Banco Santander - Chile ADS

Good morning, everyone, and welcome to our third quarter earnings presentation, like always. The presentation will start with our CEO, Hector Gris's comments, followed by my more detailed explanation of the P&L. He will have his concluding remarks, and then we will open it up for questions. Hector, please go ahead.

Thank you very much, José. Good morning to everyone, and thank you for joining us. Today's presentation, as always, First, I will talk about our results in the context of our study. Then Jose will review our financial performance in greater detail, and then I will conclude with some final messages, as Jose said. We will then open the floor for all your questions. The main highlights of our results in this period are the following. Q3 was another record quarter for Santander, which continues to demonstrate the benefits from the execution of our strategy and the resilience of our business model. Profit reached $3.3 billion, 12% above the Q3 of 2023. on the back of a solid franchise of 171 million customers that continues to increase as we improve our customer experience through simplification, automation, and leverage of our global platforms. Profit reached 9.3 billion in the first nine months, also a record of 14%, supported by strong customer revenue growth across regions and all the global businesses. We achieve this as we invest for the future and continue to make excellent progress towards a simpler and more integrated model which has helped us to improve our efficiency by 229 basis points and increase our ROTE to 16.2%. Finally, our balance sheet remains solid with a sound capital ratio and robust credit quality, and contributed to the strong profitable growth, shareholder value creation, and attractive remuneration. TNAF plus dividend per share increased by 14%, and the cash dividend per share will be 39% higher in 2024. Going into more detail into our income statement, as always, we present growth rates in both current and constant euros. These quarters, there were no material differences between them year on year, but as we say, we'll explain later, they are more significant on the quarter on quarter. Our P&L remains strong from top to bottom. Number one, strong top line supported by all our businesses and regions. NII and fees, both at record levels, accounted for over 95% of total income, driving the vast majority of our revenue growth. Number two, expenses grew below revenue and inflation, showcasing the possible effects of our transformation. sorry, the positive effects of our transformation. Three, loan loss provisions grew fairly in line with average lending and credit quality also had an excellent performance. All in all, as shown over time, our results are sustainable and less volatile than peers due to our business and geographical diversification, the high quality of our revenues, and a prudent approach to risk. We are on track to exceed the targets we set in January and upgraded in July. Solid business dynamics supported high single-digit revenue growth. Our efficiency ratio improved as we accelerated one transformation and increased operational leverage. Cost of risk is expected to remain in line with our 24 target on the back of active risk management, strong labor markets, and interest rates dropping in most of our countries. As a reference, year-to-date cost of risk improved to 1.4%. 14%, even with the additional provisions in Poland in Q2. Our City-1 ratio ended September at 12.5%, and we are comfortably in line with our target of keeping it above 12%, even after Basel III implementation fully loaded. And our ROTE is already above the target we set for the end of the year. Our execution of one transformation continues to boost our operational leverage, structurally improving both revenue and cost performances. Simplifying and automating processes and our active spread management have already contributed 259 basis points of efficiencies since we started, surpassing the levels which we expected to reach at the end of 2025. Our global businesses continue to drive the group's profitability and have delivered 82 basis points in efficiency gains. Finally, our proprietary and global tech capabilities have generated 72 basis points in efficiencies so far. Remember that we are focused on going back to basics, offering the best products and user experience to our customers and boosting operational leverage through our global platforms to support value creation for our shareholders based on profitable growth with minimal volatility. This is already reflected in the great performance of our businesses. All of them show solid revenue growth, retail and consumer, and will strongly improve our efficiency ratio, leading to higher ROTE. While CIB and payments reflect our efforts to develop new products and global platforms, which have started to deliver results. This is a fantastic example of how our model works. Higher interest rates benefit some of our retail franchises, while other parts of our business perform better under different circumstances. But overall, our combination of highly diversified businesses allows us to deliver consistent, profitable growth and value creation. The global businesses and the cross collaboration are helping us to extract the full potential from our unique combination of local leadership and global capabilities with the cost of infrastructure that delivers efficiency and scalability. This allows us to reach our 25 profitability targets. In retail, which is at the heart of our banking business, we are working to become the number one bank for our customers. Let's look at how one transformation is delivering results. Innovation is key. We are enhancing our digital onboarding and promoting simpler customer journey and better experiences across the bank. For example, in Brazil we have reduced onboarding time by 50%, which has contributed to a 3% customer growth only this quarter. We are progressing fast towards a common operating model across our banks, which together with automation and digitalization frees up time of our people to focus on commercial activities on our branches. Dedication of resources to non-commercial activities has dropped by 11% since we started with One Transformation. Deployment of our global platform remains on track, and for example, in the UK, customers have been migrated to our global app that already operates in Spain, Portugal, Poland, and OpenBank with great success. As a result, our profit grew 29% year-on-year, with ROTE up 400 basis points to 18.5% on the back of revenue growth. up close to double-digit on good performance of NII and fees, with all regions growing, especially Europe and South America. Cost is well under control, down 5 percent in real term, reflecting structural benefits from our transformation. provision is improving, and the cost of risk fairly stable at really comfortable levels. Going forward, our improvements in customer experience, the implementation of a common operating model, and the deployment of our global tech platform will drive additional customer growth, better efficiency, and profitability. In consumer, our priority is to continue expanding our leadership across all our footprint. Our best-in-class global solutions are integrated into our partners' processes. For example, we have integrated our front-end Hyundai systems, providing our customers the best digital experience, faster credit approval, and time to pay. We are making great progress in our deposit strategy to increase NII stability and reduce the funding cost. Deposits increased 12% year-on-year on the back of our deposit gathering platforms. The deployment of global platforms is key to scale of business, reduce our cost to serve, and improve profitability. Last Monday, we reached an important milestone in the U.S. with the nationwide launch of OpenBank. In the last four weeks, we have already gathered around 200 million in deposits and welcomed over 7,000 clients. We also launched Xenia, a co-branded card with Amazon in Germany, and we are deploying a new operational leasing functionality. Consumer continues to grow a strong operation leverage with a 9% net operating income increase and some profit growth on the back of, number one, strong revenue with solid NII performance and 25% fee growth. Number two, cost falling 2% in real terms thanks to our transformation efforts, even if we continue to invest in growth. And third, LLP is normalizing in Europe and in the U.S. in line with expectations. Overall, we continue to see positive operating trends, and we expect them to improve on the back of lower rates and volume growth. We are building a world-class CIB business for our clients that leverages our strengths and global footprint to go profit while maintaining the same low-risk profile. Number one, we are deepening our client relationships and increasing our capabilities in the U.S., building on our areas of expertise to accelerate growth across the group. Revenue in CIB in the U.S. rose 41% year-on-year and is expected to boost cross-border revenue across the group as we continue to progress on our U.S. build-out initiative. We continue to execute our global markets plan, which is starting to pay off with institutional sales doubling in Europe and more than tripling in the U.S. Number two, we're expanding and sophisticating our centers of expertise. we're strengthening our financial sponsor franchise, which is leading to business opportunities in M&A, capital markets, and GTV across a group, and continues to pay off with several first deals. This quarter, for example, for the first time, we were appointed sole book runner for an IPO of SPAC, and we acted as the lead left-under writer in an LBO transaction with one of the largest industrial-focused investment firms. And these are just a few examples of a long list. Third, we are driving cross-border revenues on the back of enhanced client solutions and global collaboration. We had a great number of cross-border deals in Q3, such as those resulting from the collaboration of our teams in Mexico and Spain, France and Brazil, Peru and Mexico or Italy and France, among others. CIB reached solid results with revenue up 9% after record 23, making the first nine months the best ever. Free is growing at double digits and the vast majority of our growth coming from client flows. And the best is still to come. Growth will accelerate going forward as we continue to execute our strategy on a global basis. Moving on to wealth, we continue to build the best wealth and insurance manager in Europe and the Americas. How? Number one, by improving customer relationships through the best customer service and right solutions, resulting in double-digit growth in private banking customer and fees. We are shifting our product offering towards value-added solutions, such as discretionary portfolio management, advisory and alternative investments, and this has also supported Spain's double-digit increase in the number of private banking customers and a 22% total revenue growth. Number two is promoting collaboration with other businesses, especially with retail and CIV, which is a major driver for growth and allows to capture network benefits. Collaboration fees increase by 13% year-on-year. Number three is developing global platforms across all the businesses and digitalizing our distribution and advisory capabilities to improve customer experience and really promote growth. Good examples of this are the recent implementation of a single operating platform for alternative products and the deployment of Sun Connecta in Mexico and Brazil, which boosts the distribution network capabilities and provides real-time information about funds and markets. In summary, we are accelerating growth and maintaining high profitability. Attributable profit rose 15% on the back of strong activity and fees growing a double digit across the three businesses. Finally, efficiency improved 210 basis points year-on-year and ROTE rose 400 basis points to 81%. Finally, payments. As I already advanced last quarter, we have a unique position on both sides of the value chain, issuing where we manage more than 100 million cards group-wide and merchant acquiring. In merchant, we are one of the largest acquirers in Latin America, Spain and Portugal, with the right balance between growth and profitability. GetNet total payments volume and PagoNext open market revenue keeps growing strongly, which is helping us to consolidate our presence in core markets, such as Brazil and Mexico, where we maintain a leadership position. And at the same time, we build up market share in fast-growing markets, such as Chile, where we recently launched GetNet. Our payments hub already processes all types of payments, for example, credit transfers, direct debits or instant payments, and international payments for several countries and businesses. We have already migrated 800 million transactions this year. This is five times more than than the same period last year. Also, we continue to deploy Plard, our global cards platform. In Brazil, we currently manage more than 8 million debit cards through Plard, and we are on track to full migration by Q2 2025 to manage around 17 million total cards. In a second phase, we will start with the credit card portfolio. At the same time, we continue to boost our cards proposition through our risk data lab, our solution based on AI. Payments delivered strong results with good revenue trends in both businesses, cost under control, and sound credit quality in cards, which drove to a 10% profit growth, excluding the non-recurring items with its cost in Q2. Pago Next EBITDA margin improved to 23%, backed by GetNet, with one of the best ratios among our competitors. We expect cost efficiency and CapEx optimization to continue to drive profitability in the coming quarters. Our capital ratio has improved this year from 12.3% to 12.5%, backed by strong organic capital generation, after investing in profitable growth, absorbing regulatory impacts, and shareholder remuneration. As a result, we continue to grow our value creation, which in terms of TNAP plus DPS increased 14%, which represents around $10 billion year-on-year. and we are increasing our shareholder remuneration. In September, the Board of Directors approved an interim distribution against H-124 results, which is being executed in two equal parts, a cash dividend of $0.10 per share, which will be paid from the 1st of November, and a share buyback program up to $1.5 billion that is currently underway. Cash dividend will be 39% higher in 2024. And at the same time, since 2021, if we include the full amount of the current share buyback program, Santander will have repurchased 12.5% of its outstanding shares. I'll leave you now with Jose, who will go into our financial performance in more detail.

Thank you, Hector. Let me go into more detail, the P&L and the capital. As Hector has mentioned, we are yet again reporting record results as our transformation continues to drive operational leverage. Revenue grew 8% on the back of the highest NII and fees in our history and the best efficiency ratio in the last years, boosting the net operating income, which rose 13% year on year. Provisions grew only slightly, even after the expected normalization in consumer and the Swiss franc provisions in Poland were recorded in the second quarter, while cost of risk fell in the quarter. On the right-hand side of the slide, you can see the upward trend in profit, which grew 1% quarter-on-quarter in euros, 5% in cost in euros, driven mainly by customer revenue and lower provisions. This quarter, there is an effect from the depreciation of some currencies, affecting the quarter-on-quarter comparison, But as you can see in the P&L, the impact year on year is not material. Please remember that the last quarter we decided to take a more conservative approach to valuing, to recognizing the value of the results obtained in Argentina. So we began to apply an inflation-adjusted exchange rate for the Argentine peso, which in the quarter was 1,618 compared to the official exchange rate of 1,069 to the euro. And obviously this is a much more conservative exchange rate than the one used by our peers. This approach caused some distortions in the quarter-on-quarter comparison that I will comment during the presentation only were relevant. Total revenue increased 8%, with all businesses and regions growing, driven by customer revenue growth, which made up more than 90% of total revenue. This strong growth was primarily supported by our retail business, which continues to grow close to double digits, with good performance in NII and fees, especially in the Americas, and also by CIB, growing across the three lines of business on the back of good activity levels, mainly in global banking and markets. Consumer revenue also rose, supported in this case by volumes and active asset repricing and double-digit growth in fees across our geographies. We also delivered double-digit revenue growth in wealth, driven by solid commercial activity, both in private banking and in asset management. Payments is growing at good trends, showing relatively good underlying performance. As both Pago Next and Cards increased, even more so if we exclude the one-time positive fee recorded in Brazil in the first quarter of last year. Finally, the corporate center's revenue improved on the back of less negative impact from FX hedging. Turning to NII, net interest margin, most of our revenue came from net interest income, which increased 9% year-on-year, supported by all our businesses and regions, basically due to active price management, particularly in retail in Europe and in consumer, and higher volumes and the benefits from negative sensitivity to rates in South America, in retail South America. which is now very evident, especially in Brazil and Chile, and also good activity levels in our global banking business in CIB. NII was resilient quarter-on-quarter, rising 1% in constant euros. in a new interest rate environment, particularly driven by retail, where it was up 2%, with the vast majority of our countries positively contributing in the quarter, especially Brazil, driven by higher average volumes, Poland due to better spreads and higher volumes, and the U.K. supported by good price management. In terms of profitability, we improved our net interest margin year on year. This is explained by higher yields on assets as we actively manage credit spread, focusing on profitability, not market share, which more than outweighed higher funding costs. We were able to contain, thanks to our discipline, deposit remuneration in Europe and deposit repricing downwards in South America. As we commented last quarter, we are seeing a slight deceleration in net interest margin and net interest income in line with our expectations. Please remember that the decrease in net interest margin in the second quarter was due to the prudent adjustment we made to the exchange rate in Argentina. And this quarter, net interest margin was also affected by the hyperinflation accounting in Argentina and the depreciation of the real and the Mexican peso, and to a lesser extent, the beginning of a new interest rate cycle in Europe. Over the last few quarters, we have gradually adapted the sensitivity of our balance sheet to position for this new monetary policy. This and the positive contribution we expect from our consumer businesses put us in a good condition, in a good position to mitigate the effects of margin compression expected in Europe and North America going forward. In an environment of low credit demand in general, we generated another record in fee income, reflecting our transformation efforts to promote connectivity across the group and provide the best customer service. Retail increased as more customers chose Antander as their primary financial service provider. We added 5 million new customers over the last 12 months to a total of 171 million customers. Outstanding performance in consumer, largely driven by increased insurance penetration in Europe. CIB also grew from record levels last year, especially in the U.S., on the bank of strong dynamics in global banking. We had a 16% increase in wealth, with all three businesses growing at double digits. And payments was impacted, as I mentioned before, by the one-time positive fee recorded in the first quarter in 2023 in Brazil. Our transformation towards a simpler and more integrated model continued to deliver structural efficiency gains. Our cost-to-income ratio for the nine-month period improved to 41.7%, the best level that we have reported in the last 15 years, one of the best in the sector, and is already at better levels than the guidance we provided for 2024. Costs declined 1% year-on-year in real terms, despite the lagged effects from higher inflation on salaries and other costs and our investments in transformation. By business, costs remain very well under control in retail and consumer, which represent 70% of our cost base. More than 90% of the nominal cost increase came from CIB as part of our strategy to reinforce our CIB franchise. Costs remain contained in wealth, even with higher commercial activity, and we're fairly flat in payments, even as we invest in global platforms. As we look ahead, structural improvements from our new operating model, which help us achieve our target of maintaining cost-to-income at around 42% in 2024, while it should improve further next year. Credit quality remains robust around and across our footprint in line with our expectations. We record low unemployment rates in most countries and easy monetary policies. Credit quality improved year on year as reflected both in the NPL ratio and lower coverage needs. The NPL portfolio has collateral guarantees and provisions that account for 90% of its total exposure. Twelve-month cost of risk improved to 1.18%. In our retail and consumer, 12-month cost of risk improved in the quarter. In retail, there were some underlying trends across the different countries. Cost of risk improved across Europe and remained at very low levels in the UK and Portugal. In Brazil, it fell for the second quarter in a row. And in Mexico, it also declined in the quarter following a year of expected normalization. Similarly, in consumer, 12-month cost of risk was impacted year on year by the normalization we expected. but it dropped in the quota to 2.12%. The cost of risk in the first nine months of the year was 1.14%, putting us in good position to end the year comfortably within our target of 1.2%. Finally, turning to capital, our fully loaded capital ratio remains at a comfortable level, backed by strong organic capital generation and significant risk-weighted asset mobilization. This quarter, we generated 43 basis points organically, on the back of 52 basis points from profit generation, partially offset by risk-weighted asset growth and by minorities. We recorded a 26 basis point charge for shareholder remuneration in line with our 50% payout policy We had 18 basis points of regulatory charges, mostly related to model updates in low default portfolios. And finally, we had positive impacts from the placement of Santander Poland and ALCO portfolio valuations, which were offset by impacts on deductions, pensions for the most part. We continue to deploy capital to the most profitable growth opportunities and expand our asset mobilization capabilities to maximize capital profitability and productivity. Our disciplined capital allocation is resulting in a new book return on risk-weighted assets of 2.9% in the quarter, which is equivalent to a return on tangible equity of 23%, well above that of our back book at 16%. Our centralized asset management desk, which aims to optimize capital deployment, is achieving outstanding results. In the first nine months of the year, we have disposed of an amount of capital equivalent to $40 billion in risk-weighted assets at a cost of capital of half of that of new originations. In addition, one-third of our balance sheet that matures every year is being substituted by more profitable new business. The combination of these actions explains the expanding profitability and resilient capital ratio. That's all from my side. Hector, back to you. Thank you.

Thank you, Jose. It is important to say that our progress towards the targets we set for 25 in our last Investo Day is ahead of plan as we continue to leverage our unique competitive advantages and excellent execution of our strategy by our teams. some CET1 levels and strong execution of our capital allocation plans, further improving our profitability to about 16% and delivering 14% value creation and increased remuneration to our shareholders. In conclusion, The benefits from the execution of our strategy are evident. Q3 was another record quarter on the back of strong customer revenue with all regions and businesses contributing, which results in the best nine months' profit ever, with all-time high NII fees and net operating income at a 19 percent EPS growth. Sustained progress in our structural changes towards a simpler and more integrated model, leveraging the group's scale, is driving both higher revenue and lower cost to achieve the best efficiency ratio we have reported for the last 15 years. A rock-solid balance sheet and robust credit quality are contributing to growth and double-digit shareholder value creation. As a result, we remain on track to exceed the 24 targets we set in January and upgraded last quarter. And we are in a great position to continue growing, increasing profitability, and delivering shareholder value creation. The progress of the last 10 years to simplify and align our model in all our businesses and now deploy our own tech stack is already evident. And as we continue to execute our strategy, we will deliver on primary target of double-digit TNAP per share plus DPS growth through the cycle. And now we're very happy to take your questions. Thanks.

So thank you, Hector. Operator, please, let's begin the Q&A session, please.

Thank you. If you wish to ask a question, please press star five on your telephone. We already have the first question from . Please go ahead.

Thanks very much. Good morning, everyone, and thanks very much for the presentation and for taking the questions. I have two, if I may. The first one is on NII, just to get a bit of a better understanding of the moving parts of the NII during the quarter. and also how should we expect about the group top line, group NII, in coming quarters. The second one would be on course outlook. Given the solid performance that we have seen in the quarter, how should we think about course performance going forward? And as per Jose's comments in the presentation, what kind of improvements should we expect in terms of cost to income for 2025? Thank you.

Thank you, Ignacio. Let me give it a first hit, and then Jose basically could give you a better idea. It's interesting to see that if you see NII in constant, you see that it's 1% up. The effect of Argentina is the one that's hitting us in the current euros. It is important to explain why. First of all, the sensitivity of our balance sheet to movements in rates is mostly concentrated in retail and commercial business. This is about 60% of the group balance sheet, with some parts showing really positive sensitivity in Europe, and others a negative one like the one we have in Brazil, as you already know. Europe and Brazil concentrate about 80% to 90% of the rate exposure. Over the past few quarters, we have been very proactively managing and working to reduce the sensitivity of the different balance sheets and position them to lower rates environments. For example, in the case of Europe, we have reduced the sensitivity to around 25%. That's one quarter of what was at the beginning of the rate cycle. In places like Brazil, for example, we are taking measures to reduce the sensitivity further by doing some things to the alcohol and also taking some hedges. As you have already seen this year, the retail business is operating leverage is 10 points. We are growing the top line, not just because of higher interest rates, but also because we're changing the operating model, which is the most important part that you guys need to concentrate. We're growing customers, for example, 2.6 million in the third quarter alone. And we're keeping costs flat, which is quite important, because that's creating an operating leverage and improving our margins. And this basically... I think that we will continue improving thanks to, first of all, the geographical and business identification, the strong focus on capital allocation, and the strong focus on profitability that we have up to this point. I don't know, Jose, if you'd like to complement on the margins, and then we'll take on cost.

Yes, definitely. Thanks, Hector. So let me explain Argentina in a bit more detail. In June, we used an exchange rate of 1.499, and we explained at the time that we are devaluating, depreciating the exchange rate with inflation, independent of of the official exchange rate. The official exchange rate as of now is 1.069. For the quarter, for the end of the quarter, we used 1.618. And remember that when you use 1.618 in inflation accounting, you adjust backwards all the accounts to that exchange rate. So we have two impacts on our P&L. One, there is over 100 million negative quarter-on-quarter increase in the monetary position that comes in other income. And in Argentina, as interest rates come down and we have a very liquid balance sheet and it's invested mostly in bonds, the yield earned on this bond portfolio is lower. And quarter-on-quarter, there is over 200 million drop in In local currency, when you look at local currency, there is over 200 million drop in the yield coming from these investments. So Argentina actually explains most of the drop in net interest income, quarter on quarter, but also it means around 300, over 300 million impact on total revenue. So as Hector explained, we have been reducing our sensitivity to rates both in euros and in Brazil, which obviously outside Europe is the highest sensitivity we have. In Europe, we have been buying an increase in the ALCO portfolio. If we look at the total euro ALCO portfolio we have, which is Spain, Portugal, and the consumer finance, We have 50 billion in Euro government bonds with an average maturity of over six years and a yield of 3.2%, 3.3%. The second action we took was to float the liabilities, the market liabilities. And we also hedged the repricing of our mortgages in Spain by signing some forward stats. So this has reduced the sensitivity of the net interest income in euros quite significantly to around a quarter of the sensitivity we had prior to entering this cycle of higher rates. In Brazil, we did the opposite. In Brazil, we're changing the mix of the liabilities and also floating the assets. Net-net, when we look into 2025 over 2024, we see NII down a little bit in current euros, but we see NII up in constant euros, thanks to these measures that we have discussed. And these estimates are based on forward rate curves.

Thank you, Jose. Ignacio, in terms of cost, it's very important that you understand the following. This is not about a cost-cutting exercise. This is about changing the model and the go-to model we're basically introducing in the whole group. It's talking about, I mean, take a look at the amount of the catalog of products that we have in the group. We have diminished them by almost a third. From 10,000 products, we're down to less than 7,500, for example. We are changing completely the model. We're doing a strong simplification. We're doing a lot of automation. But most importantly, by deploying the global platforms, we are working together and spending less money on what we do every single day. So one transformation is driving structural efficiency gains and operating leverage. Just a piece of data. Costco grew less than half. of the revenue growth. We're delivering positive jobs that are helping to reduce the efficiency to 41.7, which is 229 basis points lower than a year ago. This is placing us on track to meet the target being at 42 in 24. So we're going to be much better, and we believe that we're going to continue that. The new paradigm is focusing on absolute cost. Our ambition is not to lower cost, it's exactly to lower cost in absolute Euro million terms, which is quite important given all the different countries that we operate. It is true that costs are up 2.5%, but we look at the cost performance in real terms. In real terms, costs are down minus 1% year-to-year. That's a remarkable performance after the operating leverage. with the strong declines that I described in retail reflecting the transformation effort and the cost containment in consumer and payments while we invest in the global platforms and continue to grow. All right? So the higher cost, as Jose explained, reflect also the currency depreciation and the seasonal effects, the salary agreements, bonus accrual, and CIB is the bulk because we're investing in the business to basically get out of it more revenue, and it's actually getting there. So in 2024, efficiency ratio is around 42%. We acknowledge that this ratio is already at the level we committed for the 25 ID target. And all the investments we have been doing will not only help maintain costs flat, but grow the revenue faster. So our ambition is, therefore, to do better than initially planned next year in 2025 in the cost of income, as we described. So I don't know if that basically answers your questions.

Thank you. We can take the next question, please.

The next question comes from the line from Francisco Riquel from Atlanta. Please go ahead.

Yes, hello. So thank you for the presentation and taking the questions. First one is on motor finance business in the UK. I know that you need time to analyze the recent ruling, but I wonder if you can give an indication of how big the provision needs. whether we are talking about hundreds, billions, and also the impact on the business. And my second question is on capital. You can update on the regulatory impact spending for this year and next, and also on the Basel III impact of up to 50 basic points on a fully loaded basis. Other banks have reduced the impact after recent regulatory updates, so you can also comment on this. Thank you.

Thank you, Francisco. Okay. First of all, let me tell you that, I mean, as you correctly said, it's not possible this time to reliably predict the financial impact of the ruling, other elements that affect the financial impact on our accounts. This said, in any event, the potential impact is not expected to be material for the group's financial position. Okay? It's very important. nor will affect the achievement of the group financial targets for 24. So if you make the numbers and we are reiterating the guidance above 16%, that basically tells you where do we believe the number is, okay? So it's very important, and I will reiterate that again, that it will not change our 24 guidance. So that basically gives you a ballpark idea of where do we believe the number should be. I don't know, Jose, if I left something out. I think it's quite clear, no?

Yeah, I think that's perfect.

And in terms of why don't you go to the capital thing?

Remember that we estimated supervisory charges to be between 20 to 30 basis points in the second half of the year. We had 18 in the third quarter. We still believe that it's going to be these 20 to 30 basis points. So this doesn't change our target. So our target for capital for year-end, remember, since the beginning of the year, has been between 1240 to 1250. We are at 1250 in the upper end of the range, and we think we will close the year more or less at this level. For next year, day one Basel III impact data. basically close to zero, slightly negative, slightly positive, but it's not going to change much. So day one capital ratio for Santander under Basel III will be more or less the same, with which we will end 2024. And the fully loaded, and when I mean fully loaded, I mean fully loaded, taking into account all the charges we expect up to 2033. So we are not excluding the 2029 to 2033 charges. So fully, fully, fully loaded, we think the impact is going to be 40 basis points. which means that we will be on day one above the 12% that we set as our target, fully loaded capital above 12% on day one, fully loaded. Thank you. Thank you, Paco. Next question, please.

The next question comes from the line of Alvaro Serrano from Morgan Stanley. Please go ahead.

Can you hear me okay?

Yes, go ahead.

Can you hear me? Yeah, sorry. Yeah, I just had two follow-up questions, really, one on capital generation. So you've given basically a very limited impact for the next 10 years, which you're already at 12.5%. And with the mobilization you're doing on the balance sheet, it does look like you're going to generate capital above the 12.5% you're currently sitting on. So the question is, as we think about 25-26%, are you willing to operate in a range of 12.5-13%, let's say, or do you expect to grow into that 12.5%? or would you consider sort of increasing any – distributing any excess or increasing the payout? I just wanted to understand how you're thinking about that capital generation, if we do have that excess capital generation. And on – and I apologize to follow up on this on the UK. That's the only explanation, in my view, why the share price might be down this morning. You've been quoted, José, saying it's less than $600 million. And I understand it's not an impact for 2024, but it might be an impact beyond that. So any details you can give us on the book, if it's new cars, the size of the book, or any details that make you confident that we're looking at a relatively manageable number, that would be great. Thank you.

Thank you, Alvaro. Okay, let me explain to you a little bit what is very important. I mean, as you know, Jose explained exactly... what we're doing in terms of rotating the balance sheet. You've got to understand that we're changing completely the model of the bank in the way we used to. The bank used to consume a huge amount of RWAs to generate profits. We're changing the model in a way, and the most important thing of that changing the model is becoming the number one bank to our clients. But becoming that, basically you generate quite a lot of quite a lot of revenue by something different that just used RWAs in order to generate those. that basically explains you the good fees momentum that we're having. You're going to continue to see that over in the future. So if we continue changing this model, use less capital to become actually much more profitable, that basically will tell you that we could be able to accumulate much more capital than we're doing today. We feel really comfortable that we can manage the bank very well at these levels of capital, but I do believe that we will be accumulating capital. Also, As we have a tremendous capacity to generate assets, we also have now, with the asset desk in place, tremendous capacity to move those assets out of the books. And by the way, you saw what Jose said, we are doing so and making money on top of it. Also, we're servicing, we're getting fees and servicing assets. the assets that we sell. So it's a double whammy in that sense. So the model of the bank is changing in that sense, and it's becoming much more profitable and less dependent on capital. So, yes, I believe that capital generation will be much better, and we believe that we could be accumulating more capital in an organic way in the future. On the UK, José, I don't know if you want to also complement something on capital.

No, I think capital you answered perfectly. Alvaro, the issue is complex. Let me remind you of some of the things that we need to clarify in the next few months. We need to clarify the perimeter of commissions. We need to clarify the vintages because the ruling talks between 2005 and 2024 The FCA focus is between 2014 to 2021. The percentage of redress, the claim rate, the compensatory interest, so there are many moving parts. The ruling has been taken to the Supreme Court. We expect the FCA report in May, so there are many moving parts. We are analyzing this and obviously we will make a very conservative assumption once we are able to come to a conclusion on all these variables that need to be put into the estimation. However, we are very confident that, as Hector explained, the impact, and I'm talking about what we will charge in the next few weeks with this conservative approach, will not be material for the group, and we will still meet our objectives, our return on tangible equity target for the year, which is 16 or slightly above 16%. And that's all we can say. What happens with the FCA report in May? That's basically speculation. So obviously we will make a decision based on the actual ruling, based on if we have time to take into consideration the Supreme Court guidance on this. And in any case, obviously the provisioning that we will take will be a conservative provision. Thank you, Alvaro. Next question, please.

The next question comes from the line of Antonio Reale from Bank of America. Please go ahead.

Good morning. It's Antonio from Bank of America. Two questions for me, please. The first one is on the outlook for loan growth in Brazil. If I look at loans or flat quarter-on-quarter in local currency, which is perhaps not particularly encouraging for the NII outlook in the context of rate hikes in the region. Can you talk about your expectations for loan growth here and what this means for NII in Brazil? And maybe could you also please remind us what the time lag is with respect to repricing between assets and liabilities in Brazil? I understand your liability reprice is much faster than assets. If you could remind us how many months in lag that is. And my second question is with respect to the U.S. profitability. I mean, this is a part of your business that's negatively correlated to rates. You've been adding quite a decent number of investment or corporate bankers in the region, which is showing good momentum in fees. Could you maybe just talk us through the key P&L line items and if you see these numbers as sustainable going forward, please? Thank you.

Thank you, Antonio. Let me go a little bit through the Brazil situation, okay, to tell you a little bit what's going on. It's very important that you understand the following. In Brazil also, we're changing a little bit the model that we have today. As you know, we used to use very hardly RWAs. We used to basically give out a lot of loans. Now we're changing a little bit. The way we do things. We are basically focused on profitability, okay? Lesser focus on profitability, which is basically changing a little bit the mix, also changing a little bit, I mean, the way we manage. And we're managing the loan portfolio as a portfolio by division. We used to basically... grow in every single segment. Now we're not doing so. We're basically looking at the segments that basically have the best profitability and the best cost of risk in equal. So we're being very choosy in the way we manage that, and we're doing that all along the group. Also, we are very much focused on increasing the amount of clients and the amount of transactional clients that gives deposits and have their deposits with us, their Also, their payrolls. And it's quite important to understand that that basically is going to improve margins because we're improving the funding of overall of the franchise in Brazil. Okay? NII, if you see it, is a good quarter. It's up more than 3% in the quarter. It is more than 22%. in year-on-year. What's behind the performance? As I told you, healthy volume growth, changing the mix, and the lower rates because we're doing and increasing the number of clients. If you remember in my presentation, I talked about the new onboarding that basically is very competitive and is basically getting us much more clients. It is true that the rate outlook has changed, but now the market is having some rate hikes that will mean the NIR growth will be a bit less intense than we expected. And we thought at the beginning of the year, but nevertheless, we still expect Brazilian IAO to grow around the meetings marked by the end of 2024, and we will have further growth in 2025. And if we continue with our strategy and getting clients and getting more deposits at a good place, I think we could be better off. Okay, and let me take the opportunity also to... to flag the opportunity that Brazil has delivered almost a 17% ROTE. This is strong profitability improvement. It's not just reliant on NIR growth, but also it's very important the good delivery on fees because also, as I explained, we're becoming the number one bank to our clients. So selling other products, insurance, some more things that are basically helping us out. Also, it's very important to take a look at the cost contention that we have had and also an stable cost of risk. I believe that, and I don't believe, I really remain very optimistic on Brazil and the ability to continue expanding its profitability through 25. Okay? I don't know, José, if you'd like to go in detail in terms of the liabilities.

Yeah, so liabilities in Brazil basically reprice automatically with interbank rates. So almost 100% of the liabilities are linked to the interbank rates. 60% of the assets mature in 12 months. So that gives you a sensitivity of the positive sensitivity, sorry, negative sensitivity we have to rates in Brazil.

Thank you. Let me go into the U.S., Antonio. So it's very important to understand, first of all, that we are not a full-fledged commercial bank in the U.S. We are focused on the businesses we are focused, okay? We are focused mainly in our consumer business. The consumer business, as you say, has negative sensitivity to rates. That's exactly why we launched Open Bank there. And we're also using SB&A, our commercial bank, to fund that. All right? We've been also changing the mix in a very strong way. I was looking at the numbers in terms of the new mix we have, and as you're talking about a mix that is 42% with FICOS really on the – prime and near prime level, okay? And we're decreasing the amount of risk that we have to dip so prime and so prime. So that basically makes combination, and it's going to give you a pretty good idea of what we're doing there. In terms of consumer, it's very important that you understand that, I mean, as you know, we are at an at-scale player. We are also leveraging the relationship we have with the OEMs, and we were able to capture very good agreements with Ineos, Lotus, Tesla, and Mitsubishi. It's very important for you to understand that some of these changes in the P&L, you're not going to see them at the revenue level, due to the fact that a lot of this is basically done, for example, on the electrical vehicles. And the electrical vehicles, we're buying them because it's mostly leasing. So that basically tells you that it's not going to appear on the revenue line, but you see it on the payback we have on the tax line. that we get back for the electric vehicles. So that basically changes a little bit the outlook. But all in all, I really see that the U.S. will continue to thrive over the next year or so. Okay? Also, in the commercial side, the business is doing well. We have Dick's expertise. We also, you know, that we have this JAB with the FDIC, which has been tremendously successful, and I think will continue so. It has had a solid performance. And then you talk about the CIB advisory services. CIB just grew 41% year-on-year in terms of the fees that we are collecting on that business. But also, you don't see how the U.S. is helping the rest of the business to thrive. If you take a look at the fees in CIB in Europe also are being... pushed up by all the businesses we are doing by using the U.S. teams to help us out, getting some of our new business that we didn't used to get. Also in Latin America, if you take a look at, for example, not just cross-border M&A, but if you take a look at what we've been doing in DCM, you will see that we have become one of the three most important players in DCM in that market just because of the expertise we brought into the table. So when the Mexican UMS did a $7 billion transaction at the beginning of the year, we were one of the four banks and we were the only non-American bank in the game. So those are the particular things that are happening to us given that now we have this – With the local strength that we have, we're combining the global expertise that we're bringing onto the table. And wealth, also we have a leading brand in Latin America. That business is basically working as a Swiss clock. So I really do believe that the U.S. will continue to thrive. Very good outlook for 2025 and really good numbers coming up in terms of the P&L we see there.

Thank you, Antonio. The next question, please.

The next question comes from the line of Martha Sanchez Romero from Citi. Please go ahead.

Good morning. Thank you very much. My first question is in Spain. You have been moving market share in loans and deposits over the past year. You have recently made management changes at the top of the Spanish business. Do you foresee a change of strategy? Are you going to have more risk capital? But how do you see loans and deposits in Spain going forward? My second question is on the U.S. deposits. So the cost and the volume are flat in the quarter. We've just only launched open banks in the country. On your website, you say you're paying 11 times the national average for the buses. How much do you expect in terms of volumes to gain from the urban bank franchise and where do you see the costs evolving? And just quickly, and I'm not sure if I'm saying it correctly, the new effective corporate tax rate for 2025, have I understood that there are changes on the TV tax credit? Thank you.

We couldn't hear you the first question at all, so could you repeat that one? Sorry about that. And the second question was about the U.S., but we lost part of it. So quickly on Spain.

Sorry, it's just like the... Sorry for that. So on Spain, you've been using market chain long-term deposits over the past year. You have made management changes at the top, so... Do you expect a change of strategy, more risk appetite? Where do you see loans and deposits going forward in Spain? Secondly, in the U.S., so you've launched Open Bank. So far, your volumes and cost of deposits are flat in the quarter. How much deposits do you expect to bring to the platform? And where do you see the cost going forward? And sorry, the effective tax rate in the U.S. Thank you. I'm sorry for the... Thank you, Martha.

Let me go ahead. In terms of the money changes we have done to Spain, basically they're not going to change the plans that we had before. We're going to basically very much focus on profitability. That's number one. We're also changing the model. Spain is one of the most important places where we believe we have an opportunity on one transformation, okay, due to the fact that We believe there is a huge opportunity of simplification, automation in what we have there. If you compare one of our branches, for example, in Portugal versus our branches in Spain, 90% of what we do in a branch in Portugal is basically taking care of clients. 50% of what we do in Spain is taking care of incidents, problems, different situations, etc., So it's very important that we do that simplification and then transformation and automation that we need to do on the back in Spain so we make our business much more reliable, much more efficient, and with a much better cost structure. Thirdly, we are, as you know, deploying the global platforms, and Spain is one of the places that we're going to be concentrated the most in the near term, all right? So it's quite important to understand that we will continue doing that. And we will continue basically focusing on managing the deposit vetas that we have done, all right? So very much concentrated on that. Getting new clients. It's very important to acknowledge that for the seven consecutive months, we have grown on clients in Spain, in a mature market. That basically tells you that the model is working, that exactly we are delivering on what we believe is the right thing to do. So... We will continue to do as we have been doing in the past in terms of transforming Spain in what we need to do, but also with global platforms we're going to be able to be much more competitive, more efficient, and better for our clients. Also, this structure of being the number one bank to our clients is very important in Spain because this basically will allow us to sell them more products. One product that is very important and we are punching below our weight is insurance, for example, in which some of our competitors are much more bigger than us in that sense. So there's a huge opportunity where we can do that. Also, if you take a look on CIB, CIB will have had a really interesting and important deliver, given that we're using our Jewish teams to support what we're doing here in Spain. So that is helping us out quite a lot, and we've been actually number one in the market for the whole year. So Spain will continue, as we say. In terms of the tax rate in the U.S., Yes, please. No, no, I wanted to talk a little bit. I mean, just that I believe that 24 in all in all is going to be a strong year for Spain. We remain optimistic of NII. We see growing in high single digit together with customer growth, as I told you, and higher transactionality. And we'll drive our revenue up about double digit. The efficiency ratio will continue improving, and we see growth. The cost of risk below 50 basis points by year end, okay, and also strong improvements in ROTE to a level well above 20%. So, José, if you'd like to come into the U.S.

Just quickly, Marta, this year the tax rate is going to be more or less close to zero. Actually, we're going to actually have a slight credit. from the sale of EVs. And from here, it should gradually normalize as we do less EVs and more contribution from other businesses. So we could think of like around 10% next year, maybe 15% the next year. So gradually normalizing at that pace, at more or less 10 next year, 15 the following year. Yeah. Okay, thanks. Next question, please.

The next question comes from the line of Carlos Peixoto from Casabank PBI. Please go ahead.

Yes. Hi, good morning. A couple of questions from my side as well. Firstly, on the UK NII outlook, we saw a good recovery in the first queue. We actually saw improvements in low yields and also lower deposit costs. I was wondering if you see this trend prevailing into the fourth queue and into 2025. Should we expect margin expansion to prevail or should we expect it to stabilize further? the customer spreads to stabilize more or less around these levels, just basically how do you see the outlook for NII in the UK. Then, if I may pick up a bit on the interest rate sensitivity questions that were raised before. You mentioned that you lowered the NIH sensitivity in Spain to 25% of what it was prior to the change in rate cycle. I was just wondering if you could update us on exactly where the sensitivity lies now, particularly for Spain, but also for some of the larger geographies. That would be much appreciated. Thank you very much.

Thank you, Carlos. I would like to tell you, I mean, I think it's one of the countries that we have one of the greatest opportunities in terms of one transformation. We have a very good advantage of simplifying. That's something that we are very concentrated on. Also, the automation, what we're doing there, we are actually lowering the amount of people that we have. We started the year with 20,000 people. We're going to end up with 18,000. So simplification and automation is well underway. And then, as I said on the presentation, It's quite important that we already start deploying the global platforms. One app came into the UK just about. We did the Big Bang and changed all our clients there. And it's becoming really helpful in order to gain new clients, helping us in the deposit base, and also helping us in terms of NPS. It is important to say that we believe that... We have much better market and economic dynamics. Lending activity, we see it picking up. We are very much also focused on profitability in that market as well. We see more rational behavior of the UK banks, better pricing of the new loans, plus better pricing of deposits. We are proactively managing deposits, as I told you. First of all, with the new clients coming in, with the new edge account that we launched, that's been helping us. So we reiterate our view that NIA will improve In the H2 versus H1, okay, as you have said, we're going to finish 24 with NII down only mid-single digit instead of the minus 9% that we have reported in the first nine months. And we expect a further rate cut in the remaining of 24. But the outlook of 25 is positive in the sense of what we have seen so far.

So, Carlos, in terms of interest rate sensitivity, so let me comment for the main countries. For the group as a whole first, in constant euros, as I said, we would expect NII to increase next year, you know, maybe 2%, 3%. In Spain, using a 2.5% interest rate in Europe for the mid of next year, of 2025, we would expect a slight decrease in NII in Spain. In the U.K., as Hector just commented, a slight increase in NII. In the U.S., we would expect high single-digit increase. In Mexico, mid to high single-digit increase. In Brazil, this is quite important. The outlook for interest rates in Brazil is really important to estimate the future evolution of NII. We expect average interest rates in Brazil next year to be around 11%, 11, 11.5%. With this level of interest rates, NII in Brazil should be up mid-single digits. And finally, in DCV, also high single-digit increase with the level of interest rates that we just talked about. So, as I said, if you compare these with the sensitivity in the way up that we had in the countries in Europe, for instance, or in DCV, as interest rates were going up, the sensitivity we have in the way going down is significantly, significantly lower. Thank you, Carlos. Next question, please.

The next question comes from the line of Andrea Filtri from Mediobanca. Please go ahead.

Hi. Thank you for taking my question. First of all, a question of extrapolation. Consensus is forecasting no growth of profits in 2025 versus 2024. You are currently growing profits at 14% year on year in the nine months. And I know you usually give guidance in February, but do you think 2025 profits will actually be above 2024 in your view? And the second is a follow-up on the capital elaboration you've done before. I'm looking at slide 23. Without regulatory headwinds, you would have built 35 basis points of capital in one quarter after distribution. Can you confirm with Q4 we should exhaust the bulk of the expected regulatory headwinds, and is the higher profitability then yielding to higher capital buildup versus the 10 basis points per quarter guidance that you have given us? Final thing is a clarification on Basel IV. Before you said that on day one, CT1 should be flattish. If I remember correctly, there were 20 basis points of impacts this year that should have reversed with Basel IV adoption. Can you clarify that? Thank you.

Thank you, Andrea. Let me give you a little, I mean, of what we believe. First of all, I must tell you that I have great confidence that we'll deliver, and in some metrics like cost to income over deliver on the financial targets that we set on the investor day for the period of 23 to 25, okay? 25 will be better than 24. For 2025, we expect to continue to grow revenues, especially fees, as I explained with the new model deployment that we're doing. We're going to further improve the operating leverage, and we're going to deliver higher profitability. And we will do this, how? By leveraging further the global and network businesses. We're putting a lot of focus on increasing the network effect. We'll do more with less, first of all. Leveraging also our products and global factories, like, for example, from our corporate bank into our commercial banks, what we're doing between CIB and the commercial business on the midsize companies and SMEs. Also, one transformation is leveraging platforms that help reduce the cost to serve in retail. We're talking about minus 4% on year-to-year cost per active customer and 6% year-on-year revenue per active customer. So since the start of the program, the number of products, as I said before, is down almost 36%, okay? 60% of the products are now digitally available to our customers. That's 9% points up since we started the program. In summary, the strategy and business model diversification, disciplined approach to capital allocation, we believe deliver a consistent compound effect that will continue yielding positive results for the years to come. So, all in all, yes. Jose, I don't know if you'd like to comment into the capital questions.

Let me give you all the components of the capital ratio, and I think you can... Make your own conclusions here. So on page 23, we show 43 basis points of organic capital generation, post-81s, cost of hedges, et cetera, which includes 19 basis points negative from organic risk-weighted asset growth, which is 8 billion growth, partially neutralized by risk transfer initiatives of around 11 basis points or 5 billion growth. Remember that so far this year we've mobilized 35 to 40 billion in terms of risk-weighted assets. And on markets and others, we have seven basis points from the sale of Poland. So with this, I think you can conclude what more or less the recurring capital generation we will be able to have going forward, obviously. The net risk-weighted asset growth, gross risk-weighted assets net of asset mobilization initiatives is the other key component. Obviously, that excess capital is being, or that capital is being reinvested at 2.9% return on risk-weighted assets, but obviously it's capital that is being reinvested. Basel IV. You're right. The maturity will impact the negative impact of the 21 basis points or 22 basis points we had in the first quarter of this year will reverse in the first quarter of next year and this will compensate the other negative impacts, day one impacts that we have mostly from technical adjustments to low default portfolios, corporate portfolios, etc. So net-net It's obviously zero is the net of some positives and some negatives, and amongst the positives is these 20 basis points from the maturity we use in derivatives transactions. You're right. Andrea, thank you. Next question, please.

The next question comes from the line of Ignacio Cerezo from UBS. Please go ahead.

Hi, good morning, and thank you for taking my question. Sorry, I'm going to come back to capital in particular, if you can give us actually the path of those 40 basis points you have on a fully loaded basis, actually, how are those scattered beyond actually the next years, and specifically how much of that is going to fall on 2025? I'm sorry if you have referred to this, actually, but I just want clarification. And then related to this, going back basically to what Alvaro was asking before, What is the preferred use of any potential excess capital that you're building? Are you thinking basically of accelerating growth, spending a little bit of that, or is it a question basically of also considering the possibility of increasing distributions? And then the final on the capital, actually, if I may, what kind of budget for SRTs actually you have per annum in the next two to three years building up into your capital forecasts? Thank you.

Okay, so the 40 basis points. As you remember, we are not affected by the output floor because we use lots of standard models. So that 72.5% limit to the benefit of internal models relative to standard models, we are not affected by that. That is back-loaded. That's what comes later from 2029 to 2033, if I'm not mistaken. We are mostly affected, the 40 basis points is mostly the result of operational risk that will come over the next four or five years, if I'm not mistaken. So that's how these 40 basis points are going to be added to the phase-in in our case. I think Hector already answered the question about the excess capital. And budget, on a recurring basis, obviously the demand for private credit today is enormous. I'm not going to say it's infinite, but it's huge. So obviously I don't think we are going to have this type of demand as interest rates come down, obviously. But we think that on a recurring basis we should be able to mobilize somewhere between 35 to 55 billion in risk-weighted assets. Obviously, SRTs will only be maybe a third of that, 15 billion a year. It's reasonable to assume that 10 to 15 will come from SRTs, and the other will be from other types of hedges and other types of transactions, asset sales, et cetera, like we did this year. But on a recurring basis, with a more normalized market, 35 billion, 40 billion per year, like a reasonable number. Thank you, Ignacio. Next question, please.

The next question comes from the live of Sophie Petersons from JP Morgan. Please go ahead.

Thank you for taking my question. This is Sophie from JP Morgan. Sorry to just go back to the organic capital generation, but on the analyst call that you hosted a few weeks ago, You said or it was said that you target net zero risk-rated asset growth and around 15 basis points organic capital generation per quarter. Is that reasonable to assume going forward and – Yes, that would basically be my first question. And then the second question is that M&A is a quite hot topic in Europe at this point in time. If you're going to generate more capital going forward, how do you think about inorganic growth opportunities? What would be something that you could potentially consider in terms of product or region? And, yeah, if you could talk about your thinking around M&A. And then the last question would be around Brazil asset quality. I noticed that the NPL ratio ticked up 0.3%, quarter and quarter, and also coverage came down quite a lot in Brazil. How should we think about this? Thank you.

Thank you, Sophie. Yes, I mean, the answer is in organic capital generation, yes, you're right. I mean, that's about it. Okay. In terms of the organic opportunities, I do believe that we have a lot of organic opportunities within the group. I think that the chances, and if you make some numbers in terms of what we could do by becoming best in class versus the best in class in every single market that we operate, that basically tells you the huge opportunity that we have in front of us. And we will continue like that. We will concentrate on our... changes on the go-to model of the bank. I mean, it's a process that is going to take us at least the next 24 months in order to have also the global platform set in place, etc. So we're very much concentrated on that, okay? And that's exactly what all the focus of the group is today. In terms of the Brazil asset quality, as you have seen, I mean, as you have seen, basically First of all, I must tell you that we have very strong revenue performance, okay? Solid devolution on cost, okay? Flat quarter on quarter. But we have a really resilient behavior of the credit quality. Cost of risk is stable at 4.78, and the more recent vintages are performing well, and we don't have any signs of deterioration. It's very important that you acknowledge what I explained at the beginning in terms of the change of mix and the change of the way we're looking at the Brazilian portfolio. Okay? So... As I was telling you before, we used to grow in every single segment of the market. Today, we're not doing so. We're much more focused on profitability and also on the cost of risk that we have. So you're going to see a much better performance of Brazil over the next years because we're exactly doing so. All right? So it's quite important that you see that. And you're going to see, basically, that the outlook that we have towards the end of 2024 is unstable cost of risk versus 2023, around 4.6%. As I said, I mean, with the new changes that we're putting in place, et cetera, I think the vintages will perform much better than we expected. Okay?

Okay, thanks, Sophie. The next question, please.

The next question comes from the line of Brita Smith from Autonomous. Please go ahead.

Yeah, hi there. Thank you for taking my questions. A few clarifications. When you talk about earnings growth, does that apply to current euros as well? I'm just asking, if you got it to 2% to 3% and our growth next year in constant euros, and it might be a little bit lower in current euros, and that I would think would have to drive most of the revenues to deliver positive jaws. And then a clarification on the rates. You mentioned 2.5% for Europe. Is that what you expect for the full year then as well, or what is the average expectation for the year? And then lastly, on Portugal, on the net interest income, it declined significantly this year as we saw a big deposit cost increase. Is that just a catch-up with the competition, and where do you expect deposit costs to go in the future? Thank you.

So, yes, we would expect fee income next year to grow mid-single digits with costs fairly flattish. So, yes, we would expect revenue, operating income, to actually increase next year. In terms of interest rates, well, we think 2.5% is the rate that we expect by mid-year, and then maybe one drop, one cut more in the second half of the year. So we do not see 2% as the terminal rate in Europe right now. Obviously, you know, we'll see. But in our case, we are not as negative as the market or positive, depending on how you look at it, in terms of interest rates. And then, you refer to countries, which countries? Spain, in particular? Sorry, I didn't get which country you were referring to. So we will get back to you after the call. Carlos will give you a call and clarify that. But let me just very quickly in Spain. Obviously, the betas that we ended up having this year were much, much lower than the ones that we expected. So we managed our cost of deposits pretty well. basically thanks to avoiding the transfer of current accounts to time deposits. As rates come down, those parts of the current accounts that are tied to interbank rates or the URIBOR, basically private banking, corporate banking, and the large corporations, is adjusting downwards as well. So going forward... we should see actually a positive contribution from year-on-year deposit cost in Spain from 24 to 25. Other Euro countries, in Portugal, the situation is a little bit more extreme. So in Portugal, we would expect NII to actually go down a little bit more than in Spain next year because there, obviously, the situation is a little bit more extreme than it is in Spain. Thanks, Britta.

Next question, please.

I just have just one question left, and thank you for the color on 2025 NII rate sensitivity. So it's a bit of a follow-up question, but is the sensitivity to lower euro rates linear as rates move lower, or would the negative drag on NII be larger on European rates if we start to move below your expectations or below 2% policy rates? You mentioned earlier 2.5% at the mid-year, 2.25% by the end of next year. Would we need to recalibrate the sensitivity if we start to get towards 2% or below 2%?

Chris, thank you. It also depends on how steep or flat the curve is. A curve that flattens would have a more negative impact on margins than a curve that remains steep. So obviously, if rates go well below 2% and approach zero, obviously from two to zero, the impact on margins is greater than from four to two. So it's not linear. But if rates stay between two and two and a half, I think we are going to have a pretty good outlook in terms of NIA. Because again, the cost of deposits at those levels will gradually approach zero, basically, and we will have at least that two to two and a half percent margin on the asset side. Thanks, Chris. And the final question, please.

The last question comes from the line of Hugo Cruz from KBW. Please go ahead.

Hi, thanks a lot for the time. Three quick clarifications, if I may. So first, trading income in Brazil has been quite weak now for a couple of quarters, been negative. Can you give any guidance there? Second, the corporate center, NAI, Should we expect a positive number in Q4? Or again, any guidance you could give? Third, I heard you on the tax rate for the U.S. What does that mean for the group? So can you give guidance on the group tax rate? Thank you.

Thank you, Hugo. In terms of the trading income, it's in any case very small in the context of Brazil's total revenue, and it shall not overshadow the very strong operating performance in the quarter and in the improvement in profitability. Okay, the client-related trading income has had a strong performance in Q3, okay? However, recent market volatility around the Brazilian REI and the yield curve led to an important deterioration in local assets during Q2, but also in Q3. But we have a stabilized dose, and I believe that the outlook will be much better. This is a challenging market environment, and we've been basically offsetting this during Q3, and I believe Q4 is going to be much better.

NIA for the corporate center. NIA in the corporate center should gradually decrease because of the remuneration of the liquidity. that we have at the corporate center. So you should expect NII to reflect the lower rates on the liquidity that we hold at group level. And finally, the tax rate for the group, it should be fairly flat next year, maybe a touch below what it will be this year, but just marginally. So, you know, for model purposes, I would use the same tax rate in 2025 than we will have in 2024, same tax rate. And I think we've answered all the questions. Thank you very much, everybody. Investor Relations, myself, Hector, are at your disposal to answer any follow-up questions that you may have. Looking forward to seeing you over the next few weeks on one-on-ones. And we'll talk to you again for the fourth quarter earnings in January. Thanks, everybody.

Bye. Thank you very much. Bye-bye.