Morning, everyone. Thanks for joining this Grupo Santander Q4 earnings presentation. As every January, we're delighted to have our Group Executive Chairman with us. Today, she will address the 2018 group performance, as well as after, obviously, our Group CEO addressing in more detail the group and different business areas' full year numbers. She will also talk about how we are accelerating our commercial and digital transformation before concluding remarks, and obviously plenty of time for your questions. With no further delays, Ana, please.
Good morning, and thank you, Sergio. I have to say congratulations, Sergio, our Head of Investor Relations, had twins two days ago, so we very much appreciate you being here today. They were boys. Nobody's perfect, I'm sorry. Two boys, but they're doing fine. Again, thank you for being such a disciplined Santander executive. You should've stayed with your wife. We're very happy to have you. Good morning, everybody, and thank you for joining us. As we close our three-year cycle, I'd like to start by saying that 2018 was an excellent year for Santander. I would like to say that as you see from our results this year, we actually performed well all down the P&L, all the way down to a net profit, which is up 18% and up 32% in constant euros.
Very importantly, we did well on revenues, on cost, and on cost of risk. We're also confident that the underlying commercial trends continue to be very positive. In terms of growth, we have done well with a 9% increase in revenues based on a growth, again, in loyal and digital customers. This has led to better profitability and also to improvement in our balance sheet, where we're reaching ahead of our target of being over 11%. We're actually closing with a CET1 of 11.3%, as you can see on the screen. Just for reference, I will not go through all the numbers, but we are closing a three-year cycle we launched in October 2015. We have reached or exceeded all our financial targets. Importantly, we have achieved the double-digit EPS earnings per share growth this year in 2018 at 11.2% increase.
José Antonio will cover in more detail 2018, given we're closing the cycle, I would like to briefly review what we have achieved in these three years. It's very important that one of the key announcements we made back in 2015 was our new strategy. It's a simple strategy, it works. It's about loyal customers and digital excellence, but it all starts with our people and our team, the culture. We are very proud to be at 82% in terms of team engagement, with 88% participation rates across the group. Importantly, this puts us already close to best in class. This has led to an increase in customers and has led in turn to a increase in fee income and improved profitability, 11.7%, but 12.1% on an underlying basis. The loyalty strategy is leading to higher customer engagement, which leads to higher returns.
Loyal customer in terms of revenues are over three times more profitable. Regarding the retail franchises, but very importantly, the churn rate decreases significantly, as you can see, at -66% versus the active customers. The growth, which is one of the signs or differentiation of Santander, we're growing our revenues again in constant euros, which reflects the commercial effort. We have grown over these three years at 24%, our top line. Importantly, in two key countries for Santander, which represent 25% of the group's tangible equity, that's Brazil and Mexico, we were at 13% ROE, return on tangible equity, sorry, 13% and 14% in 2015. Today in both those countries, we're at 20%. As you can see, also, a lot of the growth in customers is coming from these two countries that are very important, not just today, but also for the future.
Growth is important, but we also set ourselves a goal of being more profitable in terms of per share metrics. Return on tangible equity I mentioned, but very importantly, on return on risk-weighted assets has improved, leading to not just earnings per share growth, but a very significant increase in cash dividend per share, up 31%. In this case, we're referring to four years since we did the capital increase of 2015, which is when we changed our policy. We have been very focused on profitability and better capital allocation, as I mentioned, across subsidiaries. Most of our subsidiaries have significantly increased their profitability. I mentioned Brazil and Mexico, but back in 2015, 60% of the tangible book value of Santander was below the cost of equity. Two of our main countries, Brazil and Spain, were below.
Today, we are only at about 10%, and that's Santander Bank in the U.S., which with a normalized capital level, because we have much higher capital than required at the moment. We would be already around 7%, actually a bit more than 7%, also in this subsidiary. A very significant shift in terms of not just capital management and allocation, but also capital returns. Santander Consumer, which is our other business in the U.S., is at around 13%-14%, but again, normalized for the capital that's required, would be around 20%. You can see most of the countries have significantly improved their return on risk-weighted assets. Growth, profitability, but we're also focused on strength. Strength is, of course, about capital, even though the holistic management of the balance sheet is really what's important. We have generated over EUR 25 billion in capital over these three years.
We have made some acquisitions, excluding Popular. We have paid, as I've mentioned, much higher cash dividend per share. We also have issued a lot of AT1s, which have required us close to EUR 13 billion in payments to shareholders and bondholders, which means that after dividends, we have generated EUR 10.2 billion.
We increased capital by EUR 7.5 billion, January 15. Of course, we did Banco Popular, but that's basically a wash. The capital we increased was to finance the acquisition, which means we have accumulated in the period close to EUR 18 billion in capital, around 300 basis points. How have we delivered this plan? We focus very much on digital transformation, but we have also put a lot of focus on our culture. Santander aims to be, and we want to show in everything we do every day to our customers, people, communities, and shareholders, that we are a responsible bank.
How we're thinking about our digital transformation, as we think about our core banks, we want to deliver all the products and services of a bank, not just lending, but all types of services, end-to-end through digital channels. In some banks, we're doing that already in the group. In others, that's still work in process. Second, even though we are probably one of the most efficient banks, in terms of our peers, the most efficient, we believe we can do better. We want to do more things in terms of efficiency at the same time that we deliver a better service and building on those foundations which we have established. One of the goals we set for ourselves is to be in most of our countries top three in customer satisfaction.
We have achieved that in seven out of 10, and we're now moving to a more demanding metric, as we'll explain in Investor Day in April, which is net promoter score, NPS. How we think about the re-engineering of our core banks, we call them Supertankers. The important change here from before is that more and more we are leveraging the group scale. We're working along five axes. One is transforming the front. What do we mean by this? As an example, today in the group, we have more than 60, six-zero, mobile banking apps. We launched a project six months ago to start working on this as a group. After these few months of work, we now can say that 70% of all the costs and all the features are common across countries. It's 70% common from Brazil to Poland to the U.S. to the U.K.
We're going to start building the front end in a way that is leveraging the scale of the group. The second thing is, of course, digitizing the back-end processes. This is very important. We are sharing best practices. We are using more and more robots. In back-office process, we are seeing that that could save around 10% of the cost, and this is going to be very increasingly important for the future. Third very important is our IT architecture and systems. We will be able to integrate Popular in 18 months. We have integrated Portugal already and will be finishing Spain towards the end of this year. Again, our core banking is an advantage in terms of integrating these banks, and we are modernizing this back end, building APIs, we can then have more flexibility for our customers, but also to connect to the wider ecosystem.
Fourth very important, how we can scale up new capabilities. We are using more and more, as I said, robots, but we're also working in a way that allows us to integrate whatever is new in innovation. Finally, we are becoming more and more an agile organization. We have already 35% of our projects being executed in agile, and this is going to help us again in terms of time to market, but also leveraging people in different markets to work for the group. You investors rightly and shareholders and ourselves as management, we always ask ourselves, how do we measure progress? I think this is a great way of seeing it. In these three years, we have doubled digital customers, we have doubled the number of digital transactions. We have much more engaged customers.
What's important, 68% of the engagement from customers comes from the mobile. Finally, we have doubled digital sales. Today, 32% of all our sales across the group are made through digital channels, which again is one of the reasons that we have been able to keep our cost income, actually improved it to 47%. All of that relates to what we call our core banks, our Supertankers. We also have parallel initiatives, which we call the Speedboats. There's two things about the Speedboats that are important. One is that they compete in the open market with everybody else out there, fintechs, banks, non-banks. The very important difference is that they're also helping to service our Supertanker customers.
We do connect between these autonomous ventures and our main bank, so we can bring the best of innovation, but also the best of speed and the best of going after new revenue streams. A great example is One Pay FX, which has already been launched in several markets, where we've, for example, in Spain, since the launch, we're up 55% on FX transactions. It's the first blockchain-based retail payment, foreign exchange payment for individuals, and we hope soon to launch it also in the open market, so we can actually attract new customers to the bank. Openbank is the first fully digital bank. In terms of the asset side, which we launched recently, the growth is exponential. Mortgages was just recently launched. Again, it's end-to-end digital, and those numbers are up 390%.
If you look at the asset side, which is really a lot of the new products, it's growing at 90% in the last year. I mentioned how important the team's engagement is, and we defined that Santander wants to be different. If you ask any of us why Santander is different from other banks, we want everybody to have a common answer, and we want this to be reflected also, of course, in how our customers, society, and shareholders see us, which is that we are doing things in a way that is simple and personal and fair. We are already top three in seven of our 10 geographies. I mentioned that. In terms of team engagement, we are doing better.
Very importantly, if we want to deliver for customers in a simple way, for example, this is difficult because we have lots of new regulation coming up all the time, this is probably the hardest thing for us to achieve. As an example of what we're doing here, of the progress, let me use Spain again as an example. Today, 68% of our response to a mortgage application is automatic. This was 47% in 2016. What it means is that this is a risk approval that is totally automated. This is very important. Another example is on the mobile app, consumer lending can be approved in only three clicks. These are the kind of things we're doing so that we really become an organization that can respond in a faster way to all our stakeholders.
In terms of our communities, we continue to be very focused on inclusive and sustainable growth. We've created a new committee of the board to basically oversee all our responsibility, culture, sustainability efforts. We've supported 5.6 million people over the last three years and granted 136,000 scholarships. We're working with universities. The Santander X platform is now in about 100 universities. It aims to be the entrepreneurship platform leading in the world. We're also doing a lot of financial inclusion with initiatives like Prospera and Tuiio in Mexico. There's still 200 million unbanked people in Latin America. Very importantly, there is $620 billion unmet SME financing needs, and Santander is very well-placed to be able to address this. To end on this section before we go to José Antonio on 2018 numbers. We have achieved a lot in these three years.
One of the very important and most ambitious targets we set was to achieve double-digit earnings per share growth. We've achieved that, 11.2%, and we have also delivered in terms of tangible NAV plus cash dividend per share, 21%. Actually, it's the plan period. Here we've gone back to 2015. Everything else relates to the plan period, but these numbers relate to the beginning of 2015, when we launched the capital increase, when we started in the bank. We will get a bit more detail on 2018 numbers now from José Antonio.
Thank you, Ana. Good morning to everyone. As Ana said, I am going to look to the group numbers, to the group performance in 2018, as well as the major units. I make some brief comments on the smaller units in order to have time to go through your questions. Starting with the idea that Ana mentioned, this slide sum up very well the business model we have. A more committed team is able to offer better customer solutions to the customers that translate into higher revenues. Finally, this translate into higher return on tangible equity. This is the center of our model. You can see this in our P&L in 2018, where we, as I say, need to sum up the features of the P&L. I will say it's predictable.
It shows the profitability, and it shows an efficient bank with a business model that create a bank that is generate high profits in a recurring way. In the fourth quarter, we were again above the mark of EUR 2 billion in the quarter. Growing compared with the previous quarters, and even taking into account the contribution to deposit warranty fund in the quarter. You compare it with the same quarter in 2017, the growth was also double rate. Profit for the whole year is EUR 7,910 million, with a extraordinary charge of EUR 254 million in the quarter. We have a positive path coming from the carve-out of Deutsche Bank in Poland of EUR 45 million, that was recorded in the quarter. The underlying profit was about EUR 8 billion. Well, as you can see in the P&L, the FX impact was very large in the year.
If you go through the P&L lines, you have exactly what I said before. Predictable means that we are generating recurring NII, recurring fee income coming from the part of the business that is 100% related with customers. We grew the NII quarter-on-quarter. The same is happening with the fee income. Also the fourth quarter has some seasonal effects coming from insurance premiums in Brazil. Another income was affected by the contribution to the deposit guarantee fund and also by the volatility on the markets. All in all, the three lines of the revenues have been performing very well. You go to the cost, we have two models. We are growing, let's say, double-digit in emerging markets. You see all the emerging markets are growing revenues double-digit. We are also investing in those markets. You see this in the numbers.
The costs are growing in real terms a little. At the same time, in markets in which the revenues are more difficult to achieve, we try to reduce the costs. We are doing that with integrations in Spain that you see, Consumer Finance, and also in Portugal, where we are reducing costs in real terms. At the end, we achieve our target of 47% of cost-income ratio. This was established before Popular, and this is with Popular. Excluding Popular, the 47% is 46.5%, something like that. We were well inside our target. We get this revolution in costs, at the same time improving customer satisfaction. That is what we, at the time we established the target, called operating efficiency, in the sense that we are able to match costs in a way that doesn't deteriorate or improves the customer satisfaction.
Credit quality, very little to say on this. The numbers speak by themselves. All the numbers only trends in the right direction. We improve the cost of credit ratio in almost every geography, and the NPL is lower, the coverage is higher. On capital, we've been guiding you for an average capital generation of 10 basis points quarter-on-quarter organic. We got this year a higher number, 64 basis points. Within that, the 10 basis points is the number you should have in mind. Our leverage ratio is very good. More than that, than the stated capital number, while we show extraordinary resilience in the stress test, not the first time. In every stress test, the bank shows extraordinary numbers due to the fact that we have a very high diversification that produce a higher resiliency, higher solvency compared with our peers. Finally, our funding plan.
In the past two years, we've been very focusing the non-preferred hybrid stuff. We are already complying with all TLAC instruments. Going forward, our issuance is going to be more focused in senior preferred uncovered bonds just for funding purposes, once we cover all the requirements, capital requirements about hybrids and TLAC requirements. Going by the units, the split of the profits by geographies, the Americas and Europe is basically 50/50. With the weights of the countries you have in the screen, very small changes year-on-year. The underlying attributable profit in constant euros grew in seven out of the 10 markets. Double-digit growth in the majority of emerging markets and Spain and Portugal. The weights tends to go more into Brazil and Spain due to the performance they had in the P&L. Starting with Brazil, I will say another good quarter. You see the numbers.
Good growth in the activity, both loans and deposits. The spreads basically are on hold. Credit quality is improving. The cost of risk is falling. We are gaining significant share in the country. This is showing the numbers that speak by themselves. The efficiency ratio is very low. The return on tangible equity is in the region of 20%. We are in a position, as I've been telling you in the previous quarters, that our franchise has improved significantly in the past two years, and we are collecting the results of this improvement in our franchise. Going to Spain. The main task in Spain at this point of time is integration, and I mentioned this. We are exactly in the middle of integration. We start to integrate branches of Popular in November last year.
We plan to finish during July, integration of the branches, and finish the integration more in October, November. You see the numbers. We are showing, the NII grow in the quarter due to the reduction of the cost of funding. You see a little bit, and sustained yield on loans, as you see in the numbers. The cost of credit is relatively stable in the region of 30 something basis points. The activity, you see the loan book shrinking. This is 100% due to our policy in CIB and institutional lending, where we are aiming a lighter capital model, and we being more active in capital markets and less active in having the loans, storing the loans in the balance sheet. Going to U.K., competitive environment went tough, particularly in the mortgage market.
The mortgage market is fairly competitive at this point in the U.K., grew the mortgage book by 2%. This year also, we were working the whole year in the creating the ring-fenced structure. Ring-fenced structure means that we did a carve out of the bank in U.K. of around EUR 50 billion assets to the Santander London branch. This was complete. We've been continuing to doing significant investments in our multi-channel and digital proposal that you see is reflected in the cost of that grew significantly more than, or slightly below, above inflation. Those are basically regulatory and risk related projects and investments in technology and digital. Provisions remain fairly low. This quarter, we have some extra provisions, but is a still very low number. For Consumer Finance, I will say another good year, consistent trends.
The capacity of generating recurring profits is very well demonstrated over the years. We continue to capture some market share gains, particularly in auto lending all across the geographies. As you know, this unit is highly diversified across all of Europe, and we are showing a consistent profitability of this business. In the other smaller units in Mexico, our business model, we are investing a lot in Mexico. As you see, the costs are growing significantly, improving the franchise. Having said that, we've been able to show a bottom line number that grows 14%, and the return on tangible equity is in the region of 20%. Good situation in Mexico in a bank that is the franchise that is improving. In Chile, the economic environment was a little bit more constructive than the previous year.
The economy grew faster, and we translate this into higher profitability in a bank that, as you know, is the leader of the market and is a consistent leader in the market. In the U.S., good year. Profit grew significantly. We are progressing very well in our regulatory milestones. We improved the net interest margin in SBNA. Also, SCUSA has a very good year with a return on tangible equity, as Ana said, in the north of 20%. In the last quarter, there was a reclassification that affects the P&L of the SCUSA and the group. EUR 200 million went to net interest income, that we net in the provision line with another EUR 200 million more provisions in the quarter. In Portugal, we finished the integration in October of Banco Popular, very well executed. In two years, they execute Banif and now Popular. We are gaining share.
We around 20% share in Portugal. We are the leading bank in the country, and for sure, the leading bank in profitability. In Poland, two events this year. We changed the brand. Now the bank is not called anymore BZ WBK, it's called Santander Polska. We did the carve out of Deutsche Bank by November. This increased the cost, one-off cost in Poland this year. Having said that, the recurring items of the P&L are going very well. In Argentina, difficult year. Depreciation forced us to change the accounting. The accounting is now inflationary accounting. The one-off impact and going forward is significant as you see in the numbers. In the corporate center, very little to say, higher NII, negative NII due to the issuance with earning senior unsecured and hybrid instruments.
The gain on losses on financial transactions is the result of the changes, the result of the hedges. All the other numbers, well, in provisions, we have a small item, several small items that fall into the corporate center related with the group activities. Overall, nothing important here in this quarter. I hand back to Ana that continues to elaborate in our transformation and the takeaways.
Thank you very much, José Antonio. I will be brief. Just to recapitulate, we are staying on course, as you'll hear in April in our Investor Day, which we'll tell you now the date. We are going to continue on the same strategy. We have a clear purpose, and we have a clear aim as a bank to become the best open financial services platform, earning the lasting loyalty of our people, customers, shareholders, and communities, and of course, doing things in a way that is simple and personal and fair. I've repeated many times over the last few months that our goal now is to accelerate execution. This is what we're going to focus on. We're going to continue building on our strengths. The first one is scale. Scale allows us today with technology to be competitive in ways that was not possible a few years ago.
I want to just remind everyone that we are already leaders in six out of our ten markets. In the other three, we are top three, in the case of Brazil, of the private banks, in Mexico and in the U.K. on the retail side, basically on mortgages. We are top five in our Santander Consumer business in the U.S. Importantly, we have examples, again, more detail coming, but we have generated and will be generating this year, it's a two-year program, EUR 200 million in savings by centralizing global negotiations with T&O providers. This would not be able to do for one country alone. We are estimating, again, 25%-35% savings in three, just three group transversal processes. Again, building them together.
We have already, and this goes back to 2015, over the last three years, we've increased the collaboration between our countries by giving product service from our Corporate & Investment Bank to the mid-corps and increased revenues by EUR 1.4 billion. This is happening more and more. When I say accelerate execution, I mean mostly this across the group collaboration. The other very important feature is that we are working together on things that are not just process and not just technology. I was this morning in our Santander Work Café here in Madrid. This is an innovation that happened in Chile. We now have it in four countries. Customers love it. When a non-customer comes into a Santander Work Café, within 30 days, they become a customer.
One of the key assets, or one of the key advantages we have is that we have 100,000 people talking to customers every day from branches, from contact centers. We are very much going to continue investing in our branch network in different ways. We today have 13,000 branches across the group. The second strength upon which we're going to build, as Antonio mentioned, that is our diversification. We do have a predictability in our results that's higher. We do have the opportunity to deliver across the cycle, one of the reasons is this diversification, which means that we continue to be the best performer under stress, this is very important and gives us an advantage in terms of capital.
The predictability, you've seen this before, I want to mention that we've looked back 20 years, we've also looked back at what has happened the last three, four, five years, and we continue to be in the same place as you can see here with quarterly earnings per share volatility that is way lower than our peers. Of course, as you can see there, with earnings that are growing, not the most, but still growing 4x over the 20+ years. Accelerate execution is the goal. We will continue to invest in our digital transformation, which delivers a more capital-light model and increased profitability. I mentioned before how this has allowed us. There's many other things, of course. We've changed people, we've changed governance, we're working more together.
What's important is that we're now delivering above the cost of equity in close to 90% of our tangible equity, which was not the case three years ago. What is it you're going to hear more about in April? I referred to that before because we've been doing some of that already for the past three years. We're going to continue in investing in our core banks, digitizing the core. We're going to continue to leverage group capabilities. Another example where we are also working together, and this is for the future, is digitizing our contact centers, but doing it together as a group. The numbers here are pretty significant. We believe we can achieve another EUR 200 million in savings, but importantly, also generate around EUR 100 million more revenues by working on this together.
As we think on the parallel ventures, which I mentioned, are not just competing in the open market, but also servicing, in some cases, our core banks. Openbank is, of course, one of the key projects where we'll be aiming to go to new countries. We can open a full bank with full services for individuals for around EUR 20 million, and there's many more things we can actually do with Openbank. I mentioned also One Pay FX, and we will be announcing what we'll be doing with all these new ventures also in April. Even though we cannot give you more detail today, we do want to share with you what our medium-term targets are in terms of profitability and in terms of our capital. The aim is to be between 13%-15% return on tangible equity.
As a reminder, for this three-year plan, we aim to be above 11.5%. We've delivered 11.7%, and actually above 12% on an underlying basis. In terms of capital, our aim was to be above 11%. We're 11.3%, and we aim to be between 11%-12% CET1. This will give us flexibility in terms of hedging and other areas, and also, of course, certain regulatory changes that we continue to foresee in the next few years. We have set a date, which is April 3rd in London, where we will give you all the updates that I was referring to. Just to sum up, we're very proud of what our teams have done. Really, these three years have been very hard work.
We have managed to deliver for shareholders, and we've done it in a responsible way because we have continued to invest so we can deliver to you for many years to come. We have a clear strategy. The strategy is not going to change. We want to accelerate execution. By this, we mean working together across the group in ways that leverage our scale. The talent and the innovation that we have across Santander. We'll continue to focus on the loyalty strategy and digital excellence.
What we are seeing is very strong underlying commercial and business trends. Really, it's about better together. We think, and we are confident we can do this by making us more competitive, but really working in an agile way across the group, so we can continue to be a winner in the next decade. London will give you more details, and we're now obviously ready to answer questions on 2018 or the past three years. Thank you.
Indeed. Thanks, Ana. Thanks, Juan Antonio. We have now time to answer your questions. Please, operator, we can kick off with the Q&A now.
Ladies and gentlemen, the Q&A session starts now. If you wish to ask a question, please press zero one 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. Well, I'm aware, obviously, that you will give us actually all the granularity about your new planned ROTE targets and capital targets in early April. I will try, because, obviously, the ROTE target, it's at 13%-15%. This is 200 basis points difference. This implies a high degree of uncertainty over the coming years, and obviously, we will discuss this in early April. My question is just about one of the potential sources of uncertainty, which is Brexit, about which we may have some clarity, maybe not, but we may have some clarity over the coming actually two months. I think I was wondering whether maybe you could actually help us navigate the coming two months by maybe telling us how this range could be modified in case of a no-deal Brexit.
We would end up in the lower half of this, in the midpoint. How could a no-deal Brexit impact actually this ROTE target? Related to this is also if you could actually rephrase a bit your hedging strategy in the pound, what was the length of this hedging, one or two years? What's the percentage of earnings, and at which level if you can actually have the hedge?
The second question is on capital, maybe you could, sorry, apologies if I missed it and you already said that, but if you could actually provide any guidance on the impact of IFRS 16. I would like to know how is the management, how are you actually thinking about the trade-off between capital generation and capital volatility? You spend every year around 30 basis points of capital in hedging your capital ratio, and obviously, if you reduce that, you could actually generate more at the cost. Another way to ask this question is whether you are willing to sacrifice capital volatility for higher capital generation. Thank you very much.
[audio distortion] I am sorry. I'll start that again. I'll start with Brexit. On Brexit, it does make a difference, but I'd say the scenario which we hope doesn't happen, which is a no-deal Brexit, because that would obviously impact the economy, our customers, and therefore, us as banks. That is the one that would have a negative impact. We are not counting on a no-deal Brexit, so we continue to plan for a U.K. economy which is softer. Inflation is having impact through the depreciation of the pound. We've been very prudent. We've grown our loans about 1% year-on-year. We are being prudent on our risk appetite. We have had especially higher costs this year, José Antonio mentioned, because of ring fencing. I'd say our focus in the U.K. is on profitability.
We set a range, as you know, for the three-year plan, which was to be between nine and 10, and we're a bit more than nine. We'll continue to be aiming to be above the cost of equity with probably less growth, and this will have some impact on earnings. That is really the plan. In terms of hedging, we hedged the pound for two years, and we still have one more year of hedge, if I remember correctly.
We hedge for the results for the next 12 months. That would have no impact. In terms of capital, this is a change because we said above 11%, we are above 11%, but we do anticipate some volatility from quarter-over-quarter this year because of regulatory impacts. IFRS will be around 20 basis points, but it will depend on the outcome of the headquarters, which is in the press, it is public. That will be around 20 basis points.
There's some other regulatory impacts this year, but we also have some positives. You will see some volatility, and definitely our aim is to be between 11% and 12%, so we can have that added flexibility in terms of hedging for the future. We need some buffer there so we can manage that in a more, I'd say, in a more efficient way economically. That is the goal, to be between 11% and 12%.
No, it's okay. The reason for the range between 11% and 12% is to gain some flexibility, as you said, yeah.
Okay. Thank you.
Thanks, José, for your question. Next one, please.
The next question comes from Francisco Riquel from Alantra Equities. Please go ahead.
Yes, thank you. Follow up on capital. You have changed the guidance to the new range over the medium term, looking for flexibility. I wonder if you can comment on 2019, if we shall expect any change in the way you will allocate capital this year. You have been allocating it to date, roughly on equal parts in between business growth, dividends, and capital buffers. If we shall expect any change this year, in particular for the dividend, and if we need to be in the upper range of the new guidance before you're considering an increase in the dividend payout, or if we can see that earlier. Also, if you can also update on the regulatory headwinds beyond IFRS 16, if we shall expect any other impact from any other issue this year. Thank you.
In terms of that, we'll give you more detail. We still have a few months to Investor Day. As a reminder, last year we said we'd go to two dividends per year. We said that we would not do a scrip in 2019. These things, we will be updating the market in April, as I said. We still have plenty of profitable growth opportunities, so we will be allocating some capital to growth, and we will accumulate some capital for the next year. Again, this is something which will give us added flexibility. In terms of the headwinds, we have IFRS 16. I forgot the numbers now.
We have a couple more things. There's the TRIM models and some other things that, as you know, are going on. We don't know exactly the timing of that. We expect it will be this year. More than that is that we do get affected somehow by exchange rates. These are the things that would create some volatility, and that's why, over time, we are aiming to be in a range, and then have some flexibility in terms of some of our strategies. For example, the FX hedging on results, which obviously, I think this year is costing us 20 basis points in 2019.
No, less.
I'm sorry, 2018. Less?
A little bit less. If I may. In allocating capital, the main change we have, probably you have seen, and I mentioned in the case of Spain, when we reduced the size of the loan booking CIB and corporates, is we are aiming a lighter capital model, particularly in the corporate world. We are strengthening our capabilities in CIB, in capital markets, in order to do so. That's clear, and you continue to see that our business model is going to be lighter in capital, particularly in the large corporations CIB.
Thanks for the question, Paco. Next question, please.
The next question comes from Vanessa Guy from JP Morgan. Please go ahead.
Hi. Good morning. I had two questions. The first one on Mexico. Given the political uncertainty, how should we think about this division in 2019? What's the government's stance on the banking fees, and what potential impacts could we expect should they be capped at some level? My second question is on Brazil. There's been some headlines that the government intends to reduce corporate taxes, and they plan to end the interest on capital tax deductibility. I was wondering how that could benefit Santander in Brazil. Thank you.
I visited Mexico, and it was quite public. I had a long meeting with the new President. I believe that there will be changes. Governments will introduce changes both in Brazil and Mexico. Net net, we're very bullish on both countries over time. On the commissions, there was nothing that I remember was set. We are in conversations with the government regarding certain improvements and trying to bring innovation and more benefits to consumers. Again, I think this is something which is good for the economy over the medium term, eventually, we'll benefit. I'm not seeing anything specific at this point that could make us worried about Mexico in the next 12 months at all.
On the contrary, it's a country where we've committed the biggest investment, and we're continuing with that investment that we announced a couple of years ago because we're confident the country will continue to progress. In the case of Brazil, I think it's too early to tell, but I did meet with the new economics minister last week. It's an excellent team that is really focused on the right things. I'd say the most important thing in Brazil, it's not easy, but we, again, got quite a lot of reassurance that they have a plan and that they will be able to execute a plan, is pension reform. They are working on that for the next few months. If that happens, Brazil, there are other reforms that they will work on. Net net, I think this will be positive for the economy.
If pension reform happens, you can see 10 years of high growth in Brazil. Remember, Brazil has had negative growth for three years in a row, 9% of GDP. The upside and the change could be very significant. The key is that we get pension reform implemented as soon as possible. On taxes in Brazil, I'm not aware that there's any-
It's relatively there, yeah.
Thanks, Vanessa. Next question, please.
The next question comes from Alvaro Serrano for Morgan Stanley. Please go ahead.
Good morning. Two questions. One on capital, follow-up on capital. In the quarter in Q4, you built 10 basis points, which is your usual run rate. There was a big rally in Brazilian bonds, which it doesn't seem like it had a positive effect on the capital. Maybe can you clarify that? When I look at this year, you flagged obviously the headwinds, but is it possible the capital goes down below 11% versus the 11.03% fully loaded, with IFRS fully loaded. Is it possible you dip back below 11%? Which I think could make some people nervous. Just to follow up with my credit colleagues on the AT1, you put on your presentation that you plan to issue EUR 1.5 billion, which seems to suggest you will call at least one of the two AT1s, if you can confirm that.
The second question on your plan, 13%-15% ROTE target. Obviously, there's uncertainty around the cycle. I'm just curious if you can expand of what kind of economic scenario beyond Brexit, which we don't know, and we can only be hopeful. Beyond that, what kind of cycle you're assuming, for example, in the U.S., because I saw the pickup in provisions. You've already flagged there was a change in accounting, but even above and beyond that EUR 200 million, there is a pickup in provisions in some of the Consumer USA. If you can comment about the cycle, how you're seeing it and what you're factoring in. Thank you.
I'm going to start with the third one on the 13%-14% on the cycle, José Antonio will answer the more detailed ones on capital and AT1. The cycle, obviously at some point the cycle is going to turn. We're working on the assumption that 2019 will see some slowdown. Actually, we see this as a positive because we are more sustained recovery. This is actually a scenario which is pretty good for banks because it could allow for a slower increase in rates, but some increase in rates, which should be good for margins. Should also be relatively good for the non-performing loans, will continue to perform well, and finally, should lead to some increased demand for credit. 2019, we see as relatively good, even though a bit less growth overall.
One of our key markets, which is Spain, continues to be incredibly resilient. You've seen the great results of Spain this year. In the plan, we have around 2% growth, but given the strength in the numbers we saw, I think it was yesterday, unemployment creating 566,000 jobs last year. We're growing at double the rate of the European Union. I think Spain will do very well. Brazil is supposed to do very well. These are some of our big markets. Even though overall a bit less growth, I'd say positive for us and for banks, and some of our key markets doing especially well. In the U.S., probably the U.S. might turn around, in terms of from positive to negative before Europe, before LATAM.
Again, nothing major and nothing at this point for 2019 that would give us concern that the strong underlying commercial trends will continue. In terms of the 13%-15% ROTE, we'll give you more details again in Investor Day, what are the milestones to get us to those levels of profitability. Maybe, José Antonio, you want to answer the other?
You mentioned the Brazilian bonds as having an effect, the rally in Brazilian bonds as at the fourth quarter having an effect in the total capital base of the group. The portfolio of Brazilian bonds is relatively small. If I remember well, in the fourth quarter, the positive from the AFS was like EUR 200 million or something like that. Fairly small number. 1.5 basis points for the group is not a big impact. When you say the volatility is true, and I mentioned we're going to have some volatility. Volatility coming from FX, volatility coming from AFS is true.
Till now, as you know, we've been fairly conservative in hedging to protect the capital ratio, but it's true that we have some volatility there, yeah. In relation with AT1s, our policy was stated several years ago. We made a relevant fact to the market saying that we are referring to all the hybrid instruments. We don't call based purely in economic terms, and this policy stands.
Thank you, Alvaro. Next question, please.
The next question comes from Ignacio Ulargui from Deutsche Bank. Please go ahead.
Hi. Good morning. I just have one question on Brazil. We have seen a bit of a slowdown in NII, in the QoQ performance in local terms. Acknowledging that Brazil has had a great year in 2018 and 2017, how do you see the trends in terms of margins and loan growth going forward? Linked to that, what should we expect in costs in Brazil? Thanks.
I believe the slowdown is due to some financial, non-commercial factors in Q4. Nothing that concerns us at all in terms of the underlying trends. It is true that if the economy, as we expect, takes more speed, you will see more growth coming from volumes than from margins, because as you know, margins expanded quite a lot and now are going to more normal levels. I'd say you've seen very good loan growth in Brazil in the year and I think in the quarter, at double digit in most segments.
I'd say that is where you're going to see the growth, and that's what we expect. Our total loans in Brazil is around EUR 70 billion. This is a huge opportunity for growth. Mexico is around EUR 25 billion, I believe. Still relatively low numbers compared to the size of the economy and compared to the size of the Santander loan book. I'd say Brazil and probably also Mexico, will see more volume growth than margin expansion.
Next question, please.
The next question comes from Mario Ropero from Fidentiis. Please go ahead.
Hello, good morning. I have two questions. The first one is on NII in Spain. Basically, by taking the fourth quarter level and multiplying it by four, you already have +5.5% in 2019. I wonder if you can give us some guidance or maybe to comment on how the different levels of NII could evolve in 2019. The second question is on Brazil. I think Ana mentioned that you're expecting double-digit loan growth in Brazil. I was wondering if you can comment whether you expect this double digit to feed into the bottom line or not, depending on how you see the different levels moving. Thank you.
Antonio, you want to take those?
NII in Spain, we saw some expansion in the fourth quarter. We continue to see next year some growth in probably mid-single digit, basically coming from the reduction in funding costs is expectable. We don't expect a big deal on the yield on the loans. The market remains fairly competitive, probably to thinking around mid-single digit is something that is reasonable for next year, coming basically from the funding side. In Brazil, when you have in the presentation the spread on loans in Brazil. It's like 900 basis points or north of 900 basis points. The small changes there can affect significantly the NII generation. While I do expect, I don't know if in 2019, but in a medium term, some margin compression in some products in Brazil. The market is becoming a little bit more competitive.
As you know, we've been gaining significant market share, naturally we have good competitors there that are reacting to our market share gains, particularly in segments like consumer lending, auto lending, and all these things. May be the case, maybe not. I'm not sure, but there is a case for some margin compression there. It's also true that there is a case for margin expansion on the funding side. As you know, the reserve requirements are extremely high in Brazil, may be the case that the two process goes together, or at least in the medium term, I will expect the two process to go together.
One, some margin compression on the asset side, some margin expansion on the liability side, probably due to the reduction in reserve requirements. As you can imagine, this depends on the regulatory environment and the competitive environment in Brazil in coming years. It is not next quarter, it is more if I look three years forward.
Thanks, Mario. Last question, please.
The next question comes from Carlos Peixoto from CaixaBank BPI. Please go ahead.
Hello. Good morning. My first question would be a bit of a follow-up on capital and on dividend. I just wanted to make clear, are you maintaining the full cash dividend policy that was mentioned last year for 2019 and going forward, or are there any scrip dividends or something of that nature embedded here? How should we think about payouts going forward and within the context of the targets for quarter one that you mentioned, basically? A second question will be a bit on the outlook for 2019 in Spain. How do you see volumes evolving and how do you see lower funding costs, particularly the cuts that were made on the 123 Account remuneration? How do you see that feeding into the NII evolution in Spain in 2019? Thank you very much.
On dividends, obviously, we will discuss in more detail dividends in April. We are, at the moment, not changing what we already announced, which is a full cash dividend in 2019, no scrip, two dividends instead of four. For the three-year plan, we're not going to change this for now. We have to discuss this, but I'm not thinking about anything very different, but we need to discuss this with the Board. We need to work a bit more on this. As of now, as you know, we set 30%-40% distribution from profits.
Sometimes, if there's a one-off or not, we might change that between underlying and net profit, but roughly 30%-40% range payout. We're very comfortable with that dividend policy. Again, I don't want to say in advance what we're going to say in April, but you shouldn't expect much change from that. In terms of the outlook for Spain, on margins, I think, José Antonio, you mentioned that already.
Yeah, I already mentioned.
It's more volumes and-
The only thing is volumes. As I said, we expect some growth in volumes in the lending side. Not that much, because probably we're going to keep shrinking the balance sheet in CIB and institutional lending. Yeah. We're already showing growth in SMEs and consumer lending that are the two engines of the activity right now. Probably we'll continue to see some growth in these two segments, while the other two, institutional and CIB, continue to be flat at best, or most likely reducing the size of the loan book. Yeah.
Yes. Just on the 123, the 123 is a strategy, which is a customer loyalty, a customer relationship strategy. It's been very important over the last three years in Spain, the loyal customers have increased by 72%. It's been the base of our growth in terms of we're doing 3x more mortgages, 4x more consumer lending. It's really helped us to increase the business and relationships with our loyal customers. That is something which will continue, we believe, over the next few years. It's not just about the margins, it's about all the business that we're doing with these 123 customers.
Thanks, everyone. We need to leave it here. Obviously, IR team is at your entire disposal today and the days after for any follow-up. Thanks, Ana, José Antonio, see you next quarter. Thank you.
Thank you.