[Operator Instructions]. The first question comes from Jose Abad from Goldman Sachs. Please go ahead. José Abad: Yes, hello, good morning. Thank you very much for the presentation. You reiterated this morning your plans to meet your 11% core equity tier 1 target. The question is whether you plan to do it this year. And you said -- you mentioned that the fully loaded capital target as of Q2 was 10.62% fully loaded, including the full impact of IFRS 9, also pro forma for we think. Therefore, there is a 40 bps shortfall to your target. So it would be good if you could actually give us some visibility of how you plan to meet the target this year, given the run rate of organic capital durations of 10 bps per quarter. The second question is on FX. Would be good if you could give us an update on your hedging strategy for major currencies and in particular the Brazilian real for -- and the British pound for half two of the year and 2019 and also whether you could give us some sensitivity of the impact to tangible book of, let's say, every 10% appreciation in these currencies. Thank you very much. José Antonio Álvarez Álvarez: Okay. I will elaborate on the first point. And I pass to Jose, our CFO, to elaborate on the hedging strategy vis-a-vis with the currency and sensitivity around this. It's true that we have 10.62%. Our target is 11%. As I said, I would remain confident to be at the end of the year around 11%. What we do expect is a relatively low growth in the second half of the year of the risk-weighted assets, while the profit generation will remain fairly strong. We already charge -- we charge already restructuring charge. We anticipate, compared with the previous year -- last year, we charged in the third quarter. This year, we anticipate the second quarter. So as I say, we remain confident based on our numbers. We're going to be around there. Need to say that, based on the current numbers, it's better than our internal numbers, the internal numbers we were expecting at this time. But the minority interest in SCUSA, that is the only thing, as I said to you, that came as unexpected. Jose, you want to -- José Antonio García Cantera: Yes, so the hedging, we haven't changed our strategy, the one we communicated in previous quarters. So we have fully hedged the -- our budget, our profits coming from Brazil and Mexico, so fully hedged in 2018. We also have fully hedged the pound for '18 and '19. So in -- as of the end of June, the net gain of all these positions was approximately €80 million. The sensitivity of book value to changes in the currencies, well, it's very easy to calculate just by applying the sensitivity to the actual equity that we have in these economies. We hedge the capital adequacy ratio, which is the axis of the local ratio to the group. So that doesn't really change much the sensitivity of the actual valuation of the book value. So you can calculate that by just applying the changes in the currency to the book values that we have in reais or in Mexican pesos. Sergio Gámez: Thanks, Jose. Next question, please.

Thank you very much. The next question comes from Mario Ropero from Fidentiis. Please go ahead.

Hello, good morning. My first question is on the available for sale ALCO hit in the quarter reflected in capital. Could you please elaborate in which geographies this impact was felt? And then also on the cost of risk guidance of 1.2%, do you think that 1% is sustainable in the coming quarters, particularly because it is really -- it continues to be really, really low in consumer finance Europe and in the UK? So maybe you can also elaborate a bit on what you expect for cost of risk in these two geographies in the coming quarters. Thank you. José Antonio Álvarez Álvarez: Okay. You want to elaborate on AFS? José Antonio García Cantera: Well, the amount of the portfolios that we have right now is around -- a bit less than €30 billion between Spain and Portugal, €28 billion, and BRL14 billion. We have a very small portfolio in Mexico. So obviously, it was the change in euros and reais that explain the movement in the quarter. But again, as Jose Antonio said, we look at the first half. Basically, the impact is almost neutral in euros and slightly negative in reais. So in the year, in the first half, the valuation of the AFS portfolio almost detracts just a couple of basis points from our capital adequacy. José Antonio Álvarez Álvarez: Probably yes, to clarify that the portfolio is basically Spanish sovereign bonds and Portuguese sovereign bonds because we disposed the portfolio we had in Popular of Italian bonds at the end of last year, at the beginning of -- José Antonio García Cantera: Beginning of this year. José Antonio Álvarez Álvarez: Beginning of this year 2018. Because of risk, how sustainable it is, you asked specifically about two geographies, consumer finance and UK. Well, it's true that the cost of risk in these units you mention is fairly low. Having said that, in consumer finance, we may even have some reduction before it was -- probably, it will get better before it will get worse because what we are seeing every time when we dispose a portfolio, and you see every year quarter on quarter that we make gains when we dispose the portfolios, have written off the loans that were provide or written off. So probably the expected losses at this time of the -- at this point of the cycle is even better than the ones we are reflecting in the P&L. And this is the experience when we dispose portfolios, while in UK, it's true that the cost of risk is close to zero, other than some events, specific events we have had. Naturally, in our case, depends very much on the behavior of the real estate, particularly the mortgage book, although when we start to -- as you know, IFRS introduced some volatility on -- potential volatility in the way we provide, given the fact that we provide based on models. And if we see -- we start to see the housing prices going down or the GDP going down or a combination of both, we need to anticipate expected losses based on the model, and this will add volatility. What we say incurred losses is nothing new, but maybe in the future, depending on the house price evolution and other factors, macro factors, you may see some quarters, say, some volatility there, but we have not seen any sign that leads us to think that we're going to need more provisions on the UK, particularly for the mortgage book. Sergio Gámez: Thanks, Mario. Next question, please.

Thank you. The next question comes from [indiscernible]. Please go ahead.

Yes, thank you. Two questions, one follow up on capital. Just wondering if you are considering any nonorganic measure to get to the 11% target, and in particular if you can comment on the potential unwinding of the JV with Chrysler for SCUSA and the potential implications or any other measure, like the sale of the real estate assets in Spain, if you're also counting on reducing any capital here. And then second question is on Brazil. Very strong trends in the second quarter with loan growth accelerating, but we have seen also macro prospects deteriorating the last few months with some downgrades in consensus forecast. So if you can update also on your expectations in terms of loan growth and cost of risk for Mexico -- sorry, for Brazil in the full year. Thank you. José Antonio Álvarez Álvarez: Okay. On capital, you are thinking nonorganic measures. Now when I said to you that we were going to be around 11%, it's -- well, nonorganic, we're going to be active as usual in securitizations. But other than that, nonorganic measures. You point out to one fact that is the FCA announcement that they did in the Investor Day that they planned or may plan to buy back from us to secure the option they have in the contract they have with SCUSA. Nothing to comment here. Their intention was announced. They have the right to do so. They have the right to take from us basically all the book we generate in operations with Chrysler, the loan book plus the leases. But it's too early to say anything. Well, the potential impact of that in capital naturally depends on price. And we haven't talked to them. And we haven't received any figure from them. And so it's too early to tell you. So naturally, this has a positive impact in capital. So from one still you can estimate the book is basically 50% of the book of SCUSA. You translate this basically one for one for risk-weighted assets. And you can estimate easily the potential impact on capital. But we are not counting on that for this year. Sale of assets in Spain, I think that you are referring to real estate assets. This is a continuous process. We're going to continue to sell. We're going to continue to dispose risk-weighted assets in Spain. This is -- I state to you many times that this is not core for us. The real estate market is in relatively good shape, and we're going to continue to dispose these. Naturally, this is going to reduce somehow the risk-weighted assets. But this is more -- the reason is not because reduce the risk-weighted assets. The reason is because it's not core for us. And we're going to keep disposing all of this. In Brazil, you say about -- that the quarter was strong. Well, I've been -- we've been telling you for many quarters that our franchise has improved in a significant way and keep improving. We have several business in which we are gaining significant market share. And I expect to continue in this regard, business that are mainly retail related. We have a phenomenal consumer business there. We have a credit or [indiscernible] payroll-related lending that is doing very well. And we are gaining share. We are gaining share in credit cards. Our SME business is starting to work, while still corporate business that is better than it was is starting to perform better. CIB is not growing. So we have significant growth, significant market share gain on the retail SME side. And well, corporate is improving, and CIB is still relatively flattish. Should this pattern of growth and gaining market share translate into higher cost of risk that you are pointing out? We don't -- well, last quarter, some of you asked me why the cost of risk was four, whatever, 30 or whatever and not going so fast to the 4% we were advising you. The reason was exactly this. So we are growing much faster than we were anticipating in retail and less so in the global corporate and corporate business. Having said that, I do expect the cost of risk to remain where it is or trending slightly down, assuming that we keep this pattern. Naturally, if the pattern of growth changes, probably we can say that we start to grow more in CIB probably because of fiscal down faster than otherwise would be the case. But overall, we remain fairly confident. It's true that the macro deteriorates a little bit. But we remain fairly confident in the capacity of our franchise to keep outperforming our peers in the market. Sergio Gámez: Thanks, Paco. Next question, please.

Thank you. The next question comes from Alvaro Serrano from Morgan Stanley. The floor is yours, sir.

Hi. Just a couple of questions on Spain and the UK. So Spain, the NII recovered quarter on quarter. But you still have the -- I think the 1, 2, 3 count. There was a repricing in March and another one in July. So the question is, can you give us a sense of what kind of NII growth we should expect considering that and considering the volume is also recovering? What kind of NII growth should we expect? And should we expect any NII growth as we go into next year, given it seems like we're not going to have any rate increases now? The second question is around the UK. So the NII is now broadly stable. Can you give us both an outlook both in the NII but also in the costs? There was obviously a lot of front-loaded costs that you've pointed out in Q1. The cost rate hasn't dropped that much, only marginally in Q2. And I'm conscious that management expected 5% growth in costs for the full year, so maybe an update in the UK, both in NII and trends and the cost guidance. Thank you. José Antonio Álvarez Álvarez: Okay. Let me to elaborate on the -- I assume that it's the net interest income in Spain. It's a combination -- well, the main driver was funding costs, as you rightly said. There is still more to come in this regard. You also mentioned that it's coming by July. We are building on loyalty at a cost. So and we are balancing this equation. So what is most important probably or the main change is the change we've seen in volumes. Consumer lending plus SMEs is growing. It's growing. Consumer lending was growing last year, but SMEs is the first time. And this is particularly important in our franchise after Popular will hold a significant market share here. And it's critical for us going forward. This is the good news. The bad side continues to be the rates, as I said. Going forward, we expect we still have room to take measures in order to keep our net interest income going. I'll not give you a number, this. But I remain -- I think that we initiate kind of a trend in which we stop the decrease in net interest income. While in the UK, you mentioned the two sides, the NII stable and the costs stable. But you were expecting apparently to have lower costs. And then I -- the market -- the mortgage market remain fairly competitive, although in the quarter, we've seen relatively flattish the spread compared with the first Q. It's not the case, you remember that the second part of last year and the first quarter of this year, the spread came down from a region of 1.30 to a region of 0.9 or something like that. Now we remain basically there. And for that reason, with some volume growth that we show in the quarter, the NII remained stable. And still, the impact of a standard variable rate is there. But this quarter was less important. Going forward, we're going to continue to have some impact from SBI, although we think that we can keep growing somehow not that much on being constructive on NII, not -- to remain stable is probably the target. On cost, we were flattish this quarter compared to the previous quarter. Probably, we are growing on a year-on-year basis in the 7% -- the region 7%, 8%. Probably, we're going to remain relatively flattish or slightly down in the second part of the year. And we will end up in a kind of cost growth in the region of 5%. This is the result of many investments we are doing and we continue to do. In many fronts in order to -- particularly in projects that are particularly trying to serve customers in a fully digital way. And we continue to do so in order to have a franchise that is able to compete in the market going forward. So that's all, yes? Sergio Gámez: Thanks, Alvaro. Next question, please.

Thank you. The next question comes from Sofie Peterzens from JPMorgan. Please go ahead.

Yes, hi. Here is Sofie from JPMorgan. So I wanted to ask you, what's your view on the potential banking tax in Spain? And what impact would you potentially expect on Santander? And then I also wanted to ask about the Chrysler deal. If it goes ahead, how do you think about your US franchise, given that the annualized ROE in Santander Bank USA is still well below or is slightly below 4%? How should we think about the kind of -- how important the US franchise is to you? And then just very quickly, on the Popular cost synergies, when should we expect to see a big decline in the cost line in Spain? Thank you. José Antonio Álvarez Álvarez: Okay. Tax in Spain, potential banking tax, difficult to elaborate on this. We have seen so many -- I don't know if you call it ideas in the coming -- in the past weeks coming to the media. That is difficult to elaborate in any specific direction. We have seen ideas in increasing the corporate tax, other ideas pointing to having a labor tax and other ideas having a taxation on statutory profits. So it's difficult to elaborate at this stage on this. Naturally, we are -- it's too early to us to give you a number. So you got all of this information, and we don't have more information than the one probably you got through the media. In relation with Chrysler and the return on equity, it's true that, well, when you look at the business in US and we -- you look at the return on equity, with the asset equity, as you know, we have sales equity in the US that we should upstream in the future. But you take the business with a core capital of 11%, 12%. Our return on equity's around 8% to 9%. It's true, as you rightly said, that the return on equity of SCUSA is 18% or was 18% this quarter, and while the return on equity in the bank is much lower. This is based on the stated equity. If FSA business goes, probably the return on equity of SCUSA with adjusted equity naturally, reducing the amount of equity there, is going to remain pretty much the same. But the relative size is going to be much lower than it is today. So the combined entity just doing the maths will get a return on equity that is reduced. This is the other things equal. Let me to elaborate on the business. So going forward, this is pure maths. If we take out today FSA business from our [indiscernible], going forward, looking forward, if -- and it's a big if -- FSA business goes, for sure, we will find new ways in the US to replace partially or totally this business. It may take some time, but we're going to replace this business. So I will not bet in SCUSA business being only the subprime piece going forward as it is today without having agreements with maybe with other dealers, maybe with other OEMs, maybe with other partners. And for sure, we're going to have this. I remain confident we're going to have this. So SCUSA size is not going to be as small as you -- as doing the math of the Chrysler business going. And most important, the US bank, we have seen and you saw in the quarter we are showing encouraging sales in the bank. So you saw the loan book growing for the first time in -- I don't know -- many quarters. Our C&I business is starting to show significant progress. Our CIB business is also showing progress. And I remain confident that the bank is in capacity to deliver faster. There's still some work to do in retail, where it's more work to do, particularly improving the operational side of the business, the systems and the process before we're in a position to show a significant uplift in the capacity to generate profits on the retail, although we've been doing quite good in the reduction of the funding cost in the last year and this year in a more competitive deposit market. So overall, I think that, if we finally sell, because FSA is a good option on SCUSA, we will be in a position to replace partially or totally the business. And the bank is improving. So overall, I remain constructive and positive our capacity to improve the return on equity in the US with adjusted equity. Naturally, we have significant sales equity there. Finally, the last point you make was cost synergies in Spain. I said in the presentation that we are on track, well on track to get more than €150 million this year. This is in line with our plans or maybe slightly better than our plans. And we remain committed, fully committed to deliver on this. This is in our strategy update. We will update you clearly on this because, well, we are making, as Jose said, good progress on Popular integration. And there is nothing that make us to be more pessimistic, probably quite the opposite in relation with the cost synergies in Popular. Sergio Gámez: Thanks, Sofie. Next question, please.

Thank you. The next question comes from Ignacio Ulargui from Deutsche Bank. Please go ahead.

Hi, good morning, gentlemen. I have two questions for you, one on the tax rate, if you could elaborate a bit on what should we expect on the tax rate going forward after what we have seen in the quarter. And the other one, coming back to the cost of risk, you have just printed a very good cost of risk. The scope to improve in maybe [indiscernible] at the end of the day from Brazil and the US, how do you -- how comfortable do you think you are into 2019 on that improvement in terms of cost of risk? Thanks. José Antonio Álvarez Álvarez: The tax rate, as I said, this quarter was 36%, probably for the full year should be a bit lower, probably 35% maybe, in the region, 34%, in this region. So this quarter was particularly high due to -- I mentioned in the presentation to Brazil. And Brazil, there is a -- what they call interest on own funds that this quarter was not applied. And in other quarters, we may have room to apply. And this will reduce a little bit the tax rate that we show this quarter. The cost of risk, particularly you point out to US, Brazil. In US, probably forgot, although Jose mentioned that the seasonality in SCUSA mainly means that the cost of risk in the second quarter tend to be lower due to the fact that there's a tax season in the States where people get rebates, and the recoveries are higher than in other quarters. But overall, we've been, and you see clearly in the SCUSA P&L, increasing the FICO in SCUSA. We did it last year. So the cost of risk -- [indiscernible] also, but the cost of risk is going to be lower, but this quarter was -- is the seasonality play there, while in Brazil, I remain fairly confident that, if we had -- on a like-for-like basis, I feel comfortable with the current cost of risk. I mean like-for-like because changes in the mix have a significant impact, both on NIM and cost of risk. And you saw that we are showing this quarter in a decreasing rate environment an increasing spread due to the fact that the change in mix has been fairly dramatic. If you go back to the beginning of 2017 until now, the change in mix has been seemingly high in Brazil. José Antonio García Cantera: If I may add to that, when we guided you on the impact of lower interest rates on margins, we guided towards lower margins. So when we look at the net of margins cost of risk, the outcome of what we're seeing today is better of what we actually anticipated. So this business is clearly on a net basis more sustainable, more profitable and better in a lower interest rate environment. Sergio Gámez: Thanks, Ignacio. Next question, please.

Thank you. The next question comes from Andrea Unzueta from Credit Suisse. Please go ahead.

My questions are first on Brazil and the NII. You continue to benefit from an improving loan yield, but you're also benefiting from a funding cost decline. I was wondering that, now that the Selic has stabilized, and assuming it remained stable, is there more room for improvements on that front? And in Spain, along similar lines, your cost of time deposits is at around 27 basis points now. Your peers are between 5 and 10. Considering the 1, 2, 3 accounts and Popular, where do you think that cost can get and when? José Antonio Álvarez Álvarez: Okay. In Brazil, if we have room, well, naturally, the spreads in Brazil, as you know, are relatively high. Well, as long as we expect over time with the growth in volumes some -- you asked me for the next three or five years, you should expect some spread reduction. If you ask me for the next quarter, I don't expect -- or for the next two quarters, I don't expect a spread reduction in Brazil, while in the medium term and the long run, I do expect some margin compression in Brazil in the retail arena, while incorporates and CIB, I'm not convinced. Probably, it may be even the opposite. So the difference between spreads in CIB and corporates and retail are too big. And probably, we're going to have some reduction in retail. But going forward, maybe corporates and CIB will have the opposite. The most important thing in Brazil is, on competitive grounds, we are gaining share significantly in the market. And we think our franchise is ready to keep going outperforming the peers in a market that, as you know, profitability is relatively high. We've reached already 20% return on equity there. And we are closing totally, or we overtook some of the top banks there. And we are very close to the top performer there. In Spain, you mentioned the capacity. Naturally, we have flexibility, while we need to keep, as I said, the balance between building loyalty and the cost of funding. And we're going to continue to operate in these grounds, in both directions, reduction or increasing, depending on the environment, depending on the rates, depending on our outlook on when the rates are going to increase in Europe. The top priority is to build on loyalty, to keep the fee income line going in the retail and to build on a customer base resilient and able to produce recurrent revenues for the bank in Spain. Sergio Gámez: Thanks, Andrea. One last question, please.

Thank you. The next question comes from Marta Sanchez Romero from Bank of America. Please go ahead.

Good morning. Thank you very much. Most of my questions have been answered, but I had a follow up on the AFS. I'm sorry if I missed this. How much of your capital still comes from the AFS and realized net gains? What's the average maturity of your Spanish, UK and Brazilian bonds? And given the vulnerability of your capital base to market moves, do you think being at around 11% is the right mark for Santander, particularly considering that some of the future earnings of this portfolio, the capital that may come from this has already been front loaded today? So I'd love to hear your thoughts there. Thank you. José Antonio Álvarez Álvarez: Let me to answer for the second part of the question, and I pass to Jose the first part. In relation with the 11%, we need to put in context this with the fact that we are widely recognized as one of the most diversified banks in the world that where -- when you go through the stress test, we always come at the top. Our consistency and the recurrency of our business is much higher than the majority of our peers. And I do think that we deserve -- we have lower rates, as is shown in the stress test. And we deserve a capital -- with 11%, we are much more than covered. When we analyze the capital on economic basis, not on the regulatory basis, the sales of capital is very large. It's in the region of 20%, 30%. So it's still very large. And this leads us to think that we are in the position where we should be. And I now pass to -- José Antonio García Cantera: At the end of the quarter, the AFS portfolio added 15 basis points to our capital. Right now, it's 20. So just in the month of July, we've recovered 5 basis points. But at the end of June, it was only 15 basis points of total capital that came from the AFS portfolio. Sergio Gámez: Thanks, everyone. I'm afraid we need to leave it here. So obviously, the IR team is at your complete disposal for any follow up any time. So thanks, and see you next one. José Antonio Álvarez Álvarez: Okay. Thank you.