Good morning, everyone, and thanks for joining today's 2019 earnings presentation. As every 3 months, our group CEO, Mr. Jose Antonio Alvarez, will address in detail the group performance, followed by our group Chief Financial Officer, Mr. Jose Alfie Cantera, who will address as well in detail the different business areas performance for the Q1. And our CEO will take again the floor for concluding remarks.
As always, we'll have plenty of time to take your questions. So now with no further delays, Jose Antonio, please.
Thank you, Sergio, and good morning to everyone. Thank you for attending this first quarter's results conference call. Well, 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 the group 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%. So overall, I wouldn't say that the quarter shows a significant slowdown in the commercial activity of the bank, and we were able to transform this into a result that in the statutory profit quarter, we got €1840,000,000 That is 10% below the same quarter last year, Mainly due to the extraordinary provisions resulted with it as a result of the restructuring we're doing mainly in Poland and in UK in the quarter. Also, we have some capital gains from Prisma in Argentina and losses due to the disposal of real estate in Spain, net net is €108,000,000 charge to the P and L. So the underlying profit was more in the line of close to EUR 1550,000,000 in the quarter. So The results are affected mainly in the quarter by what I call here in the slide market environment.
It affects mainly CIB business, so the wholesale business. As you've 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, Yasmin, in Argentina. Argentina last year, as you remember, in the first and second quarter, they were producing there is €60,000,000 to €70,000,000 results. This quarter came as a result of the high inflation accounting, like €10,000,000 So it's a significant slowdown there, yes. In terms of profitability, we continue to produce a in the quarter a higher significantly higher return on tangible equity than our peers, And 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 value grew in the quarter. As a result of this, the core equity Tier 1 at the end of the quarter was 11.25 percent after absorbing almost 30 basis points of regulatory effects that I will elaborate later on. So we update you in our midterm view in our Investor Day at the beginning of this month. So I have nothing to add to what we said at the time.
And 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 Q1, as I mentioned, customers continue to grow in a good way. We transformed this into higher volumes. At the customer, revenue is growing 4%, And we've been affected in the quarter by the effects I already mentioned. Profitability basically On call, it's slightly lower, but I would say underlying profitability is progressing well.
The solvency I mentioned on credit quality is still is improving, 40 basis points NPL down and cost of credit below 100 basis points. So I wouldn't say there is no is here. So 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 States. You see in the numbers, volumes are growing well.
And we are holding up basically the volumes in more in Continental Europe where But consumer finance, that is still growing and is growing above the market. When it comes to the volumes, I already mentioned, we are growing 4% or 5 percent about loans and deposits. You see on the loan 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 cannot be applied to customer funds, We are growing across the board, some recovery in the quarter in the asset management, thus the 4 quarter last year was very bad In terms of assets under management due to market conditions, we recovered somehow in the quarter, although the fee income is not still feeding through the P and 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 Q1 and the Q4. 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 and L compared with the Q1 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 UK, 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. And so result of this, the net operating income went up by 1% on earning cost and profit before tax plus 3%, Taking into account the benign credit scenario I already mentioned.
Lastly, in the net, the tax Right. In the quarter, it 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 €108,000,000 This comes from a positive capital gain on the sale of Prisma, the acquiring business in Argentina, that is €150,000,000,000 positive.
Capital loss from the sale of properties is basically the anticipation of future commissions that we should pay for those properties quickly serviced, EUR 180,000,000 and restructuring costs in Poland and UK, EUR 78,000,000. So looking at the P and L lines, starting with the net interest income, excluding the FX effect is 5% better due to higher volumes. It rose in 7 out of the 10 markets. It was lower in the Q1 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. 2nd, IFRS 16, the impact is EUR 80,000,000. 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 4th quarter year on year. I will elaborate on this later on. And 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 8% you see volumes.
And NIM, we matched to get a higher net interest margin in mature markets increased 2 basis points, customer NIM and 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 the income 3% up, reflecting What I told you, the number of customers, greater loyalty, greater customer loyalty, both in individual and companies. And well, you see the activity growth in mutual funds and 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 margin, 1% and the CIB that the quarter was weaker as I anticipated. By markets, you have mature markets going down by 3%, mainly affected by CIB where the activities are stronger in mature markets is the market making activities while developing markets are still growing at 9%. So those are the components. In costs, while as I mentioned at the beginning, [SPEAKER JOSE ANTONIO ALVAREZ ALVAREZ:] We are seeing the cost, the result of integration popular integration both in Spain and Portugal and the cost control in the U. S.
Where the cost 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. But Poland, due to the integration of Deutsche Bank operations, Mexico, where as you know, we are in an investment plan that drives the cost up. And Argentina, well, you compare it with inflation.
Is very high inflation. And when you actualize salaries and back with inflation, some quarters come significantly up or down. Cost of paid quality, very little to add. Cost of paid, south of 100 basis points, NPL is continuing the right way and coverage ratio, as usual, stays very high. Capital quarter was Capital generation was good in the range of 20 basis points.
We absorbed 29 basis points due to the regulatory impact. You have The bottom, which regulatory impacts were there? The IFRS existing was the most important one, 19 basis points, and you have another minus one, including the TRIM, that was 5 basis points. Capital organic capital generation, 20 basis points as small changes in perimeter. I mentioned Prisma in Argentina, the sale of the acquiring business and others that is pluses and minuses mainly related to the pension funds.
On the right side, you have The other capital ratio, the other relevant capital ratio, the total capital ratio, Tier 1, leverage ratio, all of them, our numbers are good. And well, we already comply with MREL requirement as of the end of the quarter. So the ratios, tangible net asset value per share went up by 3%. We reached slightly the return on tangible equity. The quarter was a bit quicker, as I mentioned at the bottom line and the underlying borrower suffer a little bit as a result of this.
So I hand over to Jose that will elaborate
Good morning, everyone. Thank you, Jose 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, 7 out of our 10 core markets had positive evolution, and 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, Jose 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 €81,000,000 in the quarter. And compared to the 4th quarter, we had 2 fewer days that meant EUR 190,000,000 less net interest income.
Somehow these issues disguise 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% 15%, respectively. We continue to gain market share selectively in order to finance 8 basis points credit cards, 103 basis points payroll based credit, 144 basis points get net, 132 basis points. So 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%, lowest 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, 2 fewer days.
On the other hand, customer related net interest income increased in the quarter 1%. And if we exclude the 2 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 4th 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, and 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 percent. If we exclude the higher costs in some activities in Openbank, costs in Spain, in The Retail Bank in Spain were down 8% in the quarter, showing the benefits of the integration with Popular. Non 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 3 50%. This is translated in more activity and a significant growth in deposits that increased EUR 6,000,000,000 in the quarter. Double digit growth in demand deposits that more than offset therefore in time deposits. Again, more customers, more operations.
And some examples, for instance, We had new insurance premium contracts up 16% and point of sale turnover up 12%. Stock of loans remain unchanged over the Q4, fell 3% year on year, mostly due, as Jose Antonio said, to the contract to the decline in the stock of mortgages and the deleveraging in Wholesale Banking and Public Institutions. Compared to the Q4, 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 4th 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. So overall, a good performance in net interest When we look at the underlying customer trends, costs were lower and provisions increased coming from a particularly low level in the 4th 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 in the country. New lending rose 2%, despite that actually cash sales in Europe were down 3%, and this is due due to the fact that our brands are gaining market share all across Europe. 1st quarter profit was up 1%.
By lines. Gross income increased mainly due to higher net interest income, higher volumes and lower 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 Q1 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 United Kingdom, businesses 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 4% sorry, euros 4,000,000,000 year on year.
We continue to reduce commercial real estate. Customer funds changed to more demand deposits that continue to increase up 2%. 1st 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 SBR balances, also lower fee income from corporate banking activities and reduced gains on financial transactions. Slightly increasing 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 €66,000,000 associated with the closing of 140 branches and the renovation of another 100 branches, the closure affecting 1200 employees. Looking ahead in terms of revenues, we continue to see a strong competition and a strong 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 one of the main ones, although you have all the details in the appendix.
In Mexico, our focus our strategic focus is 3 fold. On the one hand, 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 and 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 6 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 and L lines where attributable profit actually increased 35%. Year on year, the good performance was driven by increasing gross income costs and provisions. Profit grew strongly quarter on quarter, benefiting from seasonal factors. Remember that in the Q4, at Santander Consumer, trends tend to be the weakest of the year with higher costs and higher provisions, while those in the Q1 tend to be the lowest. Also remember that in the Q4 of last year, we had a methodological change in the accrual of troubled debt restructuring, TDRs, with almost no impact on the bottom line, But there was a top line impact of €150,000,000 In summary, in the appendix, you have all the details of the impact of this adjustment by line.
In summary, positive evolution, what we expect will continue in the coming quarters with again seasonality in Santander Consumer with a stronger first half relative to the second half. In Chile, the economy is growing at 3% is expected to grow 3% this year and next year. And on the back of these, 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 0. And because of the inflation adjusted products, this had a negative impact of €45,000,000 Already in April, inflation was 0.3 percent and we had a gain of around €20,000,000 So this tends to be There seems to be some volatility associated with this. But again, the underlying customer 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 1,000,000,000 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 and P upgraded the rating of our bank to BBB, And it was chosen as the brand with the best reputation in Portugal, 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 2nd largest bank in the country. The integration obviously explains the abnormally high growth year on year growth rates that you see in the P and L and the balance sheet.
The very good business performance is not driven all the way down to the P and L because of higher contribution to the banking tax, which by the way, it's not tax deductible. And lastly, we had a EUR 12,000,000 restructuring charge in the quarter, affecting the closure of 70 branches and more or less 1400 employees. Finally, in Argentina, very 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 CHF161,000,000 including the capital gain from the sale of our stake in Prisma. Excluding this, the underlying profit was CHF 11,000,000 There was an inflation adjustment of CHF 53,000,000 the monetary adjustment was €38,000,000 and through currency adjustment, €15,000,000 On the business side, we see 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. And in In the net interest income, we also had higher costs, higher financial costs due to higher stock of issuances and the impact of IFRS 16. Verification measures and the streamlining. On the other hand, the investments in global projects.
Also, IFRS 16 has a positive impact on costs. Lastly, we include here a loss of EUR 180,000,000 from the sale of a portfolio of real estate assets to Cerberus Capital Management in the quarter. And now I'll turn it back to Jose Antonio for his closing remarks. Thank you.
Thanks, Jose. Let me to finish this presentation. Yes, summing up a little bit what The environment in the Q1, well, in this environment that was now great, we increased our volume 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 increased significantly, increased 3% in the quarter. So underlying rotten return on tangible equity higher than our competitors, affect by market weaknesses in the quarter.
In the very short term view looking forward, we see a deterioration in the is a macro scenario with lower growth expected in our markets. Probably, we should expect component growth of 1.5 percent GDP growth. In this environment, we're going to have mixed trend volumes, probably growing, keep growing double digit, around double digit in Latin in the Americas and 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 the Investor Day and the cost of credit remained relatively low levels. And our aim is continuing market share in our main markets and improve our profitability and strengthen our balance sheet.
Let me to finish to elaborate in the 2 operations we announced the same month. The ones 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 our the strategy we announced. And it meets our financial criteria with a expect a 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 believe we do this offer because we believe in the financial sector in Mexico and the potential The second operation we announced this same month was a we signed a memorandum of understanding with Credit Agricole for our custody and asset servicing businesses. This operation is Also consistent with our strategy, the business are very complementary in a business where the scale matters a lot. We are 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. Well, this operation, as we already communicated to you, will produce at the closing an estimated capital gain of EUR 700,000,000 that we expect to record in extraordinary charges and provisions. Overall, the line of extraordinary charges in provisions at the year end the quarter was minus NNA overall in the year will be basically 0.
Positives and negatives will offset each other. This operation has also a slightly positive impact in capital, 3 basis points. And the profit going forward expected profit going forward based on the business plan of the combined entity will mean a slightly increase in our EPS. Finally, just to remember you our main targets financial targets that we announced to you in the 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 America. 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. And capital generation has been good in the quarter, and we've been able to offset the regulatory headwinds. And this will transform as we're expecting higher profitability and translate in higher in a higher dividend and higher profitability for shareholders. Thank you.
And now you will remain at your disposal for the questions you may have.
Thanks, Jose Antonio. Indeed, we have now time to open the Q and A. So please, operator, we can proceed with the first question.
The first question comes from Jose Abad from Goldman Sachs. Please go ahead.
Two questions from my side. The first one is what's the impact from the regulatory equivalents with Argentina? I believe positive And also, I mean, a follow-up question on this is whether actually the positive impact from this in case there is one, is included in the 50 bps impact from management actions that you guided during your Investor Day? The second question is on litigation. There was an article in I believe last week talking about the Supreme Court in Brazil forcing Santander to compensate workers from Banispa From their bonuses back to actually in 1986, the article quantifies the potential impact of actually north of €1,000,000,000 So I think it would be useful for us actually if you could [SPEAKER CARLOS ALBERTO PEREIRA DE OLIVEIRA:] To 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, Jose. I will elaborate on the second question. I'll pass the first one to the CFO that will elaborate on the equivalence in Argentina that was approved, you know, by the EU in April or in March? In April, yes. So the article you referred the case you referred in the court in Argentina Sorry, 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 4,000,000,000 in the country. We appealed this ruling of the court and we think that we are well provide for The plenty of for the significant litigation labor claims that we have in Brazil, we are well provide. And not only specifically for this one, for the overall litigations claims that we have that is a very high number taking into account 1 by 1.
Specifically, the article referred to BRL 1,000,000,000. So we are talking really €150,000,000 worst case scenario. And again, this is a process that will take quite a long time. We don't expect needs to be actually to finish at least within the next 7, 8 years. And I didn't get the first question.
So this is due for those who are not familiar with this. As a matter of fact, there is 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 regulator, the local regulator is declared equivalent by the EU, there is waiting gets goes to 0. And this is a reduction in risk weighted assets and translating what Jose said, 6 basis points of
EBITDA. Thanks, Jose. Next question please.
The next question comes from Vanessa Guy from JPMorgan. 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? And my second question is regarding the U. S.
And how the Chrysler agreement is progressing? Thank you.
Yes. So on capital, we guide you in the Investor Day 50 basis points. 50 basis points? Yes, 50 basis points to 60 basis points. We already had in the quarter 30, so another 20 to 30 to come.
Yes? So this is what is going to come from what we expect to come from regulatory headwinds, including Many items there, yes. On the other side, a question related with Chrysler FSA. We are still holding with FSA what I will qualify as a constructive dialogue [SPEAKER MARCO TRONCHETTI PROVERA:] In relation with the business we have, 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 make the business, 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.
And 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 update List of some more efficiency and optimization, we could look forward to. So you've talked in the past about UK model. We've got the 6 basis points that you 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. And the second on restructuring, I was can you maybe give us a feel for the timing of the restructuring In Spain and UK, I think you mentioned Spain for July, the last headcount reduction. But in the UK, 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, but can we look forward to further reductions and when those restructuring and those reductions might happen?
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 say I will stress the word average. On average, we generate 10%. This quarter came better. The reason is we are being more efficient in margin risk weighted assets.
At the same time, we have much more demand in I mentioned in the when I was talking about Spain, our we have much more demand in those exposures that well, within or below the cost of equity. And for that reason, we are heading at what we qualify in our Investor Day as a lighter capital model. And this is the reflection of this. You mentioned also Mexico and the buyer in Mexico and the agreement with the credit recall that have small positives in capital. Well, but I will not [SPEAKER JOSE ANTONIO ALVAREZ ALVAREZ:] The capital management, as you can imagine, became a priority for the group several years ago with higher capital requirements,
[SPEAKER JOSE
RAFAEL FERNANDEZ:] And we are refining all the capital models with a big project, internal big project that is called that is managed by the CFO office. That we are improving significantly the tools to match capital across the group and some of this is going to be reflected in the numbers going forward. So being more efficient on one side, inducing the capital in new operations and the other side being having a margin 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. Jose talked about the timing in Spain. We called the unions, I think it was yesterday, to have the first meeting in a week, next mandate, I think, to start the negotiation process with the unions. Well, it's very difficult to say when the process is going to finished.
On the other side, the integration process, the branches the branch integration process that Jose also mentioned, we already integrate 600 branches out of 1600. We expect to finish the 1600 branches integration at the end of July, more or less. And after that, we start the reduction of number of branches, provide that we reached an agreement with the unions that we're going to have the discussion at the same time. So in our mind, it has been to finish the process this year in Spain. You mentioned UK.
UK, we guide you to a restricted cost control. And at the same time, in the Investor Today, 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's true that we plan to grow some businesses in the UK. We are growing JV and related business, but we are suffering and we are betting on a tough environment for the mortgage business that the one who is more affected at this stage, and we expect to have to show to be able to show a better cost control, not only better cost control, probably some Going forward is something that you we expect to get.
Thanks, Alvaro. Next question, please.
The next question comes from Carlos Cobo from Societe Generale. Please go ahead.
So thank you very much for the presentation. And a couple of questions from my side. In the U. K, as a quick follow-up, not only that you're seeing some cost inflation, NII is weak, fees are not particularly strong. I was wondering whether you are considering more actively the potential cut in the 1, accounts as you did in Spain as a way to compensate profitability challenges in the UK.
2nd, 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's any exceptional or some seasonality that you tend to charge higher provisions in take provisions in the first Q.
You mentioned the UK. We're going to take I will say we are managing the business and we're going to take measures 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, But this is sure that we should look for a new sources of revenue at the same time that we reduce the cost that this is the plan going forward in the UK. 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 regions of 30s basis points in the 30s, yes, for the year. Nothing new here in this front.
Thanks, Carlos. Next question, please.
Your next question comes from Ignacio Ulargui from Deutsche Bank. Please go ahead.
Hi, good morning. Just have two questions. 1 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, What are the recent downgrades that we have seen in GDP may affect a bit lending demand? How do you see that? The second question on the competitive landscape in And particularly on the mortgage market and the implication of the new mortgage law, how do you see that should impact margins going forward?
Thanks.
Well, NII in Brazil in the quarter, as you know, came down. This is more due to non related activities, last year, interest rates are 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, I remain we've been guiding you for double digit kind of growth in the country, and we've been guiding you for a lower growth in NII, so mid maybe too high, mid to high or mid single digit in Brazil.
So 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 It's through a reduction in the funding costs, at the same time slight increase in the yield we are getting from our assets.
So we are happy with this. You specifically referred to mortgages. Mortgages remain fairly competitive. I haven't seen an extra reduction in prices from the one we had 1 quarter or 2 quarters ago remains competitive. But 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 grew in SME lending and grew in consumer lending that reflects into higher yield in the loan book.
At the same time, we reduce the funding costs, as I said. Mortgages, I will say the market remains competitive. I don't expect 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.
Good morning. Two questions, 1 on capital and 1 on hedging. On capital, there have been changes to CRD rules, talking to CRD 5 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? And can you also clarify on the regulatory headwinds?
I was left at 50 basis points and then before maybe you said 50 to 60. And finally, the TRIM impact, when you guide the 50 basis points, is it all in 2019 Order 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're adjusting to a more dynamic use of this tool? What was the P and L cost and the capital impact in Q1? Thank you.
Okay. You take it, Edgine?
So, Edin, the strategy remains the same. So we hedge the capital ratio. So that is why despite the risk weighted assets due to currency depreciation went up EUR 8,000,000,000 in the quarter, There was no impact on the capital ratio. The cost of that strategy in the Q1 is more or less 4 basis points of capital. We also hedge the P and 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 Q1 was €60,000,000 On the other hand, obviously, you have the positive of the translation of the results in local currencies into euros all throughout the P and L.
The numbers you asked about Capital, the 50 to 60 basis points regulatory headwinds is for this year, it's for 2019. We already have solved, as I said before, 29. So we expect the rest to come along the year. When you were referring to the CRD-five eventually Changing in SME, super factor and intangibles, as you know, we have a significant exposure to SMEs, mainly Although a significant portion of the SMEs around the world are in the standard model, Yes. So we have this mix in the corporate business in UK, U.
S. And now Latin America is still standard model, we have our own internal rate base model basically for Spain. So but 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've been very vocal on this because we think that in this At this particular juncture, where we are investing significantly in digitalization, so what means basically investing in software, There is an asymmetric treatment when you invest yourself and you put the dual and see when you buy from someone else. When you invest yourself, is intangibles, and you did that 100% from capital. When you buy for someone else, the treatment is totally different. We've been, as you know, Our software we control our software, and we continue to measure 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, is €2,800,000,000 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. So 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. And then on the NPL ratio in Spain, I noticed that it has remained flat since mid 2018. So please, if you could comment and clarify what's going on here. Thank you.
Fee income in Spain, as you mentioned rightly mentioned, went down by 3% is 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 will say having the same activity than last year. The other question was about NPLs.
NPL in Spain.
Well, NPL, well, we are still in a the credit quality in Spain has good trends. I don't remember exactly the NPL number. It is flat, probably all right. But I don't have in my mind any significant problem in the reduction of both nonperforming assets, I mean, both loans and properties. We are progressing a good base in the reduction of this and also the provision of this, we feel comfortable with the level of provisions we have already for all of these
exposures. Thanks, Mario. Next one, please.
The next question comes from Tara 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 effective corporate tax rate in Spain. And I'm just wondering if you see any risk to the amount of taxes you pay out of the legal entity in Spain. And then a second question on asset quality and provisions in the UK 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 will take for those provisions to normalize and at what level do you expect them to normalize?
Thanks.
So in Spain, well, it's too early to say, yes? So 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. And 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 UK, consumer finance. Yes. So 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 being having around 40 basis points or 40 or even lower. And we the expected loss is basically doubled on this. We are not seeing any sign of deterioration in the credit quality and probably for this year, if I need bet, probably will remain closer to the 40s than to any other number.
But 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.
Yes. 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, yes, in Scotia. And with the UK, We gave you the figures. Our basic book in the UK is mortgages, is 80% of the book, yes?
So the remaining 20% is a mix between corporates and Xiamo consumer lending, a small fraction. Our loan to value is one of the lower the lowest in the market and our front book will be much more conservative than some of our appears there and our buy collect exposure is low. Well, when you have a construction fees that is south of 10 basis points, Well, it's advised There's only one way to go. Yes. So there's only one way to go that is up.
When? Well, again, We are in retail business. Our exposure is with households and the main driver as in consumer finance tend to be unemployment. So We are not seeing any sign of deterioration of unemployment rates all across Europe, including UK.
Thanks, Danak. Next question please.
The next question comes from Paretosh Smith of Autonomous Research. Please go ahead.
Yes. Hi there. I've got 2 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 will have any impact on or the merchant acquiring fees in Brazil?
And secondly, could you let us know what the IFRS 16 impact was on costs? I might have missed that. And 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.
Yes. So I'll take [SPEAKER JOSE ANTONIO ALVAREZ ALVAREZ:] If you want, I'll take the second. Let me give you the throughout the P and L, IFRS 16 in the Q1 had, as I said, a negative impact on net interest income of €81,000,000 and costs were reduced by €59,000,000 So net bottom line net impact was negative EUR 22,000,000. And when we look at cost trends, obviously, this is a one So obviously, this will affect the year on year comparison this year, but this obviously, we consider this as a one off.
In relation with Brazil, competition in acquiring business, well, new competitors came to the market. This is a market that was a market that basically were 3 2 competitors 5, 6 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. And the last 2 or 3 years with newcomers into the market, newcomers with a strong proposition, particularly for e commerce related and small tickets, and the market is becoming much more competitive.
[SPEAKER JOSE RAFAEL FERNANDEZ:] As you know, the fees in this market was significant. There was 3 sources of revenues in the market, the interchange fee, The flow business that was significant because the payment date was like 20 plus, D plus 20. So the business was significantly in this front, the income generation from this front. And finally, rent of the gadgets that the merchants use for this purpose. The competition is coming in the I will say in the three fronts.
Our business is, I think, is much more resilient than others because our business is not just acquiring business. It's a business that we bundle the acquiring business with banking services, some lending embedded there and a package to the mainly to the small merchants in the market. So We were expecting somehow this competition to come sooner or later. It's coming now. And 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 6 years ago, 7 ago, and we got from 1%, 2% to 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 In the previous year, we were even growing 30%. We expect to keep growing significantly in this business.
Thanks, Britta. Next question, please.
The next question comes from Fernando Gilles Antibanez from Barclays. Please go ahead.
Hello. Thank you for taking my question. Question is regarding the U. S. And the cost.
I see that the cost of 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 come this figure down. Thank you.
So performance in costs is, Al, the performance in costs in the Not only in the last quarter. In the last couple of quarters, it has been good in the U. S. Still to arrive. Our cost income compared with our peers, CV and A compared with our fees in the market is still very high, and we are working on this in 2 different fronts, yes?
So one front is getting more Internal synergies in the that means that, as you remember, we were matching the U. S. Has a separate business, on one side, the private banking another side, consumer finance another side, SBNA and another side, CIB in the New York branch and the broker dealer. When the holding company came along under regulatory pressure, we build 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 That means exactly one operation in the U.
S. Where we can extract synergies from the operation. Having said that, and 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 We are starting to show significant progress, not only in consumer business, but that is another business. In SB and A, we are showing some progress in CIB business, where our revenues in the group are growing starting from very low levels, close to 20%. Our C and 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 need we have more things to do in the retail arena with households and individual customers. So On one side, and we mentioned in the Investor Day that one of the key elements for improving our profitability in U. S. Was the operating leverage. We have a very high cost income, as you rightly mentioned, and we expect to keep this well under control or keeping, in some cases, going down and at the same time, being able to improve with infrastructure we have, the revenue lines in the segments I mentioned to you.
So I'm and with these two elements, we expect to reduce significantly our cost income and improve our profitability in the U. S, in SBNA particularly.
The last question comes from Carlos Peixoto from CaixaBank BPI. Please go ahead.
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 well, yes, that would be my only pending question.
Thank you.
No, I think there's nothing special there. We've had more issuances along the way compared with the Q1 of last year, particularly to comply with NREL requirements. As Jose Antonio said, we already fully comply with the requirements of the SRB. There is nothing special there. And also the cost of the hedging, which are included as part of the cost of the corporate center, which as I mentioned were EUR 60,000,000 in the quarter.
Okay. We need to do it here. So thanks very much everyone for joining and obviously the IR team is at your disposal for any follow-up. Thank you.
Thank you.