Good morning, everybody, and welcome to Banco Santander's conference to discuss our financial results for the first half of 2022. Just as a reminder, both the results report and the presentation we will be following today are available to you on our website. I'm joined here today by our CEO, Mr. José Antonio Álvarez, and our CFO, Mr. José García Cantera. Following their presentations, we will open the floor for any questions you may have in the Q&A session. With this, I will hand over to Mr. José Antonio Álvarez. José Antonio, the floor is yours.
Thank you, Begoña. Good morning to everyone. Thank you for joining us this morning. I should start saying that the second quarter we've been living in a period in which we saw inflation hitting decade high levels, interest rates going up, starting to rise, and significant concerns regarding lower economic activity in the future. This is to sum up a little bit the environment of the last quarter. In this environment, we continue to grow our business, our customer base, and we translate this into a growth in the loans and deposits and revenues in our P&L, NII plus fees, as you can see on the slide. Our progress in the digital front has been significant in the quarter.
When we talk about profitability, second quarter profit was EUR 2.4 billion for the first half of EUR 4.9 billion, 33% higher than the previous year. If we look in the constant euros is 21% higher than the previous year. The costs in a highly inflationary environment remain well below inflation, and our efficiency ratio stood at 45.5% in line to reach our end of the year target of 45%. We improve our profitability ratios, the return on tangible equity stays at 13.7%, and we continue to create significant value per share for our shareholders. EPS grew 38% compared to the previous year, and tangible net asset value per share plus cash dividend per share grew 9% year- on- year.
In regard with the strength, the quality of the balance sheet, NPLs continued to trend down, the cost of risk remaining well inside our expected range, and our capital is slightly above 12%, the Core Equity Tier 1 following a strong net organic generation of 18 basis points in the second quarter. As I have just mentioned, our commercial strategy was reflected in widespread growth. As you can see in the slide, we've been growing in individuals, both in mortgages and consumer and others, in mid- to high single digit. Less so in the corporate space, where we are seeing relatively flat this loan book in SMEs and corporates, while Corporate Investment Bank is growing at 13%.
Overall, loans were up 2% quarter-on-quarter, EUR 21 billion in the quarter, with increases in all countries, mainly from mortgages and consumers, as I said. In summary, I think we have a high quality, well-diversified portfolio by market, and our CFO, José, will explain later on in more detail the portfolio by geographies and by collateral. On the other hand, deposits grew 1% quarter-on-quarter and 5% year-on-year, with a market shift towards time deposits due to the interest, the new interest rate environment. Turning to the income statement, let me first give you a brief overview of the main ideas.
The performance in euros was better than in the currencies due to the depreciation of euros, although we have a negative partially was offset by the hedging included in the corporate center. This is included in gains on financial transactions. In constant euros, talking in constant euros, group grew revenue 4% year-on-year at a faster pace than in Q1 on the back of higher volumes, interest rate hikes starting to feed through in some countries, together with another strong quarter in CIB. Cost management faced inflationary pressures but continued to grow well below inflation. This allow us to achieve record pre-provision profit of EUR 14 billion in the first half of this year. As for loan loss provisions, the releases recorded in the U.K. and U.S. in second quarter 2021 affected the year-on-year comparison.
Finally, we had a positive impact from minority interest, followed by banks in Mexico and the U.S. and lower tax burden mainly in Brazil due to the recovery from tax contingencies and others. This led to a record first half profit of EUR 4.9 billion. In 2022, attributable underlying profit recorded the same amount as we don't have extraordinary charges in this first half of the year. If you look for ideas in Europe, we continue to accelerate our business transformation towards a common operating model. This was reflected in a customer growth year-on-year and increasing nearly by 300,000 in the quarter. Double-digit growth in net operating income and profit. Return on tangible equity improved to 8.8%. In North America, we are refocusing our position in the U.S. while maintaining a disciplined capital allocation. We accelerate growth volumes.
Loans rose 7% in most segments in Mexico and in Auto and CIB in the U.S. We also increased our customer base 3% year-on-year. Lastly, we achieved a profit of EUR 1.6 billion in the region. In South America, we are leaders in the region with a unique presence strengthened by the group assets and delivering profitable growth. Our growth strategy based on increasing customers, 6 million year-on-year, and capturing new business opportunities led to a sharp increase in volumes. Loans growth 12% and deposits 5%. First-half underlying profit over EUR 1.9 billion, 7% year-on-year, and higher return on tangible equity staying above 20%. In the Digital Consumer Bank, we continue to strengthen our leadership position as reflected in new lending. We rose by 10% in a shrinking market.
Profit rose to double digits and Return on Tangible Equity is increased to 12%. If we look at performance metrics, efficiency ratio, I already elaborate on this. We are running at 45.5% now, heading towards our target of 45% for the year end. Return on Tangible Equity, we are slightly ahead of our target for the whole year at 13.7%. This is. We are on track now to meet our 2022 target. In terms of EPS, EUR 0.27 in the quarter, 38% year-on-year, 19%, versus first half of 2021 in underlying earnings per share.
We are showing sustained earnings per share growth, mainly if we take into account that we amortize almost 550 million shares through the buybacks. That is approximately slightly above 3%, 3.2% of our capital. The tangible net asset value per share was EUR 4.24, including cash and dividends. It was in line with the previous quarter and 9% higher year-on-year. When it comes to capital, the organic capital generation was in line with our expectations. Net organic, 18 basis points. If we take into account the payout of 40% half in cash dividend, half in buyback, we are generating, roughly speaking, 10 after taking into consideration the buyback. That is in line with our expectations then per quarter.
This quarter does not show up in the total capital ratio due to the fact that the held-to-collect and sell mark-to-market detracts 13 basis points on our capital, and this offsets the growth in the organic generation. We are meeting our targets here. Risk-weighted assets growth below loan growth. We show that this is one of our targets. Better profitability in the front book and reducing the weight of risk-weighted assets that are producing a return on equity below the cost of equity. We are progressing well on those targets, and this is shown in our profitability. Finally, before I hand to José, I would like to highlight Santander's strong commitments in ESG.
Mainly I want to refer to new targets we published just a couple of weeks ago, on top of the already existing targets in relation with power generation and coal. We published specific targets for energy, aviation and steel, reduce the absolute level of emissions in the region of 30% for the relevant period from 2019 to 2030. Well, you have the figures on, we are progressing in green finance, and we appointed a new head of green finance in order to first to measure properly, to classify properly according to EU Taxonomy our loan book, and to generate a business, and help our customer to a greener economy for all our customers.
Well, as you know, we are very active in the social front, particularly in Latin America, with financial empowered people. You have the figures in the presentation. Overall, I'm proud of the group progress on delivering in our responsible banking commitments to help to tackle global challenges, both in the climate front and in the social front. I will now hand to José to elaborate on the group and business areas review, and finally, I will do some final remarks.
Thank you, José Antonio Álvarez. Good morning, everyone. Just provided a brief overview of the main highlights for the quarter, and I will go into more detail about the P&L of the group and the progress of the country and business areas. In the quarter, we earned EUR 2.4 billion after recording regulatory charges of nearly EUR 500 million, EUR 400 million for the resolution fund and EUR 88 million contribution to the new institutional protection scheme in Poland. In the first half, total income exceeded EUR 25 billion. Both NII and fee income grew at 7% in constant euros and accounted for 97% of total income.
Trading gains and other income decreased 40%, compared to last year, mostly affected by FX hedging, which detracted EUR 300 million, and also from lower lease income, ALCO portfolio sales in 2021, and higher regulatory contributions. In the quarterly performance, we saw similar trends, revenue up 4%, excluding regulatory charges. Let me take a moment to go through the main drivers of NII in more detail. Group NII was up supported by broad-based growth in loans and deposits, coupled with margin management and interest rate hikes in U.K. and Poland. As a result, NII, net interest income and net interest margin increased from 2.38% last year to 2.49% in the first half of this year. You have all the information on the slide, but I would like to highlight the following by country.
We had very strong NII in the U.K. and Poland, as I mentioned, because these are the two countries where we see the impact of higher rates in Europe. We also had robust activity in both countries. Spain and Poland, we decreased NII by 6% and 8% respectively, despite the rise in volumes, due to the continued pressure on yields and lower ALCO portfolios. In the U.S., NII was affected by the Bluestem portfolio disposal and consumer loan pricing competition. Mexico, NII up 9% due to strong loan growth in individuals and corporates. Finally, in Brazil, NII rose 2% backed by volume growth and credit mix, which was particularly offset by negative sensitivity to initial rate hikes.
We expect this negative impact from liability repricing to level out in the fourth quarter of this year and turn positive into next year. Regarding fees, we had very positive performance in all regions, supported by greater activity in high-value-added products and services, as you can see on the right-hand side of the slide. All countries increased fee income with exception of the U.K., which was affected by the transfer of the CIB business to the London branch. It would have been flattish, excluding this impact, and in the U.S., affected by the Bluestem disposal and lower overdraft fees. In terms of costs, we kept our target of growing costs below inflation while improving the efficiency. In Europe, costs were down 7% in real terms, with widespread falls across countries, and the efficiency here improved four percentage points.
In summary, we continue to make structural changes to our operating model to drive new productivity improvements in the future. Turning to risk, the group maintained positive credit quality ratios. The NPL ratio was 3.05%, 21 basis points better than in the previous quarter, and most markets improved. In Spain, it fell 64 basis points due to portfolio sales. Total loan loss reserves stood at EUR 24 billion, and the loan loss coverage at 71%, up 2 percentage points in the quarter. The distribution of the loan portfolio by stages remained stable, and even stage three assets were lower in the quarter. Our cost of credit stood at 83 basis points. This is last twelve months.
If we look at the first six months of the year, the cost of risk was 91 basis points, in line with our target for the year. I would like to drill a little deeper into loan loss provisions and cost of risk performance. By country in Europe, all countries remain below 1% or were negative. In Spain, cost of risk improved due to lower loan loss provisions and better portfolio quality. U.K. and Portugal, slightly positive considering only six months. In Poland, improved BAU provisions, but cost of risk was affected by the contribution to the Swiss franc mortgage portfolio. The U.S. cost of risk below 1%. After the 2021 releases, loan loss provisions are up year-on-year but still well below pre-pandemic levels.
In Mexico, cost of risk improved slightly, I mean, significantly, thanks to a better-than-expected performance of the loan portfolio. In Brazil, the cost of risk increased primarily in unsecured individuals, which represents around 20% of the portfolio. Secured individuals, SMEs and corporates, which represent 80% of the total portfolio, were stable. The coverage ratio over 90 days is well above pre-pandemic levels. We are better positioned than in the previous crisis. As we increase the individual secured portfolio, we have less volatility than the market, and cheque especial decrease its weight compared to previous crisis. In digital consumer, cost of risk improved and continued to show outstanding low levels considering the nature of the business. Finally, I would like to show you a brief overview of our loan portfolio. It's most concentrated in mature markets, around 80%.
In developing markets, Brazil accounts for just 9% of the group total, and 65% of the total portfolio is secured, mostly by real estate collateral. By segment, mortgages with loan-to-values below 80% account for 90% of the total. The consumer lending portfolio is very well collateralized and is a very short-term duration. SMEs and corporates is covered with 50% real guarantees. Lastly, 65% of our corporate portfolio, large corporate portfolio, is rated investment grade, and 42% is rated above A minus, a very good quality portfolio. Let me now make some brief comments about the evolution of our main units in 2022. In Spain, year-on-year results were driven by lower costs, 4%, and reduced cost of risk in an environment of weak revenue performance. Looking forward, we expect trends to continue for the second half.
NII should absorb the impact of TLTRO cancellations, but in 2023, we expect to reflect asset repricing, delivering margin expansion. Fee income should remain robust in the second half. Costs should maintain its downward trend. Trend pointing to achievement of our cost-to-income target and cost of risk is expected to remain around 55-60 basis points for the year. In the U.K., we also maintain very positive dynamics in new lending and strong NII. Looking forward, we expect these trends to continue with NII growing well, although probably at lower rates than until today, flat costs and cost of risk normalization close to around 10 basis points. In the United States, results compared to 2022 results compared to high financials in 2021. Nevertheless, in the first half, profit remained very, very high above $1 billion.
Our outlook for 2022 is lower revenue impacted by lease businesses. Cost is slightly up, partially due to the incorporations or the incorporation of Amherst Pierpont and better than initially anticipated cost of risk well below normalized levels. Santander México had another excellent quarter. For the year as a whole, we expect higher NII and fees, cost up impacted by investments in digitalization and higher inflation, and cost of risk below 2.5%, supporting a credit quality that is better than average. In Brazil, in the first half, when we had a negative impact due to our balance sheet's initial negative sensitivity to higher rates, higher inflation that is putting pressure on costs and a cost of risk that deteriorated in unsecured loans to individuals, we earn a 21.5% return on tangible equity.
We expect to end 2022 maintaining efficiency around 30% and cost of risk below 4%-4.5%, which will result in a return on equity around 20%. All in all, in a difficult year, we expect a strong set of results and profitability, and we are optimistic for 2023, when we expect to see an improvement in revenue. In the Digital Consumer Bank, new business activity increased 10% year-on-year. We gained market share, particularly in used cars. Looking forward to the second half, the environment will continue to be challenging, but we are confident in meeting our goals and expect a record year in new business, exceeding the previous record of EUR 49 billion in 2019.
We expect some normalization from the current low cost of risk rate, but should remain well below previous normalized levels because in this case, cost of risk has to do more with unemployment than with interest rates, and we expect a strong labor market in Europe in general in the coming years. CIB delivered another very strong excellent quarter. In the coming quarters, we expect to continue to gain market share, increasing revenue through excellent dynamics in structured finance and project finance, transaction volumes and markets where we are protecting the value of our trading books. Wealth management and insurance, despite market volatility, results grew 15%. In private banking, we had net new money inflows of EUR 6 billion. In asset management, profits rose 8%. In insurance, gross written premiums grew 17%.
Looking forward, we expect to maintain double-digit growth in profit contribution across the three businesses. In PagoNxt, total revenue in the first half surged 87% year-on-year on the back of our four main business segments, especially merchants and trade. Activity is evolving very well, and we believe we will meet our +50% revenue target for the whole year. Finally, in cards, we managed 96 million cards throughout the group, and revenue grew 28% year-on-year to circa EUR 2 billion, that with double-digit growth in Latin America and Europe. We expect to continue to grow turnover and revenue at high double digits in the coming months. Let me now turn it back to José Antonio for his closing remarks.
Thank you, José. Let me try to guide you to take a look forward, how do we see the group evolving in the coming quarters. On one side, on the revenue side, we have an environment in which NII should increase in the coming quarters, benefiting mainly from interest rate hikes. Normally, the interest rate hikes take a while to show up in the P&L. It starts and accelerates later on. With the expected activity levels, we expect a significant acceleration of the revenues, particularly in 2023. You will see some of this. You are already seeing some of this clearly in Poland and U.K., where the rates start to go up faster.
We will see next year basically a strong acceleration, significant acceleration on the back of higher rates in the Eurozone and also in Mexico and in other countries. Fee income, José mentioned, how our fee income generating business are evolving. You saw both wealth management and insurance and CIB that are the main fee income generators. We are gaining share clearly in CIB space. That is performing very well. We are also doing very well in private banking and insurance, where we think that we can grow in wealth management and insurance well into double digits. For that reason, I am relatively optimistic about the commercial activity, fee income that generates fee income.
Positive in revenues and costs. We face clearly a higher inflation than the one we were expecting. While we have a track record and we continue to think that we're gonna be able to increase the productivity and to evolve clearly the cost well below inflation as we are doing quarter after quarter. Naturally, some of the inflation is gonna go through the cost base, particularly in those countries with high inflation. We feel that the productivity gains and cost management will allow us cost grow well below inflation. In asset quality in this environment, and you know, I may have published some numbers yesterday or the day before yesterday, I don't remember exactly, and there is an erosion of the expectations on the GDP.
Naturally in this environment, the discussion is if there is a recession coming or not. Some of this credit quality duration, as you know, IFRS 9 require us to anticipate potential deterioration. In the first half of the year, we already done in our provisions some of this, around EUR 600 million or something like that for the duration. We see, given our loan portfolio structure, the high household saving rates, the low unemployment rates, and the resilient real estate prices as a protection in our portfolio. For this year, we feel comfortable that we're gonna be inside our range that we gave to you, less than 1%. We are running up 91 basis points, and we feel comfortable with our target for the year.
In capital, our commitment is to stay at or above 12% in every quarter and having disciplined capital allocation and well reflect this in the higher profitability. We are there, and the capital generation of the group, other than the mark to market of held-to-collect and sell, has been good in the quarter. My impression is that continue to be good and we'll continue generating capital on a continuous basis. This will translate into our shareholders, where our commitment is to have a 40% payout for this year, although we hope to increase closer to 50% in the future once that is what we communicate to you in our shareholders meeting.
Well, just to reiterate our commitments for the year, both in terms of efficiency, Return on Tangible Equity, and Core Equity Tier 1, we feel comfortable that we can reach those targets this year. For the future, I think that the revenue increase will more than offset the potential higher costs and potential increase on cost of risk. I'm positive on the capacity of the group to generate profits in the future. That's it. Now we remain at your disposal for the questions you may have.
Thank you, José Antonio. We'll open now the floor for any questions.
If you wish to ask a question, please press star one on your device. We already have our first question from Ignacio Ulargui from BNP Paribas Exane. Please go ahead.
Are you there?
Our next question is coming from Alvaro Serrano from Morgan Stanley. Please go ahead.
Hi. Hi, good morning. Hopefully you can hear me. I've got two questions, one on Brazil and another clarification on your latest comments on capital. On Brazil, I heard José mention that you keep the 4%-4.5% cost of risk. But if I look at Q2 standalone cost of risk, I think is 525 basis points. It looks like to achieve your guidance for the full year in the second half, you'd need to be below 400 basis points.
I just wanna make sure I've understood the guidance correctly, and maybe you can give a color, a bit of color of what's going on, because it's probably a steeper increase than we were expecting, although you had flagged that the peak would be in Q2. Maybe a bit of color of what's going on and if I got those numbers right. The second question on capital. The 50% you mentioned, José Antonio, is that? Can we expect that already in 2023? Or another way to ask it, is there anything we need to take into account that might prevent you from raising it to 50%, i.e., remaining capital headwinds?
I think for 2023, you already said there isn't any left, but I don't know if there's anything in the second half, conscious that Banamex is no longer on the table. I just can't see any reason why you shouldn't increase it to 50. Thank you.
Okay, thanks Alvaro for your questions. On Brazil, well, José already elaborate on this. Let me to go in more details. As José said, we are seeing a increasing cost of risk in the consumer mass market portfolio, as you rightly said, in the second quarter was higher than in the first quarter. Having said that, we remain comfortable with the guidance we gave to you. It's true that if we go, we saw already in June, better results than we saw in the three or four previous month. We remain constructive, and we think that we are in control of this and this to remain in this range. As you know, we reduced the lending last year.
José already mentioned that our exposure to the overdraft, that is the part of the higher cost of risk has been reduced, and we feel comfortable with our expectations for the year. Mainly take into account that Brazil has been one of the few countries in which expectations for GDP growth have been improved by the IMF. The situation in the country is true that we face elections by October. In general, we see the situation from a more constructive point of view, and we think that with the measures we took and with the trends we are seeing, we're gonna stick with this 4.5% cost of risk for the whole year.
We are not seeing any sign of deterioration other than the ones we saw before. We are seeing the corporate book performing very well. We are seeing, including SMEs, and it remains related with the individual consumer portfolio. Inside the consumer, auto portfolio improves already. It's more unsecured consumer that is still causing this spike in the cost of risk. Second question, well, it's true that when we said that we don't have headwinds going forward in our capital. Well, what I am stating here is what we state in the AGM, the intention of the board to go to 50%. When is this gonna happen? Well, it's up to the board.
I am not in a position to anticipate the decision that is gonna be taken by the board. This is the clear intention of the group to go back to these levels and continue to use the buybacks and the combination of buybacks and cash dividend, as we've done in the last year.
If I may give you a bit of color about the regulatory charges in the second half. In the first half, we had 5 basis points in the first quarter. The +3 in the second quarter has two components. It's +7 from the non-performing loan backstop difference and -4 from models. From pure regulatory, we have around 9-10 basis points already accounted for, and we would expect another 10-15 in the second half. Very much in line with the guidance we gave you at the beginning of the year for 20 or 25 basis points total regulatory charges in the year as a whole.
Okay. Thank you for the clarification, José.
Thank you, Alvaro. Can we have the next question, please?
The next question is coming from Ignacio Ulargui. Please go ahead.
Hi. You hear me now?
Yeah. Very well, indeed.
Okay, perfect. Thanks so much. Sorry for the problem before. Just have one follow-up question on Mexico. Just following the outcome of Banamex, what is the strategy that you plan to follow there, and what are the priorities for the bank in terms of organic growth? In which segments you think that you can gain market share? And the other question is on cost of risk at a group level. I mean, you have given a bit of a comfort about Brazil. I mean, is there sort of like any other market where you think that there could be sort of like would you envisage some deterioration that could put at risk that below 100 basis points cost of risk guidance for 2022? Thank you.
Okay. Thank you, Ignacio, for your question. Mexico, what strategy? Well, as you say, rightly said, and we communicate to the market, our strategy is to organic growth. When we look at our franchise in Mexico, we have overall 13%-14% market share, enough scale to compete efficiently in a market. No doubt about this. When you look in more detail, where we're gonna focus, we're gonna focus more on individuals. When you look at the market shares all across, it's true that we, our market share in the corporate space is higher than it is in the individual space, particularly for the reason the organic growth is gonna be focusing growing the customer base, individual, that should fit through the ba...
In the balance sheet through a larger deposit base, individual deposit base, I mean. Through a large share, particularly on the consumer. We are growing in auto. We started three years ago. We got already 14% market share, and we're gonna continue to grow in the consumer space, but also in credit cards, where we launched in September last year, a new card that is selling 100,000 cards a month. We are growing well there, and we expect the growth to accelerate. It's accelerating. If you look at the numbers, at the balance sheet, at the P&L, it's accelerating, and we expect to continue to do this acceleration.
In short, we're gonna focus more on the individual side, where we need to grow the deposit base and also in the consumer finance space and credit cards. In mortgage market, our market share is around 18%, 19%. We are well above our average market. We are doing well there. Those are gonna be the focus. It reminds me a little bit of the situation we faced in Brazil a couple of years ago when Bradesco bought HSBC. On the back of this, we were able to gain two or three percentage point market share in Brazil in a very difficult time in Brazil at that time.
Brazil was in recession at that time, and we were able to profit from this situation, and we are doing already on the back of the process now, and we expect to continue to do in the coming years. Second question, cost of risk, more general question, not that much focus in Brazil as your colleague, Alvaro, I already elaborated on Brazil. You mentioned other markets. The cost of risk is going up in Brazil, for the situation I explained, and it's going up also in the U.S. It's back to normal in the U.S., yeah. In the U.S., in 2021, the cost of risk was abnormally low, well below expected across the cycle, and we are in some kind of normalization. It's going according with our plans in a...
Well, you know that the cost of risk largely depends on the auto market, and the auto market remains in a situation that is not, I don't know how to qualify, not normal in the sense that the availability of new cars is not there, and the used car prices remain at all-time highs, I think. This situation creates a market where the cost of risk is still. Unemployment is very low, well, and inflation helps to pay the bills in the short run. This will keep the, for the time being, the normalization is gonna happen little by little in the U.S. This is the other market in which you go to the numbers, you see the cost of risk going up.
In all the other markets, I don't see any sign of deterioration, quite the opposite. In Spain, we are trending down. We expect to continue to go down this year and next year. While in consumer, we are not seeing any sign across the board. I'm referring now to consumer Europe. In Mexico, we feel very comfortable with the portfolio. In Chile, we also feel very comfortable with the portfolio. I don't see any deterioration in the portfolios. In fact, NPLs are trending down. Remember that, the NPLs now around 3%, taking into account that there is a change in criteria within the definition of default. Like for like, we are compared with last year, this period around 2.80, 2.80 something.
Still trending down, we are not seeing signs of deterioration there. Well, maybe I should elaborate because I mentioned in the previous quarters around ICO loans. Remember that in the previous quarter, we were discussing uncertainty surrounding ICO loans with extension we did last year for one year. Those loans mature, start to pay normal installments in April, May. I should say that it came significantly or much better than expected. Arrears, initial arrears were below 3%. This is a significantly better than at least my expectations, yeah, and the uncertainty why I was showing you this. That's the situation. Our models have high sensitivity. As you know, we provide for based on the models applying IFRS 9 rules.
I mentioned that provisions in the first half, EUR 600 million, were due to macro conditions to pick up in the new macro conditions, for the future. These were mainly in Spain, like EUR 100 million due to macro conditions. In U.K., like EUR 200 and 250 million, and U.S., EUR 100 and 30 million. Those are provisions that are there due to change in the macro conditions, not reflecting any kind of deterioration in the portfolio. I think I expect to clarify a little bit the issue of the cost of risk.
Thank you. Thank you, Nacho. Can we have the next question, please?
The next question is coming from Pamela Zuluaga from Credit Suisse.
Good morning. Thank you for taking my questions. The first one is again around capital. Most of the organic capital that you keep on generating has been offset by fair valuation adjustments from your bond portfolios. Are you thinking about maybe changing your risk allocation strategy, shifting your accounting towards held to maturity for bonds in order to somehow shield capital better? How should we think about this risk moving forward? Because thinking about the pending regulatory impact that you were guiding for, could we therefore expect some further risk to capital if market dynamics continue weighing on valuations? The second question is on Poland. Do you have any estimates on the potential impact from mortgage moratoria in Poland? Because we already have confirmation that four of those months are gonna happen this year and four next year.
Should we continue to expect further provisioning in Poland related to the FX-denominated mortgages? Thank you.
Okay. Thank you, Pamela, for your questions. In capital organic, your question is related with the held-to-collect and sell. Well, what happens with this portfolio, our portfolios are relatively short duration. So the portfolio is in the region of EUR 50 billion. I think the duration, José, probably you can give the duration of the portfolio. We took a charge on our capital of 25 basis points in the first half of the year due to the held-to-collect and sell mark-to-market portfolio. We are not in a hurry to change this reclassification. We know that if we reclassify, you get back 25 basis points.
While at the same time the duration is short, and as long as the rates remain stable, it's feeding through the P&L, yeah, month after month and quarter after quarter, and will get reduced significantly if rates remain as they are today. Naturally, if they go one way or another, well, this affect the P&L. We don't feel that we are not in a hurry, given the size of the portfolio and the duration to do something as you say. Yes. I don't know, José, if you want to comment something on this.
Yeah, just a bit more detail on this. Of the EUR 75 billion ALCO portfolio, EUR 53 billion is held-to-collect and sell, and only EUR 20 billion, EUR 22 billion, EUR 21.5 billion is held-to-collect. We have most of our portfolio in mark-to-market. Of these, as José Antonio said, 75% has a duration of less than two years. For instance, in Poland is one year, in Mexico is 1.7 years. Very, very short time duration, 70% less than two years. The impact of this potential further deterioration with this duration is going to be significantly less going forward than it has been so far.
Okay, the second question is in Poland. If I understood you well, you are asking two questions. One is about mortgage moratoria, and the other one is a FX Swiss franc provision for mortgages. In relation with the first one, has been published recently, and what we've done is assuming 50% take up of all the portfolio is going to be an impact of PLN 1.3 billion, yeah? So that means in euros, I don't know, EUR 200 billion or 200 something. Very likely not. Once we have the estimations, this is gonna be charged in the third quarter in our P&L in Poland. So the figure is slightly below EUR 300 million. For FX, we are now at 32, if I am right, coverage.
Well, do we need to top up? We'll see. The market is around 35%, so we are there. It's not gonna be significant, but maybe we need to top up depending on how the litigations go, how many customers go to courts, and how many customers we negotiate directly with them, a potential compensation here. I don't rule out to go to the 35%, 36%, 37%. In any case, it's 3% of a portfolio of EUR 1.9 billion or something like that. In euros it's like EUR 50 million-EUR 60 million, yeah. I hope I answered your questions.
Thank you, and thank you, Pamela. Can we have the next question, please?
The next question is coming from Sofie Peterzens. It's from JP Morgan.
Yeah. Hi. Here is Sofie from JP Morgan. Thanks for taking my questions. My first one would be on the proposed Spanish banking tax. Do you have any additional comments that you can make what the potential impact on you will be? And will it only be on your Spanish operations or also on your international operations? My second question would be a little bit a follow-up on the ALCO portfolio. Could you just remind us how much ALCO bonds you have in Spain and kind of over time where you expect it to build up that ALCO portfolio level to? How much could you potentially increase the ALCO portfolio by? Then just a follow-up question on Mexico.
Could you just clarify why you walked away from the Banamex transaction? Thank you.
Okay. Spanish banking tax. Unfortunately, I have no idea, yeah, at this moment, at this point of time. I was told that, and the rumor in the media is that this morning, the same morning, we're gonna have a kind of presentation, because this is a presentation in the parliament for the parties for coming from the parties. This is the way they manage this, and we're gonna know this the same morning. If this affect Spanish operations or global operations, I have no idea. I do expect this to affect Spanish operations, but we'll see what happens when this is presented to the parliament today. ALCO in Spain, we don't have ALCO in Spain, 0. We don't have bonds.
You are asking me for the level of potential ALCO portfolio. Well, if I look at the, we have a negative duration of five years in the balance sheet in Spain. If you were to offset all of this, the portfolio will be very, very large, yeah? You can do the math on your own, but it will be very large. What seems to me is a reasonable ALCO portfolio for Spain is to put the duration of the balance sheet between -2 and +2 years, yeah? That is normally where we imagine the portfolio is set in extraordinary times when the rates went into negative territory.
We're gonna reconstruct this portfolio little by little, depending on our view on the market and trying to put the balance sheet with a less negative duration. We haven't started, but we will for sure start at some point when we think is the appropriate time. Banamex, well, as you know, we've been very transparent on this. We were interested in the asset. We put the conditions. One of the conditions was at the price, naturally, at the price. The return on investment was in conditions not to issue shares. So we told you openly. We submit a non-binding offer and, well, we were told that we are not going to continue in the process. That's it. There's no more to add, yeah?
We were disciplined and, as I said before to your colleague, we think that we have put a price asking for a return on investment attractive for our shareholders, knowing that we have a good chance of gaining market share in the new situation and growing organically and adding several percentage points of market share in Mexico with our existing franchise.
Thank you. Thank you, Sofie. Can we have the next question, please?
The next question is coming from Benjie Creelan-Sanford from Jefferies. Please go ahead.
Yes. Good morning, everyone. Thanks for taking the questions. I had two questions on the revenue outlook, please. First of all, just on the Digital Consumer Bank, you know, I guess looking in the quarter, volumes are going up, but margins are going down. Just wondering if you could discuss a little bit about what you're seeing in terms of consumer loan demands across the European business. You know, how are clients reacting to cost of living pressures versus, you know, what are still very good employment trends? In terms of margins in the consumer business, you know, is there a lag effect in terms of asset repricing that is weighing on margins? Or are you seeing increasing pricing competition in that segment?
The second question was just a clarification on Brazil and the NII outlook in the second half of the year. I understood that you expect sort of the rate repricing to sort of level out in 4Q. Should we assume that NII will be down sequentially in 3Q again? Perhaps if you could just be a bit more precise or offer any more guidance around kind of the rebound as the lag effect in the rate repricing runs off into 2023. I know you gave guidance on the rate sensitivity on a year one basis. Can you give any indication of what that rate sensitivity looks like on a year two basis in Brazil? Thank you.
Okay. The first question led me to elaborate on the digital consumer bank, consumer loan demand in Europe. The consumer loan demand is not bad, I should say. It's good. Yeah. The problem with our portfolio here is basically EUR 120 million, of which 85-
Billion.
Sorry, EUR 120 billion, of which 85 or north of 85 is related with auto and the remaining is basically direct lending and point of sale. We are seeing good trends in both business, but lead times in the auto industry are getting very, very long. To give you a proxy of this, normally we have stock finance in that we fund the inventory of the car dealers normally in the region of EUR 13 billion-EUR 15 billion. Now, this is running at half of this. It's EUR 6 billion-EUR 7 billion. This tells you an indication where the industry is in the capacity to deliver the demand they have. On the other side, I mentioned for the U.S., but the same happens in Europe, the activity in used car markets and the price in used car markets is strong.
Our origination this year, we're going to go to the EUR 50 billion mark. This is where our originations are growing 10%, but this is because we are gaining share, okay? It's not the market is not there. Car sales are falling significantly. What happens is we are gaining share all across and for that reason, we are growing 10% originations. The second question, this is the state, this is the situation of the market. The second question was margining and pricing. This business led me to start with the balance sheet of this business. This business is, as I said, close to a EUR 120 billion loan book. The majority of this fixed rate, normally with a duration of around two years.
Funded with a combination of deposits in the region of EUR 40 billion, and the rest is wholesale funding, normally issuance and securitizations and other things. Well, we tend to have relatively very low interest rate risk in this business. What is happening with the margins? Yields are going up, not at the speed of what is happening in the swap yield curve, but this is the usual pattern that this business follow. Normally, it started to go up a couple of months ago, more so in countries in which the rates went up faster before, like U.K. and the other markets are following. I don't see a pattern now differently than the one I was expecting. Yeah.
Normally, this business suffer a little bit, not that much, because the combination of 40% deposits and 60% wholesale funding, the majority of this with two, around two years duration. We can accommodate the majority of this and not to suffer that much on the margin side. The fee income is doing well on the other side, on the back of activity. If the activity recovers, I do not expect a significant margin compression there, although this, we cannot pass 100% in the very first day. We pass over a period of 3-4 months the new prices to the new origination. In Brazil, you mentioned NII outlook, the fourth quarter and rebound in Brazil when the rebound is gonna happen. José gave you some indications of this.
Basically, what happens in Brazil, as long as rates go up. Let me explain the NII in Brazil. NII in Brazil, in the loan book is going up. It went up, has been going up. In the market-related activities collapse and went into negative territory. The rates went from 2% to 12%. When this is gonna turn around? Normally, when you finish the tightening cycle, it takes around two quarters, yeah, to go up. Okay? We think that we are close to the peak, but we will see. We think that is a couple of basis points still to come from the Banco Central do Brasil, probably 75, probably 100, I don't know, in this region. Two quarters afterwards, we gonna show up this in NII.
Yeah, José mentioned 2023 for the rebound, expecting that the central bank rate, the official rate, in Brazil peaks.
In August.
August, September this year. Okay? This is our outlook for Brazil. Having said that, the customer business, so the loan book, the spread of the loan book is going up, but the financial activities went from positive territory to negative territory this year and is the main swing we have there. This is gonna fade away as long as the portfolio mature and renew all these things, yeah. Those are the dynamics in Brazil.
Thank you, José Antonio, and thank you, Benjie, for your question. Can we have the next one, please?
The next question is coming from Ignacio Cerezo from UBS. Please go ahead.
Yeah. Hi, good morning. Thankk you for the presentation. I have two questions on the U.S., both around asset quality. So if you can kind of let us know your view about what do we need to monitor to gauge when and how quickly asset quality can start deteriorating, if it's unemployment, like you were mentioning in the European consumer finance operation, or you're also concerned around collateral prices going down and reversing the pickup we have seen in the last couple of years. The second question around this is, I mean, obviously the units it has been blended into one. I mean, we don't have the disclosure between SCUSA and the rest of the bank any longer, and there has been significant changes on the mix of SCUSA in recent years as well.
It's difficult for us actually to have a kind of a realistic view about the through the cycle cost of risk for that unit. If you can share your with us basically the view you have on where can actually cost of risk in the U.S. land in a normal environment. Thank you.
Okay. The first question about asset quality, what we are looking when this start to deteriorate, natural unemployment rate is one of the key drivers also in the U.S. You mentioned U.S., what is going on. Let me guide you a little bit what's going on in consumer in terms of the dynamics of the business now. We are generating in the loan book with a FICO that is 35 points above what we were generating one year ago. So this is, we are generating this. The pricing model is quite sophisticated and goes along with the FICOs we are generating. So this explain a little bit the trends in yields there.
Second, leasing business now, the dynamics are different from any time we have seen before. Normally, leasing businesses works in a way that the customers take the car and three years later or four years later, they give us back the car and we dispose the car in an auction to the market. This process in normal times is a process that produce very little profits, very little losses, yeah? What has happened in this period is in 2021, this was a very profitable business in 2020 on the back of very high secondhand used car market price. In 2022, what we are seeing is the customers are now returning back the cars to us. They prefer to sell their own, given the high prices prevailing in the used car markets.
This changed the dynamics in the P&L is that the reason that you see that the I think it's in the other income you see a significant decrease in the other income due to this phenomena. Last year, we made out of this EUR 200 million, this year we are making very little or out of this process. Asset quality. We expect we traditionally were around 4% or 4-something percent in SCUSA . In the cost of risk, less than 5%. Now the cost of risk in U.S., the whole U.S. is 1.5%. What the bank is you split between the bank. The bank is very low cost of risk. It's meaningless.
All the cost of risk you are seeing now, the 1.5% comes from SCUSA, okay? This normalization will happen over time, and depends not necessarily based on the past. As we are generating higher FICOs, we also expect lower cost of risk when the unemployment deteriorate. I think unemployment continues to be the main driver, not that much interest rates. Remember that we here, we are lending a very high yield, and the impact of additional 100 basis points or 50 or 200 basis points in the yield is not meaningful when you are lending at 20% or something like that. You go to 21 is not as important as it is in the prime space, where the changes in the rates can produce more significant changes in the monthly installments.
I think I answered your questions, yeah.
Thank you, José Antonio, and thank you, Ignacio, for your questions. Can we have the next question, please?
The next question is coming from Carlos Peixoto from CaixaBank. Please go ahead.
Yes. Hi. Hi, good morning. A couple of questions from my side as well. I was just wondering, the first one is really just a follow-up, because I believe I missed exactly the guidance that you had given for NII in Brazil for the full year. On the second question, I was wondering on the outlook for cost of risk in Spain. I believe that in the past, you had mentioned something in the areas of 50 basis points. Right now, cost of risk is still trending a bit above those levels. I was wondering how you see it for the second half of the year and possibly to 2023. Thank you.
NII in Brazil, you have
In Brazil.
Single digit, mid-single digit growth in Brazil is what you should expect for NII in Brazil for the whole year. While the cost of risk in Spain hasn't changed our expectations, we set 50-60 basis points for the whole year. Probably this is what you should expect for Spain this year. Naturally, this means, as you know, the cost of risk now largely depends on the macro scenarios. I told you that EUR 600 million in the first half came from the macro. The second half, the macro is so uncertain in these days that we will see what kind of macro we introduce at the end of the year.
If the macro remains as it is today, let's take IMF expectations that they published yesterday, day before yesterday, should stay in these levels, yeah? As I said to you before, we do not expect a big deal this year on the ground, coming from the cost of risk, yeah.
Thank you, José Antonio. Thank you, Carlos, for your questions. Can we have the next one, please?
The next question is coming from Andrea Filtri from Mediobanca. Please go ahead.
Thank you. Two questions. One on rate sensitivity. This is the flavor of the moment, but the visibility you're giving is still quite low compared to other names. Can you please give us for each main area your 12-month rate sensitivity, assuming zero deposit beta? If you plugged in the forward curve that we can all see, just to add some transparency on that front. I didn't understand quite well before, José Antonio, your elaboration around the reason not to have any Spanish bonds, ALCO portfolio in Spain, and how big the ALCO should be in a normalized scenario. The second question is on Brazil, again on the rate sensitivity.
You elaborate quite a lot around this, but I wanted to understand in Brazilian reais terms what you would expect then to be the tailwind on a full phasing when the liability
Pricing stops and asset repricing at the current rates level is completed to understand the swing in the pendulum from the negative headwind to the positive tailwind, and hence, how much can this pay in terms of cost of risk. Thank you.
Okay, let me elaborate. José will guide you through the specific details on the numbers you see. Rates sensitivity to rates. We're gonna give you a tease in the presentation, the parallel shift on the yield curve. You asked for areas. High level, I should say that with the forward, normally what happens is this is a process that is accelerating. If I take the whole 2023 with the forward rates, probably in Europe, we think, we should think in all our business in Europe, EUR 2 billion, north of EUR 2 billion, probably. This is a figure that, well, you know, there is plenty of numbers there, but this is a figure that sounds reasonable to me. You asked for the Spanish ALCO.
I may in terms of duration, but having an ALCO between EUR 20 billion-EUR 40 billion is something that sounds to me reasonable. ALCO does not necessarily mean one single sovereign. It means a portfolio of fixed rate assets that we do not generate in commercial terms. In commercial terms, as you know, the majority of our 80% of the mortgage book, the majority of the lending to SMEs and corporates, and 100% of the lending to CIB, or almost 100% of the lending to CIB is floating rate.
On the other way around, is a limited asset that we generate a fixed rate, and for that reason, the need of having a significant ALCO portfolio in Spain that we don't have because our view of our interest rates was that they should go up, and that's the reason why we don't have this portfolio. José, you want to-
Yeah.
Clarify the specific data?
Yeah. The reason we give a parallel shift, well, parallel shift really is from one day to 12 months. The sensitivity we have doesn't go beyond 12 months, obviously. When we talk about a parallel shift, we are talking about a movement between overnight and 12 months. The reason we give a parallel shift is because today, for instance, the market is expecting rates in Europe to stay at 1%, while just a month ago, it was much higher than that. It's much better to look at sensitivity and then for a parallel shift, which is again a movement between a day and 12 months, and then you put your own, you know, outlook of rates.
For a parallel shift of 100 basis points and a 25% beta, the sensitivity in Spain is EUR 750 million. In the U.K. is EUR 300 million, most of which we have already seen, by the way. In the U.K., we would expect further sensitivity in the second half of this year, and then probably some stabilization in 2023. EUR 140 million in the U.S. For the second year, this is relevant for Brazil. In Brazil, in the second year, we would expect a positive sensitivity of around EUR 150 million.
If we are right, and then the last interest rate hike takes place in August, September, and then we start seeing the positive sensitivity flowing through the P&L in Brazil towards the end of this year, beginning of next year, then we should see this sensitivity in the P&L in Brazil, which is around EUR 140 million-EUR 150 million. This sensitivity to a parallel shift is in the presentation. Thank you, Andrea.
Thank you, José and José Antonio. Thank you, Andrea, for your question. Can we have the next one, please?
Just a quick reminder to ask a question, press star one. The next question is coming from Carlos Cobo Catena from Societe Generale. Please go ahead.
Hi. Thank you very much for taking my questions. A couple of questions from me. One is on M&A appetite. Now that you've ruled out Mexico, there's been some reports in the media about you exploring some agreements or expanding the agreements with car makers in Europe. You've always been very interested in your European consumer finance business. Could that be an area where you could do some bolt-on deals? How material, if you could quantify that, they might be in terms of capital consumption, if it's possible to give some view. I understand there's been some pop-ups in the macro provisions overlay. Can you elaborate on in which countries you've allocated that provision? Because obviously, our Spanish peers aren't really popping up that COVID overlay.
It will be interesting to see if you differ from them. That's it. That's my two questions. Thank you very much.
Thank you, Carlos. Well, M&A appetite, well, we are not looking. What you mentioned is agreement with OEMs. Well, we look at this as almost as a BAU. If I look backwards, in the last year, we signed three important deals. The main one was Stellantis. That was a restructuring of the previous deal that will bring to us our portfolio as a result of this will grow in the region of EUR 5 billion with the agreement with Stellantis. We reached another important agreement with Mitsubishi to be the provider in the U.S., and we done another agreement, very important, this one, with Honda in Mexico, to be the provider for Honda in Mexico. Naturally, we have this plenty of discussions in some cases for one country, in some cases for the whole Europe.
Probably we have several of those open, but nothing that I can communicate at this stage because. I see this as a BAU for the division of digital consumer finance. Reaching agreements with the OEMs means, in some cases, that we establish a joint venture with them, in which we match the financial side and they match the commercial side of the joint venture. Having a white label, providing white label to them and provide our services there. We agree in this. I forgot to mention that we also reached an agreement in Greece last year with the main importer in Greece for that has 30% market share.
This is, as I should say, business as usual and is in our projections that we gave for the business as usual in the Digital Consumer Bank space. The provisions overlay, I said before, the EUR 600 million is, roughly speaking, numbers, EUR 100 million in Spain, EUR 260 million in U.K., and EUR 130 million in U.S. So those are the EUR 600 million that you have embedded due to macro in the first half results.
Thank you, José Antonio, and thank you, Carlos, for your question. Can we have the last question, please?
The last question is coming from Britta Schmidt from Autonomous Research. Please go ahead.
Yeah. Hi there. Good morning. I've got two questions please. One is on the rate outlook for Brazil. The consensus expects that there will be rate cuts in 2023, and maybe you can help us work through the dynamics of your NII outlook then. Could we see even wider spreads, let's say, in the second half of 2023, depending of course on the timing? My second question would be on Poland. Do you have any update on the WIBOR issues there? Do you expect this still to become a legal case and drag on? What's the latest from the ground? Thank you.
In the rate outlook for Brazil, we expect the rates to peak rather sooner than later, maybe in August, maybe September this year. When those rates start to go down, more difficult to say. As you know, in the very short run, we, the CFO already elaborate on this. Normally, you should expect a one, two quarters negative or positive, and afterwards, the commercial dynamics prevail. Overall, those are the dynamics and what you should expect from NII. This is the outlook for rates in Brazil, well, still highly uncertain next year. Poland, you're asking me if it's a legal case. It's too early to tell. We naturally, as of today, we're analyzing the situation.
I provide you the impact, assuming a 50% take-up on the mortgage moratoria. This is a significant damage for the system as a whole. While our colleagues, the financial system in Poland will take a view on this, while this is not an individual case, this is a whole financial community in Poland that should take the appropriate view on this, when we finish to analyze the proposal from the government.
If I may add, in terms of the WIBOR, we just know that there is a proposal to change it, but we don't have the details. It will start next year, but there are no details at all with regards to the change in the WIBOR. It will be very difficult.
Very difficult. Yeah.
To change the index. I don't know if you want to elaborate, but it would go against recommendations for index regulation in Europe, so it would be very difficult to change. We have no news.
The proposal is difficult to execute. As José said, this, European regulations prevent to go this way, and that's the situation. We do not expect any news soon, yeah, on this. No. Okay.
Thank you, José and José Antonio. There are no further questions.
Thank you, guys, and take care.
Thank you.
Have good holidays, those who take holidays next couple of weeks. Thank you. Bye.
Thank you, everybody. Bye.