Banco Santander, S.A.

Good morning, everyone. Thanks for joining to this Santander nine-month 2021 earnings presentation. As every quarter, our group CEO, Mr. Antonio Alvarez, will address the highlights on the group performance. Then the group CFO, José García Cantera, in detail, will comment on the different business areas, trends, before the CEO jumps into the key takeaways. And obviously, we'll have plenty of time to answer your questions. José Antonio, please.

Okay, thank you, Sergio. Good morning to everyone. Thank you for joining us in this third quarter result presentation. I think the results show the business momentum we are having with another solid set of results in the Q3. The operating income pre-provision profit is growing 11% year-on-year in constant euros. Revenue was up 8% driven by the risk in volumes, loans, deposits, mutual funds. And this comes along with a growth in the, it cannot be the other way, increasing customers and greater digitalization that led to strong broad-based revenue generation, efficiency improvement, and higher profitability. Specifically going to the numbers, Q3 21 profit was around 2.2 billion euros, plus 2% quarter-on-quarter in constant euros, plus 5% in current euros on the back of some The Euro average depreciation against the currency year-on-year is different, but in the quarter, the Euro depreciate a bit against the basket of our currencies. Nine months, 21 group attributable profit, 5.9 billion euros. Excluding Q1 extraordinary items, nine months, 21 underlying profit, 6.4 billion euros. The numbers speak for themselves. We maintain our cost discipline and solid credit quality. the later reflected in a cost of credit below 1%. Regarding capital, strong capital generation in the quarter, plus 48 basis points in Q3, enable us to reach a fully loaded core equity tier 1 ratio of 1185% at the top end of our 11-12% target range. We continue to deliver an outstanding growth in profitability, return on tangible equity stood at 12.6%, in-app tangible net asset performance value grew in the quarter and including the dividend per share rose 6.5% year-on-year. The Board, as you know, has approved a new remuneration policy for 2021 with a 50 payout set at 40% underlying profit, 50% cash, 50% buyback problems. Interim distribution approximately in the region of 1.7 billion euros. So in short, we are well on track to outperform the full year 21 goals that we established at the beginning of the year and to reach our median term underlying return on tangible equity target in the region of 13 to 15%. Moving to customers. Well, great success on digitalization has been a key driver of the revenue and net operating income growth. We recorded an steady increase in total customers, and in turn, our customers are increasingly using our products and services through contact centers, digital channels, and the branches. As a result, digital customers rose by more than 5 million year-on-year. Digital transactions were up 39% year-on-year and grew across all the countries between 20% and 50%. Digital sales as a percentage of total sales stood at 54% in IMAO 2021, plus 10 full percentage points year-on-year, with growth in all products across the board, mainly in the ones related with individuals, mortgages, consumer deposits, investments. If we look at the last quarter, digital sales reached 57% of the total. Also, and this is important, we are top three by NPS in seven markets in which we are operating. Going to move into the group's income statement, exchange rates had a small positive impact in the quarter, as I mentioned before, but year on year, still negative impact, minus 5% percentage points in revenue and minus 3% percentage points in cost. Looking at the results in constant year revenue group, particular customer-related revenue, We demonstrate, of course, discipline and an environment of recent inflation. Certainly, inflation is rising, particularly not only in Argentina, as has been the case in the last couple of years. Also in Brazil and Mexico and Chile, we have significant inflation. Now in Europe. Additionally, we had a significant reduction in loan loss provisions, although they reflected in the quarter some increase, mainly in the U.S., We delivered a nine-month 21 underlying profit of 6.4 billion euros plus 87% year-on-year. No extraordinary items in the third quarter. Recall that we recorded 530 million restructuring costs in Q1. I will give you a brief overview of the performance of the regional and global business. Our CFO, José García Cantera, will elaborate further. Very positive performance across all of them. Once again, the U.S., Brazil, and CAV performance stands out. The global business performing very well, wealth management, insurance, and Pagonex delivering according or better than our expectations, our guidance that we gave to you, underscore as usual by our geographical and business diversification. Each of our three regions contributed roughly 30% to the group profit, Europe 29%, North America 29%, South America 30%, and Digital Consumer Bank the 12%. If we analyze the quarterly trends in core lines, sustained revenue growth, NII up 1%, positive performance in trading gains in Q3, and the quarter-on-quarter comparison was favored by the single resolution fund contribution in Q2. On the other hand, net income remained stable, impacted by decisionality in Europe and strong figures in CIB, in the corporate investment banking business, across the board. I will run you through this in more detail in the following slides. Cost control in the context of higher inflation and increased expenses related with greater activity, higher loan loss provisions mainly in the U.S., and to a lesser extent in the U.K., as both had some provision releases in Q2. As you already know, in the U.S., LLPs tend to have some sectionality in the second half of the year. NII was 7% higher compared with nine months in 2020 and 1% quarter-on-quarter. On the back of higher volumes, loans grew $8 billion in the quarter. Deposits grew $15 billion. Regarding margin management versus previous years, we saw a general repricing of liabilities, Europe, North America, and Chile, and improving loan spreads in UK, Poland, and the U.S. In addition, there was a positive impact year-on-year of the TLT role that you know very well. Naturally, no impact on quarter-on-quarter. Finally, average interest rates remained lower than in nine months 2020. despite increases in Latin America, Brazil, Mexico, and Chile, where the rates went up, and recently in Poland. These increases will positively impact NII in the coming quarters. When we go to the fee income, we continue with the recovery from the lows in the second quarter in 2020. The entire range of products show higher activity levels year on year, with some seasonality in the quarter 2020. mainly in Europe. You have the figures in the slide. All the activities show a greater activity. Payment volumes grew significantly. Cars are growing. Cars turnover are growing in a significant speed. In consuming activity, trends continue to improve with strong signs of recovery year on year. In Q3, mainly the motor finance business has been affected by new vehicle sales that are affected, as you know, by the shortages in the supply chain of the OEMs. And while we have a strong activity, the strongest, probably the strongest activity we have seen so far in the used vehicles space. In addition, CAB and wealth management and insurance generate a sharp increase in fee income, representing about 50% of the group's total fee income. Wealth management insurance grew 11%, underpinned by the significant increase in assets under management and insurance return premiums. CAB fees grew 19%, on the back of pay good activity in DCM, ECM, and MIA. In short, free income recovery pre-pandemic levels across our footprint set for the UK due to regulatory changes regarding overdraft since April 2020. In the cost side, we continue to see, and this is new, significant increases in inflation in all countries, particularly in Latin America. In this context, group costs rose 3.7%. In real terms, excluding inflation, costs were 1% lower after absorbing higher inflation. IT expenses, digital developments, increased activity, and labor agreements. Our efficiency ratio improved more than 120 basis points year on year to 45.6%. That is a very good number in the industry. Mainly driven by Europe, we recorded the highest efficiency gains. In Europe, costs were 1.5% lower. making headway in our cost reduction plan, which we expected to accelerate in the coming quarters, increasing synergies. Of note, Spain, with a 7% decrease in efficiency in the region, as I mentioned before, stood at 50%, having improved 7 percentage points year on year. In North America, costs increased 8%, mainly driven by technology expenses, digitalization, amortizations, and a US $50 million increase. a dollar donation to our community foundation in the U.S. that was recorded in the quarter. Of note was the performance in Mexico, minus 2% in real terms. Efficiency in the region stood at 44%. In South America, the increase in costs plus 9% was greatly distorted by the very high inflation in Argentina. In real terms, costs declined 3% in the region. Brazil, minus 6%. Chile, minus 1%. And Argentina was flat in real terms. Deficiency in the region stood at 35% with continued improvement. Finally, the consumer bank cost increased due to changes in perimeters. This is the leasing company that we bought in Germany, 6 Leasing, and the joint venture in Italy that we launched this year. Finally, loan loss provisions. Well, we have a cost of credit in the last 12 months of 90 basis points. In the same period of 2020, it was 1.27. Taking into account the first nine months of the year, only the cost of risk was 0.83, 83 basis points, performing better than expected due to lower provisions in most markets mainly in the U.S. digital consumer band, Brazil and Chile, together with the net releases in the U.K. The NPR ratio was virtually flat year-on-year and slightly lower quarter-on-quarter. Total loan loss reserves stood at 24.5 billion with a coverage ratio of 74%. In addition, I would like to remind you that the majority of the overlay that we recorded last year is on the balance sheet. We expect to make some releases in Q4 and Q4 on the back of new macro scenario, which will enable the cost of risk to reach around 80 basis points by year end. This is our best estimation, if nothing changed, in our view of the macro scenario. Finally, on capital, I would like to highlight the strong organic generation in the quarter, 48 basis points. The figure is mainly supported by our net profit. risk-weighted asset matchment through securitization mainly, and neutral impact from dividend accrual on the back of the new dividend policy that you already know. Additionally, we recorded 16 basis points related to regulatory and model-related capital impact, and another 17 basis points mainly market performance. All in all, The core equity tier one ratio increased by 15 basis points to 1185 on a fully loaded basis, very close to the maximum level of our range, 11 to 12%. The phase-in you have in the slide, 1226%. Additionally, I would like to comment on the solid results achieved by the group in the EVA stress test. In accordance with our expectations, we outperformed clearly our peers. That showed that the resilience of our business model in stress scenarios. So when we go to the ratios, you have, in the slide, the return on tangible equity progressing well. EPS is progressing well. Tangible net as the value per share is still progressing clearly. Also noteworthy is the return on risk weighted assets. We reached 1.8% versus 1% 1 year ago. You already know our dividend policy. Once the ECB lifted the recommendation not to pay dividends, well, the board approved a payout at 40% of underlying profit. We are entering distribution for value of 1.7 billion euros, well, half in cash, half in buyback. Today, around 30% of the buyback program was already executed. So this is where we are in this regard in our dividend policy. Finally, going to ESG. So as you know, the bank has strong commitments to ESG. Well, we have stood for a sustainable and inclusive growth of people and business for many years, and we continue working on improving our financial products to support our customers in their transition towards a low-carbon economy. We have set ambition to be net zero by 2050, being a founding member of the Net Zero Banking Alliance, among other guidelines requires the bank to set the carbonization targets for carbon-intensive sectors no later than September 22. In this regard, we have set and disclosed the first specific net zero banking alliance targets for power generation, that is to reduce emissions more than by half in our power generation portfolio by 2030. In this regard, in Q3, we joined the Partnership for Carbon Accounting Financial. It's important to have general standards to harmonize all the numbers that are being published, and we are committed to reaching to have a standard under which we publish all the numbers related with this. As regard to the green finance, well, as you know, we are market leader in renewable energy. We mobilized in nine months 17 billion, 51 billion since 2019. As you know, we are leader in financial renewals. In our core geographies, we continue to lead the renewals project finance league tables year-to-date, by number of deals by Bloomberg, and I'm top three by volume in the logic. We have issue on our own one billion grid bonds, three billion total to date, as part of our sustainable debt plan. On the social side, as having a strong presence and being the market leader in Latin America, naturally our Our main goal, this is to financial empowerment strategy in the program that we call Santander Finance for All. It helps people access to the financial system, set up and grow micro-business, and also offers financial education. Our micro-finance initiatives have already been launched in Brazil, Mexico, Uruguay, Colombia, and it was launched in Peru in Q3. We have reached 6.2 million people financial and power people since 2018, of which 1.3 million are microentrepreneurs, and we are making progress in the share of women in senior leadership positions. When it comes to governments, well, you know the board, the composition of the board, diversity in the board in terms of independence, and also gender and diversity in all the dimensions. We also include ESG metrics in our executive bonus score. In addition, our work in our corporate cultures and underway were reflected in the results of the year global engagement survey, where the level of employee commitment reached 80% considerably higher than the sector average rates. Finally, I would like to point out that our different ESG initiatives have got significant external recognition along the years. And now I'll hand over to José to elaborate over the different business units and regions.

Thank you, José Antonio, and good morning, everyone. Like always, I will start with a brief summary of the regions, and then I will move into the main countries in the following slides. In Europe, we continue to grow our business while we advance in a common and more efficient operating model. We had volume growth year-on-year and quarter-on-quarter in almost all markets. and we expect these trends to continue in the coming quarters. This led to revenues growing strongly at 12% year-on-year, and as Jose Antonio mentioned, outstanding cost management with a strong efficiency improvement, and we also had low cost of risk at 48 basis points. This, in turn, led to net operating income growth of 30% and doubling of profits. In North America, we had accelerated volumes, although U.S. figures, as I will explain later, are affected by the disposals in the year-on-year comparison. We had a strong profit growth year-on-year, boosted by cost of credit improvement, mainly in the U.S., and revenue increase, excluding disposals, revenue, total income was up 7%. Return on tangible equity in North America was 13%. In South America, we continue to strengthen our regional ties, reflected in solid double-digit customer and volume growth. Profit was up 31% and return on intangible equity stood at 20%. In the digital consumer bank, we saw strong profit growth in the third quarter, leading to double-digit growth year-on-year as well. Now let me go into the main countries now. In Spain, the stock of loans was flat in the quarter as mortgages offset the decrease in companies. Mortgages recorded the highest new business volumes in the last three years. Results in the third quarter were boosted by strong net operating performance. Revenue rose 11% in the quarter, while costs dropped 4%. Regarded provisions, we remain cautious in Spain, but we expect the cost of risk in 2022 to be approximately half of that of 2021. Year-on-year revenue grew 4%, mainly driven by net fee income, especially in transactional and insurance products. Our cost reduction efforts were reflected in a sharp fall, 7%, improving efficiency by 6 percentage points, while loan loss provisions remain stable. This obviously was reflected in the almost 50% growth in profit. We expect balance sheet trends to continue in the coming quarters, which should lead to a stable net interest income, while fee income could expand at mid-single-digit rates. Cost should maintain its downward trend. In the UK, the main trends recorded in previous quarters continued. Net interest margin kept improving based on deposit repricing and volume growth. The mortgage grew 4%. As you can see in the slide, downward training costs accelerated as our transformation program delivered savings, partially offset by IT investments and regulatory-related programs. As a result, the efficiency ratio improved 13 percentage points in the first nine months of the year. We recorded another quarter of zero loan loss provisions. Return on tangible equity in the first nine months was 11.5%. Like in Spain, we expect balance sheet trends to continue in the coming quarters. Assuming no hikes in rates, net interest income should stabilize, while fee income would grow at low single-digit rates. We expect to reach a cost-to-income below 50% next year, while the cost of risk should gradually normalize. Brazil closed another excellent quarter in terms of volumes, profit, and profitability. We maintained a strong growth rate in new mortgage lending and reached a record high in card sales. We gained 1.6 million new customers just in the third quarter. Turning to results, profit was almost 30% higher year-on-year at 1.8 billion euros, and return on tangible equity increased to 22%. We had positive NII performance due to larger volumes as a slight increase in average interest rates, while net fee income also grew in insurance and capital markets especially. We reached record efficiency levels with costs up 1% while inflation was up 10% year on year. Loan loss provisions decreased sharply with a very positive cost of credit performance which fell to 3.6%, 1 percentage point In the coming quarters, the structural double-digit volume growth rates should be maintained, which will continue to push up net interest income and fee income. We expect to be able to keep costs growing below inflation and to maintain cost of risk at similar levels. In the U.S., the work conducted over the last several years allowed us to be uniquely positioned to benefit from current market conditions. In volumes, loan performance was impacted by Bluestem portfolio disposal. Excluding perimeter, growth was 2% year-on-year, with auto originations increasing 16% versus the same period of last year. Customer funds showed strong performance, also growing 13%. Year-on-year performance is affected by Puerto Rico and Blue Stem disposals, so I will comment on the year-on-year results on a like-for-like basis. Net operating income increased 17%, on the back of resilient NII growth of 7%, strong auto leasing results, and fee income. At the same time, provisions decreased sharply, although we are starting to see signs of normalization. Thank you. We are very proud to announce that this quarter Santander U.S. donated $50 million to the Santander Consumer Foundation in order to fund a multi-year program focused on transforming lives of low-income students, young adults, and families across the country. This program will target closing the digital divide and aiding students and families in education programs to boost digital and financial competencies. In addition, in line with group strategy to deploy capital to the most profitable businesses, and to accelerate growth in the U.S. In the third quarter, we announced two transactions that we have already shared with you. The proposal to acquire all outstanding shares in Santander consumer we don't own, which is around 20%, and the agreement to acquire Amherst Pierpont Securities. Both transactions are still subject to regulatory approvals. In the coming quarters, we expect high single-digit growth in loans supported by consumer and CIB. Revenue should continue to grow, driven by double-digit growth in AII, while fees might contract slightly. Cost of income is expected to remain at similar levels. In Mexico, lending started to show signs of recovery in the quarter, as individuals' positive performance partially offset corporate loan normalization. In the third quarter, NII was favored by volume growth and higher interest rates, while fee income performance was impacted by insurance seasonality in the second quarter and lower financial advisory fees. Costs were affected by inflation, IT projects, and new outsourcing legislation. In September, cost of credit stood well below 3%. We expect NII plus fees to grow at high single digits, Next year, while cost should increase below inflation and cost of risk should remain fairly stable. In the digital consumer bank, activity trends generally continue to improve. New lending was 11% higher year on year. However, in the third quarter, the microchip shortage hampered production and consequently the new auto market, particularly in the first part of the quarter. Despite this, in terms of total income, September was the best month of the year to date, driving the strongest quotas since 2019, thanks to recovering fees in Germany and strong consumer lending and flat-use vehicle volumes. These, together with 3% falling costs and the SRF contribution in the second quarter, resulted in a 32% increased quarter-on-quarter in underlying profits. For the coming quarters, we expect strong cyclical growth in consumer finance demand, Cost to income should remain below 40%, and cost of risk should gradually normalize. Turning to the global businesses, in corporate and investment banking, we held leading positions in the rankings of structured finance in Europe and South America, and DCM and ECM in most countries where we operate. We are one of the world leaders in financing and advising on renewable energy. Outstanding three-quarter results shown by revenues, which was up 12% year-on-year, and the efficiency ratio remained a benchmark in the sector at below 38%. Loan loss provisions started to normalize as well. In wealth management, total assets under management increased double digits year-on-year. Commercial flows year-to-date in private banking and Santander asset management reached $14 billion. These flows account for more than 3% of total volume managed. In insurance, gross return premiums rose 5% year-on-year. In summary, total fee income generated, which includes the part accounted for in the commercial networks, grew 11%, and total contribution to the group profit increased 16% year-on-year. Now turning to PagoNext, in nine months, revenue increased 41% year-on-year, boosted by the strong jumping fees, 45% at constant exchange rates. We are clearly on track to achieve our expected second-half revenue growth of close to 50% versus the first half and to reach €1 billion of revenue in the medium term. Now, talking about the three components of PagoNext, starting with merchant solutions, GetNet continued to deliver significant growth, The number of active merchants and total payments volume grew across all geographies. GetNet Brazil continued to increase market share in the country, reaching 16% in total and over 30% in e-commerce. We are developing an integrated offer for European customers with GetNet Europe and the integration of Wirecard's technology assets and talent acquired last January. All in all, we reach a total of 1.2 million active merchants and a total payment volume of 81 billion in the nine months, up 53% year-on-year. In trade, our initiatives to support our clients in international trend to expand beyond their domestic markets continue to evolve favorably. One trade already connects our customers in eight countries, reaching 7,300 active customers from 4,100 in March 2021, an 80% increase in the last six months. Avery already has over 15,000 corporates as customers, growing over 500 new companies per month, revenues growing at over 20% versus the first quarter. Finally, in consumer solutions, Superdigital began to operate in Argentina in the third quarter. Looking forward, we expect revenue in Pagonex to continue to grow strongly in line with 2021, which puts us on track to achieve the €1 billion revenue target in the medium term. Lastly, we expect to reach more than 2 million active merchants in the medium term. And to finalize, let me now go over the corporate center. Underlying attributable loss of €1.6 billion in the first nine months, is higher than last year due to lower gains on financial transactions. Remember that we had positive foreign currency hedging results in 2020. On the other hand, we have no material differences in NII and cost, and significantly lower provisions due to charges in the first nine months of last year for certain holdings whose valuation was affected by the crisis. And now let me turn it back to the CEO for his final remarks.

Thank you, Jose. Once again, I think we are presenting to you solid results in the third quarter, consistent across geographies and business, and supported by the right metrics, volume, growth, the translating to higher revenue, efficiency improvement, credit quality is solid, better credit quality. We continue to build. and finally our return on tangible equity is now clearly higher than our cost of equity. As a result of this strength and following the lifting of the decision of the ECB recommendation, we resume our dividend policy. And we continue to focus on improving our profitability while helping our customers and the society in general. We aim to grow our customer base I should say, keep growing our customer base, strengthen the loyalty by improving their satisfaction, help them in digitalization, support them in financing and growing their businesses in a sustainable way with a positive impact for the whole society. In short, we are seeing a business normalization and our strength underpin our great confidence in our profitable growth ahead. For that reason, we are confident to continue to show progress towards our medium-term target return on tangible equity, 13%, as I said at the beginning of this presentation. Thank you very much for your attention, and now we will be open to the call for questions that you may have.

Indeed. Thanks, José Antonio. So now we can proceed with the Q&A session. First question.

Thank you. The first one is coming from the line of Alvaro. from Morgan Stanley. Please proceed, sir.

Good morning. Thanks for taking my questions. My first question is on capital, and maybe if you can provide some guidance. And thanks, Jose. You've provided already quite a detailed guidance on the P&L. But on capital, as we think about 2022 as well, Can you maybe give us some guidance of what remaining headwinds? Are we past the bulk of the headwinds now for several years, or is there anything remaining? And any thoughts on Basel IV, if that's an additional impact or not? And then I had another question on costs. You've given the $1 billion sort of guidance. Costs in the group were slightly higher in the quarter. I wonder if you can give us your thoughts on big plans, particularly in the U.K., and why is it proving so difficult to cut costs in the U.K.? It feels like it's been years now since we've been discussing the cost plans in the U.K. not delivering. What's proving so difficult, and do you think you can get to that billion target? Thank you.

Okay, I will address the cost issue and I pass to the CFO the capital question that he can elaborate in more detail. On the cost issue and particularly you're referring specifically to the cost cutting in Europe, we commit one billion nominal reduction in cost in the four core business, Spain, UK, Portugal and Poland. We are progressing well in Spain and Portugal. In UK we are a bit behind. But I do think that we are at the running rate. This year we're going to be at a running rate of 600 million nominal cost reduction. And for next year, well, I remain confident that we can reach the 1 billion cost cutting. The lack in the U.K. is mainly due to some compliance investments that we are making. And this forced us to make these investments, but we remain committed to deliver the $1 billion that we told you by 2022.

Well, with regards to capital, so this year we don't expect any more regulatory charges. For next year, we have a small impact from minorities, and we will have some impact from updating the models. But this should be significantly smaller than the impacts we had in 2021. So we would expect to be at the upper end of the range throughout the year. And Basel III, well, we need to see the final legislation. We've seen a draft that was leaked a few days ago with ILM equal to one. If this is confirmed and the treatment of equity stakes and some other smaller changes, the impact on Santander is going to be very small. As you know, we will not be affected by the output floor. So with ILM equal to one and some other adjustments, I think the impact will be really small.

Thank you. Next question, please.

Thank you. The next question is coming from the line of Fernando Gildas Santivani from Barclays. Please go ahead.

Hi. Good morning. Thank you for taking my questions. So the first question comes on Spain and AI and how do you see trends, pricing, and volumes going forward? This would be one. The other would be to touch a little bit on the U.S. and how do you see the franchise long-term without the agreement with fiat developing? Thank you very much.

Okay. In Spain, well, let's talk where the market is right now. We see significant activity, good activity in the mortgage individual space, mortgage and consumer lending, good activity in this front. not that good in the corporate sector where the demand for credit is relatively low. So the NII has been affected largely, as you know very well, by the level of Euribor. Assuming that the Euribor remains where it is, we think a NII that is going to be in line with what we had in – what we are showing today. So assuming that the arrival remains there. Naturally, we are – the interest rates are – the balance sheet with the algo positions being very small, non-existent is the positions towards higher rates. On the U.S., you asked specifically about the franchises who signed the franchise with the agreement of Chrysler. Well, Chrysler, the agreement expires in 2023, but this doesn't mean that we do not continue to do business with Chrysler. As you know, Chrysler bought their own finance company, but it's going to take for a while before they got they are able to underwrite the whole business, particularly in the subprime and near-prime space where we are a real specialist and we expect to keep significant part of the business. On top of that, we are diversifying out of Chrysler. Naturally, we have now like three different providers. One is what we call internally core business, that is the additional subprime that we generate in our own, that is... the bulk of the business, and the other is crisis learning, which we have the prime, the near prime, and the subprime, and that comes from crisis. The prime, normally we dispose 100% of them, or the majority of them, and we keep normally the near prime and subprime where we are specialists. Going forward, I do expect some impact from this, but not being very significant and not change the dynamic of the franchise, mainly taking into account that we are, and for sure we are going to get agreements with other originators, being digital originators, as we are working already with them, or being traditional originators or other OEMs that may substitute some of the volumes we are getting now from Chrysler.

Thanks, Fernando. Next question, please.

Thank you. The next one is coming from the line of Francisco Rica from Alantra. Please go ahead.

Yes, thank you for taking my questions. First one is a general question about Brazil. The bank in Brazil is performing very well, delivering RTE above 20%. However, the macro risks are increasing with inflation running above north of 10%, concerns on fiscal spending driving long-term yields up, GDP growth expectations revised down for 2022. So in this context, the general question is how do you see the main KPIs in Brazil in the current macro environment, mainly the volumes, margins, the costs, and the cost of risk. And the second question is about the other revenue lines. If you can explain more details of what you include here in these 500 million euros in the third quarter, particularly in Spain, which was much higher than expected, and also in the consumer businesses, digital consumer bank, and in the U.S., If you can comment also on the nature of these revenues, whether they are recurrent or not. Thank you.

Okay. Okay, thank you for your question. Brazil, you asked a very general question on Brazil. Let me make two starting points. One, we are performing well in Brazil, as you recognize, on the back of market share gains. We are gaining market share across the board, but mainly in the retail space, credit cards, insurance businesses, mainly those businesses that, well, on the lending side. So there is a mixed effect. We are not growing that much at this stage. Now on the corporate side, we are growing mainly in the retail. You mentioned what you call, I don't know how do you qualify, the macro environment having high risk on the back of the fiscal policy and all these things. Well, The inflation naturally has been growing significantly. On the back of this, the central bank is increasing rates, as you know, and probably continue to do so. And the prospects for the inflation is to come back a certain level. It's not different than the expectations we have in the mature markets that the inflation now is running high and will come back at some point. You asked specifically the question how this affects our KPIs going forward, this macro environment, the cost of risk and all these things. I do not expect a material impact in the cost of risk other than the one reflected that comes from the mix. Yeah, naturally, the cost of risk is a total impact. probably is going to be higher on the back of having the retail business growing in high double digit and the corporate business growing probably mid-single digit or a bit higher but significantly lower than the other. So other than this, I don't see a significant impact coming from this side. The critical question here is our capacity to keep the momentum in the business and being... a market leader, a real market leader in the way we are doing the digital transformation. So what our commercial activities is going very well. As a matter of fact, we are about to reach one million credit card sales per month. That is quite a number, comparing that we were probably one year and a half ago, two years ago, in half of this, half a million or less than so. So it's the growth. We have high confidence in keeping our business momentum, our commercial activity, with good control of risk. Naturally, the environment is going to be volatile because we face elections next year and some volatility may be expected around elections, presidential elections next year, and some measures could be taken looking at the elections next year. On the other revenue lines... But mainly Spain, I think, is equity method.

And the deposit guarantee and the contributions to the SRF in the second quarter. So is the volatility associated with both?

So there are some businesses that we account by equity method that are going back to normal and probably you should expect this line to keep growing in a sustainable basis because those are businesses that, well, some of you know, the Merlins in Spain and the likes that you know, that, well, given the economic scenario, we expect this to keep growing in the coming years.

Thanks, Paco. Next question, please.

Thank you. The next one is from the line of Adrian Sigi from Credit Suisse. Please go ahead.

Hi there. Good morning. Adrian Sigi from Credit Suisse. Two follow-up questions from my side, one on Brazil and one on capital. On Brazil, we've seen NII increase in the quarter by 8.5% in Euro terms. My understanding is that the first year impact of rate increases, which we reiterate again, is a negative impact of 63 million from 100 basis points rate increase. This year, the central bank has increased rates by over 400 basis points. Are we seeing the impact of these increased rates in these results, i.e., is the underlying results even stronger, or are these rate increase impacts somewhat delayed and should we expect them in the coming quarters? We're clearly in the middle of a very aggressive cycle, so any insight of how the timing and quantum of impact from these would be much appreciated. Sticking with Brazil, we've seen some pretty big moves in FX in recent weeks. Can you update us whether your hedging is on this? And briefly on capital, you had a 17 basis point headwinds in the market and others. Can you give us any color as to what drove this, given that there are some relatively limited spread movement this quarter? Thank you very much.

Okay. Let me take first the question in Brazil. I will pass the hedges to the CFO, and I will elaborate also on the On the capital, yeah. So on the capital swing due to market. Brazil, you are saying, oh, well, we have a negative impact when the rates goes up. That's true in the short run. In one year, it's minus 63,100,000 basis points. We increased four. You said we... See the rates increasing 400 basis points. That's true. But when you look at the numbers and the volumes, what you see is the volumes in retail with very high margins growing close to 20%. Okay. The mix effect is very strong. We translate this into 11% growth in NII. We are missing here like for like we should be growing higher. the margin in the region of close to 20% year on year. We are growing 11% and partially due to this increase in rates that you rightly pointed that affect us in a negative way. I should say that the 63 million is on one year. Probably you take this quarter on quarter, the impact is more negative at the beginning, as less negative as the time goes, and we are able to repreciate assets and liabilities. But the effect that you mentioned is due to this. I pass the question to the hedge. The capital, the market is basically market-to-market available for sale portfolio. The impacts we have had in Brazil, Mexico, Shanghai, and U.S. Yeah, so... Yeah?

No, see, the three largest impacts in terms of the available for sale portfolio have been Poland, Brazil... and Chile in the region of 500 million each from the beginning of the year. So this explains basically the impact on capital. In terms of the hedging, well, we continue to hedge the capital ratio. So FX movements do not affect the capital ratio, and we continue to hedge expected profits when we think, that the market is running ahead of itself. So now we have some currencies already hedged for next year. And again, this is tactically, and it depends on our view of the market relative to what the market expects. But again, the most important is the hedging of capital, which we continue to do, so the ratio continues to be fully hedged.

Thanks, Adrian. Next question, please.

Thank you. The next one is coming from the line of Sophie Petersens from J.P. Morgan. Please go ahead.

Hi, here is Sophie from J.P. Morgan. So I just had two follow-up questions. Just the first one, going back to Brazil net interest income, I get that you have the mixed effect, but if I look at the loan growth in Brazilian terms, that Loan growth was up only 2% quarter-and-quarter in the third quarter, but net interest income was up 5% quarter-and-quarter in Brazil. I was wondering, did you have any increased outgo performance in Brazil or something else that kind of helped the net interest income in Brazil, or it was purely the mixed effect? And then my second question would also be a follow-up question. I recognize that on the regulatory front, you're saying that next year the regulatory impacts will be less. Could you just remind us how much all the minorities are on her spear point? Is there anything else that we should be aware of in terms of SPAC or Equity Tier 1 impacts outside the regulatory impacts? Thank you.

Okay, going to Brazil, the other issue on top of the mix and the different growth, path of growth between retail and corporate business is the ALCO portfolio. So naturally, as the ALCO portfolio now is much smaller and the NII is much smaller than it was, the size is smaller and the spread is smaller. So those are the two components of this. Yeah, so no more than that. On the regulatory front, I pass the question to Jose.

So we have this year, we have the, well, again, this is subject to regulatory approval still. But the Amherst peer point impact will be around nine basis points. The buyback of Escusa minorities will be ten basis points. If we get the regulatory approvals before the year end, we will account for those this year. In terms of peer regulatory charges next year, the change in the accounting of minorities will be another ten basis points next year, which is the only significant regulatory impact that we expect next year. On top of that, again, we will have new models, which could cost us a bit of capital. But again, when we look at the sum of regulatory plus models next year relative to 2021, we'll be significantly smaller.

Thanks, Sophie. Next question, please.

Thank you. The next one is coming from the line of Carlos Cobocatena from Societe General. Please go ahead.

Hi, hello. Thank you for the presentation. I have a couple of questions. One is on Stellantis. You've already touched on the impact in Europe, but it's been reported that they are in the process of reassessing their partnerships in Europe, and I was wondering if you could explain a little bit on that from where are you in the negotiations and if you see any risk of losing some of those joint ventures or any of that part of the relationship with them. And secondly, if you have considered a different approach to capital allocation in the group, and if not, why not? Because running with a tight capital ratio versus the market perception could be preventing the stock from really re-rating further, perhaps unlocking some capital somewhere else in the group, even if you see you need some earnings could help you to run with a more comfortable capital buffer that the market may reward, and if you don't agree with that view, why is that? It would be nice. I know it's an open question, but it would be good to hear your thoughts. Thank you very much.

Okay, taking the question, the first one, Stellantis, the partner system in Europe, we are naturally talking to them, and, well, we are I would say, fairly optimistic on continuing the existing relationship and maybe the case that we continue to be the preferred partner for them, or I do expect to continue to be the preferred partner for them in the coming years. So I do not expect any material change on this. If any, I think it should be positive. On the back of the performance of the joint venture, so it's not other things. So when we started the UN Ventures with them. The UN Ventures were making 250 million net profit. Now they are making more than 500 million net profit on the back of this excellent, outstanding performance. We expect this to continue going forward. You mentioned capital. Well, our view is different. So the board took the position our target on capital is 11-12%. Well, you say more comfortable. I'm comfortable with the capital. We're going to be We are close to the upper end of the range and absolutely comfortable with this for two reasons. When I look at the market, I look at the credit side, our CDS is the lowest in Europe among the largest banks. So from the credit standpoint of view, no need. When you look at the stress test, our score in the stress test is by far lower under the stress scenario. So that sustains our view why we should be in the 11%, 12%, and we are already at the upper end of the range, and we plan to remain there. And we will be at the end of the year, and next year we will be around this. So that's the view. Jose, you want to add something?

Yeah, no, just a couple of comments. Amongst the largest banks in Europe, we are the bank with the lowest capital requirement of all. And our MDA CET1 buffer... stands today at 340 basis points. So being capital a scarce resource and the most expensive one, I think Jose Antonio has said it all. But again, we are the bank with the lowest capital requirement amongst the largest in Europe. Thanks for the question, Carlos. Next one.

Thank you. The next one is coming from the line of Dara Quinn from KBW. Please go ahead.

Hi, good morning. Thanks for taking my question. One, just clarification on the comment you made on the cost of risk into Q4. And I think you mentioned a release of provisions and that that would lower the provision charge, if I understood correctly, to 80 basis points for the full year compared to 90 basis points as of September. So just wanted to clarify that. And then just a maybe again on capital. You know, you've indicated you're at the high end of your range, not expecting too much change on that in Q4, but with lower regulatory headwinds in 2022, and given your guidance on profitability, I'm just wondering, maybe can you not be more specific on why the CT1 ratio wouldn't be moving above that range that you've given, or is it that those higher profits are being offset by higher RWA growth?

Thanks. Okay, let's address the two questions. The first one is the cost of risk. I said in the presentation that We need to update our macro scenario. You know the overlay that we made last year that remains in the balance sheet and that is in the region of 2.5 billion has two components. One is coming from the macro scenario. The other one comes from collective assessment of the different portfolios. When we update the macro scenario in the fourth quarter, I don't know. I don't have the final number, but I guess that the majority of the provisions related with the macro scenario in the region of, I don't know, 700 to 1 billion may be released in the fourth quarter, assuming that the scenario is what we have in mind right now. And this will lead to the cost of releasing the whole year in the region of 80 basis points that I mentioned before. The second question is on capital. When we look at the capital, we have a range that we, and the board, and we think that is the right range for the bank for the perception we have about the risk that the bank is facing. And remember that looking forward, naturally, You mentioned risk-weighted assets and potential capital ratio going beyond 12%. This may happen, naturally, because the capital generation, given our expectations on return on tangible equity, is going to be significant. At the same time, we continue to see the bank as we expect to grow. So I do expect growth. in the emerging markets to keep deploying capital, growing the business. Well, I don't see any reason why we shouldn't grow in Latin America more than 10% a year, in Europe probably less so, and on average having a risk-weighted assets growth on the region of, I don't know, six, seven, five, higher than the one we have had in the last two or three years. And, well, if we are right, our return on tangible equity in the region of 13% to 15% allow us to pay a healthy dividend and at the same time to grow the risk-weighted assets significantly more than we did. If finally we are not growing at that space, naturally the ratio will grow beyond the 12%. And in that case, the board is up to the board to take the appropriate decisions in relation with capital. To me, the capital, we have still some regulatory models, things in 2022. Beyond 2022, Basel III for us is not an issue at all. We don't have impact of the output floor. If the ILM comes equal to one operational risk, it's not going to be an issue for us, and I will say we will have a sky clear future. sky to navigate with a risk-weighted asset growth in the region of medium to high single digit growing and rewarding having a dividend policy, consistent dividend policy that our shareholders, particularly retail ones, like very much to get paid in cash.

Thanks for the question.

Next one, please. Next question. Thank you. The next one is from Mario Ropero Garza from Best Inverse Securities. Please go ahead.

Hi, good morning. My first question is related to NIA in Spain. You mentioned that you expect NIA stability going forward. What are the assumptions regarding filters embedded in this stability for NIA in Spain? Are you assuming that the current conditions will remain in place for for the whole year 2022? And then a more general question on the return target. I know that you have a mid-term time guideline for the target. Would it be possible to give some indication for next year, perhaps, on the road to target? Or maybe if you can give us some indication about whether you expect Rotary to continue improving versus 2021 year level. Thank you.

So, in Spain, the conditions we're assuming are the current ones. So, I'm not assuming an increase in rates in the cards. So, I'm assuming that we navigate more or less on average with the same level that this year. You know that Euribor one year is the main, the one who has the largest impact, but not only, okay? So in general, as you know, we don't have algo positions in Spain, so our position to higher rates is pretty, pretty strong, probably the strongest we have had in many, many years. So that's about what is on the back of my projections is 2022 and rates being similar to 2021. If those are lower, it affects my projection. If those are higher, it will be a big, big positive. Return on tangible equity. I do expect the return on tangible equity in 2022 being higher than the one in 2021. So it's not our policy at this point to give guidance to you. But, well, you can project easily. You see the trends in our business. And some... indications that we gave you, particularly on provision in Spain where the cost of risk is going to be significantly, significantly lower, and Jose already gave you an indication of where we expect to navigate on this, you can make your own numbers and you get easily into what may be the development of the group next year. But for sure, I do expect high return on tangible equity in 2022 than in 2021.

Thanks, Marie. Next question.

Thank you. The next one is from Andrea Fiotri from Mediobanca. Please go ahead.

Thank you for taking my questions. You've given some detail on the reversals you expect in overlay provisions. Can you tell us where you expect them? And I may have missed if you have given indications on guidance on where the cost of risk outlook is going in the U.S.? ? I don't know if you could share with us if you expect any impact from IFRS 17 implementation, Alex, on capital. Is the impact from the implementation of the addendum rules over with what you've taken this quarter? And from the important securitization activity that you're having, should we expect a negative impact in the future on NII? Thank you.

Sorry, I don't know if you can hear me. I don't know if the mic was off or wrong. Sorry. The guidance of cost of risk in Spain, we expect lower cost of risk. In the SME space, I made these comments in the previous quarter that we were taking a prudent view on the SME portfolio in Spain. As you've seen, we've been building a significant amount of provisions this year in relation with all the events that have happened around the pandemic and all the lending related with SMEs, and we expect this to come materially down next year once we feel comfortable with the evolution of the macro and the expected losses that we have already in our balance sheet for future events, expected events on the credit side. You mentioned also the U.S. cost of risk. The U.S. cost of risk this year was extraordinarily low. This next year is going to go up. is not going to go up to the levels we've seen before because still the environment is helpful and the situation of the motor industry with the used car price being at very high levels probably make us to be more optimistic than what is the average across the cycle for 2022, but it's going to go up. No doubt compared with this year. You mentioned securitization being negative. Securitization, we use this as a tool of, traditionally as a tool of funding. In the last two or three years, it's a combination of funding plus capital. So the market is in a situation in which we are issuing, we are doing securitizations and release capital at incredible low implicit cost of equity. as low as 2% or something like that. If the market remains in this situation, probably we're going to be relatively or very active in security decisions, particularly on the consumer portfolios where the market is eager to buy these kind of portfolios and implicit capital costs when your security size is extremely low. It's not the same for all the assets. Jose, you want to?

In terms of IAS 17 that refers to leases if I understand correctly and we are not aware that there will be any changes to this but we will look into it and get back to you but no changes as far as we know related to the leasing accounting. Thank you.

So we need to leave it here. Thanks everyone for joining and obviously the IR team is at your disposal for any follow up. Thank you.

Thank you guys. Take care. Bye.