Southern Missouri Bancorp, Inc.

Good morning, everyone. Thanks for joining us for this first Q2021 earnings call. As always, we have our group CEO, José Antonio Alvarez, and the group CFO, José García Cantera, who will address the presentation, the slide that we published earlier today, 7 o'clock Madrid time. Before jumping to the questions, obviously, the CEO will... address the highlights for the first quarter and the group performance then the CFO in detail the different business areas review before handing over back to José Antonio for the key takeaways and then the Q&A so with no further delays José Antonio please Good morning to everyone thank you for making the time to attend this conference call so I should say that we have had a good performance in the first quarter

We have delivered growth in the quarter, net operating income, the pre-provision profit increased 15% on the back of revenues growing 8% and costs being flat in constant euros. This was driven by greater volumes, repricing deposits and strong cost control. In this environment, naturally, in the middle of the pandemic, the digital adoption was keep accelerating, and now more than 50% of our sales were made through digital channels compared with the 41% in Q1 2020. Compared with the first quarter of 2020, revenue was higher, fees improved a lot, mainly driven by Europe, and the cost of credit also improved, notably to 108 basis points. Loan loss reserves stood at €24 billion, while non-performing loan coverage of 74%. We have barely used the provisions overlay that we made last year. As a result, underlying attributable profit reached €2.1 billion, and underlying return on tangible equity stood at 13%. In addition, we recorded expected restructuring charge for the whole year, for the whole 2021, €530 million net of taxes, resulting in an attributable profit of 1.6 billion. The core equity tier one ratio was 12.3%, with an organic generation in the quarter, a strong organic generation on the quarter, of 28 basis points, including 15 basis points that we accrue to remunerate the shareholders, equivalent to 40% of Q1 2021 underlying profit. The bank is accruing through the year, or its intention to accrue through the year, the proportional amount of 40% to remuneration holders once the supervisors allow to do so. The tangible net asset value per share grew 2% quarter on quarter, and while it's true that we still live in an environment with significant uncertainties going forward, particularly those related with the vaccination process and wind economy, it's going to go back to normal. On top of this, as you already know, we announced our intention to make a cash offer to repurchase our standing shares in Santander, Mexico, around 8% of the stake in the company. This transaction is expected to be completed in the second or third quarter of this year. So if we look at the quarter, I should say that we've been living in an environment in which we have had still a Expansionary fiscal and monetary policy with very low rates, although we should say that we start to see some changes in the quarter. Brazil in our footprint already raised rates in the first year, but in general we still have very low rates across the board. In relation on the social front, lockdowns and restrictive measures, with different density in different countries and different time, but this has affected significantly, particularly household and individuals and consumer activity in the countries in which we operate. On the other hand, state warranty programs had a negative impact on the revenue also, even with respect to benefit the cost of credit. So we have different speeds in the vaccination that while it's producing different outcomes among major economies, we are seeing already a significant rebound in the activity in the U.S. UK has had significant volume levels and in the EU we are starting to see some rebound starting back in March and accelerating a bit in April. Going to the group performance, I should say, starting with the income statement, share rates, and you have two columns there in the presentation, had a strong negative impact year on year, 12 percentage points in revenue and 8 percentage points in costs. Excluding them, revenue grew driven by all the P&L lines. We continue to deliver an excellent cost performance in all the regions, and we are doing especially well in Europe. As a result, net operating income, as I mentioned before, grew 15% year on year. In addition, lower loan loss provisions compared with previous quarters and lower cost of credit, which I will describe later in more detail. All in all, the first quarter underlying attributable profit reached what I already mentioned, 2.1 billion. Finally, we recorded 330 million expected restructuring charges for the year as a whole, mainly in the UK, around 300 million, Portugal, around 160 million, and corporate centers and others around the remaining 70 million. Following this, Q1 attributable profit stood at 1.6 billion. Overall, all income statement lines performed well, supported, as can be seen in the slide, by our diversification. All other geographies showed virtually the same weight, I mean the regions, and recorded a strong profit increase. Of note probably was the U.S., with net profit of €616 million in the quarter. Digital Consumer Bank, which contributes to 11% of the group's underlying profit, also increased its profit significantly. There is also the case for our global business, as CAB had an excellent quarter with a result above 700 million profit. If we look at the trends in the P&L, we see revenues going up 3% quarter on quarter due to the strong performance in CAB on the back of our strong activity with our corporate customers and the continued recovery in net fee income 4% that came mainly from CIV and other activities because, as I said before, the activity with household was somehow subdued in the quarter due to the lockdowns. Costs were down 3%, mainly driven by falls in North and South America, as the four-quarter is usually affected by seasonal factors. As a result, net operating income increased 8% quarter-on-quarter. Loan loss provisions plummeted by 25%, with growth Base fall across regions and most markets. Digital consumer bank also recorded sharp falls. Finally, underlying profit exceeded 2 billion, notably higher than in the previous quarters. I have focused more in the NII. I should say that while NII grew 5%, it's a result of higher volumes, plus 2% in loans, plus 8% in deposits. Cost of deposits management that I mentioned before, positive impact from the TLTRO and well, it's one of the highest figures in the last couple of quarters. Moreover, it's worth recalling that the first quarter has always some seasonality compared with the Q4. As for year-on-year performance by country, I should remark the good performance in the UK, plus 24%, on the back of higher customer balances, deposit replacing actions, that were partially offset by lower asset yields. Spain plus 10% driven by higher volumes and TLTRO. Brazil plus 6% due to greater volumes that offset lower interest rates. The U.S. remained flat despite interest rate cuts. On the other hand, Mexico fell 6% due to lower interest rates and lower portfolio volumes. impacted by the pandemic and having a relatively cautious approach to the credit risk. When you go to net fee income, well, continue to be affected, particularly on the households by the lockdowns in most countries and seasonality as every year in Brazil. Despite this environment, the upturn in net fee income quarter after quarter from the loss of Q2 2020 allow us to recover pre-pandemic levels. And from here, we expect to start to grow if the pandemic behaves as we are expecting on the back of better activity on the consumer household side of the business. Our study has remained focused on growing loyal customers and higher value-added services and products. These were reflected in the positive performance in CAB, insurance, wealth management, and other business. That In total, they account for 50% of the group's total fee income. Cars and transactional fees were dampened by the pandemic, and the U.K. reflected the impact from regulatory changes to overdraft since April 2020. By region, North America grew 7%, with prices both in U.S. and Mexico. South America, 2%, with growth recorded in Chile and Argentina, while Brazil started to recover. And Europe minus 4% with generalized declines except Poland due to lower activity on the household side that I've been commenting across the presentation. On the cost side, well, very positive performance. So we see Europe cost falling 4%. And North America, although they grow 2.8%, inflation, as you know, in Mexico is relatively high. and South America is performing extremely well when you see in real terms. Efficiency improved a lot. At the group level, now it stays at 45%, slightly below 45%. And I want to remark productivity gains, significant productivity gains in Europe, where cost-income ratio stays now at 50% when last year, this period, we were close to 50%. 60%. We are building a new operating model across the group that will enable us to accelerate our transformation and further increase in productivity and remain one of the most fishing global banks in the world. Going to credit quality, so we have here the NPL is basically flat. Improved cost of credit to 108 basis points, driven by lower loan loss provisions in most countries, particularly in the U.S., Brazil, the U.K., and also in Spain. Looking at the three-month annualized provision, the cost of credit to quarter was 84 basis points, that, well, in the first year of 2020 was almost double due to the provision overlay we took at this time. Loan loss reserves stood at Euro 24 billion, while non-performing loans coverage at 74%. As I said, the overlay is still in the balance sheet that we did last year. It's mainly in the balance sheet. In summary, amid the system uncertainties, especially in Europe, we see areas that are performing better than expected, such as the U.S. Looking forward, we also expect... and improvement in individuals. We are seeing consistent trends on individuals' household credit quality, and we are somewhat more prudent about corporates, particularly SMEs, that is going to depend very much on the recovery of the economy that we expect to start in second and third, mainly, quarters of this year. All this enabled the group cost of pay to perform better than expected, And, well, this is moving towards our average cost across the cycle. While this strong operating performance translating to the ratio of the return equities in the return tangible equity in the quarter, 13% EPS growing nicely and tangible net asset value that also reflect before they translate. The good results, the good consistent, I will say, sustainable results towards the ratios, the main financial ratios. On capital, I already commented on the strong organic generation, 28 basis points in the quarter, due to the net effect of the 43 basis points increased from profit and risk-weighted asset management and the negative impact from the shareholder remuneration of 15 basis points. This positive performance was offset by regulatory impact. Six basis points is the IFRS 9 phase-out. and market sympos on the AFS portfolio. And full year 21, expected restructuring charges of 10 basis points that we bring forward to the first quarter. So now we hand it to the CFO, José García Cantera, that is going to elaborate about the different ideas of the group.

Thank you, José Antonio, and good morning, everyone. I'll start by... Our global scale, our customer focus, and our diversification really help once again our business and profit growth in the quarter. In Europe, we are executing our business transformation to accelerate growth through a more efficient operating model that should allow us to progress towards our medium-term return on tangible equity target of 10% to 12%. In the first quarter, it was 8%. Loans grew 2% and customers 7%. with positive trends since the beginning of the year in all markets. Revenue growth was 13% versus the first quarter of last year, with strong cost control and efficiency improvements. In addition, we had lower cost of risk at 51 basis points in the quarter. In North America, a sharp increase in deposits in both the U.S. and Mexico, while loans fell due to the negative economic impact from the pandemic and, more importantly, from the expulsions Thank you very much. Thank you very much. our strategy remains focused on Santander 1, where customer migration is advancing according to plan. In activity, we saw positive commercial trends in individuals, notably in residential mortgages that were up 17% year-on-year and consumer finance. However, loans fell slightly in the quarter, mainly driven by wholesale banking in line with global corporate deleveraging. On a year-on-year basis, growth was 3% due to SMEs and corporates. Customer funds were 10% higher year-on-year, and of note here, mutual funds that were up 23%. In terms of results, underlying profit amounted to $243 million, almost three times higher than last year. We had resilient total income growing 10% in NII, although this was negatively affected by lower fee income from reduced economic activity from the pandemic. Quarter on quarter, NII was negatively affected by lower day count, lower ALCO portfolio, and reduced volumes. We continued with a transformation of our distribution model, which enabled us to grow the net operating income 9%, loan loss provisions down 29%, and cost of risk improving relative to the previous quarter. Going forward, and despite the uncertainty that still remains in the quarter, we expect NII growing at mid-single digits and a cost of risk below 2020, while operating costs should perform as expected. In the UK, we had a very positive quarter based on volume growth, lower cost of deposits, and efficiency improvements. In volumes, continued year-on-year growth in lending driven by mortgages and SMEs, and customer funds were also up, boosted by retail banking deposits and mutual funds. Profits were 6% higher year on year. Here, total income increased 12%. Of note was, again, net interest income up 24%, mainly from deposit repricing actions, as well as higher customer balances, especially in mortgages. Fee income was lower due to regulatory charges affecting overdrafts. Cost decrease reflecting progress on our transformation program, and cost of credit was 21 basis points in the quarter. In 2021, we expect to grow net interest income close to double digits, benefiting from new business pricing dynamics and lower funding costs. The 1-2-3 account latest changes introduced in April will drive additional improvements in our Q2 NIAE. We remain confident on being able to reduce the cost base by mid-single digits in 2021, and we are not seeing any signs of a quality deterioration in the UK. If we move to Brazil, which had an excellent performance at the beginning of the year, both in terms of volumes and results, we saw commercial activity recovering pre-COVID levels, and we took advantage of that, increasing our market share in lending. We hit the highest number of mortgage sales in the first quarter, and in auto, we remained the leader in individuals, and we increased our current account customer base. All the above was reflected in greater volumes. Loans grew 13% year-on-year, mainly in individuals and government-backed SMEs, while customer funds rose 12%. In terms of results, profit was up 47% year-on-year, and return on tangible equity increased to 21%. Total income was backed by very strong NII and higher gains on financial transactions. We had higher productivity and strong expense management, which enabled costs to drop 3% in real terms and reach record efficiency levels. Loan loss provisions decreased strongly with a very positive cost of credit performance, which fell to 3.8 percent if we look at 12 months, 3.3 percent in the first quarter. Compared to the fourth quarter, profits up 3 percent, again driven by strong NII and cost reduction, which offset lower fee income, which is affected by insurance seasonality. If we look at 2021, we expect loans to grow faster than the market, while customer revenue should increase moderately and cost maintain a good trend. And we would expect the cost of risk to be lower than last year and in no scenario higher than 4%. Moving to the U.S., where we believe that the work that we have conducted over the last few years is is showing in these numbers. So beyond the improved macro conditions that obviously is helping, we believe that the work, again, that we've done in the last few years is helping our performance in the U.S. Volumes was impacted by the divestiture of Blue Stem and Puerto Rico that I referred to before. Excluding these perimeter changes, loans were up 1% year on year, with auto originations increasing 24%. Also, deposits continue to perform very strongly. We had very good and positive P&L performance with underlying profit of 616 million, the highest of any country in the first quarter. Net operating income increased 13% of the bank of strong NII from strong lease income, capital markets, fee income, and expense management. Excluding the disposals impact, net operating income was up 19%. On top of that, loan loss provisions decreased 81%. We've made significant regulatory progress as the Fed terminated its 2017 written agreement with Shusa, and the OCC upgraded Santander Bank's Community Reinvestment Act rating to outstanding. In private banking, BSI announced a transaction to acquire $4.3 billion in customer assets and liabilities from Credit Agricole, improving our competitive position in this highly profitable market. For 2021, we would expect these trends to continue all throughout the P&L and maintain a positive performance in asset quality. We move to Mexico. We continue to invest in digital channels, and that is strengthening our value proposition with new products and services. Year-on-year volume performance reflects the normalization of the corporate portfolio following the uptick at the beginning of the pandemic. Profit was down year-on-year, impacted by NII pressure due to lower rates and volumes. Total income was down. Again, NIA was pressured, but this was more than offset by which more than compensated fee income and gains on financial transactions. Costs were slightly up due to higher technology investments, but in real terms, costs were down 3%. Loan loss provisions dropped 7% despite some charges recorded for certain corporate customers. When we look at 2021, we would expect to see flattish NII, while net fee income is expected to grow, supported by credit cards, insurance, funds, and investment banking. Cost of credit should start to improve in the coming quarters, with non-performing loans around 3% by year-end. Moving to our digital consumer bank, remember that we created this program as the leading digital consumer finance bank in Europe, combining the scale and leadership of Santander Consumer Finance and OpenBank's digital capabilities. As a result of the health crisis, new lending fell 3% year-on-year, especially in January and February, but as I said before, we saw strong recovery in the month of March. In results, underlying profit was 291 million, 25% higher year-on-year. Total income increased slightly compared to 2020, NII was down mainly due to lower outstanding balances in Spain and interest rate limitations in Poland, which were offset by higher income from operational leasing activity following the acquisition of six leasing Germany in 2020. Cost increased 1%, mainly due to digital investments in technology in open bank, excluding the acquisition of six in Germany. Cost fell 4% year on year. We had a strong reduction in loan loss provisions with quite strong credit quality performance. Cost of risk was 0.69% in the quarter. For the coming quarters, we expect a strong cyclical growth in consumer finance after one year of the pandemic with a gradual recovery of volumes and a solid credit quality across the European customer footprint. Moving quickly to the global businesses, SIB, Santander Consumer, sorry, Corporate and Investment Bank, delivered a very excellent quarter. We held leading positions in the rankings of structure finance, DCM, and ECM. Outstanding results in the quarter, which hit a record high. Revenue was up 44% year-on-year, driven by customer-related activities. Costs 8% higher. but the efficiency ratio improved to an outstanding 31.8%. Although these quarterly results are unlikely to be repeated in the coming quarters, we expect a positive performance for 2021. The wealth asset management and insurance business continue to perform well in the quarter. Total asset management amounted to $370 billion, to 12% higher year-on-year. For insurance, fee income rose 5%. Total fee income generated accounted for 31% of the group's total and grew 3% year on year. Looking ahead, we expect continued growth in line with volumes in this business. This is the first quarter in which we report Pagonex, so I'm going to just stop here for maybe a bit longer than for the other countries. Payments, as you know, are at the cornerstone of our strategy to grow and reinforce our customer loyalty. Santander serves more customers than any other bank, over almost 150 million, including 4 million SMEs, of which more than 200,000 are international customers in Europe and Latin America. PagoNext comprises three different businesses. First, Merchant Solutions. GetNet is already one of the top three acquirers in Latin America. As you know, it started in Brazil. That is a highly competitive market. But the business is growing. We are taking advantage of that, gaining market share, reaching 15% in December 2020 from 11.5% in 2019. In the first quarter, we launched GetNet Chile, providing differential features in the local market that generate strong demand. GetNet in Latin America already operates in Brazil, Chile, Mexico, and Argentina, has 1.1 million active merchants. and this figure is growing 14% year-on-year. Total payment volume was $22.5 billion in the first quarter, up 26% year-on-year. And we would expect to achieve 20% to 30% growth in the medium term for these two metrics. This year is an investment year for the company. We will start generating revenues in Europe in the second half of the year. And to this end, obviously, we will rely on the newly acquired technology assets of Wirecard that have been purchased at a good price, and we are unlocking their value quickly. The second component of Pagonex is trade solutions. As I said, we have 207,000 clients with international activities in the last 12 months. Let me focus on the two most representative businesses here. The first is OneTrade, which is our global trade and international payments platform. It already connects our customers in Brazil, Spain, UK, Chile, Portugal, and Colombia, and we have over 4,000 active customers. We expect to double the transaction volume yearly going forward here. Iberi, which has a presence in 20 countries, offers financial solutions to simplify international trade. It has already 15,000 customers, active clients, and we would expect its revenues to grow 30% to 4% a year in the medium term. And the third component of PagoNext is consumer solutions. Here, SuperDigital, our platform to address the financial needs of the underbanked population, is being rolled out across seven countries in Latin America. This provides, obviously, huge growth opportunities for us, and we believe we can double business year on year. To this end, SuperDigital in Brazil already have almost 600,000 active customers, with the transaction volume growing 30% year-on-year. And now let me finish with the corporate center, where we see results improve 49% year-on-year, mainly due to the positive impact of income tax from the release carried out this year and the charges recorded in the first quarter of 2020, and the positive trend in operating expenses, which improved 7% compared to the first quarter of last year, driven by ongoing streamlining and simplification measures. On the other hand, net interest income was impacted by the increase in the liquidity buffer. We had lower trading gains because of the positive hedging results recorded last year, and we had higher provisions. The net loan loss provision line includes a charge of 150 million gross, 105 million net, which has not been allocated to any specific portfolio so far, and it was built due to the lack of visibility as to the timing, pace, and strength of the economic recovery. And with this, I'll turn it over to José Antonio. Thank you.

Thank you, José. I'm going to elaborate just to finish, just give me one minute. On the back of the first quarter results, I should say that, well, the results were solid, consistent, and sustainable. Revenue grew 8%. It could improve the efficiency. And as a result of this, I already said that net operating income grew nicely. So we continue to build on our customer base. Digital customers keep growing. The loyal digital customers keep growing. On our customer satisfaction, we are top three in six markets in which we operate. We already recorded the restructuring charts for the whole year and continue to focus on cost control and improving our efficiency ratio. We also improve the cost of credit with an underlying profit of 2.1 billion. The core equity tier one ratio is above our target and the underlying return on equity rebound to 13% in the quarter. Let me to Take a look forward for 2021, and I should say that we are increasingly constructive. Taking a look to the business environment, we expect activity to increase as vaccination progresses, although at different speeds depending on the vaccination progress in different countries. Amid some remaining uncertainty, we see lower costs of credit with better performance in individuals than in corporates. We believe that the demand for individuals and consumption will rebound, especially in countries with a faster vaccination rate. This will allow higher fee income generation as activity increases. Regarding the outlook for the main regions, in Europe we expect high single-digit underlying return on tangible equity, on the back of a strong household activity rebound, margin management, net fee income recovery, and savings plan execution. North America underlying profit trends should be better than initially expected in the U.S. As shown with Q1 excellent results, the auto business is well positioned to benefit from strong demand for vehicles leveraging our deposit franchise in the U.S. South America amid the challenging environment, we should deliver continued growth in Brazil with an underlying return on tangible equity projected around 20%. The digital consumer bank, we expect, we have already seen some recovery of volumes toward normalization and solid credit quality as seen in the U.S., potential growth in digital retail banking across Europe with operations in Spain, Portugal, Netherlands, and Germany through the open bank. Expect double-digit return on tangible equity in 2021 as seen in Q1. As we progress through the year, we are more confident that we will deliver on our medium-term goals, and we remain very constructive on our target for 2021, improve the efficiency ratio, reduce the cost of credit, and increase significant increase of our profitability. Thank you very much, and now we will remain at your disposal for the questions you may have.

Thank you, Jose. Indeed, it's time now to jump to the Q&A session. So, please, operator, we can proceed with the first question.

Thank you very much, everyone. If you wish to ask a question, please key star 1 on your telephone. And we already have a couple of questions. The first one coming from Alvaro Serrano, representing Morgan Stanley. Your line is now open.

Please proceed. Good morning. Thanks for taking my questions. Two questions for me. One, the first one is on growth. Look, it's clear that provisions on the whole are much better. But beyond that, it does look like the market, I mean, the market, the multiple suggests that the market is not buying the growth outlook. And my question is on that. What do you think is missing from consensus numbers Because beyond the currency, if I look at your medium-term target, it does look like Europe is the biggest disconnect. And if I think about the digital consumer bank, you obviously at the end of the year, with the four-year results, you were looking to double profits medium-term. If I look at the cost-income ratio, that's more than a billion delta in revenues. And your European operations is also a delta there. What's consensus not grasping there? Is there... Are you that optimistic that you can grow consumer business there? Is it purely open bank? Are you going to do add-on acquisitions that we don't fully appreciate? And maybe a comment in growth generally, and in particular with the European skew. And the second question is on capital. You're 11.9 fully loaded. It looks like the capital build is going to be better for the remainder of the year. Would you consider... buying back last year's script as a way to maybe sort of gain back some of the institutional investors that were disappointed last year? Thank you.

Thank you for your questions. Growth, a very general question. So you know that our business in many areas and dimensions in the medium long term is supposed to grow because we have the vision that we have and we are in the geographies we have with plenty of growth in front of us. This is by geographies in Latin America. This year probably the visibility on this is poor. The massive depreciation of the current since 2020 naturally affects the translation of the growth we have had. You see the numbers in Brazil, you see the numbers in Mexico, you see the numbers in Chile. We are growing nicely. even in the middle of the pandemic, the translation into euros was not so good. In the consumer side, where we do think that we can grow, naturally, with the lockdowns, we are not growing. What we are seeing already in March and April is a rebound on these activities, and we expect, provided that the vaccination goes as expected, we expect to start to show significant growth. We can capture growth on the digital consumer bank, On the auto space, where we are market leader, we were not working in the leasing space. We can start to grow there. And the digital consumer bank offers us opportunities in the non-auto-related consumer space that we are starting to take. So those are the – on top of this, you have Pagonex. Jose already elaborated on the growth process of Pagonex that we expect to capture in the coming years. So this is, we continue remarks, our growth outlook. Naturally, it's difficult to talk about growth in the middle of an economic meltdown due to the pandemic, but you see our results. The main difference, I should say, compared with what I've seen in the market, is that we are growing revenues and controlling costs, and the main difference is our operating income is growing 15%. The P&L is not made out of the Reduction in provisions. Naturally, we have reduction in provisions, but we have top-line growth that we expect this to rebound from now onwards due to the improvement in the economic activity. The capital, second question, you said a specific question. We accrue, as you see in the quarter, our intention is to accrue 40% of the underlying profit to remunerated shareholders. It can be dividend, it can be by packs, okay? So this depends, it's up to the board to take the appropriate decision. We are allowed to do so naturally by the regulator, but our intention is to continue with this accrual because we think that this is sustainable. And that's our intention.

Thank you, Alvaro. Next question, please.

The next question is coming from the line of Francisco Riquel representing Alhambra.

Please proceed. Yes, I wanted to ask about Spain. First, on the top line, NII falls 4.5% quarter-on-quarter beyond the 2% of the day count. So I wonder if you can update on your guidance. It seems to me that the mid-single-digit growth might be a bit challenging, so you can update on the trends in the quarter and the drivers for the coming quarters. And also, in Spain, on the cost of risk, it remains high for another quarter, which makes sense because obviously the Spanish macro is underperforming other geographies. But so you can update on how do you see the credit cycle in Spain and your cost of risk, when do you see the normalization at what levels? Thank you.

Okay, thank you, Francisco. First question about NII, well, revenue in general in Spain, particularly on NII. Well, Our guidance remains the same. So we expect to grow NII during the year around mid-single-digit. The quarter you mentioned already, the day count, was some reduction in volumes, and those two affected this. But for the whole year, we remain confident that we reached the kind of mid-single-digit growth in NII. And naturally, in FinCon, we expect to make significant progress starting next probably starting in the second quarter and progressing along the third and fourth quarter of the year. So we remain constructive on our outlook for revenues in Spain. In the course of this, that is your second question on the credit cycle. This is a very interesting question. As I mentioned in the presentation, we are constructive on the credit quality on the households, individuals, consumer space, where we are seeing good trends. The moratorium has expired, and we are seeing good trends, and we remain confident on this side of the business. While in SMEs, particularly in those economies that are performing not so well on that, due to the relative specialization of these economies, we don't have enough visibility at this point. There are several factors, some of them seasonal, you know, the tourist season, if this year is going to, how it's going to be the tourist season, strong uncertainty in relation with this, and when the business is going to come back to normal. The second question is the credit cycle, probably is the right question. When are we going to have visibility on this? Probably, if you ask me, as of today, I should say to you that we need at least I don't know, two quarters of normalization before we have a clear visibility of the damage of the pandemic in the SME space. Probably, well, it's my guess or it's the best guess I have. So a couple of quarters to see this. But make sure that we keep updating you. Now visibility is relatively poor because, well, there's a significant number of customers affected by the lockdowns in in the SME space, micro-business and self-employed people. Although, as you know, we have a large portfolio protected by state warranty schemes. This affects mainly in our portfolio in Spain, Portugal somehow, but the largest portfolio is Spain.

Thanks. Back to the next question, please.

It is coming from Ignacio Largi representing Exxon BNP Paribas. Your line is now open. Please proceed.

Thanks very much for taking my questions. I just have two questions. One on cost performance. How do you expect the $1 billion savings to perform now that you have a separate data consumer bank and should we start to see the benefits of all the restructuring charges in Spain, particularly in the U.K. And the second one is on cost of risk in the U.S. I mean, we have a very good performance of second-hand CARP indexes that makes a lot of good performance of provisions. But, I mean, what would be the normalized level of provisions that you would expect out of the U.S. going forward? Thank you.

Okay, thank you, Ignacio. Thank you for the question. The whole issue of cost performance, the one billion commitment in Europe, and the restructuring charge. I mentioned the restructuring charge. We took all the restructuring charges expected for Spain last year. I think it was the fourth quarter, Jose. It was the fourth quarter last year. In this quarter, we are taking the one we expect for the U.K., Portugal. I think a small part like 20 million for digital consumer bank and like 50 million for the corporate center. On the back of this, we expect Spain to be the cost decreasing high single digit, UK mid single digit, and the same can be applied Portugal and less so in Poland. And the consumer bank, the consumer bank is a different story because it's a growth, as I mentioned before, the question of Alvaro. It's a growth story, and we're going to have the two dimensions. One dimension in which we reorganize our business in Europe. Remember that we have 15 banking licenses that we're going to reduce. We're going to transform into branches, and this allows us to reduce costs. On the other side, we want to grow the retail bank and the non-auto-related business to grow faster than with the buy-no-pay-later kind of new activities and with the leasing in the auto activities. And we're going to have two dimensions. On one side, we're going to save costs due to reorganization. On the other side, we're going to increase the business and we're going to grow the business in this dimension. So the $1 billion will come mainly in In the proportions of the costs we have, the majority will come from Spain, UK, two-thirds, and the other 30% comes from all other units. The second question was the cost of provision in the U.S., the normalized level. I should say we have two effects in the U.S. One is the cost of risk that naturally goes to the long-lost provision. Remember that we are not releasing provision in the U.S. We are still providing for the business. but it's true that the cost of risk is significantly lower on the back of the fiscal stimulus that provides support to households, individuals along the U.S. And on top of that, we have what you already rightly mentioned, the used car prices that support, we have leases, and we have residual value, and when we dispose the cars once the leases expire, we are making some gains out of this business. So the two go in the same direction. So having said that, we expect the cost of the first part on the back of the fiscal stimulus to remain well below the traditional standards, while the leases, the used cars, For the time being, much more difficult to forecast. It's probably relatively easy to forecast one quarter, but much more difficult to forecast the long term. But it's true that we are pricing the leases in a conservative way to try to protect when the downturn of the used car prices happen, that for sure is going to happen. So those are the two engines. But for this year... The business continues to show for the whole year. I expect very good trends in the business.

Thank you, Ignacio. Next question, please.

Thank you. It is coming from Derek Quinn representing KEW. Please proceed.

Hi, good morning. Thank you for the presentation and taking my questions. I'd like to go back or stick with the provision charge in the US, please, and specifically the consumer business, so a loan loss charge of just 300 basis points this quarter versus a historical number of closer to 10%. Clearly, we've seen over the last few quarters that that number has come down, but I just kind of I wonder, apart from this year and maybe the shorter-term impacts of the stimulus, what do you think is an appropriate medium-term outlook for the provision charge in the US consumer business? That would be my first question. And a second question on Brazil and cost growth. I think, historically, your guidance there has been to grow costs below inflation. In the first quarter, we've actually seen a nominal reduction in costs. Is that just down to specific trends in this quarter, or is it a reflection of a greater focus on cost control in Brazil? If I may, just a final question on capital. A small amount of regulatory charges this quarter. Maybe if you could just remind us of what we could expect on that front for the rest of the year. Thank you.

Thank you, Darak, for the questions. I pass to Jose, to the CFO, the question in relation with the capital. The provision charge in the US, as you rightly said, is low for this quarter in the region of 300 basis points. We've been more on the high single digit, but this largely depends also on On the mix, yeah, you know that, well, depends on what we retain on the balance sheet. Normally, we dispose a significant chunk of the prime business that we originate. Some of this goes to the market. We securitize. We dispose some of this goes to SVNA, to our commercial bank that use the deposits to fund this business. And what remains in the balance sheet, the mix is So it's very important. But provide that we have the same mix that in the past that was in the region of, if I remember well, I'm not sure, we had like 20 billion of subprime and another 20 billion between near prime and prime, the cost of this should be in the region of seven, eight. This region has been, and makes sense that I don't know when, probably not this year, maybe next year. I don't know how difficult to forecast this with the economy of the U.S. Well, it's going to perform very well on the back of the infrastructure investment program and the fiscal stimulus. It's very difficult to say when this is going to back to normal, provided we keep the same mix. That's extremely important, direct, because the difference in cost of risk between the two businesses is very, very large. The second question, if I remember well, was Brazil costs, the general costs in Brazil. So in Brazil, productivity is improving dramatically. Our digital sales are performing extremely, extremely well. And on the back of this, we are able to increase significantly the productivity. And you see we are keeping – it's not the same – Transformation that the one we are doing in Europe is not about closing branches and all these things. As a matter of fact, we are still opening some branches in areas in which we don't have presence. It's true that we also close some branches in other areas that are more crowded. But in general, it's more internal organization of the business and the capacity to increase digital sales and remote sales. remote sales from specialized call centers that we incorporate in the last six months ago, a new contact center in the south of the country that is far cheaper than it is Sao Paulo for having this business and is performing extremely well. And we are optimistic that we can continue to design new ways to reach customers and in a market that offers good opportunities to grow, and we are capturing some of them. You see that we are reducing costs at the same time gaining significant share in the most interesting products in the country. Brazil is not going to be a cost story. It's going to be a revenue growth story, more than a cost story. Having said that, we want to increase our productivity. In March, for example, we sold 630,000 in this month, with the economy being in the middle of a lockdown, and we're going to be focusing to continue to grow in the country, naturally we would cause control. Now, I hand it back to Jose.

Yes, with expected regulatory charges in capital, the sum of some small charges could be between 5% to 10%, Then there are two, the two largest charges that we would expect this year come from the low default portfolios, which is coming in the second quarter, and that will be around eight basis points. And then the new definition of default, which is uncertain when it will have to be taken and the amount that that will represent, but we believe it will be in any case less than 10 basis points. So more or less we would expect to see 25% to 30% basis points of charges from regulation in the three quarters this year.

Thanks, Derek. Next question, please.

Thank you, everyone. Just as a reminder, if you wish to ask a question, please key star one on your telephone. And the next question is coming from Carlos Cobo Catena, representing Societe Generale. Your line is open. Please proceed.

Hi, thank you very much for the presentation and taking my questions. Two quick ones and then just a clarification. The first one on the UK, I was expecting probably a better performance in net interest income, maybe the same as the performance in Spain, probably on the low end of expectations. In particular, the business dynamics in terms of volumes on front book spreads were more encouraging. Could you elaborate a little bit on why the net interest income declined in the quarter? I understand it's a calendar effect, but are there other drivers that you could elaborate on? Second question on legacy assets in Spain. It's not you only. I think the whole sector... It's providing only for the pandemic cost of risk with no much attention on legacy assets, and you still carry a high stock of non-performing assets in Spain. I would like you to elaborate a little bit on how do you think about that portfolio, how do you plan to divest it, and if that will demand a top-up in coverage to accelerate the exit from this portfolio. Also, not quite in Spain, if you could discuss how much of, well, Spain, and this is for the whole group, How much of the restructured loans on payment holidays do you keep after forming in your Stage 1 portfolio? Because this is just a thought for the sector in general. I mean, if you maintain the bulk of the potential problematic exposures after forming, obviously the modeling and the provisioning models will demand lower provisions, but when shall we have a clearer view on how much NPL formation you provided for to compare with how much potential iteration could be coming? I know it's a complex question, but if you could elaborate a little bit on how much of the payment holidays there still is and the performing Stage 1 portfolio, that would be very helpful. Thank you very much.

Thank you, Carlos, for the questions. The first point was UK and I think Jose already elaborated on this, so we expect still the NIM to accelerate a bit in the second quarter as a result of the back of further deposit cost reduction and having good activity on the volume side in mortgages make us positive on this and for the whole year we should be north of 10% in NII growth in the UK. We guide you, I think, last quarter in this direction, and we remain confident that this is going to be the case. You elaborated the question about NII that was also raised by Francisco before. You tried to understand the first Q. The first Q, as Francisco said, well, is 2%, mainly 2%. 2% of the drop is the account and another, you see the long book fell like 2% in the quarter. On top of having less activity, the activity, the new activity, the activity in the quarters with the lockdown was somehow reduced. And this activity partially, the fee income generated at the beginning, at the origination goes to NII and those are the factors from this. When you refer to legacy assets, well, our provisioning policy, And, well, we've been, I will say, in the quarter conservative provisioning policy in Spain. The provisioning remains pretty high. The cost of policy, if I remember well, is close to 100 basis points. Remember that before the pandemic we were in 30 basis points, 35. Now we are close, 100. We are taking another provision for prudential reasons due to the uncertainty and poor visibility on the corporate center. So we thing that we are providing, we are improving in our provisioning in the P&L for the potential events that may come, including the legacy asset, naturally, that we take into account in our provisioning policy, naturally. It's not only about the scenarios, it's also about what we have in the balance sheet, in the situation in which they are. Restructuring loans, you referred to payment holidays. I don't know if I understood you well the question. When a customer asks for a the payment holiday for a moratoria remains in stage one, naturally. So for the time in which the company or the majority of the individuals stay in moratoria. Once the moratoria expired, some of these moratoria were mandatory by the government, particularly this happened in Portugal, in the UK, and half and half in Spain. In Spain, half was granted by the bank, half was mandatory by the government. The majority of these moratoria expire. When the moratoria expires, if the customer starts to pay again normally, remains in stage one, naturally. If the customer asks for another extension that maybe in some cases not, but we start to classify accordingly, and the customer doesn't pay, goes to stage three. You know that this is not as straightforward as before. And this is how we are classifying. That's the reason why you are seeing progressively since the pandemic started, you are seeing stage two, particularly stage two, also stage two, growing accordingly with the behavior of these payment holidays. Having said that, while the majority of the moratoria already expired, you have the numbers in the presentation, what remains in moratoria is basically the ones who were mandatory in Portugal that expired, I think, I'm speaking from memory, is in September, and the ones in Spain that are expiring around now, because were granted one year ago in April, May, June, and in this second quarter will expire the majority, and we classify accordingly with the payment behavior shown by the customer. So I hope I answered your question.

Thank you, Carlos. Next question, please.

Thank you. The next one is coming from Fernando Diaz de Santibanes representing Barclays. Please proceed.

Hi, good morning. Thank you for taking my questions. Just two questions, please. Elaborating a little bit more on the NII in Spain and Europe, I just want to refresh the contribution from the GLTRO programs and how do you see evolution during the year? This would be the first question. Related to that, especially in Spain and the UK, I just would like to know a comment on the changes in management that we have seen so far, the strategy in the new with the new management teams. I guess it's not cost related. It should be more revenue related, but just want to know if there's any strategy change in those areas, in those regions. And finally, on the restructuring charges, you mentioned that we're done for 2021. I just want to know if there could be some moving on into 2022. given these recent changes in these specific regions that we mentioned. Thank you very much.

Okay, thank you, Fernando, for the questions. Starting from the very last one, we do not expect on the back of the cost, the one euro program, additional restructuring charge. It's done for the one billion cost savings that we announced, I don't know when, it was in October, That's all. This is related with the changes in management and strategy that you mentioned before. Well, when we announced the One Europe, the One Europe is on the back of One Santander is the intention to become more integrated in order to gain significant efficiencies operating together. So that means that in several products you're seeing The new flow, you know, you follow this, the new flow in the organization in Europe is becoming an organization where the products are, some products, not all the products, some products have funds. There are people, securities that have European responsibility, mortgages, cars, and some other areas. And there are also... in the transformation and the digitalization that are in Europe. The new app is going to be the same in one year for all the group in Europe, and this transformation program, having a new head of Europe, make advisable to do the change that we announced today in order to create the organization that fit for purpose in this regard. We have both Nathan, as the CEO of UK, and Rami, as we announced this morning. They remain in the group doing different roles, but this is to accommodate the European Organization to the Transformation Program that we announced, and we are progressing well on this. NIA in Spain, I said mid-single-digit, well-prepared. Also in UK, double-digit, a little bit weaker in Portugal. And, well, I don't have a specific guidance for Poland. Probably you have, Jose, and the TLTRO programs you can elaborate on this.

The year-on-year increase in revenues from the TLTRO is going to be 21 over 20, between 300 to 350 million.

Thank you. Next question, please.

Yes. The next question is coming from Sophie Petersens, representing J.P. Morgan. Please proceed.

Yeah, hi. Here is Sophie from J.P. Morgan. Just a follow-up on the previous question. Unfortunately, I couldn't hear what the TLDR road benefit is, so if you could just repeat that. And then my first question would be, last week there were some headlines around something they are potentially looking at lease plan. Could you just discuss what your view is on M&A and disposals, and has anything changed here? And how should we think about any potential strategic M&A, if you could just remind us what your... what your key ambitions here are. And then my second question would be if you could just talk a little bit about Brazil. What's your outlook in terms of rate hikes in Brazil? Where do you expect interest rates to go in Brazil? And if you could also remind us of your rate sensitivity in Brazil and kind of how do you think about NII progression in Brazil? Thank you.

Thank you for your question. The question on TRO, José.

Yes, so it's, as I said, 21 over 20, 300 to 350 million increase.

Okay. M&A activity, strategic M&A activity, well, we have nothing to add. So we are not, we are focused 100% in organic growth. We are not looking at any kind of deal that can be deemed as strategic. Well, At least, naturally, we made the offer, the tender offer in Mexico, but those are small, nothing that changed the profile of the group. Brazil. So, as to the rates, the market expects that the rates keep going up. They already raised their rates by 75 basis points. The market is more to come, and I agree that there's more to come on the back of relatively high inflation. And... And this affects the business in a way that you have the figures, José, how much is the sensitivity to higher rates in Brazil?

Brazil is very much balanced. So it's slightly negative. 100 basis points parallel shift in the interest rate curve is less than 100 million. So it's very much balanced. For the group as a whole, again, a parallel shift upwards of 100 basis points is is a positive 1.75 billion.

Next question, please. Thanks, Sophie.

The next question is coming from Adrian Sidi, representing Credit Suisse. Please proceed. Hi there.

Thank you very much. Two questions for me, one on capital and one on asset quality. On capital and specifically on capital requirements, how do you see the impact of the upcoming stress test on Santander? You've previously mentioned that you expect the stress test to be harsher than previous ones, but do you have any visibility at this stage on the contours of the outcome? And then on asset quality, can you give us maybe the moving parts of the overlay provisions you've made last year and how much of these provisions remain unutilized? Thank you.

So the first question, capital stress test, we are doing this exercise. It's too early to provide you with any numbers. We send the first numbers. We, as you know, we tend to perform very well on the stress test on the back of our diversification. So knowing that the scenario is harsh, but, well, I remain confident that we're going to continue to perform very well on the stress test. But it's too early to call, yeah? So the discussion with the regulator is about to start, and we'll see the different interpretations they have in relation with our numbers. The second asset quality, the overlay I said in the presentation that we barely use the overlay. I think on the 1.6 billion, probably we use 100, maybe? 150. It's telling me. So the majority remain on the books. And, well, I gave you already my outlook for the credit quality. The majority of this is related with consumer, and consumer is evolving very well. And, well, we'll see. This is too early to call. Significant uncertainties remain, and we prefer to be prudent at this stage and remaining with the capacity to offset potential future losses just in case. Something goes wrong with the vaccination and the recovery that everybody expects, including ourselves, but the situation I advise you to be prudent.

Thanks, Adrian. Next question, please.

Thank you. The next question is coming from Sharnesh Omahen representing Goldman Sachs. Please proceed.

Okay. Good morning from my side as well. I'd like to ask a couple of questions and they're all related to the capital return prospects. So the first question, you gave us an update at the end of the fourth quarter on your interaction with the SSM on the dividends and the prospect of restrictions being lifted. I guess we're three months closer now to the 30th of September. And I was just wondering if there's anything more that you can share or perhaps give us insight as to the discussion with your relevant authorities on this topic. Do you feel more less confident or is the situation exactly the same as it was at the end of the year? And the second question I would like to ask is when you think about risk-weighted asset growth for this year and then perhaps further out, what kind of number do you think is realistic?

The capital return, if we have additional information than the one we shared with you at the end of the last year, in reality, we have got any additional information other than the one that was made public. At some point, it was the interpretation of the market. The SSM was more constructive, and they are pointing... towards the provisioning level, these levels vis-à-vis of the potential, the uncertainty surrounding the economic activity. What we have is one quarter of more visibility. As I said in the presentation, I'm more constructive on the consumer individual side, but I remain with significant uncertainties on the on the SMEs and corporate books. And for that reason, I think I repeat a couple of times, we keep providing and not releasing provisions in the court. So that is what I can share with you in this regard. In relation with risk-weighted asset growth, I do not expect a lot of growth on the back of the market remains in very good shape to release capital through securitizations. And the implicit cost of equity at which you can release capital, at least up to today, is well below the cost of capital. At least this is clear on the more granular type of portfolios. If that remains, our risk-weighted asset growth is going to be somehow limited, and probably Jose can give you a number, on the back of being pretty active in secretizations that we've been doing in the last, I don't know, couple of quarters. And we always look at the market in this direction. If we can release capital significantly below the cost of capital, we do. And the market now is in good shape for that reason. I'm I do not expect significant growth in risk-weighted assets. José, you want to say something?

No, this year, like José Antonio is saying, we don't see risk-weighted asset growth, and we are working to compensate the regulatory charges that we discussed earlier on. Looking forward, we think we can, over the long term, we can have risk. Obviously, this is excluding regulatory changes. we think we could sustain more or less a 3%, 4% risk-weighted asset growth over time.

Thanks, Jernick. I'm afraid we are running out of time, but we have time for one last question, please. So let's proceed with the last question.

All right. It is coming from Ignacio Cerezo. Ignacio is representing UBS. Your line is now open.

Please proceed. Hello, good morning. Most of the questions have been answered, but I have two on capital left. If you have any view or color on the impact of the U.S. fiscal reform, I'm thinking on DTAs in the country, if any, and then the second one, I've seen the higher charge non-credit impairment in Poland, which I think is related to the FX mortgages. How much more is coming, do you think, actually, throughout the year on that one? Thank you.

To tell about the fiscal reform, you can do the math. So the main information is the rate, the final rate. And naturally, if this increase is going to have an impact, not very significant. I don't have a specific number because I don't have which rate we should expect. I don't know if this is already known or not. People tell me that it's unknown. And the high charge in Poland, you were right, absolutely right, is due to the Swiss francs. Our provisions there stay around 200 million euros. So, well, as you know, this is subject to the Supreme Court ruling or decision that is going to come, if I am well informed, next month, but has been delayed already twice. and is expected to come in 15 days, José, or something like that? Yeah, 13th of May is expected, while the provisions you mentioned were made on the back of this.

Okay, we need to leave it here, everyone. So thanks very much for attending this call. Obviously, the entire IR team is at your disposal for any follow-up. So thanks. Keep safe.

Thank you, guys. Take care. Bye.