Banco Santander SA

MAD:SAN

Earnings Call Transcript 2019-Q1

[Sergio Gámez Martínez, Global Head of Shareholder & Investor Relations]

Good morning, everyone. And thanks for joining to this 2019 Earnings Presentation. As every 3 months, our group CEO, Mr. José Antonio Álvarez, will address in detail the group performance, followed by our group Chief Financial Officer, Mr. José Antonio Cantera, who will address as well in detail the different business areas performance for the first quarter. And our CEO will take, again, the floor for concluding remarks. As always, we'll have plenty of time to take your questions. So now with no further delays, José Antonio, please.

[José Antonio Álvarez Álvarez, CEO & Vice Chairman]

Thank you, Sergio, and good morning to everyone. Thank you for attending this First Quarter's Results Conference Call. Well, the quarter has been, from the macroenvironment, relatively challenging. In this environment, we've been able to continue to grow the commercial dynamics, with having changed in the quarter we'll continue to grow both in the number of customers being active, being digital customers in -- at the group base. We are transforming this growth in customers into growth in the volumes of loans deposited to mutual funds, we're growing 4%, 5%. So overall, I wouldn't say that the quarter shows a significant drop down in the commercial activity of the bank, and we were able to transform this into a result, that in the statutory profit of the quarter we got EUR 1,840 million, that is 10% below the same quarter last year, mainly due to the extraordinary provisions as result with it -- as a result of the restructuring we are doing mainly in Poland and in U.K. in the quarter. Also we have some capital gains from Prisma in Argentina and capital losses due to the disposal real estate. In Spain, net-net it's EUR 108 million charge to the P&L. So the underlying profit was more in the line of -- close to EUR 1,550 million in the quarter. So the results are affected mainly in the quarter by what we -- I call here in this slide, macroenvironment, it affects mainly CIB business. So the wholesale business. As you've seen -- inside the CIB, the market-related business inside CIB. And the accounting impact that you very well know is the change in IFRS and the high inflation adjustment in Argentina. Argentina, last year, as you remember in the first, second, third -- first and second quarter, they were producing in the range of EUR 60 million to EUR 70 million results. This quarter came as a result of the high inflation accounting like EUR 10 million. So it has significantly slowed down there. Yes.In terms of profitability we continue to produce a -- in the quarter a higher -- a significantly higher return on tangible equity than our peers. And the capital generation in the quarter was good. We guide you for an average around the year, around 10 basis points per quarter. This quarter came double than this due to the fact that the risk-weighted assets' value grew in the quarter. As a result of this, the core equity Tier 1 at the end of the quarter was 11.25% after absorbing almost 30 basis points of regulatory effects that I will elaborate later on. So we update you in our midterm view in our Investor Day at the beginning of this month. So I have nothing to add to what we said at the time. And while we still face significant uncertainties in the short run, mainly the lower loan interest rates and Brexit uncertainties being the main ones, but not the only ones. In the first quarter, as I mentioned, customers continue to grow in a good way. We transformed this into higher volumes. And the customer revenue is growing 4%. And the -- we've been affecting the quarter by the effects I already mentioned. Profitability, basically, is slightly lower, but I will say the underlying profitability is progressing well, the solvency I mentioned on credit quality is still improving at 40 basis points, NPL down and cost of credit below 100 basis points. So I wouldn't say there is no news here. So in relation with customers, I mentioned that we continue to gain significant market share in some key markets, particularly, in Brazil and Mexico we are gaining share, we are also doing well in the States. I'm using the numbers where volumes are growing well. And we are holding up basically the volumes in a more -- in Continental Europe where -- but Consumer Finance is still growing and is growing above the market. When it comes to the volumes, I already mentioned we are growing 4%, 5%, both loans and deposits. You see on the loan side some deleverage is still going on in Spain and Portugal. We are going -- growing very much in line with the market in Spain although we are reducing our booking in -- mainly in CIB and institutional lending where the book is falling for different reasons, some of them related with more activity in capital markets, some others because profitability by around double-digit, while in SMEs and the -- and consumer we are growing the book. And this quarter, the book was basically flat. All the other markets, as I mentioned, we are growing well both in the U.S., Brazil, Mexico according to our expectations, remember that we told you in our Investor Day that we expect our Latin American business to grow around in double-digit territory in volumes. The same cannot be applied to customer funds where we are growing across the board, some recovery in the quarter in the asset management. That's -- the fourth quarter last year was very bad in terms of assets under management due to market conditions, we recovered somehow in the quarter although the fee income is not still fitting through the P&L just because there was a recovery through the quarter. You have here the numbers quarter-on-quarter, the attributable profit. And I already mentioned the figures, you have the comparison with the first quarter and the fourth quarter. The comparisons, you know that there's several accounting effects, particularly that is a negative in net interest income, net positive in provisions you have here in the P&L, compared with the first quarter 2018. What we have is here customer revenue increased driven by net interest income and fee income. Costs are starting to reflect the synergies we are getting in Europe, particularly in Spain, Portugal and it will come more from the U.K., also in the U.S. that we anticipate to you several quarters ago after the regulatory drive we're going see a better cost performance in the U.S. And as a result of this, the net operating income went up by 1% and profit before tax, plus 3% taking into account the benign credit scenario I already mentioned. Lastly, in the next -- well, the tax rate in the quarter was higher, 36% compared with 34.7% a year ago and minority interest grew 16%, mainly due to the strong performance of Santander Consumer U.S. The net capital gains and provision, the number is minus a charge of EUR 108 million. This comes from a positive capital gain on the sale of Prisma, they are quite business in Argentina. That is EUR 150 billion (sic) [ EUR 150 million ] positive. Capital loss from the sale of properties is basically the anticipation of future commissions that we should pay for those properties with the servicer, EUR 180 million and restructuring cost in Poland and U.K., EUR 78 million. So looking at the P&L lines, going -- starting with the net interest income excluding the FX effect, it's 5% better due to higher volumes [ euros ] in 7 out of the 10 markets, it was lower in the first quarter for 3 reasons, we have the TDRs in the U.S. that we mentioned in the previous quarter that is fully compensated for lower loan loss provisions, positive in -- NII is a negative in loan loss provision. Second, IFRS 16, the impact is EUR 80 million and eliminating this impact, net income will have risen by 1%. On a like-for-like basis, it's growing 1% quarter-on-quarter. Fee income was higher than the fourth quarter and year-on-year. I will elaborate on this later on. And other operating income, while it was weak, it's very much related with the activity of CIB and our core portfolios that were lower than it was the previous year.Going into the net interest income. You have here the drivers. Overall, growing 5%. Mature markets growing 2%. Developing markets, 8%. You see volumes. And NIM will match to get a higher net interest margin in mature markets, increased 2 basis points, customer -- NIM and developing markets, some margin compression that we were advised and anticipating you mainly in some markets, 26 basis points down. This -- those are the main components of the net interest income.When it comes to fees, I will say fee income, 3% up, reflecting what I told you, the number of customers, greater loyalty, greater customer loyalty, both in individual and companies. And, well, you see the activity growth in mutual funds and particularly in cars and insurance premiums that are growing very nicely. On the right side of the slide, you have a deeper detail of what's going on with the fee income. Retail banking is growing 5%. Wealth management, 1%. And in CIB that the quarter was weaker as I anticipated. By markets you have mature markets going down by 3% mainly affected by CIB, that will -- activity is stronger in mature markets. It's the market-making activities while developing markets are still growing at 9%. So those are the components. In costs, while -- as I mentioned at the beginning, we are seeing the costs, as a result of the integrations -- of popular integration, both in Spain and Portugal and the cost control in the U.S. where the cost -- in all the 3 markets, the costs are going down. Also in the Corporate Centre are going down, nominal basis. On real-term basis compared with inflation costs are going down in the majority of the markets. But Poland due to integration of Deutsche Bank operations, Mexico where as you know, we are in an investment plan that drives the cost up. And Argentina, well, you compare it with inflation, it's very high inflation. And when you actualize salaries and [ backward ] inflation Santander has come significantly up over time. Cost of credit quality, very little to add. Cost of credit south of 100 basis points. NPL is continuing the right way. And coverage ratio, as usual, it stays very high.Capital. The quarter was -- capital generation was good in the range of 20 basis points. We absorbed 29 basis points due to the regulatory impact. You have at the bottom, which regulatory impacts were there, the IFRS 16 was the most important one, 19 basis points. And you have another minor, including the TRIM that was 5 basis points. Capital -- organic capital generation, 20 basis points, small changes in perimeter. I mentioned Prisma in Argentina, the sale of the acquiring business and others that is plusses and minus, mainly related with pension funds. On the right side you have on the other capital ratio, the other relevant capital ratios, the total capital, ratio Tier 1, leverage ratio and all of them. We -- our numbers are good. And, well, we already comply with MREL requirement as of the end of the quarter. So the ratios, tangible net asset value per share went up by 3%, it will reduce slightly the return on tangible equity. The quarter was a bit quicker, as I mentioned, at the bottom line and the underlying growth suffered a little bit as a result of this. So I hand over to José that will elaborate on the different units of the different subsidiaries.

[José Antonio García Cantera, CFO, Head of Financial Division & Senior EVP]

Good morning, everyone. Thank you, José Antonio. In the quarter, we increased slightly the weighting of the Americas relative to Europe to 52% due to the higher weighting of Brazil and the U.S. In terms of underlying attributable profits, 7 of our 10 core markets had a positive evolution, and we had double-digit growth in the U.S., Brazil and Mexico. Before I go into the different units, I wanted to make some general comments that affect almost all of them. On the one hand, José Antonio has already alluded to this weak market conditions, which affected gains on financial transactions and fee income. IFRS 16 had a negative impact on net interest income of EUR 81 million in the quarter. And compared to the fourth quarter, we had 2 fewer days. That means EUR 190 million less net interest income. Somehow, these issues disguise better trends in the underlying business -- in the customer business that we have in the different countries.Starting with Brazil, good quarter again, following the positive trends we saw in 2018, double-digit growth in loans and funds with demand deposits and time deposits growing 11% and 15%, respectively. We continue to gain market share selectively in order to finance 8 basis points; credit cards, 103 basis points; payroll-based credit, 144 basis points; GetNet, 132 basis points. So these are just examples of the market share gains that we are producing in Brazil. Looking at year-on-year profits, a significant growth with return on tangible equity up 21%. Net interest income increased based on more volumes and fee income. We've basically raises in all lines. Costs, very much under control, growing lower than inflation and improving efficiency to record levels, down 100 basis points year-on-year. Lower loan loss provisions with cost of credit at 3.88%, lowest -- the lowest in many years and well below 4%, which was our prediction a couple of years ago. Quarter-on-quarter, higher profits. Basically, on lower costs and reduced provisions, net interest income fell due to the impact that I just mentioned, IFRS 16, fewer days, 2 fewer days. On the other hand, customer-related net interest income increased in the quarter 1%. And if we exclude the 2 fewer days, the net interest income increased 3% quarter-on-quarter. Fee income was, obviously, as you know, affected by the seasonally higher fee income that we had in the fourth quarter associated with a renewal of insurance policies.In Spain, we are progressing according to our plan in the integration of Banco Popular. We have already integrated 600 branches, which is more or less 40% of the total and the plan is to finish the integration in July. Underlying profit fell 11% year-on-year, particularly affected this quarter by capital markets activity and our core portfolio management. Excluding these impacts, profit would have grown mid-single digits. We had positive evolution of net interest income due to significant improvement as you can see in the cost of deposits and reduced fee income mainly due to weak wholesale businesses and mutual funds. Costs were down 6% if we exclude the higher costs in some activities and Openbank, costs in Spain -- in the retail bank in Spain were down 8% in the quarter, showing the benefits of the integration with Popular. Provisions were down. Cost of credit was 34 basis points in the quarter, which is already a low level.In terms of activity, since December, total customers are at 50%. Digital customers, up 350%. This is translated in more activity and a significant growth in deposits that increased EUR 6 billion in the quarter, a double-digit growth in demand deposits that more than offset the fall in time deposits. Again, more customers, more operations and as some examples, for instance, we had new insurance premium contracts, up 16%, and point of sale turnover, up 12%. Stock of loans remain unchanged over the fourth quarter, fell 3% year-on-year, mostly due, as José Antonio said, to the contract to the decline in the stock of mortgages and the deleveraging in wholesale banking and public institutions. Compared to the fourth quarter, our gross income was 3% higher, better conditions of the 1|2|3 account and the impact of the lower -- obviously, we had a contribution to the deposit guarantee fund in the fourth quarter, more than offset the lower accrual of interest, fewer number of days, as I said, and the ALCO portfolio, the negative impact of IFRS 16. So overall, a good performance in net interest income when we look at the underlying customer trends. Costs were lower and provisions increased coming from a particularly low level in the fourth quarter.Looking ahead, we see flat to slightly positive net interest income. And it will benefit from the change in the conditions of the 1|2|3 account, while costs will continue to reflect the optimization measures carried out as a consequence -- as the integration of Banco Popular progresses.Moving to Santander Consumer. It continued to grow, backed by commercial agreements and the increased sales through digital channels. For example, in March we signed an agreement with Hyundai and KIA to acquire 51% of their financial arm in Germany, which will strengthen our leadership in the country. New lending rose 2% despite that actually car sales in Europe were down 3%. And this is due to the fact that our brands are gaining market share all across Europe. First quarter profit was up 1%. By lines gross income increased, mainly due to a higher net interest income, higher volumes and a lower -- slightly lower funding costs. Operating expenses were flat despite business growth. The efficiency ratio improved by 119 basis points year-on-year. Loan loss provisions were stable despite the impact of higher portfolio sales in the first quarter of last year. We've had none this year. Cost of credit at 38 basis points is below the average through the cycle. Looking ahead, we see our business growing faster than the market and cost of risk normalizing.In the United Kingdom, businesses -- our business was carried out against a backdrop of very strong competition, particularly in mortgages and the uncertainty associated with Brexit. Lending went up slightly year-on-year fueled by mortgages and other retail loans that were up 4% -- sorry, EUR 4 billion year-on-year. We continue to reduce commercial real estate. Customer funds changed to more than demand deposits. That continued to increase, up 2%. First quarter underlying profit was 16% lower year-on-year due to reduced gross income. We had, as I said, pressure on mortgage margins and lower SVR balances, also a lower fee income from corporate banking activities and reduced gains from financial transactions. Slightly increase in costs, up 1%, due to investments in technology and projects although in real terms, costs were down 1%. Cost of credit remained at very low levels, only 7 basis points in the quarter. In addition, we had a restructuring charge of EUR 66 million associated with the closing of 140 branches and the renovation of another 100 branches. The closure affecting 1,200 employees. Looking ahead, in terms of revenues, we continue to see a strong competition and a strong -- therefore, a strong pressure on net interest income, particularly now that all interest rate hikes seem to have been pushed forward significantly. Costs, however, should be flat or down in real terms.Looking at other units. So we'll go very briefly over the main ones, although you have all the details in the appendix. In Mexico, our focus -- our strategic focus is threefold: on the one hand, transform our retail and commercial banking; improve customer retention models; and focus on the digitalization. All of this is reflected in greater customer attraction and retention and the launch of new businesses. Loyal customers year-on-year are up 28%. Digital customers are up 57%. We had a stronger growth in lending, especially large companies and payroll-based lending. Growth in funds were driven by deposits of individuals and SMEs. Profit was 12% higher year-on-year underpinned by net interest income, double-digit growth, due to volume and interest rates; and the falling provisions, cost of credit, which improved to the best level in the last 6 years. In short, greater loyalty and activity, higher profits and profitability with a return on tangible equity of 20%. We expect these trends to continue in the coming quarters. In the U.S., we had an excellent quarter with good evolution of both volumes, with lending increasing double digits as well as the main P&L lines where attributable profit actually increased 35%. Year-on-year, the good performance was driven by increasing gross income, costs and provisions. Profit grew strongly quarter-on-quarter benefiting from seasonal factors. Remember, that in the fourth quarter at Santander Consumer, trends tend to be the weakest of the year with higher costs and higher provisions, while those in the first quarter tend to be the lowest. Also, remember that in the fourth quarter of last year, we had a methodological change in the accrual of troubled debt restructurings, TDRs, with almost no impact on the bottom line but there was a top line impact of EUR 150 million. In summary -- in the appendix, you have all the details of the impact of these adjustment by line. In summary, positive evolution, where we expect it will continue in the coming quarters with, again, seasonality in Santander Consumer with a stronger first half relative to the second half. In Chile the economy is growing at 3%, it's expected to grow 3% this year and next year. And on the back of these loans are growing well, growing at 8%. And also improving the mix of customer funding. All -- demand deposits, time deposits, mutual funds are also growing. Underlying attributable profit was up 1%, very much affected by lowered inflation in the quarter, inflation was 0 and because of the inflation-adjusted products, this had a negative impact of EUR 45 million. Already in April, inflation was 0.3%, and we had a gain of around EUR 20 million. So this tends to be -- there seems to be some volatility associated with this. But, again, the underlying customer -- the trends in terms of customers and business are very positive. And we will -- we would expect them to continue so in the coming quarters.In Portugal, strong lending with clear gains in market shares in almost all products. Our new production market share is in the region of 20% for almost all the products. The stock of loans dropped year-on-year due to portfolio sales last year, more or less EUR 1 billion. Deposits are up 9% year-on-year. Profits also up 7% year-on-year due to higher revenues, lower costs, reflecting the synergies of the integration of Banco Popular and provisions, which were slightly positive. In the quarter, S&P upgraded the rating of our bank to BBB. And it was chosen as the brand with the best reputation in Portugal amongst the banks in Portugal. In Poland, the acquisition of Deutsche Bank Poland has strengthened our competitive position in the country, and we are now the second-largest bank in the country. The integration, obviously, explains the abnormally high growth -- year-on-year growth rates that you see in the P&L and the balance sheet. The very good business performance is not driven all the way down to the P&L because of higher contribution to the Banking Tax, which, by the way, it's not tax-deductible. And lastly, we had a EUR 12 million restructuring charge in the quarter, affecting the closure of 70 branches and more or less, 1,400 employees. Finally, in Argentina, a very -- the business was very conditioned by the very high inflation, 50% inflation, 50% depreciation of the peso and almost 70% interest rates, attributable profit was EUR 161 million including the capital gain from the sale of our stake in Prisma. Excluding this, the underlying profit was EUR 11 million. There was an inflation adjustment of EUR 53 million, the monetary adjustment was EUR 38 million and through currency adjustment, EUR 15 million. On the business side, we see a positive performance of customer revenues and positive cost control.Finally, on the a Corporate Centre. The underlying profit was hit by higher costs associated with foreign currency hedging and in the net interest income, we also had higher costs -- higher financial costs due to higher stock of issuances and the impact of IFRS 16. In terms of cost, 1% lower. Here, we had 2 forces in opposite direction: on the one hand, we had the simplification measures and the streamlining; on the other hand, the investments in global projects. Also IFRS 16 had a positive impact on costs. Lastly, we include here a loss of EUR 180 million from the sale of a portfolio of real estate assets to Cerberus Capital Management in the quarter. And now I'll turn it back to Jose Antonio for his closing remarks. Thank you.

[José Antonio Álvarez Álvarez, CEO & Vice Chairman]

Thanks, José. Let me do -- finish this presentation, yes, summing up a little bit what the environment in the Q1. Well, in this environment that was not great we increased our volume -- customer volume and customer base. The underlying trends are solid, year-on-year growth in customer revenue, cost control and lower loan loss provisions. The capital generation was good in the quarter, as we mentioned before. And tangible net asset value per share increased -- significant increase 3% in the quarter. So underlying RoTE, return on tangible equity higher than our competitors' affected by market weaknesses in the quarter. In the very shorter view, looking forward, we see a deterioration in the macro scenario with lower growth expected in our markets, probably we should expect component growth of 1.5% GDP growth. In an environment -- in this environment we're going to have been mixed trend volumes probably growing double-digit -- around double-digit in Latin -- in the Americas and growing the customer base but not that much in volumes in the mature -- in Europe. We expect good cost control and the synergies and efficiencies we announced in the Investor Day and the cost of credit remain relatively low levels. Our aim is continue gain market share in our main markets and improve our profitability and strengthen our balance sheet. Let me to finish -- to elaborate, in the 2 operations we announced the same month the ones -- the first one was the voluntary tender offer for the 25% of the shares of our subsidiary in Mexico. This is very much in line with our -- the strategy we announced and it meets our financial criteria with expected return on investment of 14.5%.At the same time, for Santander minority shareholders it's an opportunity to monetize their shares and gain exposure to a global bank and diversified bank, like Santander. We believe -- we do this offer because we believe in the financial sector in Mexico and the potential growth going forward through a higher bank organization and in large number of customers in the country.The second operation we announced the same month was a -- we signed a memorandum of understanding with Crédit Agricole for our custody and asset servicing businesses. This operation is also consistent with our strategy, it's businesses -- the business are very complementary in a business where the scale matters a lot. We have -- we're getting better position in the combined entity to be an efficient competitor in this niche of the market in Europe and the Americas. Well, this operation as we already communicated to you, will produce at the close, an estimate capital gain of EUR 700 million that we expect to record in extraordinary charges and provisions. Overall, the line of extraordinary charges in provisions at the year-end and the quarter was minus EUR 108 million, overall in the year it will be basically 0, positive and negatives will offset each other. This operation has also a slightly positive impact in capital, 3 basis points and the profit going forward -- expected profit going forward, based on the business plan of the combined entity will mean a slightly increase in our EPS. Finally, just remember to you our main targets, financial targets that we announced to you in the Investor Day. I think the quarter in the underlying basis shows a -- that we are progressing towards our goals. We are showing that the business is growing as we were expecting in America -- in the Americas. We are showing that our efficiency gains that we announced to you in Europe -- you see in the numbers in Europe that we are starting to gather momentum there. And capital generation has been good in the quarter, and we've been able to offset the regulatory headwinds. And this will transform as we expect in higher profitability and translate in higher dividend and higher profitability for shareholders. Thank you, and now we will do -- we'll remain at your disposal for the questions you may have.

[Sergio Gámez Martínez, Global Head of Shareholder & Investor Relations]

Thanks, José Antonio, indeed, we have now time to open the Q&A. So please, operator, we can proceed with the first question.

[Operator]

[Operator Instructions] The first question comes from José Abad from Goldman Sachs.

[José Maria Abad Hernandez, Executive Director]

Two questions from my side. The first one is, what's the impact from the regulatory equivalents with Argentina? I believe positive. And also, I mean, a follow-up question on this is whether it actually -- positive impact from this, in case there's one, is included in the 50 bps impact from management actions that you guided in -- during your Investor Day? The second question is on litigation, there was an article in [ expansion ] I believe last week, talking about the Supreme Court in Brazil forcing Santander to compensate workers from Banespa for their bonuses back to actually 1986. The article quantifies the potential impact of actually north of BRL 1 billion. So I think it would be useful for us actually if you could actually clarify what's the potential impact from this? And any litigation reserve that you may already have against this contingency?

[José Antonio Álvarez Álvarez, CEO & Vice Chairman]

Thank you, José. I will elaborate on the second question. I pass the first one to the CFO that will elaborate on the equivalents in Argentina that was approved, as you know, by the EU in April or in March?

[José Antonio García Cantera, CFO, Head of Financial Division & Senior EVP]

April.

[José Antonio Álvarez Álvarez, CEO & Vice Chairman]

Yes? So the article you referred, the case you referred in the court in Argentina -- sorry, in Brazil, well, it's related, as you know, the litigation related with labor claims in Brazil is pretty high. As a matter of fact, the provisioning we have in the balance sheet for labor claims is close to BRL 4 billion in the country. We appeal this ruling of the court. And within that, we are well provide for the plenty of -- for the significant litigation labor claims that we have in Brazil where we'll provide. Not only specifically for this one, for the overall litigation's claims that we have that this -- a very high number taking into account one by one. And José, do you want to?

[José Antonio García Cantera, CFO, Head of Financial Division & Senior EVP]

Yes. Specifically, the article referred to BRL 1 billion. So we are talking really EUR 150 million. Worst-case scenario and, again, this is a process that will take quite a long time. We don't expect this to be actually -- to finish at least within the next 7, 8 years. And I didn't get the first question.

[José Antonio Álvarez Álvarez, CEO & Vice Chairman]

The first question was about equivalents in Argentina, declaring, therefore, the European union -- Argentinian regulatory equivalents. How much this impacts our capital [indiscernible]?

[José Antonio García Cantera, CFO, Head of Financial Division & Senior EVP]

6 basis points.

[José Antonio Álvarez Álvarez, CEO & Vice Chairman]

6 basis points.

[José Antonio García Cantera, CFO, Head of Financial Division & Senior EVP]

Yes. 6 basis points.

[José Antonio Álvarez Álvarez, CEO & Vice Chairman]

Now this is due for those who are not familiar with this. As a matter of fact, there is significant reserve requirements in Argentina. And when we got the deposits, we need to reserve it at Central Bank, some of these deposits for regulatory reasons. And those deposits had a risk-weighting. When the regulator, the local regulator has declared equivalent by the EU the risk-weighting gets -- goes to 0. And this is [ actually ] risk-weighted assets and translating what José said, 6 basis points of capital.

[Operator]

The next question comes from Vanessa Guy from JPMorgan.

[Vanessa Maria Pilar Guy Vazquez, Analyst]

My first question was on capital. I was wondering if you could provide some guidance on what capital impacts you will expect over the next, coming quarters for 2019? And my second question is regarding the U.S. and how the Chrysler agreement is progressing?

[José Antonio Álvarez Álvarez, CEO & Vice Chairman]

Yes. So on capital, we guide you in the Investor Day 50 basis points. Yes, 50 to 60, we already had in the quarter 30. So about another 20 to 30 to come. Yes, So this is what is going to come from -- what we expect to come from the regulatory headwinds, including many items. On the other side, we're still related with Chrysler FCA. We are still holding with FCA, what I will qualify as a constructive dialogue in relation with the business we have -- we are operating for them in the U.S. I cannot, at this point, tell you where this dialogue will end. But I will say at this point, that the dialogue is constructive, and we are looking for solutions, how to make the business -- how to have a better business for both helping them to sell more cars and having a sound and solid financial business going forward.

[Operator]

The next question comes from Alvaro Serrano from Morgan Stanley.

[Alvaro Serrano Saenz de Tejada, Lead Analyst]

A question on capital and then on restructuring for me. On capital, you've built 20 basis points in the quarter from organic generation. Can you maybe give us any color why it's higher than your usual 10 basis points run rate? Is it faster DTA rundown or something that we can extrapolate? And when we look forward, you have obviously done Mexico, the buyout. You've done the MOU with CASA. Can you maybe just walk us through an updated list of some more efficiency and optimization we could look forward to? So you've talked in the past about U.K. model, we got the 6 basis points that you've just mentioned on Argentina. Can we look forward to further securitizations? You've got a stake in [ NOL ] that presumably, is a source of capital, just general color on that. And the second on restructuring. I was -- just can you maybe give us a feel for the timing of the restructuring in Spain and U.K.? I think you mentioned Spain for July the last head count reduction, but in the U.K., given the revenue trends, it's very difficult for any substantial change in those revenue trends at least in the short term, given the rate outlook. If you could maybe just talk us through, you mentioned costs flat versus inflation this year, but can we look forward to further reductions and when those restructuring and those reductions might happen?

[José Antonio Álvarez Álvarez, CEO & Vice Chairman]

Okay, going into the first question. The capital generation in the quarter, 20 basis points compared with our guidance on average, 10 basis points. I will say that the word average. On average we generate 10, this quarter came better, the reason is we are being more efficient in matching risk-weighted assets, at the same time we have much more demand in, I mentioned in the -- when I was talking about with Spain our -- we have much more demand in particularly in those exposures that are well within at or below the cost of equity and for that reason we are heading at what we qualify in our Investor Day as a lighter capital model. And this is the reflection of this. You mention also Mexico and the -- buyout in Mexico and the agreement with the Crédit Agricole that have more positives in capital. And while, but I will not the capital management as you can imagine became a priority for the group several years ago with a higher capital requirements, and we're refining all the capital models with a big project, internal big project that is called -- that is managed by the CFO office. We are improving significantly the tools to match capital across the group and some of this is going to be reflected in the numbers going forward. So being more efficient on one side, inducing the capital in the operations. On the other side being -- having a -- managing the balance sheet in a way that provides a higher return. The second question was restructuring in Spain. You mentioned Spain, U.K. timing. José talked about the timing in Spain. We called the unions I think it was yesterday to have the first meeting in a week, next Monday I think to start the negotiation process with the unions while it's very difficult to say when the process is going to finish, on the other side, the integration process, the branch integration process that José also mentioned. We already integrate 600 branches out of 1,600. We expect to finish the 1,600 branches integration at the end of July, more or less. And after that, we start the reduction of number of branches, provided that we reach an agreement with the unions that we're going to have the discussion at the same time. So in our mind it has been to finish the process this year in Spain. You mentioned U.K. U.K. we guide you to a strict cost control and, at the same time in Investor Day we guide you to a return on tangible equity in a tougher revenue environment, higher than the current one. And this mainly will be done through the cost, so that we plan to grow some businesses in the U.K. We are growing CIB and other related business, but we are suffering, and we are betting on a tough environment for the mortgage business that is the one who is more affected at this stage, and we expect to have to show to be able to show a better cost control, not only better cost control, probably some reductions in costs going forward, is something that we expect to get.

[Sergio Gámez Martínez, Global Head of Shareholder & Investor Relations]

Thanks, Alvaro.

[Operator]

The next question comes from Carlos Cobo from Societe Generale.

[Carlos Cobo Catena, Equity Analyst]

A couple of questions from my side. In the U.K., as a quick follow-up, not only that you're seeing some cost inflation. NII is weak. Fees are not particularly strong. I was wondering whether you are considering more actively the potential cutting the 1|2|3 account as you did in Spain as a way to compensate the profitability challenges in the U.K. Second, in Spain, cost of risk was slightly higher than the run rate last year. I was wondering if you could provide some color here, outlook for the whole year and whether there is an exceptional, some seasonality that you tend to charge higher provisions, credit provisions in the first Q.

[José Antonio Álvarez Álvarez, CEO & Vice Chairman]

You mentioned the U.K. We're going to take -- I will say, we are managing the business and we're going to take measure both on the business front and in the cost front. In the business front, you mentioned the 1|2|3 account, we don't have a specific decision for this specific account at this stage. But this is issue that we should look for a new sources of revenue, at the same time, that we reduce the cost that this is the plan going forward, in the U.K. The cost of risk in Spain I will expect the cost of risk in Spain to remain. Nothing new, the quarter was a small spike, but I will expect to be in the region of 30s basis points, in the 30s yes, for the year. Nothing new here in this front.

[Sergio Gámez Martínez, Global Head of Shareholder & Investor Relations]

Thanks, Carlos.

[Operator]

The next question comes from Ignacio Ulargui from Deutsche Bank.

[Ignacio Ulargui, Research Analyst]

Just have 2 questions. One on the Brazilian NII. If you could update us on the trends that we should see. You have been guiding for a high single-digit supported by loan growth, whether the recent downgrades that we have seen in GDP may affect a bit lending the month. How do you see that?The second question on the competitive landscape in Spain, particularly on the mortgage market and the implication of the new mortgage law, how do you see that impact margins going forward?

[José Antonio Álvarez Álvarez, CEO & Vice Chairman]

Well, NII in Brazil in the quarter as you know, came down. This is more due to noncustomer related activities last year interest rates with the previous year 2017 interest rates came down sharply as a result of this in 2018 we got significant revenue on this. On the consumer front, I remain -- we've been guiding you for double-digit kind of growth in the country. And we've been guiding you for a lower growth in NII. So mid-, maybe mid-to-high or mid-single-digit in Brazil. So some margin compression we are expecting in Brazil.When you referred to Spain, as you said rightly, the market remains fairly competitive, not only mortgages, I will say all across the board. It's true that we match this quarter to increase our net interest margin on customers. You saw through a reduction in the funding cost, at the same time, a slight increase in the yield we are getting from our assets. So we are happy with this. You, specifically, refer to mortgages. Mortgages remains fairly competitive. I haven't seen extra reduction in prices from the one we had one quarter, 2 quarters ago, remains competitive. But it's true that we were able -- we managed to get a higher yield due to the fact that in the quarter, we remain flat on the loan book but the group grew in SME lending and group grew in consumer lending that reflects into higher yield in the loan book, at the same time, we reduce the funding cost as I said. Mortgage as I will say the market remains competitive. I don't expect a big deal here. To remain where it is at this stage.

[Sergio Gámez Martínez, Global Head of Shareholder & Investor Relations]

Thanks, Nacho.

[Operator]

The next question comes from Andrea Filtri from Mediobanca.

[Andrea Filtri, Research Analyst]

Two questions. One on capital and one on hedging. On capital, there have been changes to CRD rules. I'm talking to CRD 5 and, specifically, to the SME support factor and to the possibility to exclude from intangible deductions some software components. Could you give us your indicative impacts for next year? And can you also clarify on the regulatory headwinds, I was left at 50 basis points and then before maybe you said 50 to 60. And finally, the trim impact. When you guide the 50 basis points, is it all in 2019? Or there is still a part in 2020 regarding the low-default portfolio? On the hedging, could you update us on your hedging strategy and how you're adjusting to a more dynamic use of this tool? What was the P&L cost and the capital impact in Q1?

[José Antonio Álvarez Álvarez, CEO & Vice Chairman]

Yes, you take the hedging.

[José Antonio García Cantera, CFO, Head of Financial Division & Senior EVP]

So hedging, the strategy remains the same. So we hedged the capital ratio, so that is why despite risk-weighted assets due to currency depreciation went up EUR 8 billion in the quarter, there was no impact on the capital ratio. The cost of that strategy in the first quarter is more or less 4 basis points of capital. We also hedged the P&L on let's say on an opportunistic basis based on the outlook that we have and the risks that we see in the different countries. Right now, we have fully hedged the pound and the Mexican peso and 75% hedged the expected results that we have in Brazil. The cost of that in the first quarter was EUR 60 million. On the other hand, obviously, you have the positive of the translation of the results in local currencies into euros all throughout the P&L.

[José Antonio Álvarez Álvarez, CEO & Vice Chairman]

On the numbers you asked about capital the 50 to 60 basis points regulatory headwind is for this year.

[José Antonio García Cantera, CFO, Head of Financial Division & Senior EVP]

Yes.

[José Antonio Álvarez Álvarez, CEO & Vice Chairman]

It's for 2019. We already, as I said before, 29. So we expect the rest to come on the year. When you were referring to these CRD 5 eventually impacting changing in SME support factor and intangibles, as you know, we have a significant exposure to SMEs mainly after this decision of Popular although a significant portion of the SMEs around the world are in standard model, yes? So we have the SMEs in the corporate business in U.K., U.S. and all Latin American is still standard model. We have our internal-based model basically for Spain, so. But we have significant exposure there and changes in these support factor affects as accordingly. And intangibles, you mentioned this. While intangibles there is a door open there to have a discussion of what the intangibles. We have been very vocal on this because we think that in this -- at this particular juncture where we are investing significantly in the digitalization's so what it means basically investing in software there is an asymmetric treatment when you invest yourself, and you put [ in dual and seek ] when you buy from someone else. When you invest yourself and intangibles you did 100% from capital when you buy from someone else the treatment is totally different. We being, as you know, our software -- we control our software and we continue to make significant in our results. This will be a significant deal for us, it's very difficult to say at this stage because software there are different type of software for how long the software remains being useful for the bank it's probably too early to call, but we have intangibles if I remember what it's EUR 2.8 million or something like that in the balance sheet how much this may be affected? I have no idea at this stage, it's too early.

[Sergio Gámez Martínez, Global Head of Shareholder & Investor Relations]

Thanks, Andrea.

[Operator]

The next question comes from Mario Ropero from Fidentiis.

[Mario Ropero, Research Analyst]

Fee income trend in Spain, which has been very negative quarter-after-quarter for a while, principally due to corporate investment banking. So I was wondering if you can give us an indication on the weight of this business in the fee income line and when do you expect this line to bottom out? And then on the NPL ratio in Spain, I noticed that it has remained flat since mid-2018. So please, if you could comment and clarify what's going on here.

[José Antonio Álvarez Álvarez, CEO & Vice Chairman]

Fee income in Spain as you mentioned rightly mentioned went down by 3% explained basically for CIB activities. If I look for the whole year, I will expect some growth in this slightly positive, some growth in fee income assuming that the CIB business behaves in a normal way I will say having the same activity as last year. The other question was about NPLs.

[José Antonio García Cantera, CFO, Head of Financial Division & Senior EVP]

NPL in Spain.

[José Antonio Álvarez Álvarez, CEO & Vice Chairman]

Well, NPL, while we are still in a -- the credit quality in Spain has good trends, I don't remember exactly the NPL number, it is flat probably right, but I don't have in my mind any significant problem in the reduction of both -- nonperforming assets I mean, both loans and properties. We are progressing at good pace in the reduction of this and also the provision of this we feel comfortable with the level of provisions we have already for all of this exposures.

[Sergio Gámez Martínez, Global Head of Shareholder & Investor Relations]

Thanks, Mario.

[Operator]

The next question comes from Daragh Quinn from KBW.

[Daragh Joseph Quinn, Analyst]

A question on Spain, just with a view on the new incoming government. We saw the Socialist Party campaign on the idea of a minimum effect of corporate tax rate in Spain. And I'm just wondering if you see any risk to the amount of taxes you pay out of the legal entity in Spain. And then a second question on asset quality and provisions in the U.K. and the European Consumer Finance business. You've indicated before that you expect to see a normalization of credit charges there. I was wondering if you could just update us again on, a, the time that it will take for those provisions to normalize and at what level do you expect them to normalize?

[José Antonio Álvarez Álvarez, CEO & Vice Chairman]

So in Spain, while it's too early to say, yes. So the tax rate in Spain, while it's too early to say, naturally, it was added for the legal entity to the corporate tax in Spain. And as you know, our corporate tax is already higher than the other sector. Well, I'm not going to speculate on higher or lower tax rate at this stage. In asset quality, provisions as you mentioned the U.K., Consumer Finance yes. So we told you in the Investor Day that we're having a cost of risk lower than with respect to the loss across the cycle. The distance and in the Consumer Finance, we have been having around 40 basis points, so in the 40 or even lower. And we -- the expected loss is basically double than this. We are not seeing any sign of deterioration in the credit quality and probably for this year if I need guess, probably it will remain closer to the 40s than to any other number. But well, we have always in mind that if our models are right, at some point it should normalize. When? Your question is when. Probably to see when we need to look at the employment numbers, yes? The unemployment number is the main factor that drives the cost of credit -- cost of risk in the consumer business in our consumer business, not only in Europe also in U.S. And with the U.K., we gave you the figures. Our basic book in the U.K. is mortgages, it's 80% of the book, yes? So the remaining 20% it's a mix between corporates and some consumer lending a small fraction. Although our loan-to-value is one of the lowest in the market and our front book we've been much more conservative than some of our peers and our exposure is low. Well, when you have a cost of risk that is south of 10 basis points, well, it's...

[José Antonio García Cantera, CFO, Head of Financial Division & Senior EVP]

There's only one way to go.

[José Antonio Álvarez Álvarez, CEO & Vice Chairman]

There's only one way to go, that is up. When? Well, again, we're in a retail business, our exposure is with households and the main driver as in Consumer Finance then to be unemployment. Yes. So we are not seeing any sign of deterioration of unemployment rates all across Europe, including U.K.

[Sergio Gámez Martínez, Global Head of Shareholder & Investor Relations]

Thanks, Daragh.

[Operator]

The next question comes from Britta Schmidt of Autonomous Research.

[Britta Schmidt, Former Partner, Spanish and German Banks]

I've got 2 questions, please. In Brazil, one of the competitors in the credit card merchant acquiring business has changed pricing on selected credit card transactions, and I was interested to get your opinion on whether you think that'll have any impact on GetNet or the merchant acquiring fees in Brazil. And secondly, could you let us know what the IFRS 16 impact was on costs? I might've missed that? And can you confirm that this likely cost reduction was already part of the business as usual costs being flat that you've given at the Investor Day?

[José Antonio García Cantera, CFO, Head of Financial Division & Senior EVP]

Yes. So I'll take the -- if you want to take -- I'll take the second, and let me give you the -- throughout the P&L, IFRS 16 in the first quarter had as I said, a negative impact on net interest income of EUR 81 million. And costs were reduced by EUR 59 million. So net, bottom line net impact was negative EUR 22 million. And when we look at cost trends, obviously this is one off. So this will affect the year-on-year comparison this year, but this obviously will consider this as a one-off.

[José Antonio Álvarez Álvarez, CEO & Vice Chairman]

In relation with Brazil, competition acquiring business, while new competitors came to the market, this is a market that was a market basically where 3 -- 2 competitors 5, 6 years ago we came along with our proposal in GetNet. We went from very low market share or almost no market share to close to 15% market share and the last 2 or 3 years with newcomers into the market, newcomers with a strong proposition, particularly for e-commerce related and small tickets. And the market is becoming much more competitive. As you know, the fees in this market was significant, there was 3 sources of revenues in this new market, the interchange fee, in the flow business that was significant because the payment date was like 20 plus, V plus 20. So the business was significant in this front, the income generation from this front. And finally, rent of the gadgets that the merchants use for this purpose. The competition is coming in I would say in the 3 fronts. Our business is, I think, is much more resilient than others because our business is a -- is not just an acquiring business, it's a business that we bundle the acquiring business with banking services some lending embedded there and a package to the -- mainly to the small merchants in the market. So we were expecting somehow this competition to come, sooner or later. It's coming now, and we expect to keep gaining market share and approaching us over time to a market share closer to 20% that was our original aspiration when we started this business 6 years ago, 7 years ago. And we got from 1%, 2%, to 13%, 14%, close to 15%, and we expect to keep going up in our market share in a more competitive market and with lower unitary fee income, but higher volumes. Don't forgot the volumes, we've been gaining market share are growing well in double digit, close to 20% year-after-year. In the previous year, we were even growing 30% we expect to keep growing significantly in this business.

[Sergio Gámez Martínez, Global Head of Shareholder & Investor Relations]

Thanks, Britta.

[Operator]

The next question comes from Fernando [ Hela Santibanyas ] from Barclays.

[Unknown Analyst]

My question is regarding the U.S. and the cost. I see that the cost on Santander Bank is still up on a cost/income ratio of 77% more or less. I wonder what further actions you have in mind in order to come this figure down.

[José Antonio Álvarez Álvarez, CEO & Vice Chairman]

So performance in cost -- the performance in costs, not only in the last quarter, in the last couple of quarters has been good in the U.S, still you are right. Our cost income compared with our peers SBNA compared with our peers in the market is still very high, and we're working on this in 2 different fronts, yes? So one front is getting more internal synergies. That means that as you'll remember, we were much in the U.S. as a separate business on one side the private bank in the other side, Consumer Finance and other side is SBNA and another side CIB in the newer branch and the broker-dealer. When the holding company came along on the regulatory pressure, we build -- we are still in the process of building the holding operations in the U.S., and we are in a project that is what they internally call one Santander that means exactly one operation in the U.S. where we can extract synergies from the operation. Having said that, and you should expect a good cost control going forward, in the U.S., this is just one part of the business. On the revenue side, when we compare ourselves with our peers our revenues are weaker. In this regard we are progressing well. We are starting to show significant progress, not only in consumer business but the business in SBNA, we are showing some progress in CIB business where our revenues are growing, starting from very low levels, close to 20%. Our C&I business is showing significant progress. The multi-family [entree] that we have basically in New York is showing significant progress and still we need -- we have more things to do in the retail arena with our households and with our customers. So on one side -- and we mentioned in the Investor Day that one of the key elements for improving our profitability in U.S. was the operating leverage. We have a very high-cost income as you rightly mentioned, and we expect to keep this well under control or even in some cases, going down. And at the same time, being able to improve with the infrastructure we have the revenue lines in the segments I mentioned to you. So with these 2 elements, we expect to reduce significantly our cost income and improve our profitability in the U.S. in SBNA, particularly.

[Sergio Gámez Martínez, Global Head of Shareholder & Investor Relations]

Thank you, Fernando.

[Operator]

The last question comes from Carlos Peixoto from Caixabank-BPI.

[Carlos Peixoto, Analyst]

My question will be on the Corporate Centre. I was wondering if you could shed some light on the evolution of the funding costs at the Corporate Centre, which went up 14% quarter-on-quarter if I'm not mistaken, 27% year-on-year. That would be -- yes, that would be my only pending question.

[José Antonio García Cantera, CFO, Head of Financial Division & Senior EVP]

I think there is nothing special there. We've had more issuances along the way compared with the first quarter of last year, particularly to comply with MRL requirements. As José Antonio said, we already fully comply with the requirements of the SRB. There is nothing special there and also the costs of the hedging, which are included as part of the cost of the Corporate Centre, which as I mentioned, were EUR 60 million in the quarter.

[Sergio Gámez Martínez, Global Head of Shareholder & Investor Relations]

So thanks very much everyone for joining and obviously the IR team is at your disposal for any follow-up. Thank you.

[José Antonio Álvarez Álvarez, CEO & Vice Chairman]

Thank you.