Santander, 1st Q 2018 Earnings Conference Call Webcast Presentation. As normally we do, our group CEO will address their group performance for this Q1 of the year. Our group Chief Financial Officer will addressing more detailed business areas performance, again, for the Q1. And obviously, our CEO, just ahead of the Q and A session, will conclude the presentation. With no further delays, Jose Antonio, the floor is yours.
Thank you, Sergio, and good morning to everyone. You for attending this first Q results presentation. The first area I want to share with you is that we are We're on track to reach our targets for 2018, the targets we established almost 3 years ago. This is the first idea that I want to tell you. The year, I will say, started with Making good progress in our commercial transformation.
Our commercial transformation, as you say, as you know, we put the emphasis in Growing both the loyal customers and the digital customers, and we are progressing well on this regard. At the same time, The customer satisfaction and the operational excellence that is a combination of cost income and customer satisfaction is progressing well. We are able to translate this good behavior on the customer side into results. As you see in the numbers, we are The profit year on year grew 10%, 22% in constant terms. If we exclude the perimeter, probably the Popular probably were growing in constant numbers at around 15% with group progress compared with the previous quarter and the previous year.
As a result of this, our return on tangible equity is 12.4%, and we are generating We are extending the balance sheet, generating capital. We generated organically in the quarter, 9 basis points. I will elaborate later on. And as we as the Chairman said in the AGM, our intention is to increase the dividend for this year, and we changed our policy. We announced that we plan to change our policy for 2019 going 100% cash dividend.
Well, as I said at the beginning, we are confident to meet our 2018 targets. And I would say Popular integration is on track. Legal integration was approved yesterday by the Board. We expect to execute by in the fall to be executed the legal integration. In the numbers, you did not find Specific popular numbers, we were discussing internally to provide, not to provide numbers.
The numbers are not representative as long as we did Some integration steps, particularly we already integrated Hook orders. As you know, we reduced 1100 and produced back in February as a result of the 3rd quarter's integration. We already integrated GCB business as long as we have Popular Portugal in Portugal, Total Bank and was very difficult to make a comparison. So what we are providing is a set of numbers for Spain that includes Portugal and the former Santander Spain Popular Spain and the former Santander Spain. Also, Quasar, what we call Quasar that is the disposal of real estate assets, was executed at the end of the quarter.
Going to the numbers into the first slide, I was telling you both Royal customers and Digital customers are growing well. And the customer satisfaction, we are top 3 in customer satisfaction in 7 countries, and we are progressing in the main markets in which we operate. We are top in class In this regard, that Guadalajen translated into the 3 areas we also showed to you in the year end result presentation, we are growing. We are growing loans and deposits. It's true that there is some Change in perimeter here, but we are growing in almost all the markets in both deposits and loans.
As a result, customer revenue grew 12%, which are made into Double digit growth in profit and higher profitability as is shown by the return on tangible equity. This is the highest in the last few years, And we extend the balance sheet with a fully loaded core equity Tier 1 reaching 11% and the NPL ratio, the credit quality going in the direction we were expecting to go and we were telling you in previous quarters. When it comes to the P and L, Well, first thing is no there's no non recurring items in the quarter, neither Neither positive nor negative. The good performance, there is some preliminary effect, I already told you, is Santander Asset Management Plus Popular. On the other hand, there is a significant negative impact on the exchange rate of 10 between 10 12 percentage points along the P and L.
You have the numbers there. The quarter showed a profit of north of EUR 2,000,000,000 significantly higher than the previous quarter, well and showing good Notwithstanding constant currency net interest income, net fees that are well in double digit. So the customer revenues are growing double digit As long as the net loan loss of the provisions, we are Growing a little bit, but well below what is the growth of the loan book, so the cost of risk is falling. Other income provisions that is a significant fall comes from the fact that in 2017, we had not restructured in Brazil. As you know, normally, when you do some reduction in employees In Brazil, it comes 1 year later, the costs and this was not the case in 2017.
That's the reason why this line fall significantly compared with the previous year. When you go through the lines, consistent growth, I would say consistency is And the work that probably defined the best what you see in the slide, both net interest income and free income are growing on a consistent basis, while the other income is more or less Fairly stable, fairly flattish. The volatility here depends more on quarter on quarter than a trend in the business in itself. If we look at the net interest income in more detail, we have 2 different behaviors: Net interest income growing 11%, 7% in mature markets, 16% in developing markets. When it comes to mature markets, what we have is organic growth, some organic growth plus perimeter, mainly perimeter.
And we have a net interest margin pressure due to the extraordinarily low level of the Interest rates particularly affecting some of the business in U. K. And Spain. When it comes to emerging markets, we are growing organically, mainly organically Both in loans and customer funds, at the same time, we are expanding the net interest margin both principally in Mexico Brazil and Mexico. So we have these kind of these two behaviors.
Jose will elaborate later on specific countries the trends on this regard. Well, I was starting the presentation telling about commercial transformation. This is not just about number We translate this growth in number of customers, loyal customers, digital customers into activity growth. The slide shows Some numbers in this regard. You see the green cars is growing, the units is growing and interrelating to a healthy growth into the fee income line.
The fee income line is growing both in the Global and Emerging Markets and in the different business we have. In the Wealth Management, that is relatively a small portion of the Defe income growth, we have this kind of growth because the change in perimeter due to the incorporation of the 50% that we bought last year of Santander Asset Management. So overall, healthy growth in revenues coming from customs. In cost, our target was to cost income in the region of 45 to 47. This is a combination because we have Some integrations process going on that reduced normally cost.
You have there Portugal. We have there the quarter in Spain. Quarter on quarter, the costs are are going down 3.5% and there's more to come, as you know, as integration on Popular make progress. And we have other geographies in which we are in A strong investment process, particularly we shared with you Mexico, the 3 year plan in which we have a significant growth in cost. And probably More surprising to you, although this quarter probably is a little bit overstated in U.
K, where the cost grew year on year 8%, that we think that is going to moderate in the coming quarters toward more normalized level. Here, we are investing we are making significant investments in the compliance and digital transformation. So overall, we feel that We are committed in the 45% to 47% target that we have in this particular Trade quality, very little to say here. Other than the coverage ratio went up due to IFRS 9. No more news here.
The trends are the ones we were expecting. No particular news here, but Brazil is going in the right direction. Probably some of you were expecting Fastest fall in the cost of credit in Brazil, but there is a significant change in mix there. More we are growing In retail, and we are growing in Global Corporate Banking, and this explains a little bit. But in any case, all the trends in this Credit quality and cost of credit are going as we were expecting.
Real estate exposure, this is what is left here, €5,200,000,000 in all the business in Spain. You have the split of this business. I will need to repeat again that our priority is to reduce these 2 immaterial levels as soon as we can, and we're going to continue to dispose Both on one on one basis are looking for operations to dispose in blocks. But I will say this €5,200,000,000 start to be almost a nonmaterial number in the balance sheet of the business Finally, capital, we reached 11% core equity Tier 1. We generated 9 basis points well, this Around the 10 basis points we guide you quarter on quarter, we generate also some capital due to the perimeter.
The positive coming from the disposal of the real estate assets of Banco Popular, the Blackstone deal, plus 10 basis points. The negative came because we listed Metrogloss and the change in accounting producing a cost of 2 basis points on capital. These ratios are calculated according to IFRS 9, transitory calendar. If the calendar had not been applied, We will be around 10, 8. So this is where we should be because the total impact IFRS 9 is in the region of 23 basis points.
We got due to 20. Instead of 20, it's 23 is what is the final number. On the right side of the slide, yes, because we have several items there, I want to guide you for the future capital impacts not Related with the organic capital generation that we already know that are coming pending our regulatory approvals of other items. You have the total bank disposal that we and we think that we both we are expecting regulatory approval that is 5 basis points and 9 basis points. We have in Scusa The supervisor does not consider according to with the European regulation entity to be regulated.
And therefore, we cannot include these minority interests in capital. In any case, we reaffirm our core Equity Year 1 goal of more than 11% in 2018, as we told you in the previous quarters. Well, when it comes to ratios, good developments in the return on risk weighted assets. We continue to grow the return on risk weighted assets, almost 116. The EPS this quarter is fairly flat.
But if you annualize this, well, we are well on track for double digit growth EPS in 2018. That is our target. And finally, Italian tangible Net asset value per share was impacted this quarter by IFRS 9. Excluding IFRS 9 impact, it had grown from 4.15 to 4.20. So I hand over now to Jose to go and elaborate our through the units, And we'll come back at the end to make some final remarks.
Good morning, everyone. As always, I will cover the main units in a bit more detail and the smaller ones quickly, and I will finish with a quick comment on the Corporate Center. We continue to have, more or less, 50% of our business in Latin America, 50% in Europe and 50% in Emerging Markets, 50% in Developed Economies. The largest the greatest contributors to our profits this past quarter were Brazil with 27 Spain, 18% the U. K.
And Santander Consumer Finance each 13%. 8 out of the 10 core geographies showed an increase in profitability, as you can see on the right hand side of the slide. And in general terms, we saw very strong operating performance in all the economies and all the countries. Starting with Brazil. The economy in Brazil is doing much better.
It's expected to grow 3% or above this year. And on the back of this strong economic performance, we had an excellent quarter. We launched new initiatives, and we gained market share in customers and in credits and deposits. Attributable profit was up 27%. Return on tangible equity also up to 20%, the highest level in many years.
We saw double digit growth in net interest income and fee income, reflecting this greater Commercial activity that I referred to, the efficiency improved, also showing greater productivity. And asset quality continued to also improve to 4.35 percent, trends all throughout the P and L that we would expect to see in the coming quarters as well. In Spain, the integration of Banco Popular is proceeding as planned. We already completed the integration of the headquarters, and we just announced this morning that we are Proceeding to the legal integration in the Q3, as Jose Antonio said, which will probably help us Accelerate the operating integration a little bit. We recovered the control of the card business and the ATMs of Banco Popular and launched the 1st joint commercial initiative between Santander and Popular.
It's the 123 professional account for self employed and micro SMEs. In just a few weeks, We already have 75,000 accounts opened in this product. We saw a Positive evolution of SME volumes and corporate volumes. However, Global Corporate Banking and Institutions continued to contract. New mortgage production is strong, but it's still insufficient to compensate amortization of the existing portfolio.
Attributable profit was €455,000,000 up 26%. Positive trends in commercial revenues year on year in commercial revenues and cost of credit. Costs were affected obviously by the Integration of less efficient businesses coming from Banco Popular. Quarter on quarter, we see a lower net interest income due to lower average ALCO portfolios. On average, 4th quarter relative to the Q1, the ALCO portfolio was €8,000,000,000 lower.
And that obviously had a negative impact on net interest income. We saw quarter on quarter also slightly higher provisions because of seasonal factors. And costs are starting to show the benefits of the integration process. When we move to Santander Consumer, this is Clearly, best in class in Europe, much better, much lower than any of our competitors. And we see cost of credit and NPLs at an all time low.
When we compare year on year, provisions go up because of some asset proposals last year in 2017 in several countries like Poland, Germany, etcetera. In the Q4, we announced the integration of our operations Germany, and like in the case of Popular in Spain, the integration of our German operations is proceeding as planned. Looking forward for the rest of the year, we see similar trends to what we have seen in the Q1. Moving to the U. K.
Here, the economy is resilient despite the uncertainty associated with the Brexit process. We see a highly And the need to invest in regulatory projects like green fencing, PSD2, etcetera. We saw a pickup in mortgage activity in the Q1. Our mortgage portfolio went up £1,900,000,000 which again shows how resilient the economy is. And on the liability side, we continue to focus on growing demand deposits.
We see lower profits year on year due to the combination of different aspects. Like Jose Antonio said, in some cases, these are one offs. On the revenue side, we see lower gained some financial transactions and also some margin pressure due to competition and the drop in the attrition in the SVR portfolio. Costs included some IT investments, digital transformation and regulatory projects. And in the case of non performing loans, we saw 2 one off cases in Corporate Banking, and there were in this Quarter, there were no PPI charges.
Quarter on quarter, attributable profit was up 7%, although, again, we saw pressures coming from the revenue side. Going forward, we would expect a recovery in the year on year comparison in net interest income and the cost of risk to remain more or less what it is today in the region of 10 or slightly above 10 basis points. Going quickly through the rest of the countries, very strong quarter in Mexico with double digit growth all throughout the P and L. We are Investing, as we discussed last year, in Mexico in a very deep transformational plan, which is yielding very positive results in our commercial strategy. The 1, 2, 3 account in Mexico, as you know, is called Santander Plus, it has attracted already 3,500,000 customers, more than 50% of which are new.
So double digit Growth in the P and L with asset quality that is stabilizing, cost of risk at around 3%. And again, these trends, we think should be maintained for the rest of the year. In Chile, we are the leading private bank in terms of loans and number of customers. The Chilean economy is accelerating, and we are benefiting from that. We are seeing positive growth, faster growth in loans and deposits, particularly in consumer credit, mortgage loans and demand deposits.
Profits were up 15% based on very strong revenue, Total revenue performance, the efficiency ratio and the cost of risk are also improving. Quarter on quarter, the results were Sorry. If we move to the U. S, very strong quarter in the U. S.
Here, the main focus continues to be to improve our foundations and to close our regulatory our open regulatory issues. We had Very strong results both at the bank and at Santander Consumer. In the case of the bank, improved net interest margin, basically because of lower cost of deposits, but we are geared towards higher rates. So as interest rates go up in the U. S, we should continue to see this trend being maintained in the coming quarters.
And also, in the case of the bank, we saw a better efficiency ratio. In the case of Santander Consumer, lower loan loss provisions and also lower costs. We look at the U. S. As a whole, including all our operations in the U.
S, costs were down 1%. As I said, we are positively geared towards higher rates in the U. S. So we would expect to see some of these positive underlying trends materializing and solidifying in the coming quarters. In the case of Portugal, The year on year comparison is affected by the fact that we had Popular Portugal being integrated into Santander.
So the year on year comparison is affected by that. Now we are the largest private bank in the country, both in terms of assets and loans with a leading position in corporates and SMEs. The integration is proceeding as scheduled, and we would expect to close it before the year end. Profits were up 1% year on year, but this is affected by asset ALCO portfolio sales and higher tax rates. When we look at pretax profits, profits were up 10%.
Moving to Argentina. In the case of Argentina, the comparison is a little bit complicated because in the Quarter of last year, we included the balance sheet of Citibank, but not the P and L. The P and L has started coming through in the second quarter, so the Year on year comparison is distorted. Having said that, after the integration of Citibank, we are now the largest private bank in Argentina by credits and customer funds. The stabilization of the economy is clearly helping growth in long term Credit products and consumer loans, in loans to SMEs, mutual funds also increased 85% year on year, which are all very positive trends.
And these are, we think, sustainable trends that will be maintained through the rest for the rest of the year. In the case of the P and L, we see a very strong performance in the upper part of the P and L. It didn't go through because of some one offs, again, associated with the introduction of Popular. In the case of Poland, the economy is growing at 4% with very subdued inflationary pressures. On the back of this, we have a very, very strong performance.
We're gaining market share, and the upper part of the P and L is performing very well. However, Because of lower financial transactions and the fact that the contribution to the resolution fund was Front loaded to the Q1 last year, it took place in the Q2. That distorts the numbers. But excluding these one offs, We see double digit growth almost all throughout the P and L, which shows again that the bank is clearly taking advantage of the very positive macro environment in Poland. Finally, if we look at the corporate center, net losses were down 10% year on year.
Here, we have a combination of different Trends, on the one hand, we have lower hedging costs, particularly as interest rates have come down in Brazil. Hedging our capital adequacy in Brazil is now cheaper than it was last year. On the other hand, we have had to continue to issue TLAC instruments and NREL instruments, which have increased financial costs. In terms of operating costs, they are broadly flat in the quarter, following the simplification measures that we implemented at group level last year. But total costs, Operating costs at the Corporate Center, 4% and there, are just a bit below 2% of the total for the group, which compares very favorably with all of our competitors.
And with this, I'll turn it back to Jose Antonio for his concluding remarks. Thank you.
Thank you, Jose. To conclude this presentation, Well, I will make some final remarks. As I started at the beginning, we maintain our clear and consistent commercial study. This has been reflected in volumes, fee income generation and better results and increasing profitability. And we are Progressing, as I said, very well towards our goals that you have in the slide on the right side, and you have what we have achieved so far till now.
Let me to elaborate a little bit our expectations in coming quarters. In terms of the operating environment is I would qualify the operating environment as constructive. GDP is growing In all our geographies, relatively well, the inflation is under control. Probably, we should expect The gradual interest rate increases in the mature markets, market volatility has increased so far. And probably we but probably this is due that the previous one was extremely low and we when we came back to more normalized levels.
Turning to the group. We expect the good customer growth to continue, So, positive in this. Increased volume growth with a careful management of the spreads depending on the market. We don't expect surprising credit quality other than some potential volatility. As you know, IFRS 9 is the 1st year we are implementing, maybe some potential volatility there, but nothing relevant.
Efficient commercial and digital transformation will continue and all the integrations we are doing in Spain, Germany, Portugal, All are progressing according to the plan. So, we should be in this environment, we should be able To deliver the targets you have on the screen, you review all of them. We are close to achieve Those targets are probably some of them we are in a position to surpass. In this positive macro environment, we think that we can deliver as solid results And finally, just to remember you that we're going to update you in a more deeper way Investor Day in London on the October 3 this year. For now, we remain at your disposal for the questions you may have.
Thank you.
Thanks, Jose, as well. Indeed, we have now plenty of time for your Q and A. I would appreciate if you introduce yourself and stick to 2, 3 questions max per analyst. Please go ahead.
Thank you very much. Ladies and gentlemen, the Q and A session starts now. The first question comes Francisco Riquel from Alantra Equities. Please go ahead, sir.
Yes. Hello. Francisco Riquel from Alantra Equities. A couple of questions for me. First on capital.
Regarding the Change in the regulatory treatment of the Scusa minorities. I wonder if it could not be more efficient to buy out the minorities. If you can share your views with us on 2nd, you are including in the pro form a capital ratios the profit from the sale of the non classes from Popular Total bank and we think. And I wonder if there is any negative to come, for example, from the winding of the rest of the JVs at Popular, if can also update on this. And also a clarification whether the 11% target For the full year, if it is assuming IFRS 9 on a fully loaded basis or not?
And if so, how do you plan to offset for the shortfall of the new We should expect a faster organic generation or if there could be any asset that
The 3 questions were related With capital, yes, so the first question was about exclusive minorities and up to one point, there is an arbitrage of Capital there, naturally there is, but we don't have any plan to do anything in relation with this stake. The pro form a capital ratios with the joint venture from Popular, I provide the data of the agreements we already signed. When we made progress in the remaining agreements, we provide you the maybe negatives, maybe positives depending on the final agreements with the partners In the remaining issues we have issues, joint venture that basically is insurance, asset management and if comes to my mind, acquiring, Yes, acquiring businesses is the other. At the same time, remember that we continue to dispose real estate assets and all the real estate exposure on the other side and probably some capital generation coming from those stakes. The 11% target was established before IFRS 9 and was established in 2015.
Well, Our organic generation, we continue as there is no reason this year to not to think that we're going to continue to generate in the region of 10 basis points per quarter on average, maybe quarters in which we generate more, maybe quarters in which we generate less, but this is the average. Probably, you asked me Going forward and the macroeconomic situation remains, probably we should expect, at some point, faster growth. And our organic capital generation, if that's the case, will get reduced, but this year, I see to continue with the same organic capital generation.
Thanks, Paco. Next question, please.
Thank you very much. The next question comes from Alvaro Serrano from Morgan Stanley. The floor is yours.
Hi. The first question is on Main, fees and NII were down. You explained the outflow contribution, but in general, I would have expected maybe fees to be a bit stronger given Santander Asset Management was being integrated. So the question is, How's the integration of Popular affecting the franchise? Are you seeing more attrition in revenues than you expected before?
And the second question is on the U. S. After sort of overcoming some of the regulatory There was supposed to be quite a lot of cost cutting potential in compliance and other of in general integration of the bank, but the costs are up. And in particular, in the Retail Bank, they're up quite a lot. So maybe can you give us an update On how is the turnaround of the U.
S. Going and what kind of profits could we expect this year for the whole of the U. S. Franchise? Thank you.
Okay. First question about Spain NII and fee income In the quarter, well, probably the quarter has, as Jose already elaborated, has some impacts Both in NII and fee income. In NII, the disposal of the ALCO portfolio. The ALCO portfolio is much smaller than it was. In customer, NIM is basically flat, and we I think that we have room for a even in a Highly competitive market on the asset side to reduce our funding costs, Quarters in this environment that, as I said, is highly competitive.
When it comes To fee income, you mentioned a couple of hypotheses of what's going on in attrition revenues and all these things. Now this is much more simple than that. We expect for the whole year, including some, the asset management to grow fee income in double digit And we are now including some probably high single digit is what you should expect for fee income in Spain. And we In relation with Popular, we are progressing as expected. Remember that we include some attrition already in our projection coming basically from the more Global Corporate Banking side, in which we've been reducing some positions there as a result of the integration due to U.
S. Cost. Well, the cost, as I said, went down. It was
Q on Q.
Q on Q, 2% down. We expect for the whole year negative cost growth in the U. S. But in the U. S, We still have some pending regulatory issues, but overall in the year, the cost will decrease In nominal terms, I expect to decrease in nominal terms.
But what is more important probably in the U. S. Is we are progressing while in the business model of SCUSA With being much more predictable, the average FICO is higher than it was, the cost of risk is lower, And our scoring is make us more optimistic about the capacity of the Scusa to generate profits. When it comes to the bank, Now our NIM is head to head with the competitors for the first time in the last 2 or 3 years, yes? So we come from very low levels of net interest margin, and we are catching up with our peers in the U.
S. So I'm fairly I will I'm fairly constructive in the bank. In the U. S, mainly, we take into account that we are investing in Areas in which we were weak, like Global Corporate Banking, that we are building there and C and I, Commercial and Industrial, that we are building the teams there. We Bill already attends and we are making some progress in these areas.
So I'm as I said I said also in the shareholders' meeting that I am optimistic about future trends in the U.
S. If I may just Very quickly, Alvaro. The way to look at costs in the U. S. Is to look at all the operations together because There are services that are provided from CHUSA to the bank and vice versa.
So there may be quarters in which there are some movements in between these two, But these are not a reflection of underlying trends. So the way to look at costs in the U. S. Is to look at the overall business that we have. And as Jose Antonio said, Costs are down and are expected to continue to go down.
Thanks, Alvaro. Next question, please.
Thank you very much. The next question comes from Sophie Peterson from JPMorgan. Please go ahead.
Yes. Hi. Here is Taffy Peterstens from JPMorgan. I had a question on Brazil. We have elections there later this year.
What's your view on the Brazilian elections? And do you have do you believe it will have any impact on loan growth margins and asset quality? And could you just reiterate and you still believe that you can reach around 400 basis points cost of risk in Brazil? And my second question was on U. K.
NII was reasonably weak, but NIM was Flat this quarter. So could you just give us some guidelines on what drove the net interest income weakness? And you also mentioned that you didn't take any PPI provisions in the Q1, but should we expect any
The first question in Brazil is what you say is Basically, absolutely true. We have Brazilian elections in presidential elections back in Well, in October, in the next month of October, probably it's too early to make an elaboration because We don't know even which candidate is going to have the main parties. I mean, the main parties, meaning the parties that are Center right that traditionally is the main candidate. It's probably too early to say. We know some candidates And all the polls are reflecting basically the candidate that's already known, but we don't have a still credit in this.
But more than that, As Jose said, the economic situation in Brazil has improved significantly, and we are seeing this in the business. We are seeing more in the Retail arena done in Global Corporate Banking and Corporates. We are seeing significant growth in the Retail. We are not seeing that yet in the And GCB, how do we expect this to come? But it's not the case till now.
As a result of this, We've been growing nicely. We've been increasing net interest margin. And on the other side, the cost of risk, I think it fell 1 basis point quarter on quarter, but you go on a like for like basis and you compare the cost of risk By segment, it's falling much faster than that. It's falling both in ECB and in the retail, and we continue to be positive on this We are on a like for like basis. And do I expect the ECB and corporate to pick up probably the current dynamic is faster growth in retail and with this Growth in retail and with this seat to continue, the unemployment is falling, the demand for credit is picking up, the interest rates went down dramatically.
So this will help in this space. In the U. K, as you said, As you rightly said, we had a relatively weak quarter. It was a combination of some Kind of one off items, but if I guide you for the entire year, we are Betting, we are thinking at this time that we're going to have a relatively flattish NII for the entire year. The fee income, We think that this is going to grow in low single digit without taking into account the asset management Change in perimeter, so low single digits.
So, I will expect that we're going to be able to grow Somehow the revenues, and as I said in the aspect, still relatively high or high for our standards, yes? So It's still relatively high, more in the region of 5% probably is what we should expect. As I said, we are investing a lot in both in the compliance side and also in the digitalization of the bank and this is putting some pressure on the cost on top of the inflation. You mentioned PPI that we did not take any charge for PPI this quarter. We did not.
We think it's not needed. Based on the current consumption, based on the stock of provisions we have in the balance sheet and the current consumption of these provisions, At this stage, unless the behavior change in a significant way, we think that we don't need more PPI provisions going forward. Underneath the behavior of the change, that's the case.
Thanks, Jafin. Next question, please.
Thank you very much. The next question comes from Oda Smit from Autonomous Research. Please go ahead.
Yes, Haile. I've got two questions, please. Coming back to Brazil. The loan yield increased quite strongly this quarter, And net interest income is performing well. Could you help us break it down a little bit?
How much of the improvement was down to the mix shift And how much is down to potentially asset spread pressure coming from the interest rate environment? And then the second question I would have is in terms of refinancing. Could you give us a little bit of an idea as to how the TLTR-two maturities fit into your refinancing strategy? And how you're going to confront this over the next couple of years? Do you intend to replace it with some ECB financing?
How much of that do you think will be replaced by TLAC issuance? If you could give us Some ideas. Thank you.
First question, I will elaborate on the first question. The second one, I pass to Jose On the TLTRO. In Brazil, the fact is that we are gaining significant market share across the board, particularly in retail. So if you look at the numbers, well, our market share is growing significantly in car lending, where our market share is north of 20 We've been gaining market share the last 2 years, and we continue to gain market share. Also, we continue to gain Significant market share even faster than in car lending in payroll based lending, what is called their credit accounts in Nao.
And Those are the 2 main drivers of the growth of the loan book, the car lending plus credit accounts. Also, we are growing in mortgages, how to starting from very low levels. The production more than doubled, but starting from very low levels. So it's about gaining market share in these segments. And we for this reason, we are growing faster than our competitors there.
The mix shift, We are not, in principle, pursuing the mix shift. It's the demand is still not yet there in corporate, where we want to have more exposure and large corporates. But as a result of the events on the last couple of years, probably still not having a significant demand on these segments. You mentioned also the Rate environment and the cost of risk, the interest rate environment, as you know, the rates came down significantly. We are the balance sheet the position of the balance sheet is towards lower rates.
So we've got some extra Pushing net interest margin and net interest income coming from this side. But I think that there's not that much, maybe some Still some cuts in rates, but not that much to come. Going forward, we can now rule out Some regulatory pressure in here and there, not particularly important, but well, The regulator has been more vocal now than he was in the past in relation with some segments, particularly on the credit cards and the acquiring business.
Well, TLTRO, We haven't disclosed the total amounts of TLTRO, but obviously, we are very well aware of the amounts that we have to repay. And at the same time, we have to comply, like you said, for TLAC requirements. We already meet MREL requirements. We were told our MREL requirements last November, And we already meet EMRE requirements. In terms of TLAC requirements, we're still pending the treatment Of equity participations, if the final treatment of equity participations is equivalent to that of MREL, we are very close to complying with TLAC as well.
If it was different, we will have a currently, we will have a GAAP of around €15,000,000,000 to €20,000,000,000 Last year, in 2017, we issued €19,000,000,000 of TLAC eligible instruments. So, the gap is really manageable. And as we issue these instruments, Obviously, we are building long term liquidity that will help repay TLTRO in 20 2021. So from a liquidity standpoint, for us TLTRO, I'm not going to say it's almost irrelevant, but clearly has been factored in our financial plans and we don't see it really today. We don't see an issue in being able to repay TLTRO as scheduled.
Thanks, Britta. Next question, please.
Thank you. The next question comes from Jose Abad from Goldman Sachs. The floor is yours.
Hello, good morning. Three questions, very brief, on Spain. The first one is on the integration of Popular. You announced this morning the acceleration of the process. Could you give us an update on the size and timing of brands closures of Banco Popular, whether actually the announcement this morning is Changing this in any way.
The second is that I think you referred to the Spanish competitive environment as very, Very competitive. So but is this actually changing towards more competitive lately or to a bit less competitive lately? And we have probably an evidence of a number of actual local players being a bit more aggressive lately, but not sure whether this is just anecdotal or That you are actually seeing. And I mean, maybe on volumes, what you are seeing In trends in terms of actually demand would be interesting. And the last thing is actually on Spain is that obviously you made this big acquisition actually Banco
Popular last year and you are
Last year, you are the number the largest bank actually in Spain domestically. So could we say That you have no plans. You are close for business when it comes to making further acquisitions? Or you are still open to analyze Potential targets if the conditions are the right ones. Thank you very much.
Well, starting, first question, Popular integration. We announced today The assumption of Banco Popular, this is going to take place by the fall, around the fall. There is some anticipation here. Well, as I already said in the AEM, we If we establish, in my mind, we have like 3 steps, the 3rd quarter integration that was already done and is about to finish, was Agree with the and we executed mainly in February, but still some fee spending. The second one that is IT, an operation that is going on along all the process.
And the third one that when it comes when we are ready to integrate from a technological standpoint of view, all the branches in Spain, Popular branches is working on the Santander IT systems. We should be ready by the after immediately after the absorption to start to do this integration. Specific details on this in the Investor Day, specific details of this integration. Spanish competitive environment, well, you are seeing like we are seeing some competitors become more aggressive in particular segments of the market. And we are starting to see this maybe we are not till now is anecdotal evidence.
We need to be very careful in margin spreads going forward. But the environment, as I said, is highly competitive. More acquisitions in Spain now, we are not. We are focused 100%, I would say 110% in doing popular integration, and we roll out as decisions in Spain.
Thanks, Jose. Next question, please.
Thank you very much. The next question comes from Rohit Chandarajan from Barclays. Please go ahead.
Hi, good morning. It's Rohit Chandarajan from Barclays. I wonder if I could just follow-up actually with a couple of questions on NII in Brazil and the U. K. So Just to follow Britta's question actually.
So the loan yield in Brazil was up 23 basis points in the quarter after several quarters of sequential declines. It would be really helpful actually because that's quite a big step change to understand how much of that is mix shift and how much is kind of rate driven repricing pressure. So I guess thinking about the outlook particularly on the loan yield side. And then in the U. K, the loan yield was up A few basis points again having been in decline, particularly with the SVR repricing.
Do you now think that's pretty much done in the U. K? And then I guess market expectations in terms of U. K. Rate rises have been pushed back a bit.
But when we do get a rate rise in the U. K, How do you think loan and deposit pricing would react?
I'm going to elaborate on the UK side, and I pass to To go into the details of the yield on loans and deposit costs in Brazil that allow us to increase our NIM. In the UK, all the comments I made before were done under the assumption that we're going to have, 1 increase in rates, 25 basis points this year in the UK, no more than 1. This will help a little bit on the net interest margin, not that much because The size of the increase is relatively small. Or what the size of the increase we expect is relatively small. But the higher the increase in rates, the more positive impact because the bank The position of the bank is towards higher rates.
More on that, what we have seen in the market in U. K, we saw competitive pressure in the mortgage market at the end of 20 'seventeen, that continues to at the beginning of this year. Now we've seen in the last 2 months is becoming It's stabilizing a little bit, yes? So and this is what made us to think that we're going to have a relatively flattish NII for this year naturally with a A small increase in rate, as I elaborated before. Now do you want to elaborate in Brazil?
Yes.
If you look at Page 36 of the presentation, in the section we spoke about Brazil, you can actually see there the evolution of yield on loans. And customer net interest margin was 8.4% in the first Quarter of 2017 and in the Q1 of this year, it was 10.6%. At the same time, Net interest rates have gone down to 13.75% in December 2016 to below 7% in December this year. So this means that the repricing of liabilities And the change in the mix of liabilities where we actually substituted the more expensive letters financetas, which is like the 3 year CDs for customer deposits helped improve the cost of deposits, which again is now much more related to the actual interest rate and it should remained for the rest of the year. And the change in mix is what explains the fact that the yield on loans has remained flattish.
When we look at In each individual component, we are starting to see some margin compression, but because of the change in mix more towards lending in the Retail segment relative to corporates and GCB explains why loans the GE loan loans remains flattish. At the same time, we are seeing volumes picking up. Obviously, as interest rates have come down significantly, we are seeing more volumes, particularly in retail, and that explains the very good performance that we see in net interest income. And as we mentioned, this is a trend that we would expect to maintained for the rest of the year.
The next question comes from Ben Ton from RBC.
There was a decline in U. K. Deposits in the quarter. Can you just talk me through the drivers here, please? And secondly, in your presentation, you note volumes in Spain being hit by outflows in large companies and institutions.
Can you I
don't have any In U. K, Well, we come back to you and we elaborate on this because nothing in particular comes to my mind.
It's seasonality. The quarter is seasonality.
While in Spain, naturally, while in the more We are in the 3 conditions in February. The impact should be around €100,000,000 a year in a So we are starting to see this and I do expect the funding costs in Spain both in Popular and Santander getting reduced, particularly in the case of Popular, some of the institutional and big accounts money, We are not paying for those deposits at all as we are running significant sales liquidity. And We speak about, let's say, stable deposits or retail deposits, including in Retail SMEs, somehow operational money from corporates, we are doing well. We are doing well in Spain. I'm pleased with the developments we are seeing in this regard.
Thank you. Next question, please.
Thank you. The next question comes from Marta Sanchez from Bank of America Merrill Lynch. The floor is yours.
Hello, good morning. I've got three questions. The first one is on your ALCO strategy in Spain and Portugal. Are you replacing the bonds that you're selling? Are you building a healthy maturity portfolio?
Are you worried about the effect QE tapering could have on Spain's credit spreads? And if you could provide an update on NAV sensitivity to move to interest rates and credit That would be helpful. The second question is Santander Consumer. The cost of risk has doubled from last year. Is this a reflection of IFRS 9?
Are Are you still benefiting from disposals of right of portfolios? Where do you see the recurring cost of risk here? And the third one is a follow-up on the mix shift in Brazil. How is growth in the consumer lending portfolios that you've mentioned The structural cost of risk in the country. Thank you.
Can you elaborate on the ALCO?
ALCO, we right now have around €30,000,000,000 of ALCO portfolio in Spain with a yield of around 100 basis points on an average maturity of 3 years. We have replaced we sold close to €10,000,000,000 We've replaced already €4,000,000,000 Our idea is to have a sort of neutral gradually neutral impact on margins. And that's why we've been talking about recovery of The net interest margin staying as the year proceeds. No major change there. I mean, it's The portfolio exists to cover interest rate risks.
As interest rates go up, we are very positively geared towards higher rates in Spain, A parallel movement in the interest rate curve of 100 basis points would approximately €800,000,000 to €900,000,000 to our net interest income in Spain.
Well, the second question was Santander NIML Finance. It's true that last year, we disposed portfolios. This quarter, I think, we have dispose write off portfolios and this affect the cost of risk. The cost of risk now is very low in Santander Consumer Finance, and we do not expect a change this year. If we see any change, it will be for positive.
So as of today, recognizing The current cost of this is below the average across the cycle, but what we are seeing in the ground is is still improving. So I expect a substantial cost of risk in this business. And The portfolio disposals, well, we continue to be there. So maybe next In the following quarter, we have some of these disposals. So it depends when we execute this because this is part of our policy.
When it comes to Brazil, the cost of risk in the quarter, we reduced, as I mentioned before, 1 basis point. Naturally, we have different behavior. The ECB portfolio is going down and keep going down. We keep going down. The quarter was minus basis points to 135%, while the retail portfolio was almost flat, minus 1 basis point of 5.14%, in the retail portfolio.
The slowdown of the cost reduction is more related with MIST than anything else. So if we go in more detail and we start to see inside the retail what's going on with the payroll based lending, with the credit card lending, with And on a product by product, we continue to see good trends there. But overall, we are growing depends on the mix. The mix is what explain And this variation is more than the overall trend that, as I said before, is good.
Thanks, Marta. Next question, please.
Thank you very much. The next question comes from Tara Quinn from KBW. Please go ahead.
It's Dara from KBW. A question on the outlook for profitability In the U. K, as loan losses normalize, it looks like profitability would fit from the current levels. Is that just the way it's going to be? Or do you see anything you could do on costs?
Or Or how would you offset that cyclical increase in loan loss charges? And just a follow-up Question on the U. K. If there were no PPI charges this quarter, if you could just provide a little detail on those other provisions of around €60,000,000 And what kind of number should we expect there for the rest of the year? And then just on Brazil, sorry to come back to this again, but Just to be clear, you're saying the change in mix, the growth in retail is behind the margin loan yield improvement.
If that mix Maintains that trend for the rest of the year, does it mean the loan loss charge is going to be higher than you'd Guided to? Or are you saying you're expecting the loan loss charge to fall in subsequent quarters?
So, U. K. Loan losses normalization. Well, in the UK, so basically, we are having around 10, 12 basis points cost of risk. We do not expect A material change here, maybe events like the one we had at the Q4 last year.
But other than that, we do not spend We do not expect a material change there. Our NPLs trend is still going down. So we are 117, if I remember well, and went down in the quarter. So, I don't expect any material development there. On the PPI, I already elaborate on this That well, we are comparing our 16 provision that is in the 300 above EUR 300,000,000 EUR 327,000,000 and more utilization in the SKU decreased from the 2017 average in line with our expectations.
The amount of utilization was €20,000,000 last year, now it's lower. And we think that well, as I said, we are comfortable with the current stock of PPI provisions. The second question was Brazil. Now I'm not meaning that we changed our view in relation with the cost of risk. Probably in the previous quarters, we talked about Approaching 4%.
We are now at 4.35%. I think that this still is the direction In which we are going, if we were and I expect this to happen, growing in corporate and GCB, we will get there very rapidly. But till now, we haven't seen, to my surprise a little bit, Growth in these segments, quite the opposite. We see a reduction in the lending To GCV, particularly to GCV, while in corporates, we are relatively flattish, but we are seeing better
Thanks, Daragh. Next question, please.
Thank you. The next question comes from Andrea Onsueta from Credit Suisse. Please go ahead. Yes, good morning. I want to focus on the Spanish NII for a minute.
You have guided in the past towards Loan growth for the year, but you've said today that the large corporate and institutional lending is actually coming worse than expected. Are you still expecting your loan book to grow? And then You have already talked about the ALCO. But how and you also mentioned that there It's from the funding costs going forward. So how should we think of the Spanish NII going forward?
So a couple of questions here. The loan growth for 2018, we were guiding you towards some growth. Probably still the case depending on we're going to grow, I expect, to grow in all the consumer, SMEs and corporate related lending To show 2% or 3% growth, we're showing relatively flat. This is going to depend if we do large sales or not with institutions or with GCB, but in terms of revenue, it's going to be, in any case, Marcela. So the ALCO, Jose already elaborated on this.
We reduced significantly the size And we are confident and we are reducing the funding cost both in Popular and Santander, and we are confident that we can reduce this. In NII, I already told you that we expect in the coming quarters the NII to improve because mainly the declining in funding costs And with volumes growing in the segments I already mentioned to you, probably where it's more difficult to grow at this stage is in mortgages The high amortization we have and ECB and institutional depends on our pricing. We are probably more demanding than the average at this Staging pricing in the high end of the market.
Next question comes from Ignacio Ollarkey from Deutsche Bank.
Hi, good morning gentlemen. I just have two questions. On one side, on cost growth outlook for Brazil, Wondering if you could elaborate a bit on how do you see costs performing in Brazil going forward? And regarding litigation risk, On the popular retail side, we have seen a number of press comments on rulings that have come out, whether we should expect Additional other provisions that or this was already covered at the moment of the integration? Thanks.
Growth in Brazil is related with we are growing the cost above inflation. But when you analyzing the cost, where the costs are going in relation with the activities. So we are gaining significant market share in acquiring business. We Again, in significant market share in credit card business, we are gaining market share in and these As long as we grow this cost, we can see maybe 2%, 3% above the inflation. But as I said, with very high correlation with our capacity to gain market share and to continue to grow the business.
So it's Somehow, you don't want me to say in that way, variable cost. Litigation risk, well, We've been quite vocal on this. We are not expecting any materials in litigation risk coming out of Popular, different from the one we incorporate in our numbers at the time of the acquisition. So there's plenty of noise around this. The majority of the noise is related mainly with the resolution of the Banco Popular that is not up to us.
While in the other side, our Commercial action that we did at the length of last year got 80% Of the customers asset, our offer that it reduced dramatically to very long levels the litigation risk. So we are not nothing
Thank you very much. The next question comes from Carlos Peixoto from Caixabank BPI. Please go ahead.
Hi, good morning. Just a couple of questions. The first one would be a bit on the evolution of cost of risk in Spain or basically How do you see it evolving throughout the year? The second question would be if you could give us some color On how much was Bufour's contribution to 1st Q results, namely to net profit and probably to NII, if you could share some light on that? Just a final question would be, how do you see the Real Estate division evolving, namely the cost In this division, now that a substantial part of the assets has been sold, what should we expect going forward On this front, should this progressively become 0 in the near term?
How do you see this evolving?
The first question comes from Greece in Spain. Think around 30 basis points, yes? So both No big difference between Santander and Popular. I think around 30 basis points is what you should expect. The second question was about?
Popular first quarter results.
The popular first quarter results, I don't have this number in mind because, well, I don't know if you have we're going to publish a number for Popular SA. How comparable is this number with the previous numbers is difficult to say, yes, so it's difficult to say. It's not comparable, Yes, because the Q3 costs are not there. The ECB business was already integrated. So We can provide you the numbers, but I don't have here the numbers.
But I will say, overall, popular business, I will say it's going as expected with very good trends in SMEs that, as you know, is the critical business in which we are focusing in. And the integration is going on track. The numbers as we split the bank in several pieces already, we have 1 total bank, Popular, Portugal was integrated in Portugal. Quasar, the real estate portfolio was disposed. We reached agreements with the joint venture.
So, it's very difficult. The comparison is very difficult. But in any case, you're going to have popular numbers in the first queue. How representative those numbers are going to be? I would say very low representative.
Real Estate Division, I don't know what I present There is the numbers of the Real Estate division that, let's say, remain in the bank balance sheet. It's true that we have the stakes in Moline, Testa, Metro Vasesa and all the others, and we continue to match this. But in the Real Estate division, I expect the losses to come down and to reduce significantly the Real Estate division already this year. So I said, and this is our target, there's no question there, we're going to reduce to immaterial levels. We can do operations as the one we've done in the past or keep dispose sure, we're going to keep disposing as we speak, but the losses should come down and probably to be I don't know if at the end of this year or next year to disappear from the bank balance sheet.
Thank you. Last question, please.
Thank you very much. The next question comes from Carlos Cobor from Societe Generale. Please go ahead, sir.
Thank you for the call. Carlos here. A quick one on NII in Spain. Again, I'm sorry to revisit. But could you Explain how is the rolling of the lower cost of the 123 account.
Is that fully reflected in the cost of funding already in the first Thank you. That will have a gradual phase in just to understand NII dynamics in Quickly on SME pressure and price competition, as you said, is still intense. Could you elaborate a little bit on how is the Landscape here because now that you control about onefour of the market, I would have expected you to have a more strong pricing power. Why has it been difficult to control prices? And who is the competition coming from?
If you could elaborate a little bit And finally, on this topic, are you seeing the Central Banks taking any steps Kind of some inspector or monitor their pricing policies here as we saw the one who's paying in the past have said that they would monitor Whether the new pricing would match in the cost of risk and all the required pricing components? That's it. Thank you very much.
Okay. First question, in Spain, I already elaborated on this. The lower 1, 2, 3, you haven't seen in the quarter because we introduced, I am right at the beginning of March, yes. So I mentioned also that as a result of this reduction, it is like €100,000,000 in a whole year and this will come in the next quarter. But it's not only about this.
I also mentioned that the funding costs in Popular are reduced at the same time. SME price competition. SME, as you know, the market is less transparent than Other segments, it's not a commoditized market. We are not seeing probably there is some price competition, but we are not seeing The competition here being as high as it is in the mortgage market and in large corporates. I will say where we see some competitors Being extremely aggressive, particularly those with low market share in those segments that make sense for them to try and to gain market share.
And for doing that, to do that, they are relative on pricing. When the last question, Central Bank in relation with the pricing policy is saying something? No.