Santander first Q 2018 earnings conference call webcast presentation. As normally we do, our Group CEO will address the group performance for this first quarter of the year. Our Group Chief Financial Officer will address in more detail business areas performance, again, for the first quarter, and obviously our CEO, just ahead of the Q&A session, will conclude the presentation. With no further delays, José Antonio, the floor is yours.
Thank you, Sergio, and good morning to everyone. Thank you for attending this first Q results presentation. The first area I want to share with you is that we are well on track to reach our targets for 2018, the targets we established almost three years ago. This is the first area that I want to tell you. The year, I would say, started with making good progress in our commercial transformation. Our commercial transformation, 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, the profit year-on-year grew 10%, 22% in constant terms. If we exclude the perimeter, probably Banco Popular, probably we are growing in constant numbers at around 15%, with good 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 extending the balance sheet, generating capital. We generate organically in the quarter nine basis points. I will elaborate later on. 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 will say Banco Popular integration is on track.
Legal integration was approved yesterday by the board. We expect to execute by the fall, to execute the legal integration. In the numbers, you do not find specific Banco Popular numbers. We were discussing internally to provide or not to provide numbers. The numbers are not representative as long as we did some integration steps. Particularly, we already integrated headquarters. As you know, we reduced 1,100 employees back in February as a result of the headquarters integration. We already integrate GCB business. As long as we have Banco Popular Portugal in Portugal, TotalBank, and was very difficult to make a comparison. What we are providing is a set of numbers for Spain that includes Portugal and the former Santander, Spain, Banco 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 area I was telling you, both loyal customers and digital customers are growing well, and the customer satisfaction, we are top three in customer satisfaction in seven countries, and we are progressing in the main markets in which we operate. We are top in class in this regard. That, well then, translated into the three areas we also show to you in the yearly results presentation. We are growing. We are growing in 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 relate 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 strengthened 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&L, well, first thing is there's no recurring items in the quarter, neither positive nor negative. The good performance, there is some perimeter effect, I already told you. It's Santander Asset Management plus Banco Popular. On the other hand, there's a significant negative impact on the exchange rate of between 10 and 12 percentage points on the P&L. You have the numbers there.
The quarter show a profit of north of EUR 2 billion, significantly higher than the previous quarter, while showing good progress in constant terms, both in Net Interest Income, net fees that are well in double-digit. The customer revenues are growing double-digit. As long as the net loan loss or the provisions 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 no restructuring in Brazil. As you know, normally when you do some reduction in employees in Brazil, it comes one year later, these costs. This was not the case in 2017. That's the reason why this line falls significantly compared with the previous year. When you go through the lines, consistent growth.
I would say consistency is the word that probably define the best what you see in the slide. Both Net Interest Income and fee income are growing a consistent base, while the other income is more or less fairly stable, fairly flat. 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 two 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 and Brazil, or Brazil and Mexico. We have these two behaviors. José will elaborate later on specific countries, the trends on this regard. I was starting the presentation telling about commercial transformation. This is not just about number of customers. 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 main cards is growing, the units is growing, and it translates into a healthy growth into the fee income line. The fee income line is growing both in developing and emerging markets and in the different business we have.
In the wealth management, that is relatively a small portion of the fee 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. Overall, healthy growth in revenues coming from customers. In cost, you know our target was to cost income being in the region of 45%-47%. This is a combination in cost. We have some integrations process going on that reduce normally cost. You have there Portugal. We have there the quarter in Spain. Quarter-on-quarter, the costs are going down 3.5%, and there's more to come, as you know, as integration on Popular make progress.
We have other geographies in which we are in a strong investment process, particularly we share with you Mexico, the three-year plan, in which we have a significant growth in cost. Probably is more surprising to you, although this quarter probably is a little bit overstated in U.K., where the cost grew on year-on-year 8%, that we think that is going to moderate in the coming quarters to a more normalized level. Here we are investing, we are making significant investment in the compliance and digital transformation. Overall, we feel that we are committed in the 45%-47% target that we have in this particular field. Credit 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 faster fall in the cost of credit in Brazil, but there's a significant change in mix there. More we are growing faster in retail than we are growing in global corporate banking. This explains a little bit. In any case, all the trends in this, in credit quality and cost of credit are going as we were expecting. Real estate exposure, this is what is left here, EUR 5.2 billion in all the business in Spain. You have the split of this business. Now, I don't need to repeat again that our priority is to reduce this to immaterial levels as soon as we can. We're going to continue to dispose assets, both on one-on-one basis or looking for operations to dispose in blocks.
I will say this EUR 5.2 billion start to be almost a non-material number in the balance sheet of the business in Spain. Finally, in capital, we reach 11% Common Equity Tier 1. We generate 9 basis points. Well, it is 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 Metrovacesa and the change in accounting produce 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. This is where we should be, because the total impact of IFRS 9 is in the region of 23 basis points.
We guide you to 20 instead of 20, 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, are pending of regulatory approvals of other items. You have the TotalBank disposal that we think that 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 with the European regulation, the entity to be regulated, and therefore, we cannot include this minority interest in capital. In any case, we reaffirm our Common Equity Tier 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. Return on Tangible Equity, accordingly, is growing. 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. Finally, the Tangible Net Asset Value per share was impacted this quarter by IFRS 9. Excluding IFRS 9 impact, it had growth from EUR 4.15 to EUR 4.20. I hand over now to José to go and elaborate through the units, and we will 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 greatest contributors to our profits this past quarter were Brazil with 27%, Spain 18%, the U.K. and Santander Consumer Finance each 13%. Eight out of the 10 core geographies showed an increase in profitability, as you can see on the right-hand side of the slide. In general terms, we saw very strong operating performance in all the economies, in all the countries. Starting with Brazil, the economy in Brazil is doing much better. It is expected to grow 3% or above this year.
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 refer to. The efficiency improved, also showing greater productivity, and asset quality continued to also improve to 4.35%. Trends all throughout the P&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. We just announced this morning that we are proceeding to the legal integration in the third quarter, as José 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 first joint commercial initiative between Santander and Popular. It's the 1|2|3 Business Current Account for self-employed and micro SMEs. In just a few weeks, we already have 75,000 accounts open 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 EUR 455 million, up 26%. Positive trends 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, fourth quarter relative to the first quarter, the ALCO portfolio was EUR 8 billion lower. That obviously had a negative impact on net interest income. We saw quarter-on-quarter also slightly higher provisions because of seasonal factors. 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 disposals last year in 2017 in several countries like Poland, Germany, et cetera.
In the fourth quarter, we announced the integration of our operations in Germany. 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 first quarter. Moving to the U.K., here, the economy is resilient, despite the uncertainty associated with the Brexit process. We see a highly competitive market and the need to invest in regulatory projects like ring-fencing, PSD2, et cetera. We saw a pickup in mortgage activity in the first quarter. Our mortgage portfolio went up GBP 1.9 billion, which again shows how resilient the economy is. 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 José Antonio said, in some cases, these are one-offs. On the revenue side, we see lower gains from 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. In the case of non-performing loans, we saw 2 one-off cases in corporate banking, and 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&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 123 account in Mexico, as you know, is called Santander Select, and it has attracted already 3.5 million customers, more than 50% of which are new. Double-digit growth, in the P&L with asset quality that is stabilizing cost of risk at around 3%. 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 total revenue performance. The efficiency ratio and the cost of risk are also improving. Quarter-on-quarter, the results were affected by seasonal factors. Remember that in Latin America, generally, the first quarter is where people take their holidays. 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 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. We are geared towards higher rates.
As interest rates go up in the U.S., we should continue to see this trend being maintained in the coming quarters. Also, in the case of the bank, we saw better efficiency ratio. In the case of Santander Consumer, lower loan loss provisions and also lower costs. When 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. We would expect to see some of these positive underlying trends materializing and solidifying in the coming quarters. In the case of Popular Sorry, Portugal, the year-on-year comparison is affected by the fact that we had Popular Portugal being integrated into Santander. 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, 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 pre-tax profits were up 10%. Moving to Argentina. In the case of Argentina, the comparison is a little bit complicated because in the first quarter of last year, we included the balance sheet of Citibank, but not the P&L. The P&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, in consumer loans, in loans to SMEs. Mutual funds also increased 85% year-on-year, which are all very positive trends. These are, we think, sustainable trends that will be maintained for the rest of the year. In the case of the P&L, we see a very strong performance in the upper part of the P&L, that didn't go through because of some one-offs, again, associated with the integration 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, the upper part of the P&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 first quarter, last year it took place in the second quarter, that distorts the numbers. Excluding these one-offs, we see double-digit growth, almost all throughout the P&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 MREL 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. Total costs, operating costs at the corporate center, for Santander, and they are just a bit below 2% of the total for the group, which compares very favorably with all of our competitors. With this, I'll turn it back to José Antonio for his concluding remarks. Thank you.
Thank you, José. To conclude this presentation, well, I will make some final remarks. As I started at the beginning, we maintain our clear and consistent commercial strategy. This has been reflected in volumes, fee income generation and better results, increasing profitability. 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, 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 very gradual interest rate increases in the mature markets.
Market volatility has increased so far, probably this is due that the previous one was extremely low, and we came back to more normalized levels. Turning to the group, we expect the good customer growth to continue, are positive in this. Increased volume growth, with a careful management of the spreads, depending on the market. We don't expect surprises in credit quality other than some potential volatility. As you know, IFRS 9 is the first year we are implementing, maybe some potential volatility there, nothing relevant. Efficient commercial and digital transformation will continue, all the integrations we are doing in Spain, Germany, Portugal, Poland, are progressing according to the plan. In this environment, we should be able to deliver the targets you have on the screen. Review all of them.
We are close to achieve those targets, 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 for the entire year. Finally, just to remember you that we're going to update you in a more deeper way in Investor Day in London on October the 3rd this year. For now, we remain at your disposal for the questions you may have. Thank you.
Thanks, José, as well. Indeed, we have now plenty of time for your Q&A. I would appreciate if you introduce yourself and stick to two, three questions max per analyst.
Please go ahead.
Thank you very much, ladies and gentlemen. The Q&A session starts now. If you wish to ask a question, please press zero one on your telephone keypad. Thank you. The first question comes from Francisco Riquel from Alantra Equities. Please go ahead, sir.
Yes. Hello. Francisco Riquel from Alantra Equities. A couple of questions from 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 this. Second, you are including in the pro forma capital ratios the profit from the sale of the non-core assets from Popular, TotalBank, and we think. I wonder if there is any negative to come, for example, from the unwinding of the rest of the JVs at Popular. If you can also update on this. Also, a clarification, whether the 11% target for the full year, if it is assuming IFRS 9 on a fully loaded basis or not.
If so, how do you plan to offset for the shortfall of the new regulatory headwind if we should expect faster organic generation, or if there could be any asset that could be up for sale. Thank you.
Thank you, Francisco. The three questions were related with capital. The first question was about SCUSA minorities and up to what 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 forma capital ratios with the joint venture from Popular, I provide the data of the agreements we already signed. When we make 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 ventures, that basically is insurance, asset management, and if comes to my mind, 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, was established in 2015. Our organic generation, we continue as there is no reason this year 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 generate less, but this is the average. Probably you ask me going forward, and the macroeconomic situation remains, probably we should expect, at some point, faster growth. 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 Spain. Fees and NII were down. You explained the outflow contribution, in general, I would have expected maybe fees to be a bit stronger given Santander Asset Management was being integrated. The question is, how's the integration of Banco Popular affecting the franchise? Are you seeing more attrition in revenues than you expected before? The second question is on the U.S. After overcoming some of the regulatory restrictions, there was supposed to be quite a lot of cost-cutting potential in compliance and other general integration of the bank. The costs are up, and particularly in the retail bank, they're up quite a lot. Maybe can you give us an update on how the turnaround of the U.S. is 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 more than it was. In customer NIM is basically flat, and I think that we have room for, even in a highly competitive market on the asset side, to reduce our funding costs higher in 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, attrition revenues and all these things. No, 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, without including some probably high single-digit is what you should expect for fee income in Spain. In relation with Banco 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 our risk appetite in relation with specific names.
U.S. costs.
U.S. costs. Well, the cost, as far as I know, went down quarter-
2% quarter on Q
Q on Q, 2% down. We expect for the whole year negative cost growth in the U.S. In the U.S., we still have some pending regulatory issues. Overall, in the year, the cost will decrease in nominal terms. I expect to decrease in nominal terms. What is more important, probably in the U.S., is we are progressing well in the business model of SCUSA with a being much more predictable. The average FICO is higher than it was. The cost of risk is lower, and our scoring make us more optimistic about the capacity of SCUSA to generate profits. When it comes to the bank, now our NIM is head-to-head with the competitors for first time in the last two or three years. Yeah.
We come from very low levels of net interest margin. We are catching up with our peers in the U.S. 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&I, commercial and industrial, that we are building the teams there. We build already the teams. We are making some progress in these areas. I'm, as I said also in the General Shareholders Meeting, that I am optimistic about future trends in the U.S.
If I may.
Yeah.
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 SCUSA to the bank and vice versa. There may be quarters in which there are some movements in between these two, but that these are not a reflection of underlying trends. The way to look at costs in the U.S. is to look at the overall business that we have. As José 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 Sofie Peterzens from J.P. Morgan. Please go ahead.
Hi, here is Sofie Peterzens from J.P. Morgan. I had a question on Brazil. We have elections there later this year. What's your view on the Brazilian elections, and do you believe it will have any impact on loan growth margins and asset quality? Could you just reiterate that you still believe that you can reach around 400 basis points cost of risk in Brazil? My second question was on U.K. NII was reasonably weak, but NIM was flat this quarter. Could you just give us some guidelines on what drove the net interest income weakness? You also mentioned that you didn't take any PPI provisions in the first quarter, but should we expect any further PPI provisions later in the year? Thank you.
The first question in Brazil is, what you say is basically absolutely true. We have Brazilian elections and presidential elections back in October, in the next month of October. Probably it's too early to make an operation because we don't know even which candidate's gonna have 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 on all the polls are reflecting basically the candidates that are already known, but we don't have a still clarity in this. More than that, as José 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 than in global corporate banking and corporates. We are seeing significant growth in the retail.
We are not seeing that yet in the corporate and GCB, although we expect this to come. It's not the case till now. As a result of this, we've been growing nicely. We've been increasing net interest margin. On the other side, the cost of risk, I think it fell one basis point quarter on quarter. You go on a like-for-like basis, you compare the cost of risk by segments, it's falling much faster than that. It's falling both in GCB and in the retail, we continue to be positive on this regard on a like-for-like basis. Although I expect the GCB and corporate to pick up probably, the current dynamic is faster growth in retail, and we do see to continue. The unemployment is falling. The demand for credit is picking up. The interest rates went down dramatically.
This will help in this space. In U.K., as you rightly said, we had a relatively weak quarter. It was a combination of some kind of one-off items. If I guide you for the entire year, we are thinking at this time that we're gonna have a relatively flat NII for the entire year. We think that is going to grow in low single digits without taking into account the asset management change in perimeter, so low single digits. I will expect that we're going to be able to grow somehow the revenues, and as I said, still relatively high or high for our standards. 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 both in the compliance side and also in the utilization 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, unless the behavior of the change. That's the case.
Thanks, José. Next question, please.
Thank you very much. The next question comes from Oda Smit from Autonomous Research. Please go ahead.
Yes. Oda. 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? 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 TLTRO2 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 via TLAC issuance? If you could give us some idea. Thank you.
First question, I will elaborate on the first question. The second one I pass to José on the TLTRO. In Brazil, the fact is that we are gaining significant market share across the board, particularly in retail. 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 have been gaining market share the last 2 years, and we continue to gain market share. We continue to gain significant market share even faster than in car lending in payroll-based lending, what is called there crédito consignado. Those are the 2 main drivers of the growth of the loan book, the car lending plus crédito consignado. We are growing in mortgages, although starting from very low levels. The production more than doubled, but starting from very low levels.
It's about gaining market share in these segments. For this reason, we are growing faster than our competitors there. The mix shift, we are not in principle pursuing the mix shift, the demand is still not yet there in corporate where we want to have more exposure and large corporates. 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 interest rate environment and the cost of risk. The interest rate environment, as you know, the rates came down significantly. The position of the balance sheet is towards lower rates. We got some extra push in net interest margin, net interest income coming from this side. I think that there's not that much, maybe still some cuts in rates, but not that much to come.
Going forward, we cannot rule out some regulatory pressure in here and there. Not particularly important, 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.
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. 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. We already meet MREL 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, currently we would have a gap of around EUR 15 billion-EUR 20 billion. Last year, in 2017, we issued EUR 19 billion of TLAC-eligible instruments. The gap is really manageable.
As we issue these instruments, obviously we are building long-term liquidity that will help repay TLTRO in 2020, 2021. From a liquidity standpoint, for us, TLTRO, I'm not going to say is almost irrelevant, but clearly has been factoring in our financial plans, and 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 José 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 this acceleration of the process. Could you give us an update on the size and timing of branch 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 competitive. Is this actually changing towards more competitive lately, or to a bit less competitive lately? We have probably evidence of a number of actual local players being a bit more aggressive lately, but not sure whether this is just anecdotal or this is something that you are actually seeing. Maybe on volumes, what you are seeing in trends in terms of actually demand would be interesting.
The last thing is actually on Spain, is that obviously you made this big acquisition, Banco Popular, last year, and you are the largest bank actually, in Spain domestically. Could we say that you have no plans, you are closed 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.
Starting, first question, Popular integration, we announced today the absorption of Banco Popular. This is going to take place by the fall, around the fall. There is some anticipation here. As I already said in the AGM, if we establish in my mind, we have three steps. The headquarters integration that was already done, and is about to finish, was agreed, and we executed mainly in February, but still some things pending. The second one that is IT and operations, that is going on along all the process. The third one that when we are ready to integrate from a technological standpoint of view, all the branches in Spain, Popular branches working on the Santander IT systems. We should be ready immediately after the absorption to start to do this integration.
This is going a little bit faster than we were anticipating before, we provide specific details on this in the investor day, specific details of this integration. Spanish competitive environment. You are seeing like we are seeing, some competitors become more aggressive, in particular segments of the market. We are starting to see this maybe, till now is anecdotal evidence, we don't have more than that. When I see this, probably I'm not so optimistic about, we need to be very careful in managing spreads going forward. The environment, as I said, is highly competitive. More acquisitions in Spain. No, we are focused 100%, I would say 110%, in doing Popular integration, we rule out acquisitions in Spain. Yeah. Thanks, Jose. Next question, please.
Thank you very much. The next question comes from Rohit Chandrasekharan from Barclays. Please go ahead.
Hi. Good morning. It's Rohit Chandrasekharan from Barclays. Wonder if I could just follow up actually with a couple of questions on NII in Brazil and the U.K. Just to follow Britta's question, actually. 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 rate-driven repricing pressure. I guess, thinking about the outlook, particularly on the loan yield side. 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.?
I guess market expectations in terms of U.K. rate rises have been pushed back a bit, when we do get a rate rise in the U.K., how do you think loan and deposit pricing would react? Thank you.
I'm going to elaborate on the U.K. side, I pass to José to go into the details of the yield on loans and deposit costs in Brazil that allow us to increase our NIM. In the U.K., all the comments I made before were done under the assumption that we're going to have one increase in rates, 25 basis points this year in the U.K., no more than one. This will help a little bit on the net interest margin. Not that much, because the size of the increase is relatively small, or the size of the increase we expect is relatively small. The higher the increase in rates, the more positive impact, because the position of the bank is towards high 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 2017. That continues to the beginning of this year. Now we're seeing in the last two months, it's stabilizing a little bit. Yeah. This is what made us to think that we're going to have a relatively flattish NII for this year, naturally with 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, in the first quarter 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. This means that the repricing of liabilities and the change in the mix of liabilities, where we actually substituted the more expensive Letras Financeiras , which is like the three-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 remain for the rest of the year.
The change in mix is what explains the fact that the yield on loans has remained flattish. When we look at each individual component, we are starting to see some margin compression. Because of the change in mix, more towards lending in the retail segment relative to corporates and GCB, explains why the yield on 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. As we mentioned, this is a trend that we would expect to maintain for the rest of the year.
Thanks, Rohit. Next question, please.
Thank you very much. The next question comes from Benjamin from RBC. Please go ahead, sir.
Good morning. Thank you for taking my questions. There was a decline in U.K. deposits in the quarter. Can you just talk me through the drivers here, please? Secondly, in your presentation, you note volumes in Spain being hit by outflows in large companies and institutions. Can you elaborate a little more on that as well? Thank you very much.
I don't have any. Deposits in U.K. We come back to you, and we elaborate on this because nothing in particular comes to my mind.
It's seasonal. In the quarter, it's seasonality.
Now, while in Spain, naturally, well, we are three conditions February, the impact should be around EUR 100 million in the year, in a whole year. 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 excess liquidity. As a result of this, maybe some of these flows went out. When 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 Sánchez 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 are selling? Are you building a handsome maturity portfolio? Are you worried about the effect QE tapering could have on Spain's credit spreads? If you could provide an update on NAV sensitivity to moves in interest rates and credit spreads, that would be helpful. The second question is on our consumer. The cost of risk has doubled from last year. Is this a reflection of IFRS 9? Are you still benefiting from disposals of write-off portfolios? Where do you see the recurring cost of risk here? 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 affecting the structural cost of risk in the country? Thank you.
Can you elaborate on the ALCO strategy?
The ALCO, we right now have around EUR 30 billion of ALCO portfolio in Spain with a yield of around 100 basis points on an average maturity of 3 years. We sold close to EUR 10 billion, we've replaced already 4. Our idea is to have a sort of gradually neutral impact on margins. That's why we've been talking about a recovery of the net interest margin in Spain 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 add approximately EUR 800 million-EUR 900 million to our net interest income in Spain.
Well, the second question was Santander Consumer Finance. True that last year we dispose portfolios. This quarter, I think we have disposed write-off portfolios, and this affect the cost of risk. The cost of risk now is very low in Santander Consumer Finance, we do not expect a change this year. If we see any change, it will be for positive. Yeah. As of today, recognizing that the current cost of risk is below the average across the cycle. What we are seeing in the ground is still improving, I expect that should the cost of risk in this business. The portfolio disposals, well, we continue to be there. Yeah. Maybe next quarter or in the following quarter we have some of these disposals. Yeah. 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, one basis point. Naturally, we have different behavior. The ECB portfolio is going down, and we keep going down. The quarter was minus 20 basis points to 135, while the retail portfolio was almost flat, minus 1 basis point at 514, the retail portfolio. The slowdown of the cost reduction is more related with mix than anything else. If we go in more detail, and we start to see inside retail what's going on with the payroll-based lending, with the credit card lending, and on a product by product, we continue to see good trends there. Overall, we are growing, depends on the mix. The mix is what's playing these variations 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 Daragh Quinn from KBW. Please go ahead.
Hi, it's Daragh from KBW. A question on the outlook for profitability in the U.K. As loan losses normalize, it looks like the profitability would slip 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 how would you offset that cyclical increase in loan loss charges? 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 EUR 60 million, and what kind of numbers should we expect there for the rest of the year? 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 guide it to? Are you saying you're expecting the loan loss charge to fall in subsequent quarters? Thank you.
U.K. loan losses normalization. In U.K., 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 fourth quarter last year. Other than that, we do not expect a material change there. Our NPLs trend is still going down. We are 117, if I remember well, and went down in the quarter. I don't expect any material development there. On the PPI, I already elaborate on this, that, we are comparing our 16 provision that is above EUR 300 million, EUR 327. Monthly utilization in the first Q decreased from the 2017 average, in line with our expectations. The monthly utilization was EUR 20 million last year, now is lower, and we think that, as I said, we are comfortable with the current stock of PPI provisions.
The second question was Brazil. I'm not meaning that we change our view in the relation with the cost of risk. Probably in the previous quarters, we talk about 4%, approaching 4%. We are now 435. I think that 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. 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 GCB, particular to GCB, while in corporates, we are relatively flattish, we are seeing better trends than the ones we saw last year.
Thanks, Daragh. Next question, please.
Thank you. The next question comes from Andrea Unzueta from Credit Suisse. Please go ahead.
Yeah. 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. 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? You have already talked about the ALCO. You also mentioned that there are some benefits from the funding costs going forward. How should we think of the Spanish NII going forward?
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 or showing relatively flat, this is going to depend if we do large deals or not with institutions or with GCB. In terms of revenue, it's going to be, in any case, marginal. The ALCO, José already elaborated on this. We reduced significantly the size of the ALCO portfolio. 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 cost.
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 because the high amortizations we have. GCB and institutional depends on our pricing. We are probably more demanding than the average at this stage in pricing in the high end of the market.
Thanks, Andrea. Next question, please.
Next question comes from Ignacio Ulargui from Deutsche Bank. Please go ahead.
Hi. Good morning, gentlemen. Just have two questions. On one side, on cost growth outlook for Brazil, whether you could elaborate a bit on how do you see costs performing in Brazil going forward. 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 there, 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. When you analyze in depth the costs, well, the costs are growing in relation with the activity. We are gaining significant market share in acquiring business. We are gaining significant market share in credit card business. We are gaining market share, and these are costs. As long as we grow, this cost could increase maybe 2%, 3% above the inflation. As I said, with very high correlation with our capacity to gain market share and to continue to grow the business. It's somehow, you allow me to say in that way, variable cost. Litigation risk, well, we've been quite vocal on this. We are not expecting any material litigation risk coming out of Popular, different from the one we incorporate in our numbers at the time of the acquisition.
There is plenty of noise around this. The majority of the noise is related mainly with the resolution of Banco Popular. That is not up to us. In the other side, our commercial action that with the other line of last year got 80% of the customers asset. Our offer that it reduced dramatically to very low levels, the litigation risk. We have nothing new to comment on this.
Thanks, Nacho. Next question, please.
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 Popular's contribution to first Q results, namely to net profit and then probably to NII, if you could share some light on that. Just the final question would be, how do you see the real estate division evolving, namely the cost base 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 zero in the near term? How do you see this evolving? Thank you.
The first question, cost of risk in Spain, think around 30 basis points. Both, no big difference between Santander and Popular. 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, we're going to publish a number for Popular S.A. How comparable is this number with the previous numbers? It's difficult to say. It's difficult to say. It's not comparable, just because the third quarter costs are not there. The ECB business was already integrated. We can provide you the numbers, but I don't have here the numbers. I will say overall, Popular business, I will say is 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 one total bank. Popular Portugal was integrated in Portugal. Quasar, the real estate portfolio was disposed.
We reach agreements with the joint venture. It's very difficult. The comparison is very difficult. In any case, you're going to have Popular numbers in the first Q. How representative those numbers are going to be? I will say very low representative. Real estate division, well, 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 Merlin, Testa, Metrovacesa, and all the others, and we continue to manage this. In the real estate division, I expect the losses to come down and to reduce significantly the real estate division already this year. 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 disposing. For sure, we're going to keep disposing as we speak. 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 Cobo from Societe Generale. Please go ahead, sir.
Hello. 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 1|2|3 Current Account? Is that fully reflected in the cost of funding already in the first Q? That will have a gradual phase in, just to understand NII dynamics in Spain. Quickly on SME pressure and price competition, as you said, is still intense. Could you elaborate a little bit on how is the competitive landscape here? Now that you control about one quarter of the market, I would have expected you to have a more strong pricing power. Why has it been difficult to control prices? Who is the competition coming from? If you could elaborate a little bit here.
Finally, on this topic, are you seeing the central banks taking any steps to inspect or monitor the pricing policies here as we saw the ECB 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, NII in Spain, I already elaborate on this. The lower 1|2|3 Current Account, you haven't seen in the quarter because we introduced, if I am right, at the beginning of March, yeah. I mentioned also that as a result of this reduction, it's like EUR 100 million in a whole year, and this will come in the next quarters. It's not only about this. It's also mentioned that the funding costs in Banco Popular are reduced at the same time. SME price competition. SME, as you know, the market is less transparent than for other segments. It's not a commoditized market. We are not seeing, probably there's 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 could 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, they are aggressive on pricing. When the last question, central bank in relation with the pricing policy saying something, no.
Okay. I'm going to leave it here. Thanks everyone for call, obviously they are for any follow-up. Thank you.
Okay. Thank you.