Jose Garcia Cantera - CFO Antonio Alvarez - CEO

Carlos Peixoto - BPI Andrea Filtri - Mediobanca Britta Schmidt - Autonomous Research Alvaro Serrano - Morgan Stanley Raoul Leonard - Deutsche Bank Ignacio Cerezo - Credit Suisse Stefan Nedialkov - Citi Group Robert Noble - RBC Carlo Digrandi - HSBC

Good morning, everyone to this is Santander First Quarter 2015 Results Presentation. This is [indiscernible] Investor Relations of the group, we will proceed with the results presentation which will be called by our CEO, Mr. Alvarez and our CFO Mr. Garcia followed by the Q&A session. As you know, we will take your question and no webcast this time. So we can limit of two questions per analyst and whole investor. So with no further delays I hand over the floor to our CEO.

Thank you, Savio [ph]. Good morning to everyone. The presentation as usually, we spilt the presentation in two parts. The first one I'm going to elaborate about the group performance in the first quarter 2015, afterwards, our CEO Mr. Jose Garcia Cantera will elaborate on the main business areas. We plan not to go through all the business areas, we have to leave more time for questions, that's you have presentation all the details about the units we've do not plan to elaborate in detail. And finally, I will make some conclusions of this presentation. Just starting with the macro environment, we are seeing which we're growth in our businesses. Let's say we are seeing good developments both in the US and the UK. The Euro sun probably is be hiding which is hiding is a little bit which is unexpected mainly in Germany and Spain and the margin economies we have probably now greater activity in Mexico, Chile and Poland. Brazil is lagging well behind and is in a middle of an adjustment process that probably leads the economy this year into recession. We are forecasting this, a decrease of 1% of GDP and finally and banking business continued to be affected by the into rate policy in the maturity of the mature markets. Last but not least back for competitions in some markets we see later on in our presentation. Starting with numbers, the trends in the 1Q were pretty similar of those we saw in the last quarter 2015. We saw it continued to normalize, we have been speaking for quite bit of time about normalization of the profits, we are following the same trend. Profit was ahead of EUR1.7 billion 18% higher quarter-on-quarter and 32% higher year-on-year. Drivers of this growth, the higher commercial revenues, higher gross income which increase more units is pretty well spread across the board. Mainly driven by the net interest income not so much by face as we see later on. Loan provision something that was suspected probably well expected in some of our core markets particularly Spain, but these general improvement across the board because of credit. The cost were under control, we are delivering what the commitment we made, we make general commitment to grow the cost baseline and slightly below inflation. So in Real, not to increase cost take in into account that we face difficult regulatory pressures on the cost side. We are proud to say that we are meeting our commitment as we move up. Lastly and this is very important this quarter particularly this quarter. We have a positive significant impact from exchanged rate under units resulting Euros. In the majority of the presentation I will look at the numbers of the cost on Euros just to analyze what is going on in the underlying business. Well as a result of this trends all the unit increase profits, but Chile and we improve the profitability ratios as we will see later on while the EPS and return annual equity restarting in direction. We anticipate to you in our targets for 2017. Going to the balance sheet, the volumes are growing and we anticipate that this was our expectation, when we raised capital in the beginning of the year and with the lending is growing in ninth of our ten core markets. While we are as you know, putting some emphasis in new products and service and improving the customer satisfaction and this is delivering, so when we look at the number we are seeing quarter-on- quarter in constant year as we're growing loan book at 3%that is significant deposit 4% and year-on-year 7% and 8%. And this growth is increasing, as we will say right around when we analyze more in detail about long-term and deposit coverage. This is small perimeter affect in the quarter, this above 1% the loans due to incorporations of the PSA in UK and infras. We did review NPL ratio was probably anticipated, the coverage is increasing the NPL ratio is falling and our solvency remain the core capital remain unchanged and fully loaded 9.7% we will elaborate later one, the different components of this the moves that we got in the quarter. Going to the P&L, attributable profit is set was 1.7 billion, EUR1,717 million, 32% up year-on-year and 18% up quarter on quarter. This was the exchange rates contributed about 10 percentage points on year-on-year growth and 6 percentage points on quarter on quarter. There was also slight perimeter impact, which in year-on-year terms 3% a growth of 2 percentage points in revenues and cost more or less the same sites. Excluding the exchange rate impact, the underlying trends are pretty solid. revenues are growing 7% year-on-year and were virtually unchanged compared with the previous quarter that has, the first quarter has a seasonal component particularly in Latin America and some revenues worn off mainly in insurance business in Brazil in the last quarter that is probably year in the last quarter. The cost remain unchanged quarter-on-quarter and rose year-on-year affected also by the parameter. Loan loss provision show insignificant decline and as you can see in the reduction of the cost of credit. Finally, let me to remember you, that the contribution [indiscernible] in Spain is recorded when accrued interest, which is adding out the GL and so well, it has no charts for this item in the first quarter charts on quarterly basis should be around EUR50 million to EUR60 million as charts, we anticipate at this point. Going to the P&L, the results remain in lines the income statement revenues gross income for the period till you have an cost and current Euros in the left side in current Euros price high cost and Euros. You see the growth, consistent growth across 7% in constant Euros 13% in current Euros. Cost growing in 5% so positive jobs both year-on-year and quarter-on-quarter along loss provision declining 10% well we were expecting on quarter-on-quarter 10%, year-on-year 10% down. If we look at the revenue line, so we have half of the increase in revenues is around EUR600 million is due to FX impact, dollar 50% is due to business is mainly to the net interest income not so much in fee income. we are, it has been affected significantly mainly by the regulatory issues, regulatory issues on special regulations particularly in the world of credit cards, where interchange fees were reduced, in significant markets for us and this has an impact in the quarter. So when it comes by geographies, what you have is, all geography is growing, but Spain mainly remaining in trends because low trading gains. That we're exceptionally high in the first quarter 2014, those that were the double of those in the first quarter of 2015. So later on, Jose will elaborate on the trends in the Spain that you see different times on the business on the commercial business is developing relatively well, while the trading were significantly lower than in the previous year. in other geographies, all geographies are growing the revenues are growing, but Chile is near to the we're been repeating quarter after quarter the relatively high inflation we have in 2014, that this year the last year inflation was around 6% this year is going to be around 3%. So on this affect the mortgage portfolio in the country. Splitting the revenues line, we have as I anticipate net interest income to, the behaviour is fairly consistent behind this is, there are volume growth on lower cost of funds. Special loans have been affected by new trends, changing mix in some geographies and packed for competition as I anticipate due to the ample liquidity in the markets. Well I want to remark the field, we saw for the second consecutive quarter and is now positive year-on-year that this remarkable change what we will see in the previous quarter, where the changing mix was reducing some pressure on the NII. Fee income is stable relatively stable, it's a certain regulatory part as I interchange credit fees and insurance in Brazil, mainly due to this. on quarter on quarter, in the last quarter there's a one off every quarter, every four quarter in the Brazil of around EUR60 million to EUR70 million due to insurance that normally make this comparison is not like for like for the first quarter of 2015 compared to the fourth quarter 2014. But relatively weak overall fee income lines. finally trading gains, while is around 6% of the total income of the gross income and significantly lower than the first quarter 2014 due to lower management, lower revenues due to inter lower trading gains due to the management of inter exchange rate hedging. When it comes to cost, the cost side. We have pretty much the same half of the cost increase is due to FX, the other half is due to our regional activities. We have several units, some units that are reducing the cost in Real terms particularly Brazil, Spain and Portugal. some of the units that are investment process particularly Mexico, this opening branches in Argentina also that is due to opening branches and all the others, I want to remark is consumable finances due to change in perimeter as x perimeter the cost are falling and USA where we face significant regulatory cost that within investing heavily in order to tackle some of the regulatory demands, we have from the regulators. So overall, I will say the cost excluding perimeter and inflation is minus 7% that was common interrelated cost below inflation. Inflation is our in the geographies which we operate is, the average weighted inflation is to be 3.9%. In provisions, 10% and without change rate impact mainly due to Spain, Brazil, UK and US. While there is a significant improvement in credit quality, partial display by the change in mix, risk management and in some cases significant better macroeconomic environment. The cost of credit went down from 1.65% to 1.38%, this improving is widely spread across all the units. Excluding SCUSA that is as you know it is subprime business with very high cost of credit. The cost of credit was 1.07%. So it is following the same trends that the overall cost of credit cards. I need to elaborate in a few lines in the balance sheet. Yes, to show you main trends in the balance sheet. in the loan, there is an accelerating pace of growth, while euro not growing as of December we were growing 5% on March, we were growing 7%, so based on accelerating pace of growth in the loan book. When you look at the geographies well all of them basically are flat, all growing significantly. well excluding the impact of the exchange rate, lending rose 3% and the quarter 7% year-on-year the latter against zero growth to 12-month before. The area, behind this growth, we are focusing in SME's. How many growth in Spain and Mexico will answer bunch of problems as well as with it in the UK. We are not growing in Portugal, but we're gaining market share in Portugal in environment the countries, they leverage. In Brazil, we grew well in companies and we are concentrating more in SME's we grow in the large corporate's and the kind of business, but Jose will expand more on this point and elaborate more on the kind of growth, we are having in Brazil. the US significant growth in GBM and position activities in Poland, within that we're on track deliver 10% growth at year-on-year and in entire year we saw economy that is seems to be little bit better than it was, showing off last year. As regard of this, to individual customers in general terms, sharp rise in mortgages in Latin America and greater focus in consumer credit in the bloated [ph] economies. in Brazil, mortgages good to fairly 5%, Mexico 15% in the Spain and UK rise in new lending, but not reflected yet in balance because the stages are pretty high, the standard growth in consumer finance not only because PSI also because the car market is not picking in Europe is having better than in the previous year. So overall accelerating growth in the lending activities. When it comes to deposits, the growth itself is significant and accelerating. Well we combine here two status, try to grow and give the cost of funding. The status here was to grow in current accounts review of suspense, if deposits on market mutual and increase the market mutual funds. The result in cost on Euros was 10% increase in demand deposits minus 3% time deposits plus 22% in mutual funds, is the result of this strategy in the last year. But units, and year-on-year UK continues to deliver pretty well, extremely well pulls 40% rise in current accounts. The success is often want to reward is beyond any doubt. Poland, well we had a company in Le'zaire [ph] where we attract significant number of customers. Portugal the main focus is to costs, to cut deposit cost. Demand deposit grew 23% and perimeter was 29%. Latin American grew and Brazil increased the funds 14% with demand deposits up for 15% and mutual fund 17%.US grew 17% current account, so lastly Spain is a good example of the strategy. We follow, we see the numbers later on with combine growth, with a forming of cost of deposits. Overall with trends, with dynamics in volumes trends both in loans and deposits. in credit quality, the NPL ratio was 4.85% falling for fifth consecutive quarter 34 basis point in the quarter summary is behind the NPLs. Net entries, for an over 20% quarter-on-quarter and year-on-year. Well the improvement is well split of demand units, you see Spain falling the NPL in UK relatively stable although, a bit lower levels is still down. Brazil, in ratio price view and this reflect, a significant change with this on, in the last two years. I will say that with the portfolio, that the cost ratio should be below the ones, used to be in past, even in this environment. Well on finally, US that well is a combination of the bank that has a good credit quality with consumer finance has been improved. To finalize this part of the presentation, a bit lower it on capital. Well, the headline number is the core capital remains the same 9.7%. This is result of a profit capital generation, gross capital generation of 25 basis points. we consume let's say growth in business is usual 11 basis points with the change of perimeter basically PSA also some more pieces of payroll as lending in Brazil, 12 basis points. So overall, we can that we're generating free capital exchange in perimeter around 10 basis points per quarter. The fully loaded level of ratio was 4.6%, well we think we maintain the equate levels of capital for our model, along we're in excellent position to take advantage of the organic growth opportunities in our market. Now coming to the financial ratios, you have their efficiency we are on track to meet our targets. Remember that our target for 2017 and the efficiency was to below 4.85%[ph] we are 47% right now. EPS growth 6% year-on-year return on tangible equity, where we obviously target of 12% to 14%, we are approaching the lower end of the range, we established the target for 2017 and the tangible value per share is lowering 16% year-on-year. So good times in the profitability ratios. And we are on track to meet our targets, we announced in February. So now I hand over to Jose that he's going to comment in remaining business areas, before I make some conclusions are there in this presentation.

Good morning everyone. Let me go through the main business areas. the breakdown of profits continue to show our high level of diversification and very well balanced source of profits around 20% come from Brazil and the UK. Spain contributes around 15%, US Santander consumer around 10%. This is similar breakdown from the one we had in the previous quarter. If we look at the profits by geography, all of them had positive earnings in quarter. Positive growth in earnings with quarter with exception of Chile basically because of the lower inflation that we had, this year relative to last year. I will make a quick comment on the smaller countries and then I will go into a bit more detail on the major units. In Mexico, we have a positive commercial strategy. The business is expanding. We also expanded our branch network as you know we grew our branches by around 200 and that is basically contributing to positive net interest income that increased 11% in the quarter and the lower cost of credit that we had in Mexico, basically explained the 13% growth in net attributable profit that we show for in the quarter. In Chile, well we have a close to $6 billion portfolio is affected by the ratio of inflation. We have significantly lower inflation in the quarter that explains the lower revenues. This high to some extent a very positive dynamics that we are seeing in the quarter growing in companies, growing in high income individuals. We are gaining our commercial punch in the country, so we feel comfortable very happy with the performance in Chile and we think that, as excluding these inflations effect, the underlying trends are positive. In Poland, we were negatively affected by the lower interest rate that we had in the quarter. Interest rates were cut by 50 basis points in the first quarter, 100 basis points year-on-year. This because of the long rate cap, this means a cap what we can charge in consumer loans basically and that affected our net interest income. we also focused on keeping cost of deposits under control after the campaign that we had last year, so overall I think the trends are positive, the economy seems to be picking up little bit, so positive trends despite our interest rates again are having a negative impact. In Portugal, as Antonio said we're gaining market share. we are running a 50 basis point market share gain in deposits and in loans which is very positive indeed, that is driven net interest income up 10% year-on-year and with lower provisions that explains the very high level of profits that we see in the bottom line growing 58%, but this has to be framed within the normalization of our activities in Portugal and also is worth mentioning that year-over-year, we had a one-off in the fourth quarter that explains the drop in quarter-on-quarter basis. Argentina, Uruguay and Peru increase their portfolio their contribution to the business. They had very positive performance there and lastly, the real estate rundown unit that we had Spain posted the lowest loses, since it was incorporated a couple years ago. If we go into the major units starting with Spain loan growth was 1% year-on-year. A slight decrease 0.8% quarter-on-quarter basically because of seasonal factor, the fourth quarter tends to be strong in terms of loan growth. Also funds grew 7% year-on-year 6% quarter on quarter. We will see the breakdown of these two in a minute. We have a positive evolution of a net interest margins. On the asset side with a strong competition driven down the profitability of our credit portfolio. This is compensated by the lower cost of deposits in the first quarter. We had a slightly higher decrease in the cost of deposits and later on in the loans. this is a result of this, we had positive net interest income growth with 1.5% year-on-year and within these we have a lower contribution from the government portfolios from the ALCO portfolio that because of the token interest rates contributed less in the quarter despite that, we had positive net interest income growth year-on-year. Fee income was weak due to some limits, now we had in the clinical business and the account of lower activity in general. Also we have some one-off gains associated with M&A and other corporate activities in the first quarter last year that we didn't have in the first quarter of the year. We also had less trading gains this quarter and this explains that gross income year-on-year was slightly down 1.5%. we have very positive performance in terms of cost, a very positive in terms of provisions and as a result our attributable profit was up 20% quarter-on-quarter 42% year-on-year. If we look at the loan revolution, we show very positive new production rates. We are producing loans for companies for 24% more, 36% more to individuals, 23% more in mortgages. The dynamics in mortgage portfolio are those that with the new production we are not able to compensate for the amortization of debt portfolio and you see the mortgage portfolio contracting. On the other hand, the company's portfolio is expanding and expanding at very, very good rate. One basically balances out and the other that is the reason why we're not showing more growth in the balance sheet by the underlying trend is clearly positive and the new production of loans is clearly positive in the quarter. We are also growing our demand deposits and funds, mutual funds at the expense of time deposits. In general, we are focusing on segmentation branch specialization and this is within yielding positive results. In terms of as a quality, very positive numbers as well. A very significant decline in non-performing loans balances in the quarter. The NPL ratio stood at 7.25% at the end of the March and the coverage ratio at 47%, 2 percentage points higher and the cost of credit is now slightly below 1% and it should continue to decrease in the coming quarters. So in general we think that the performance in the Spain to some extent also hides the good underlying performance of the business. New loan production is positive and clearly we are controlling cost better and we are having a much better contribution from the cost of credit. Moving into the UK, loan growth was 5% year-on-year 3% growth in funds. It is important to note here that the growth in loans include the incorporation of the PSA portfolio, which amounted to around £2.5 billion. Net interest income was up 8% year-on-year basically due to lower cost of deposits and higher volumes. Quarter-on-quarter is flat because of the use SBR portfolio that you know has higher margins on the average mortgage portfolio, so that explains slight decrease quarter on quarter. also the less number of days that we had in the quarter and the impact of PSA explains that change quarter-on-quarter .we have higher cost, basically because we're investing in our digital capabilities, we are refurbishing our branches and strengthening our GBM business on our corporate business in the UK. We have lower provisions as well and quarter-on-quarter there was an increase because of the releases that we had in the fourth quarter, we already talked about that for the sale of a portfolio looking at the activities in individual 1|2|3 account continues to yield very positive results. We are capturing around 100,000 new clients a months and adding around £1 billion to our current account a month, we're improving our servicing quality. We are now for the month of March, we were top three in the quality of service in the UK and we are the bank that is capturing the most switchers in the country. So we are very happy with the performance here and we think that we're going to see even better results in the future. With regards to company's growth of 9% in the quarter in a market that is declining that shows that we're gaining market share and again, I think it's also a very positive result. So in short, in the UK very positive dynamics despite the fact that it's difficult to expect an increase in margins going forward. We are managing our business with improved asset quality improved of service. We think it's also very positive performance. Moving to Brazil, we have a very positive P&L which is basically not a coincidence 2.5 years ago, we decided to push a strategy that focused on growing in long low-risk products and low-risk segments that try to control cost and improve efficiency and try to improve also our commercial capabilities. The result of that strategy I think was starting to be seen in the previous quarter was clearly seeing this quarter, when we're seeing a very positive developments in net interest margin net of provisions. The margins as a result of focusing on low risk appliance and low risk products. obviously net interest margins are down, but net of the cost of credit, net of provisions margins are started to improve and we've seen the best margins, this quarter for the last nine months. It is important to mention that the growth in loans that we see quarter-on-quarter of 6% is very much affected by the depreciation of Real, 13% of our credit portfolio is denominated in dollars. the dollar appreciated 23% relative to the Real, so this affect explains around 3 percentage points and we also as because Antonio said the portfolio of Bonsucesso. The payroll placed entity which explains another 0.7% growth. So excluding those two effects long growth was 2% in the quarter, which is very much in line with our expectation for inflation for in the year. So it's basically those elements that I explained this very high growth in loans. When we look at P&L, we had 5% year-on-year growth in fee income, net interest income on fee income. Basically driven asset by the improvement in margins, cost are well below growing well below the rate of inflation. Inflation is around 7%, cost rose 3%, provisions were lower, improved cost of credit and the NPL ratio was also lower and also we had a positive impact because we have less minorities in the quarter after our transaction of last year and as a result net attributable profit was at 41%. In the next page, we can see in fact the strategy that we're following growing very low income segments and planned segments and sorry low risk segments and low risk products growing more in companies and in mortgages and in a payroll based lending that in for instance consumer finance. We're seeing improved performance in SME's. so overall within this strategy is positive when comparing to what the market is doing, we are growing a little bit more than the system, year-on-year as you can see 15% relative to 11%, but this is basically explained by the higher growth that we have in companies, where we have a higher market share relative to other banks and because of the impact of the US Dollar. As I mentioned before the cost of credit is down compared to 4.6% and it's basically the consequence of this low risk strategy that started following a couple of years ago. So the bottom line of Brazil is that, we think we have the right strategy in the current economic environment in Brazil. We are prudent in risk, but we have to take benefit of the opportunities in the market particularly. In companies and we have a higher contribution from Brazil to the group because of lower minority interest. moving to Santander consumer, we are seeing positive underlying trends in Europe, where conception is picking and car sales in those countries what we operate, was also up 8% year on year at the end of March. We are obviously the focus is integrating the acquisition that realized in the Nordic countries and the agreement with PSA. gross lending amounted to EUR7 billion to EUR2 billion that's a growth of 20% year-on-year excluding the change in perimeter growth was 2% year-on-year and new loans increased 9% excluding the perimeter changes. Attributable profit was EUR242 million, 11% growth year-on-year excluding all the components of the P&L had very positive, very high double digit growth rates basically explained by the change in perimeter. Again as we add those units of the PSA agreement that has not been included in the quarter, in the coming months we will see similar rates in the future. Moving to the US, the P&L that we show here is the consolidated business that we have in the US so it basically includes both units, SCUSA and Santander Bank. At the bank lending increased 9% year-on-year excluding the sale of loan portfolios that we did and un-securitization that we did last year including those you see the 1% growth but excluding those they're growing at 9%. The focus is on companies and auto finance. Deposits also, grew 10% year-on-year 4% quarter and quarter and here also Antonio said the focus is basic core deposits. SCUSA, we started SCUSA continuous to be optimized in the business mix between what we originate to keep in our balance sheet, what we originate to sale and the activities, the service in activities that we do for other entities. Results, the attributable profit was up 28% year-on-year due to as we see higher gross income and lower provisions. The M&A explanation for the better figures in gross income is SCUSA. The Bank suffered because of the low interest rate environment that we have in the US. Cost increased 9% and if we were to comply with the regulatory requirements and the IT investments that we're making. Loan loss provisions were down 4% again thanks to the favourable revolution of SCUSA. The NPL ratio stood up to 2.3% and coverage at 211% over 300% coverage at SCUSA, which is best practiced in the sector in the US. Quarter on quarter, we have a decrease because of the capital gains that we have for the sale of portfolio to optimize Santander Bank's balance sheet as I mentioned before and I just wanted to make a final comment that we're making progress in building SCUSA as the operating entity in the US. If we move to the corporate activities, we have a higher cost associated with core center, big quarter basically a combination of different factors. We have lower cost of funding in the quarter that was compensated by lower income from our corporate and securities portfolios. In general, we have a less cost there, we have higher cost associated with regulatory impacts and also we have a lower tax recovery which is linked to raise in the group's tax charge and the debt business evolution that we have in Spain. Losses were obviously lower than in the fourth quarter basically you're remembering the fourth quarter of last year, we had a impact of the handling fees in Germany and with this I will turn it over back to Antonio for his closing remarks. Thank you very much.

To sum up, to give you time to my request you want. So let me to sum up the conclusion. well we are thinking we are facing a relatively benign growth environment in our main markets probably but Brazil, with some uncertainties in very low interest rates and increasing regulatory requirements that as a constant in the industry in the last couple of year. We starting the year with a solid performance, with dynamics results nine out of 10 volumes are growing profits. Volumes we are growing almost every geography. From our qualitative standpoint, we have some liquidity and capital ratios appropriate for the business model balance sheet structure on the overall profile. We are seeing with expect to continue to see more dynamics and risk and uncovering ratios and the cost of credit improving at the growth level in our almost all the units, are recognizing that in some units that better there is little room to growth. The revolution results, volumes and capital, is low to improve our main profitability ratios in line with our and the targets we established for the three year plan. We continue to make progress in our strategy and let me to finish this presentation making some comments in relation with the other, how we are evolving in our starting relation with customer and previously associated the target we establish. In relation with customers, we are standing different tools that new CRM seen in Chile, Brazil, US and Spain. 1|2|3 wall has been implemented in several geographies in Portugal, Poland and Germany. We have new initiative in relation with companies to have a better operating model, digital operating model with company and individuals, the multi-channel strategy is following is progression well across all units. In relation with ample years, we are launching a new [indiscernible] plant to ensure that we develop properly the talent we have inside the company. Well in relation with our combination with associated you know we have a extensive program of universities, in which we expand to invest million in this 40 years. In this quarter we present a new web for the Santander University company portal, and we also reach an agreement with a universe here in Madrid to pioneer in such institute in big financial data. Lastly, during the first quarter several steps were taken to enhance the transparency we have and make each year to exercise the rights. Impacting the last investors call meeting. The participation via electronic devices has multiplied by a factor of seven. in short, we are progressing well in terms of result as well with cultural transformation we are following internal interbank in order to reach our targets to be a bank simple personal as we decide that we want to be. Finally, let me to remember that well we have a investor day that is held in London at [indiscernible]. Now we remain at your disposal for the questions you may have.

[Operator instructions] [Indiscernible] from Goldman Sachs.

Thank you very much for doing the call in the English and for taking the questions live as well. I would like to ask two questions, the first one is on the deferred tax assets. can you just update us please, what the outstanding amount as of the first quarter is and what your views are on the debate at the relating to the European Commission revision of the deferred tax assets and their potential deductibility from the capital base, how would you react to that and what do you think the impact on Santander would be that went through? and the second question I have it relates to the credit quality evolution, so your non-performing loans are falling and the coverage ratio so ramped up by 2 percentage points this quarter, but the P&L charge for credit risk is broadly flat this quarter, how should we think about this, is there a level of coverage that you think, you want to reach and at that point we should expect the sharper decline in the P&L charge or do you think there is a going to be a gradual decline, how should we think about the provisioning leverage in the context of Santander? Thanks a lot.

Thanks Yian [ph] let me collaborate on the case issue, as you know what we have is a, a process that is about to start, but the bank commission is opening an investigation, but is not yet open official investigation on this topic to speculate on the outcome of process that is not yet started probably to front line article elaborate on this, what I can give you is a data that related with the amount of details we have in the balance sheet and potentially can be affected from whatever outcome of this process or another process that may follow the same path and done by European Commission or the NCB or whatever other regulators. We have around EUR5.7 billion something like that in our balance sheet, so you translate this into core capital is below 1 full percentage point of core capital. This is amount, this is on our annual report and we publish, I think at the year in annual report and into the half year report. So we update the market with these figures every six months. Particularly to elaborate more on this, so I think we don't have more information than that. The second question is about credit quality. Well as I anticipate in my presentation we were talking for the year about normalization of profits and one big piece on these valuations was the reduction on cost upgrade. Well, we being going through in normalization in the amortization markets for sure. We are already normalized probably in consumer finance and up the main deal is remained to be done in the Spain probably and in Portugal and the cost of credits particularly in the Spain where we are right now is maybe below 100 basis points. we should act into this, we average are currently 60 to 70, but probably you can expect that some kind of goal, should happens normally after a crisis like the one we suffered in Spain because the collection recover, but the room from where we're now 100 basis points cost of credit till the average across the cycle that 60 to 70, it gives you a number above where we are. In Brazil, that maybe our point the cost of credit is falling because the change in mix. Yes, so we don't break, changing mix in the country. So now we have less consumers, and secured consumer lending and much more secure consumer lending. Let's say mortgages and we have also much more large corporation and disposal that normally has significantly lower cost of risk.

That's very helpful. Thank you very much.

Next question comes from [indiscernible] from Nomura please go ahead.

I've two questions. First one Spain, net interest income and margins. It looked like there was fairly decent pressure on margins this quarter were to decline in net interest income. I want to wonder if you could just elaborate a little bit more on the type of pressure you're seeing lending yields and you think the competition is going to evolve, how much more downward pressure, do you expect to see on lending yields in Spain and the second question is on Brazil. as you highlighted the changes in mix, the cost control that you're focusing is having quite a positive impact on the P&L, but I just wonder given the ongoing deterioration in the macro environment, how long do you think expect to see positive trends in the P&L in Brazil given the deteriorating economic conditions. Thanks.

Okay let me elaborate on Brazil and I will the Spanish question to Jose. In Brazil, so it's true that we're facing a challenging environment, but let me to re-stress what we've done in the last two or three years that it has to be relatively optimistic about the outlook of our franchise in Brazil. We are not working within initiative Brazil, that the significantly different than the consensus. we are thinking the GDP is going to fall 1% this year, so we don't expect a significant lending route, meaning significant in Brazil Real growth, we expect to grow the loan book probably around 9%, in line with inflation. So no growth in Real terms that for emerging economy as you know is not particularly demanding or particularly aggressive and we expect to grow in line with this. What we have done in the last few years, we improved significantly our franchise in several France. the cost base is the third year in a row that we're growing our cost base significantly less than inflation, while our competitor probably growing in line or above inflation remember that they each agreement in countries was around 9% and we're lowering the cost much lower than this. So this is, we work a lot in the cost base. We work a lot in our capacity to in our collections skills and at the same time, we change dramatically the business phase. so having all of this, taking all of this into account and understanding then the environment is quite demanding, we are fairly positive that we can continue to deliver some revenue growth in the country with very good cost control and probably about the same cost of risk. Yes, so maybe is more up and down due to specific cases, but overall we see an fairly stable P&L in the coming quarters in the trends in a market that is not performing very well. So now I hand it to Jose to elaborate on income and margins in Spain.

As we showed in the presentation, we see a strong competition on the asset side very strong competition as interest rates are very, very low and we have low liquidity we are seeing, lot of competition on the asset side. It has to give an idea of what we are and in terms of companies including all types of companies, we are producing right now loans at around 200 basis points. A year ago, it was around 260 basis point and that trend that is continuing, the only exception to that is mortgages. New mortgages are being produced that is created of our own 150 basis points relative to the back book at around 90 basis points. But the trend clearly going forward is lower spread on loans because of competition. On the liability side, so far we've been able to compensate because of the drop in the cost of deposits, but that has limit. Obviously you know we think we can have few more causes just few more causes of positive news that, but it will be a point where that factor will stabilize. So we think that going forward, the pressures in terms of margins are going to mount. On the other hand, as we described, we're seeing very positive trends in new production. We are seeing new production in mortgages going up 24% and companies lending going up high double digits. So the combination of those two factor is, what is going to be driven net interest income going forward.

Thank you, very clear.

Next question comes from [indiscernible]. Please go ahead.

Yes I wanted to elaborate a bit more on the net interest income in Spain and also in Brazil. And regarding the contribution loan portfolio because net interest income has fallen quarter-on-quarter despite the better customer spread. So if you can update on the loan portfolio and a year contribution in the quarter and also in Brazil, the net interest margin is up quarter-on-quarter despite the lower long spreads. So if you can update there on any contribution of the loan portfolio affecting in the quarter as well?

Okay, let me to elaborate on this. I pass the question ALCO portfolio to Jose. In Brazil, probably to elaborate on the longer stats, is the only geography in which we are seeing clearly from book increased, we are able to increase the spreads in the loan book. Yes so in the last quarter we saw this trend and we think this is going to remain in the market for a while. so positive in the certain years in this front assuming that our mix and speaking like for like for the mix effects continue wither, but on a like for like to increase the spreads. You want to elaborate on the ALCO contribution in the Spain.

Yes, well both in Spain and Brazil. In Brazil, there was no contribution from whatsoever from ALCO portfolio to net interest income and in Spain because of lower interest rates, the contribution was significantly lower and the one we have last year. Roughly it was like around EUR100 million less is slightly more than EUR100 million less contribution to margins, this quarter and it was a year ago.

Next question comes from Carlos Peixoto from BPI, please go ahead.

[Indiscernible].

Sorry, Carlos we couldn't hear. So unless you repeat on much more clear basis, we'll IR rep will call you for follow-up.

Sorry, can you hear me better now? Hello? Can you hear me?

Next question comes from Carlos Peixoto from BPI, please go ahead, sir.

Are you hearing me now?

I think we jumped Carols, we'll follow up with him. Next participant, please?

Next question comes from Andrea Filtri from Mediobanca. Please go ahead.

Two quick questions, one on strategy and one again on ALCO. Could you please provide more details on the Pioneer Santander's management deal with regards to Santander's management P&L in 2014 prospects for a subsequent IPO further acquisitions and a comment on the completeness of the product offered and on the governance of the combined entity? And on the ALCO, if you could please provide as usual the breakdown of the portfolio, the contribution Q1, 2015 P&L and the maturity profile. Thank you.

Okay, with relation with Pioneer deal, we have announced I think two days ago, that we signed a Memorandum of Understanding, we signed on some conditions. Now we're entering the process of drafting the contract that it's going to last maybe two months. we will sign the final agreement around in two months or don't take this for granted is not written not two months or one month or maybe three months, but we will sign the contract in two months and afterwards we enter into all the all the regulatory process that it's going to be quite long. Probably as long as one year. so because we will be asking for regulatory approval in all the judicial in which we have asset management companies that basically means in all the jurisdictions in which we have a core subsidiary, so Mexico, Brazil, Chile, Spain all the jurisdictions. So we will have an at the end an operating company probably one year from now is the timetable I have in mind. But this May is more changes around the route. This is the timetable also that now written in the stamp. And Jose do you want to elaborate on ALCO.

Yes, the total ALCO portfolio that we have at group level amounted to EUR84 billion the contribution to net interest margin the quarter was EUR350 million for the group.

Next question comes from Britta Schmidt from Autonomous Research. Please go head.

I've two question please. the first one is, to what extent was the level in Brazil was impacted by the US Dollar versus the Real, is that hedged on a local basis and do you expect that this would be reversed to some point if the interest rate continues to improve and then secondly and within Santander Bank in the US, the cost income ratio is at 71% impacted by the higher regulatory charges there. Is there any management action that you can anticipate and could talk about improve the situation there? Thank you.

In Brazil, I think your question refers to what point the level of interest rate as I understood you well is impacting in the capacity to the revenues, up to what point in movement rates changed our capacity to new revenues, is not an important topic this one is Brazil. as you know the amount of the dispatch, we get on deposits is relatively low is around 1%, as you know the maturity of the current accounts and cheap deposits should be used in the Central Bank and the Central Bank pays you or nothing a fixed rate. So high rates in Brazil, do not translate necessarily into higher significant, higher revenues because on the liability side, we have the reserved requirements coming from the Central Bank and this, prevent has to make to increase the revenues due to this. The second question related with the US and cost income in US and naturally we have a unit that is bank that the cost are relatively high, the cost of income is very high. We are mixing in the bank, as you know we are incorporating a holding company in the US, from the scratch probably all these costs are falling into the bank cost. Probably we should look more at the cost of the consolidated holding and not march into the bank isolated because probably some of the cost that will fall into the holding in the future now are situated in the bank. Having said that, our banking operation not a consumer operation banking operation in the US. we have plenty of work to do to improve the franchise and the revenge side should be improving in a significant way, is not that much, is not that we have probably high cost base, is more that our capacity to raise revenues particularly the fee income is particularly is weak compared with our competitors in the capacity, the NII we are more in line with competitors, in the income we are lagging well behind those competitors and there is plenty of work to do in improving the franchise in order to improve the revenue generation and having the better cost income ratio.

Next question comes from Ignacio Largi [ph] from BBVA. Please go ahead.

One question on Mexico and the increase in the cost of risk, what shall we expect going forward on the cost of risk in Mexico for 2015? Thanks.

Well we don't expect a significant changes in the cost of line by line, what happened in this year in Mexico, is we're growing. the market in terms, we're growing less, the loan book is growing around mid double digit, 15%, 14%, 16% and what we have a is a growth that is significantly lower in credit cards. I mean that's the issue, but being the credit cards , the higher cost of risk in Mexico, it depends if we keep the same trend probably the cost of this is going to be relatively stable, but in [indiscernible] if the credit cards portfolio start to grow or not because in that case, the credit card portfolio not happy, that is maybe around or above double digit ,while the average consulting fees is significantly lower. Taking that aside, this change in mix particularly in credit cards, I will see a relatively stable cost of reaching company.

Thanks very much.

Next question comes from Mario Roberio [ph] from Fidantis [ph]. Please go ahead.

Couple of questions. the first one is, could you give an on the front and the back book cost of the time deposit book in Spain and the second question is, you mentioned the ALCO portfolio at the group level. Can you also give an update on the ALCO portfolio in Spain average duration and average yield? Thank you.

One, deposit cost I don't know, if this quarter for loan book. We are running till the new production is coming appoint, 30 something.

33.

33 or 35. So this is a new production, while I think the average cost of time deposits still above for around 1%. So that this gives you the dynamics of this the time deposit portfolio. In the ALCO portfolio, Jose you want to collaborate specifically on this.

Yes in Spain, we have a total of around EUR27 billion with an average duration of slightly less than four years and an average interest of slightly above 2%.

Next question comes from Alvaro Serrano from Morgan Stanley. Please go ahead.

Just a follow-up on the Spain and NII. With your UI lower and the mortgage is still hoping to reprice and all the dynamic you explained. Can you think, you'll be able to grow NII this year in to Spain? and the second question was more on M&A. the Postbank is now up for sale, you've looked to the bank in the past and my impression is that Germany is an interesting for Santander and I've think you've also shown interest in the past with acquisitions of SEB and the consumer business you're building there, how should we think or how you thinking about opportunities such as this one and also if you can update on where we're on ALCO. Thank you.

Okay in relation with NII in the Spain, Jose already elaborate on this, but let me to add, a bit of color. Within that we continue to be able to reprice downwards the deposit book. I told you the new production from book, how is behaving so this is still LATAM but has limit, we are running up on 60 something because of deposits, probe we can reach something like that, that is 0.4, but there's a limit. On the other side and I mentioned before, we were not expecting the decrease we're seeing asset splits or we were expecting this to come later. What we're seeing by the way is more offers come into the market at lower prices probably this is due to liquidity into the market and to the effect of the quantitative division. so we are seeing a relatively this quarter we were able to offset decrease in asset spreads, with decrease the positive spread probably this is not going to be possible more and many quarters more, probably one more, but probably afterwards, we are going to suffer in NII in Spain -- not elaborating on the ALCO portfolio that is more practical. In relation in M&A, you know we are participating in Oracle. we are not that during the year has started too reasonable to start. We've analyzed bank and we are going to put an offer that is attractive for us, once we see the numbers. in relation with our market, we clearly have stated our policy there. our priorities organic growth. naturally we're going to look into marketing which that are core for us, the potential opportunities probably not day, weeks, once and this is our stance in relation with M&A. so the only process we have by now is Nova Banco in which you know where we're at.

Thank you.

Next question comes from Raoul Leonard from Deutsche Bank. please go ahead.

So I've had two questions. the first one is about balance sheet, you obviously grew your next customer loans and total assets 8% in the quarter. what I'm interested in understanding is ,what's your expectation for balance sheet growth going forward per se, you know the end of 2015 or 2016 and do you expect the same pace of growth to continue? because we're leading on, you end with up risk weight inflation growth. could you update us on what are you expectations off of that? and then, will you think your capital base will end up being your capital base target between 10% and 11%, do you think that will end up being some kind of constraints on your balance sheet growth? and would you actually pull back from loan growth if you're not making your bottom end of the target at 10%? so that was about three questions, my other question is on tax rate guidance. the tax rate is been trending up and this quarter is around 31% and how should we think that about going forward?

I'm not sure, if I get right to your questions. I understood that given the growth and the prospect of growth we've had, in relation with the capital raised we had. It's true that, we are seeing and happy, acceleration of growth, we are happy in our geographies and at the same time, we are generating that the profits are going up and as I mentioned in the presentation with the current growth and the current profits natural, we are able to generate around 10 basis points free capital for quarter after dividend and after the growth in weighted assets. this quarter we're different higher rate before, due to PSA that brought into the books EUR12 billion and new loans. so overall I think that we should be on track to get into our target that is 10% to 11% core capital ratio in coming quarters we are going to approach the lower part of the range and we feel comfortable in this regard. The second question was about the tax rate, is to that tax rate this quarter came 30% and this one off, we are yes agreeing, 30% last year we were accruing at this point at time, 27.5% is to that we're expecting a higher tax rate due to the combination of the geographies and the different corporate tax we have across geographies.

Next question comes from Ignacio Cerezo From Credit Suisse.

I had a couple of questions. first one is valuation adjustments line in the balance sheet has been closed to EUR3 billion in the quarter if you can split that between AFX and FX and the second question is on the contribution to positive guaranteed this EUR50 million to EUR60 million quarterly number was given for the Spanish business, but if you can give us like a group number and split that within the ratios? thank you.

Valuation adjustment EUR3 billion, AFX and FX, having mind FX being EUR2.3 billion or EUR2.4 billion and the rest comes from AFX. remember our policy, let me to remember our policy in fetching the FX rate, you have policies to the capital ratio means that we fetch the ratio, not the actual amount and this is reason why we have this difference in valuation adjustments. in relation with deposit one. I mentioned the Spanish, do you have the figures of dollar? Dollars one, do you have here?

Follow-up.

We follow-up Ignacio and we provide you the figures for the other units, yes.

Okay, thank you very much.

Next question comes from Stefan Nedialkov from Citi Group. please go head.

Good this is Stefan Nedialkov from Citi. two questions from our side. Number one on the balance sheet, we're seeing that Spain and Mexico are seeing increases in basically the trading portfolio due to create institutions as well as from credit institutions. just wanted to understand is this an FX affect through the derivatives line of some sort or is it something else, maybe liquidity related and number two, on Brazil. It was very good showing this past quarter ROE in the mid-teens. your group ROTE is at 11.5%, so that's very close to the target of 12% to 14%, what did you understand, how much upside is there in Brazil to help you get to closer to 12% to 14% ROTE as you're targeting? is Brazil the driver to get you to 12% to 14% or is it another geography? thank you.

Thanks. Mexico and Spain.

The more, the FX. there is an increase in both assets and liabilities on financial intuitions. it's basically related to FX in those countries and also to increased activity in the repo market associated with GBM activity. so there are no special issues with regards to liquidity. it's basically repo in Spain associated to GBM and for the rest of the group it's FX.

Okay in relation the second question that our targeting the recount annual, we've been 12% to 14% and we're being and 11.5%, that we are close, well one to go, up what point in Brazil is going to help on this, as Brazil being the main contributor to the profits of the group and naturally is key part of the group and as I said, our franchise in Brazil has improved quite significantly in the last two years and I remain confident that Brazil is going to help us in a significant way to achieve our targets not only in repo and tangible equity also the other targets, we establish at the group level. But we remain optimistic about it outlook for Brazil in medium term. We're going to produce not in the medium term, we expect brazil to positioning growth issued compared with the average of the group.

Our next question comes from Steffie [ph] Peterson from JP Morgan. Please go ahead.

One quick question on the collected provisions, they were off quite significantly from EUR6.3 billion end of last year to EUR8.5 billion in the first quarter. could you just talk about why you increased the collective provisions, are you concerned about something particular like Petrobras or something that hasn't hit the balance sheet, but then should hit the balance sheet later, this year and second of all, can you give outlook on how you view the UK growth in the UK has been very impressive so far, should we expect similar growth in the UK going forward? Thank you.

It is related the collective provision is related with exchange rate, yes. So is basically due to this. The outlook for the UK as Jose elaborate in the presentation, we're seeing fairly stable spreads, well the liability re-pricing is coming to an end and we're seeing relatively good quality. So we don't expect business from this side and the capacity to grow in the volumes in the countries is going to be key to produce relative results and the ones we got in this quarter.

Thanks for your question Sophie [ph]. I'm afraid we're running out of time. So we have maybe time for just one or two more incoming question please. Go ahead, follow with the next one.

Next question comes from Robert Noble from RBC. Please go ahead.

Two questions from me. In Chile, should we expect more pressure on the interest margins in the coming quarters or do you think the positive customer dynamics you've got out waving I guess is inflation impact and in Brazil, could you comment on the progress of all the lawsuits going on and specifically the press reports on the potential tax fraud scheme and also what litigation relations you've set aside for any lawsuits in Brazil as well? Thank you.

Well in relation with Chile, we elaborate on inflation. Last year inflation was 6% with this year we are expecting to cover around 3%. Well going forward pressure probably in the first quarter, you split 3% we expect for the year for the first quarter, we got a little bit more. Yes, so done in other quarters. But overall, aside from the inflation has an effect, we tend to have a long position due to mortgage book between high end $7 billion. This is impact in the big annual, so inflation different from 3% and the impacting of $5 billion to $7 billion portfolio. The lawsuits in Brazil, I don't know which ones you're referring to, but probably I don't know you referred to the relation with [indiscernible] or which one are you referring to?

I'm sorry, there are reports on the tax fraud scheme.

We don't have any indication from authorities and we think, well this was our behaviour has been correct and we don't expect any kind of deal there.

Okay, thank you.

The last one.

Yes, last question, please.

Last question comes from Carlo Digrandi from HSBC. Please go ahead, sir.

Two more questions. You've been guiding for organic capital generation 40 bps this year, if I understood correctly, 10 bps for the quarter. So the question is, if you expect capital generation to accelerate as of 2016 onwards maybe 60 bps, 70 bps or you think the regulation will take a stall and you expect the flat 40 bps per year over the next two years? And the second question on the Spanish Real update went off, you've been guiding for good improvement in non-performing loans especially from Spain good trend. So I was wondering if the weight of this division will come to zero by 2017 in terms of negative contribution to the profit. Thank you.

Carlos, organic capital in relation I mentioned in the presentation around 10 basis points per quarter, is what we seek with current outlook we have. So this is what we expect. The runoff we are stating Spain, as you saw the results spinning the think the results are falling. so we expect this to keep the space and to produce less and less negative result and you mentioned 2017 coming to an end probably we have the base of 25%, if 2017 coming to an end, are not, if this not come to an end will be very, very low. Yes the negative contribution.

Thank you very much.

Thanks very much everyone for joining. Obviously we missed of course for further questions. See you next quarters. Thanks.

Thank you.