Good morning, everyone. Thanks for joining this nine-month Grupo Santander conference call and live broadcast. As we do normally, our Group CEO, Mr. Álvarez, will address the group performance, followed by the Group Chief Financial Officer, Mr. Garcia-Cantera, who will address in more detail the different business areas' performance. Obviously, we will have, after the concluding remarks, plenty of time for your questions here live. Obviously, if there are some pending questions, we'll go the IR team right after the call get back to you. With no further delays, Jose Antonio, please.
are growing at a good pace. The digital transformation and the potential in digital customers is also progressing well. The results in the quarter were around EUR 2 billion, affected by the hyperinflation accounting in Argentina. That impact was EUR 169 million in the quarter. It goes through all the lines. If you wish, we can elaborate later on this. Excluding this impact, Q3 profit will have been the highest in many, many years. Year-on-year profit grew double-digit rates. We continue to generate capital. The quarter was particularly good on this. I will elaborate later on this, and we maintain high profitability. In regard with the integration of Banco Popular is progressing according to our plans. Some of them we anticipate. Portugal integration, operational integration was executed in mid-October. It went well.
Legal integration was also executed in Spain at the end of September. We have a plan to execute the operational integration starting by November according to a plan that is going to last for six, seven months. Finally, as a summary, I will say that we are well on track to meet our 2018 group targets that we established three years ago. Going through the main developments, you have here the numbers, how the commercial transformation is progressing. I already mentioned the numbers. We are adding half a million customers, digital loyal customers, and one and a half million digital customers in the quarter. We are above our target in loyal customers or very close to our target in digital customers. We are progressing in improving our digital capabilities and providing new services and more access to our customers to the bank.
At the same time, we are investing in the back office, things that are not seen from our side, investing in the back office to try to reengineer all the operations of the bank and improving the IT capabilities to serve better our customers. When it comes to the P&L, the P&L evolution has some positives, as you know, impacted by the perimeter, Santander Asset Management, and negatively by exchange rates and inflation in Argentina. Going through the P&L, we see good developments in both net interest income and fee income. Although the fee income was affected by some weakness in the CIB area and some seasonality in the quarter, but Really the most important was CIB fee income generation in the quarter was weak due to the situation in the markets.
We continue to have to show consistent. Seasonal effects plus CIB weakness is producing a decrease in fee income in the quarter, but nothing that is structural. I will qualify this as a blip more than something that is recurring. Good cost control in the quarter, going down 1%. Loan loss provisions, there is a seasonal effect. The change from the previous quarter is a seasonal effect in Santander Spain, where the second quarter is the lowest quarter in terms of loan loss provisions due to the fiscal events. The third quarter comes in line with the previous year. If you compare the cost of risk in Santander Spain this year and the previous year, this year is lower than the previous one, good developments also there.
Using cost and earnings developments, the quarterly capacity to generate results quarter-on-quarter, you see a consistent upward trend that shows that the results are recurring, consistent and growing results quarter-after-quarter. When it comes to the net interest income, we have both growing in mature markets and in developing markets, with different patterns. In mature markets, we are growing volumes. We are seeing NIM compression, -8 basis points. While in developing markets, we see the two, both volumes and NIM improving, basically across the board, with good developments and good capacity to generate net interest income in both markets for all the different reasons. In fee income, the levels of activity remain strong, pretty strong, I would say. You see the figures there, both the number of customers, activity with those customers. It's not just the number of customers.
The activity of those customers is growing nicely. Mutual fund balances, card turnover, insurance is growing pretty well. You see the fee income growth by market. We are showing pretty consistent results across the board, mature markets growing 6% and developing markets 14%. When it comes by segments, you will see there what I already comment, CIB is the segment that is quicker, while in the retail banking and in wealth management, we are growing in a strong way, I would say. For that reason, I was telling you before that I deem this more as a blip than a consistent trend that you can extrapolate into the future quarters. When it comes to costs, decrease in the quarter, we are seeing the results of the integrations we are doing both in Spain and Portugal.
In the U.S., we are after the years in which we invest significantly to tackle the regulatory issues, we are showing decrease in costs. In the other markets in which we are growing costs, like Brazil and Mexico, we are growing much faster in the volumes and the activity than we are growing the costs. The cost income in both those markets is pretty low and still low. Overall, at the group level, we are slightly below 47%. As you know, our target is between 45%-47%, pre-Popular. With Popular, there's a couple of percentage points that push the cost income higher, but we are on track to meet our target. At the same time, the customer satisfaction is progressing well. We are top three in six countries, we are progressing well. In the main countries, we are top three.
We are satisfied with the results on this bit. Credit quality, two comments here. What you have on the right side, the first time we publish under the IFRS recovery ratio, the stage 1, 2, and 3. You have numbers there. You have the comparison between January and September. We're going to continue to publish this number; it's the first time we publish, it's the way to follow this. Overall, the trends are pretty good. It's fairly benign credit environment. In almost every market, you have one-offs probably in the quarter, in Mexico and in Spain, if I remember well. Overall, the credit quality remains well on track and the trends are pretty good. The environment is, as I said, benign. On capital, strong capital generation in the quarter, we generate in the quarter 31 basis points. At the end of the year.
The ratios, good progress here, both in ROA, return on tangible equity growing. You have the numbers on underlying and total basis. EPS growing already 5%. By the end of the year, we will be in double digits, as we have been guiding you. The tangible net asset value per share grew in the quarter 1.5%. The main effect here has been the share ratios; this is going to be still the main uncertainty on this. Other than this, we are generating net asset value per share due to the capital retention we do as we grow the business in the markets. Now, I will hand it to Jose that is going to operate into the business areas and the countries. Finally, I will come back to make some final comments.
Thank you, Jose Antonio. Good morning, everyone. I will focus on the main areas and briefly review the others. Compared with previous quarters, in terms of underlying profits, Europe's weighting was up two percentage points. Spain was up more or less two percentage points at the expense of Argentina, which decreased by the same amount. The underlying profit increased in eight out of the 10 core markets. The only ones where it dropped were the U.K. and Argentina. In these cases, I will explain later, due to inflation accounting. Starting with Brazil, in a fairly volatile environment, we had a very good set of numbers in the country in terms of balance sheet and results, with very strong growth of our customer base. Loans to our funds grew at double digits, notably retail loans. On the liability side, we kept growing profitable market share.
The return on tangible equity increased over 300 basis points over the period, reaching 20% in the first nine months of the year. We saw double-digit rise in net interest income and fee income. Quarter-on-quarter, fee income was impacted by higher volatility, which led to lower activity in the corporate investment bank and the replacement of mutual funds by savings accounts, what is called locally, poupança. The efficiency ratio reached its best level in the last five years; credit quality improved with the cost of credit down to 4.17%. We are quite optimistic about the performance of Brazil in the coming quarters. We see good trends in revenues, costs rising in line with inflation, and a stable cost of credit. In Spain, the goals set for the integration of Banco Popular are being met successfully. The legal integration was concluded in September.
We had good business dynamics in the first nine months of the year in terms of volumes, with record July in terms of new loans driven by SMEs up almost 20%, and consumer credit also 20% higher than in July of the previous year. Positive loan book evolution in SME and private banking. This was offset by a force in mortgage lending and CIB portfolio. Mortgages production is up, it is a healthy growth, but is insufficient to compensate the amortization of the existing portfolio. In deposits, we saw increase in retail banking balances. The 1|2|3 Account balances are up EUR 4 billion year-to-date. Underlying profits increased 18% year-on-year, with a strong revenue growth, which was boosted by a lower cost of deposits, down six basis points in the quarter. Cost declined 2%.
Thanks to the optimization measures following the integration of Banco Popular, we are starting to see the synergies that we already announced, loan loss provisions remained basically unchanged. In the U.K., we see an economy that remains fairly stable with some, obviously, uncertainties associated with Brexit. The ring-fence structure is close to completion ahead of the deadline, January 1st, 2000. Sustainable growth in profits and return on tangible equity at 17%. New lending grew 8% from December 2017, well above the market, and profits were up 7%.
Quarter-on-quarter, we saw a good evolution in net interest income and lower costs, down 6%, mainly due to seasonal effects and the first synergies that we are getting in Germany, where the commercial network integration is advancing as planned. We will continue to focus on improving our auto finance business, as well as growing the consumer credit segment due to improved digitalization. Going into the other units very quickly. In Mexico, the focus is commercial network transformation, digitalization, and retail customer attraction, with a strong increase in digital customers, we are up 40%. Strong growth in loans, mainly payroll, companies, and SMEs. Growth in funds driven by deposits from individuals, SME, and mutual funds. Profits increased 13%, driven by higher net interest income at 12%, fee income up 9%, loan loss provisions down 7%. Cost of credit was very significantly lower than a year ago.
Higher profits, return on tangible equity reached 20%. We see similar trends in the future. In Chile, we are working on regaining leadership in the mass consumer market, and we will launch new products before the end of the year to continue pushing into this direction. In volumes, loan growth accelerated. The economy is doing better, and we are seeing that in terms of credit demand. The profit in the first nine months were up 8%, underpinned by good performance of customer revenues. In the U.S., the Federal Reserve terminated the 2015 written agreement, demonstrated the continued improvement on regulatory issues. Volume dynamics are improving, with loans growing for the second straight quarter, both at the bank and at the Santander Consumer. In this case, it is mostly leasing. Higher profits, year-on-year growth of 47%, with a strong growth in both units, Santander and Consumer.
Quarter-on-quarter, profits were affected by higher provisions. As Jose Antonio said, there is seasonality in the provision calendar at Santander Consumer, and that affects the quarter-on-quarter comparison. On the other hand, we saw very good news in terms of net interest income and costs, at the bank, and the first increase and the first decline in both in several quarters. In Portugal, the integration of Banco Popular was concluded in October. Totta is now the largest privately owned bank by domestic assets and loans in the country. Underlying profits were up 9% year-on-year, driven by improved efficiency. Revenue growth was higher than costs growth and lower cost of credit. In Poland, the economy is doing very well, growing between 4% and 5%, and we are seeing that in terms of growth in loans and funds, both quarter-on-quarter and year-on-year.
We had quarter-on-quarter very good performance in all recurring items of the P&L. This is not necessarily reflected in the profits in the bottom line due to the seasonal collection of dividends in the second quarter. In Argentina, let me go in a bit more detail about the accounting changes. We had to apply excluding this, year-on-year performance was really good. Customer revenue was up due to very good spread management. Fee income also up due to the use of cash and effects. Higher provisions and costs were partially offset by the peso depreciation and the automatic review of the collective salary agreement. In general, we see positive evolution of future profits in Argentina, a country that will stabilize gradually with the agreement between the government and the IMF. Turning to the corporate center, the underlying loss was 11% lower than a year ago.
This better result was mainly due to lower costs associated with effects hedging. Net interest income reflected also the higher financial cost associated with the issuances made to comply with TLAC and MREL requirements. Operating costs were basically stable, other income and provisions include charges for provisions, intangibles, state guarantees, cost on DTAs, pensions, litigation, deterioration of stakes. Lots of different things which explain the increase that we see year-on-year. With this, I'll turn it back to Jose Antonio for his concluding remarks. Thank you.
Thank you, Jose. To conclude, I would like to make some comments in relation with the KPIs we have for the end of the year and the progress we've been making in the last year. You have here the main KPIs we established for the group. We are, as I mentioned, well on track in the side of customers, more customers, more satisfied, and greater loyalty. That was the center of our commercial strategy. Continue to grow volumes and fee income. Although the quarter was, as I mentioned, weaker, we are growing at 10% compared with the previous year. A significant growth that is very much in line with the loyalty and the number of digital customers we are getting with the commercial transformation. The cost of risk, relatively below 1%, while our target was a bit higher, as I also comment.
Cost income in the upper side of our range, but inside our range, that given particularly the extremely low rates, negative rates in Europe, is a good achievement at the group level. The EPS double-digit growth target, we are now on track to meet this target, taking into account the developments in the results quarter-on-quarter in 2017 and 2018. The dividend per share, we've been increasing the dividend per share year after year in line with our commitment. The full loading Core Equity Tier 1, our target of higher than 11% seems to be achievable at the end of the year, and we are making good progress on this regard. The quarter was particularly good. Also, I mentioned before that our current capacity is more in the line of 10 basis points per quarter return on tangible equity already above our targets.
We think that we are well on track to meet our target by the end of the year. Not less because on business as usual, we expect to deliver solid results in Q4. We don't have any reason to think that there is going to be any change in such a short period of time. That's the end of the presentation, now we remain at your disposal for the questions you may have on the results, on the items that may be of your interest.
Thanks, Jose Antonio. We are-
Good morning, ladies and gentlemen. The Q&A session starts now. If you wish to ask a question, please press 01 on your telephone keypad. Thank you. The first question comes from Francisco Riquel from Alantra Equities. Please go ahead.
Good morning. Thank you for taking my questions. Two for me, first on capital, which has surprised positively this quarter. I wonder if you can give us more color on the capital optimization measures that you have taken during this quarter. If there is any P&L-related dilution from these measures. You have mentioned securitizations. Well, I don't know if you can comment more on this or not. Other peers are also reporting headwinds related to TRIM. If you can please update on where are you in this process. The second question is on Spain NII. The 5.5% quarterly growth in NII is remarkable, given that Q3 is typically a seasonally weak quarter. If you can please help us understand the drivers of this growth and give any guidance for the coming quarters.
If you are changing the bond portfolio or not, and in particular, the benefits from the replacing of the 1|2|3 Account, and how much is still to come from the next replacing that you announced recently. Thank you.
Thank you, Paco. I'm going to go with the questions. The first one, the three components. You asked about capital, more color. While the generation in the quarter was, roughly speaking, half of the generation, I will say profits minus dividends and AT1s and all the usual stuff. We've done some securitization, not that much in the quarter. The optimization, as you know, the density of our risk-weighted assets compared with assets is one of the highest in the sector. In some models, internal ratings-based model, we are still refining those models. As a result of this quarter came in this way. Well, I wouldn't say there's more to come, but we're going to have headwinds here, one quarter maybe in one side or another.
What I want to stress to you, and I told you that the capital generation. When you look at the loan book, we split the loan book in three components, let's say the mortgage component, the institutional lending, and the corporate lending and the consumer-
Miss Sofie, you have the floor. Please go ahead.
Hi, here is Sofie from J.P. Morgan. Just one more question on capital. Next quarter, you will get 9 basis points from WiZink. How much will the Deutsche Bank Polska acquisition have of an impact on your Core Equity Tier 1, and are there any other adjustments we should take into consideration going into the fourth quarter? My second question would be on Brazil, if you could just elaborate a little bit more on your outlook on Brazil, post the elections we had over the weekend, and how we should think about net interest income growth, fee growth, cost growth, and asset quality going forward. My third question would be anything you can comment on your new CEO that starts next year. Thank you.
Okay. Capital, you asked specifically for the fourth quarter. On top of the 9 basis points we anticipate from WiZink, the Deutsche Bank Polska assets are meaningless in terms of the impact on capital. It's neutral. Basically, it's a neutral in terms of capital, I don't expect this. The only thing that we anticipate as of today, in terms of capital, is the ordinary capital generation on the 9 basis points from WiZink. Other than that, it's business as usual, I will say, yeah? Probably the main impact come from exchange rates, is the most volatile component and available for sale portfolios. Do you have anything to add to this, José? No. Okay, those are the main components. Brazil, you make a broader question about the outlook. Obviously, it depends on the number of products we sell and the cost associated with this growth.
Overall, I will expect in local currency, Brazil to keep growing at double digits, yeah. Probably well in double digits going forward. Finally, on the new CEO, well, you know him. The only thing I want to stress, we said clearly, some of you elaborate about giving the person that is going to be the next CEO and his previous experience. Some people went immediately to a kind of M&A, increasing activity on M&A. The strategy is not going to change. Our focus continue to be organic growth, and we will look for opportunities in our existing markets as we've been doing in the previous years. It's the only thing I want to add to avoid any kind of confusion that this is going to change the strategy of the bank.
Thanks, Sofie. Next question.
The next question comes from Alvaro Serrano for Morgan Stanley. Please go ahead.
Hi. Good morning. two questions from me and another one on capital first. You mentioned the 10 basis points run rate, We can think you'll be close
Then by the end of the year. The question is, can you give us any update on the negotiations of the Chrysler? How is that going?
Have an option. They explore the possibility about to buy the assets we currently are running in Exclusa. I do not see nothing happening this year. Probably we continue with the negotiations, although it's more on FCA side to interest on closing these negotiations or not. At this stage, I don't see this being closed before the year end. I may be wrong, but I don't see this being closed before the year end. The U.K. costs, well, it's true that we started the year with a significant growth in costs in the U.K. We were running at a running rate of 8% or something like that. I would expect, as you rightly said, at the end of the year to be at the 5%.
We expect to continue to have a better cost control going forward in the U.K., with the business being more focused in the niches, in the areas in which we can make the difference. We are designing a strategy to focus on specific areas with better cost control, the one we had at the beginning of this year. At the same time, we are making significant digital investments. That is what is the main cause of this increase in cost.
Foreign subsidiaries, which they agreed on bringing this down from 100 to 95. Whether you have any information, any details on this, in particular, what will be the taxable base here? Whether it will be only dividends or all the profit generated by subsidiary separately. Thank you very much.
The first question about Santander Consumer Finance cost of risk growing. Well, we haven't seen any development there. We know that the cost of risk is significantly below expected cost of credit through the cycle. We haven't seen any development there. The difference between this quarter and the previous quarter is the previous quarter we disposed some portfolios, non-performing portfolios. On this quarter, we didn't. For that reason, you see the difference quarter on quarter. On the ground, we are not seeing any difference. As I said, the cost of risk remain low when you look in historical standards. The second question was about the size of IRPH portfolio.
I think that, I am speaking by memory, around EUR 2 billion in Popular, another EUR 2 billion in Santander is relatively small because we were not that active with this kind of index in the past. Finally, the tax. The information I have is the same you have. This is an intention, and it's going to be discussed in the parliament. If it's passed, we will need to assess. I don't have a specific number to or further clarification than the information you got and you gave in your question.
Thanks, Jose. Next question, please.
The next question comes from Carlos Cobo from Société Générale. Please go ahead.
Hello. Thank you for the presentation. Couple of questions here. One, if you could add a little bit of color
Divided the two networks, Popular and Santander Spain, just to see how revenues are performing and whether one of them are underperforming or outperforming the other. Same for fees, cost of funding and all that. Second, on capital. Sorry to insist there, just to see if there are any potential upside in Q4. Could you provide us the pro forma impact on capital coming out of the appreciation of the Brazilian sovereign exposures? Thank you.
Okay. A bank, the organization is, even the regional organization, the local organization, the head of the region, the head of the areas, are just one head for the two networks. We are not following this organization. I'm particularly happy with the developments in SMEs, where it was the critical sector when we decide to make an offer for Popular. On capital, I don't know if you have something.
Yeah. Remember that we hedge the capital adequacy, the ratio is hedged against changes in exchange rates. From the equity investor in Brazil, the exchange rates do not affect the capital adequacy. We also, as we said in previous quarters, have hedged the profits coming from Brazil this year. The profitability that we are seeing in Brazil is higher of what we expected at the beginning of the year. Yes, there will be a slight positive impact in the fourth quarter, but it will very much depend on the profitability of the quarter, the tax in the quarter, the capacity to amortize DTAs. I think it's very premature to assess at this point, at the end of October, what the impact on capital will be.
For sure, what is affected is the TNAV. Yeah? The TNAV is affected in a positive way, because we hedge, as Jose said, the capital ratio, but not the full capital invested there. As long as the real appreciates, the capital invested there gives a positive uplift to the TNAV.
Thanks, Carlos. Next question, please.
The next question comes from Mario Ropero from Fidentiis. Please go ahead.
Hello. Good morning, everybody. My first question is, if you could please update the amount of synergies that have been achieved so far on Popular and the amount pending. The second question is a follow-up on a previous one, is if you could give us the exposure to foreign currency denominated mortgages and provisions attached to them. Thank you.
Well, synergies on Popular, we are well on track with our plan. We were guiding you one third per year. At the end of this year, we are well on track to be and probably to exceed a little bit this target this year. I feel comfortable that we're going to achieve the synergies announced for Popular. In the Investor Day next year, we will update you, particularly on this topic, our views going forward. In foreign currency mortgages, as far as I remember, the other significant one was in Poland. Yeah? I don't know if you refer to the Spanish.
The Spanish Multidivisa.
Yeah, the Spanish Multidivisa. It's a minor portfolio. It's a very minor issue. Yeah. It's negligible.
Yeah.
I think it's EUR 500 million or something like that. It's the notional amount, it's negligible. The other topic on this is in Poland, where as you know, before 2010, there was a significant portfolio of Swiss franc mortgages that is getting reduced over time, and we don't see any particular development there.
It's been amortized very quickly.
Very quickly. Yeah.
From Credit Suisse, please go ahead.
Hi, good morning. I just wanted to follow up on Brazil's NII on-
We have seen a significant expansion in the NIM due to the mix, that we're shifting the mix from large corporate into more consumer SME kind of lending. Although we expect we continue to grow faster, probably, in consumer lending and SMEs, probably the gap is not going to be as large as it was in the past. For that reason, the NIM, probably the expansion of the NIM is not going to be as strong as it was in the past, all other things equal. Although the competition, potentially regulatory issues or regulatory pressure on some products may also produce more pressure on NIM. Overall, we continue to be constructive on expectations about the NIM going forward. Thanks, Andrea. Next question, please.
The next question comes from Stefan Nedeialkov from Citigroup. Please go ahead.
Yeah. Hi, guys. Good morning. It's Stefan from Citi. I just recently joined the call, so excuse me if any of these two questions have been asked partially or fully before. On Mexico, could you provide us with what you see as the outlook at the macro level, as well as on your loan growth into 2019 margins and provisions, given the new presidency of AMLO from the 1st of December. Secondly, on the RWA optimization.
In credit cards, where the cost of risk is north of 10%, we reduce the cost of risk in credit cards, having less activity in open market, we've been reducing the cost of risk there. We think that this is sustainable. The growth there is going to be significant. This year, we expect to finish with probably around 600,000, 700,000 new payrolls. We are expanding in a big way our customer base. This means that we're going to have more capacity to lend to existing customers and less need to go to the open market. That makes me relatively optimistic about the outlook, all other things equal, with the current economic environment that we have in mind in terms of the provisions and the cost of risk. The second question is about related that optimization.
No, it's a combination of many things. There's no single element, no single factor or variable that is worth mentioning that explains the movement. It's a combination of different variables in the internal ratings-based models in several countries, but none is really meaningful.
Thank you. Last question, please.
The last question comes from Carlos Peixoto from CaixaBank BPI. Please go ahead.
Hello, good morning. A couple of questions. The first one would be, if you could share some light on how you see
Customers of the digital customers. What we see this year, the fee income has been, as I mentioned, our CIB business is particularly strong in Spain and Brazil, and the fee generation both in Spain and in Brazil has been affected by the weakness in the CIB fee income. In retail, probably the weakest area has been mutual funds. That while due to the behavior of the market, the growth has been so far limited on the negative side. On the positive side, we are growing at very good pace, at a very good rate in insurance. Insurance fees coming from insurance are growing nicely. Going forward, probably the balance depends on the market behavior and this both in CIB and mutual funds that are the lower performance in this year. This is developments in Spain.
In Brazil, overall we are growing, I think, at 14% or 15% the fee income, so a very healthy number. When you dig inside the fee income generation, as I said, weak in CIB, particularly strong in all the business related with volumes. We grew the volume significantly both in lending, the volumes of insurance. Competition is increasing, acquiring business. As you know, acquiring business was fee income generation was strong in Brazil, and we are seeing more competition. It's the only area in which I see more competition. As a result of this competition, probably the operators in the country, including ourselves, where our market share is approaching to 15% and probably keep growing. We are seeing some competition there that reduce the fee income. Other than that, I continue to see good developments in Brazil. The mortgage stamp duty, well, wait till next Monday.
The idea of the range is potentially so wide that giving you numbers or I don't have the numbers, but the range is so wide that elaborating on this, does not add any particular idea, I guess, because the range is potentially extremely wide. Given the fact that we are talking about tax, where changing it retroactively is, in legal terms, really difficult because this is not something that was in our contracts, was in the law or in the bylaw, and we were following the bylaw, was not due to our contracts like other claims. We were following the law since, if I remember, 1995 or something like that, and the discussion is different in this regard. Yeah.
Okay. Thanks everyone for joining the call. Obviously the IR team, we need to hear is at your disposal for any follow-up you might have. Thank you.