Banco Santander SA

MAD:SAN

Earnings Call Transcript 2019-Q3

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

Good morning, everyone. Thanks for attending to this 9 months earnings presentation from Banco Santander. Obviously, as every quarter, our group CEO, Mr. Alvarez will address the group performance for the first 9 months of this year, followed by our group CFO, Mr. José Cantera, who will address in much more detail the different performance of the business areas, and the CEO will conclude the presentation before jumping into the Q&A session. So José Antonio, please?

[José Antonio Álvarez Álvarez, CEO & Vice Chairman]

Thank you, Sergio. Good morning to everyone. Welcome to third quarter result presentation. As you know, I will start saying that we are progressing well according to our plans in order to meet our commitments that we made to you back in April, in an environment that there is a bit worse than the one we were expecting at that time, in an environment that with falling interest rates, slowing markets and high volatility due to geopolitical tensions. It's true that in our main market in -- by profit generation, that is Brazil, things are having to -- over projection and probably is one of the few countries in the world in which the growth expected for 2020 is higher than the one we are having today in 2019. Going into the activity of the quarter. We are progressing relatively well. In our targets in relation with loyalty, we continue to be loyalty in our customer base. The growth in both the number of customers, digital customers and loyal customers is progressing according to our plans, and this is relating to the volumes both in loans and deposits that are behaving well, plus 4%, plus 6%, more so in emerging markets than in mature markets. That's something that we were anticipating to you in the previous quarters. This translation into results. The statutory profit in the quarter is EUR 501 million, impacted by the charge of basically the impairment we've done in U.K., the goodwill impairment of around EUR 1.5 billion and the PPIs that also impacted U.K. Excluding this, the recurring profit generation is -- in fact, is 4% higher than the previous quarter, EUR 2.1 billion, and 4% more than in the Q3 2018. Underlying profit for the year -- for the first 9 months of the year, north of EUR 6 billion, almost EUR 6.2 billion, with a behavior that goes according to our expectations. On capital. The capital generation organically is progressing above our guidance to you of 10 basis points per quarter. The last quarter were 19 basis points. And the accumulated impact for the whole year has been 48 basis points organic capital generation that we were able to do to offset the impact coming from the regulatory front that has been in the region of 60 basis points. So we expect to be in the region of 60 basis points for the whole year. The profitability is around 12%. We are showing significant consistency in this -- in the return to shareholders. You know already, we announced the dividend that we expect to pay the 1st of November, EUR 0.10 per share with -- according to our policy of 40%, 50% payout ratio. That is where we pretend to stand in the coming years, the 40%, 50% payout ratio on recurring underlying profit. So going to the regions. While this reflects different regions, Europe, North America and South America reflects pretty well what is going on in the business, growth around double-digit in emerging markets. Well, quite resilient growth in Europe, 2% in loans, 5% in customer funds, although we have some countries like Spain and Portugal where the deleverage is still going on. And we are having a return on equity above the cost of equity in all the 3 regions, 10% in Europe, 13% in North America and 21% in South America. And well, the profit generation in the regions is close to 20% both in North and South America and minus 4% in Europe, impacted mainly due to the less revenues -- less NII impacted significantly for the less revenues from the ALCO performance. Going to the customers and digital activity. Just to remember you the numbers, the growth is significant, individuals and companies, and we are building loyalty. The loyalty is now in the region of 30% compared with the number of active customers. So no surprises here. The digital activity, we provide you with a very internal detailed numbers of accesses and transactions, you see in the region 20% to 30%. And this is continuing -- this showed the continuous progress of how the customers operate vis-à-vis with the brand and also how we are progressing in providing more and more services and products through the digital means. That is going to -- is changing and is going to keep changing the way we do business, our distribution model and our distribution and operating model. So going to the P&L. What you see in the P&L is -- well, let me to remember you that due to the change in accounting in TDR, TDR is the assets, the way we account the assets of SCUSA, net interest income and loss -- loan loss provisions are affected by this. Net interest income instead growing at 5% on a like-for-like base, ex TDR should be growing at 4%, while loan loss provision instead of 5% should be more in the region of 2%, 3%, yes. So aside from that, while showing significant progress in net interest income, net fee income, the quarter has been good, although we've been in the seasonal low during the summer in Europe, but we're growing faster than we were growing in the previous quarter. And the guidance of financial transactions came lower than the previous year due to the FX hedging. Expenses, well controlled. We will see later on the numbers country-by-country and region-by-region. Loan loss provisions, nothing new here, consistent -- relatively low provision level and we are not seeing any sign of deterioration in the most sensitive portfolios that we manage. Well, nothing to add, but the extraordinary charges of the quarter, that in the quarter we charged EUR 1.6 billion, mainly the EUR 1.5 billion from U.K. goodwill and EUR 100 million from PPI. The others are -- it's just to remember you that the ones we've done in the previous quarter. Total in the year charges -- extraordinary charges of almost EUR 2.5 billion that naturally impact our statutory profits. So looking at the profit -- the recurrent profit, the underlying attributable profit generation quarter-after-quarter. We are in the mark of EUR 2 billion, EUR 2.1 billion. So this quarter, in fact, has been the best in the past 8 quarters and showed the resilience of our business to an environment that is, as I mentioned at the beginning, is worse than the one we had in the previous quarters.Looking at the different lines of the P&L. Net interest income. Well, we are growing in the majority of the markets, and we have pressures, as you may imagine, due to the lower rates in Europe and deleverage, mainly in Spain and Portugal, and also the less weight of the ALCO portfolios, particularly in Spain. Net fee income, acceleration, as I mentioned before, in the quarter, well, quarter-on-quarter improvement mainly due to South America. That has -- continues to show a, particularly Brazil, a significant capacity to grow revenues, particularly fee income quarter after quarter. The other revenue, well, you have here the up and downs due to the contributions to the resolution plan and to -- in the fourth quarter, normally you have the deposit warranty in Spain. So in the second and the fourth quarter, we have these 2 impacts. Otherwise, nothing specifically to mention here. If I analyze net interest income, consistent with the growth. Mature markets growing 2%; developing markets 9%, consistent with the growth in the volumes. It's true that as a result of lower rates both in Mexico and Brazil, well, it's impacting the NIM. And NIM in mature markets are remaining flat year-on-year, although phasing, we've been able to offset the reduction in the interest rates and the inability to pass the lesser interest rate to deposits with lower deposit costs and also with a relatively stable NIM in the main markets. While in emerging markets, I already mentioned, some margin compression due to lower rates. On fee income, good levels of activity across the board. You see the mutual funds, insurance and credit cards are doing well. Volumes are progressing well. The fee income, as I mentioned before, in developing markets, particularly, South America, growing double-digit. Mature markets falling a bit. What has changed in the quarter, in the previous quarter, CIB was in negative territory. The third quarter was relatively good for CIB activities, and the fee income coming from these activities is flat year compared with the previous year. That was not the case in the previous quarter. Well, in wealth management, the 5% hides the fact that we are growing double-digit in insurance and banking, while asset management due to the reduction in the average fee that there is some margin compression in terms of fee. So in the industry, it's affecting the revenue, the fee income coming from asset management, although we are growing very well in volumes. In costs. Well, this reflects the efforts, our commitments to reduce EUR 1 billion cost in Europe. You see the progress we are making there. Spain, minus 7%; U.K., minus 0.8%; Portugal, minus 3%. So in negative territory. This is going to be probably the pattern in the coming quarters and years, and probably with some significant acceleration that is going to come from the U.K. and remain in the same territory probably in Spain and in Portugal. In all the other markets, some deceleration in Mexico. Remember that we are obviously growing at 7%, but we come from 11%. So good cost control all across the board, I will say, overall. Sound credit quality. No news here is good news. The cost of credit remains below 1%, NPL ratio keeps falling and the coverage ratio is -- well, it's holding approximately at the same levels that we had before. And finally, on capital. Well, the capital ratio at the end of the quarter is the same as in the previous quarter. We generated capital 19 basis points organically. Regulatory impacts in the quarter, 17 basis points. Probably at the end of next quarter, we expect to grow the 11.30% towards figures more in the -- in line with the 11.40%, 11.50% for the end of the year. This is our expectation, but it still depends on how big are the regulatory impact that we expect to be smaller than the ones we have had in the previous quarters. So this is our expectation for the end of the year. Keep in mind that we are -- we don't have here the impacts, positives and negatives, that will come next year that you already know. Finally, well, in terms of the profitability ratio, the return on equity is basically flat. It's around 12%. Tangible net asset value per share is growing 2%. And the underlying return on risk-weighted assets is progressing well, is 1.63%. We've been progressing consistent in this ratio. That reflects that we are being much more selective in our capital allocation than we were in the past. And in fact, you will see this in some portfolios in which we are disposing assets in some cases or being -- underwriting less volumes in assets that are not -- do not provide a profitability according to our targets. We are much more demanding on capital, obviously, than we were in the past. And now I pass the -- I give the floor to José, who is going to elaborate on the group, on the areas of the group and on the main countries, how the quarter went for those. José, floor is yours.

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

Thank you, José Antonio, and good morning, everyone. So after having reviewed the group, we'll now look at the countries, the corporate center and Santander Global platform. Starting with geographic diversification, the distribution of the underlying profit was unchanged in the third quarter between Europe and the Americas and developed and developing countries. In terms of underlying attributable profit by markets, it went up in 8 out of our 10 core markets, with double-digit growth in Mexico, in Brazil, in the U.S. and Portugal. By segments, Retail Banking, which is a stable, recurring and predictable business represents the largest contribution to profits. Corporate banking and wealth management are growing faster at double digits, thanks to the benefits derived from being part of the group, both in terms of cost synergies and revenue opportunities. We experienced widespread volume growth in the last 12 months. As José Antonio said, loans up 4%. Demand deposits up 6% and time deposits up 5%. We saw very positive trends in mutual funds, gaining market share in most of our markets. Loans grew mainly driven by emerging markets, where it was up 10%; and our consumer finance business, Santander Consumer Finance, in Europe was up 7%; and Santander Consumer U.S., 5%. Only Spain and Portugal fell as the markets continued to deleverage. Customer funds rose in all markets, and developing markets grew at double digits. Let me now go through the main countries. Starting with Brazil. Since the end of 2016, interest rates in Brazil have decreased by almost 10 percentage points, which has produced a rapid development of retail banking while, naturally, margins have started to suffer. However, the price times -- the P times Q equation is positive and will likely continue to do so in the coming quarters. Our bank shows a strong year-on-year growth in profits and in return on tangible equity, which rose 2 percentages points to 22% due to higher net interest income and net fee income, cost control and the fall in the cost of credit to the lowest level that we've seen in recent years. Our strategy is focused on 3 points. First, taking advantage of the growth in retail banking. For example, payroll based lending was up 27% year-on-year, and we now have 25% market share in auto lending. Second, increased banking penetration. We, as you know, have a product, an offering for low-income people called Superdigital that is doing extremely well. Fee income in cards was up 11%. GetNet now has more than 1 million point of sale from 500,000 in 2015. And credit card transactions was up 15% year-on-year. And three, growing in specialized lending, particularly in agrobusiness and microcredits through Prospera. Moreover, we are beginning to launch some of these products and services in other South American countries. In Spain, we successfully completed the technology -- the technological migration of all Popular branches and customers to the Santander platform with no incident. By the end of the year, we will have closed close to 1,200 branches since the acquisition of Banco Popular, which is 70% of Popular's initial branch network, achieving, as you can see in the numbers, sizable cost savings. We see a pickup in consumer credit, corporates, particularly international business, which is up 11%, turnover of credit cards up 13% and point of sales, which are up 9%. These positive dynamics, though, are not fully reflected in the stock of credit, which was down 6% year-on-year due to the deleveraging in CIB and in institutional lending and the fact that new mortgages -- the new mortgage lending is not offsetting current stock maturities yet. Additionally, we disposed of EUR 3 billion of loans through sales and securitizations in this past third quarter. We have strengthened our value proposition this year, reorganizing the insurance business with Aegon and MAPFRE. Underlying profit was EUR 1.2 billion, 3% more than in 2018. This growth was mainly due to cost synergies, the improvement in customer spreads, an active portfolio management, benefiting from the low interest rate environment. As for revenue, net interest income rose 1%, excluding the IFRS 16 impact. Net fee income dropped mainly due to the reduced SCIB activity and mutual funds as the sharp increase in balances since December up EUR 4 billion did not offset the lower net fee income driven by the increase in funds with a more conservative investment profile. Quarter-on-quarter, profit was 45% higher, favored by the Single Resolution Fund contribution made in the second quarter and lower costs and provisions, which offset the fall in net interest income, lower rates, volumes, growth in portfolios, et cetera, and net fee income, which was affected by the seasonality of the summer months. Santander Consumer Finance maintained its leadership in consumer finance in Europe, with a top 3 position in all markets where it operates. Its evolution continued to be very positive in a slowing sector. We are gaining market share -- our captive brands continue to gain market share in almost all countries, and this is reflected in the fact that net lending rose 5% year-on-year with a very good performance in Italy, 13% up; France, 9% up; and Spain, 6% up compared to the 2% fall in new car sales in Europe. The first 9 months underlying attributable profit was close to EUR 1 billion, in line with that of the same period of 2018. Profit before taxes was up 4% due to higher total revenue and costs that rose at a slower pace than business growth. Compared to the second quarter of '19, underlying attributable profit was 2% higher due to increased revenue and lower costs, which offset growth in loan loss provisions. We had some portfolio sales in the second quarter, we already talked about that when we presented second quarter earnings. Turning to the U.K. The environment in the U.K. continues to be very challenging, uncertainty over Brexit, regulatory changes and tougher competition. In this, under -- against this tough backdrop, we increased credit by 2% and customer funds by 3% year-on-year in constant euros, which was not reflected in the underlying profit, which was down 19%, as income remains under pressure due to lower mortgage margins and continued SVR attrition. We have very good news on costs, which reflect savings from transformation programs, down 3% in real terms. We expect more positive results from our efficiency program in the U.K. in the coming quarters. Provisions were higher due to releases in 2018. And as you can see, cost of credit remains very, very low, with very low -- very good credit quality. In the quarter, underlying profit was down 22%, impacted by the factors that I have already mentioned. Looking ahead, we expect the pressure to remain on net interest income as a result of the tough competition and lack of interest rate hikes on the horizon. Costs, as I have mentioned, should reduce further in real terms. Going through the other countries quickly, let me summarize the main points. Very positive performance in the U.S., despite a strong seasonality of Santander consumer business where profits, as you know, are always higher in the first half than in the second half. Lending, leasing and origination volumes remained strong in the year. Underlying profit rose 27% year-on-year, with an adjusted return on tangible equity of 10%. Keep in mind that, as José Antonio has mentioned, there was an impact from TDR accounting in revenues and loan loss provisions. Excluding this impact, revenues in the U.S. would have grown 5% and provisions just 2%, well below volume growth. The impact, obviously, of this change on profits is negligible. The quarterly evolution was also impacted by seasonality.In Mexico, profit was up 14% year-on-year, thanks to the very good performance of customer revenue and loan loss provisions, which more than offset the higher costs. The cost of credit improved and reached the lowest level we've seen in the past 6 years. The commercial strategy remains focused on improving the distribution model and on driving the digital channels to increase customer loyalty. In volumes, strong growth in payroll, mortgages and credit cards. Funds declined 1% year-on-year due to management of spreads. In Chile, profits rose 6% year-on-year with very good results in treasury and ALCO portfolios, cost control and a 9% reduction in loan loss provisions due to the improvement in nonperforming loans and in the cost of credit.In Portugal, in an environment of deleveraging, our portfolio is stabilizing as the falling lending to large companies was offset by the rising consumer lending and mortgages. Despite a tough environment, profits are growing at double digits, and profitability is increasing. This is basically due to very good performance in net fee income and gains on financial transactions. Costs are also being optimized and cost of credit is 0. The NPL ratio has improved by more than 250 basis points over the last 12 months. In Poland, year-on-year evolution is affected by last year's acquisition of Deutsche Bank's retail and SME business. Credit volumes increased 5% year-to-date, although customer funds less so due to the active liquidity management. This is beginning to be reflected in a lower cost of deposits. There was substantial growth across the whole P&L year-on-year. Even excluding the perimeter impact, revenues continued to grow -- revenue continued to grow strongly, up 9%; and costs 3%, which is particularly good performance when you take into terms the wage pressures at national level, which were up 7%. Top line performance did not -- does not fully reflect -- is not really reflected in the underlying profit year-on-year due to increased deposit guarantee fund and banking tax contributions. In Argentina, since the primary elections in August, we set capital and liquidity management in Argentina as a priority. As of the end of last week, we had close to EUR 1 billion of excess liquidity above the mandated reserves at the Central Bank, which is ample to meet our customer demands in almost any scenario. The bank remains very adequately capitalized. In terms of P&L, we have strong growth across all lines, both in euros as well as without the exchange rate, produced by high inflation and very high interest rates. As a result, and despite a greater monetary adjustment from the high inflation than that in 2018, profits increased. In Uruguay, Peru and Colombia, we saw strong growth in activity, which was reflected in customer revenue and profits. We are launching new initiatives and very actively. We launched Prospera, which, as you know, is the microcredit initiative that originated in Brazil. Now it's in Uruguay. We have auto finance and infrastructure projects in Colombia. We -- and the focus on large corporates in Peru remains. In the Corporate Center. Underlying profit was impacted by reduced gains on financial transactions due to the higher cost of exchange rate hedging. Net interest income was hit by the year-on-year -- was hit year-on-year due to the impact of IFRS 16 and the larger stock of issuances. Costs, on the other hand, declined and continued to reflect the positive effect of the streamlining and simplification measures underway. Let me now finish by looking at Santander Global platform. In the case of Openbank, it has a very large customer base, 1.2 million, most of which are active and are increasing their transactions at 32% year-on-year, which is driving up volumes and profitability. We have growth rates of 20% or more in payrolls and accounts with direct debits. Strong increase also in the number of active cards and in the card transactions, in this case up 50% year-on-year. Cost of deposits has fallen 14 basis points in the quarter, almost to half of what it was 12 months ago. As you know, we are working on expanding Openbank internationally. We have launched in Germany. I hope to be in the Netherlands and Portugal in the next few months, and Argentina and Mexico by the end of next year. In other services, the rollout continues in line with the schedule that we had announced. In the case of Superdigital, we already have more than 600,000 active users, after having been launched in Chile with the same technology that we have in Brazil. It already has 10,000 customers in Chile, and the medium-term goal overall is to reach 1 million. Pago FX, we have requested a license in the U.K. and an European passport. Global Merchant Services continues to develop a single open technological platform in the cloud. With more than 1 million merchants, it will be implemented in Mexico first, followed by other Latin American countries in 2020 and Europe in 2021. Global Trade Services also continue to progress as expected, and the rollout of the first -- of the initiative will be in the first quarter of 2020. It is scheduled to be operating in all of the group's countries by the end of next year. As part of its strategy, the Trade Club Alliance was recently launched together with 13 global banks. It offers an innovative digital platform for SMEs and by 2022, is expected to cover more than 50% of the -- sorry, 90% of the world's trade corridors and support more than 1 million companies throughout the world. And finally, InnoVentures has invested more than EUR 100 million in 28 companies with 4 new investments in the last quarter. And with this, I will turn it now back to José Antonio for his closing remarks.

[José Antonio Álvarez Álvarez, CEO & Vice Chairman]

Thank you, José. Just a few words to finish with some cautions. I would say that we are progressing towards our commercial and financial goals through the acceleration of the utilization in the whole activities of the bank, on the commercial and operational side of the bank, improving our -- the capital allocation we are doing across business segments and clients. Well, and we are able to maintain consistency, high consistency of our results in order to continue to offer our shareholders attractive and sustainable returns. We are starting from a strong base. Our business both in Europe, where our main focus is simplifying and integrating our structure in order to improving our operating performance as a way to offset the pressure we have on the revenue side that -- due to the very low or negative interest rates. And at the same time, try to keep low cost of credit that we have today, although we still have some possibility in some countries. So margin spreads going forward and being able to underwrite the most attractive business is going to be key in order to obtain a return on capital attractive to our shareholders.In North America, business and profits are growing well in both countries. We are progressing well in terms of volumes. Some margin compression in both countries, in Mexico due to -- Mexico and U.S. due to lower rates, but still at very good levels. And we have a business that is different than in Europe where we underwrite significant percentage of the business at fixed rate that provides a higher capacity to match the NIM going forward. In South America, while we continue to grow significantly, with the uncertainty in Argentina, but Brazil is -- Chile and Uruguay and the other countries are doing well. And we are starting, as José has mentioned, to roll out our very successful activities in the region such as payments, auto finance where we are progressing in all the countries, Prospera for financial inclusion and Superdigital as a payment system for the low-income customers. With the -- with Santander Global Platform, we are progressing in our vision about being an open banking platform that provides services to -- very inclusive service to all the society, including companies, individuals, both high income and low income. And we are progressing well in CIB, in our services of trading, in which we are one of the -- recognized one of the leaders in this field. Well, finally, the capital allocation is key going forward, is getting more and more important due to the significant differences that we have in profitability among the different segments. You have the track record there. The RoRWA is growing consistently, and we keep trying to do so, being more demanding or less keen to underwrite business in some segments, areas that the profitability is lower and going for the capital allocation towards the most profitable customer, regions and markets. Finally, you know that our dividend policy has been fairly consistent. The 40%, 50% payout ratio is maintained, and we pretend to -- with the proportion of the cash dividend per share being at least that of the last year. We aim to create shareholder value. The TNAV is an important metric for us, although we have some volatility coming from FX in this figure that is getting -- this year is not that strong due to the relative stability of the currencies during this year. Finally, I don't want to finish without mentioning some achievements that we made in other areas, like responsible banking. Well, for our employees, we were choose one of the 25 best companies to work for in the world, according to the ranking -- the annual ranking of Great Place to Work. As you know, we are working on this, with a -- trying to align the interest of our employees in favor of the interest -- aligned with the interest of the shareholders and the society in general. In relation with the society, we were choose like the top bank in the world in the Dow Jones Sustainability Index, has choose us as the most sustainable one. It's the first time that we reached this position, although we were traditionally very well in this regard. Finally, we signed the Principles for Responsible Banking as one of the founding members, and we again joined the Collective Commitment to Climate. Those are recognitions that are important and recognize the work -- the good work we've done in the previous years in relation with these issues that we put at the center of our strategy since 5 years ago when we announced targets for employees, customers, shareholders and the society in general.Thank you very much, and we remain open to your questions now.

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

Thanks, José Antonio. We can open the Q&A session now. So please, operator, proceed with the first question.

[Operator]

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

[José Maria Abad Hernandez, Executive Director]

I have 2 questions. The first one is on Spain. Latest high-frequency indicators, including labor market data, point to a significant slowdown, particularly in household consumption. So I guess the first question is whether you expect a pickup in cost of risk beyond the 41 bps that you reported in Q3 at some point over the Q4 or maybe 2020? And related to this, whether you are revising on the back of this, your expectation for loan growth in Q4 and 2020 as well? And if I may, another question on the upcoming stress test to be run by the EBA next year. Santander has been a top performer in previous iterations of the test, mostly due to your regional diversification. Do you anticipate any meaningful change in the macro assumption and/or in the methodology that may change this next year?

[José Antonio Álvarez Álvarez, CEO & Vice Chairman]

Well, José. Thank you for -- the first one related with the situation in Spain and how this slowdown in the economy may affect the cost of risk. We are not anticipating at this stage, although we share a view in relation with the -- of the macroeconomic situation of the country close to the consensus, we do not anticipate at this level a material change of the cost of risk, and we are not seeing any signs of deterioration in the cost of risk with the figures that we have in mind based on consensus. In relation with the loan growth. I will split -- I will be -- I would like to elaborate a bit more here. As you can see in our numbers in, well, for several years, and I've been quite open on this, we've been more selective in capital allocation than we were. Although we are keen to keep underwriting launched in some segments, we are not -- we are reducing our activity or we reduce the size of our loan booking, institutional lending in CIB kind of activities due to -- mainly to profitability and return risk-weighted assets basis, yes. Overall, the loan growth, we continue to see relatively good dynamics in consumer-related lending, although the growth now is lower than it was in the first quarter. And SMEs, we continue to see consistent growth. While in mortgages, the market is -- the front book is falling significantly compared with the previous year. I'm not in a position to tell you how much of this is due to the change in the procedures to underwrite a mortgage today that are much more bureaucratic now than they were before in the first 2 quarters. But we are seeing less activity in the mortgage front. While in the CIB and institutional lending, unless we see changes in the underwriting standards, namely NIM, we'll continue to be selective in the way we use capital there. Overall, probably we should think in a kind of flattish, slightly down overall portfolio, probably, with some growth in consumer-related activities; decreasing in mortgages; medium-sized companies, probably growing a little bit; and CIB and institutions depending on the -- how the spreads come -- are in the market. The second question is in the stress test. I don't know, José, you want to elaborate on this?

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

Has not -- the methodology, as you know, has not been published. It has -- is expected to be published by the EBA over the next couple of weeks. And -- but at this stage, we don't have any indication of what type of macro assumptions that might be included in this space.

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

Thanks, José. Next question, please.

[Operator]

The next question comes from Alvaro Serrano from Morgan Stanley.

[Alvaro Serrano Saenz de Tejada, Lead Analyst]

Two questions. First of all, on capital. José Antonio, you mentioned that there'll be more capital headwinds next year. Can you just walk us through what you expect in Q4? And also, what is remaining for 2020? Because I'm not sure. I didn't have in mind there was anything material other than the Allianz charge, which is not regulatory. But can you walk us through that? And the second question on the U.K. José, you said there's more to come on costs in the coming quarters. If I look at the U.K. subsidiary, a lot of the restructuring that's happened this year, I think, up to 7% of the workforce was in some shape or form restructured or involved in restructuring, and you've cut 20% of the branches or are in the process of doing it. I see the head count is starting to come down materially in Q3. But if I think about that 7%, should we expect costs to be down 7% next year or something in that order of magnitude in the U.K.?

[José Antonio Álvarez Álvarez, CEO & Vice Chairman]

In relation with your first question, capital, and -- well, the figure is difficult to put when the regulatory impacts come in any specific quarter. There is significant uncertainty there, may change from one quarter to another. But let me to share with you the -- what we already know and to discuss a little bit the regulatory impact overall. What remains to be executed now is Allianz that we already agree, is the custody business that we disposed in the first quarter. It's also Puerto Rico that we announced a couple of weeks ago. So those are the main impact that we already know. In relation with the regulatory, we do expect less in the fourth quarter than we have had in the third quarter, but this is highly uncertain. But overall, between 2019 and 2020, and this is probably something that we can be more accurate on this, we expect not 100 basis points, but probably in the region of maybe 80, 90 basis points overall regulatory impact, of which probably 60 or more come this year. This is a figure that probably is pretty accurate of our expectations today. When they're going to come, difficult to say, yes. So -- but for sure, what we do not expect in 2020 is an impact as big as the one we have had in 2019, and it's going to be, based on our expectation, significantly or much lower than the one we have had this year. The second -- well, the costs in U.K., I mentioned that we are starting to see the first signs of the cost reduction. Costs are in negative territory for next year. We expect a figure, mid-single-digit down for the U.K. Well, overall, in the -- our plan for cost reduction in Europe, the EUR 1 billion we committed in nominal reduction in costs, approximately half of this should come from the U.K. starting this year, but intensifying next year.

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

Thanks, Alvaro. Next question, please?

[Operator]

The next question comes from Sofie Peterzens from JPMorgan.

[Sofie Caroline Elisabet Peterzens, Analyst]

Here it's Sofie from JPMorgan. So I wanted to ask one question on kind of investments and divestments. How should we think about this going forward? You recently announced Puerto Rico, you also did a deal in Mexico. How should we think about potential kind of more M&A or more divestments? What's your view here? And then could you update us on the Basel IV impact that you expect on capital? And also, do you have any plans of changing your hedging strategy, which could potentially have a positive impact on your capital generation per year?

[José Antonio Álvarez Álvarez, CEO & Vice Chairman]

Okay. The first one, the capital allocation, I mentioned several times on the -- during the presentation. What we are doing here is being much more granular than we were in the past. So we already have an analysis of not only business that we have had analysis country-by-country, portfolio-by-portfolio, and we have a better view where the profitability meets our targets. And after that, this profitability is due to shorter reasons or long-term reasons in order to take appropriate decisions based on this. I mentioned during the presentation, some activities that in which we are reducing our activity due to capital allocation reasons, and we continue to do so by segments. So our segments that the profitability may be low due to nonstructural reasons in which we keep going on because we want to protect, at the same time we need to combine the franchise value with the short-term profitability. This is critical and this is probably the main task we have in our table, to take appropriate decisions when the profitability is low due to nonstructural reasons or when the profitability is low due to structural reasons. And we are taking appropriate decisions based on this. You see the result of all of this that is very granular, and the finance division is having this offer in our return risk-weighted assets, where we are growing consistently, and we want to keep growing return on risk-weighted assets in a consistent way. This is our approach on capital. On Basel IV, well, probably José can elaborate on the Basel IV potential impact on our strategy -- hedging strategy that is very well known by you, but has some relationship with this. José, already elaborated in previous quarters, but you can clarify.

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

Well, again, the Basel IV impact, as you know, we have no impact at all coming from the output floor. Most of the impact would come from operational capital, capital from operational losses. The methodology to calculate that has not been defined yet. So it is uncertain, in our case, what the impact could be. But you could -- we could use a sort of 100 basis point figure as the potential impact of Basel IV in total. However, obviously, once Basel IV is in place, we would see a convergence of capital ratios amongst all the major banks in Europe towards what we see in the American banks, which is around, let's say, 11% to 11.50%, wouldn't make any sense to -- after Basel IV to keep capital levels above or at 12%. You don't see that on average, amongst the largest American banks. And Basel IV basically means a convergence towards where the American banks are today. So I would expect to see capital levels in Europe post Basel IV moving around 11%, 11.50%, which is what makes sense. In terms of hedging, we continue to hedge the excess capital. Having said that, obviously, lower rates in Brazil, lower rates in Mexico means that the cost of hedging is significantly lower than it used to have. 3 years ago, the cost of hedging was around EUR 1.2 billion a year. As interest rates come down, the cost of hedging comes down, as I said, very significantly. And the strategy is to continue to hedge the excess capital, because from a capital treatment perspective it's efficient.

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

Thanks, Sofie. Next question, please?

[Operator]

The next question comes from Andrea Unzueta from Crédit Suisse.

[Andrea Unzueta, Vice President]

The first one is on Spain, where core revenue trends were very weak. You've explained what happened on the -- with the loan portfolio, but your deposits also declined by EUR 6 billion or EUR 4 billion, if I take into account the increase in mutual funds. Are you losing customers? What should we expect there? The other question is on Mexico. If I look at the Mexican peso's numbers, you have loan declines in the quarter, but NII is growing despite customer spreads have been compressed by 20 basis points. So if you could explain what's happening there? And lastly and very quickly, in the U.S., if you could give us some clarity on the cost line, which increased by 4% quarter-on-quarter?

[José Antonio Álvarez Álvarez, CEO & Vice Chairman]

Okay. Starting with the first question, core revenue trends in Spain. Well, I mentioned before, the core revenues, when you look at the year-long loans, cost of deposits, we are relatively flat quarter-on-quarter and pretty consistent. If you compare with 2 years ago, we increased a little bit. So when it comes to volumes, José already mentioned that we sold a portfolio of EUR 3 billion in the quarter, and also we are being much more selective. When you see the trends in our institutional and CIB books, the reduction in volumes is significant, is, as I mentioned before, a combination of capital allocation and the prevailing spreads on the markets. We are not losing customers, quite the opposite if you see the deposits. We are growing faster than the market in deposits and we are gaining share in mutual funds. Although mutual funds, the average fee is going down due to the impact of the ETFs are having in the industry. In Mexico, well, we are growing accordingly with -- there is some slowdown in the growth accordingly with the economic situation in the country. The country, the growth has been around 0 the last 2 quarters, and we are reducing our pace of growth according with the macro situation in the country. When you mentioned NII is growing, well, there is no customer-related revenues NII that is growing in the quarter. It's not a big business in Mexico, but is growing, and is what explaining what you said that we are growing NII, although we have a lower spread in lower yields and loans, minus cost of deposits. In U.K., the 4% quarter-on-quarter -- U.S. sorry, U.S. 4% growth in costs quarter-on-quarter. Well, is -- you cannot take this is a probably some impact specifically in the quarter without, I don't know, you have -- you want to elaborate on this?

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

Year-on-year is 2.8%

[José Antonio Álvarez Álvarez, CEO & Vice Chairman]

Year-on-year is 2.8%, and probably we're going to -- depends on how much we grow the business, particularly in the car dealers. This has to do a lot with our originations in SCUSA. In 2019 compared with 2018, grew significantly. And as a result of this, the fees paid to the car dealers are going up significantly. This is the only reason I have to see the cost growing quarter-on-quarter, along with maybe some marketing efforts. But the main one is related with the volume of originations in SCUSA.

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

Thank you, Andrea. Next question?

[Operator]

The next question comes from Marta Sánchez Romero from Bank of America Merrill Lynch.

[Marta Sánchez Romero, Director and Analyst]

I've got a follow-up -- a couple of follow-ups in Spain. The first one is on your cost of deposits, you're still paying 13 basis points. Your peers are at around 3. Are you introducing changes into your commercial offer? Are you tweaking your 1/2/3 Account? Where do you see the cost of deposits next year? Also on NPLs, the quarter in Spain, your NPL ratio is high, above 7%. Your coverage is coming down to 40. Do you think you have the right coverage to evacuate NPLs faster? What's your strategy? Are you planning more wholesale NPL disposals? So do you think your -- that guidance of 30 to 40 basis points cost of risk is sustainable? Or we could see an increase on one-off cleanups? And just quickly, sorry, on your defined benefit pension plans. Have you updated the actuarial assumptions this quarter? What's the size now of your pension liabilities? And what's the discount rate you're applying there? And if you expect any further negative adjustments in Q4?

[José Antonio Álvarez Álvarez, CEO & Vice Chairman]

First question, deposit cost. Well, we said, we're going to keep updating our commercial offers to the prevailing rates in the market. We still have some room to reduce deposit costs, higher than our competitors, and we will do so in the -- at the appropriate time. So we have this -- I tend to see this as a positive vis-à-vis with the others because we can reduce maybe 10 basis points the deposit costs, 8 basis points compared to what we have today relatively soon. NPLs. Our NPLs are higher than the others. We were the lowest in the market before Popular. As a result of the Popular integration with very high NPL ratio, we went to the 7% that you mentioned. We take, I think, an appropriate coverage. It cannot be other way around. And we are managing actively our -- both -- all the nonproductive assets including NPLs, and we continue to do so. We don't have an operation that I can share with you on the table, but be sure that we continue to manage actively this. We do not -- I do not expect a significant change in the cost of risk. And I do not expect any charge in the Q4. In the actuarial pension plan, I am not aware at this point the -- I don't know, José, you know the issue?

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

Yes. Yes, the update of these plans usually takes place in the fourth quarter, so we will make the adjustment in the fourth quarter. And still we have to run the models. But I would expect a negative capital impact of around 3 or 4 basis points due to this in the fourth quarter. Having said that, you have to take into account that over long periods of time, obviously, if the available-for-sale portfolio and the -- so the ALCO portfolio and the pension liabilities hedge each other over long periods of time. Although in one particular quarter, one adjustment might take place and on the other side, it might take place the next quarter. But again, in this particular case, we will do it in the fourth quarter and it will be around 3 or 4 basis points of capital.

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

Thanks, Marta. Next question, please?

[Operator]

The next question comes from Carlos Cobo from Societe Generale.

[Carlos Cobo Catena, Equity Analyst]

I'd like to ask a couple of questions. And if you -- and ask you to please repeat the explanation on the NII in Mexico, which I kind of missed. So first one on Brazil. Could you explain the performance of NII, which seems to be following the volume momentum, but we've seen some kind of a 35 basis point compression in the customer spread? If I'm not wrong, I would like to understand whether there's been a higher contribution from ALCO on securities? The second one, if you could recap a little bit the whole cost saving story in Europe. You said EUR 1 billion net reduction, which already factors in the EUR 750 million savings in Popular, some cost inflation. So net-net EUR 1 billion down the cost base of the European division. I think I understood that today, you said half of the savings should come from the U.K. and I'd like you to elaborate, if possible, on the other half. And whether you see any material room to cut costs in Santander Consumer Finance, which keeps growing? And I mean, I'd like to understand where should we expect the other half and which measures you're thinking about?

[José Antonio Álvarez Álvarez, CEO & Vice Chairman]

To clarify, NII in Mexico, I said, your colleague asked why if there is a lower yielding loans and higher cost of deposits, the NII was growing. And I said this is due this quarter to noncustomer business. That was the question that your colleague made before. The second question is about Brazil, where you addressed pretty much the same issue. You say, comparing the yield on loans, if I understood well, with the deposit cost, there's a reduction of, you mentioned 35 basis points. Well, very likely to -- we'll continue to have in Brazil, a -- some net interest margin compression coming in some cases by regulatory changes in some high-yield products like the -- what they call personal check, that is kind of overdraft in Brazil or may affect credit cards. But it's reasonable to expect some margin compression coming in Brazil that we expect to offset these revenues with a good growth in fee income and also developing new business that we are already developing. You see new initiatives in Brazil, on top of the traditional payments initiative where we are gaining market share, significant market share through GetNet. We launched several initiatives in insurance sector, Superdigital that José has already commented. We launched already initiatives in the asset management space, and we continue to launch initiatives in order to offset that what is going to come, for sure, that there is some margin compression. Difficult to predict when because some of these come from the regulatory front. But we factor into our numbers into our expectations that this is going to come in over time. Cost savings story in Europe. Well, we announced in our Investor Day back in April, EUR 1 billion nominal cost reduction in Europe. We announced this in April. So if I understood you well, you are counting the EUR 750 million Popular. All of them are not there because some of them we're already produced before we -- in this Investor Day. That means that taking our numbers at the end of 2018, we expect in the medium term, a EUR 1 billion down. Round numbers is going from EUR 11 billion to EUR 10 billion, yes. So -- and this includes naturally all the business in Europe, namely, U.K., Spain, Consumer Finance, Portugal and Poland. For -- from areas in which we plan to reduce costs, half of this will come from IT and operations. In some cases, because we plan to share services, the data centers, the use of the cloud and change the operations and this is going to provide half of the savings. Another EUR 200 million will come from what we call shared services. That means that we're going to share services across Europe, different kind of services. And the remaining will come from the traditional integration that is still going on in Poland, in Popular and in other markets like Portugal. So this is the EUR 1 billion. You -- I already mentioned half of this will come from the U.K., the other significant part will come from Spain. Consumer Finance participate on this only in the piece of shared services, in the -- when shared services means risk, means operations, means accounting, means finance, means legal, means all these services, yes. So those are -- these are where those savings will come according to our plans.

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

Thanks, Carlos. Next question.

[Operator]

The next question comes from Franciso Riquel from Alantra Equities.

[Francisco Riquel, Head of Research]

Just wanted to ask a bit more about the U.K. business after the write-down of the goodwill. You mentioned before that the plan for the cost-cutting, but I wonder if you can elaborate more also on the revenue outlook, you anticipate more pressure ahead. You can update on the SVR accretion and competition dynamics in terms of front book and back book prices. And then overall, if you can share with us, also for the U.K., how have you changed your business plan? You are currently delivering 7%, 8% ROE in the third quarter versus 9%, 11% in your strategic plan. If you can please an update on this, on the financial targets that you are now considering after the goodwill revision? And what cost of risk also are you considering under the new plan?

[José Antonio Álvarez Álvarez, CEO & Vice Chairman]

Okay. Let me to elaborate a lot on the U.K. business, our vision of the market. Our revenue outlook, the main, probably, item that is ahead of us is the whole overdraft issue. That is going to change the revenues coming from overdrafts. That also is going to change the very nature of the P&L, because we're going to lose significant amount of fees. At the same time, we're going to get some of this being offset by higher NII due to the overdraft issue. This is one-off, let's call it that way. When I go to the business, the front book dynamics, the market is not bad -- is not in bad shape today. The front book is coming at decent margins, while the back book will still suffer a slowing down SVR attrition, but it continues to be there. So overall, probably, we're going to -- the net interest income, well, it's going to be holding up with all the things I mentioned, the overdraft and all these things. While the fees, we still see some pressure. But this is only related with the mortgages. In other business, we expect to show growth. We expect to show some growth in corporates, we expect to show some growth in insurance, private banking and the wealth, what we call internally the wealth management business and asset management, we expect to generate new sources of growth there. Overall, with this cost-cutting that I mentioned before, along with the revenue measures and with the situation of the mortgage book, we remain confident that we're going to achieve in the medium-term the cost of equity that we're going to go back to the region of 9%, 10% return on equity that we announced in our Investor Day. This is the overall assessment of the situation. That was the one we use for the impairment we done naturally in the goodwill in the U.K.

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

Thanks, Paco. Next question?

[Operator]

The next question comes from Andrea Filtri from Mediobanca.

[Andrea Filtri, Research Analyst]

A question on capital with a bit more detail then on the U.K. Your quarterly run rate of organic capital generation is well ahead of your 10 basis points quarterly guidance. Can you please detail how much is from balance sheet and model optimization this year? And do you stick to the 10 basis points guidance going forward? What contingencies do you have against these new regulatory hurdles that you just disclosed for 2020? And were these unexpected? And are they from TRIM? Secondly, on U.K., do you confirm your interest to grow further also inorganically in the U.K.? And if so, what would be of interest to you and what would be the rationale?

[José Antonio Álvarez Álvarez, CEO & Vice Chairman]

On capital, probably, José, you can elaborate this, the evolution of the figures this year and how the TRIM has worked for us, how much come from the models. You can elaborate on this, yes?

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

Yes. Okay. So this year, remember that we have around 20 basis points coming from IFRS 9 and IFRS 16, and the rest is basically TRIM. TRIM, we would expect to have this year between 20 to 30 basis points, and another 10 to 20 or so would come from the application of Santander models to Popular portfolios. As José Antonio said, it's very difficult to estimate when some of this impact will come, particularly with regards to the TRIM. So we would expect some to come in the fourth quarter some to be delayed to next year, and that's the overall sort of 80 basis points figure that José Antonio mentioned. When we look at the organic growth -- when we look at organic, which is basically the natural risk-weighted asset growth and its capital consumption and the profitability of the business, that's what generates more or less 40 basis points a year, roughly 10 basis points a quarter. Quarter-on-quarter, you might see some differences because of securitizations, because of risk sharing agreements with, for instance, multilateral agencies, et cetera. The models really don't have -- optimization of models really don't have a meaningful impact on the capital generation, and we wouldn't expect that to be the case going forward.

[José Antonio Álvarez Álvarez, CEO & Vice Chairman]

In relation with inorganic growth potential -- inorganic growth in U.K., we don't have in U.K. a different policy than the one we have in our core markets and we've been pretty clear on this. In our core markets, we remain open for opportunities if those appear. Are we analyzing anything? We are not, in this case, in the U.K. But our policy, as I said, is no different from other markets, other core markets for us.

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

Thanks, Andrea. Now last question, please?

[Operator]

The next question comes from Ignacio Cerezo from UBS.

[Ignacio Cerezo Olmos, Executive Director & Equity Research Analyst]

A couple of quick ones for me. You can help us understand a little bit better, the run rate in the U.S. business. And obviously, there's 3 different business there. The usual seasonality in the SCUSA saw from the probably EUR 750 million, $800 million profit this year. How do you think that number can evolve in the future? And then the second one, quicker, if you have taken or planning to take any charges for the FX mortgage situation in Poland?

[José Antonio Álvarez Álvarez, CEO & Vice Chairman]

Well, the first one, as you rightly mentioned, is we have 3 businesses there. We have a positive outlook for both the SCUSA and the private banking business, also for CIB that is based in the broker-dealer and the newer branch that are reported under the U.S. umbrella. So all these parties, we have a positive outlook. We are growing well, and we expect to continue to grow well. The negative impact will come from lower rates due to the deposits of SBNA. That is the negative impact. Overall, we remain positive on the development of our U.S. business, and we expect to continue to deliver significant growth in the business. Remember that we are still work in progress, our return on tangible equity to achieve our targets, and we remain committed with the targets we established in Investor Day. So this is our view on this. Charges for FX mortgages in Poland. Let me to -- if I remember well, the total mortgages, FX Swiss franc mortgages, in Poland is CHF 2.6 billion in our books. CHF 2 billion are in the books of the bank. CHF 600 million approx are in the books of the Consumer Finance company. As you know, this is a case-by-case. And given the origin of these mortgages, look, we have several different situations. One, the mortgages that come from BZ and the Consumer Finance, and the other that come from KBC.As I said, this is case-by-case. Do I expect significant charges at this stage? No. But if it were the case, we need to go -- probably our portfolio is worth to mention that we have 3 portfolios that may have different outcomes depending if they decide to go to the court in case-by-case. But we don't expect a material charge at this stage. Naturally, you have numbers, the potential impacts here and there, but you can do on your own. But we don't expect a material charge for this.

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

Okay. We need to leave it here. So thanks, everyone. And obviously, the IR team is at your disposal for any follow-up. Thank you.