Ladies and gentlemen, the Q&A session starts now. [Operator Instructions] Thank you. The first question comes from Francisco Riquel from Alantra Equities. Please go ahead.

Two for me. First, on the top line. The interest rate, the scenario has changed in the last few months. If you can please update on the outlook for NII in developed markets, particularly Spain and the U.S. And second, on costs. If you could please update on the EUR1 billion of cost-cutting plan in the European operations that you have reiterated today. I understand that half of the targets comes from Spain, where you have already reached an agreement with the unions, so just to check whether you are on track or not. And also if you can please give more color on the other half and in what countries. What actions shall we expect for you to deliver on these targets? We have seen some progress in the UK. And also what are the pending restructuring costs? Thank you. José Antonio Álvarez: Okay. Interest rate, the scenario, I mentioned in the presentation the lower for longer. Naturally, the shape of the yield curve and the yield curve as a whole has decreased pretty significantly in the quarter. And this is affecting in a significant way our business in Europe. The sensitivity to low rates for 100 basis points is north of EUR1 billion. So this gives you an idea of the impact. So for that reason, I said in the presentation that the outlook for revenues was difficult in mature markets and depends very much on the activity – on the levels of activity we are able to develop in the coming years.On the NIM, on the net interest margin, I’m more optimistic. And if you saw the last couple of quarters, and particularly in this quarter, we increased our net interest margin due to the reduction we were able to get in deposit costs. And we still have some room there that we’re going to take advantage of this. At the same time, probably due to the situation of the market, I am a bit more optimistic on the capacity to increase margins on the asset side that are very low at the moment.In relation with the cost-cutting plan for Europe, you asked the question. I mentioned in the presentation also our EUR1 billion nominal cost reduction in Europe. And you asked how to split this. I will say, well, by countries, you said Spain is half of this or close to half of this. UK is 40% of this, so it’s significant. And also we have small numbers in Portugal and shared services.When we create the idea of Europe, one of the main targets we have is to reduce cost in shared services by EUR150 million, yes? And this is part of the plan. This is – comes from all the countries together, doing the things in a different way, both the IT and operations, mostly in IT and operations. IT and operations represent 50% of the cost reduction we are planning in the coming years.And finally, you said restructuring costs. Well, we’re going to have the payback in Spain. What is left is EUR200 million, more or less, yes? So from the Popular acquisition, the payback is worth 2.3 years. In UK, probably the payback is 1 for 1, yes? So you can expect a number of – for restructuring costs in line with the reduction in cost we are pertaining there. Sergio Gámez Martínez: Thanks, Francisco. Next question please.

Thank you. The next question comes from Alvaro Serrano from Morgan Stanley. Please go ahead.

Good morning. Thanks for taking my questions. It’s related to – on the NIM outlook, just a follow-up there. You mentioned you’re more optimistic on asset spreads. I’m thinking Spain and the UK at the moment. What makes you more optimistic on those asset spreads, any particular product? Because it does look pretty challenged, the market, particularly in Spain. And in your deposits, you’ve got the 1|2|3 account in both countries. I think you’ve launched a 0|1|2|3 account which lowers the remuneration. Maybe you can give us a sense of defining how much that benefit could be of the 0|1|2|3?And the second, on the U.S., you’ve now had year-to-date EUR400-and-something million versus consensus. I think consensus is looking for EUR600 million for the full year. So you did it in the first half, EUR465 million, and consensus was EUR630 million or so. Is there anything in the second half? You mentioned seasonality already. But provisions looked relatively contained. Is there anything apart from seasonality in terms of the U.S. slowdown, anything you can flag that should produce a slowdown in Q2? Or is consensus just too low? José Antonio Álvarez: Okay. So I’m going with the same questions. NII, why I’m not so pessimistic about asset spreads? As I said, the revenue – the macro environment is difficult. Well, I do think that – particularly in Spain, not much in the UK. In UK, the asset is spread – the margin compression comes more from the SVR book. So it’s the back book who is reducing the size of this book. And the front book, the margin compression, we came from 130 basis points one year ago to 90 basis points now. But it’s fairly stable in the last couple of quarters, so I’m not seeing in the front book additional margin compression. The margin compression comes from the back book.While in Spain, I continue to see an environment in which, due to difficult revenues, I see less – traditionally more aggressive entities less keen to continue with the aggressive financing in the market due to difficulties in generating revenues, particularly this is particularly strong from the domestic players, yes? For that reason, I’m not saying that now is the case. But looking forward, this is my view.You mentioned on the deposit side, the 1|2|3 account. Naturally, we have all the – a full range of products. We have the 1|2|3 account, but we have other accounts just because some customers are more sensitive. They don’t care about balances or interest rate that we pay, they care more about the fee and we have different accounts that we can adapt to this. So well, I still see some room to reduce deposit costs, yes? So both across Europe, including Consumer Finance, Spain, Portugal and UK, we are talking not a big deal, but 5, 10 basis points is something that I think we can achieve that given the current levels is significant.So the question about the U.S. The U.S. business is, as José mentioned, is doing well. Volumes are growing. Finally, we’ve got an agreement with Chrysler to keep working with them the next four, five years in SCUSA. Our penetration rate in Chrysler went up to 35%. The scenario – the greater scenario is fairly benign. The residual values of the cars in lease activities are holding up. And the last vintage has shown Consumer Finance having better behavior.So with low rates, in the case of the U.S., goes in favor of the consumer activities, it should have got placed against the banking activities. But overall, in consumer, we are optimistic. Although as José mentioned, the second quarter and the first quarter are the seasonal highs. The third and the fourth quarter are much weaker in consumer activities. But overall, I remain optimistic about the capacity of SCUSA to keep generating good results.While in the bank, in the bank, probably I explained in the previous quarters, we are making good progress in the corporate CIB activities. While in retail, we are still working on this and improving the operations in the – and improving the branches and everything to improve our competitiveness in the market.So we are going up in the rankings in terms of customer satisfaction and the – how the customer value our apps and all these things. So we are – the trend goes in the right direction, but there's still work to do. Overall, I remain fairly optimistic about our capacity to continue to generate good growth in profits in the U.S. activities. Sergio Gámez Martínez: Thanks, Álvarez. Next question please.

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

Yes, hi. It's Sofie from JPMorgan. I'm going to ask on capital, your capital progression was good this quarter. Could you just remind us what kind of capital headwinds and tailwinds you see in coming quarters that we should take into consideration? Are there any more regulatory headwinds that you expect to take and how we should view capital in coming quarters?And my second question would be on Santander Global Platform. Could you just give a little bit guidance how we should think about the performance and the outlook in this division over the next two, three years? And my last question is on the IRPH mortgages. Could you just give your view of what you expect from the September ruling? Thank you. José Antonio Álvarez: Okay. So let me to elaborate in the Santander Global Platform and IRPH and I pass to José the capital headwinds to go into what we have in front of us going forward. Overall, I gave you the guidance, the organic capital generation. And José will elaborate about the headwinds.Santander Global Platform, as I said to you, we have several business there. The most important ones are Openbank. We've been providing the financials of this bank and we keep updating you on this. So this is a – we plan to expand Openbank as an activity to several markets in Europe and several markets in Latin America in the coming years. It's a full banking proposition, and we provide good results.The other activities I mentioned there that probably you're less aware of, I do expect Superdigital already has financials. They are making some money already in Brazil. And we expect this activity to start to make money from the very beginning or achieve the breakeven in several counties. This is not going to be in itself a big P&L generator.But this is going to be extremely important to generate customers for the banks, yes, for the traditional banks, because as I said to you, this is for unbanked population, not only for unbanked population, we also reach agreements with the other distribution networks in order to gather their revenues through our Superdigital proposition, like the one going – the agreement we reached in Brazil with a large network of sellers called Natura with one million sellers in the state that they use Superdigital in order to process and to gather the cash they get from the revenues they are doing. So, it’s a proposition for unbanked population, but also serves some type of – some kind of business. This is the second one.The third one and the fourth that I mentioned in the presentation, the GMS and GTS, are more embedded in the traditional banks. GMS is acquiring business. As you know, we have significant market shares in the majority countries in which we operate and we try to be the full proposition for all the banks we operate. So, we already have – the starting point is GetNet in Brazil, where we started six years ago or seven years ago with 4% or 5% market share. Now, we’ve got 15% market share still growing. And we have market shares in Spain, 15%, 16%, in Mexico, 15%, in other geographies, in line with our market share. And we plan to put all these together in order to have a stand-alone, the same proposition all across the board. And eventually, third parties will use the platform, the GMS, the acquiring platform may use – the third parties may use the platform in the markets, in which we plan to operate this platform. But this is a significant revenue and P&L business.And finally, GTS. GTS is more an idea of providing middle market. And this means with the same kind of services the CIB customers are getting already and with having a full digital proposition all across the board for these kind of customers. This is also potentially a good way to get significant revenues out of this business. But we plan to improve significantly our proposition in order to accelerate the growth in this space. Those are the most significant business. You have all the others and our idea through the Investor Relations department and quarter-on-quarter to provide detailed information of all this.IRPH, you mentioned, well, the latest news I have is we’re going to have a ruling by the end of the year. Our portfolio there, if I’m not wrong, is around EUR4 billion, yes? So, the 50% came from Popular, 50% was by – generated by Santander. And that’s all I can tell you about this. Well, nothing else on top of this, yes? So José, do you want to explain capital? José García Cantera: Yes. On capital, well, it’s always very, very difficult to estimate the impact of capital inspections. But I would say we will expect to see another 20 to 30 basis points of regulatory headwinds in the second half, and – but at the same time, we would expect our capital ratio to grow from here until the year-end. As we mentioned in our Investor Day, our target is to get to 11.50% as soon as possible. Sergio Gámez Martínez: Thanks, José. Next question please.

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

Hi, good morning. Thank you for taking my question. The first one is a follow-up on what you just said on the 20 to 30 basis regulatory headwinds still pending in the second half. Can you please clarify how much is TRIM and what would be the rest?Then the second one is on behalf of a fall in Spain, could you please tell us what is the average yield and the pace at which you expect this yield today to decline, given the yield compression that we are seeing very recently?And then finally, just a follow-up on the cost guidance you gave for the U.K. If I'm correct, you said that basically we can expect a decline in the cost base in the U.K. equal to the restructuring charges that we are seeing. Is that correct? I mean, basically, the decline that we are seeing in the U.K. in cost this quarter is not all, no? I mean, we are still waiting to see more. José Antonio Álvarez: Thank you. I take the cost question in the U.K. and José will elaborate in the other two, the capital and the ALCO portfolio. The cost guidance in U.K., I said to you that basically in the context of the EUR 1 billion reduction in costs in Europe, probably around EUR 400 million or something like that comes from the U.K.And as for the question how much this in restructuring costs? I said in U.K. normally it's one for one, yes? So it's what I said. This is in the medium term. So you should expect a reduction in cost in the U.K. of this size or the size I mentioned, yes? José? José García Cantera: All right. So as I said, it's again very difficult to estimate future impacts from regulatory inspections. But I would say we still have the SME TRIM pending. The conclusions of that exercise, that could mean around 10 to 15 basis points, I would say. Then we have some other exercises for corporate activities and market-related activities. And then we have the first impacts of FRTB and others. So I would say from 20 to 30, I would say two-thirds would be TRIM and the rest would be other smaller impacts. For the ALCO portfolio, the yield is around 1% right now. José Antonio Álvarez: Thank you. Next question please.

Thank you. The next question comes from José Abad from Goldman Sachs. The floor is yours sir. José Abad: Hello, good morning. Congrats on the presentation. My first question is on rate cuts on monetary policy. In case of additional rate cuts by the ECB over the coming months, which seems actually likely, what's the rationale for not passing these negative rates through to a broader group of clients? So in – and in particular, what's the rationale for not passing these negative rates through to retail customers and households?Now my second question is on dividend policy. So the Deputy Governor of Bank of Spain has been actually very vocal over the last actually two, three months about the need of Spanish banks actually to accelerate the buildup of capital through several channels. One is a return of a scrip dividend, which you've probably done. And the other is actually banks changing the way they or you provide guidance. They suggest actually guidance to be linked to the payout of a reported earnings rather than to an absolute amount, which is partially actually your case. So in light of this, should we be expecting any changes in your dividend policy and/or capital plans targets going forward?And if I may, a third question on the countercyclical capital buffer, which remains at zero in some of your realms, in particular Spain, whether we should expect actually an increase either in second half or first half of next year. Thanks very much. José Antonio Álvarez: Okay. The question ECB negative rates, is why not to pass to the customers? We are already doing. We've been doing in the most – we started with institutional clients as long as the rates got more and more into the negative territory, we need to rethink our view in relation with this. Particularly with the large corporates and corporates, we need to start to think how we'll manage the deposits, more the deposits that are not operational deposits. Those who are operational probably will remain zero. Those who are not operational, we need to look at this.Your question about retail, probably it's too early to enter into this territory of charging retail customers for holding deposits. It's a discussion that is not on the table right now. In relation with the dividend policy, so our policy is we said to pay out 40% to 50%. You mentioned – you relate this with the ECB, Bank of Spain comments and the capital targets. Naturally, every year, we have a high capital plan, in which we include our projections for dividends and capital and building the capital required for the business with the buffers we can add-in. So I do not see a – we're going to – I don't see any threat to this 40%, 50% payout ratio.When you mention to pay dividends based on reported profits and being audited, we already changed our quarterly dividend policy for the ratio and – because we were paying the first interim dividend before the first half results were audited. And we concentrate the dividends in two payments. But this doesn't mean that we plan to change our payout ratio. So it's a question to accommodate to the requirements that have audited results before we pay any dividend to the shareholders.And finally, the countercyclical buffer, it's true that the Bank of Spain published something – the methodology to estimate the countercyclical buffer. It maybe is too early to say. I don't know if you want to... José García Cantera: Yes. In any case legally, any requirement for countercyclical buffers actually enters into force a year later. So even – we wouldn't expect anything in the coming quarters. But just to give you sensitivity, a 25 basis point countercyclical buffer in all countries where we operate in Europe would increase our capital requirements at group level by around eight basis points. Sergio Gámez Martínez: Thanks José. Next question please.

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

Hi, thank you for taking my questions. The first one is on the Brazilian NII, if you could give us the contribution from the bond portfolio this quarter. I know it was quite stable in previous quarters. But I was wondering what happened this quarter? And how should we think about that proportion of NII in Brazil going forward?And the second one is just a clarification. Last quarter, you guided for regulatory impact on capital of around 20 basis points to 30 basis points. And I had understood that you booked 12 basis points this quarter. But your guidance going forward remains the same. So I was wondering if there is an incremental regulatory impact now. Thank you. José Antonio Álvarez: So I think in the second part of the – I thought we guide you to 50 basis points to 60 basis points regulatory impact for the whole year, yes? And we are still basically within this range, yes? So I don't know if I made a mistake, but what I have in my head, I always had 50 basis points to 60 basis points and in line with what José elaborated what is coming in the next two quarters is the figures José mentioned.And NII on the bond? José García Cantera: Yes. We have an ALCO portfolio in Brazil of around EUR16 billion with an average yield of 10%. So with this – and the average duration is three years. Sergio Gámez Martínez: Thank, Andrea. Next question please.

Thank you. The next question comes from Daragh Quinn from KBW. Please go ahead.

Hi, good morning. It’s Daragh Quinn from KBW. Just on the U.K., maybe if you could just give us more detail about that outlook for weaker margins and the net reduction in costs, but also presumably some kind of normalization of provisions. Just trying to understand how the mechanics work to see an improvement in return on equity from the current levels?And then just on capital, you've reiterated the organic capital generation. But just looking a bit further out, I mean what kind of impact do you anticipate from operational risk or other areas of Basel IV that could also have – has an impact that, at some stage, the market will start wanting to take into account? José Antonio Álvarez: Okay. Thank you. The first question about U.K., I mentioned in the margin side was basically the impact is coming from the back book, the standard variable rate that, while although I have reduced a bit, will continue to be there.In the fee income generation, over the last, as you know, limiting over the last years isn’t an issue. So we're going to produce a significant reduction in costs. There's already areas in which we can grow revenues. Particularly, we can grow revenues with a more focused activity in the corporate sector, also what revenues we get from other areas like, related more with fee income.In provisions, well normalization, what you call normalization, we are not seeing signs of deterioration of the mortgage book because, well, as you know, 85% or 90% of the book is mortgages – are mortgages. Loan to value is pretty low, so – well, it's more – you can make the hypothesis on your own of what you call normalization of provisions. We are not seeing any risk of – at this point to have a high provision seeing in – meaning mortgages, although I understand that the level – the current level is very low, but it has been very low for years already, yes? Well, capital, operationally Basel IV is 2022, José? José García Cantera: Yes. I think it's still very early, although, Daragh, you know this, although it seems that Basel IV is really finalized, the reality is that it's not. And in terms of the operational risk, as you know, there are two components. One is size and the other one is the multiplier. The multiplier still needs to be defined. And there are some uncertainties with regards to size and the size of the actual operational loss that is part of the calculation.So the range, depending on how this plays out, actually the range could be somewhere in between like 20 to 100. So I think it's speculation at this stage. And until we see this really finalized, I prefer not to give you a number because again it will very much depend on the outcome. Sergio Gámez Martínez: Thanks, Daragh. Next question, please.

Thank you. The next question comes from Fernando Gil de Santivañes from Barclays. Please go ahead. Fernando Gil de Santivañes: Hi, good morning. Just a question from my side. The first one is volumes in Spain and UK, what are the trends that you're seeing and especially in Spain after the new mortgage law? This is one. Second would be the fixed rate mortgage production. How do you see it in Spain?And finally, in the U.S., you had the approval to increase in Santander Consumer. So if you can please provide an update on how you are doing on the increase on shareholder in Santander Consumer? And the capital release, if you get to that figure, 80%, how much will it be? Thank you. José Antonio Álvarez: So volumes in Spain, particularly in mortgages after the new mortgage law was introduced. Naturally, when you introduce a new law that is much more demanding on terms of the requirements in order to reassure that the customers know every stream of the contract they sign and they need to go twice to the public notary, for example, when before it was just one. And they sometime, between the first visit, let's call in that way, to the notary and the second one, creates some noise in the process. But it's a pure procedure. And some of the digital deployments that were new to assure that the new process was working properly had some problems because they were different developments in the market.Aside from this I will call noise, the activity remains, I would say, business as usual. When I mean activity, I mean activity in the demand of the new mortgages, not the activity on finally signing the mortgages, where the procedure creates some noise in this. But I wouldn't say nothing that wasn't expected, yes? So the usual thing when you introduce a more – much more demanding in terms of procedure law.And other than mortgages, I will say, well, probably this is more about us than the market as a whole, we are more demanding in terms of profitability of the new lending. For that reason, probably we are less – we are growing less or even decreasing some portfolios that the profitability is not the one we require. And other than that, I don't see a change in trend.In the UK, José already mentioned that we are seeing a growth of 1%, 2%. We are growing in line with the market, both in mortgages and the other items. And I don't see this changing. So we haven't seen a change in the trends in the market in the UK.Fixed rate, we are 20% something of the new production is coming from fixed rate. We are not so pushing that much this. We are – let's say, we have a policy in which we offer fixed – both fixed and floating rate without particular bias in our distribution of mortgages towards fixed rate or variable rate. We are allowing – we inform the customers that we're allowing them to choose what they think is more convenient to them.Finally, your last question, SCUSA buyback, capital release in relation with this. Well, you know it's public. The share buyback is now $1 billion, up to $1 billion. According to the SEC rules that we have a percentage that we can buy based on the volume. Depending on the volume, we will reach the 80%, where is the level at which triggers a capital release depending on the price at which we buy. Because depending on the price, the price matters at the price I would buy, but maybe in the region of 10 basis points or maybe below 10 basis points, yes? So that's the outcome we expect. Sergio Gámez Martínez: Thank you. Next question, please, and the last question.

Thank you very much. The next question comes from Andrea Filtri from Mediobanca. Please go ahead.

Yes, thank you. First question, on BRRD II, what are the main changes versus your current MREL requirement? And if you can elaborate on this final version to address us on this. And secondly, on capital, what's the outlook for the approval of the new UK IRB models? Thank you. José Antonio Álvarez: [Indiscernible] regulator and the ECB. I don't know if you have a specific… José García Cantera: No. Obviously, the approval of models now, it's a bit more complicated because of Brexit because it has to be approved by both the ECB and the PRA. And the current situation is delaying a little bit the approval of the models. We expected to have some new mortgage models approved this year. Now it seems that it's going to be delayed to next year. But again, this is not going to affect our plans in terms of the targets that I gave you earlier. José Antonio Álvarez: But having said that, our weighting in UK probably now is in the mid-teens, when our competitors on average are around 10%, 11%, yes? So it's a big deal for us. But when this is going to happen, I cannot give you a specific timetable for this. Okay? Sergio Gámez Martínez: Thank you, everyone. Thanks for joining. And obviously, the IR team is at your disposal for any follow-up you may have. Thank you.