Banco Santander Mexico, S.A.

Good morning everybody and welcome to Banco Santander's conference call to discuss our financial results for the third quarter of 2022. Just as a reminder, both the results report and presentation we will be following today are available to you on our website. I'm joined here today by our CEO, Mr. José Antonio Álvarez, and our CFO, Mr. José García Cantera. Following their presentations, we will open the floor for any and all questions you may have in the Q&A session. With this, I will hand over to Mr. Alvarez. José Antonio, the floor is yours.

Thank you, Begoña, and good morning to everyone. Thank you for attending to this conference. So I should say, to start this presentation, that while we've been developing our activity now, highly uncertain macro environment. In this environment, we've been able to keep growing our customer base and translating this into volumes growth and revenue growth. So the most remarkable change in the quarter probably has been the acceleration, starting the acceleration of NII. with a growth of 5% quarter on quarter. Probably this is the main event on the back of activity levels and starting, just starting to raise interest rates, particularly in the Eurozone where our exposure So our high rate is high. Our profitability improved significantly. Our return on tangible equities stays in 13.6%. EPS is growing at 31% on the back of the profits we got in the quarter, 2.4%. Billion after absorbing 181 million charge net of tax and minorities in Poland. The gross number was north of 300 million related to the new payments holiday regulation. Excluding it, profit grew 11% in the quarter, 10% in constant years. In the nine-month attributable profit, we got €7.3 billion, increasing 25% with the positive impact of the currencies being plus 14% in constant euros. The credit quality on our balance sheet shows no signs of deterioration so far in the quarter. Overall, the cost of risk remains below 1% and we continue to generate capital at good pace. Finally, as you already know, we continue to pay value to our shareholders, both in terms of shareholder remuneration with the cash dividend we announced the board approved last month, and the growth in tangible net asset value per share that provides a combined TNAP plus cash dividend per share of 11%. Going into more detail into the regions, you see the growth is well spread across the board, both in loan and deposits. It's fairly balanced growth. We cannot say that we are growing just in one part of the business. We are growing well across regions. The board in constant euro loans increased 2% quarter on quarter, 17 billion, which increases in almost all countries. Deposits were up 2% also in the quarter, with some shift towards time deposits given the current interest rate environment. In the actual month, loans and deposits grew 7% and 6% in constant years. Regarding our loan portfolio, naturally this doesn't change quarter to quarter. Yes, you have to remind that our portfolio is fairly balanced at 1.30%. Individual mortgages, mainly UK and Spain by this order, being UK by far the largest, more than 50% of the total portfolio. The other, less than a third, but close to 30%, is consumer lending. The majority is auto lending in Europe and in the U.S. And finally, we have an exposure north of $400 billion, close to 40%. of our loan book, the majority in SMEs and corporates and in CIV. You see that all the main portfolios are growing, so 7% individual mortgages, 7% consumers, 6% corporates. So, as I said, balanced growth across the board. Looking at the income statement, we provide you growth rates both in euros and constant euros for you to analyze in the best way you can analyze. As you can see, there was a positive impact from change rates of around 5-7 percentage points, partially offset by the FX hedge in the corporate center that is including gains on financial transactions. In constant euros, revenue grew at a faster pace than in Q1 and Q2, and costs faced inflationary pressures but continued to grow below inflation. Thanks to this performance, net operating income reached 21 billion, a record for the first nine months of a year. In long-lost provisions, that is one of the current topics in this particular environment, there were two opposition forces impacted significantly. the year-on-year performance. On the other hand, in 2021, there were COVID-19-related long-loss provisions released in Q2 and Q4 of 2021 due to better-than-expected credit performance. On the other hand, in 2022, long-loss provisions including... include an additional $1 billion, circa $1 billion in provisions related to update macro assumptions, mainly in the U.S., Spain, and U.K. So the macro provision, roughly speaking, was $1.1 billion. Spain represents $200 million, U.K. $300 million, and U.S. $500 million, and other countries $100 million, of which $500 million are expenses against P&L, and the other $600 million is reassigned funds, mainly coming from COVID. provisions that were in the balance sheet. So, we are seeing, this is an important development in the quarter, some normalization in the U.S., as we anticipate to you, and in Brazil, some stabilization of the cost of risk. We elaborate on this Jose will elaborate in this further. Additionally, this year we record higher charges related to fund contributions and new resolution schemes, plus lower minorities and tax borrowing. The net results, as you can see, is 7.3 billion. Elaborating a little bit on the P&L trends, let me to say, well, positive trends in customer revenue, especially NII the last quarter, which we expect to continue as the positive impact of interest rate hikes and activity growth are fully reflected in the different regions. The positive impact is just starting in Europe and somehow more advanced in other countries like the UK and US, and more so in Poland and in Mexico. The opposite happens, the negative impact has happened in Brazil and Chile, as you know, that they are getting lower rates. Secondly, our costs grew below inflation in all regions in most countries. Our efficiency improved slightly to 45.5% compared with full year 21, but this is being eroded by inflationary pressures in some regions by the lack between the almost immediate impact on costs and the revenue benefit from higher rates coming later. Thirdly, in general, we did not see any deterioration in the cost of risk or in the credit quality variables such as arrears. We have very good cost of risk in Europe and the ECB, and also in North America, where both the U.S. in process of normalization and Mexico are performing better than expected. In South America, the cost of risk in general was stable. You know that Brazil went up this year. For now, for two quarters in a row, it has been stable. and we believe that we already reached the peak and some indicators are more constructive on this going forward. All in all, we are confident for the whole group to achieve our cost of risk target.

In relation with the

Profitability, I mentioned our ROT is 13.6%. Earnings per share grew 31%. Unbacked by higher profit and share by bucks, we bought back 3.2% and we amortized 3.2% of our group's capital. Finally, regarding shareholder remuneration policy for 2022, our intention, the board already approved 40% payout, half of this in cash, 5.83 cents in cash, and $979 million in buybacks that we expect to be approved by the ECB soon and we start to execute. as soon as it's approved. As a result, the total remuneration in this first dividend is gonna be 1.9 billion. Positive TNA performance, I mentioned before, that is increasing for several quarters in a row, given the performance, the profitability of the group, a more constructive exchange rate combined. Finally, on capital, we are very comfortable with our tier 1 core equity tier 1 ratio remaining above 12%, a level that we consider to be very appropriate for our business. In the quarter, net organic capital generation of 26 basis points after 8 basis points accrual for the future cash dividend. The increase was partly offset by negative impacts from markets, available for sale portfolios, and some from models, mainly more markets and models. At the same time, we continue to deliver our commitment of disciplined capital allocation. As you can see on the slide, risk-weighted assets grow well below long growth. higher book from book profitability and lower weight of risk weighted assets we return equity below the cost of equity now our cfo jose garcia cantera will take you through the results in more detail thank you jose antonio and good morning everyone

After the CEO presentation, I will go through our performance in more detail, in the quarter in more detail, and we'll look at the progress in terms of country and business. Starting with profit, on the right-hand side, you can see the upward trend in profitability, driven mainly by revenue, which increased 5% in the quarter. This increase was supported by NII, which also increased 5%, and which, as we can see, has accelerated in the last two quarters, primarily as Spain and Portugal are beginning to benefit from interest rate increases, in addition to the growth that we have already seen in countries like UK, Poland, US, etc. In North America, NII rose 6%, with both countries growing more or less at the same pace, and And in South America, it was up 5%, supported by a strong growth in Argentina, while Chile and Brazil showed negative sensitivity to rates, especially Chile, where we had lower inflation in the quarter. In Brazil, NIA remained stable following declines in previous quarters. I will explain this in a bit more detail when we go through Brazil. The digital consumer ban was practically flat recently. due to the, although we have neutral positioning to rates in DCB, it's a slightly negative in the first couple of quarters, and then it neutralizes, and that's what explains these behaviors. Net fee income was flat in the quarter, mostly due to weak performance in Europe due to seasonality. We had lower fees charged on deposits from CIB large corporate clients and one-off in credit cards in the second quarter in the UK. On the other hand, South America increased 5% with an excellent performance in Chile and Argentina. Gains on financial transactions were higher, driven by CIB. Obviously, quarter-on-quarter comparison in other income was affected by the contribution to the single resolution fund in the second quarter. This is our net interest income sensitivity to rates. This is consistent with what we have shown in previous quarters. This time around, we thought it would be better to look at forward rates rather than a sensitivity to a 100 basis point change. So this is the sensitivity of forward rates relative to rates remaining stable over the next 12 months. Obviously, you know, it is fully comparable because now forward rates are almost 200 basis points, and the sensitivity we showed in the previous quarter was 100 basis points for the euro zone, for instance. So this is the sensitivity, again, of forward rates relative to rates remaining stable. As expected, obviously, we have very high sensitivity in euros. In sterling, we have some additional sensitivity from current levels, but obviously the higher the rates, the higher the beta as well. So the beta we have here is around 50%, 50% to 60% in this exercise. And in Brazil, as interest rates remain flat, asset repricing should gradually compensate the increase in the cost of deposits, which, as you know, is almost automatically repriced. It's important to note that this sensitivity is based on the maintenance of the TLTRO depot conditions that exist at the moment, and we all know that they will change tomorrow. We don't know what the change will be, so we will adjust that accordingly in the next presentation. Looking at costs, the CEO has already mentioned that costs are growing below inflation, which, as you know, is one of our targets. And as you can see on the slide, we are achieving, thanks to the transformation plans underway in all countries, particularly in Europe, a very good performance. we had in Europe a four percentage point improvement in the cost to income at the same time. As costs automatically adjust with inflation in emerging markets, it takes a bit longer in Europe for that to happen. As I said, in South America, the rising cost is explained by the automatic adjustment of cost to inflation, particularly in salaries in Brazil, Chile, or Argentina. Even so, cost in the region fell a little bit in real terms, and efficiency remained excellent despite a slight increase. And in North America, it's worth mentioning the investments that we continue to make in Mexico to modernize our infrastructure. In terms of credit quality, we are not seeing any significant deterioration. The NPL and coverage ratios have been stable in recent quarters, as has the cost of risk. Stage 3 exposures increase in line with the credit portfolio. As previously mentioned by our CEO, you can see the COVID-19 related provision releases in the second quarter increased. and the fourth quarter of 2021, and the additional over 1 billion of macro provisions in 2022. José Antonio already mentioned half of which came through the P&L, and half were reclassifications of previously created COVID-related provisions. Compared to 2021, there were long-term provisions increases in the UK, in the US, Brazil, and Poland, but very much in line with what we expected. Going into a bit more detail about the quality of our portfolio, we maintain a low-risk profile balance sheet. It's mostly concentrated in mature markets, 80% of the total exposure, with approximately 65% in secured lending, mostly by real estate collateral. Additionally, the main macroeconomic variables that affect our businesses, particularly unemployment, are expected to remain resilient across our footprint. Looking at the main countries, in Spain, 75% of our mortgage portfolio is floating. We have significantly reduced the average loan-to-value and the percentage of mortgages with loan-to-values over 80%. Corporate portfolio improved its rating, and as you know, the eco-portfolio is performing very well and better than expected. Unemployment is low and stable and is expected to remain so. Housing affordability has improved significantly in recent years, and house prices are on average 30% lower in real terms than in 2008. In the UK, 12% of the portfolio is floating. The simple average loan-to-value of mortgages is 40%, and less than 5% have loan-to-values over 80%, versus 12% in 2015. In terms of macro, the UK has a very low unemployment rate, which we believe will help avoid a sharp fall in prices. Moreover, affordability is currently at 34%, 10 percentage points lower than in 2008. In the U.S., we've changed the mix recently towards more prime, which currently represents 80% of the total auto portfolio, and therefore is a better quality portfolio. Used car prices are clearly above historical levels. They should gradually normalize, but this normalization should take place gradually, as I said, because of the scarcity of new vehicles. And also U.S. unemployment is at very low levels. It's expected to go up a bit, but by no means reaching the levels of previous crisis. Lastly, in Brazil, activity is gradually recovering. We are growing in low-risk products. Sixty-five percent of individuals' portfolio is secured. The average maturity of our balance sheet in Brazil is a bit less than one and a half years, which means that asset quality deterioration surfaces very quickly. In summary, we remain constructive on the future of our asset quality. Now, let me go in a bit more detail through the main countries. Starting with Spain, we continue to see a very dynamic market. Net customer, we have had positive net customer growth every month since December 2021. We have increased transactionality and we've seen robust volumes growth. Year-on-year profit was supported by our efficiency plans. Cost to income is down 2.4 percentage points and the reduction in loan loss provisions. The nine-month annualized cost of risk is 62 basis points, including 200 million from macro adjustments. In revenue, NII was under pressure in the first half, but it started to ease in the third quarter, growing 10% quarter-on-quarter, starting to reflect the hike in interest rates. Looking forward, for the next few months, we continue to see positive trends in NII, lower cost base in absolute terms, and controlled cost of risk. In the UK, we continue to have positive new lending trends and higher interest rates obviously are supporting NII growth. We had double-digit growth in revenue together with strong cost control. Costs were down 6% in real terms, which resulted in over 4% improvement in the cost to income and drove the strong operating performance, which was up 20%. Underlying profit was flat due to higher loan loss provisions versus releases in 2021. We are comfortable we will reach our targets, both for return on tangible equity and cost to income, with double-digit growth in NII year-on-year and flat costs. Turning to the U.S., again, also very solid business dynamics, both in loans and deposits, and the line profit remained high at 1.5 billion, well above average pre-pandemic levels, despite falling year on year following a record nine months of 21, affected by competitive pricing and obviously the normalization of the cost of risk. We continue working on normalizing our capital levels in the U.S. So far this year, over $3 billion have been upstream to the corporate center. So gradually we will show a more sort of transparent profitability levels in the U.S., which, as you know, our objective for the long term is to keep returns on equity at around 15%. We maintain our outlook for the year of 22, lower revenue impacted by leasing, flat costs, and better than initially anticipated cost of risk, well below normalized levels. In Mexico, another excellent quarter, profit increase quarter on quarter, driven by a strong upturn in NII and lower loan loss provisions. Costs were affected by the salary revisions that took place in July. We also delivered higher profit and greater profitability year on year, supported by volumes growth, interest rate management, higher fees, and excellent risk behavior. For 2022, again, we maintain our expectations of double-digit growth in NII and fee income, higher growth in costs affected by our investments in digitalization and obviously inflation, and a cost of risk of around 2%. The performance of us at Quality in Mexico is excellent. In Brazil, we continue to grow our customer base and volumes, dealing obviously with the pressure on margins coming from repricing. As you know, we tighten our credit standards in the high-risk portfolios, particularly unsecured individual lending last September, and that still continues. We are growing in low-margin businesses more frequently, particularly CIV and mortgages, and that changing mix is obviously affecting NII. But NII, as repricing of assets, it starts outweighing the repricing of liabilities, is flattening. The quarter-on-quarter NII is basically flat already in the third quarter, and we would expect to see a very gradual improvement until more or less the first half, second quarter, and starting to grow more after the third quarter of next year. You know, interest rates have already peaked. We have a 12-month repricing gap, so we would expect to see a gradually increasing NII in the second half of next year. Costs rose because of the automatic pass-through of inflation to costs in the country. Salary agreement in September for 23 was 8% relative to the 11% of last year, so we have some positive news there. for cost in 2023. Cost of risk around 4.5%, very much in line with our guidance. We would expect this to remain more or less at these levels in the fourth quarter, maybe a touch higher, but around 4.5%, 4.6%, and gradually starting to come down next year. If we turn to the digital consumer bank, here the activity remains strong despite continued market contraction. We are gaining market share, particularly in used cars. We have double-digit profit growth supported by fees, leasing, and a very good cost-of-risk performance. challenging environment for new cars, but we think we will be able to continue to gain market share and we should be able to maintain high returns on equity in the coming quarters. In the global businesses, CIB reported its best quarter in its history, gaining market share in all businesses and products. We expanded in the U.S. and we maintain our leading positions in the different countries in Latin America. We are leaders in sustainability, ranking number one in Latin America, Europe, and globally. in structured finance in the renewables sector. In terms of results, underlying profits grew 36% year-on-year, with double-digit growth in all core businesses. Underlying attributable profit represented 27% of the group's total operating profits. In wealth management and insurance, the contribution of this unit to the bank was 17% on a like-for-like basis, so very good performance. Private banking is attracting new customers, up 6%, also new money, up 10 billion, and profits grew 30% year-on-year. In Santander asset management, the asset management business was affected by market volatility, but it increased its contribution to group profits to 8%. Finally, in insurance, we had sustained growth in gross return premiums, and the total contribution to profit increased 15%. We expect to maintain double-digit growth in profit contribution in this unit in the coming quarters. In PagoNext, total revenue increased 75% year-on-year in constant euros, almost 100% in euros, fueled by all four main businesses, especially merchants and trade. So we are doing better than our guidance of 50% revenue target for the year. Activities are really going very well here. And finally, in cards, I would like to highlight the efforts that we are making to improve our credit card business. We currently manage almost 100 million cards across the group. And thanks to active customer management, nine-month revenue was 25% higher year-on-year in constant euros, 36% in euros, with very positive performance in both credit and debit cards across the regions, particularly in South America. Let me now turn it back to José Antonio for his final comments. Thank you.

Just a few words in relation with the outlook. So... I should say that we expect significant revenue growth on the back of activity levels that will remain healthy, particularly in our global business with the capacity to generate additional net fee income. and while the additional NII growth that benefiting from activity and interest rate hike. So I'm fairly constructive on our capacity to keep growing our revenue in the coming quarters. On the cost side, Well, we face inflation pressures, you've seen through the P&L, but I'm confident that we continue to improve in our productivity and efficiency, not only on the back of expansion of revenues, that for sure is going to happen, also for our capacity, demonstrated capacity, to run the cause while below inflation. On credit quality, I do recognize that the environment is highly uncertain, but when I look at the balance sheet and the long book, well, I feel comfortable that we are ready and prepared to face a more difficult environment with credit. particularly the one in the consensus, as the consensus is today for the macro. It doesn't worry me that much. Even harder scenarios, we are in good position to match, given the very nature of the portfolio. On capital, while we're going to be above 12%, I feel that we have handled better than the average the impact of the pandemic. portfolios, the valuable for sale portfolios, that has affected the capital across the board less than our competitors. And at the same time, we continue to be extremely disciplined in our capital allocation. So all in all, we spare revenue growth to more than a set cost inflation pressures and the potential increase of cost or risk. And on the back of this, improve our profitability and the value creation for shareholders. That's all on our side. So we remain at your disposal for the questions you may have. Thank you. I forgot to mention that we have an investor day in the very last page on the 28th of February in London. We have an investor day where we update you on the prospects for the group. Back to you, Begoña.

Thank you. We can start with the Q&A session, please.

Thank you. If you wish to ask a question, please press star one on your telephone. We already have some questions in the queue, and the first one is coming from Ignacio Bulargui-Lopez from BNP. Ignacio, please go ahead.

Thanks very much. Thanks for taking my question, José Antonio. Not sure if this will be your last results call, but I wanted to wish you all the best, and thank you for the support all these years. I have two questions. on the numbers. One is on the European loan book, how big has been the repricing of the asset side so far? I just wanted to get a bit of a sense of where we are standing in terms of the NII uplift that could come in coming quarters. And also linked to the NII, I wanted to understand a bit better what has been the contribution of the TRTRO in the quarter. The second question is basically linked to the cost-to-income ratio you have flagged In your final remarks that you aim to keep on improving the cost-to-income ratio, target is going to be a bit high probably for 2022. What can you do to keep on improving costs, which looks to me very sticky in terms of growth, particularly in Latin America? Thank you.

Okay, in the first question, I mentioned a little bit the European long book. I said that NII expansion is just starting in Europe, particularly in the Eurozone. I mentioned that we have, as you know, the central banks have reacted. The expansion reaction has not been the same across the board. In this particular cycle, Latin American central banks reacted first. We saw Brazil going from 2 to 14, Chile going from 1 to more than 10%, Mexico reacting along with the Fed but starting at higher levels, and UK and US came later, the ECB being the last one. I forgot to mention Poland, that the reaction was one of the first also. When you go to the different books, I mentioned in the presentation that you've been seeing the impact of higher rates for a while in Brazil, and a particular case was negative. And in Chile, that is more complex because it's a trade between inflation and nominal rates, as you know. We saw some reaction coming from UK, US, and Mexico that are not just midway, but somehow midway. Poland is advanced. It's like in Latin America, you see the margin expansion. And Europe is starting the loan book, specifically in the loan book. Remember, in the quarter, we barely have depreciation other than the new origination and some loans related with LIBOR through amount. The mortgage book that everybody follows We repriciate in September. The book that repriced in September was repriced with the Euribor in July. That was not that high compared with the one we have right now. I should say that the big repriciation is going to go along the next 12, 13 months. And it's going to be pretty significant. You asked the TLTRO in the quarter. The number I have in mind is 60 million, 69 million or something like that?

For Spain, yes. For the whole, it's 216 to 91. For Spain, it's 150 to 70. In the quarter? Yes.

Yeah. Okay. So this is the impact of the TLTRO. The cost to income keep improving while I said in my final remark that naturally the cost to income with the revenue expansion we expect AND KEEPING THE COST GROWING BELOW INFLATION, NATURALLY THIS LEADS TO AN IMPROVEMENT IN THE COST OF INCOME. I DO RECOGNIZE THAT TO REDUCE NOMINAL COSTS AS WE ARE DOING IN EUROPE BUT CIV IS DIFFICULT IN THE CURRENT INFLATION ENVIRONMENT AND PROBABLY IS IMPOSSIBLE. WE NEED TO RENEW SOME AGREEMENTS WITH THE UNIONS AND THIS IS put pressure on this. Cost of income for sure on the back of higher income is going to improve. But also remember that while in South America at some point with the outlook that we have for Brazil becoming more constructive on the trends at some point and in Chile at some point we will start to recover. Overall I'm fairly confident that the cost of income should go down, but you're going to have specific details on the investor day in relation with the specific targets for this.

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

Thank you. The next question is coming up from Francisco Rical from Alantra. Francisco, please go ahead.

Yes, thank you for taking my questions. I wanted to ask about Brazil. In particular, first of all, about the NII. You mentioned in the past presentation that there was a two-quarter lag between the peak in the SELIC rates and the draft in NII. Now I hear from your comments that the NII in Brazil will not grow fast until the third quarter of 2023. So you can please update the the NII dynamics in Brazil. And if you can please update on your NII guidance here as well. And second in Brazil is about asset quality. You can comment on the unsecured lending for individuals. What is that is still driving MPLs up this quarter. And if you can update on the 4.5% cost of risk guidance for 2022, how much of a deviation, and then where do you see cost of risk normalizing from here and when? Thank you.

Okay, let me give you the big picture on Brazil and specifically the question you raised. So we've been in a situation in which we've been suffering a margin compression of the back of two things, higher interest rates, that the balance is geared toward lower rates, And second, we changed our underwriting standards back last year, in September last year, that leads to a change in mix with lower origination in the low end of the mass market. And this naturally impacts the yield of our new origination and the yield of the portfolio. That's the impact on the NII. Where are we right now? So we are now more constructive. For two quarters, we've seen the cost of risk in line with our expectations, so that means that we are in a position to start to grow a little bit more, little by little, checking this, and start to offset, as Jose said, to pass through the growth in activity to some growth in NII. volumes going to grow faster than NII for a while, but this gap is going to get reduced over time as we reprice assets in the book. And maybe at some point, if we have confidence, the mix becoming more normalized compared with the one we have today and the one in the past. So that's the expectation for NII. So more constructive, little by little, more activity, more pass-through to NII in this environment. The asset quality, Jose mentioned the 4.6, 4.5, 4.6, like at the end of the year, we were guiding you between 4.2, 4.5. We are growing particularly in non-individual sector, less than expected. Growth has been limited in corporate sector and in CIV and SMEs where credit quality is good and the denominator push us up a little bit. our expectation on the asset quality. But nothing that we see fundamentally wrong in the vintage. We are analyzing on the generation in the mass market, in the low end of the mass market is where we got the problem. So all in all, I feel I'm more constructive on the outlook for Brazil. So I think that little by little we're going to show these trends, I hope, and show to you in the coming quarters.

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

Yes, the next question is coming from Alvaro Serrano from Wagan Stanley.

Alvaro, please go ahead. Good morning. A couple of questions from me. I won't touch on Brazil because I think you've been pretty clear. But one question on UK, another one on US. In the UK, you've now raised your 1-2-3 account and you've got a pretty competitive portfolio. remuneration on deposit remuneration. When we think about the next few quarters going forward and considering what's going on in the mortgage market, do you still have capacity to grow the NII? I'm just thinking your overall ability to grow profits in the region given the NII potential headwinds from repricing mortgages, minimum deposit sensitivity and and obviously the economic outlook sort of deteriorating, so maybe an update on the outlook on the U.K., more to think about next year. And the second question on the U.S., I think you called out, Jose, I think, called out the gradual normalization. Some of your peers have profit-warned. Some of your competitors in the auto space have profit-warned. during the results season. Could you update us as how sort of delinquencies are performing? Are we back to normalized levels and it's just about normalizing secondhand prices? And in that context of normalization, is the 300 basis points provision charge for 2019 that you posted in 19 a reasonable sort of fully normalized provision charge or what's a fully normalized look like for you? Thank you.

Okay, thank you, Alvaro, for your questions. In the UK, you mentioned the one, two, three. Overall, in the UK, as you know, there is a fairly dynamic and competitive deposit market. We have a large loan book, not only mortgages, but mainly mortgages. And while we plan to keep the retail funding in line with the long book that we have, for that reason we need to react. This is, your question goes straight, can you grow the NII having to react to the more dynamic and competitive deposit market? Yes, I think we can. Jose mentioned about the beta. So we think that we still enjoy margin expansion. Outstanding that we need to react as we reacted in 1, 2, 3. But taking into account all of this, I do expect the NII to keep very constructive in the U.K. and growing nicely in the U.K. in the coming years. The market is complex. You know, you remortgage basically one third of the mortgage book. In our case, roughly speaking, $60 billion along the year. And while this is going to raise some questions, because all in all, it's going to go from two, two and a half, three, to double of this as of today. And this increase should be more than enough to, along with the corporate book that reprises faster, should be more than enough to offset the increase in the positive cost. That is going to happen, and it's happening. But I see margin expansion next year in the U.K., all in all. Okay. In the U.S., well, your question goes in our panel in the U.S., particularly you're referring to the auto sector. What is happening there is margin expansion on the back of the deposit base of the bank, fairly competitive market in prices in the auto space, fairly, fairly competitive, more than I was expecting. And what we are seeing in the cost of risk, Jose mentioned that the cost of risk is increasing less than expected. We have several factors there. One factor that is fairly negative is the leasing. because on the back of the very high second-use car prices, we are not having gains on the disposal of the cars that we have leases as we had the previous year. And on the other side, the cost of risk, you mentioned 300 basis points up, probably is not going to be the same than previously. Our book is more prime than it used to be. And so, as Jose said, 80% of the book in the U.S. is prime, only 20%. is subprime, and we do not expect to go back exactly to the levels we had in 2019 because the mix is true that some of our competitors show some increase in risk. I haven't gone through the numbers and knowing, and I don't know if they changed the mix or they changed, but we are now seeing this. And on the back of this, we are, I feel comfortable, we are fairly well-provided. In fact, we reassigned 500 million of provisions that we built for COVID to the new macro scenario. So in that regard, normalization will happen. I don't expect to go back to the levels of 2019, just because the mix overall. But on a life-for-life basis, it makes sense that at some point we'll get there. Overall, not due to the mix, but this is going to happen little by little. It's taking longer than we were expecting.

Thank you, José Antonio, and thank you, Álvaro. Can we have the next question, please?

The next question is coming from Sophie Petersens from J.P. Morgan. Sophie, please go ahead.

Yeah, hi. Here is Sophie from J.P. Morgan. So my first question would be if you could just repeat the TLGRO NII benefits. Sorry, I couldn't quite hear that. But then more broadly, the questions are the first one is on cost growth in Europe. You said a very strong cost performance in Europe, but how should we think about the wage agreements coming up? Also higher investment, higher IT costs, higher general expenses. So how should we think about cost growth in Europe going forward? And then my second question would be, when would you expect the cost of risk for Santander to peak? It sounds like Brazil will still be relatively high cost of risk. US cost of risk is going up. UK cost of risk is trending up. So how should we think about the cost of risk peak for Santander? And at what level could that come into play? Thank you.

I pass the question of TLTRO to José.

Let me give you the figures. The group has 88 billion in TLTRO, 60 billion in Spain, 20 billion in Santander Consumer Finance, and 7 billion in Portugal. So you can do the math very easily. Thank you. Sophie.

Cost growth in Europe and the wage agreements. So where are we in different jurisdictions? I should say in Poland and UK we've been updating salaries along with inflation. So I should say BAU, business as usual, is in Spain and Portugal where... We had agreements for several years. In Spain, that is the most important one due to the size till the end of 2023, and we are starting to negotiate a new agreement with the unions probably mid-2023. Okay? Before that, maybe some minor adjustments, but it will be minor. But we expect these unions to be quite demanding, naturally, and we difficult to forecast the final agreement. But, well, looking into what has happening in Spain, wages in 2022 are growing at 2.6%. We are growing wages north of 1.5% or 1.6%. And naturally, I do expect the wages in Spain to accelerate a little bit. We've seen the agreement of the government with the civil servants roughly speaking 9% for three years. This is a... that this establish a kind of benchmark because it is an agreement for 3 million people or 4 million people. Along these lines, I do see having a negotiation with the unions. So this is my expectation. It's going to be possible to keep the cost below inflation. I think so. With this kind of agreement, this will be below inflation and probably growing the cost. In the region of 3% is something before efficiency should be something, 3%, 4% will be something doable. Overall, in some countries less. In CIB, probably as we are gaining share and we are expanding the business, probably we're going to grow the cost faster than that, probably. As I mentioned in the presentation or Jose mentioned in the presentation, CIB, as the main driver of positive cost growth in Europe, while the retail units in Spain and Portugal are deeply in nominal negative growth. So CIB, I expect to continue to grow faster than the retail units, where the transformation is going to go on, and overall being in the 3-4% region for the next couple of years. Cost of risk peak, difficult to say. So the macro, as you know, we are providing due to the macro right now. We add 1.1 billion due to the macro. Probably overall in the year, if the macro remains the same or the scenario we have remains the same, we're going to add this year 1.4 billion. Adding this $1.4 billion for this year, the cost of risk remains below 1%. If the macro deteriorates further, naturally, as is expected, the macro deteriorates further. We may need to... increase the cost of risk next year. When it's going to peak, based on the consensus, should be next year. But naturally, difficult to say. So based on current expectations, the end of 2023, 2024 is going to be the worst period with a significant economic slowdown being predicted. Having said that, this is based on the scenario, the peak. But in any case, our expectation on the causal risk is not to have anything close to what we had in the COVID. So well below this. So going up. But not that much. That's our expectation. And with the current scenario going up, but very much more levels. And for sure, including what I said before, revenues, increasing revenues will offset more than offset the potential increase in ordinary cost and cost of risk.

Thank you, José Antonio, and thank you, Sophie. Can we have the next question, please?

The next question is coming from Carlos Cobo-Catena from Societe General.

Carlos, please go ahead. Carlos Cobo- Hi. Thank you. Thank you for the presentation. A quick question on the NII sensitivity, please. For Spain and Europe, you mentioned that you've updated the way you calculate the sensitivities, but could you touch quickly on why do you see the mix of deposits between site and term evolving, and what is the term deposit beta that you think is reasonable to assume going forward. And the same thing for Brazil. You've already explained how did you expect the NII to evolve over the following quarters, but how that compares with the slide where you showed that NII upside in NII in Brazil is only 100 million euros. If you can explain or reconcile those two guidance, it would be helpful. Thank you.

Okay, NII sensitivity in Spain, well, currently almost 100% of deposits are current account. It's not 100%, but it's 90-something, yeah? So gradually this is going to go from current accounts towards NII. Well, a combination probably of money market funds, term deposits, some kind of life insurance products. Overall, what this means is, well, based on the past... This used to have a beta that was between 60 and 80, so in relation with the official rates, which is the percentage that is going to go to term deposits. It's difficult to say at this stage. What I said, I can say to you in the past, it was a long time ago, yeah, so we have had negative rates for so long that probably we almost forgot this. We used to have a kind of 30 to 40% current accounts with no remuneration. We used to have another 20 to 30% what we call median remuneration that was kind of lower sensitivity, and another 30% kind of high sensitivity. Overall, the beta you are using is 25 for the whole deposit book. This is what we are using, and this is what embedded in what Jose said in relation with expansion of NII. Naturally, you may say that there are some new factors here, difficult to measure. So online deposits is somehow new, or the extension of potential players in online deposits is there. Now they are playing. They are the only ones that are offering high rates. I don't know how important it's going to be this. If the rates remain in the 2% or 3% area, it's not going to be that big. If the rates naturally, the higher the rates go, the more impact of this. You mentioned NIA in Brazil, the plus hundred million. The plus hundred million is a exercise, like for like, taken into the forward rates. The forward rates means for one year. So what we guide to you is being constructed every quarter. the pass-through from volume growth to NII is going to be higher. That's what we're telling you. In the overall one year, using the forward rates and no volume growth is plus 100, okay?

Basically because interest rates just stopped increasing. So obviously because you have the 12-month lag, it will be, you know, as we said, we are using end of September figures, 12 months is end of September next year, and you would only have three months of full repricing of assets and liabilities. So when we look 12 months in advance, the sensitivity is what I say. If you look beyond the 12 months, obviously the sensitivity is greater.

Okay. Thank you. And thank you, Carlos. Can we have the next question, please?

Yes, the next question is coming from Marta Sanchez Romero from Citi. Marta, please go ahead.

Good morning. Thank you very much for taking my questions. The first one is a follow-up on the US, just a clarification on the cost of risk. Jose Antonio mentioned that we won't go to 2019 levels, which, if I'm right, is roughly 310 bps. I think in the past you've guided for us through the cycle level of 250. Are we going to be somewhere in between for next year? How do you see that? And also in the US, if you could elaborate as well on the long growth expectations, your risk appetite generally for the auto lending business. And the second question is on deposits in Europe. You have a loan to deposit ratio above 200% in the digital bank, 115 in the UK. It's true that you've got excess deposits in the Spanish balance sheet, but what are you going to be doing strategically in terms of deposits? Are you going to be chasing deposits to balance the books in the digital banks? Are you going to be setting the price and going to be potentially pushing prices higher. I think you've already launched a new platform in Germany to gather deposits. So what do you see the cost of deposits? If you can give us a little bit more clarity on betas across the different businesses for the next 12 to 18 months. And just, sorry, quickly, if the ECB changes the terms of the PNPRO tomorrow, would you be repaying or your TLTRO funds, or you will be holding on to them. Thank you.

Okay, the last question is the easiest one. It depends on the terms.

We are prepared. We were, as you know, planning to repay the full amounts next year. If the terms change and it no longer makes sense to hold on to those funds, we will repay. We could immediately repay almost in full. The excess liquidity we have today, the liquidity that we've been building to repay next year, would let us pay almost in full that. But again, we need, as José Antonio says, we need to look at the terms.

Okay, Marta, going to the other questions. U.S. cost of risk. In 2019, our cost of risk was close to 3%. It was 280 or something like that. So normalization should be lower than that. So on the back of the miss. The growth in prime and air prime and the blue stem sale. So we saw blue stem where the cost of risk was extremely high. And this, we think, that this is going to be below these levels on 2019 for these two reasons. So you asked the long growth. Well, long growth, you know that we have two sources of origination, two main sources of origination, and others that are work in progress. As you say, Stellantis, we are being, I think, last month, our penetration, last month meaning September, was our best month ever in penetration in Stellantis, so that means that we continue a good pace. Naturally, they sell less cars, and this is affecting the new car sales, is affecting this. On the traditional subprime space, our appetite, well, we went a little bit, we increased a little bit the FICOS, and this affects the long road. But largely it's going to depend on the car market. We are trying to add, and we have some agreements with other OEMs. We already signed Mitsubishi, and we are working with dealers associations in order to sign agreements with them, in order to diversify our long route. We have appetite. for this type of loans at the right price. Naturally, there are some, as I mentioned, the market is fairly competitive now, but we want to grow this, provide that we can obtain the profitability we are targeting for this business. You mentioned deposits in Europe. You rightly said that our loan to deposits is higher than 100% in UK and consumer finance and significantly lower in Spain and somehow in Portugal. What we plan to do? In the consumer finance and the digital consumer bank, we expect to grow significantly. Now the figures are the following. We have a book of, roughly speaking, $120 billion loan with a deposit book in the region of $50 to $60 billion. So in the next couple of years, we do expect to add more. a couple of billions in deposits, maybe in the region 20 to 30 billion is a figure to think about, in order to close the gap. Not that much, but close the gap between deposits, sorry, loans and deposits. We are in a position to do that. As you know, this is a business that we have more or less advanced deposit platforms in several countries, in Germany, Netherlands, also some in Belgium. And in the past, we were active in deposits also in the Nordic countries, and we are reactivating this in order to increase the percentage of funding coming from deposits in this business. We are in a good position to do that, and we think we're going to be successful on this. In the other markets, I already elaborate in the U.K., where we plan to keep growing line assets and liabilities. And, well, that's the reason we think our beta is higher in the U.K. than it is in Spain, because this position. And basically that's it.

Thank you, José Antonio. And thank you, Marta. Can we have the next question, please?

Absolutely. The next question is coming from Carlos Peixoto from CaixaBank BPI. Carlos, please go ahead.

Hi, good morning. Thank you for taking my questions. And, well, just a word to José for his last presentation. It was a pleasure throughout these years. So my question was actually on NII in Spain. So you gave the sensitivity to a stable interest rate scenario, but I was wondering if you could complement that with sensitivity to further hikes, considering that the next prediction is that we will get some additional hikes this week and possibly before June. And then finally, on NII in Poland, I was wondering what type of evolution you expect going forward, whether you think there could be some margin compression given the higher deposit costs as the political pressure on that front seems to be mounting. Thank you very much.

Carlos, as I said, this analysis that we showed here is consistent with the previous one in which we showed that the sensitivity in Spain to 100 basis points is 750 million. So that's the sensitivity to additional increases over the forward rates in Spain only, not in the Eurozone, which obviously is higher.

Well, in Poland, you've seen, I would say, a very significant margin expansion on the back of increasing rates. It's true that we enjoy the cheapest funding costs in Poland. Naturally, additional margin expansion probably is going to be difficult, but I remain comfortable that we can keep the NIM, the net interest margin, going on around the levels we are having on the back of repricing. although we do recognize that the liabilities cost, we should pay more for deposits, given our position being the less, having the lower funding cost in the market. So, but probably working with an assumption of NIM being around where it is, is a fair assumption to me, yeah?

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

Yes, the next question is coming from Pamela Zuluaga from Credit Suisse. Pamela, please go ahead.

Hello, good morning. Thank you very much for taking my questions. The first one is on the provisioning outlook. You've now built a 1.1 billion overlay. yet you've been mentioning that you have not seen a significant deterioration in credit quality across the majority of your footprints. You flagged also that consensus sees cost of risk peaking next year. However, how are you thinking then about the timing to either use or release these provisions? Are you expecting to allocate some of these provisions to keep some stability in cost of risk in 2023? Then a question on your capital optionality. You have managed to build capital above your target now to 12.10% CET1. Would you be open to increasing your current 40% payout or is there a particular headwind that you're foreseeing and therefore you're deciding to be more cautious? And then if I may, one follow-up. Can you give us some color on specifically the AEB's negotiations with the trade unions to address the loss of purchasing power in Spain. I understand the last meeting was on Friday. Have we heard anything about the proposals from the unions and what would this mean specifically for the cost inflation in Spain? Thank you.

Thank you, Pamela. Let me do... Well, when we are providing based on expected losses, and you are asking me about the use of this overlay, naturally we are providing with a scenario. The scenario we are providing is a scenario that sees some mild recession in some countries in 2023, more towards the end of 2023. So if these materialize and our models are right, in theory, we will use this provision. If we are wrong one way or another, we may be in a situation if the scenario deteriorates further and in 2024 the scenario is worse than the one we are expecting, we keep building, the other way around is releasing. So everything is based on if our scenario is right, our scenario is... Not far away from the IMF, just to understand. Not far away from the IMF that says that second part of 2023 we will see some recession. In that case, we will use this. The 1.1 we already built and the extra 300 we expect to build from now until the end of the year. But this is, again, this is based on the materialization of the scenario or not of the scenario goes into 2024. Capital optionality, well, we stated clear that the board, when the board approved 40%, expressed the idea of going to 50% at some point. So it's a decision that the board is going, is up to the board, and it's not a decision taken. Having said that, I said in the presentation that within that, the 12% is an appropriate level for us, and we keep building capital. AEB negotiations, yeah, while there have been some negotiations about kind of one-off for the employees or some employees or the employees this year, aside from the negotiation from the unions in the future, yeah. So this is not going to be a... This is not going to substitute the big negotiation that is the one who matters in terms of cost. This one is more about some compensation, but a small one. It is not a negotiation of the full agreement with the unions that will come, as I said before, start in 2023, mid-2023.

Thank you. And thank you, Pamela. Can we have the last question, please?

Yes, the last question is coming from Fernando here, from Bestinver. Fernando, please go ahead.

Thank you for taking my questions. A couple of questions, please. First one on Spain. What is your view on the potential impact that you may have if there's a change in the code of good practices on those vulnerability families that might be implemented? This is one. Second, on Poland and the payment holidays provision that you have done, are you forecasting or seeing any more coming in the next quarter? And finally, if you can comment a little bit on the ALCO strategy and the mix that you have in the Spanish portfolio, that would be great. Thank you very much.

Okay. In Spain, well, I should say that this agreement, the way we match vulnerable customers that have a mortgage with us is, I should say, business as usual. The agreement we try to reach is which are the ways that how do we match this. And the ways I should say we are discussing is business as usual and naturally the Extra provisions, if any, are embedded in our macro scenario. Naturally, the macro scenario, when it comes to mortgages, contemplate the real mortgage book and the capacity of the customers to repay, the affordability, the loan-to-value, and all these things. If this deteriorates as a result of the higher inflation, lower disposable income, this is already included there. So I do not need to change anything because we changed this. supposed to be included in our expected scenario. Naturally, if the expected scenario is worse, the most sensitive issue here is unemployment. So unemployment is the key. Because when I look at the real estate market in Spain, it's not in any dimension overvalued. So it's not the case that we had 14 or 15 years ago. It's more a question of affordability ratios for those customers in the low end with low income or medium-low income with high affordability ratios that suffer in the disposable income. It's more this. But it's included, as I said, in our macro scenario. Poland, payment holidays, we need to see, yeah? What's going on? Yeah. So we think we've done, I don't know, all or at least the majority of the provisions. In any case, well, if we're going to assess how many customers come to claim the payment holidays, and we adjust accordingly to this. It's not... I expect not to be significant, but maybe we need to add more. We will see quarter on quarter if we need to add more. Having said that, the revenue generation of the bank and operating profit that the banks generate, and as I said before to a question of one of your colleagues, I feel very constructive that we're going to keep relatively stable. or very high NII that allow us to face potential higher requirements from the payment holidays. ALCO strategy, I don't know if I should pass while we start to build our portfolio little by little. So there's more to do. Jose, you want to elaborate on this?

Yeah, as we mentioned in the first half results presentation, we didn't have an ALCO portfolio at the time in euros, which obviously was a conscious decision that cost us some net interest income compared to our competitors, but obviously put us in a much better position in terms of balance sheet value and the opportunity to rebuild the ALCO portfolio going forward. We have today 6.5 billion already. in the Eurozone, we are building the portfolio through diversified countries, not only Spain, we have France, we have Italy, And we would gradually continue building the portfolio over the next probably two years. We don't have a figure in mind, but clearly we have an opportunity to rebuild the portfolio earning more than 3% yield, which is what we have so far in the 6.5 billion. We will make purchases again depending on the opportunities that we see. But again, from six and a half today, gradually growing to a much larger figure over the next couple of years.

Thank you, Jose and Jose Antonio. There are no further questions.

Okay. Thank you, guys. Thank you for all these years following this resource presentation. I tried yesterday to count the number of times I faced you, and I got a number of 72 times in the last 19 years. Good luck, guys, and keep following Santander. There is always an interesting equity story. And with improving profitability going forward. Thank you. This is my last message to you. And good luck, guys. Bye.