Good morning, everyone, and thanks for joining today's-
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... 2019 Earnings Presentation. As every three months, our Group CEO, Mr. José Antonio Álvarez, will address in detail the group performance, followed by our Group Chief Financial Officer, Mr. José García Cantera, who will address as well in detail the different business areas performance for the first quarter. Our CEO will take again the floor for concluding remarks. As always, we'll have plenty of time to take your questions. Now, with no further delays, José Antonio, please.
Thank you, Sergio, and good morning to everyone. Thank you for attending this first quarter's results conference call. The quarter has been, from the macro environment, relatively challenging. In this environment, we've been able to continue to grow. The commercial dynamics having changed in the quarter, we continue to grow both in the number of customers being active, being digital customers, at a good pace. We are transforming this growth in customers into growth in the volumes of loans, deposits, and mutual funds. We are growing the 4% or 5%. Overall, I wouldn't say that the quarter shows a significant slowdown in the commercial activity of the bank. We were able to transform this into a result that in statutory profit quarter, we got EUR 1,840 million.
That is 10% below the same quarter last year, mainly due to the extraordinary provisions results we did as a result of the restructuring we are doing mainly in Poland and in U.K. in the quarter. Also, we have some capital gains from Prisma in Argentina and capital losses due to the disposal of real estate in Spain. Net is EUR 108 million charged to the P&L. The underlying profit was more in the line of close to EUR 1,550 million in the quarter. The results are affected mainly in the quarter by what we call here in the slide market environment. It affects mainly CIB business, the wholesale business, as you have seen inside the CIB, the market related business inside CIB. The accounting impact that you very well know is the change in IFRS and the high inflation adjustment in Argentina.
Argentina last year, as you remember, in the first, second quarter, they were producing in the region of EUR 60 million- EUR 70 million results. This quarter came as a result of the high inflation accounting, like EUR 10 million. It is a significant slowdown there. In terms of profitability, we continue to produce in the quarter a significantly higher return on tangible equity than our peers. The capital generation in the quarter was good. We guide you for an average around the year, around 10 basis points per quarter. This quarter came double than this due to the fact that the risk-weighted assets barely grew in the quarter. As a result of this, the Core Equity Tier 1 at the end of the quarter was 11.25%, after absorbing almost 30 basis points of regulatory effects that I will elaborate later on.
We update you in our mid-term view in our Investor Day at the beginning of this month. I have nothing to add to what we said at that time. While we still face significant uncertainties in the short run, mainly the lower for longer interest rates and Brexit uncertainties being the main ones, but not the only ones. In the first quarter, as I mentioned, customers continue to grow in a good way. We transform this into higher volumes. The customer revenue is growing 4%. We have been affected in the quarter by the effects I already mentioned. Profitability basically is on hold, is slightly lower, but I would say underlying profitability is progressing well. The solvency I mentioned, and credit quality is still improving. 40 basis points NPL down, and cost of credit below 100 basis points. I would not say there is no news here.
In relation with customers, I mentioned that we continue to gain significant market share in some key markets, particularly in Brazil and Mexico, we are gaining share. We are doing also well in the U.S., and you have seen the numbers. The volumes are growing well. We are holding up basically the volumes in continental Europe, where consumer finance is still growing and is growing above the market. When it comes to the volumes, I already mentioned, we are growing 4% or 5% above loans and deposits. You see on the loans side, some deleverage is still going on in Spain and Portugal. We are growing very much in line with the market in Spain, although we are reducing our booking mainly in CIB and institutional lending, where the book is falling for different reasons.
Some of them related with more activity in capital markets, some others because profitability by around double digit, while in SMEs and consumer, we are growing the book, and this quarter, the book was basically flat. All the other markets, as I mentioned, we are growing well both in the U.S., Brazil, Mexico, according to our expectations. Remember that we told you in our Investor Day that we expect our Latin American business to grow around in double digit territory in volumes. The same can be applied to customer funds, where we are growing all across the board. Some recovery in the quarter in the asset management, thus the fourth quarter last year was very bad in terms of assets under management due to market conditions. We recovered somehow in the quarter.
The fee income is not still feeding through the P&L just because it was recovering through the quarter. You have here the numbers quarter-on-quarter, the attributable profit. I already mentioned the figures. You have the comparison with the first quarter and the fourth quarter. The comparisons, you know that there is several accounting effects, particularly. That is a negative in net interest income, a positive in provisions. You have here in the P&L, compared with the first quarter 2018, what we have is here, customer revenue increase driven by net interest income and fee income. Costs are starting to reflect the synergies we are getting in Europe, particularly in Spain, Portugal, and it will come more from the U.K., also in the U.S., that we anticipate to you several quarters ago, after the regulatory drive, we're going to see a better cost performance in the U.S.
Result of this, the net operating income went up by 1% on income. Profit before tax + 3%, taking into account the benign credit action area I already mentioned. Lastly, in the net, the tax rate in the quarter was higher, 36% compared with 34.7% a year ago. Minority interest grew 16%, mainly due to the strong performance of Santander Consumer U.S. In the net capital gains and provision, the net number is minus a charge of EUR 108 million. This comes from a positive capital gain on the sale of Prisma, the acquiring business in Argentina, that is EUR 150 billion. Positive capital from the sale of properties is basically the anticipation of future commissions that we should pay for those properties with the services, EUR 180 million, and restructuring costs in Poland, U.K., EUR 78 million.
Looking at the P&L lines, starting with the net interest income, excluding the FX effect, is 5% better due to higher volumes. Euros, in seven out of the 10 markets. It was lower in the first quarter for three reasons. We have the TDRs in the U.S. that we mentioned in the previous quarter. That is fully compensated for lower loan loss provision is positive in NII, is a negative in loan loss provision. Second, IFRS 16, the impact is EUR 80 million. Eliminating this impact, net income will have risen by 1%. On a like-for-like basis, it's growing 1% quarter-on-quarter. Fee income was higher than the fourth quarter and year-on-year. I will elaborate on this later on.
Other operating income, while it was weak, is very much related with the activity of CIB and ALCO portfolios that were lower than it was the previous year. Going into the net interest income, you have here the drivers. Overall growing 5%, mature market growing 2%, developing markets 8%, you see volumes. NIM, we match to get a higher net interest margin in mature markets, increases two basis points customer NIM. Developing markets, some margin compression that we were advising, anticipating you mainly in some markets, 26 basis points down. Those are the main components of the net interest income. When it comes to fees, I will say fee income 3% up, reflecting what I told you, the number of customers, greater customer loyalty, both in individual and companies.
While you see the activity growth in mutual funds, particularly in cars and insurance premiums, that are growing very nicely. On the right side of the slide, you have a deeper detail of what's going on with the fee income. Retail banking is growing 5%, wealth management 1%, and it's CIB that the quarter was weaker as I anticipate. By markets, you have mature markets going down by 3%, mainly affected by CIB, where the activity is stronger in mature markets, is the market-making activities, while developing markets are still growing at 9%. Those are the components. In costs, as I mentioned at the beginning, we are seeing the costs, the result of Banco Popular integration, both in Spain and Portugal, and the cost control in the U.S., where the costs in those three markets, the costs are going down.
Also in the corporate center are going down on nominal basis. On real-term basis, compared with inflation, costs are going down in the majority of the markets. Poland, due to integration of Deutsche Bank operations, Mexico, where you know we are in an investment plan that drives the cost up, and Argentina, you compare with inflation, is very high inflation. When you actualize salaries back with inflation, some quarters come significantly up or down. Cost of risk, quality, very little to add. Cost of risk, south of 100 basis points, NPLs continuing the right way, and coverage ratio, as usual, stays very high. Capital generation was good, in the range of 20 basis points. We absorb 29 basis points due to the regulatory impact. You have at the bottom which regulatory impacts were there.
The IFRS 16 was the most important one, 19 basis points, you have another minor one, including the TRIM that was five basis points. Organic capital generation, 20 basis points. Small changes in perimeter, I mentioned Prisma in Argentina, the sale of the acquiring business and others that is pluses and minus, mainly related with pension funds. On the right side, you have the other relevant capital ratios, the total capital ratio, Tier 1 level ratio, and all of them, our numbers are good. We already comply with MREL requirement as of the end of the quarter. The ratios, tangible net asset value per share went up by 3%. We reduced slightly the return on tangible equity. The quarter was a bit quicker, as I mentioned at the bottom line, and the underlying ROE suffered a little bit as a result of this.
I hand over to José, that will elaborate on the different units of the different subsidiaries.
Good morning, everyone. Thank you, José Antonio. In the quarter, we increased slightly the weighting of the Americas relative to Europe to 52% due to the higher weighting of Brazil and the U.S. In terms of underlying attributable profit, seven out of our 10 core markets had a positive evolution, we had double-digit growth in the U.S., Brazil, and Mexico. Before I go into the different units, I want to make some general comments that affect almost all of them. On the one hand, José Antonio already alluded to these weak market conditions, which affected gains on financial transactions and fee income. IFRS 16, that had a negative impact on net interest income of EUR 81 million in the quarter. Compared to the fourth quarter, we had two fewer days, that meant EUR 190 million less net interest income.
Somehow, these issues disguise a better trends in the underlying business, in the customer business that we have in the different countries. Starting with Brazil, good quarter again, following the positive trends we saw in 2018. Double-digit growth in loans and funds, with demand deposits and time deposits growing 11% and 15% respectively. We continue to gain market share selectively. In auto finance, eight basis points, credit cards, 103 basis points, payroll-based credit, 144 basis points, Getnet, 132 basis points. These are just examples of the market share gains that we are producing in Brazil. Looking at year-on-year profits, significant growth with return on tangible equity at 21%. Net interest income increased based on more volumes and fee income, with basically raises in all lines. Costs very much under control, growing lower than inflation and improving efficiency to record levels down 100 basis points year-on-year.
Lower loan loss provisions with cost of credit at 3.88%, the lowest in many years and well below 4%, which was our prediction a couple of years ago. Quarter-on-quarter, higher profits, basically on lower costs and reduced provisions. Net interest income fell due to the impact that I just mentioned, IFRS 16, fewer days, two fewer days. On the other hand, customer-related net interest income increased in the quarter 1%. If we exclude the two fewer days, the net interest income increased 3% quarter-on-quarter. Fee income was obviously, as you know, affected by the seasonally higher fee income that we had in the fourth quarter, associated with the renewal of the insurance policies. In Spain, we are progressing according to our plan in the integration of Banco Popular.
We have already integrated 600 branches, which is more or less 40% of the total, the plan is to finish the integration in July. Underlying profit fell 11% year-on-year, particularly affected this quarter by capital markets activity and ALCO portfolio management. Excluding these impacts, profit would have grown mid-single digits. We had positive evolution of net interest income due to significant improvement, as you can see, in the cost of deposits and reduced fee income, mainly due to weak wholesale businesses and mutual funds. Costs were down 6%. If we exclude the higher costs in some activities in Openbank, cost in Spain, in the retail bank in Spain, were down 8% in the quarter, showing the benefits of the integration with Popular. Provisions were down. Cost of credit was 34 basis points in the quarter, which is already a low level.
In terms of activity, since December, total customers are up 50%, digital customers up 350%. This is translated in more activity and a significant growth in deposits that increased EUR 6 billion in the quarter. Double-digit growth in demand deposits that more than offset the fall in time deposits. Again, more customers, more operations, as some examples, for instance, we had new insurance premium contracts up 16% and point of sale turnover up 12%. Stock of loans remained unchanged over the fourth quarter, fell 3% year-on-year, mostly due, as José Antonio said, to the contract, to the decline in the stock of mortgages under the leveraging in wholesale banking and public institutions. Compared to the fourth quarter, gross income was 3% higher.
Better conditions of the 123 account and the impact of the lower, obviously, we had a contribution to the Deposit Guarantee Fund in the fourth quarter, more than offset the lower accrual of interest, fewer number of days, as I said, and the ALCO portfolio. The negative impact of IFRS 16. Overall, a good performance in net interest income when we look at the underlying customer trends. Costs were lower, provisions increased, coming from a particularly low level in the fourth quarter. Looking ahead, we see flat to slightly positive net interest income, as it will benefit from the change in the conditions of the 123 account, while costs will continue to reflect the optimization measures carried out as the integration of Banco Popular progresses. Moving to Santander Consumer, it continued to grow, backed by commercial agreements and the increased sales through digital channels.
For example, in March, we signed an agreement with Hyundai-Kia to acquire 51% of their financial arm in Germany, which will strengthen our leadership in the country. New lending rose 2%, despite that actually car sales in Europe were down 3%, and this is due to the fact that our brands are gaining market share all across Europe. First quarter profit was up 1%. By lines, gross income increased, mainly due to higher net interest income, higher volumes, and slightly lower funding costs. Operating expenses were flat, despite business growth. The efficiency ratio improved by 119 basis points year-on-year. Loan loss provisions were stable, despite the impact of higher portfolio sales in the first quarter of last year. We had none this year. Cost of credit at 38 basis points is below the average through the cycle.
Looking ahead, we see our business growing faster than the market and cost of risk normalizing. In the U.K., our business was carried out against the backdrop of very strong competition, particularly in mortgages, and the uncertainty associated with Brexit. Lending went up slightly year-on-year, fueled by mortgages and other retail loans that were up EUR 4 billion year-on-year. We continued to reduce commercial real estate. Customer funds changed to more demand deposits that continued to increase up 2%. First quarter underlying profit was 16% lower year-on-year due to reduced gross income. We had, as I said, pressure on mortgage margins and lower SVR balances. Lower fee income from corporate banking activities and reduced gains on financial transactions. Slightly increase in costs up 1% due to investments in technology and projects, although in real terms, costs were down 1%.
Cost of credit remained at very low levels, only 7 basis points in the quarter. In addition, we had a restructuring charge of EUR 66 million associated with the closing of 140 branches and the renovation of another 100 branches. The closure affecting 1,200 employees. Looking ahead, in terms of revenues, we continue to see a strong competition, therefore strong pressure on net interest income, particularly now that all interest rate hikes seem to have been pushed forward significantly. Costs, however, should be flat or down in real terms. Looking at other units, I will go very briefly over the main ones, although you have all the details in the appendix. In Mexico, our strategic focus is threefold. On the one hand, transform our retail and commercial banking, improve customer attention models, and focus on digitalization.
All of this is reflected in greater customer attraction and retention and the launch of new businesses. Loyal customers year-on-year are up 28%. Digital customers are up 57%. We had a stronger growth in lending, especially large companies on payroll-based lending. Growth in funds were driven by deposits of individuals and SMEs. Profit was 12% higher year-on-year, underpinned by net interest income, double-digit growth due to volume and interest rates, and the fall in provisions, cost of credit, which improved to the best level in the last six years. In short, greater loyalty and activity, higher profits and profitability with a return on tangible equity of 20%. We expect these trends to continue in the coming quarters.
In the U.S., we had an excellent quarter with good evolution of both volumes, with lending increasing at double digits as well as the main P&L lines, where attributable profit actually increased 35%. Year-on-year, the good performance was driven by increase in gross income, costs, and provisions. Profit grew strongly quarter-on-quarter, benefiting from seasonal factors. Remember that in the fourth quarter at Santander Consumer, trends tend to be the weakest of the year with higher costs and higher provisions, while those in the first quarter tend to be the lowest. Remember that in the fourth quarter of last year, we had a methodological change in the accrual of Troubled Debt Restructurings, TDRs. With almost no impact on the bottom line, but there was a top-line impact of EUR 150 million. In the appendix, you have all the details of the impact of this adjustment by line.
In summary, positive evolution, where we expect will continue in the coming quarters, with again, seasonality in Santander Consumer, with a stronger first half relative to the second. In Chile, the economy is growing at 3%, is expected to grow 3% this year and next year. On the back of this, loans are growing well, are growing at 8%, and also improving the mix of customer funding. All demand deposits, time deposits, mutual funds are also growing. Underlying attributable profit was up 1%, very much affected by lower inflation in the quarter. Inflation was zero, and because of the inflation-adjusted products, this had a negative impact of EUR 45 million. Already in April, inflation was 0.3%, and we had a gain of around EUR 20 million.
There seems to be some volatility associated with this, but again, the trends in terms of customers and business are very positive, and we would expect them to continue so in the coming quarters. In Portugal, strong lending with clear gains in market shares in almost all products. Our new production market share is in the region of 20% for almost all the products. The stock of loans dropped year-on-year due to portfolio sales last year, more or less EUR 1 billion. Deposits are up 9% year-on-year. Profits also up 7% year-on-year due to higher revenues, lower costs, reflecting the synergies of the integration of Banco Popular, and provisions, which were slightly positive. In the quarter, S&P upgraded the rating of our bank to BB B, and it was chosen as the brand with the best reputation amongst the banks in Portugal.
In Poland, the acquisition of Deutsche Bank, Poland has strengthened our competitive position in the country, and we are now the second-largest bank in the country. The integration obviously explains the abnormally high year-on-year growth rates that you see in the P&L and the balance sheet. The very good business performance is not driven all the way down to the P&L because of higher contribution to the banking tax, which by the way, it's not tax deductible. Lastly, we had a EUR 12 million restructuring charge in the quarter, affecting the closure of 70 branches and more or less 1,400 employees. Finally, in Argentina, the business was very conditioned by the very high inflation, 50% inflation, 50% depreciation of the peso, and almost 70% interest rates. Attributable profit was EUR 161 million, including the capital gain from the sale of our stake in Prisma.
Excluding this, the underlying profit was EUR 11 million. There was an inflation adjustment of EUR 53 million. The monetary adjustment was EUR 38 million, and through currency adjustment, EUR 15 million. On the business side, we see positive performance of customer revenues and positive cost control. Finally, on the corporate center, the underlying profit was hit by higher costs associated with foreign currency hedging. In the net interest income, we also had higher financial costs, due to higher stock of issuances and the impact of IFRS 16. In terms of costs, 1% lower. Here, we had two forces in opposite directions. On the one hand, we had the simplification measures and the streamlining. On the other hand, the investments in global projects. Also, IFRS 16 had a positive impact on costs.
Lastly, we include here a loss of EUR 180 million from the sale of a portfolio of real estate assets to Cerberus Capital Management in the quarter. Now I'll turn it back to José Antonio for his closing remarks. Thank you.
Thanks, José. To finish this presentation. Yes, summing up a little bit what the environment in the Q1. Well, in this environment that was not great, we increased our customer volume and customer base. The underlying trends are solid. Year-on-year growth in customer revenue, cost control, and lower loan loss provisions. The capital generation was good in the quarter, as we mentioned before, and tangible net asset value per share significantly increased 3% in the quarter. Underlying return on tangible equity higher than our competitors, affected by market weaknesses in the quarter. In the very short view, looking forward, we see a deterioration in the macro scenario with lower growth expected in our markets. Probably we should expect a component growth of 1.5% GDP growth.
In this environment, we're going to have mixed trend volumes, probably growing double-digit, around double-digit in the Americas. Growing the customer base, but not that much in volumes in Europe. We expect good cost control, and the synergies and efficiencies we announced in Investor Day. The cost of credit remain at relatively low levels. Our aim is continuing market share in our main markets and improve our profitability and strengthen our balance sheet. Let me finish elaborating the two operations we announced the same month. The first one was the voluntary tender offer for the 25% of the shares of our subsidiary in Mexico. This is very much in line with the strategy we announced, and it meets our financial criteria, with an expected return on investment of 14.5%.
At the same time, for Santander minority shareholders, it's an opportunity to monetize their shares and gain exposure to a global bank and diversified bank like Santander. We do this offer because we believe in the financial sector in Mexico and the potential growth going forward through a higher bancarization and a large number of customers in the country. The second operation we announced the same month was we signed a memorandum of understanding with Crédit Agricole, for our custody and asset servicing businesses. This operation is also consistent with our strategy. The businesses are very complementary in a business where the scale matters a lot. We get a better position in the combined entity to be an efficient competitor in this niche of the market in Europe and the Americas.
This operation, as we already communicate to you, will produce at the closing an estimated capital gain of EUR 700 million that we expect to record in extraordinary charges on provisions. Overall, the line of extraordinary charges and provisions at the year end, the quarter was -EUR 108 million. Overall in the year will be basically zero. Positives and negatives will offset each other. This operation has also a slightly positive impact in capital, three basis points, and the profit going forward, expected profit going forward based on the business plan of the combined entity, will mean a slight increase in our EPS. Finally, just to remember you our main targets, financial targets that we announced to you in Investor Day. I think the quarter, in the underlying basis, shows that we are progressing towards our goals.
We are showing that the business is growing as we were expecting in the Americas. We are showing that our efficiency gains that we announced to you in Europe, you see in the numbers in Europe that we are starting to gather momentum there. The capital generation has been good in the quarter, we've been able to offset the regulatory headwinds, and this will transform as we expecting higher profitability and translate in a higher dividend and higher profitability for shareholders. Thank you. Now we remain at your disposal for the questions you may have.
Thanks, José Antonio. Indeed, we have now time to open the Q&A, please, operator, we can proceed with the first question.
Ladies and gentlemen, the Q&A session starts now. If you wish to ask a question, please press 01 on your telephone keypad. The first question comes from José Abad from Goldman Sachs. Please go ahead.
Hello. Good morning. Thank you very much for the presentation. Two questions from my side. The first one is, what's the impact from the regulatory equivalence with Argentina? I believe positive, also a follow-up question on this is whether actually the positive impact from this, in case there is one, is included in the 50 basis points impact from management actions that you guided during your Investor Day. The second question is on litigation. There was an article in Expansión, I believe, last week, talking about the Supreme Federal Court in Brazil forcing Santander to compensate workers from Banespa from their bonuses back to actually in 1986. The article quantifies the potential impact of actually north of EUR 1 billion. I think it would be useful for us if you could actually clarify what's the potential impact from this and any litigation reserve that you may already have against this contingency.
Thank you very much.
Thank you, José. I will elaborate on the second question. I pass the first one to the CFO that will elaborate on the equivalence in Argentina that was approved, as you know, by the EU in April or in March?
April.
April. The article you refer, the case you refer in the Supreme Federal Court in Brazil, while it's related, as you know, the litigation related with labor claims in Brazil is pretty high. As a matter of fact, the provisioning we have in the balance sheet for labor claims is close to BRL 4 billion in the country. We appeal this ruling of the court, we think that we are well provided for the significant litigation labor claims that we have in Brazil. We are well provided. Not only specifically for this one, for the overall litigations claims that we have, that is a very high number, taking into account one- by- one. Now, you want to-
Specifically, the article referred to BRL 1 billion . We are talking really EUR 150 million, worst case scenario. Again, this is a process that will take quite a long time. We don't expect this to be actually to finish at least within the next seven, eight years. I didn't get the first question.
The first question was about equivalence in Argentina, declaring there for the EU, the European Union. How much this impact our capital?
I don't know exactly the numbers. 6 basis points.
This is due for those who are not familiar with this, as a matter of fact, the significant reserve requirements in Argentina, and when we gather deposits, we need to reserve at the central bank some of these deposits for regulatory reasons, and those deposits had risk weighting. When the local regulator is declared equivalent by the EU, the risk weighting goes to zero, this is a reaction in risk-weighted assets and translating what José said, 6 basis points of capital.
Thanks, José. Next question, please.
The next question comes from Vanessa Guy from J.P. Morgan. Please go ahead.
Hi. Good morning. My first question was on capital. I was wondering if you could provide some guidance on what capital impacts you would expect over the next coming quarters for 2019. My second question is regarding the U.S., and how the Chrysler agreement is progressing. Thank you.
On capital, we guide you in Investor Day 50 basis points. 50 basis points-60 basis points. We already had in the quarter 30, so another 20 basis points-30 basis points to come. This is what we expect to come from the regulatory headwinds, including many items there. On the other side, question related with Chrysler, FCA. We are still holding with FCA, what I will qualify as a constructive dialogue, in relation with the business we are operating for them in the U.S. I cannot, at this point, tell you where this dialogue will end, but I will say at this point that the dialogue is constructive and we are looking for solutions, how to have a better business for both, helping them to sell more cars and having a sound and solid financial business going forward.
Thanks, Vanessa. Next question, please.
The next question comes from Alvaro Serrano from Morgan Stanley. Please go ahead.
Good morning. A question on capital and then on restructuring for me. On capital, you've built 20 basis points in the quarter from organic generation. Can you maybe give us some color why it's higher than your usual 10 basis point run rate? Is it faster DTA rundown or something that we could extrapolate? When we look forward, you've obviously done Mexico, the buyout, you've done the MOU with CASA. Can you maybe walk us through an updated list of some of more efficiency and optimization we could look forward to? You've talked in the past about U.K. model. We've got the 6 basis points that we just mentioned on Argentina. Can we look forward to further securitizations? You've got a stake in Alawwal that presumably is a source of capital. Just a general color on that. The second on restructuring.
Can you maybe give us a feel for the timing of the restructuring in Spain and U.K.? I think you mentioned Spain for July, the last headcount reduction. In the U.K., given the revenue trends, it's very difficult for any substantial change in those revenue trends, at least in the short term, given the rate outlook. If you could maybe talk us through, you mentioned cost flat versus inflation this year, can we look forward to further reductions and when those restructuring and those reductions might happen? Thank you.
Okay. Going into the first question, the capital generation in the quarter, 20 basis points compared with our guidance. On average, 10 basis points, I will stress the word average. On average, we generate 10 basis points. This quarter came better. The reason is, we are being more efficient in managing risk-weighted assets. At the same time, we are much more demanding. I mentioned when I was talking about Spain, we are much more demanding, particularly in those exposures that within or below the cost of equity. For that reason, we are heading at what we qualify in our Investor Day as a lighter capital model. This is the reflection of this. You mentioned also Mexico and the buyer in Mexico, the agreement with the Crédit Agricole that has small positives in capital.
The capital management, as you can imagine, became a priority for the group several years ago with the higher capital requirements, we are refining all the capital models with a big project, internal big project, that is managed by the CFO office. We are improving significantly the tools to match capital across the group, some of this is going to be reflected in the numbers going forward. Being more efficient on one side in using the capital in new operations, on the other side, having a match in the balance sheet in a way that provides a higher return. The second question was restructuring in Spain. You mentioned Spain, U.K. timing. José talked about the timing in Spain.
We called the unions, I think it was yesterday, to have the first meeting in a week, next Monday, I think, to start the negotiation process with the unions. It's very difficult to say when the process is going to finish. On the other side, the integration process, the branch integration process that José also mentioned, we already integrate 600 branches out of 1,600. We expect to finish the 1,600 branches integration at the end of July, more or less. After that, we start the reduction of number of branches, provided that we reach an agreement with the unions that we're going to have the discussion at the same time. In our mind, it has been to finish the process this year in Spain. You mentioned U.K.
U.K., we guide you to a restricted cost control. At the same time, in the best of day, we guide you to a return on tangible equity in a tougher revenue environment, higher than the current one. This mainly will be done through the cost. It is true that we plan to grow some businesses in the U.K. We are growing GB and other related business, but we are suffering, we are betting on a tough environment for the mortgage business. That is the one who is more affected at this stage. We expect to be able to show a better cost control. Not only better cost control, probably some reduction in cost going forward is something that we expect to get.
Thanks, Alvaro. Next question, please.
The next question comes from Carlos Cobo from Société Générale . Please go ahead.
Hello. Thank you very much for the presentation. A couple of questions from my side. In the U.K., as a quick follow-up, not only that you are seeing some cost inflation, NII is weak, fees are not particularly strong. I was wondering whether you are considering more actively the potential cutting the 123 Account, as you did in Spain, as a way to compensate the profitability challenges in the U.K. Second, in Spain, cost of risk was just slightly higher than the run rate last year. I was wondering if you could provide some color here, outlook for the whole year, and whether there is any exceptional or some seasonality that you tend to charge higher provisions in the first Q. Thank you.
You mentioned the U.K. I will say we are managing the business, and we're going to take measure both on the business front and in the cost front. In the business front, you mentioned the 123 account. We don't have a specific decision for this specific account at this stage. This is sure that we should look for new sources of revenue at the same time that we reduce the cost, that this is the plan going forward in the U.K. The cost of risk in Spain, I will expect the cost of risk in Spain to remain nothing new. The quarter was a small spike, but I will expect to be in the region of 30 basis points, in the 30 basis points, for the year. Nothing new here in this front.
Thanks, Carlos. Next question, please.
The next question comes from Ignacio Ulargui from Deutsche Bank. Please go ahead.
Hi. Good morning. Just have two questions, one on the Brazilian NII. If you could update us on the trends that we should see. You have been guiding for a high single digit, supported by loan growth. Whether the recent downgrades that we have seen in GDP may affect a bit lending demand, and how do you see that? The second question on the competitive landscape in Spain, particularly on the mortgage market and the implication of the new mortgage law. How do you see that should impact margins going forward? Thanks.
NII in Brazil in the quarter, as you know, came down. This is more due to the non-customer related activities. Last year, interest rates, or the previous year, in 2017, interest rate came down sharply as a result of this in 2018. We got significant revenue on this. On the customer front, we have been guiding you for double-digit growth in the country, and we have been guiding you for a lower growth in NII. Mid, maybe to high, mid to high or mid single digit in Brazil. Some margin compression is we are expecting in Brazil. When you refer to Spain, as you said rightly, the market remains fairly competitive, not only mortgages, I will say all across the board. It's true that we managed this quarter to increase our net interest margin on customers.
You saw through our reduction in the funding cost, at the same time, slight increase in the yield we are getting from our assets. We are happy with this. You specifically referred to mortgages. Mortgages remains fairly competitive. I haven't seen an extra reduction in prices from the one we had one quarter or two quarters ago remains competitive. It's true that we managed to get a higher yield due to the fact that in the quarter, we remained flat on the loan book, but we grew in SME lending and we grew in consumer lending. That reflects into higher yield in the loan book. At the same time, we reduced the funding cost, as I said. Mortgages, I will say, the market remains competitive. I don't expect a big deal here to remain where it is at this stage.
Thanks, Nacho. Next question, please.
The next question comes from Andrea Filtri from Mediobanca. Please go ahead.
Yes, good morning. Two questions, one on capital and one on hedging. On capital, there have been changes to CRD rules. I am talking to CRD V, and specifically to the SME support factor, and to the possibility to exclude from intangible deductions some software components. Could you give us your indicative impacts for next year? Can you also clarify on the regulatory headwinds, I was left at 50 basis points, then before maybe you said 50 basis points-60 basis points. Finally, the TRIM impact. When you guide the 50 basis points, is it all in 2019, or there is still a part in 2020 regarding the low default portfolio? On the hedging, could you update us on your hedging strategy and how you are adjusting to a more dynamic use of this tool? What was the P&L cost and the capital impact in Q1? Thank you.
Okay. You take the hedging?
Yeah. Hedging, the strategy remains the same. We hedge the capital ratio. That is why, despite that risk-weighted assets due to currency depreciation went up EUR 8 billion in the quarter, there was no impact on the capital ratio. The cost of that strategy in the first quarter is more or less 4 basis points of capital. We also hedge the P&L on, let's say, on an opportunistic basis based on the outlook that we have and the risks that we see in the different countries. Right now, we have fully hedged the pound and the Mexican peso, and 75% hedged the expected results that we have in Brazil. The cost of that in the first quarter was EUR 60 million. On the other hand, obviously, you have the positive of the translation of the results in local currencies into euros all throughout the P&L.
On the numbers you asked about capital, the 50 basis points-60 basis points regulatory headwinds is for this year, is for 2019. We already absorbed, as I said before, 29 basis points, we expect the rest to come along the year. When you were referring to the CRD V eventually impacting changing in SME support factor and intangibles, as you know, we have a significant exposure to SMEs, mainly after this decision of Popular, although a significant portion of the SMEs around the world are in the standardized model. We have the SMEs in the corporate business in U.K., U.S., and all Latin America is still standardized model. We have only internal ratings-based model basically for Spain. We have significant exposure there and changes in the support factor affects us accordingly. In intangibles, you mentioned this.
Well, intangibles, there is a door open there to have a discussion of what the intangibles. We are very vocal on this, because we think that at this particular juncture where we are investing significantly in digitalization, what means basically investing in software, there is an asymmetric treatment when you invest yourself and you put it in your balance sheet when you buy from someone else. When you invest yourself, it's intangibles, and you do that 100% from capital. When you buy it from someone else, the treatment is totally different. We being, as you know, our software, we control our software, and we continue to invest significantly in our software. This will be a significant deal for us. It's very difficult to say at this stage, because software, there are different type of software.
For how long the software remains being useful for the bank is probably too early to call, but we have intangibles, if I remember well, it's EUR 2.8 billion or something like that in the balance sheet. How much this may be affected, I have no idea at this stage. It's too early.
Thanks, Andrea. Next question, please.
The next question comes from Mario Ropero from Fidentiis. Please go ahead.
Fee income trend in Spain, which has been very negative quarter- after- quarter for a while, presumably due to corporate and investment banking. I was wondering if you can give us an indication on the weight of this business in the fee income line, and when do you expect this line to bottom out. On the NPL ratio in Spain, I noticed that it has remained flat since mid-2018. Please, if you could comment and clarify what's going on here. Thank you.
Fee income in Spain, as you rightly mentioned, went down by 3%. It's explained basically for CIB activities. If I look for the whole year, I will expect some growth in this, slightly positive, some growth in fee income, assuming that the CIB business behaves in a normal way, I would say, having the same activity than last year. The other question was about NPLs.
NPL in Spain.
NPL. The credit quality in Spain has good trends. I don't remember exactly the NPL number. If it's flat, probably all right. I don't have in mind any significant problem in the reduction of both non-performing assets, I mean, both loans and properties. We are progressing a good pace in the reduction of this, and also the provision of this, we feel comfortable with the level of provisions we have already for all this exposure.
Thanks, Mario. Next one, please.
The next question comes from Daragh Quinn from KBW. Please go ahead.
Hi, good morning. A question on Spain, just with a view on the new incoming government. We saw the Socialist Party campaign on the idea of a minimum effect of corporate tax rates in Spain. I'm just wondering if you see any risk to the amount of taxes you pay out of the legal entity in Spain. Then a second question on asset quality and provisions in the U.K. and the European consumer finance business. You've indicated before that you expect to see a normalization of credit charges there. I was wondering if you could just update us again on, A, the time that it'll take for those provisions to normalize, and at what level do you expect them to normalize? Thanks.
In Spain, well, it's too early to say. The tax rate in Spain, well, it's too early to say. Naturally, it was subject for the legal entity in Spain to the corporate tax in Spain. As you know, our corporate tax is already higher than the other sector. Well, I'm not going to speculate on higher or lower tax rate at this stage. In asset quality provisions, you mentioned U.K. and consumer finance. We told you in the Investor Day that we are having a cost of risk lower than the expected loss across the cycle. The distance in the consumer finance, we have been having around 40 basis points, or 40 basis points or even lower. The expected loss is basically double than this. We are not seeing any sign of deterioration in the credit quality.
Probably for this year, if I need to bet, probably will remain closer to the 40 basis points than to any other number. Well, we have always in mind that if our models are right, at some point it should normalize. When? Your question is when. Probably to seek when, we need to look at the unemployment numbers. The unemployment number is the main factor that drives the cost of credit, cost of risk in the consumer business, in our consumer business, not only in Europe, also in U.S. With the U.K., we gave you the figures. Our basic book in the U.K. is mortgages, is 80% of book. The remaining 20% is a mix between corporate and some consumer lending, a small fraction.
Our loan to value is one of the lowest in the market, and our front book will be much more conservative than some of our peers there, and our buy-to-let exposure is low. When you have a cost of risk that is south of 10 basis points, it's advisable.
There's only one way to go.
There's only one way to go. That is up. When? Again, we are in retail business. Our exposure is with households, and the main driver, as in consumer finance, tend to be unemployment. We are not seeing any sign of deterioration of unemployment rates all across Europe, including U.K.
Thanks, Tara. Next question, please.
The next question comes from [guess] , Autonomous Research. Please go ahead.
Yeah, hi there. I've got two questions, please. In Brazil, one of the competitors in the credit card merchant acquiring business has changed pricing on selected credit card transactions, and I was interested to get your opinion on whether you think that'll have any impact on Getnet or the merchant acquiring fees in Brazil. Secondly, could you let us know what the IFRS 16 impact was on costs? I might have missed that. Can you confirm that this likely cost reduction was already part of the business-as-usual costs being flat that you've given at the Investor Day?
Thank you.
Yeah. If you want, I'll take the second. Throughout the P&L, IFRS 16 in the first quarter had, as I said, a negative impact on net interest income of EUR 81 million, and costs were reduced by EUR 59 million. Net, bottom line net impact was EUR -22 million. When we look at cost trends, obviously this is a one-off. Obviously this will affect the year-on-year comparison this year. We consider this as a one-off. In relation with Brazil competition in acquiring business, while new competitors came to the market, this is a market that was a market that basically were two competitors five, six years ago. We came along with our proposal in Getnet. We went from very low market share or almost no market share to close to 15% market share.
The last two or three years, newcomers into the market, newcomers with a strong proposition, particularly for e-commerce related and small tickets. The market is becoming much more competitive. As you know, the fits in this market were significant. There was three sources of revenues in the market, the interchange fee, the flow business that was significant because the payment date was like 20 plus, V plus 20. The business was significant in this front, the income generation from this front. Finally, rent of the gadgets that the merchants use for this purpose. The competition is coming, I would say, in the three fronts. Our business, I think, is much more resilient than others because our business is not just a acquiring business.
It's a business that we bundle the acquiring business with banking services, some lending embedded there, and a package mainly to the small merchants in the market. We were expecting somehow this competition to come sooner or later. It's coming now. We expect to keep gaining market share and approaching us over time to a market share closer to 20%. That was our original aspiration when we started this business six years ago, seven years ago. We got from 1%, 2%- 13%, 14%, close to 15%, and we expect to keep going up in our market share in a more competitive market and with lower unitary fee income, but higher volumes. Don't forget the volumes. The volumes we've been gaining market share growing well in double-digit, close to 20% year after year. In the previous year, we were even growing at 30%.
We expect to keep growing significantly in this business.
Thanks, Rita. Next question, please.
The next question comes from Fernando Gil de Santivañes from Barclays. Please go ahead.
Hello. Thank you for taking my question. My question is regarding the U.S. and the cost. I see that the cost on Santander Bank is still up on a cost income ratio of 77%, more or less. I wonder what further actions you have in mind in order to calm this figure down. Thank you.
Performance in cost. The performance in costs, not only in the last quarter, in the last couple of quarters, has been good in the U.S. still. You are right. Our cost income compared with our peers is VNA compared with our peers in the market is still very high, and we are working on this in two different fronts, yeah? One front is getting more internal synergies. That means that, as you remember, we were much in the U.S. as a separate business. On one side, the private banking, on other side, consumer finance, on other side is VNA, and another side, CIB, in the New York branch and the broker-dealer. When the holding company came along under regulatory pressure, we are still in the process of building the holding operations in the U.S., and we are in a project that is what they internally call One Santander.
That means exactly one operation in the U.S. where we can extract synergies from the operation. Having said that, you should expect a good cost control going forward in the U.S., this is just one part of the business. On the revenue side, when we compare ourselves with our peers, our revenues are weaker. In this regard, we are progressing well, or we are starting to show significant progress, not only in consumer business, but that is another business. In SVNA, we are showing some progress in CIB business, where our revenues are growing, starting from very low levels, close to 20%. Our C&I business is showing significant progress. The multifamily and CRE business that we have basically in New York is showing significant progress, and still, we have more things to do in the retail arena with households and individual customers.
On one side, we mentioned in the Investor Day that one of the key elements for improving our profitability in the U.S. was the operating leverage. We have a very high-cost income, as you rightly mentioned, we expect to keep this well under control or even in some cases going down. At the same time being able to improve with infrastructure, we have the revenue lines in the segments I mentioned to you. With these two elements, we expect to reduce significantly our cost income and improve our profitability in the U.S., in SVNA particularly.
Thanks, Fernando. Last question, please.
The last question comes from Carlos Peixoto from CaixaBank BPI. Please go ahead.
Hello. Hello, good morning. Thank you for taking my call. My question would be on the corporate center. I was wondering if you could shed some light on the evolution of the funding costs at the corporate center, which went up 14% quarter-on-quarter, if I'm not mistaken, 27% year-on-year. That would be my only pending question. Thank you.
I think there's nothing special there. We've had more issuances along the way compared with the first quarter of last year, particularly to comply with MREL requirements. As José Antonio said, we already fully comply with the requirements of the SRB. There's nothing special there. Also the cost of the hedging, which are included as part of the cost of the corporate center, which as I mentioned, were EUR 60 million in the quarter.
We'll end it here.
Thanks very much everyone for joining, and obviously the IR team is at your disposal for any follow-up. Thank you.
Thank you.