more you can make the hypothesis in your own of what you call normalization of provisions.
We are not seeing Any risk of at this point to have a high provisions in I mean in Mortgages, although I understand that the level the current level is very low, but has been very low for years already, yes. Well, capital reorganization operation is Basel IV is 2022, Jose.
Yes. I think it's still very early, although Derek, you note this, although it seems that Basel IV is really finalized, the reality is that it's not. And in terms of the operational risk, you know, there are 2 components. 1 is size and the other one is the multiplier. The multiplier still needs to be defined, and there are some uncertainties with regards to size and the size of the actual operational loss that is part of the calculation.
So the range depending on how this plays Actually, the range could be somewhere in between like EUR 20,000,000 to EUR 100,000,000. So I think it's a speculation at this stage. And until we see this really finalized, I prefer not to give you a number because again, it will very much depend on the outcome.
Thanks, Tarek. Next question, please.
Thank you. The next question comes from Fernando Gil De Santubanes from Barclays. Please go ahead.
Hi, good morning. Just two questions from my side. The first one is volumes in Spain and UK, what are the trend that you're seeing, especially in Spain after the new mortgage law, this is 1. 2nd would be the fixed rate Mortgage production, how do you see it in Spain? And finally, in the U.
S, you had the approval to increase in Santander Consumer. So if you can please provide an update on how you are doing on the increase in shareholder in Santander Consumer And the capital release, if you get to that figure, 80%, how much would it be?
So volumes in Spain, particularly mortgages after The new mortgage law was introduced. Naturally, when you introduce a new law that is much more demanding in terms of The requirements in order to reassure that the customers know every stream of the Contact, they sign and they need to go twice to the public notary, for example, when before was just one. And The sometime between the first visit, let's call it in that way, to the notary and the second one, create some noise in the process, but it's a Pure procedure. And some of the digital developments that were new to assure that the new process was working properly It had some problems because there were different developments in the market. Aside from this, I will call, noise, The activity remains, I will say, business as usual.
What I mean activity, I mean activity in the demand of the new mortgages, not the activity on Finally signing the mortgages where the procedure creates some noise in this, but I wouldn't say nothing that was expected, Yes. So the usual thing when you introduce a more much more demanding in terms of procedure law. Other than mortgages, I will say, well, probably is more about us than the market as a whole. We are more demanding in terms of profitability of the new lending. For that reason, probably we are less.
We are growing less or even decreasing some portfolios that the profitability is not the one we require. And other than that, I don't see a change in trend. In UK, Jose already mentioned that we are seeing a growth of 1%, 2%. We are growing in line with the market, both in mortgages and the other items, and I don't see this changing. So we haven't seen a change in the trends in the market in the UK.
Fixed rate, we are 20 something percent of the new production is coming at fixed rate. We are not so pushing that much this. We are, let's say, we have a policy in which we offer fixed both fixed and floating rate without particular bias in our distribution of mortgages towards fixed rate or variable rate. We are allowing we informed the customers that we are allowing them to choose what they think is more convenient to them. Finally, your last question is crucial buyback capital release in relation with this.
Well, as you know, it's public. Share buyback is $1,000,000,000 up to $1,000,000,000 According to the SEC rules that We have a percentage that we can buy based on the volume. Depending on the volume, we will reach the 80% where is the level at which triggers a capital release depending on the price at which we buy because depending on the price, the price matter, the price I would buy, but maybe in the region of 10 basis points or maybe below 10 basis points, yes. So that's
the outcome we expect. Thank you. Next question please and last question.
Thank you very much. The next question comes from Andrea Filtri from Mediobanca. Giovanca, please go ahead.
Yes. Thank you. First question on BRD2. What are the main changes versus your current And MREL requirement. And if you can elaborate on this final version to address us on this.
And secondly, on capital, What's the outlook for the approval of the new UK IRB models?
[SPEAKER JOSE ANTONIO ALVAREZ ALVAREZ:] Okay. The MREL requirements has no impact At all, the RD2 has no impact on us at all. In relation with the approval of models in UK, well, we need the approval of both the local regulator and the ECB. I don't know if you have a specific No.
No. Obviously, the approval of models now, it's a bit more complicated because of Brexit, because It has to be approved by both the ECB and the PRA, and the current situation is delaying a little bit the approval of the models. We expected to have some new mortgage models approved this year. Now it seems that it's going to be delayed to next year. But again, this is not going to affect our plans in terms of the targets that I gave you earlier.
But having said that, Our weighting in UK probably is in the mid teens when our competitors on average are around 10%, 11%, yes? So it's a big deal for us. But when this is going to happen, I cannot give you a specific timetable for this. Okay? [SPEAKER JOSE ANTONIO ALVAREZ
ALVAREZ:] Thank you, everyone. Thanks for joining. And obviously, the IR team is at your disposal