Banco Santander, S.A.

to take us around one hour. And now, José Antonio, the floor is yours.

Okay, good morning to everyone. Thank you for attending this second quarter results presentation. So as you very well know, the quarter has been very challenging. The environment was significantly deteriorated by the pandemic. And in this environment, this difficult environment, the bank had delivered solid operating performance despite the economic environment. So during the second quarter, we were able to continue the performance trend set during the previous quarters in activity and underlying results. In terms of activity, the bank has extended substantial financial support to its customers to help them through the pandemic. Stock continued to grow in our three regions, and our digital adoption has accelerated a lot. We are starting to see signs of normalization in retail new lending, particularly in Europe, with mortgage and consumer new business increasing. SMEs and corporates were supported by the existing government warranty programs. CIB reduced from the peak in April. I will talk more in depth about the different segments of the activity. Strong top-line performance given the current market context with a net operating income increase of 2%, driven by resilient customer revenue and our cost reduction plan, minus 5% year-on-year in real terms. The cost reductions are ahead of plan, driven by successful expense management in the last few years and additional savings measures adopted in the beginning of the crisis. Higher loan loss provisions based on the application of two-hour models, the scenarios we outlined to you in the previous quarter. The total loan loss provisions are $7 billion in the first half of the year, an underlying profit of $1.5 billion in the quarter, $1.9 billion in the first half of 2020. However, as a result of the pandemic, the bank has completed a review of the valuation of the bank goodwill held against past acquisitions and of the tax credits carried forward. We recorded a non-recurring impairment charge of €12.6 billion, resulting in an statutory attributable loss for first half of €10.8 billion. I will explain the details later. Additionally, we have strengthened the balance sheet. We maintain the estimation of the cost of credit we gave to you in the first queue, expecting to reach 1.4%, 1.5% at the end, with very good credit quality supported by mitigation measures that we've been taking. Furthermore, we reinforce our capital position in the quarter, delivering a strong organic capital generation of 28 basis points in the quarter, with Group CD1 reaching $11.84 at the top end of the bank's 11-12% target. After the accrual of six basis points of Core Equity Tier 1 capital in the quarter, to allow the flexibility to pay a cash dividend from 2020 earnings, In addition, the board's intention is to propose to shareholders the payment of a script dividend paying shares in 2019. As soon as possible, depending on the macro and the regulatory requirements, the intention of the board is to go to full cash dividend, to 100% cash dividend, as I said, as soon as possible. Going to the P&L. So we deliver a strong performance. Strange rates has a significant impact, a percentage points in revenues and six percentage points in cost. Resilient customer revenue, even with lower business activity. A strong performance on CIB space that is reflected in other income. We accelerate our cost reduction and higher loan loss provisions due to COVID-19 related provisions. In Q1, these were within the provision overlay, which we included in the net capital gains and provisions, which have now been allocated by country in this line. You have the details in the appendix. As a result, second quarter underlying attributable profit of $1,531 million, driven first half 2020 results of $1.9 billion after absorbing $7 billion of long-lost provision. We have also recorded non-recurring charges, which I am going to explain and break down in the following slide. Every year, usually in the Q4, group evaluates whether the adjustment of the good will generate in the acquisition of the subsidiaries is necessary. In the quarter following the trigger events occurred requiring an earlier review. This is a very special economic situation. The changes in the economic environment has been very high. We expect GDP to contract in all the countries in which we operate and anticipate a two, three year recovery period. At the same time, we have a lower for longer interest rates with significant decreases in many jurisdictions. And we also increased the discount rates to reflect market volatility and high risk premiums when we discounted the future cash flows. So the analysis of value in use guidance and its comparison with the value results in a total will impairment of 10.1 billion euros, of which 4 billion is the result of a one percentage point increase in the discount rate. By country, you can see the figures in the slide. Central and the UK, 6.1 billion, US, 2.3 billion, Poland, 1.2 billion, and consumer finance, 500 million, some in Nordic, some in Germany. Additionally, the economic environment also affects our capacity to use the tax credits carried forward in the short run, especially those that are registered in Spain, the Spanish Consolidated Fiscal Group. As a result, we also recorded a 2.5 billion impairment to deferred tax access. The impairments, as you know, are non-cast items, have no impact on our market position and credit risk position, and are neutral in CET1 capital. Nevertheless... We remain optimistic that the growth potential in the markets in which we operate and this impairment does not reflect in any case the importance of the markets in which we operate and how core are for us. Going for capital, we continue to build capital in the quarter 2021. we generate 28 basis points organic capital in the quarter due to higher net profit, management of risk-weighted assets, and increased securitizations. This, together with the positive regulatory impact driven by the expected European regulation of capital requirements, CRR2 quick fix measures led to a total increase of 52 basis points. On the other On the other hand, there were several non-recurrent impacts in the quarters such as and negative impacts coming from effects mainly and some from pensions. All of this results in a CT1 of 1184 and the management buffer of circa 300 basis points versus 189 basis points pre-COVID-19. Today, we have greater visibility than a few months ago. We do not believe that we're going to destroy capital. Conversely, we think it's more feasible to pay dividends. So we haven't included in this capital position the sale of Puerto Rico, not the sale of Puerto Rico, not the potential impact of the software deduction that may come at the end of the year that will be in the region of 20, north of 20 basis points impact. So going to the activity, let me use the activity in the quarter. First, on the operational side, the bank has operated remarkably well in all the geographic areas. The business continuity was not compromised, and we haven't had any relevant incident. At the same time, we continue to serve our customers with the attention they deserve. Currently, nearly 90% of our branches are open. We strengthened our corporate center's capabilities, and we are over 37,500 ATMs available to the group working as usual. Also, our point-of-sale turnover has recovered near to pre-crisis levels, following 25% turnover growth from the low reached in April. Also, we started to gradually return to our usual workplace in some countries at the end of May, always following the recommendation of the local governments, respecting the individual's needs of each employee. When it goes to the activity, to the financial activity, you have on the screen the new retail, new lending. We are seeing some signs of normalization, particularly intense in Europe, also in the U.S., less intense in Latin America. In Europe, as you can see, mortgage lending, new businesses recovering, particularly in UK and Spain. North America and South America are below crisis levels, with South America more affected as some restrictions still apply. In consumer lending, recovering quickly in all European countries, with Nordics above recovery activity and Germany near 100% and Spain and Italy over 70%. We had strong origination volumes in the U.S., particularly in prime, boosted by FSA campaign. In South America, volumes still below pre-COVID despite having spike in April. When we go to the corporate and CIV lending, let me to remember that this has been a quarter in which we've been using the great facilities through the government warranty programs. Over 630,000 operations have been formalized, amounting for more than 25 billion, mainly in Spain, also in UK, and some in the US. In lending to SMEs and corporates in Europe, growth was driven mainly by Spain, in large part due to high loans, and also in the UK, bounce back loans and civils. North America, volumes returning to pre-COVID levels. South America is still an earlier phase of the crisis and continues to have mixed performance across countries. Brazil declining month on month, while Chile and Argentina having some growth. In CIB, credit growth of 16 billion since February, such in drop-downs across countries in March and first weeks of April, thought normalizing in the later half of the quarter. Much of this liquidity has been placed directly in deposits that grew 24 billion in the quarter. So if we go for geographic areas, you see the activity. In June, group new lending was similar to pre-COVID levels. In the second quarter, stock continued to grow in our three regions, resulting in a 6% year-on-year increase in loans and 7% growth in customer funds. The stock, you have the stock there, basically retail loans remain fairly stable while corporate and wholesale balance increase across the board. Finally, as a result of the health crisis, digital adoption has accelerated a lot. Our digital products and services are becoming more important than ever. We have increased 6 million mobile customers since 2019, growing 22%, and we reached 40 million digital customers. In first half 2020, we grew 50% more than in first half of 2019. Our digital sales penetration increased 47% in Q2. versus 36% in 2019. Of note, the US and the UK with an exceptional 92% of digital sales of the total in Q2, 76% in the first half of 2020. As a result, we have again achieved record quarterly figures in the number of digital accesses and transactions. Going to the group earnings, let me just start with revenue. I will qualify the revenue as I did at the beginning, very resilient with significant growth in the Americas. North America is still growing and Europe some decrease mainly due to the free income line as a result of lower activity. Well, overall, as I said at the beginning, very resilient revenue as a result of our business model that is characterized by a strong relationship with our customers. You go to the different parts of the revenue lines, the different revenue lines, NII was 16.2 billion basically flat compared with the previous year so although internally we have significant changes better higher volumes the impact of the lower interval rates some regulatory path particularly in brazil with the overdrafts and the higher the very high liquidity buffer the highest ever that has an implications in the cost but overall flat in constant currencies. Going to the fee income, we have like three walls here. The retail banking that suffer naturally the lack of activity in the quarter, the lower volumes of transactions mainly in Europe, and regulatory changes in several units. The Americas remain broadly stable. From the business point of view, of note is wealth management and insurance, CIV, increased fees and represent 47% of the group fees. This quarter, we can perceive a gradual recovery in net fee income associated with normalization of the activity. In retail, point-of-sale and car turnover increased 25% and 28% between April and June, after a sharp plunge of 24% year-on-year on April. In wealth management and insurance, volumes show positive year-on-year growth, In Santander asset management, driven by market movements and positive net sales in May and June. In insurance, new production started to recover pre-crisis levels in the second quarter. mainly in Latin America. In CIB, the evolution has been very good, 20% up the fee income driven by global transaction banking, global debt financing, and the global markets. Our strategy remains focused on increasing loyalty and growing higher value-added products and services, and we are more optimistic for the coming quarters. Costs, as I mentioned at the beginning, 5% lower in real terms, reflecting our successful management in this space. We are accelerating the cost reduction trends in most markets, notably in Spain, minus 10%, UK, minus 6%, and US, minus 4%. This allows us to be ahead of schedule in our cost reduction plan, and we capture incremental cost efficiency. We have already achieved efficiencies in Europe over 300 million year to date. We represent 75% of the initial full year 2020 target. The fishing ratio remained broadly in line with the previous year at 47%, what is remarkable in this environment. And we believe that the management that we plan to do by region and the lessons learned from the management of the pandemic will enable us to accelerate our transformation plan in the future and consequently further optimize costs while improving customer experience. We are optimistic about about the cost evolution in the coming quarters. So going to credit quality, we recorded our loan loss provisions, as I mentioned before, of $7 billion, $3.9 billion first quarter, $3.1 billion second quarter. As a result, we still expect the cost of risk of the group to be in the region of 1.4, 1.5, as we already mentioned. So the traditional measures of credit quality at this stage do not apply that much. NPL remains fairly flat. So all these provisions are based on the models plus applying the scenarios to the model, as you know. Having said that, let me give you some colors about what's going on in our long book. As we mentioned in the previous quarter, the amount of customers affected that got a payment holiday has been significant. More than 5 million customers got some kind of moratoria for a total amount of $116 billion. Close to 80% of this amount is granted to individuals, of which around 90% is secure lending. The vast majority is mortgage-related and it represents 60% and is mostly concentrated in our highly collateralized UK portfolio. Moreover, as 100% are legislative moratoria, A large majority of the customers in the UK have requested the payment holiday as a way to benefit from favourable financial conditions. Indeed, circa 90% of these customers do not have any arrears on record. Consumer accounts for 20% of the moratoria, of which two-thirds is auto loans. Such a moratoria is short-term, typically two, three months, and is starting to expire, and I will provide you some data immediately. Just 6% of the SME and corporate portfolio is under moratoria. and is complemented with new liquidity facilities backed by government guarantees by more than 20 billion, as I mentioned before. In summary, according to our internal risk analysis, 75% of the portfolio subject to moratoria is defined as a low risk, although still as early given the uncertainty levels to draw final conditions. Let me share with you what's going on with this portfolio as long as the current moratoria has expired. As you can observe, close to 90% of the moratoria will mature in 2020. of which 25% had already expired as of 30 of June, and 50% more will do so in the next three months. Although it's still too early to draw any conclusions on expired volumes, we can see that the current expirations are behaving with no material deviation from their normal behavior. Of the total expired at 30 of June, circa 29 billion, 98% remains performing. More than 60% are residential mortgages, mainly concentrated in the UK, 18 billion euros. 30% is consumer, of which 90%, 8 billion euros, is shot up mainly in Escusa. Concerning SMEs and corporates, as of June, despite loans are concentrated mainly in Brazil. We are reinforcing local recovery schemes. This moratoria and the early performance of SPIRE payment holidays were taken into account when calculated the estimated cost of credit at the end of 140, 150 BSC funds. As of 15 of July, more than 40 billion of these loans had SPIRE, maintaining similar credit quality, and only 2% of the total had entered into stage 3. So let me to handle now to Jose that is going to elaborate to different business areas, regions and business areas in the quarter.

Thank you, Jose Antonio, and good morning, everyone. As previously mentioned, Group net operating income was again supported by the bank's geographic and business diversification. North and South America grew their operating income, while the performance of Europe was impacted by the economic environment, showing the different stages in the evolution of the pandemic. We had an outstanding performance in our global businesses, both in net operating income and profit, enhancing our local scale with global reach. As mentioned, our corporate and investment bank grew profits by 23%, achieving double-digit growth in all of its main businesses, but particularly in global markets and global debt financing. Also, wealth management and insurance expanded its profits based on sound revenue and flat costs. Now, moving on to the countries, let's start with Spain. In a period heavily impacted by the state of alarm, we led among Spanish banks the response to the economic crisis. It is worth mentioning the implementation of Plan Ayuda, help plan or aid plan to protect our most vulnerable customers with more than 170,000 joining the mortgage consumer and card payment holiday measures. From the outset, we've been the most proactive bank in eco-funding, and thanks to process automation, we granted 20 billion euros of eco-loans in over 150,000 operations, which represents a market share of 27%. Customer funds were 2% lower year-on-year, impacted by the fall in time deposits on mutual funds, mainly due to market performance. However, customer deposits grew 6% in the quarter. Underlying attributable profit amounted to 251 million in the quarter, 64% down year-on-year, obviously driven by higher provisions. In addition, total income decreased due to lower net interest income, basically lower rates, and a smaller ALCO explained the majority of this drop. and also lower net fee income due to reduced transaction volumes. These impacts were partially offset by double-digit cost reduction as a result of the optimization processes carried out. Looking forward, we would expect to see improved trend in net interest income boosted by higher volumes, as it was the case quarter on quarter, and also we will see further cost reduction. Santander consumer finance, we are starting to see strong signs of recovery in most of the markets where it operates. New car sales in Europe dropped almost 40% in the first half, while new lending in Santander consumer finance fell by less than half due to the strong performance in January and February. The largest falls in the business were in Southern Europe, while Northern Europe, less affected by the lockdown, held up better. As the CEO already explained, new businesses have bounced back considerably in recent weeks, approaching pre-crisis levels in many markets, or even exceeding, as it is the case in the Nordics. Net interest income increased 3%, driven by strong long-growth year-on-year, particularly in Northern Europe. However, net fee income, which is directly related to the fall in new car sales, decreased 16%. Costs were down 4% year-on-year, 8% quarter-on-quarter, due to the efficiency programs that we had launched already before the COVID. Loan loss provisions increased to historically high levels, but the cost of credit, the cost of risk, remains at a low level for this type of business. As a result, underlying profits fell 26%, although it rebounded 19% in the quarter. In the UK, volumes continue to grow healthily. Loans rose 4% year-on-year. Underlying attributable profit continued to be impacted by revenue pressures, net interest income affected by the base rate reduction and the SVR, and net fee income affected by lower transactionality and regulatory changes to overdrafts. There was also an expected significant impact on loan loss provisions. We have reason to expect, however, an improvement for the rest of the year. We have reduced the rates on the 1 to 3 world accounts in May, and we have announced a further reduction in August. Additionally, funding from the Bank of England's term funding scheme has significantly reduced funding costs. Both of these will support net interest income over the rest of the year. Moreover, our transformation program is driving the 5% year-on-year drop in costs, 6% in real times. Our credit quality remains strong. Related to payment holidays that have been granted, as previously mentioned, the majority are mortgages with very high-quality borrowers who have requested a holiday due to its favorable financial conditions. Looking forward, We believe that we have weathered the worst of the crisis and expect an upward trend in the coming quarters. The UK remains a core strategic market for the group. Brazil has again proved its balance sheet strength and successful business model, which enabled us to maintain high returns for our shareholders. Return on tangible equity was 17%. Additionally, we continue to focus on improving our service quality, and this was reflected in a substantial increase in NPS to record levels. Lending increased 18% year-on-year, with all segments growing. Customer funds also rose, boosted by demand and time deposits. Net operating income rose 5%, backed by positive performance of revenues and efforts to reduce costs. Net interest income increased slightly, driven by larger volumes, with offset margin pressures due to the changing mix, interest rate cuts, and change of the cheque special terms, a regulatory change, while net interest income was impacted by the slowdown in activity. Costs were 1% lower, excluding inflation, with improved efficiency year on year, 67 basis points down. The good net operating income was not reflected in underlying attributable profit, because obviously higher provisions, which also led to an increase in cost of credit, but within our expectations. In short, the bank continues its excellent performance, even in a more difficult environment. During the pandemic, Santander US has remained focused on supporting its customers, employees and communities while pursuing its strategic priorities. In the bank, in SB&A, we continued our digital and branch transformation while enhancing our auto finance partnership with Santander Consumer, focused on prime loans. In Santander Consumer, we had disciplined originations through our dealer network, enhancing our partnership with Fiat Chrysler and SB&A and the bank. Loans were boosted by the Paycheck Protection Program. In Santander Consumer, originations declined in March and April, but have recovered later in the quarter driven by FCA initiative programs. Underlying attributable profit decreased 56% year-on-year due primarily to provisions, which increased almost 50%. Compared to the previous year, underlying attributable profits was 1.5 times, 2.5 times, 150% higher due to lower cost loan loss provisions and reduced minority interest. In summary, we had a solid volume growth in the quarter and in previous quarters with double profits in the last two years, and we have strengthened our capital position as shown in this stress test. This is the result of the continuous improvement in our franchise, and we believe we can continue to grow and add value in a key market for us. In Mexico, the bank continued with its debtor support program, aid on individuals and SMEs. In addition, a significant number of branches operated with reduced staff. Digital channels and contact centers worked normally. Digital activity increased substantially year on year, with a 38% increase in mobile customers, 45% in transactions, and digital sales penetration is now 11 percentage points higher than in the first half of 2019. Loan growth was driven by corporates, CIB, and mortgages. Quarter-on-quarter, obviously, it was impacted by the slowdown in the use of credit lines from corporates and CIB following the strong growth that we had in the month of March. Net operating income increased 11% year-on-year, supported by positive revenue performance and improved efficiency. Costs show a better trend than in previous quarters, and the efficiency ratio improved by more than 2 percentage points. Underlying attributable profit rose 4% year-on-year, which benefited from reduced non-controlling interests. In short, very positive trends reflecting the improvement of our franchise in recent years. And finally, in the corporate center, the first thing I wanted to say is that it continues to play a critical role in supporting the group, through the special situation committees. Also starting in May, the progressive reincorporation of employees to the workplace began with a mixture of on-site and remote working, always following government and health authority recommendations, maintaining a high level of flexibility to meet individual needs. With regards to results, underlying attributable loss is flat compared to 2019. mainly due to the combination of, on the one hand, the positive impact of the foreign currency hedging, which is reflected in financial transactions of $250 million, and a 4% reduction in costs. On the other hand, net interest income was negatively affected by larger liquidity buffer, while the revaluation of some small stakes is reflected in provisions. And now I will hand it back to José Antonio for his concluding remarks. Thank you.