Banco Santander SA

MAD:SAN

Earnings Call Transcript 2018-Q3

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

Good morning, everyone. Thanks for joining this 9-Month Grupo Santander Conference Call and Live Broadcast. As we will normally, our Group CEO, Mr. Alvarez, will address the group performance; followed by the Group Chief Financial Officer, Mr. José Cantera, who will address in more detail the different business areas' performance. And obviously, we will have, after the concluding remarks, plenty of time for your questions here, likely -- obviously, if there is some pending questions we will go, the IR team, right after the call, get back to you. So without further delays, José Antonio, please.

[José Antonio Álvarez Álvarez, CEO & Executive Director]

Good morning. Thank you to everyone for attending this third quarter result presentation. So I will start saying basically that we had a positive performance in the third quarter. Group grew, grew at, out-trending all the key metrics is the right one. Grew our customer base, increased profits, strong capital generation in the quarter and improved efficiency and decreasing cost of risk. This was done in a fairly volatile environment, with developments that were not helping the business. Well, it's very well known, we have seen a deterioration of economic expectations affecting mainly some emerging markets, as you will see through our P&L and mainly through the exchange ratios and the impact that the exchange ratios have had on our P&L. Starting with the performance, well, we continued to show good developments on the commercial transformation. Our strategy related with loyal customers and increasing digitalization is producing results, you've got the numbers. Loyal customers and digital customers are growing a good pace. The digital transformation and the penetration of digital customers is also progressing well. The results in the quarter were around EUR 2 billion, affected by the hyperinflation accounting in Argentina that the impact was EUR 169 million in the quarter. It goes through all the lines. If you wish, we can elaborate later on, on this. But excluding this impact, Q3 profit will have been the highest in many, many years.Year-on-year profit grew double-digit rates. We continue to generate capital. The quarter was particularly good on this, I will elaborate later on, on this. And we maintain high profitability. In regard with the integration of Banco Popular, it's progressing according to our plan. Some of them, we anticipate Portugal integration -- operation integration was executed in mid-October. It's going well. Legal integration was also executed in Spain at the end of September. And we have a plan to execute the operational integration starting by November, with the -- according to a plan that is going to last for 6, 7 months.Finally, that -- as a summary, I will say that we are well, well on track to meet our 2018 group targets that we established 2 -- 3 years ago. Going through the main developments, you have here the numbers, how the commercial transformation is progressing. I already mentioned the numbers. We are adding 0.5 million customers, digital -- loyal customers and 1.5 million digital customers in the quarter. So -- and we are all above our target in loyal customers. So very close to our target in digital customers. We are progressing in improving our digital capabilities and providing new services and new and more access to our customers to our -- to the bank. At the same time, we are investing in the back-office things that are not seen from outside, investing in the back office to try to reengineer all the operations of the bank and improving the IT capabilities to serve better our customers. When it comes to the P&L, the P&L evolution was -- has some positives, as you know, impacted by perimeter, Popular asset management and negatively by exchange rates and inflation in Argentina. Going through the P&L, we see good developments in both net interest income and fee income, although the fee income was affected by some weakness in the CIB area and some seasonality in the quarter, but particularly, the most important was CIB fee income generation in the quarter was weak due to the situation in the markets. We continue to have to show consistent management of cost and without having impact the investment we are doing in the specific areas, particularly in the digitalization of the bank. On credit quality, I think to add loan loss provisions remain well under control and are going below the loan book growth. And all the provisions fell significantly, as you have seen in the previous quarters, due to mainly to Brazil, to legal and labor claims in Brazil that are falling, as we were expecting. And finally, the profit -- attributable profit grew 13% in current euros and 28% in constant euros. That is a very good development for the group.Loan loss provisions, there is a seasonal effect. The change from the previous quarter is a seasonal effect in SCUSA, where the second quarter is the lower quarter -- the lowest quarter in terms of loan loss provisions due to the fiscal rebates, and the third quarter comes in line with the previous year. You compare the cost of risk in SCUSA this year and the previous year, this year is lower than the previous one. So good developments also there.Using costs in euros, the developments in the quarterly capacity generated results quarter-on-quarter. You see a consistent upward trend that shows that the results are fairly recurring, consistent and growing results quarter-after-quarter. When it comes to the net interest income, we have both growing in mature markets and developing markets, although with different patterns. In the mature markets we are growing volumes. We have seen NIM compression, minus 8 basis points. While in developing markets, we see that both volumes and NIM improving across-the-board, basically across-the-board doing good developments and good capacity to generate net interest income in both markets for all the -- for different [ growth shares ]. In fee income, the levels of activity remained strong, pretty strong, I would say. You see the NIM, the figures there, both in number of customers, activity with those customers, it's not just a number of customers, the activity of those customers is growing nicely. Mutual fund balances, card turnover, insurance, is growing pretty well. And you see the fee income growth by market. Now we are showing pretty consistent results across the board. Mature markets growing 6% and developing markets 14%. When it comes by segments, you will see there what I already comment, CIB is the segment that is weaker, while in the retail banking and in wealth management, we are growing in a strong way, I will say. So for that reason I was telling you before, that we don't see any -- I deem this is more or less a blip than a consistent trend that you can start pointing to in the future quarters. When it comes to costs, decrease in the quarter. We are seeing the results of the integrations we're doing both in Spain and Portugal. In the U.S., we are -- after the years in which we invest significantly to tackle the regulatory issues, we are showing decrease in costs. And in the other markets, in which we are growing costs, like Brazil and Mexico, we are growing much faster in the volumes and the activity done. We are growing the cost, so the cost income in both markets -- in those markets is pretty low and it's still lower. Overall, at the group level, we are slightly below 47%. As you know, our target is between 45% and 47% pre-Popular. With Popular, there is a couple of percentage points that pushed the cost income higher, but we are on track to meet our target. At the same time, the customer satisfaction is progressing well. We are top 3 in 6 countries, so -- and we are progressing well. In the main countries, we are top 3. So we are satisfied with the results on this as well. Credit quality, few comments here. Well, you have on the right side, the first time we published under the IFRS, the coverage ratio, the Stage 1, 2 and 3. You have numbers there. You have the comparison between January and September, while it's -- we're going to continue to publish these numbers. So it's the first time we publish, but it's the way to follow this. But overall, the trends are pretty good. So it's a fairly benign credit environment. In almost every market, you have one-offs, probably in the quarter, in some -- in Mexico and in Spain, if I remember well. But overall, the credit quality remains well on track and the trends are pretty good. And the environment is, as I said, benign. Well, on capital, strong capital generation in the quarter, where we generated in the quarter 31 basis points. The generation came from the ordinary generation plus some securitization that we -- reduction in risk-weighted assets produced by some securitization and some changes in the parameters in the internal rating-based models. This quarter was particularly good. This doesn't change our guidance for the future. Our recurring capacity to generate capital is in line with the 10 basis points per quarter we were guiding you before. And this quarter was particularly good, but doesn't change our capacity to generate capital that we've been sharing with you in the past. So we have -- we think that probably it's going to be close in the next couple of days, weeks, that on a pro forma basis, is 9 basis points. As we already told you, that leads us 11.20 on transitional -- on IFRS transitional arrangement. So we are on track to meet our target of 11%, higher than 11% Core Equity Tier 1 at the end of this year.The ratios, good progress here, both in RoRWA, return on tangible equity growing. You have the numbers on underlying and total basis. EPS growing already 5%. By the end of the year, we will be in double-digit as we have been guiding you. And the tangible net asset value per share grew in the quarter 1.5%. The main effect here has been the exchange ratios, and this is going to be still the main uncertainty on this. Other than this, we are generating net asset value per share due to the capital retention we do as we grow the business in the markets. Now I will hand over to José, that is going over right into the business areas and the countries. And finally, I will come back to make some final comments.

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

Thank you, José Antonio. Good morning, everyone. I will focus on the main areas and briefly review the others. Compared with previous quarters, in terms of underlying profits, Europe's weighting was up 2 percentage points. Spain was up more or less 2 percentage points at the expense of Argentina, which decreased by the same amount. The underlying profit increased in 8 out of the 10 core markets, and the only ones where it dropped were the U.K. and Argentina. In this case, as I will explain later, due to inflation accounting. Starting with Brazil, in a fairly volatile environment, we had a very good set of numbers in the country in terms of balance sheet and results, with a very strong growth of our customer base. Loans and funds grew at double digits, notably retail loans. On the liability side, we kept growing profitable market share. The return on tangible equity increased over 300 basis points over the period, reaching 20% in the first 9 months of the year. We saw double-digit rise in net interest income and fee income. Quarter-on-quarter, fee income was impacted by higher volatility, which led to lower activity in the corporate investment bank and the replacement of mutual funds by savings accounts, what is called locally [ Foreign Language ].The efficiency ratio reached its best level in the last 5 years, and credit quality improved, with the cost of credit down to 4.17%. We are quite optimistic about the performance of Brazil in the coming quarters. We see good trends in revenues, cost rising in line with inflation and a stable cost of credit. In Spain, the goals set for the integration of Banco Popular are being met successfully. The legal integration was concluded in September. We had good business dynamics in the first 9 months of the year in terms of volumes, with record July in terms of new loans, driven by SMEs, up almost 20% and consumer credit also 20% higher than in the previous -- in July of the previous year. Positive loan book evolution in SME and private banking was -- this was offset by falls in mortgage lending and CIB portfolio. Mortgages production is up very -- is a healthy growth, but is insufficient to compensate the amortization of the existing portfolio. In deposits, we saw increase in retail banking balances. The 1|2|3 account balances are up EUR 4 billion year-on-year, year-to-date. Underlying profits increased 18% year-on-year with a strong revenue growth which was boosted by a lower cost of deposits, down 6 basis points in the quarter. Costs declined 2%, thanks to the optimization measures following the integration of Banco Popular. We're starting to see the synergies that we already announced, and loan loss provisions remained basically unchanged. In the U.K., we see an economy that remains fairly stable, with some obviously uncertainties associated with Brexit. The ring-fence structure is close to completion, ahead of the deadline January 1, 2019. In terms of volumes, loans quarter-on-quarter and year-on-year were impacted by the reduction in commercial real estate and non-core loans, particularly -- partially offset by lending growth in mortgages. In the case of the mortgage portfolio, the attrition of the SVR is affecting the trends. But if we strip this, mortgages are actually growing. In customer funds, the focus is on management of spreads. The current accounts were up 5%. We had an interest rate increase in August. Obviously, this helped in this case. The profit for the first 9 months was lower due to the pressure on mortgage spreads and reduced gains on financial transactions, higher costs associated with regulatory and risk projects, as well as investment in strategic and digital transformation projects. But on a quarterly basis, on a sequential basis, costs are down, and we expect to see the same trend in the fourth quarter. Provisions increased, however, the cost of risk remained at very low levels, 8 basis points. The quarter was good, with profits up 5%. The trends that we see this quarter should be kept in the fourth quarter, with net interest income and costs stabilizing going forward. In Santander Consumer Finance, good trends in general in terms of activity and revenues, sustainable growth in profits and return on tangible equity at 17%. New lending grew 8% from December 2017, well above the market, and profits were up 7%. Quarter-on-quarter, we saw a good evolution of net interest income and lower costs, down 6%, mainly due to seasonal effects and the first synergies that we are getting in Germany, where the commercial network integration is advancing as planned. We will continue to focus on improving our auto finance business as well as growing the consumer credit segment due to improved digitalization.Going into the units very quickly. In Mexico, the focus is commercial network transformation, digitalization and risk -- and retail customer attraction, with a strong increase in digital customers, were up 40%. Strong growth in loans, mainly payroll companies and SMEs. Growth in funds, driven by deposits from individuals, SME and mutual funds. Profits increased 13%, driven by higher net interest income, up 12%; fee income, up 9%; loan loss provisions, down 7%. Cost of credit was very significantly lower than a year ago. Higher profits, return on tangible equity reached 20%. We see similar trends in the future. In Chile, we are working on regaining leadership in the mass market -- in the mass consumer market, and we will launch new products before the end of the year to continue pushing into this direction. In volumes, loan growth accelerated. The economy's been better, and we are seeing that in terms of credit demand. And the profit in the first 9 months were up 8%, underpinned by good performance on -- of customer revenues. In the U.S., the Federal Reserve terminated the 2015 written agreement, demonstrated the continued improvement on regulatory issues. Volume dynamics are improving, with loans growing for the second straight quarter, both at the bank and at the Santander Consumer. In this case, it's mostly leasing. Higher profits, year-on-year growth of 47%, with a strong growth in both units, Santander and Consumer. Quarter-on-quarter, profits were affected by higher provisions. As José Antonio said, there is seasonality in the provision calendar at Santander Consumer and that affects the quarter-on-quarter comparison. On the other hand, we saw very good news in terms of net interest income and costs at the bank, and the first increase and the first decline in both in several quarters.In Portugal, the integration of Banco Popular was concluded in October. Total is now the largest privately-owned bank by domestic assets and loans in the country. Underlying profits were up 9% year-on-year, driven by improved efficiency. Revenue growth was higher than costs growth and lower cost of credit. In Poland, the economy is doing very, very well, growing between 4% and 5%, and we're seeing that in terms of growth in loans and funds, both quarter-on-quarter and year-on-year. We had quarter-on-quarter very good performance in all recurring items of the P&L. This is not necessarily reflected in the profits in the bottom line due to the seasonal collection of dividends in the second quarter. In Argentina, let me go a bit -- in a bit more detail about the accounting changes. We had to apply what is called IAS 29, a standard rule, applies when we have high inflation, when accumulated inflation over the period of 3 years exceeds 100%. This is the case in Argentina, so that means that we need to apply this accounting rule in the third quarter. This implies 2 main adjustments: So on the one hand, a monetary adjustment, reflected, in our case, in other operating income, due to losses in the net monetary position. And the second impact is that we no longer have to use the average exchange rate during the period, but the fixing at the end of the period. This has, in turn, 2 impacts: On the one hand, on the P&L, negative EUR 169 million, EUR 81 million due to the monetary adjustment, EUR 88 million due to the use of the fixing; and the same amount positive on capital. Obviously, this EUR 169 million is pretax, capital net of tax, negative 100 -- sorry, positive EUR 105 million due to the revaluation of fixed assets in the first application, which is equivalent to 2 basis points of our capital -- [ our deposits ]. But apart from this accounting adjustment, profits obviously down, affected by this. Excluding this, year-on-year performance was really good. Customer revenue was up due to very good spread management, fee income also up due to the use of cash and FX. Higher provisions and costs were partially offset by the peso depreciation and the automatic review of the collective salary agreement. In general, we see positive evolution of future profits in Argentina, a country that will stabilize gradually with the agreement between the government and the IMF.Finally, turning in to the Corporate Centre, the underlying loss was 11% lower than a year ago. This better result was mainly due to lower costs associated with FX hedging. Net interest income reflected also the higher costs, financial costs, associated with the issuances made to comply with TLAC and MREL requirements. Operating costs were basically stable. And other income and provisions include charges for provisions, intangibles, estate guarantees, cost on DTAs, pensions, litigation, the deterioration of stakes, so this had lots of different things, which explain the increase that we see year-on-year. And with this, I'll turn it back to José Antonio for his concluding remarks. Thank you.

[José Antonio Álvarez Álvarez, CEO & Executive Director]

Thank you, José. To conclude, I would like to make some comments in relation with the KPIs we have for the end of the year and the progress we made in -- we will make in the last year. So you have here the main KPIs we established for the group. We are, as I mentioned, well on track in the sight of customers, more customers, more satisfied and greater loyalty. That was the center of our commercial strategy. Continue to grow volumes and fee income. So although the quarter was, as I mentioned, weaker, we are growing at 10% compared with the previous year, so a significant growth that is very much in line with the loyalty and the number of digital customers we are getting with the commercial transformation. The cost of risk relatively -- below 1%, while our target was a bit higher, as I said -- as I also comment. Cost income in the upper side of our range, but inside our range, that, given the, particularly the similarly low rates, negative rates in Europe, is a good terms at the group level. The EPS double-digit growth target, we are now on track to meet this target, taking into account the developments in the results quarter-on-quarter in 2017 and 2018. The dividend per share, we've been increasing the dividend per share year-after-year, in line with our commitment. The full -- well, the Core Equity Tier 1, our target of higher than 11% seems to be achievable at the end of the year, and we are making good progress on this regard. The quarter was particularly good. And also, I mentioned before that our current payment capacity is more in the line of 10 basis points per quarter. Return on tangible equity already, above our targets. So we think that we are well, well on track to meet our targets by the end of the year nonetheless, because on business as usual, we expect to deliver solid results in Q4. We don't have any reason to think that there's going to be any change in such a short period of time. So that's the end of the presentation, and now we remain at your disposal for the questions you may have on the results, on the items that may be of your interest.

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

Thanks, José Antonio. So we have...

[Operator]

[Operator Instructions] The first question comes from Francisco Riquel from Alantra Equities.

[Francisco Riquel, Head of Research]

Two for me. First on capital, which has surprised positively this quarter. I wondered if you can give us more color on the capital optimization measures that you have taken in the -- during this quarter and if there is any P&L-related dilution from these measures? You have mentioned securitization, so -- well, I don't know if you can comment more on this or not. Then other peers are also reporting headwinds related to TRIM, so if you can please update on where are you in this process also? And then the second question is on Spain NII. The 5.5% quarterly growth in NII is remarkable, given that Q3 is typically a seasonally weak quarter. If you can please help us understand the drivers of this growth and give any guidance for the coming quarters, if you are changing the 1 portfolio or not, and in particular, the benefits from the replacing of the 1|2|3 account and how much is still to come from the next repricing that you announced recently?

[José Antonio Álvarez Álvarez, CEO & Executive Director]

So thank you, Paco. I'm going to go over the questions. The first one, the 3 components, you asked about capital, more color, while generation in the quarter was half of -- roughly speaking, half of the generation, I would say, profits minus dividends and AT1s and all the usual stuff, we've done some securitization, not that much, in the quarter. And the optimization, well, as you know, our -- the density of our risk-weighted assets compared with assets is one of the highest in the sector. And we -- in some models, internal rating-based models. We are still refining those models, that's why, how this quarter came in this way. So well, I wouldn't say there's more to come, but we're going to have headwinds here, one quarter, maybe on one side or another. But I want to stress to you and I told you that the capital generation continued to be -- our model allow us to generate 10 basis points capital per quarter on average, and this continues to be our guidance. This quarter, we changed the model related with mortgages, and this produced this uplift in the quarter. You mentioned the TRIM, I don't expect a big deal coming from this, so -- at the beginning, when the TRIM was launched, we were expecting some kind of convergence in the density of the assets in relation with risk-weighted assets with the different risk profiles of the bank. This, my expectation, is not as high as it was at the beginning, so I don't expect a big deal from the TRIM. Finally, third question is Spain, developments in NII, particularly in NII, that grew significantly in the quarter. You mentioned the main components of this. Let me to add some color to this. You mentioned the 1|2|3, that is well-known and more to come with the recent announcements we've done. So the main item is funding costs are getting lower, so 6 basis points, if I remember well, in the quarter. There's more to come when we produce further reductions in funding cost. But looking at the asset side, well, it's more sustainable yield, due to the fact that we are growing. When you look at the loan book, we split the loan book in 3 components, let's say, the mortgage component, the institutional lending and the corporate lending and the consumer lending. We are growing well in consumer lending, that is a relatively high-yield book. And we are growing in SMEs relatively strong. Those are the 2 pieces of the book that are growing, that allow us to help -- or to increase the net interest margin of the loan book. Those developments, I think that are relatively sustainable in the -- going forward, so I do expect relatively well-sustained net interest income in the coming quarters. So I don't see pressures here. And once we reduce further the funding cost, probably some uplift, but in the coming -- not in the next quarter, probably in the future quarters.

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

Thanks, Paco. Next question, please?

[Operator]

The next question comes from Sofie Peterzens from JPMorgan.

[Sofie Caroline Elisabet Peterzens, Analyst]

Yes, it's Sofie from JPMorgan. So just one more question on capital. So you have, next quarter, you will get 9 basis from -- 9 basis points from WiZink. How much will the Deutsche Bank Polska acquisition have of an impact on your Core Equity Tier 1? And are there any other adjustments we should take into consideration going into the fourth quarter? And my second question would be on Brazil. If you could just elaborate a little bit more on your outlook on Brazil? There was the elections we had over the weekend and how we should think about net interest income growth, fee growth, cost growth and asset quality going forward? And my third question would be, anything you can comment on your new CEO that starts next year?

[José Antonio Álvarez Álvarez, CEO & Executive Director]

Okay, so capital, you asked specifically for the fourth quarter. On top of the 9 basis points we anticipate from WiZink, the Deutsche Bank Polska assets, well, are meaningless in terms of the impact on capital. So it's neutral, basically it's neutral in terms of capital, so I don't expect this. So the only thing that we anticipate as of today, the -- in terms of capital, is the original capital generation and the 9 basis points from WiZink. Other than that, it's business as usual, I will say, yes. So probably the main impact coming from exchange rates is the most volatile component and the available for sale portfolios. Do you have anything to add to this, José? No? Okay, so those are the main components. Brazil, you make a very broad question about the outlook for Brazil, generally speaking. So as José said when he presented the numbers from Brazil, we are seeing good developments on the ground. So we are growing nicely, we are gaining share. We are seeing some expansion in the NIM, the quarter -- this quarter not, but overall, when you compare year-on-year, some expansion in the NIM. And the asset quality, as you said, is -- the cost of risk is heading towards the 4%, it's slightly above, but the developments are good. We are optimistic about the coming quarters in Brazil. We think that we can continue to grow faster than the market. The -- probably the change in mix we have had in the past is not going to be as intense as it was. The change of mix from large corporates and corporates towards consumer is going to be -- is not going to be as intense as it was in the past, but we're going to continue to grow on both sides, probably a little bit faster, I expect, in the corporate side than we were growing in the past and probably a little bit slower in the consumer side compared with what we show in the past. Cost control, we're going to continue to grow costs, probably slightly above inflation, due to the fact to the variable costs. This depends very much on how much the business grows. It's not structural cost. It's not fixed cost. It depends on the number of products we sell and the costs associated with this -- with this group. So overall, I will expect in local currency, Brazil to keep growing at double digit, yes? So probably, well in double digit going forward. And finally, on the new CEO, well, you know him. The only thing I want to stress, we said clearly, some of you elaborate about, given the person that is going to be the next CEO and his previous experience, some people went immediately through a kind of M&A -- increasing activity on M&A. The strategy is not going to change. So our focus continues to be organic growth, and we will look for opportunities in our existing markets, as we've been doing in the previous years. It's the only thing I want to add to avoid any kind of confusion that this is going to change the strategy of the bank.

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

Thanks, Sofie. Next question?

[Operator]

The next question comes from Alvaro Serrano from Morgan Stanley.

[Alvaro Serrano Saenz de Tejada, Lead Analyst]

Two questions from me and another one on capital first. You mentioned the 10 basis points run rate, so we can think you'll be close to 11 by the end of the year. And the question is, can you give us any update on the negotiations with the Chrysler? How is that going? Because if I think, if there is a -- if I remove the RWAs from Chrysler, I think it was like 25, 30 basis points. So if there is an agreement, could we think that on a pro forma basis, you could even end up the year, 11.3, 11.4 or sort of a significantly...[Audio Gap]increase in capital there? So any comments, any updates on the Chrysler negotiation? And the second question is on the U.K., the results overall are, I think, are very good, but the U.K. is[Audio Gap]maybe not as good, and in particular, the costs after -- and the cost over in the first half, the expectation was around plus 5, and it seems like it could be slightly higher than that. Can you just update us on how the investments are going there and what are reasonable expectations of the cost growth, not only in Q4, but also in '19 and then '20?

[José Antonio Álvarez Álvarez, CEO & Executive Director]

Okay, on capital, well, you asked the question on Chrysler. As you know, this is a -- we've been in negotiations with them, they have an option. They explore the possibility about to buy the assets we currently are running in the SCUSA. I do not see this, nothing happening this year. So probably, the negotiations, we'll continue with the negotiations, although it's more on FCI -- FCA side to interest on closing these negotiations or not. At this stage, I don't see this being closed before the year-end. I may be wrong, but I don't see this being closed before the year. So the U.K. costs, well, it's true that we started the year with a significant growth in costs in the U.K. We were running at a running rate of 8% or something like that. I could expect, as you rightly said, at the end of the year to be at the 5%. And we expect to continue to have a -- well, not continue to have, having a better cost control going forward in the U.K., with the business being more focused on the niches, in the areas in which we can make the difference. And we've been -- we are designing a strategy to focus in specific areas with better cost control, the one we had at the beginning of this year. At the same time, we are making significant digital investments. That is what is the main cause of this increase in costs that you see. Going forward, I expect the cost growing below inflation, clearly, in the U.K. So well, this was the question, yes, basically.

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

Thanks, Alvaro. Next one, please?

[Operator]

The next question comes from José Abad from Goldman Sachs.

[José Maria Abad Hernandez, Executive Director]

I have 2 questions. First one is on Santander Consumer Finance. We've seen the cost of risk growing over the last 3 quarters in a row. So do you expect this to continue to increase on the back of a broad-based deceleration in economic growth in Europe? And maybe if you could give us, actually, a normalized level, it would be probably useful. Second question is on the IRPH-linked mortgage portfolio. I remember you -- I remember Popular used to have such a portfolio, maybe you could actually tell us what's the size of this portfolio for, for Santander Spain? And maybe also, the [ usual ] situation at the moment of borrowers in this portfolio? And if I may ask a third question, which is on tax. You know that the Podemos and the Socialist Party, they agreed on October 11 on a change in the 100% exception from -- for profits and dividends coming from foreign subsidiaries, which they agreed on bringing these down from 100% to 95%. So whether you have any information, any details on this? And in particular, what will be taxable this year? Whether it will be only the dividends or all the profit generated by subsidiaries abroad?

[José Antonio Álvarez Álvarez, CEO & Executive Director]

So the first question about Santander Consumer Finance cost of risk growing, well, this is -- we haven't seen any development there. So we note that the cost of risk is significantly below of expected cost of credit through the cycle. But we haven't seen any development there. I mean, the difference between this quarter and the previous quarter is the previous quarter, we disposed some portfolios, nonperforming portfolios, and this quarter, we didn't. And for that reason, you see the difference in quarter-on-quarter. But on the ground, we have not seen any difference. And as I said, the cost of risk remains -- remains low for -- when you look in historical standards. The second question was about the size of IRPH portfolio. I think that, I am speaking by memory, around EUR 2 billion in Popular and another EUR 2 billion in Santander. It's relatively small, because we were not that active in the -- with this kind of index in the past. And finally, the tax, the information I have is the same you have. So this is an intention, and it's going to be discussed in Parliament. If it's passed, we will need to assess. I don't have a specific number to -- or further clarification than the information you got and you gave in your question.

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

Thanks, José. Next question, please?

[Operator]

The next question comes from Carlos Cobo from Societe Generale.

[Carlos Cobo Catena, Equity Analyst]

Couple of questions here. One, if you could add a little bit of color on the performance of Popular and divided the 2 networks, Popular and Santander Spain, just to see how revenues are performing and whether one of them are underperforming or outperforming the other? Same for fees, cost of funding and all that. And second, on capital, sorry to insist there, just to see if there are any potential upside in Q4? Could you provide us the pro forma impact on capital coming out of the appreciation of the Brazilian sovereign exposures?

[José Antonio Álvarez Álvarez, CEO & Executive Director]

Okay, on Popular, Santander Spain, how the networks are performing. As I -- well, we are not, at this point of time, particularly following one network or another, due to the fact that some business are already integrated, like I commented in previous quarters, institutional business, CIB already integrated a couple of months ago and what remains basically split is the activity in the branches. As I said at the beginning, we are doing -- we are growing, and we are gaining share in SMEs and corporates. So the book grew in the year EUR 1.8 billion, while at the market level, it's not growing or even decreasing. So this path, as long as Popular is -- was specialized in SMEs, we are, I'm particularly happy that we are showing growth in this space, that is the space in which Popular was particularly strong. On the other segments, in mortgages, the book continued to decrease, but I am not -- I don't have the information and don't follow the information split between Popular and Santander, because since couple of months, we're operating like a bank and the organization is, even the regional organization, the local organization, the head of the region, the head of the areas, are just one head for the 2 networks. So I -- we are not following this [ or anything ]. But I'm particularly happy with developments in SMEs, where it was the critical sector when we decide to make an offer for Popular. On capital, I don't know if you have something?

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

Yes, we -- remember that we hedged the capital adequacy, so the ratio is hedged against changes in exchange rates. So from the equity invested in Brazil, the exchange rates do not affect capital, the capital adequacy. We also, as we said in previous quarters, have hedged the profits coming from Brazil this year. The profitability that we have seen in Brazil is higher of what we expected at the beginning of the year. So yes, there will be a slight positive impact in the fourth quarter, but it will very much depend on the profitability of the quarter, the tax in the quarter, the capacity to amortize DTAs, so I think it's very premature to assess at this point, at the end of October, what the impact on capital will be.

[José Antonio Álvarez Álvarez, CEO & Executive Director]

So for sure, what is affected is the TNAV, yes? The TNAV is affected in a positive way, yes, because we hedged, as José said, the capital ratio, but not the full capital invested there. So as long as the real appreciates, the capital invested there gives a positive uplift to the TNAV.

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

Thanks, Carlos. Next question, please?

[Operator]

The next question comes from Mario Ropero from Fidentiis.

[Mario Ropero, Research Analyst]

My first question is, if you could please update the amount of synergies that have been achieved so far on Popular and the amount pending? And then the second question is a follow-up on a previous one, is if you could give us an exposure to foreign currency-denominated mortgages and provisions attached to them?

[José Antonio Álvarez Álvarez, CEO & Executive Director]

Well, synergies on Popular, we are well on track with our plan. We were guiding you 1/3 per year. At the end of the year, we are well on track to be, probably to sit a little bit this target this year. So I feel comfortable we're going to achieve the synergies announced for Popular. And in the Investor Day next year, we will update you particularly on this topic, our views going forward. In foreign currency mortgages, as far as I remember, the other significant one was in Poland, yes, so I don't know if you refer to the Spanish...

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

There is the Spanish in [ the division ].

[José Antonio Álvarez Álvarez, CEO & Executive Director]

Yes, the Spanish, it's a minor portfolio. It's very minor -- so it's negligible, yes, so it's -- I think it's EUR 500 million or something like that. So it's the notional amount, so it's negligible. And the other topic on this is that in Poland where, as you know, before 2010, there was a significant portfolio of Swiss franc mortgages that is getting reduced over time and we don't see any particular development there.

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

So it's been amortized very quickly.

[José Antonio Álvarez Álvarez, CEO & Executive Director]

Very quickly. Yes, so on the Polish zloty, now it's not an issue, as the Polish zloty is holding well against the Swiss franc and the euro.

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

Thanks, Mario. Next question, please?

[Operator]

The next question comes from Ignacio Ulargui from Deutsche Bank.

[Ignacio Ulargui, Research Analyst]

I have 2 questions. One is on the tax rate, if you could update us on the development on the tax rate going forward? Keeps on going up quarter-after-quarter, what will be the limit? And the other one, it's on the rate sensitivity, particularly on the changes that you are doing in the 1|2|3 that changes somehow your interest rate sensitivity to -- in Spain? And also, if you could update us on Brazil and the U.K. rate sensitivity?

[José Antonio Álvarez Álvarez, CEO & Executive Director]

Take the second one?

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

I'll take the second one. In euros, a 100 basis point parallel move in the curve would increase our net interest income by around EUR 1.3 billion. In the U.K., again, a parallel shift upwards in the interest rate curve is -- would increase revenues by around GBP 300 million. In Brazil, it would be negative, but it's a small amount, something like EUR 50 million.

[José Antonio Álvarez Álvarez, CEO & Executive Director]

When it comes to the tax rate, in the quarter, it was particularly high, if I remember well, like 37%, something like that. Going forward, that is your question, we see more in the range of 35% probably, yes, this is the -- with some up and downs. But on average, 35% should be the tax rate for the group as a whole.

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

Thank you, Ignacio. Next question, please?

[Operator]

The next question comes from Andrea Unzueta from Crédit Suisse.

[Andrea Unzueta, Vice President]

I just wanted to follow up on Brazil's NII, if you could comment a bit more on how you expect your NIM to evolve going forward, now that you expect less changes in the mix? And also, if you could comment on your tax guidance in the region going forward, because it has been higher than expected this quarter as well.

[José Antonio Álvarez Álvarez, CEO & Executive Director]

Tax guidance, I -- in Brazil, well, we remain around where we have, yes? Once we finish the amortization of goodwill, we'll remain basically at the current levels, with some up and down, so depending on what they call [ euros on ] -- interest on the equity. They apply one quarter to another, some volatility there, but on average, you take the whole year, will basically remain at the current levels, unless they change the corporate tax, naturally. On the NIM going forward in Brazil, I elaborated a little bit at the beginning. We have seen a significant expansion in the NIM due to the mix that we achieved in the mix from corporate, large corporate, into more consumer, SME kind of lending. Do we expect it will continue to grow faster? Probably in consumer lending and SME, probably the cost is not going to be as flat as it was in the past. For that reason, the NIM probably, the expansion of the NIM, is not going to be as strong as it was in the past, other things being equal. As to the competition, potentially, regularity issues, or regulatory pressure on some products may also produce a, more pressure on NIM. But overall, we continue to be constructive on expectations about the NIM going forward.

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

Thanks, Andrea. Next question, please?

[Operator]

The next question comes from Stefan Nedialkov from Citigroup.

[Stefan Rosenov Nedialkov, Director]

Yes, it's Stefan from Citi. I just recently joined the call, so excuse me if any of these 2 questions have been asked, partially or fully before. On Mexico, could you provide us where -- what you see is the outlook at the macro level, as well as on your loan growth into 2019 margins and provisions, given the new presidency of AMLO from the 1st of December? And secondly, on the RWA optimization, and I'm not sure if you shared any details. Did that involve revising PD assumptions, LGD assumptions? And if so, which countries did that happen in?

[José Antonio Álvarez Álvarez, CEO & Executive Director]

Okay, on Mexico, so the look at the macro level, well, we are not -- we don't have a view that is significantly different than the consensus. We think that the economy is going to keep growing in line with the 2.5%, 3% that the economy has been growing. So I do think that this is an environment in which we can grow significantly the business, mainly taking into account the low leverage of the country. The leverage of the country is still very low. So we are positive on volumes. The second question was about margin and provisions. The margins, well, we saw significant margin expansion due to deposits. In our case, due to the increase in rates, that increased the margin, the spreads on deposits. But at the same time, we are growing faster in demand deposits than in the -- than the market. And this helped in the expansion of the margins we have had in the country. When it come in provisions, we, after several years, we became more selective, in particularly some areas of the business, particularly in credit cards, where the cost of risk is north of 10%. And we reduced the cost of risk in credit cards being less, having less activity in the open market, and we've been reducing the cost of risk there, so we think that this is sustainable. The growth there is going to be significant. This year, we expect to finish with probably around 600,000, 700,000 new payroll, so we are expanding in a big way our customer base. So this means that we're going to have more capacity to lend to existing customers and less need to go to the open market. That makes me relatively optimistic about the outlook, all things equal with the current economic environment, that we have in mind in terms of the provisions and the cost of risk. The second question is about risk-weighted assets. Will you take it?

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

It's a combination of many things. There's no single element, no single factor or variable that is worth mentioning that explains the movement. So it's a combination of different variables in the internal rating models in several countries, but none is really meaningful.

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

Thank you. Last question, please?

[Operator]

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

[Carlos Peixoto, Analyst]

A couple of questions. The first one would be if you could shed some light on how you see fees evolving in Spain and in Brazil as well? I take it that this quarter was a bit weaker, I guess it has to do a bit with the wholesale activities, but I was wondering if you could shed some light on how should we think about it going forward? And at the same time, touching on the mortgage stamp duty in Spain. I guess, it's difficult to see what direction the decision from the Supreme Court would take, but just to have an idea on the potential values at risk here? If there were to be a retroactive impact, what type of amounts could that mean for Santander?

[José Antonio Álvarez Álvarez, CEO & Executive Director]

Okay. The first, fees in Spain and Brazil. In Spain, well, we expect to continue to grow in fees in line with the loyal customers and the digital customers. So I think we see, this year, the fee income has been, as I mentioned, our CIB business has been -- has mainly been particularly strong in Spain and Brazil, and the fee generation, both in Spain and Brazil, has been affected by the weakness in the CIB fee income. In retail, probably the weakest area has been mutual funds. That was due to the behavior of the market. The growth has been so far limited, on the negative side. On the positive side, we are growing at a very good pace, at a very rate in insurance. Yes, in insurance, fees coming from insurance are growing nicely. So going forward, probably, the development depends on the market behavior, and this both in CIB and mutual funds that are the lower performers in this year. So this is the development in Spain. In Brazil, well, overall, we are growing, I think, at 14% or 15%, the fee income, so a very healthy number. When you look -- when you dig inside the fee income generation, as I said, weak CIB, particularly strong in all related -- the business related with volumes. We grew the volume significantly, both in lending, the volumes of insurance. There is -- competition is increasing in acquiring business. As you know, acquiring business was -- fee income generation was strong in Brazil, and we are seeing more competition. It is the only area in which I see more competition as a result of this competition. Probably the operators in the country and including ourselves, where our market share is approaching to 15% and probably keep growing, we are seeing some competition there that reduces the fee income. Other than that, I continue to see good developments in Brazil. The mortgage's stamp duty, well, wait until next Monday. The risk, the range is potentially so wide, that I'm giving you numbers -- or I don't have the numbers, but the range is so wide that elaborating on this, that's not in any particular idea, yes, because the range is potentially extremely wide. What I do think is that going retroactively is -- I do think that it's not -- the probability's low, yes? So given the fact that we are talking about a tax where a change in retroactivity is, in legal terms, is really difficult, because this is not something that was in our contracts, was in the law or in the bylaw. And we were following the bylaw, it was not due to our contracts, like other claims. This was -- we were following the law since, if I remember well, 1995 or something like that, and the discussion is different in this regard, yes.

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

Okay, thanks, everyone, for joining the call and obviously, the IR team will be here -- is at your disposal for any follow-up you may have. Thank you.