Banco Santander, S.A.

Good morning everybody and welcome to Banco Santander's conference call to discuss our financial results for the first quarter of 2024. Just as a reminder, both the results report and presentation we will be following today are available to you on our website. Let me just highlight that this is the first full quarter in which we are publishing results with our global businesses as primary reporting, aligned with the way we are managed. as we announced late last year. Secondary reporting will be what used to be primary until 2023, mainly country reporting, European DCB, etc. As we will explain later, changes versus previous periods are done on constant euros, with the exception of Argentina, which is presented in current euros, to avoid distortions. All information will be, as always, available in the Excel sheet and report that is published in our website. But now to the presentation. I am joined here today by our CEO, Mr. Hector Grissi, and our CFO, Mr. José García Cantera. Following their presentations, we will be opening the floor for any and all questions you may have in the Q&A session. As a reminder, if you would like to ask a question, please press star 5 on your phone. And with this, I will hand over to Mr. Grissi. Hector, the floor is yours.

MR. Thank you, Begonia. Good morning to everyone, and thank you for joining us. First, let me share with you what we will focus on today. First, I will talk about our Q1 results on the context of our strategy. Jose will then review our financial performance in greater detail, and then I will conclude with some final messages. Let's start with Q1. Q1 was another very strong quarter for Santander. Positive contributions for all our businesses, demonstrating the strength of our strategy and our business model. We are presenting a profit of 2.9 billion. That's an 11% increase versus Q1-23, 9% in cost and euros, As Begoña said, excluding the impact of the temporary levy of revenue paid in Spain, recorded in full in Q1, if you include that, this was another record quarter. Our customer focus and scale are driving profitable growth. Over the last year, we welcomed 5 million new customers, and our revenue in Q1 increased close to double-digit year-on-year in constant euros, and that's supported by all global businesses and the regions. We are executing on a transformation plan, which is already supporting efficiency improvements leading to growth in profitability, and as a result, our efficiency ratio improved 1.4 percentage points year-on-year to 42.6%, and net operating income has grown double-digit year-on-year for the last eight quarters. Our return on tangible equity rose 55 basis points year-on-year to 14.9%. Even more, 16.2% if we analyze the impact of the temporary levy in Spain. Finally, our solid balance sheet. With some capital ratios and robust credit quality, it contributed to strong profitable growth. And more importantly, to shareholder value creation. TNAF plus dividend per share grew by 14% year-on-year from a combination of higher profit, increased shareholder remuneration, and fewer shares due to the buyback programs we have and we are still executing. In the last 12 months, we increased TNAF by more than $4.5 billion. If we take a quick look at our income statement, as we usually do, we present growth both in current euros and in constant euros, although there were no material differences between them this quarter. Part of the reason is that for the first time, the variations in constant euros applied to all countries except to Argentina, which is in current euros, to mitigate distortions from the hyperinflation. Our P&L was strong from top to bottom. Number one, strong top-line performance driven both by NII record fees supported, as I said, by all the global businesses and regions. Second, revenue grew while costs remained flattish in real terms in line with expectations and relatively stable over the last three quarters. Third, we demonstrated the sustainability of our results with 11% growth in net operating income. Fourth, and low-loss provisions continue to normalize as expected. Finally, as I mentioned earlier, during the first quarter we recorded a 335 million charge related to the temporary levy in Spain, which was 50% higher than in 2023. Excluding this impact, profit rose 14% year-on-year, implying a growth of 12% in constant euros. Jose will go into more detail into these points later on. As you can see, this is a great start of the year and we are well on track to achieve our 2024 targets. Targets that we comfortably rate the rate. Good business dynamics supported high single-digit revenue growth. Our efficiency ratio improved even as we're investing for the future through one transformation and it is already better than our target in 2024. Cost of risk remained fairly stable, in line with our target of keeping it around 1.2% at the end of the year. The fully loaded CET1 ratio remained at 12.3% in Q1, having profitably grown our business organically and accrued distributions in line with our 50% payout, and we have absorbed regulatory impacts. We are comfortably in line with our target of keeping it above 12%, even after Basel III implementation. And Narote grew year-on-year 16.2%, putting us on track to reach our target of 16% for 2024. As you can clearly see, we're achieving these results backed by the operational leverage provided by One Transformation, which is improving both revenue and cost. The efficiencies we have captured and the impact of our active spread management have already contributed 174 basis points of improvements since 2023. Our global businesses continue to contribute to the group's profitability and have delivered 88 basis points in efficiency gains. Our initiatives to better serve our multinational corporates and SMEs through our regional coverage model continue to grow well. with revenue increasing 5% year-on-year. Finally, our proprietary and unique global technology capabilities have already generated 63 basis points in efficiency savings so far. Our global approach to technology has allowed us to capture $50 million in additional savings in Q1, for a total of $237 million since 2022. This has been mainly driven by the deployment of Gravity, by new global agreements with vendors, and process optimization in operations and implementation of the new IT and Ops shared services. A business group overview shows that our common operating model supports value creation based on profitable growth. From the creation of a best-in-class customer experience and operational leverage from our global platforms and common tech, this is helping us to accelerate the achievement of our investor day targets. This operational leverage is already very evident in our retail and consumer businesses, where the efficiency ratios improved close to 400 basis points and 200 basis points year-on-year, respectively. In CIB, we are building a world-class business, leveraging our ISOs expertise to roll our U.S. franchise without changing the risk profile, proof of which is the revenue, which grew 5% and reached another quarterly record, supported by the good performance in the U.S. and strong client flows. Wealth continues to grow strongly, improving both efficiency and profitability. And finally, in payments, where we are managing more than 100 million cards group-wide, we are seeing good activity trends. In Q123, we had a one-time revenue from a commercial agreement with one of our partners in Brazil. Excluding this impact, revenue grew 7% and efficiency remained flat year-on-year, despite our investments in deploying our global platforms. Now, let's look at each business in greater detail. First, our goal in retail is to become the number one bank for our customers, which is key to our strategy. At the same time, our retail business is a great example that demonstrates the benefits we are generating from one transformation, as operational leverage has significantly improved the efficiency ratio. First, we continue to innovate to offer the best customer experience. For example, in Spain, our new digital onboarding is contributing to 630,000 increase in net new customer year on year, while Santander Key already enables more than 4 million customers to approve transactions securely with a single click using biometrics. Second, we continue to implement a common operating model across our banks. increasing automation to free up time for our people to focus on commercial activities. As a result, dedication of resources to non-commercial activities have dropped by 4% in the last nine months. Third, the deployment of our own global platform continued in Q1, and Gravity is already operational in Spain, the UK, Chile, and the U.S., From a financial perspective, this is also a great moment for retail. We are managing margins very carefully to make the most of the tailwinds from higher for longer interest rates in Europe and at the same time benefit from our negative sensitivity to interest rates in South America on top of the strong operational leverage that we are obtaining from One Transformation. As a result, our profit grew 22% year-on-year with the following three things to highlight. First, double-digit revenue increase driven by good performance both in NII and fees, with all the regions growing year on year, especially Europe and South America. Second, costs under control, flat in real terms, as the benefits from our transformation in some units are offsetting the impact of inflation on salaries and investments. And third... provisions dropping slightly, with cost of risk fairly stable at the comfortable levels across all the group. The execution of the strategy is driving profitability improvements, with ROTA increasing three points to 17.6%. In consumer, we are working to become the partner of choice for our customers. We offer best-in-class global solutions which are integrated to our partners' processes. Last year, we launched a new digital onboarding to peer direct auto players, which has been received well because it allows our customers to compete their vehicle acquisition and financing fully aligned. We're also progressing well on simplification and automation, supporting a 15 basis points decline on our cost to total volumes ratio. Deploying global platforms is key to scaling our business, reducing our cost to serve and improving profitability. We recently announced the launch of Open Bank in North America this year, which will result in having a national deposit gathering platform for the U.S. Consumer is also delivering operational leverage with not operating income growing by 7% year on year, driven by the following three elements. First, an increase in revenue due to positive commercial dynamics with volume growth, mainly in Europe and Brazil, good and agile performance, and 22% fee growth, mainly from insurance. Second, costs dropped 4% in real terms as a result of the execution of our strategy and efficiency plans we implemented last year in a more complex interest rate environment. Third, Provisions increased year on year mainly due to the expected cost of risk normalization in the business both in Europe and the U.S., though still below the historical averages, as well as some impact from volumes and regulation. Last year, we started to prioritize profitability over volumes, so we are originating at high ROAS. The increase of volumes and good profitability levels of the new business makes us confident that profit will be growing close to double-digit year-on-year by the end of 2024, even after the normalization we expect on provisions. As you can see, we are building a world-class CIB business to help our clients that leverages our strengths to grow profit. while maintaining at the same time the same risk profile and is well under control. We are deepening our client relationships and increasing our capabilities in the U.S., building on areas of expertise to accelerate growth across all regions. We had a good start of the year and we have a very strong pipeline, with markets also performing strongly across the asset classes. As a result, revenue CID in the U.S. grew 35% year-on-year. Also, we continued expanding and strengthening our centers of expertise, including key industry groups such as energy transition, healthcare, among others, and product teams such as M&A and ECM. At the same time, active capital management continued to support graded origination and high profitability levels. Our business through CIB is capitalized, very much linked to customers, and with fees growing at a good pace year on year. CIB had a good result in Q1, with revenue up 5% year on year, even after the record in Q1 in 23, making Q1 24 the best quarter ever for the business. Almost all of our growth came from customer flows and was mainly supported by strong performances in global markets and global banking, both in global debt finance and corporate finance. Additionally, we're investing to expand our business to drive additional efficiency gains and further improve our profitability. As for wealth management and insurance, We continue our journey to build the best private banking and insurance manager in both Europe and the Americas. First, in Q1, Euromoney once again named us the best private bank in LATAM and the best international private bank in eight countries. Second, a major driver for growth is wealth, is collaboration with other businesses, especially retail and CIV, by capturing network benefits. Third, we are developing global platforms across the three businesses while we digitalize our distribution and advisory capabilities to improve customer experience and promote growth. One example is the development of a global investment platform which we began in Q1 and will enable our clients to manage any kind of investment across all countries. In summary, Customer experience, efficiency, and time-to-market improvements are accelerating growth, helping us to maintain our high profitability levels. Attributable profit grew double-digit on the back of strong private banking activity in a favorable interest rate environment, with a total fee contribution from Santander Asset Management and Insurance growing at or close to double-digit, while cost remained fairly stable in real terms. As a result, efficiency improved 4 points year-on-year and Rotter rose 9 points to 80%. Finally, payments. We have a unique position as we are on both sides of the value chain. Issuing, where we manage more than 100 million cards group-wide, and merchant acquiring. We are gaining market share as we strengthen GetNet's value proposition for customers through continued product development and a greater offering of value-added services. Growth of active merchants has been particularly strong in countries where GetNet has been mostly rolled out, such as Chile, Spain, or Portugal. We continue to migrate significant volumes of payments to the Pagonex global platform to leverage on the group's scale. Around 1 billion annualized transactions are already running through the new global platform, and we expect to double this volume by the end of the year. Also, we have started to deploy PLART, our Global TARTS Platform. We have more than 45,000 debit cards managed already in PLART, and we're starting the migration of the debit portfolio with 1.5 million cards in dual-run in Brazil. And we have launched a friends and family pilot in Chile. From a financial performance perspective, payments delivered a strong quarter, with good underlying revenue trends in both businesses, which combined with a positive performance of provisioning cards, dropped 22% year-on-year profit growth. Finally, Pagonex's EBITDA margin reached 17%, showing good progress towards reaching our 30% target by 2025, which we set our last investor day. Cost efficiency and CapEx optimization will continue to drive profitability in the coming quarters. As I mentioned in my opening remarks, the result of our strategy and our strong first quarter is aligned with our new phase of our shareholder value creation. Q1 has led to outstanding profitability growth and double-digit shareholder value creation for the fourth consecutive quarter. As I mentioned earlier, Rote was 16.2% if we analyze the Spanish bank levy, up 93 basis points year-on-year, reflecting the high levels of new business profitability. Earnings per share rose to 17 cents, up 14% year-on-year, supported by a strong profit generation and a lower number of shares following the buyback programs we have and are still executing. Finally, In the quarter, we delivered 14% growth in shareholder value creation, reflecting our disciplined capital allocation and the impact of the share buybacks. Buybacks continue to be one of the most effective ways to generate value for our shareholders. If we include in full the share buyback that is currently underway, we will have bought back around 11% of our outstanding shares in the last three years. providing a return of investment of approximately 19% to our shareholders. I'll leave you now with Jose, our CFO, to go into more detail on our quarterly financial performance. This is Jose.

Thank you, Hector, and good morning, everyone. I'll go into more detail on the group's P&L and capital performance. Let me first remember that we are presenting growth rates both in current and constant euros. and also that the full impact of the Argentine peso devaluation last December for the whole year was accounted for in the fourth quarter, which introduces some distortions quarter on quarter. Let me also, as Sector has mentioned, highlight that we are presenting constant – what we present here as constant is constant – That means local currency for all countries but Argentina. Argentina is in current. By doing that, we try to avoid the impact of hyperinflation. But also by doing this, we are lowering the growth rates that show as constant. For instance, net profit, instead of growing 9%, with Argentina in constant, is growing 13%. NII is growing 20% instead of 16%. Fees would be up 8% instead of 5%. Or total revenue would be increasing 12% instead of 9%. So, you know, we are trying to be transparent and trying to show the underlying performance of our business without taking into account the impacts of hyperinflation in Argentina. But let me go to the main components of the P&L. As Hector said, we are reporting exceptional results for the first quarter. We are starting to see the benefits of our transformation programs in terms of operating leverage in retail and consumer, and obviously the very positive momentum we are experiencing in both Europe and Latin America at the same time. Revenue grew 10%. Actually, 12% if we only look at customer revenue. supported by a strong NII, highest quarterly fee income in our history, while costs were fairly stable for the third quarter in a row. Net operating income grew 11% year-on-year. Cost of risk remained fairly stable, supported by strong labor markets and risk management. Provisions increased slightly due to the expected normalization in some countries, but we see no as a quality pressures anywhere. Additionally, we had a higher impact from taxes year-on-year, driven mainly by stronger performance in Brazil, where we have a higher effective tax rate than the group average, and also the fact that the temporary levy in Spain is not tax deductible from the corporate tax level. The full impact of this tax levy in Spain is accounted for in the first quarter and is 50% higher than last year. As you can see on the right-hand side, excluding this impact, profit would have increased 14% year-on-year or 9% quarter-on-quarter, and Q1 would have been another record high. Let me break down the P&L. Starting with revenue, there was a strong growth driven by customer revenue again this quarter, which made up more than 95% of our total revenue and explained almost all of the growth in the quarter. Year-on-year, revenue increased 9%, with all businesses and regions contributing. This growth was primarily supported by our retail business, which is growing at double-digit rates, with good performance in net interest income and fees across regions, and consumer, driven by our good profitability levels in new businesses and a strong volume growth in Europe and Latin America. CIB also had a great performance, as revenue reached an all-time high in the quarter, backed by outstanding performance in the U.S., We also delivered double-digit revenue growth in wealth driven by solid commercial activity in private banking and in asset management. Payments is also showing very good underlying trends year-on-year as both pago next and cards are growing if we exclude the one-time positive impact recorded in Brazil in the first quarter of last year as Hector has explained. Finally, the corporate center, high liquidity buffer remuneration, was compensated by the negative impact of FX hedging. Most of our revenue growth came from NII, which continued growing in the quarter, particularly in retail and consumer, representing 82% of Group's NII. It went up 16% year-on-year on the back of active price management in retail in Europe, especially deposits, and also in Mexico, and the benefits from the negative sensitivity to rates in South America, both in retail and consumer, and the fact that now forward rate curves in Europe are a bit higher. In terms of profitability, we have improved net interest margin year on year, even if we exclude Argentina. This was mainly explained by higher yields on assets, as we actively manage credit spreads to... take the most out of the interest rate environment. These gains from credit yields more than outweighed higher funding costs, which we were able to contain thanks to our disciplined deposit remuneration in Europe and deposit repricing downwards in Brazil, leading to a notable margin expansion. The only country where we saw slight increase in betas in the quarter was the U.K. Going forward, we expect the positive momentum in Europe to continue. We expect to benefit from the interest rate cuts in South America, and we expect an improvement in our consumer business throughout the year, boosted by high profitability levels of the new origination. As a result, very good NII outlook for the year. In the context of low-fee income growth in general, because of subdued loan demand and weaker consumer activity, we generated record net fee income of $3.2 billion in the quarter, even if we exclude Argentina, growing strongly quarter-on-quarter despite strong seasonality in payments in the fourth quarter. We also delivered solid growth year-on-year, supported by most of our businesses, with retail growing 9%, driven mostly by higher activity in Brazil, outstanding performance in consumer, fueled by insurance, CIB also growing from very high levels in the first quarter of last year, especially in the US, on the back of our strong dynamics in DCM and customer-related markets activity. Wealth also had a great performance, particularly in private banking, higher volumes in asset management and protection business performance in insurance. Payments was impacted by the usual seasonality from Christmas and Black Friday in the fourth quarter, and the aforementioned one-time positive fee recorded in the first quarter of 23 in Brazil. In terms of efficiency, significant improvement in our ratio to 42.6%, which remains amongst the best in the sector. As we have already mentioned, structural savings from our transformation are already becoming evident in terms of operational leverage, especially in retail and consumer. as costs remained stable at around $6.5 billion for the last three, four quarters. Average inflation continued its gradual decline across our footprint, dropping from 12% a year ago to 4% in the fourth quarter, and we were able to maintain costs fairly flat in the year in terms of real terms. despite the lacked effects of higher inflation on salaries and other costs and our investments in transformation. By business, costs remain well under control in retail, consumer and wealth, which represents 75% of our total cost base. However, total cost rose 5%, reflecting our strategy to reinforce our CIB franchise and develop global payments platforms. We expect a structural operational leverage from our new operating model to become even more evident in the coming quarters and years. Credit quality, as I have mentioned, no signs of any pressure in terms of credit quality, which remains robust. with cost of risk fairly flat in the quarter across our footprint in line with our expectations. By global business, credit quality remained stable at low levels in the quarter in retail, which represents 50% of the group's long-lost provisions, with some underlying trends across the different countries. Cost of risk improved in Spain, remained at very low levels in the UK, while Mexico continued to normalize in line with expectations. In consumer, which represents around 36% of groups' loan loss provisions, cost of risk normalized to 2.12%, also in line with our expectations, but still below the historical average, both in DCB Europe and in the U.S., which is still five percentage points below 2016 levels. Going forward, we are confident that our cost of risk will remain around 1.2% in 2024, as trends in consumer and Mexico towards more normalized levels are expected to be offset by better performance in retail, especially in Brazil, improving mostly in the second half of the year, Spain that will be stable, and in the UK that will also remain at very low levels. Closing with capital, our fully loaded capital ratio remained at a very comfortable level of 12.3%. backed by a strong capital generation and significant risk-weighted asset mobilization. This quarter, we generated 32 basis points organically after having absorbed five basis points due to the temporary leave in Spain and an increase in risk-weighted asset density related to a changing mix. We recorded 22 basis points charged for shareholders' remuneration in line with our 50% payout. There are also 24 basis points from regulatory charges related to the maturity measure of CIB models, which is expected to be temporary and revert next year with the implementation of Passive 3. Finally, there was a 14 basis point positive impact, mainly related to intangibles and evaluation of available for sale portfolios. We continue to deploy capital to the most profitable growth opportunities and expand our asset mobilization capabilities to maximize capital productivity. Our disciplined capital allocation is resulting in a new book, Return on Risk-Weighted Assets, of 2.8% in the quarter, well above that of our back book and higher than last year's. We created a centralized asset management desk with the aim of optimizing capital deployment. Last year, we disposed of an amount of capital risk equivalent to $30 billion in risk-weighted assets at a cost of capital of around half of that of the new origination. Our target this year is to do even more. That's all from my side, Hector. Over to you.

Thank you, Jose. First of all, a quick reminder. We continue to make good progress towards the targets we set for 2025. Thanks to our unique business model and the execution of the strategy, with first, a strong and increasing organic capital generation and execution of our capital allocation plans. Second, we continued improving our profitability. Investor Day target, just to remember you, was 15% to 17% ROTE. And by growing both profit and profitability sustainably, we have been able to deliver 14% value creation. And a summary to finish off. Q124 was another strong quarter, supported by recurring customer revenue growing high single digit, backed by strong performance in all our businesses and regions. Our structural change to a simpler and more integrated model is driving efficient improvement and profitable growth, which is essentially evident in retail and consumer. Our rock-solid balance sheet and robust credit quality are contributing to growth and double-digit shareholder value creation. This is very strong Q124. We are confident that we will achieve our 2024 targets as well as those we gave on our investor day in 2025. First of all, it's important to acknowledge that it's supported by our global businesses and we continue executing on one transformation. From a revenue perspective, we expect good and agile performance in the year. This is based on, first, the positive momentum in Europe, which will continue at least another quarter. Second, enjoying the benefits from the interest rate cuts in South America. And third, the significant improvements in consumer boosted by the high new business profitability. The benefits of the operational leverage from One Transformation program are expected to become even more evident during the rest of the year and well into 2025. Cost of risk is expected to be contained and in line with our expectations in a context of strong labor markets. As we deploy capital to the most profitable growth opportunities, the group's ROTE improved from 16.2% in Q1 2024, and we expect it to remain at 16% in line with our targets for 2024. All in all, Our TNAF plus cash dividend is growing double-digit, well on track to meet our target through the cycle. And now we would be happy to take your questions. Thank you.

Thank you, Hector, and thank you, Jose. We can start the Q&A session now.

Thank you. If you wish to ask a question, please press star 5 on your telephone. We already have the first question from the line of Francisco Riquel from Alhambra. Please go ahead.

Yes, thank you for taking my questions. First is on NII in Spain, which has surprised positively, and we have seen local peers raising guidance. So I wonder if you can update on your guidance for 2024 and detail the main assumptions behind it, and then how big a cliff shall we expect in 2025 with the current yield curve? Also connected to this, the NII in the corporate center, because the Spanish liquidity, I understand, is remunerated here. So you can provide any comment to better assess the combined NII performance of Spain and the corporate center. And my second question is on capital. After the 20 pips from Lodet in first quarter for Basel IV, you mentioned in the past 30 pips left for January the 1st, 2025, so meaning that you are already in line with a 12% performance I wonder if you can update on this BASEL IV regulatory impacts and other headwinds that we should expect, and where do you see your CET1 target in the context also of potential counter-cyclical buffers? Thank you.

Thank you, Francisco. Let me explain exactly how do we see NII basically going in Spain. First of all, I mean, we see really good trends, as you can see, in retail. due to the fact that we had really good growth in clients. I basically talked about 630,000 net new clients in just one year. And the trend continues basically very positive during the first quarter as well, which we can basically have been able to add 130,000 new clients. It's important to say, and as I commented, that we see this continued trend also in the interest rates towards the second quarter to continue to grow. All the different businesses basically are doing quite well, as you can see. I mean, CIV is also performing quite well, and the commercial business too. And that will basically give you the idea that we expect to have a very strong 24 all along in NIA in Spain. In terms of the corporate center of what we see there and capital, I will ask basically... Jose, to give you the details.

Thank you, Hector. Let me complement Hector's comments. With the current forward rates, as Hector said, we see NII still up in the second quarter, basically flat in the third, and a bit down in the fourth. This would lead to NII in Spain year on year up low single digits. Remember that we expected NII in Spain to drop a bit year on year in 24 relative to 23. With the current level of interest rates and forward rates, we see actually NII up in Spain year on year. In the corporate center, the first quarter is a bit abnormal because we increase the hedging. We always try to hedge at the beginning of the year based on our expectations for the different currencies. So I would expect the NII in the corporate center to gradually perform better as future FX charges might be lower. So capital, Basel III, let me make a general comment before I go into Basel III. There are a few elements, well, several elements of uncertainty to European banks' capital and capital requirements in the coming quarters. The first is the U.S. has stated that they will not implement FRTB for the time being and that they will analyze the proposed Basel III rules to avoid having any unexpected impacts. It is therefore very likely that both the FRTB and the Basel III rules in the U.S. will be quite different from the initial proposals. Europe needs to react to this because this will put European banks at a profound competitive disadvantage. It is not unlikely, though, that the Commission will make use of its delegated act to postpone the implementation of FRTB beyond January 1st, 2025. However, we don't think CRR is going to change. In addition, the EBA needs to publish 140 technical papers to interpret the new directive, capital directive. The EVA mandate is that in aggregate, the impact of all these papers must be neutral. But that doesn't guarantee that everyone and all these papers will be neutral themselves. This is the case, for instance, in the paper presented for consultation on advanced operational risk model calculation. So all in all, with the information we have today, we maintain our estimates for a very low day one impact of Basel III. So on January 1st, the impact will be very low, 0 to 20 basis points, and a fully loaded impact of between 30 to 50 basis points, as we had commented before. So all in all, we would expect to be above 12%, fully loaded and phasing once Basel III comes into effect. Counter-cyclical buffers. If in Spain, in Spain we have approximately 25% of our risk-weighted assets for the group. So any counter-cyclical buffer will have a quarter of that amount impact on capital for the group. So if it's 50, it will be 12 basis points. If it's 100 basis points, it will be 25 basis points. Remember, however, that from the time counter-cyclical buffers are announced to the time they're implemented, there is a one-year lag. So any announcement will not impact capital requirements for a year. Most likely will not impact 2025 capital requirements, or they might impact year-end capital requirements in 2025, but not 2024.

Thank you. Can we have the next question, please?

question from Ignacio Largue from BNP Paribas. Please go ahead.

Hi, good morning. Good morning, everyone, and thanks for taking my questions. I have two, if I may. The first one is on feed generation in the quarter was quite good. We're looking to the coming quarters. What should we expect? Should we expect an acceleration of growth driven by the good performance of CID and wealth management and insurance? Linked to this, I just wanted to see if there was any kind of one-off in the fees reported in the U.S. which jumped a lot, quarter on quarter. The second question is a bit linked to the capital debate, and I just wanted to better understand what is the organic generation that you expect? I mean, as profitability improves, I feel that the 10 to 15 pips has passed to be a bit low, and you could probably generate a bit more, or you would devote that to additional growth of other U.S. Thank you.

Thank you, Ignacio. Okay, in terms of fee generation, okay, we have, as you can see, I mean, a strong Q1, 14% quarter-on-quarter. That's an 18% quarter-on-quarter growth in retail. Retail represents basically half of the quarterly growth and is basically solid commercial activity in all the regions and is continued to do so, okay? You talk about the outstanding performance in CIV. That's 39% quarter-on-quarter. That's record revenue. This is basically what we've been doing in global transactional banking, and there is no one-offs whatsoever in all the banks and in the U.S. It's basically business as usual and client flow from all kinds. In wealth, we have also a very strong recording activity. In private banking, also we have higher volumes in asset management. And as well in the insurance business, we see a very good trend. And probably we see a very good trend coming from Brazil towards the end of the year that will help us out. Okay? Consumer growth came mainly from Europe. Okay? Volumes grew. And also the insurance fees recovered in Europe. And that shall help us as well. For 24, we expect the trend to continue, as I told you. The fees are growing to reach mid to high single digits. This is not an official target, but I can tell you that this is a trend that we see. This is mostly driven by the increase in CIB with the connectivity we have of wealth and payments and the growth in customer and transactionality. And most of the global businesses will experience double-digit fee growth in 2024 as we change the business model and we concentrate on the principality of the account. It's very important that you understand what the model change is about. The model change is Exactly about that. When I was talking about to become the number one bank to our clients, this goes more to transactionality and fees than RWA consumption as we used to do in the past. Okay? So this is the basic change that we're executing today. So you're going to see a much better trend towards that and a more disciplined part on the allocation of RWAs. With that, then, I'll leave the capital question to Jose. Thank you.

Hello, Nacho. Our organic capital generation post dividends is around 15 basis points per quarter. We think we can keep risk-weighted assets fairly flat throughout the year. Very, very low risk-weighted asset consumption. because of the asset rotation initiatives that I mentioned. So we should be able to have available for capital growth or regulatory headwinds 15 per quarter the next three quarters. We still expect 20 to 30 basis points of additional regulatory requirements. and some positive contributions for intangibles and intangible management. So net-net, with all of that, you know, we still see 1240 to 1250 capital ratio by year-end.

Thank you. Can we have the next question, please?

Next question from Alvaro Serrano from Monga Stanley. Please go ahead.

Hi, good morning. I've got kind of a couple of follow-up questions. Hector, you gave details on the fee performance. I just want to circle back to U.S. again and Brazil. In the U.S., I noticed you said there's no one-offs, but is this the run rate we should expect going forward? How's the pipeline looking? I realize there's no one-offs, but there may be seasonality. And can you repeat, you mentioned in Brazil there was a renegotiation. I suspect that's why the fees are a bit lower, but if you could repeat that. And then the second question on NII, thanks for your comments on Spain. Could I invite you to comment on Brazil and UK? Brazil obviously is very, very strong. It sounds like above the sensitivity you gave. What do you expect for four years? Can it continue to be strong? And on UK, just when do you think it can bottom? Thank you.

Thank you, Alvaro. Yes, as I explained to you, the performance in the U.S. is quite good. And look, we have a very strong pipeline. And if the markets are there and we're able to execute everything that we have, I think we will have a very good trend. But as you know, that will all depend on how the market basically goes. But what I can tell you is that... The market is basically helping us out in that sense, and we will continue the trend if the market helps us. I'm sorry to repeat myself. What we're looking at in Brazil is exactly what you were saying. I mean, we had a one-off in payments that we had on the first quarter last year, which is not going to repeat itself. It was a big one, $95 million. So that basically slowed us a little bit, but I see the trend quite well in the sense that I see payments growing nice, and I also see that retail is helping us out also in the growth. And what I saw towards the end of the year, we see that if we continue that trend, that should help us well in insurance, in retail, so that will help us as well. Okay, so I see pretty good trends in that sense, and the trends that they will continue to be strong. In terms of NII in Spain, Brazil, and the U.K., I could tell you that the indications we gave at the beginning is that if the rates continue the way they are, this is going to give us a – I mean, first of all, see the volume growth that we have in Brazil. So it's important to understand, and the volume growth is coming from payments and from retail. And NII in Spain, already Jose gave you a very good explanation, but I will allow Jose to go deep into that detail on that one. In terms of the U.K., let me go real fast to tell you what the trend is. I mean, as you have been seeing, the U.K. basically will behave the same as our competitors are behaving, okay? The business, as you know, is very focused on retail. It's our core business. And we continue to improve their offering and the user experience. And we also are gradually continuing to growing and investing in the corporate segment of wealth to try to diversify away from retail. Okay? NII down 4.4 in the quarter, similar, as I said, to their U.K. banks. And all the big ones have the similar trends of us, but we're taking actions to improve the NII. We're doing pricing changes. We announced both deposits and lendings in the first quarter, and we're trying to adjust the betas and to manage them in a much better way. And asset mortgage spreads also are improving in the UK market, so that shall help us towards the next quarter. So it wouldn't be as negative as we expected in the beginning of the year. And then we are also executing cost control efforts to help us on that. That is basically the main part that you're going to see in the UK. And the cost of risk is basically under control, and we expect it to be very much there. So with that, I'll ask Jose to basically give you more details in terms of Spain. And Brazil, NII.

Yeah, so in Brazil, NII should gradually accelerate towards the second half of the year. That means that year on year, we should see meet to high double digits, TIMs, not double digits, TIMs, growth in NII. And in the UK, the performance for the rest of the year should be similar than the one we saw in the first quarter. As Hector said, we've seen a pickup in volumes, margins, customer margins were flat quarter on quarter. So year on year, for the full year, you know, NII down a little bit, mid-single digits, something like that. With all of these estimates, we believe NII for the group should grow quarter on quarter this year. So sequentially, we should see higher NII every quarter this year. And year-on-year customer revenue, we've talked about fees and the strong performance in fees. So year-on-year customer revenue should be very close to double-digit in 2024 relative to 2023. Thanks.

Thank you both. Can we have the next question, please?

Next question from Ignacio Ferreira from UBS. Please go ahead.

Hi, good morning. Thank you for taking my questions. There are two, both from the U.S. I don't think I've seen the slide you used to have in last quarter around the kind of aspirational 15% ROTI target in the U.S. So if you can kind of update us basically on how quickly you think you can get to that number and what are the main drivers and the main initiatives. I've seen OpenBank being launched in the U.S. recently. So just a little bit of color basically on how quickly you can get to that. And the second one is on the asset quality in the U.S. I mean, you used to give some information around PDs, charge-offs in the past as well. I don't think I've seen those actually, so forgive me if I've missed them. But if you can give us a little bit of underlying color of how the U.S. asset quality delinquencies on the auto businesses are developing from here. Thank you.

Thank you, Ignacio. Okay, in terms of the U.S., A particular thing is, first of all, I mean, as you know, we've been investing quite heavily on that market, basically, to concentrate ourselves in the most important businesses, which is consumer on one side, okay, which is a business that we have at scale. We have also expended a little money on the CIB side to beef off our presence there, And we're also investing to become our private banking and wealth management capabilities to do it in a domestic way due to the fact that today we are just basically for non-U.S. aliens. So those are the things that we're investing in the U.S. to take it to a 15% rote. I believe it's going to be more towards the end of 2025 that we're going to be able to get there, but still we're working really hard in order to be able to complete that. In terms of... The asset quality in the U.S., let me explain exactly how the trend is. First of all, we still see a strong labor market in the U.S., okay? And the behavior of the portfolio continues to do very well. What has been happening is that we continue to see the trends in delinquencies above 90 days behave much better than pre-COVID. Remember, pre-COVID was about 90%. We went all the way down to 59%. Today is more around close in between mid-60s. And it continues to be like that. So as you can see, our... Cost of risk in the U.S. has been pretty stable around the same levels, and we expect it to continue to be like that towards the end of the year. We don't see any surprises in the way the portfolio has behaved. So circa around 2%. That's where I see it. And now what we have done also is very much focused on profitability. We're being very strong on capital allocation, and we see that the origination that is coming through is quite good. And also we are focusing on credit quality, and the mix of the portfolio continues to sustain itself in around 40%, prime and near prime. Okay, so you see the portfolio very stable and in that level. Thank you.

Thank you, Hector. Can we have the next question, please?

Next question from Carlos Pesoto from Cashabank BPI. Please go ahead.

Yes, hi, good morning. So the first question would actually be on the U.S., on the outlook for NII, how do you see it evolving throughout the year? Should we expect pressure to continue or could we also see a recovery trend in there? And then the second question, and sorry if you answered it before because I'm not sure you did, On the cost of risk in the U.K., it remains at quite low levels. Do you see this picking up throughout the year, or should we see the first Q level as something we're going throughout the year? Thank you very much.

Sorry. Thank you, Carlos. First of all, on the outlook of NII in the U.S., I see it flat-ish, okay? Let's see how volumes basically turn out. And as I explained before, since we are very much focused on profitability and also in capital allocation, I see that it's going to be flattish around there. And in terms of cost of risk in the U.K., The cost of risk in the UK, as I told you before when I was explaining Alvaro, I see it very flattish. I mean, the guidance is going to be at around 11 to 14 basis points at the most, so below 2%. Sorry, below 20 basis points.

Sorry, if I may add, as I've said, we see no asset quality pressures anywhere. Labor markets are very strong, and new employment, new job creation is also very strong everywhere. So we see really no pressure. There's no signs of asset quality deterioration. So we could extrapolate what we've seen in recent quarters in the U.K. We could extrapolate for the rest of the year.

Thank you. Can we have the next question, please?

From Marta Sanchez Romero from Citi. Please go ahead.

Thank you very much. Good morning. My first question is on capital. So if the Bank of Spain were to introduce the CCIV of 100 pips, that is 25 pips for you, but that would leave your 12% fully loaded core equity to one ratio, leaving or implying an MDA buffer just about 177 basis points, which is pretty low for European standards. So do you think that 12% fully loaded per capita tier one ratio target is still the right one in that event? The second question is on the UK. So the bottom line is now 25% smaller than last year. Is the shrinking going to continue, or do you think you can stabilize earnings at current levels? And just quickly a clarification on a previous question, the revenue growth that you are foreseeing, is that reported revenues and is that in constant or current euros? Thank you.

Let me answer your final question. We are estimating almost or around double-digit revenue growth in constant, euros with Argentina in constant. current euros. Obviously, in current euros or in euros with Argentina in constant, it might be higher than that. But as I explained, we believe this is the best reflection of our underlying performance, eliminating the distortions of hyperinflation in Argentina.

Thank you. In terms of capital, what I can tell you is basically that, exactly as I said, I reiterate that we're going to end up the year at around 1240 to 1250, okay? And I really do believe, I actually reiterate that we're going to be above 12% after Basel III. I would be, that would be the main points.

Yeah, and again, the country's equal buffer will be implemented in a year's time. So, Again, the capital target is being decided by the board. The board might review that capital target once, you know, the variables that led to that capital target might change. But we are going to be comfortably above 200 basis points NDA with our actual capital buffer.

Thank you. Can we have the next question, please?

Next question from Brita Smith from Autonomous.

Please go ahead. Yeah, Heather, thanks for taking my questions. I've got two questions. You sound more optimistic on that interest income in Spain, UK, and Brazil, but yet there's been no change to the official book targets for 2024. What is the delta here, and what do you think is the biggest delta to consensus? And then, secondly, you got it to double-digit customer revenue growth, and the group

As we saw in the first quarter, just the monetary adjustment in Argentina, in the first quarter was 600 million. We have 1.2 billion monetary position in Argentina and inflation was 51% in the first quarter. So just that in the first quarter was 600 million. That's what we are trying to avoid by looking at constant. So there are charges to the P&L that obviously we don't control. So that's the reason why we haven't changed the revenue target for, I mean, the total revenue target for the group, mid-single digits, but we believe that the customer revenue growth can approach, can be close to double digits.

Rita, in terms of the revenue overall, as you were saying, and NEI, Yes, I sound optimistic because I'm very optimistic of the trends that we have in front of us, and I reiterate that we're going to meet the 16% that we basically have announced. Onwards, I believe that it looks good and it looks promising, but I reiterate the guidance that we have given you.

Thank you. Can we have the next question, please?

Next question from the line of Sophie Petersons from J.P. Morgan. Please go ahead.

Yeah, hi. Here is Sophie from J.P. Morgan. Thanks very much for taking my question. So I was just wondering about the flat cost guidance for 2024. Does it still hold your cost for up 5% in constant euros, 7% in currency? So how should we think about the flat cost guidance that you previously gave? And then my second question would be on rate sensitivity to 100 basis point change in rates. If you could just remind us what that means for Spain, Brazil, the UK, US, all the core markets. And also if you have any hedging in place to reduce that rate sensitivity. And then my final question would be, on slide five, you say that you only got 5 million new customers year on year, but at the investor day a year ago, you targeted, I think, 75 million new customers. Just like a strategic question, maybe it doesn't make a difference if you only have 5 million new customers, or does it make a difference in the And how do you plan to get to the 75 million new customers that you guided for at the Master Day a year ago? Thank you.

Thank you, Sophie. Let me answer you the last question first. I mean, what we've been doing here is basically we are cleaning up a lot of our customer bases. And even though we are growing quite hard, we've been cleaning up that and basically – That's, at the end, what's going to be moving up towards the number of customers that we are able to include. We're going to be working on that, but the growth of customers basically is very strong in all different areas and in all different businesses. In terms of the cost, I was basically, as I explained to you, I mean, this remains fairly stable for the third quarter in a row, okay, as you have seen. That's plus 1% quarter on quarter. If you exclude Argentina, that's minus 3% because Argentina is moving the numbers up and down. That's close to 2% year-on-year in real terms. And that's a cost to income at around 42.6%. And this is in track to our 24 target of below 43% cost to income. And I believe that we're going to be able to get to that. Cost efficiencies are just coming from operating leverage through simplification of products. If you see the amount of products that we have simplified, we have 10,000 different products. Today we're down to 7,500. and automation, which is a very important part. And I was explaining to you in the change of model how are we changing the non-commercial FTEs to commercial FTEs, and this is something that in time will help us to control cost much better than we've been doing. That's basically the efficiency case. If you look at that, product simplification gave us 17 basis points year-on-year of savings. Automation is helping us out. 58% of product services are now digitally available. Okay? That's two percentage points in help versus December 23. And if I can tell you an example, the U.S. have captured 10 million in efficiencies just in Q1 alone. And that's 210 million since we started the process in 22. And that's just in consumer and retail. So... it's very important that we also remember that one transformation is not a merely cost-cutting exercise for the creation of the single model and with several other benefits. And this trend will continue on and on, helping us out as we change completely the model of the way we operate the bank. Okay? So to rate the rates is basically to tell you that we're going to be in our target below the 43% cost to income for the rest of the year.

Now, in terms of race sensitivity, there hasn't been any change in all countries, in most countries, but Europe. Let me explain. So in the U.S., it's plus minus 150 million. In Brazil, plus minus 150 million. In the U.K., it's plus minus 200. But we have reduced the sensitivity in euros, in Spain in particular, significantly. Let me make first one particular comment about the UK. Our structural hedge in the UK is 113 billion pounds with an average duration of 2.4 billion. It was 106 billion pounds in December. So 113, 2.4 years average duration. And in Spain, we have been hedging our balance sheet through a combination of different actions, basically originating, adjusting the origination, buying alcohol portfolio. We now have 30 billion alcohol in Spain at an average duration of between six to seven years at 3.25% yield. And we have been also writing some hedges. The result of that is that of the 240 billion risk-weighted assets, 50 billion, 250 billion average earning assets we have in Spain, 60% is floating, 40% is fixed. That's significantly higher fixed portion than before. So now we have now lower sensitivity to rates in Europe.

Sorry, Sophie, just to be more precise, what I was saying is the cost of income is going to be below 43%, okay? That's efficiency that we have set for a year, and we reiterate that. And efficiency this quarter was 42.6, okay?

So let me just finish. The NII sensitivity compared to the average of the major competitors we have in Spain has been reduced to 7.5% compared to their sensitivity at 5%. And we expect to continue hedging the balance sheet as we, you know, in the future. Obviously the decision to do this gradually has proven to be, you know, good in the sense that rates, curve rates, interest rates curves have picked up a bit so that has allowed us to earn higher NII and also more time to hedge depositions. We are gradually hedging our interest rate sensitivity in Europe, reducing duration through the combination of all these actions that we've taken.

Thank you. Can we have the next question, please?

Next question from Andrea Fidri from Mediobanca. Please go ahead.

Thank you for taking my question. The first is on your profitability target set. Your above 16% ROTE guidance for 2024 implies more than 12.4 billion net profit this year, with Q1 on track to hit that, and with tailwinds in H2 that you indicated in Brazil, in the UK, replicating portfolio in consumer with lower rates. Can you be more specific about your profit target for this year and give us an insight on the 2025 ROTE outlook? Second question, if you could give us a target for 2024 group costs in absolute million euros, and where do you see them going in 2025? Finally, a quick one on the insurance business. The new banking package improved the treatment of insurance activities inside banks. Could you consider internalizing this business? Thank you.

Thank you, Andrea. You're right. I mean, we are confident that we are going to reach the 16% target that we set in terms of ROTE for the year. And as we said correctly in our investor day, we set 15% to 17% towards 2025. And we are working towards that, and we are working very hard in order to be able to do it. But today I reiterate to you that we're going to be at the 16% ROTE that we have set, okay? In terms of cost, what we have said is basically around less than 43% in terms of cost to income. If you see the numbers that we have been, we've been very disciplined in terms of what we have said. I mean, if you said it, you saw it's quarter and quarter is around 1% top, and we're going to be very disciplined about it. And if you see the operational leverage that we have on the – what I presented on retail, you see that the operational leverage is working like that, okay? So our target is basically to maintain cost the way it is, and I believe that the trend will continue like this. So I feel very confident on the way we're managing things, and I believe that we could be able to reach and to be more or less flattish in terms of cost. The question of insurance is quite a good one. We love the business. We believe that we have huge upside, mainly in markets such as Spain and in Brazil, I could tell you, Mexico, where insurance penetration is quite low. So we see huge opportunities on that, and we continue to better up our systems. For example, we are simplifying products in that sense in a very important way. Today, average by market, we have 222 different products per market. The idea is basically to go down to 25 basic products that I believe that would help us in order to be much more concentrated for our teams to be able to sell to the client exactly what they expect and to continue a really good trend. So that's a huge opportunity, as you say. The other side of the coin is that we have JVs that... in place on the long-term basis, mainly in Latin America and Spain and Portugal. And we will continue to have them over the years because they are long-term. I would love to internalize that business, but unfortunately, it is what it is. We have the Gavis, and we need to respect what we have there. But as you say, it's a huge opportunity in that sense, not just because of the change, and sweeteners in regulation, but also because of the advantages that we have given the amount of customers that we have and the low penetration in the different markets.

Thank you. Thank you. Can we have the next question, please?

Benjamin Toms from ABC. Please go ahead.

Thank you for taking my questions. At the full year results, you noted that you do not expect any material impact from the FCA's review of motor finance in the UK. And since then, one of the large banks in the UK has made a significant provision in respect to that issue. Do you still expect no material impact here? And are there any numbers you can provide us to help frame the issue? And then secondly, we've seen consolidation in the space in the UK from banks looking to improve their return profiles Your ROT in the UK is slightly below that of your major peers despite a favourable asset mix. Do you believe you can improve returns in this geography using only organic methods? Thank you.

Thank you. I mean, first of all, on the UK motor finance issue, I mean, the resolution of such matters, as you know, is not possible to predict. there are some significant uncertainties that remain with regards to the existence, the scope, and the timing of any possible outcome there. So as a result, we're not yet in a position to disclose the extent of any potential impact, and I don't believe until basically this – I understand there is an expert basically running through that, so I don't believe that we can give you an idea. What I can tell you is that so far we're doing – well in the sense of the settlements that we have and so far we've been doing better than we expected. In terms of consolidation in the UK, I don't see that we should play in a consolidation at this point. I don't believe that that's a market that we should invest more at this point. That would be my view in that sense.

Thank you. Can we have the next question, please?

Next question from Chris Hallam from Goldman Sachs. Please go ahead.

Yeah, good morning, everybody. So two from me. So first on Basel IV and then on Argentina. So Jose, thanks for the color earlier on Basel IV. I mean, I suppose it sounds very possible that FRTB gets pushed to align with a revised U.S. timeframe, you know, let's say towards July 1st, 2026. And you mentioned the Delegated Act provision for FRTB here in Europe. So just within your day one and fully loaded guidance, How much is FRTB and how much is all the rest of it, i.e., if we only get parts of Basel IV in January the 1st, 2025, and then FRTB follows on July 1st, 26, how much would that change the phasing of the capital headwinds you talked about earlier? And then second, on Argentina, so clearly it has quite a distortive effect on the group figures, and then there's the associated cost of hedging, and it's below 5% of group earnings. So I just wondered whether you've reassessed your footprint plans in Argentina and I guess especially in light of the announcement that one of your peers is exiting that market, or are there any sort of interconnectivity with other parts of the group that would make such an exit uneconomic?

So the answer to your question, yeah, when – we've always mentioned Basel III, but when we gave the impacts, we were including FRTV. You're right. where day one impact of Basel III was Basel III plus FRTB. FRTB isolated is 10 basis points. So if FRTB gets postponed, we will not have this 10 basis point impact on day one that we were accounting for in our estimates. I hope this clarifies the matter.

Thank you. In terms of Argentina, I think that... We need to leave our options open given what's going on. If Argentina basically can sustain what's going and try to be positive about what could happen, I don't believe that we have no downside or upside given the situation. So there are no plans to do anything at this point and we'll just wait and we'll continue operating our business. Our business is doing well. It's very well structured. is one of the best banks that we have in terms of client penetration, in terms of the transactionality that we have from our clients, fee generation. So we will continue to be there and see what our options are later on.

Thank you. Can we have the next question, please?

The last question comes from the line of Andrea Filtri from Mediabanca. Please go ahead.

Yes, thank you. Just having a second go, asking for absolute numbers on your net profit guidance for 2024, the 16% ROPE implies over €12.3 billion. Can you be more specific about what number you're actually targeting? And then on cost, the same story. I'm asking for a nominal euro-denominated group cost target for 2024.

Thank you sufficient numbers and growth rates in the P&L to really estimate what we believe is our most likely figure for net income and cost. So, again, for net income, 16% return on tangible equity gives you a figure in line with what you are saying, around 12, north of 12 billion. It's the conclusion of this 16%. We agree with that. And in terms of cost, we are looking at a cost growth which is going to be around 2% this year, 2% to 2.5% this year. Going forward, as we've discussed, we are targeting flat costs in absolute terms going forward. That is going to be difficult. Obviously, we are still in a relatively high inflationary environment. We believe that it is a very ambitious target, but that's the internal target we have. We haven't given any guidance for 2025, but what I'm saying is that long-medium term, our target is to keep costs flat or down in absolute terms. We are not there yet in 2024, close. We think we could be closer or there in 2025, but it's too early. We are still, you know, in early 2023, sorry, 2024. So we'll give you this guidance in due course. But again, our medium long-term objective is to keep costs flat or down in absolute terms.

Thank you very much. Thank you, Hector, and thank you, Kostya. I believe there are no more questions. Thank you, all analysts and investors, for your attendance. Our investor relations team is, as always, at your disposal for any further questions you may have.