Good morning, everyone. Thanks for joining to this first half 2018 Grupo Santander Earnings conference call. As we normally do, our Group CEO will address the group performance for the first half, as well as the concluding remarks, and our Group CFO will talk deeply about the different business areas performance. Obviously, we'll have, as every quarter, plenty of time for Q&A. Without any further delay, José Antonio, please.
Thank you, Sergio, Good morning to everyone. Thank you for attending this first half results presentation. Well, we're going to go through the results in the usual way. Let me just start a little bit talking about environment. We developed the business in an environment that has been, for sure, more volatile than in the previous quarters, mainly due to political reasons, yeah. The translation into our results, probably you see more in the currency depreciation that has been fairly strong in the quarter. We also had some news from European Central Bank in the end of the quantitative easing and postponing somehow the potential interest rate increases till the summer next year.
Finally, probably the most important thing that is going on in the environment is the discussions about trade, global trade, that the potential introduction of barriers is what has the highest potential impact to affect the markets. Having said that, in this environment, our business continue to perform well. On the commercial transformation side, we continue to produce good outcome, good results. Both the number of loyal customers and digital customers are progressing according to our plans. In fact, the number of loyal customers is already above our year-end target, and we are progressing well on digital customers. The digital transformation is going across all the units with different speeds depending on the markets. We are able to translate this into our results.
We got in the quarter around EUR 1.7 billion profit after the charge, restructuring charge that you did for related with Popular integration of EUR 300 million. As usual, you have in the second quarter the resolution charge for the Single Resolution Fund. On a like for like basis, the second quarter the profits came better than the first quarter by increasing by 6%. Year, first half compared with first half results grew 12% on current EUR and 25% in constant EUR. On the capital side, the organic capital generation was good in the quarter, 18 basis points. We always guide you for an average of 10 basis points per quarter. On the year, this quarter paying better. It's true that in the quarter, We anticipate some of these impacts. In the previous quarters, we had plenty of movements.
The ones related with the perimeter, Totalbank that was anticipated to you, plus 5 basis points, restructuring charge, minus 5 basis points. AFS portfolio mark-to-market was probably the main one, in terms of being unexpected, while SCUSA minority interest, we already anticipated to you. Having said that, I will elaborate later on on the specific numbers. The profitability, we are already above 12% return on tangible equity. It's one of the highest in the sector in Europe, and we are progressing well in this regard. Finally, in the outlook for 2018, we are on track to meet all our targets. In Popular integration, I will say it's going as suspected.
We will expect to have all the authorization approvals to go for the legal integration by September, the end of September, and starting the operational integration at the end of this year, November, December, and going into the first, second quarter of next year. Well, as I said before, good progress on the commercial front. The loyalty study is paying off. You will see in the fee income. The fee income generation for the third year in a row, we are north of 10%, and this reflect the success of the loyalty strategy. We are progressing loyal customers and translating this into the line that reflects this the best. On digital customers, digital revolution is going on.
The number of customers that interact with us through digital channels is growing and growing and growing, 23%, and we are close to our target of 30 million digital customers by the end of this year. Our digital customer definition is those who interact with us in one month. That normally there is different metrics here. You have one month, you have some people that use three month, and even some people that use six month. Our measure is relatively strict. Going to the P&L, what we have is the numbers you have here. You have the second and the third column makes the point that I said before of how important was the currency depreciation this quarter. You have constant EUR in the last column, current EUR in the previous column. What you have there is basically we are growing revenues around double digit in constant EUR.
That is fairly flat as in current EUR due to the depreciation. We are the same with expenses. They are growing only 4%, while the portfolio is growing much faster than that, and in current EUR is falling. Finally, we have a higher tax rate than in the previous quarters due to the fact that in Brazil, we didn't apply this quarter the Interest on Capital. For that reason, the tax rate went up from 34% to 36%. The ordinary profit is 12% up compared with the first half of 2017 and 25% up in constant EUR. A good outcome overall for a business that is performing pretty well all across the board, as we will share in the next pages, and when the CFO elaborates on a country-by-country basis.
The main lines of the P&L underline one fact, is the recurrency of the business. The business is fairly recurrent, both Net Interest Income, we are showing constant progress quarter-on-quarter. Fee Income, pretty much the same, growing quarter-on-quarter, 2% both. You look backwards to the previous four or five quarters, you see pretty much the same costs. While we are investing in several countries, although having said that, we are able to keep the costs under control, and above or a superior performance compared with our peer group. The provisions I mentioned before, the cost of risk keeps falling. We guide to you for 1.2% cost of risk. We are below 1% already, so it's behaving better than expected. The macro environment is quite helpful on this.
You have on the right side, the performance, the P&L of the group in the last couple of quarters showing a consistent trend. Aside from the second and fourth quarter, where we have the resolution charge under deposit warranty fund charge. Aside from that, you see a fairly recurrent set of numbers that produce growing results. When it comes to volumes, we saw in the quarter some acceleration in volumes. You see on both on loans and customer funds. Almost all the units are growing, including some that were previously steady or flat or going down, like U.K. and Spain, growing all across the board. The volumes came better, both in loans and deposits. The growth tend to be faster in retail and SMEs than in large corporates and corporates. This happens not only in Brazil, that was the case before.
It's also happening in Spain and in U.K. It's more having total retail than the large corporates and corporates, both in loan and customer funds. The profits, you have all the units in constant EUR. You see all of them are growing. You have in brackets excluding the resolution fund. All across the board, the performance is not that based on one unit. The performance overall is very good, and this makes us confident that we're going to continue to deliver towards our year goals. When we look, going to detail into NII, Net Interest Income, we have the Net Interest Income in constant EUR growing both in mature markets and developing markets at different speed. Different speed come from two facts. We are growing mid-single digit high, mid-high single digit, both in loans and deposits in mature markets.
While there is some margin compression here, basically due to the Euribor, and that affects the mortgage portfolio in Spain and Portugal. That still is a drag in the customer spread. In emerging markets, we are growing double digit. We can keep growing double digit, and with some margin improvement. This margin improvement come more from the fact that there's a shift in mix, particularly in Brazil and somehow in Mexico, than on a like for like increase in the NIM. In Fee Income, I said before, and you see the numbers here, that we are able to translate the loyalty. Loyalty, again, is transactionality with the bank. When it comes, you see the activity at the bottom. You see that mutual fund balance are growing 9%. The turnover in credit cards, in debit cards is growing at 17%. Insurance premiums is growing at 11%.
Those are products that represent fairly well what loyalty means. At the end, it's the customers having more transactionality with us, other than the savings and loans traditional approach. We translate this into a healthy growth in fee income, both in developing and in mature markets, 16% in developing markets, 10% mature markets. You have some perimeter change here that you see particularly well in wealth management, where we include the asset management that grew 67%, but there is some change in perimeter there. In retail banking, we are growing at 10%, but almost no change in perimeter there. CIB this quarter came relatively weak, particularly in Spain, where you will see the fee income relatively weak because the quarter was not particularly good in this regard in Spain. Costs, I mentioned. Before you have some numbers on here that has significant impact.
The perimeter has significant impact, like Spain, Portugal. Basically, this reflects the position we are going. In countries like Brazil, we are growing real terms just because we are gaining market share. 100% of this is variable cost, is related with activity. In markets in which we have an integration, in Spain, we are starting to capture the synergies of integration this year. We are well on track to achieve synergies of more than EUR 150 million, as we anticipate to you. In the U.S., we anticipate you also that once we passed the CCAR last year, we were in a position to make some efficiency gains in the U.S., and it is reflected here. On the other side, you have Mexico, where we are making significant investments to upgrade our operations in the market. We still have to improve our infrastructure.
I'm not referring here to the digital infrastructure, although we are investing also in digital infrastructure. It's the traditional infrastructure, where we are upgrading in order to improve the quality of the service we are providing to the customers. As you can see on the slide, you see that we have good cost control with the best cost-income ratio in the industry compared with our peers. We combine this with being top three in customer satisfaction in the majority of the countries in which we operate. This is something that we care a lot about as we are building on loyalty. Building loyalty means to keep the customers with very high satisfaction rate, to keep the customers loyal to the bank. In asset quality, nothing to add. The trends are good. The cost of credit is below 1%, 100 basis points. NPL ratio keeps going down.
Finally, real estate exposure, although is less than 1% of the balance sheet in Spain, we have EUR 5 billion and it's trending down in a market that is in very good shape. The real estate market, I mean, is in very good shape. While this allows us to evacuate from the balance sheet to reducing the balance sheet, the real estate assets that are coming as a result of the CAR process that are ending with the repossession of the assets that came from the bad loans in the real estate crisis in Spain. When it comes to capital, we are very much in line to reach our capital targets in the quarter. As I mentioned at the beginning, organic capital generation was good. Well above the average we expect for the year, 18 basis points compared with 10 basis points.
Perimeter and restructuring costs offset each other. Perimeter is total bank that we sold, and restructuring cost is the charge of EUR 300 million related with Banco Popular integration. The 20 basis points come, basically the minus 20 that is reflected here as other, comes from the available-for-sale portfolio, the ALCO portfolio, the mark-to-market. That basically in the year is basically flat. In the first quarter was a positive, in the second quarter was negative, and overall in the year is fairly neutral. What was unexpected was exclusive minority interest that, while I anticipate to you in the previous quarter, is 18 basis points down. Finally, you have the WiZink that we expect the authorization maybe this quarter, maybe next quarter, around September, October, that will add nine basis points.
We are at 10.80 on transitional IFRS 9, and 10.62 on fully loaded without transitional agreement related with IFRS 9. The only thing new here that we were not anticipating was, as I said before, exclusive minority interest. That is the only headwind we have in capital. Other than that, we are on track to meet our targets and to be around 11% at the end of the year. We remain confident that we achieve our target. Another topic, regulatory topic, MREL. We knew this quarter, we published our requirement that is 24.35 of our risk-weighted assets. The good news is we already met this requirement at the end of 2017. Although the compliance date is for 2020, so at the first half year and then years of 2020. Our MREL compares pretty well with our peers.
While this is, just to tell you that we don't expect to have higher funding costs as a result of complying with MREL, it's already in our numbers. Finally, the ratios, the RoRWA, we continue to show increasing profitability, balance and return on risk-weighted assets. We were progressing steadily and constantly. It's fairly recurrent. We are going up, and this translate into a higher return on tangible equity, higher EPS, where we remain committed with double digit EPS growth this year. Tangible net asset value is performing pretty well, although we have had, as you saw, a significant impact of the depreciation in this quarter. We exclude depreciation. We have a 6% growth excluding the FX impact. Including the FX impact, we were fairly flat. That is a good outcome in a fairly volatile quarter in currencies.
Just to finish before I hand it to José to comment on the units, just comment to you that we decide to, in order to have all the numbers of our first investor day plan that finish at the end of 2018, we decide to postpone our strategy update by probably February next year, once we publish the results of 2018. We update you at that time about our prospects for the future. The main area behind this is first to complete our plan before we hand to you a new plan. At that time, we expect to give you a comprehensive analysis of our digital transformation, how this is going on, and incorporate some news that are important for our business, particularly Brexit, that is going on, also the elections in Brazil that come, as you know, by the end of October.
I hand over to José to elaborate about the units. I come back after at the end to make some conclusions.
Thank you, José Antonio. Good morning, everyone. Like always, I will make detailed comments on the major main units and quick comments on some of the small ones. In the first half, we had eight out of the nine main businesses showing positive profit growth. As you can see, being Brazil the greatest contributor. We still have more or less 50% Americas Europe, 50% emerging developed economies. The most significant change from the previous quarter is the drop of Spain, is basically the reflection of the charge for the Single Resolution Board. Starting with Brazil, we now have probably the most competitive bank in Brazil. We've been investing in developing these capabilities in the last few years. In this very volatile environment, Brazil continues to perform extremely well.
We are gaining market share in all segments, we are developing a new business mix that is helping us despite the drop in interest rates. As you can see, we are being able to even increase the net interest margin. Overall, we have a very strong performance in Brazil in the first half, also in the second quarter. We would expect this trend to continue over the next few quarters. Cost of risk is around 4.3% at the moment, it should continue its positive trend over the next few quarters. In Spain, for the first time in many quarters, we see quarter-on-quarter positive growth.
We had very strong new production in SMEs, in consumer loans, in mortgages, this helped the quarter-on-quarter evolution, which coupled with a substantial improvement in the cost of funding, as you can see at the bottom of the page, is helping net interest income growth, quarter-on-quarter of growth of around 2%. The integration of Banco Popular is going as planned, we will complete the legal integration in September. This is helping us in terms of the calendar for obtaining the synergies that we expected, we are very much in line with the EUR 150 million restructuring benefits or cost benefits that we expect from the integration of Banco Popular this year. The restructuring costs last year were made in the third quarter. We have made this restructuring charge, as José Antonio said, in the second quarter.
Again, showing that we are a bit ahead of our initial plan in terms of the integration of Banco Popular. Finally, the cost of risk should stabilize at around 30 basis points. This quarter, we have the SRB charge, which amounts in Spain of the total of EUR 270 million, EUR 163 million correspond to Spain. When we look at quarter-on-quarter comparison, this quarter is affected by two elements. One, the SRB charge and the restructuring cost for Banco Popular. If we move to the U.K., we see an economy that is performing a little bit better. We have some uncertainties, obviously associated with Brexit. The environment remains very competitive, and we are working in several regulatory aspects, particularly the ring-fencing process. In this environment, we have a significantly better second quarter than the first quarter.
We were able to grow the loan portfolio by approximately GBP 3 billion, mostly driven by mortgages, but also SMEs and CIB had a strong quarter. Profits quarter-on-quarter rose 16%. If we look at year-on-year, net interest income is down due to competitive pressures. As you can see, the net interest margin year-on-year is down. Costs obviously are up because we are investing in digital transformation, in restructuring and re-engineering the bank, and also we have some regulatory investments there. Cost of risk remains very low at 10 basis points, in line or even better of what we thought. Overall, a good quarter in the U.K., significantly better than the first quarter. In Santander Consumer Finance, the trends that we saw in the first quarter and in previous quarters continue. We saw volume growth, loans growing 9%, deposits growing 7%.
Not all of that is being translated into revenues, into net interest income because of some margin pressure. Fee income is down mostly due to adjustments in our pricing of insurance products in Germany and the Nordic countries. In Germany, the integration of all of our operations under a single entity is proceeding as expected. Cost of risk remains at historically low levels. Year-on-year comparisons here are a bit difficult because of some portfolio disposals that took place, that are still taking place, but mostly took place last year. In general, same trends this quarter than in previous quarters, and these trends should continue over the coming quarters. Moving on to the smaller economies. In Mexico, double-digit growth all throughout the P&L. Net interest income, fee income, as we mentioned, is the country where we are investing the most.
We need to restructure the operations in Mexico, and also we see their double-digit growth in costs and a much better evolution of provisions. We've seen provisions clearly growing at lower rates than before, and this is obviously helping the profitability that in this quarter, Mexico got a return on tangible equity of 20%, and we continue to see similar trends in the coming quarters. Good quarter in the U.S. We passed CCAR, and we got our capital plans approved, and that means that the dividend distributions from the U.S. up to the group will go up over the next few quarters. We see better trends in volumes, both at SCUSA and the bank. In the bank also, on top of better volumes, we see better margins, and we saw very good performance at the bank.
SCUSA is seasonally the strongest quarter. This was reflected clearly in the P&L. We have significantly lower loan loss provisions relative to volume growth. This is a reflection of the fact that our FICO is higher. The FICO for new production is clearly higher than before. We continue to de-risk the profile of the company, and its 18% return on equity this quarter is quite outstanding given the new risk profile that we see at SCUSA. Again, this is the strongest quarter of the year, but when we look at year-over-year trends, both at the bank and at SCUSA are pretty positive. In Chile, we have the leading private sector bank in Chile. We saw growth in lending and a better cost of funding and mix of funding. Profit increase basically on the back of strong commercial revenues and lower cost of risk.
We, like in other countries, are investing in technology and operational transformation. That is reflected in a slight growth in costs in real terms. In Portugal, like I always say, we have the best bank in Portugal by far. It's now in the process of integrating Banco Popular. That integration, like in Spain, is going according to plan. When we look at the P&L, year-over-year comparison is a bit distorted by the fact that we had some portfolio sales last year. Still, profit before tax is up 16%. We have higher taxes this quarter. Excuse me. That's why the bottom line is not growing, but pre-tax profits are up 16%. Good quarter in Poland, where volumes both on the asset side and the liability side are growing double digits, 10%.
On the liability side, you see a slight increase in cost of funding, basically because we needed to capture the proceeds to fund the acquisition of the Deutsche operation in Germany, which is mostly private banking, which, by the way, is doing very well. Overall, a very strong quarter, very strong performance, gaining market share, and demonstrating that the bank is and remains the most competitive in the country. Finally, in Argentina, we had a very volatile scenario with the appreciation of the peso. As a result of that, higher interest rates, which overall is positive for the banking system. It was positive for us. You see positive evolution all throughout the P&L. For us, the key is the stabilization of this process over the next few quarters. Obviously, the IMF package should help in this sense.
Profit growth was up 22% quarter-over-quarter. The trend should remain over the next few quarters. Finally, turning on to the corporate center. Lower costs. That means better performance at the corporate center, mostly as a result of the profits associated with our hedging strategies of the profits coming from the countries. The depreciation of the currencies has a negative impact, obviously, in the translation of those profits into EUR. Because we have the hedging at the corporate center, we had a gain in the hedging of these profits that is reflected in these numbers, in gains and losses of financial transactions. Net interest income, higher costs because of the issuances to comply with the TLAC and MREL requirements. As José Antonio said, we already meet these requirements. Provisions and other income are up. This is a sum of a lot of small issues here.
We have the insurance, the guarantee of DTAs. We have pensions, we have litigation. This is sum of a lot of small things, but it's nothing really significant there. The bottom line is a lower cost of the corporate center relative to the profit of the units, which was the target that we set in our investor day. I'm going to turn it back to José Antonio Álvarez for his concluding remarks. Thank you.
Thank you, José. Allow me to take just a minute to sum up. Looking forward towards our 2018 targets. I already mentioned on the loyal digital customer that we are well on track to meet those targets. In fee income, we are progressing well. The cost of credit, we are beating, clearly, our target. The environment is helping in this regard. Cost income keeps demanding, although we have here Banco Popular, excluding Banco Popular, that naturally was not in our targets when we initiate this. We are on in line to meet this target, although, as I say, remains challenging, basically because we are making significant investments on the digital side that are not yet producing the increase in productivity we are looking for with these investments. The EPS double-digit growth, we are on track to meet this target. The dividends, we already announced our policy.
In the AGM, the chairman announced our policy looking forward for 2019, where we plan to eliminate the scrip in 2019. We are increasing dividends years after years, and next year, we plan to eliminate the scrip, as I said. In the capital target, the only thing I mentioned in the presentation is the unexpected was the 18 basis points coming from the minorities exclusive. We are in line to be around this number, so we are there. In return tangible equity, we are hitting our target already, and we expect to meet our target. Overall, we are well on track to meet our targets and to deliver on this.
The environment continues to be fairly volatile, and the main drag in the results continues to be the ultra-low interest rates, particularly in the Eurozone, where, as you know, we run a significant, very large deposit book combined with a very large loan book floating rate. That is the worst combination you can have in this environment. You cannot reduce deposit costs while you have a continual reduction on the loan book, and we've been able to match in this environment. Overall, this is what I need to say. The volatility in currencies I don't expect to remain as it was in the second quarter. Probably we should expect a more constructive environment in currencies that will help us to deliver clearly in the current years. Thank you, and we remain at your disposal for the questions you may have.
Indeed. Thanks, José Antonio. Thanks, José. Operator, I think we can jump directly to Q&A. Thank you.
Ladies and gentlemen, the Q&A session starts now. If you wish to ask a question, please press zero on your telephone keypad. Thank you. The first question comes from José Abad from Goldman Sachs. Please go ahead.
Hello, good morning. Thank you very much for the presentation. You've reiterated this morning your plans to meet your 11% Core Equity Tier 1 target. The question is whether you plan to do it this year, and you mentioned that the fully loaded capital target as of Q2 was 10.62% fully loaded, including the full impact of IFRS 9, also pro forma for WiZink. Therefore, there is a 40 basis points shortfall to your target. It would be good if you could actually give us some visibility of how you plan to meet the target this year, given the run rate of organic capital generation of 10 basis points per quarter. The second question is on effects.
It would be good if you could give us an update on your hedging strategy for major currencies, and in particular, the Brazilian real and the British pound for half two of the year on 2019, and also whether you could give us some sensitivity of the impact to tangible book of, let's say, every 10% depreciation in these currencies. Thank you very much.
Okay. I will elaborate on the first point, and I pass to José, our CFO, to elaborate on the hedging strategy vis-à-vis with the coverage and sensitivity around this. It is true that we have 10.62%. Our target is 11%. As I said, we remain confident to be at the end of the year around 11%. What we do expect is a relatively low growth in the second half of the year of the risk-weighted assets, while the profit generation will remain fairly strong. We charged already the risk reduction. We anticipate, compared with the previous year, last year we charged in the third quarter, this year we anticipate the second quarter. As I say, we remain confident based on our numbers. We are going to be around there. Need to say that based on the current numbers is better than our internal numbers.
The internal numbers we were expecting at this time, but the minority interest in SCUSA, that is the only thing, as I said to you, that came as unexpected. José, you want to?
Yep. The hedging, we haven't changed our strategy, the one we communicated in previous quarters. We have fully hedged our budget, our profits coming from Brazil and Mexico, fully hedged in 2018. We also have fully hedged the pound for 2018 and 2019. As of the end of June, the net gain of all these positions was approximately EUR 80 million. The sensitivity of book value to changes in the currencies, well, it is very easy to calculate just by applying the sensitivity to the actual equity that we have in these economies. We hedge the capital adequacy ratio, which is the excess of the local ratio to the group. That doesn't really change much the sensitivity of the actual valuation of the book value.
You can calculate that by just applying the changes in the currency to the book values that we have in reais or in Mexican pesos.
Thanks, José. Next question, please.
Thank you very much. The next question comes from Mario Ropero from Fidentiis. Please go ahead.
Hello. Good morning. My first question is on the available for sale ALCO hit in the quarter reflected in capital. Could you please elaborate in which geographies this impact was felt? Also on the cost of risk guidance of 1.2%, you think that 1% is sustainable in the coming quarters? Particularly because it continues to be really low in consumer finance Europe and in the U.K. Maybe you can also elaborate a bit on what you expect for cost of risk in these two geographies in the coming quarters. Thank you.
Okay. Do you want to elaborate on AFS?
Well, the amount of the portfolios that we have right now is around a bit less than EUR 30 billion. Between Spain and Portugal, EUR 28 billion, and BRL 14 billion. We have a very small portfolio in Mexico. Obviously, it was the change in euros and reais that explained the movement in the quarter. Again, as José Antonio said, we look at the first half. Basically, the impact is almost neutral in euros and slightly negative in reais. In the first half, the valuation of the AFS portfolio almost detracts just a couple of basis points from our capital adequacy.
Probably, yes. To clarify that the portfolio is basically Spanish sovereign bonds and Portuguese sovereign bonds, yeah. We dispose the portfolio we inherited in Popular of Italian bonds at the end of last year.
Beginning of this year
beginning of this year, 2018. Of risk, how sustainable it is, you ask specifically about two geographies, consumer finance and U.K. Well, it's true that the cost of risk in these two, as you mentioned, is fairly low. Having said that, in consumer finance, we may even have some reduction before it gets worse. Probably, it will get better before it will get worse, what we are seeing every time when we dispose a portfolio, and you see every year quarter-on-quarter that we make gains when we dispose the portfolios of written off, the loans that were provided or written off. Probably, the expected losses at this point of the cycle is even better than the ones we are reflecting in the P&L. This is the experience when we dispose portfolios.
While in the U.K., it's true that the cost of risk is close to zero, other than some events, specific events we have had. Naturally, in our case, depends very much on the behavior of the real estate, particularly the mortgage book. Although when we start to, as you know, IFRS introduced some volatility on potential volatility in the way we provide, given the fact that we provide based on models. If we start to see the housing prices going down or the GDP going down, and a combination of both, we need to anticipate expected losses based on the model, and this will add volatility. In what we see in current losses is nothing new. Maybe in the future, depending on the house price evolution and other factors, macro factors, you may see some quarters, say, some volatility there.
We are not seeing any sign that leads us to think that we're going to need more provisions on the U.K., particularly for the mortgage book.
Thanks, Mario. Next question, please.
Thank you. The next question comes from Francisco Riquel from Alantra. Please go ahead.
Yes, thank you. Two questions. One, a follow-up on capital. I'm just wondering if you are considering any non-organic measure to get to the 11% target. In particular, if you can comment on the potential unwinding of the JV with Chrysler for SCUSA and the potential implications for any other measure, like the sale of the real estate assets in Spain, if you are also counting on releasing any capital here. The second question is on Brazil, there is strong trends in the second quarter with loan growth accelerating. We have seen also macro prospects deteriorating in the last few months with some downgrading consensus forecast. If you can update also on your expectations in terms of loan growth and cost of risk for Mexico, sorry, for Brazil in the full year. Thank you.
Okay. On capital, we are thinking on organic measures. When I said to you that we were going to be around 11%, is non-organic. We're going to be active as usual in securitizations. Other than that, non-organic measures. You point out to one fact, that is the FCA announcement that they did in the investor day that they plan or may plan to buy back from us to execute the option they have in the contract they have with SCUSA. Nothing to comment here. Their intention was announced. They have the right to do so. They have the right to take from us basically all the book we generate in the operation with Chrysler, the loan book, plus the leases. It's too early to say anything. What the potential impact of that in capital naturally depends on price.
We haven't talked to them, and we haven't received any figure from them, so it's too early to tell you some. Naturally, this has a positive impact in capital. From one stream, you can estimate the book is basically 50% of the book of SCUSA. You translate this basically one for one for risk-weighted assets, and you can estimate easily the potential impact of the capital. We are not counting on that for this year. Sale of assets in Spain, I think that you are referring to real estate assets. This is a continuous process. We want to continue to sell. We want to continue to dispose risk-weighted assets in Spain. I state to you many times that this is not core for us. The real estate market is in relatively good shape, and we're going to continue to dispose this.
Naturally, this is going to reduce somehow the risk-weighted assets. The reason is not because it reduces the risk-weighted assets. The reason is because it's not core for us, and we're going to keep disposing all of this. In Brazil, you say about that the quarter was strong. We've been telling you for many quarters that our franchise has improved in a significant way and keeps improving. We have several business in which we are gaining significant market share, and I expect to continue in this regard, business that are mainly retail related. We have a phenomenal consumer business there. We have a crédito consignado payroll-related lending that is doing very well, and we are gaining share. We are gaining share in credit cards. Our SME business is starting to work. While still corporate business that is better than it was, is starting to perform better.
CIB is not growing. We have significant growth and significant market share gain on the retail SME side, while corporate is improving and CIB is still relatively flattish. Should this pattern of growth and gaining market share translate into higher cost of risk that you are pointing out? Well, last quarter, some of you asked me why the cost of risk was four-point whatever, 30 or whatever, and not going so fast to the 4% we were guiding you. The reason was exactly this. We are growing much faster than we were anticipating in retail and less so in the global corporate and corporate business. Having said that, I do expect the cost of risk to remain where it is or trending slightly down, assuming that we keep this pattern.
Naturally, if the pattern of growth changes, probably we can say that if we start to grow more in CIB, probably the cost of risk go down faster than otherwise will be the case. Overall, we remain fairly confident. It's true that the macro deteriorates a little bit, we remain fairly confident in the capacity of our franchise to keep outperforming our peers in the market.
Thanks, Paco. Next question, please.
Thank you. The next question comes from Alvaro Serrano from Morgan Stanley. The floor is yours, sir.
Hi. Just a couple of questions on Spain and the U.K. Spain, the NII recovered quite. We still have, I think, the 1|2|3 Account. There was a repricing in March, another one in July. The question is, can you give us a sense of what kind of NII growth we should expect, considering that, and considering the volume is also recovering? What kind of NII growth should we expect? Should we expect any NII growth as we go into next year, given when it seems like we're not going to have any rate increases now? The second question is around the U.K. The NII is now broadly stable. Can you give us both an outlook, both in the NII, but also in the costs? There was obviously a lot of front-loaded costs that you've pointed out in Q1.
The cost rate hasn't dropped that much, only marginally in Q2. I'm conscious that management expected 5% growth in costs for the full year. Maybe an update in the U.K., both in NII and trends and the cost guidance. Thank you.
Okay. Let me elaborate. I assume that this is the net interest income.
Yeah. In Spain, it's a combination. Well, the main driver was funding costs, as you rightly said. There is still more to come in this regard. You also mentioned that it's coming by July. We are building on loyalty at the costs.
Yeah.
We are balancing this equation. What is most important probably, or the main change is, the change we've seen in volumes. Consumer lending plus SMEs is growing.
It's growing. Consumer lending was growing last year, but SMEs is the first time, and this is particularly important in a franchise where after Popular, we hold a significant market share here, and it's critical for us going forward. This is the good news. The bad side continues to be the rates, as I said. Going forward, we expect we still have room to take measures in order to keep our net interest income going. I'll not give you a number. I remain, I think that we initiate a trend in which we stop the decrease in net interest income. While in the U.K., you mentioned the two sides, the NII is stable and the cost stable, but you were expecting apparently to have lower costs. In NII, the mortgage market remained fairly competitive, although in the quarter we seen relatively flattish the spread compared with the first Q.
It is not the case. You remember that the second part of last year and the first quarter of this year, the spread came down from a region of 130 to a region of 0.9 or something like that. Now we remain basically there, for that reason, with some volume growth that we show in the quarter, the NII remain stable. Still the impact of a standard variable rate is there, but this quarter was less important than. Going forward, we're going to continue to have some impact from SVR. Although we think that we can keep growing somehow, not that much, and being constructive on the NII. Not to remain stable is probably the target. On cost, we were flattish this quarter compared to the previous quarter. Probably, we are growing on a year-over-year basis in the 7 region, 7%-8%.
Probably we're going to remain relatively flattish or slightly down in the second part of the year. We will end up in a kind of cost growth in the region of 5%. This is the result of many investments we are doing, and we continue to do, in many fronts in order to, particularly in projects that are particularly trying to serve customers in a fully digital way. We continue to do so in order to have a franchise that is able to compete in the market going forward. That's all.
Thanks, Alvaro. Next question, please.
Thank you. The next question comes from Sofie Peterzens from J.P. Morgan. Please go ahead.
Hi. Here is Sofie from J.P. Morgan. I wanted to ask you, what's your view on the potential banking tax in Spain, and what impact would you potentially expect on Santander? I also wanted to ask about the Chrysler deal. If it goes ahead, how do you think about your U.S. franchise, given that the annualized ROE in Santander Bank, N.A. is still well below or is slightly below 4%? How should we think about how important the U.S. franchise is to you? Just very quickly on the Popular cost synergies, when should we expect to see a big decline in the cost line in Spain? Thank you.
Okay. Tax in Spain, potential banking tax. Difficult to elaborate on this. We have seen so many, I don't know if you call ideas, in the past weeks coming to the media, that is difficult to elaborate in any specific direction. We have seen ideas in increasing the corporate tax, other ideas pointing to having a labor tax. Other ideas having a taxation on statutory profits. It's difficult to elaborate at this stage on this. Naturally, it's too early to us to give you a number. You got all of this information, and we don't have more information than the one probably you got through the media.
In relation with Chrysler and the return on equity, it's true that when you look at the business in U.S. and you look at the return on equity with adjusted equity, as you know, we have excess equity in the U.S. that we should upstream in the future. If you take the business with a core capital of 11%-12%, our return on equity is around 8%-9%. It's true, as you rightly said, that the return on equity of SCUSA is 18%, or was 18% this quarter, and while the return on equity in the bank is much lower. This is based on the stated equity.
If FCA business goes, probably the return on equity of SCUSA with adjusted equity, naturally reducing the amount of equity there, is going to remain pretty much the same, but the relative size is going to be much lower than it is today. The combined entity, just doing the math, will get a return on equity that differs. This is the other things equal. Let me elaborate on the business. Going forward, this is pure math. If we take out today FCA business from our existing U.S. business. Going forward, looking forward, if, and it's a big if, FCA business goes, for sure we will find new ways in the U.S. to replace, partially or totally, this business. It may take some time, but we're going to replace this business.
I will not bet in a SCUSA business being only the subprime piece going forward as it is today without having agreements maybe with other dealers, maybe with other OEMs, maybe with other partners. For sure, we're going to have this. I remain confident that we're going to have this. SCUSA size is not going to be as small as doing the math of the Chrysler business going. Most important, the U.S. bank, we are seeing, and you saw in the quarter, we are showing encouraging signs in the bank. You saw the loan book growing for the first time in, I don't know, many quarters. Our C&I business is starting to show significant progress. Our CIB business is also showing progress. I remain confident that the bank is in capacity to deliver faster.
There's still some work to do in retail where is more work to do, particularly improving the operational side of the business, the systems, and the process before we are in a position to show a significant uplift in the capacity to generate profits on the retail. Although, we've been doing quite good in the reduction of the funding cost in the last year and this year in a more competitive deposit market. Overall, I think that if we finally sell, because FCA is execute the option on SCUSA, we will be in a position to replace, partially or totally, the business, and the bank is improving. Overall, I remain constructive and positive our capacity to improve the return on equity in the U.S. with adjusted equity. Naturally, we have significant excess equity there. Finally, the last point you made was cost synergies in Spain.
I said in the presentation that we are on track, well on track to get more than EUR 150 million this year. This is in line with our plans, or maybe slightly better than our plans. We remain committed, fully committed to deliver on this. This is in our strategy update. We will update you clearly on this because, well, we are making, as José said, good progress on Popular integration, and there is nothing that make us to be more pessimistic, probably quite the opposite in relation with the cost synergies in Popular.
Thanks, José. Next question, please.
Thank you. The next question comes from Ignacio Ulargui from Deutsche Bank. Please go ahead.
Hi. Good morning, gentlemen. I have two questions for you. One on the tax rate, if you could elaborate a bit on what should we expect on the tax rate going forward after what we have seen in the quarter. On the other one, coming back to the cost of risk. You have just printed a very good cost of risk. The scope to improve, it maybe comes a little late from Brazil and the U.S. How comfortable do you think you are into 2019 on that improvement in terms of cost of risk? Thanks.
The tax rate, as I said, this quarter was 36%, probably for the full year should be a bit lower, probably 35%, maybe, in the region, 34% in this region. This quarter was particularly high due to, I mentioned in the presentation, to Brazil. In Brazil, there is a, what they call Interest on Capital. That this quarter was not applied. In other quarters, we may have room to apply, and this will reduce a little bit the tax rate that we show this quarter. The cost of risk, particularly you point out to U.S., Brazil. In U.S., probably I forgot, although José mentioned that the seasonality in SCUSA.
Seasonality in SCUSA mainly means that the cost of risk in the second quarter tend to be lower due to the fact that it's a tax season in the U.S., where people get rebates and the recoveries are higher than in other quarters. Overall, we didn't, and you see clearly in SCUSA P&L, increase in the FICO in SCUSA. We did last year, so the cost of risk, the yield also, but the cost of risk is going to be lower. This quarter, seasonality played there. In Brazil, I remain fairly confident that if we had on a like-for-like basis, I feel comfortable with the current cost of risk. I mean like-for-like, because changes in the mix have a significant impact both on NIM and cost of risk.
You saw that we are showing this quarter in a decreasing rate environment and increasing spread due to the fact that the change in mix has been fairly dramatic. If you go back to the beginning of 2017 till now, the change in mix has been extremely high in Brazil. Yeah, go ahead.
Let me add to that. When we guided you on the impact of lower interest rates on margins, we guided towards lower margins. When we look at the net of margins cost of risk, the outcome of what we're seeing today is better of what we actually anticipated. This business is clearly, on a net basis, more sustainable, more profitable, and better in a lower interest rate environment.
Thanks. Next question, please.
Thank you. The next question comes from Andrea Filtri from Credit Suisse. Please go ahead.
Hi, good morning. My questions are, first on Brazil and the NII. You continue to benefit from an improving loan yield, but you're also benefiting from a funding cost decline. I was wondering that now that the Selic has stabilized, assuming it remains stable, is there more room for improvements on that front? In Spain, along similar lines, your cost of time deposits is at around 27 basis points now. Your peers are between 5 and 10. Considering the 1|2|3 Accounts and Popular, where do you think that cost can get, and when?
Okay. In Brazil, if we have room. Naturally, the spread in Brazil, as you know, are relatively high. As long as we expect over time, with the growth in volume, if you ask me for the next three or five years, you should expect some spread reduction. If you ask me for the next quarter, I don't expect, or for the next two quarters, I don't expect a spread reduction in Brazil. While in the medium term, in the long run, I do expect some margin compression in Brazil in the retail arena, while in corporates and CIB, I'm not convinced. Probably it may be even the opposite. The difference between spreads in CIB and corporates and retail are too big, and probably we're going to have some reduction in retail. Going forward, maybe corporates and CIB, we have the opposite.
The most important thing in Brazil is on competitive grounds. We are gaining share significantly in the market and within our franchise. We're ready to keep going, outperforming the peers in a market that, as you know, profitability is relatively high. We reach already the 20% return on equity there, and we are closing totally, or we overtake or took some of the top banks there, and we are very close to the top performer there. In Spain, you mentioned the capacity. Naturally, we have flexibility. We need to keep, as I said, the balance between building loyalty and the cost of funding. We're going to continue to operate in these grounds in both directions, reduction or increasing, depending on the environment, depending on the rates, depending on our outlook on when the rates are going to increase in Europe.
The top priority is to build on loyalty, to keep the fee income line going into retail, and to build on a customer base resilient and able to produce recurring revenues for the bank in Spain. Thanks, Andrea. One last question, please.
Thank you. The next question comes from Marta Sánchez Romero from Bank of America. Please go ahead.
Good morning. Thank you very much. Most of my questions have been answered, but I had a follow-up on the AFS, and sorry if I missed it. How much of your capital still comes from the AFS and realized net gains? What's the average maturity of your Spanish, U.K., and Brazilian bonds? Given the vulnerability of your capital base to market moves, do you think being at around 11% is the right mark for Santander, particularly considering that some of the future earnings of these portfolios, the capital that may come from this, has already been front-loaded today? I would love to hear your thoughts there. Thank you.
Let me answer the second part of the question, and I'll pass to José the first part. In relation with 11%, we need to put in context this with the fact that we are widely recognized as one of the more diversified banks in the world, that when you go through the stress test, we always come at the top. Our consistency and the recurrency of our business is much higher than the majority of our peers, and I do think that we deserve. We have lower risks, as is shown in the stress test, and we deserve a capital. With 11%, we are much more than covered. When we analyze the capital on economic basis, not on regulatory basis, the size of capital is very large. It's in the region of 20%, 30%.
Yeah, it's still very large, and this leads us to think that we are in the position where we should be.
At the end of the quarter, the AFS portfolio added 15 basis points to our capital. Right now, it's 20 basis points. Just in the month of July, we've recovered five basis points. At the end of June, it was only 15 basis points of total capital that came from the AFS portfolio.
Thanks, everyone. I'm afraid we need to leave it here. Obviously, the IR team is at your complete disposal for any follow-up, anytime. Thanks, and see you next quarter. Okay, thanks.