Banco Santander, S.A.

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. So, well, I should start saying that the second quarter, we've been living in a period in which we saw inflation rise hitting decade-high levels, interest rates going up, start to raise, and significant concerns regarding lower economic activity in the future. So 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 economy loans and deposits and revenues in our P&L, NII plus fees, as you can see in the slide. So the progress in the digital front has been significant in the quarter. When we talk about profitability, second quarter profit was €2.4 billion, reaching for the first half €4.9 billion, 33% higher than the previous year. If we look in the cost and euros, it's 21% higher than the previous year. The cost in a highly inflationary environment remains 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, MPLs continue to trend down because of risk remaining well inside our expected range. And our capital is slightly above 12%, the core equity tier one, 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 is long book in SMEs and corporates, while consumer... Corporate investment bond is growing at 13%. So overall loans were up 2% quarter on quarter, 21 billion in a quarter, which increases in all countries, mainly from mortgages and consumers, as I said. So in summary, I think we have a high-quality, well-diversified portfolio by market, and our CFO, Jose, will explain later on in more detail the portfolio by geographies and by collateral. On the other hand, the deposits grew 1% quarter-on-quarter and 5% year-on-year, with a market shift towards time deposits due to the new interest rate environment. Turning to the income statement, well, 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 centers. This is including gains on financial transactions. In constant euros, talking in constant euros, group view 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 faces inflationary pressures but continues to grow well below inflation. This allows us to achieve record pre-provision profit of $14 billion in the first half of this year. As for long-lost provisions, the releases recorded in the U.K., and U.S. in second quarter 21 affected the year-on-year comparison. Finally, we had a positive impact from minority interest following by bucks 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 4.9 billion. In 2022, a tributary underlying profit recorded the same amount as we don't have extraordinary charges in this first half of the year. If we look for areas in Europe, we continue to accelerate our business transformation towards a common operating model. This was reflected in our 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 accelerated growth volumes, launched growth 7% in most segments in Mexico and in OTO and CAB in the U.S., We also increased our customer base 3% year-on-year. Lastly, we achieved a profit of $1.6 billion in the region. 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 increased customers, $6 million year-on-year, and capturing new business opportunities led to a sharp increase in volumes. Loans grew 12% and deposits 5%. First half underlying profit over 1.9 billion, 7% year-on-year, and higher return on tangible equity reaching, staying above 20%. In digital consumer bank, we continue to strengthen our leadership position and reflect the new lending. We rose 10% by 10% in our ranking market. Profit rose to double digits and return on tangible equity 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, 13.7%. And this is a, we are on track to meet our 2022 target. In terms of EPS, 27 cents 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 424, 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 and 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 is not show up. in the total capital ratio due to the fact that the health to collect and sale, the market to market, detract 13 basis points on our capital, and this offset the growth in the organic generation. So we are meeting our targets here. This way the taxes grow below long growth. We show that this is 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 Jose, I would like to highlight some 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 figure zone. 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 European taxonomy, our loan book, and to generate a business plan. and help our customers 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 and power people. You have the figures in the presentation. Overall, I'm proud of the group progress on delivering in our responsible banking commitments to tackle global challenges, both in the climate sector front and in the social front. I will now hand to Jose to elaborate on the group and business ideas review and finally I will do some final remarks.

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 $2.4 billion after recording regulatory charges of nearly $500 million, $400 million for the resolution fund, and $88 million contribution to the new institutional protection scheme in Poland. In the first half, total income exceeded 25 billion. Both NIA 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. affected by FX hedging, which detracted $300 million, and also from lower lease income algo portfolio sales in 21 and higher regulatory contributions. In the quarterly performance, we saw similar trends, revenue up 4%, excluding regulatory charges. Thank you. Let me take a moment to go through the main drivers of NII in more detail. Group NII was supported by broad-based growth in loans and deposits, coupled with margin management and interest rates hikes in UK and Poland. As a result, net interest income, 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 UK 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. And 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 the income, with the 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 4 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 305%, 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 24 billion, and the loan loss coverage at 71%, up two percentage points in the quarter. The distribution of the loan portfolio by stages remained stable, and even Stage 3 assets were lower in the quarter. Our cost of credit stood at 83 basis points. This is last 12 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 remained below 1% or were negative. In Spain, cost of risk improved due to lower loan loss provisions and better portfolio quality. UK and Portugal, slightly positive considering only six months. In Poland, improved provisions, 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 secure portfolio, we have less volatility than the market, and check is special because Decrease its weight compared to previous crisis. In digital consumer, cost of risk improved and continue 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 of very short-term duration. SMEs and corporates is covered with 50% real guarantees. And lastly, 65% of our corporate portfolio, large corporate portfolio, is rated investment-grade. and 42% is rated above A-, 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, pointing to achievement of our cost-to-income target. And cost of risk is expected to remain around 55 to 60 basis points for the year. In the UK, 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, 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 leased businesses. cost slightly up partially due to the incorporation of Amherst Pierpont, and better than initially anticipated cost of risk well below normalized levels. Santander, Mexico 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 earned a 21.5% return on tangible equity. We expect to end 2022 maintaining efficiency around 30% and cost of risk below 4% to 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 $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 structure 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 new net money inflows of $6 billion. In asset management, profits rose 8%. And in insurance, gross return premiums rose 17%. Looking forward, we expect to maintain double-digit growth in profit contribution across the three businesses. In PagoNext, 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 plus 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 2 billion euros, with double-digit growth in 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.