Apr 26, 2018
Sergio Gamez
Santander First Q 2018 Earnings Conference Call Webcast Presentation. As normally we do, our group CEO will address the group performance for this first quarter of the year.
Our Group Chief Financial Officer will address in more detail business areas performance, again for the first quarter and, obviously, our CEO just ahead of the Q&A session will conclude the presentation. With no further delays, José Antonio, the floor is yours.
José Antonio Álvarez Álvarez
Thank you, Sergio, and good morning to everyone. Thank you for attending this first Q results presentation.
The first area I want to share with you is that we are well on track to reach our targets for 2018, the targets we established almost three years ago. This is the first area that I want to tell you.
The year I will say started with making good progress in our commercial transformation. Our commercial transformation, as you know, we put out the emphasis in growing both the loyal customers and the digital customers, and we are progressing well on this regard.
At the same time, the customer satisfaction and the operational excellence, that is a combination of cost, income and customer satisfaction is progressing well. We are able to translate this good behavior on the customer side into results.
As you see in the numbers, the profit year-on-year grew 10%, 22% in constant terms. If we exclude the perimeter, probably - the Popular, probably were growing in constant numbers at around 15% and with group progress compared with the previous quarter and the previous year.
As a result of this our return on tangible equity is 12.4%, and we are generating - we are strengthening the balance sheet, generating capital. We generate organically in the quarter 9 basis points.
I will elaborate later on as we - as the Chairman said in the AGM, our intention is to increase the dividend for this year and we changed our policy. We announced that we plan to change our policy for 2019, going 100% cash dividend.
Well, as I said at the beginning, we are confident to meet our 2018 targets. And I will say Popular integration is on track.
Legal integration was approved yesterday by the board. We expect to execute by the fall, to execute the legal integration.
In the numbers, you will not find specific Popular numbers. We were discussing internally to provide, not to provide numbers.
The numbers are not representative as long as we did some integration steps, particularly we already integrated headquarters. As you know, we reduced 1,100 employees back in February as a result of the headquarters integration.
We already integrated GCB business as long as we have Popular Portugal. In Portugal, TotalBank and was very difficult to make a comparison.
So what we are providing is a set of numbers for Spain that includes Portugal and the former Santander Spain - Popular Spain and the former Santander Spain. Also, Quasar, what we call Quasar, that is the disposal of real estate assets, was executed at the end of the quarter.
Going into the numbers into the first area, I was telling you about loyal customers and digital customers are growing well. And the customer satisfaction, we are top-three in customer satisfaction in seven countries, and we are progressing.
In the main markets in which we operate, we are top in class in this regard. That we're having translated into the three areas we also showed to you in the year-end result presentation.
We are growing. We are growing in loans and deposits.
It's true that there is some change in perimeter here, but we are growing in almost all the markets in both deposits and loans. As a result, customer revenue grew 12%, which translate into double-digit growth in profit and higher profitability as we show by the return on tangible equity, is the highest in the last few years, and we extend the balance sheet with a fully loaded core equity Tier 1 reaching 11%, and the NPL ratio, the credit quality going in the direction we were expecting to go, and we were telling you in previous quarters.
When it comes to the P&L, well, first thing is no known recurrent items in the quarter, neither positive nor negative. The good performance, there is some perimeter effect - I already told you - is Santander as management plus Popular.
On the other hand, there is a significant negative impact on the exchange rate of between 10 and 12 percentage points on the P&L. You have the numbers there.
The quarter shows a profit of north of €2 billion, significantly higher than the previous quarter. Well - and showing good progress in constant terms, both in net interest income, net fees that are well in double-digit.
So the customer revenues are growing double-digit. As long as the net loan losses, the provisions, we are growing a little bit, but well below what is the growth of the loan book, so the cost of risk is falling.
Other income provisions that this significant fall comes from the fact that in 2017 we had no restructuring in Brazil. As you know, normally, when you do some reduction in employees in Brazil, it comes one year later, these costs.
And this was not the case in 2017, that's the reason why this line falls significantly compared with the previous year. When you go through the lines, consistent growth, I will say consistency is the word that probably define the best what you would see in the slide.
Both net interest income and fee income are growing in a consistent basis, while the other income is more or less fairly stable, fairly flattish. The volatility here depends more on quarter-on-quarter than a trend in the business in itself.
If we look at the net interest income in more detail, we have two different behaviors: net interest income growing 11%; 7% in mature markets; 16% in developing markets. When it comes to mature markets, what we have is organic growth, some organic growth plus perimeter, mainly perimeter.
And we have a net interest margin pressure due to the extraordinarily low level of the interest rates, particularly affecting some of the business in UK and Spain. When it comes to emerging markets, we are growing organically, mainly organically, both in loans and customer funds.
At the same time, we are expanding the net interest margin, both principally in Mexico and Brazil or Brazil and Mexico. So we have these two behaviors.
José will elaborate later on, on specific countries, their trends on this regard. Well, I was starting the presentation telling about commercial transformation.
This is not just about number of customers. We translate this growth in number of customers, loyal customers, digital customers into activity growth.
The slide shows some numbers in this regard. You see the retail fund balance is growing, the turnover in cars is growing, the insurance premiums is growing.
And they translate into a healthy growth into the fee income line. The fee income line is growing both in developing and emerging markets, and in the different business we have in the wealth management, that is relatively a small portion of the fee income growth.
We have this kind of growth, because the change in perimeter due to the incorporation of the 50% that we bought last year of Santander Asset Management. So, overall, healthy growth in revenues coming from the customers.
In cost, you know our target, was through cost-income being in the region of 45% to 47%. This is a combination in cost.
We have some integration process going on, that reduce normally cost. You have there, Portugal.
We have there the quarter in Spain. Quarter-on-quarter, the costs are going down 3.5% and there's more to come.
As you know, as integration on Popular make progress and we have other geographies in which we are in a strong investment process. Particularly, we shared with you Mexico, the three-year plan in which we have a significant growth in cost.
And probably it's more surprising to you, although this quarter probably is a little bit overstated in the UK where the costs grew year-on-year 8%, that we think that is going to moderate in the coming quarters to a more normalized level. Here, we are investing, we are making significant investment in the compliance and digital transformation.
So, overall, we feel that we are committed in the 45% to 47% target that we have in this particular field. Credit quality, very little to say here other than the coverage ratio going up due to IFRS 9, no more news here.
The trends are the ones we were expecting. And no particular reasons here, but Brazil is going in the right direction, probably, some of you were expecting faster fall in the cost of credit in Brazil, but this has significant change in mix there.
In more, we are growing faster in retail than we are growing our corporate banking and this explains a little bit. But in any case, all the trends in this - in credit quality and cost of credit are growing as we were expecting.
Real estate exposure, this is what is left here, €5.2 billion in all the business in Spain, you have the split of this business. I don't need to repeat again that our priority is to reduce this to immaterial levels as soon as we can, and we will now continue to dispose assets both on one-on-one basis or looking for operations to dispose in blocks.
But I will say this €5.2 billion start to be almost a no material number in the balance sheet of the business in Spain. Finally, in capital, we reached 11% core equity Tier 1.
We have 9 basis points - well, it's around 10 basis points we guide you quarter-on-quarter. We generate also some capital due to perimeter the positive coming from the disposal of the real estate assets of Banco Popular, the Blackstone deal, plus 10 basis points.
The negative came, because we listed Metrovacesa and the change in accounting produced a cost of 2 basis points on capital. These ratios are calculated according to IFRS 9 transitory calendar.
If the calendar had not been applied, we're going to be around 10.8%. So this is where we should be, because the total impact of IFRS 9 is in the region of 23 basis points.
We are due to 20, instead of 20, it's 23 is what is the final number. On the right side of the slide, yes, because we have several items there, I want to guide you for the future capital impacts not related with organic capital.
We mentioned that we already know that are coming our pending of regulatory approvals of all the items. You have the TotalBank disposal that we - and we think that we both - we are expecting regulatory approval, that is 5 basis points and 9 basis points.
We have in SCUSA, the supervisor does not consider, according to the European regulation, the entity to be regulated. And therefore, we cannot include this minority interest in capital.
In any case, we are up our core equity Tier 1 of more than 11% in 2018 as we told you in the previous quarters. Well, when it comes to ratios, good developments in the return on risk-weighted assets, we continue to grow the return on risk-weighted assets, almost 1.60%.
The return on tangible equity accordingly is growing. The EPS this quarter is fairly flat, but if you annualize this, well, we are well on track for double-digit growth EPS in 2018.
That is our target. And finally, tangible net asset value per share was impacted this quarter by IFRS 9.
Excluding IFRS 9 impact, it had growth from €4.15 to $4.20. So I hand over now to José that is going to elaborate our - through the units, and we will come up at the end - we will come back at the end to make some final remarks.
José Antonio García Cantera
Good morning, everyone. As I always say, we will cover the main units in a bit more detail and the smaller ones quickly, and I will finish with a quick comment on the Corporate Centre.
We continue to have more or less 50% of our business in Latin America, 50% in Europe and 50% in emerging markets, 50% in developed economies. The largest - the greatest contributors to our profits this past quarter were Brazil with 27%; Spain, 18%; the UK and Santander Consumer Finance, each 13%.
Eight out of the 10 core geographies showed an increase in profitability, as you can see on the right hand side of the slide. And in general terms, we saw a very strong operating performance in all the economies in other countries.
Starting with Brazil. The economy in Brazil is doing much better, it's expected to grow 3% or above this year.
And on the back of this strong economic performance, we had an excellent quarter. We launched new initiatives and we gained market share in customers and in credits and deposits.
Attributable profit was up 27%. Return on tangible equity also up to 20%, the highest level in many years.
We saw double-digit growth in net interest income and fee income, reflecting these greater commercial activity that I refer to. The efficiency improved, also showing greater productivity, and asset quality continue to also improve to 4.35%.
Trends all throughout the P&L that we would expect to see in the coming quarters as well. In Spain, the integration of Banco Popular is proceeding as planned.
We already completed the integration of the headquarters and we just announced this morning that we are proceeding to the legal integration in the third quarter, as José Antonio said, which we will - which will probably help us accelerate the operating integration a little bit. We recovered the control of the card business and the ATMs of Banco Popular and launched the first joint commercial initiative between Santander and Popular.
It's the 1|2|3 Professional account for self-employed and micro SMEs. In the just - in just a few weeks, we already have 75,000 accounts open in this product.
We saw a positive evolution of SME volumes and corporate volumes. However, Global Corporate Banking and institutions continue to contract.
New mortgage production is strong but is still insufficient to compensate amortization of the existing portfolio. Attributable profit was €455 million, up 26%.
Positive trends in commercial revenues - year-on-year in commercial revenues and cost of credit. Costs were affected, obviously, by the integration of less efficient businesses coming from Banco Popular.
Quarter-on-quarter, we see a lower net interest income due to lower average ALCO portfolios. On average, fourth quarter relative to the first quarter, the ALCO portfolio was €8 billion lower and that obviously had a negative impact on net interest income.
We saw quarter-on-quarter also slightly higher provisions, because of seasonal factors. And costs are starting to show the benefits of the integration process.
When we move to Santander Consumer, this is a highly diversified business in Europe, and it's return on tangible equity of 17%, which is very high reflects these very high diversified geographic business. New lending is up 9% year-on-year, with increases in almost all countries, and quarter-on-quarter is very much flat, obviously because of seasonal factors of fourth quarter is stronger generally than the first quarter.
Profits were up 4% with positive evolution of revenues, although in the case of fee income, it was affected by some regulatory pressures. The efficiency ratio is clearly best-in-class in Europe, much better - much lower than any of our competitors.
And we see cost of credit and NPLs at an all-time low. When we compare year-on-year, provisions go up because of some asset disposals last year in 2017 in several countries like Poland, Germany, et cetera.
In the fourth quarter, we announced the integration of our operations in Germany and like in the case of Popular in Spain, the integration of our German operations is proceeding as planned. Looking forward for the rest of the year, we see similar trends to what we have seen in the first quarter.
Moving to the UK. Here, the economy is resilient despite the uncertainty associated with the Brexit process.
We see a highly competitive market and the need to invest in regulatory projects like ring-fencing, PSD 2, et cetera. We saw a pickup in mortgage activity in the first quarter.
Our mortgage portfolio went up £1.9 billion, which again shows how resilient the economy is. And on the liability side, we continue to focus on growing demand deposits.
We see lower profits year-on-year due to the combination of different aspects like José Antonio said in some cases, these are one-offs. On the revenue side, we see lower gains on financial transactions and also some margin pressure due to competition and the drop in the attrition in the SVR portfolio.
Costs included some IT investments, digital transformation and regulatory projects. And in the case of nonperforming loans, we saw two one-off cases in corporate banking.
And there were - in this quarter, there were no PPI charges. Quarter-on-quarter, attributable profit was up 7%, although again we saw pressures coming from the revenue side.
Going forward, we would expect a recovery in the year-on-year comparison in net interest income and the cost of risk to remain more or less what it is today, in the region of 10 - slightly above 10 basis points. Going quickly through the rest of the countries.
Very strong quarter in Mexico with double-digit growth all throughout the P&L, we are investing, as we discussed last year, in Mexico in a very deep transformational plan, which is yielding very positive results in our commercial strategy. The 1|2|3 account in Mexico, as you know, is called Santander Plus, and it has attracted already 3.5 million customers, more than 50% of which are new, so double-digit growth in the P&L with asset quality that is stabilizing cost of risk at around 3%.
And again, these trends, we think should be maintained for the rest of the year. In Chile, we are the leading private bank in terms of loans and number of customers.
The Chilean economy is accelerating, and we are benefiting from that. We are seeing positive growth, faster growth in loans and deposits, particularly in consumer credit, mortgage loans and demand deposits.
Profits were up 15% based on very strong revenue - total revenue performance. The efficiency ratio and the cost of risk are also improving.
Quarter-on-quarter, the results were affected by seasonal factors. Remember that in Latin America generally, the first quarter is where people take their holidays.
If we move to the U.S., very strong quarter in the U.S. Here, the main focus continues to be to improve our foundations and to close our regulatory - our open regulatory issues we had, very strong results both at the bank and at Santander Consumer.
In the case of the bank, improved net interest margin basically, because of lower cost of deposits, but we are geared towards higher rates. So as interest rates go up in the U.S., we should continue to see this trend being maintained in the coming quarters.
And also, in the case of the bank, we saw better efficiency ratio. In the case of Santander Consumer, lower loan loss provisions, and also lower costs.
When we look at the U.S. as a whole, including all our operations in the U.S., costs were down 1%.
As I said, we are positively geared towards higher rates in the U.S. So we would expect to see some of these positive underlying trends materializing and solidifying in the coming quarters.
In the case of Popular - sorry, Portugal, the year-on-year comparison is affected by the fact that we had Popular Portugal being integrated into Santander, so the year-on-year comparison is affected by that. Now we are the largest private bank in the country both in terms of assets and loans, with a leading position in corporates and SMEs.
The integration is proceeding as scheduled. We would expect to close it before the year-end.
Profits were up 1% year-on-year, but this is affected by asset ALCO portfolio sales and higher tax rates. When we look at pretax profits, profits went up 10%.
Moving to Argentina, in the case of Argentina, the comparison is a little bit complicated because in the first quarter of last year, we included the balance sheet of Citibank but not the P&L. The P&L have started coming through in the second quarter.
So the year-on-year comparison is distorted. Having said that, after the integration of Citibank, we are now the largest private bank in Argentina by credits and customer funds.
The stabilization of the economy is clearly helping growth in long-term credit products, in consumer loans, in loans to SMEs. Mutual funds also increased 85% year-on-year, which are all very positive trends.
And these are we think sustainable trends that will be maintained through for the rest of the year. In the case of the P&L, we see a very strong performance in the upper part of the P&L.
It didn't go through because of some one-offs, again, associated with the integration of Popular. In the case of Poland, the economy is growing at 4%, with very subdued inflationary pressures.
On the back of these we have a very, very strong performance. We're gaining market share.
And the upper part of the P&L is performing very well. However, because of lower financial transactions and the fact that the contribution to the Resolution Fund was front-loaded to the first quarter, last year it took place in the second quarter, that distorts the numbers.
But excluding these one-offs, we see double-digit growth almost all throughout the P&L, which shows again that the bank is clearly taking advantage of the very positive macro environment in Poland. Finally, if we look at the Corporate Centre, net losses were down 10% year-on-year.
Here, we have a combination of different trends. On the one hand, we have lower hedging costs, particularly as interest rates have come down in Brazil.
Hedging our capital adequacy in Brazil is now cheaper than it was last year. On the other hand, we have had to continue to issue TLAC instruments and MREL instruments, which have increased financial costs.
In terms of operating costs, they are broadly flat in the quarter, following the simplification measures that we implemented at group level last year. But total costs, operating costs at the Corporate Centre for Santander are just a bit below 2% of the total for the group, which compares very favorably with all of our competitors.
And with this, I'll turn it back to José Antonio for his concluding remarks. Thank you.
José Antonio Álvarez Álvarez
Thank you, José. To conclude this presentation, well, I will make some final remarks.
As I stated at the beginning, we maintained our clear and consistent commercial strategy. This has been reflected in volumes, fee income generation and better results and increasing profitability.
And we are progressing, as I said, very well towards our goals that you have in the slide on the right side, and you have what we have achieved so far until now. Let me do - to elaborate a little bit our expectations in coming quarters.
In terms of the operating environment is, I would qualify the operating environment as constructive, GDP is growing in all our geographies relatively well. The inflation is under control.
Probably, we should expect very gradual interest rate increases in the mature markets. Market volatility has increased so far and probably we - but probably this is due to that the previous one was extremely low and when we came back to more normalized levels.
Turning to the group, we expect the good customer growth to continue, so are positive in this, increased volume growth with a careful management of the spreads depending on the market. We don't expect surprising credit quality other than some potential volatility.
As you know, IFRS 9, it's the first year we are implementing, maybe some potential volatility there, but nothing relevant. Efficient commercial and digital transformation will continue.
And all the integrations we are doing in Spain, Germany, Portugal, Poland are progressing according to the plan. So we should be - in this environment, we should be able to deliver the targets you have on the screen.
You review all of them. We are close to achieve those targets.
And probably some of them we are in a position to surpass. In our positive - in this positive macro environment, we think that we can deliver as solid results for the entire year.
And finally, just to remember you that we're going to update you in a more deeper way in Investor Day in London on the October 3 this year. And now, we remain at your disposal for the questions you may have.
Thank you.
Sergio Gamez
Thanks, José, as well. Indeed, we have now plenty of time for your Q&A.
I will appreciate if you introduce yourself and stick to two, three questions max per analyst. Please go ahead.
Operator
Thank you very much. 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, sir.
Francisco Riquel
Yes, hello. Francisco Riquel from Alantra Equities.
A couple of questions for me. First, on capital.
Regarding the change in the regulatory treatment of the SCUSA minorities, I wonder if it could not be more efficient to buy out the minorities. If you can share your views with us on this.
Second, you are including in the pro forma capital ratios the profit from the sale of the noncore assets from Popular, TotalBank we think. And I wonder if there is any negative to come, for example, from the winding of the rest JV's of Popular.
You can also update on this. And also, a clarification, whether the 11% target for the full year, if it is assuming IFRS 9 on a fully loaded basis or not.
And if so, how do you plan to offset for the shortfall of the new regulatory headwind, if you - we should expect a faster organic generation or if there would be any asset that that could be up for sale? Thank you.
José Antonio Álvarez Álvarez
Thank you, Francisco. The three questions were related with capital, yeah.
So the first question was about SCUSA minorities and up to what point. There's an arbitrage of capital there.
Naturally, there is, but we don't have any plan to do anything in relation with this stake. The pro forma capital ratios with the joint venture from Popular, I provide the data of the agreements we already signed.
When we made progress in the remaining agreements, we provide you the maybe negatives, maybe positives, depending on the final agreements with the partners in the remaining issues we have - issues, joint ventures that basically is insurance, asset management. And it comes to my mind, acquiring, yeah, acquiring businesses is the other.
At the same time, remember that we continue to dispose real estate assets and all the real estate disposal on the other side and probably some capital generation coming from those estates. The 11% target was established before IFRS 9, was established in 2016.
Well, our organic generation, we continue as there is no reason this year to not to think that we want to continue to generate in the region of 10 basis points per quarter on average and maybe quarters in which we are generating more, maybe quarters in which we generate less, but this is the average. Probably you ask me going forward and the macroeconomic situation remains, probably we should expect at some point faster growth.
And our organic capital generation, if that's the case, will get reduced. But this year, I see to continue with the same organic capital generation.
Sergio Gamez
Thanks, Francisco. Next question, please.
Operator
Thank you very much. The next question comes from Alvaro Serrano from Morgan Stanley.
The floor is yours.
Alvaro Serrano
Hi. The first question is on Spain fees and NII were down.
You explained the ALCO contribution. But, in general, I would expect maybe fees to be bit stronger given Santander Asset Management was being integrated.
So the question is how's the integration of Popular affecting the franchise? Have you seen more attrition in revenues than you expected before?
And the second question is on the U.S. After sort of overcoming some of the regulatory restrictions, there was supposed to be quite a lot of cost-cutting potential in compliance and other sort of general integration of the bank.
But the costs are up, and in particular, in the retail bank they're up quite a lot. So maybe can you give us an update on how is the turnaround to the U.S.
going and what kind of profits could we expect this year for the whole of the U.S. franchise?
Thank you.
José Antonio Álvarez Álvarez
Okay, first question about Spain NII and fee income. In the quarter, well, probably the quarter has, as José already elaborated, has some impacts both in NII and fee income.
NII, the disposal of the ALCO portfolio, the ALCO portfolio is much more than it was. And customer NIM is basically flat.
And we - I think that we have room for a - even in a highly competitive market on the asset side to reduce our funding costs, and to have a NII basically improving little bit in the coming quarters in this environment that as I said is highly competitive. When it comes to fee income, you mentioned a couple of hypothesis of what's going on in attrition, revenues and all these things.
Now, this is much more simple than that. We expect for the whole year, including SAM, the Asset Management to grow fee income in double-digit.
And without including SAM, probably high-single-digit is what you should expect for fee income in Spain. And we - in relation with Popular, we are progressing as expected.
Remember that we include some attrition already in our projection, coming basically from the more Global Corporate Banking side in which we've been reducing some positions there as a result of the integration due to our raised appetite in relation with specific names.
José Antonio García Cantera
U.S. costs.
José Antonio Álvarez Álvarez
U.S. costs, well, the cost as far as going down toward…
José Antonio García Cantera
2% Q-on-Q.
José Antonio Álvarez Álvarez
Q-on-Q 2% down and we expect for the whole year negative cost growth in the U.S. But in the U.S., we still have some pending regulatory issues.
But overall, in the year, the costs will grow - will decrease in nominal terms. I expect to decrease in nominal terms.
But what is more important probably in the U.S. is we are progressing well in the business model of SCUSA with being much more predictable.
The average FICO is higher than it was. The cost of risk is lower.
And our scoring is - make us more optimistic about the capacity of the SCUSA to generate profits. When it comes to the bank, now our NIM is head-to-head with the competitors for first time in the last two or three years, yes.
So we can from very low levels of net interest margin, and we are catching up with our peers in the U.S. So I'm fairly constructive in the bank in the U.S.
mainly, if we take into account that we are investing in areas in which we were weak like the Global Corporate Banking that we are building there. And C&I, commercial and industrial, that we are building the teams there.
We built already the teams and we are making some progress in this area. So I'm - as I said - I said also in the yearend shareholders' meeting, that I am optimistic about future trends in the U.S.
José Antonio García Cantera
If I may.
José Antonio Álvarez Álvarez
Yeah.
José Antonio García Cantera
If I may just very quickly, Alvaro. The way to look at cost in the U.S.
is to look at the - at all the operations together, because there are services that are provided from SCUSA to the bank and vice versa. So there may be quarters in which there are some movements in between these two.
But these are not a reflection of underlying trends. So the way to look at cost in the U.S.
is to look at the overall business that we have. And as José Antonio said, costs are down and are expected to continue to go down.
Sergio Gamez
Thanks, Alvaro. Next question, please.
Operator
Thank you very much. The next question comes from Sofie Peterzens from J.P.
Morgan. Please go ahead.
Sofie Peterzens
Yeah, hi. Here is Sofie Peterzens from J.P.
Morgan. I had a question on Brazil.
We have elections there later this year. What's your view on the Brazilian elections?
And do you have - do you believe it will have any impact on loan growth margins and asset quality? And could you just reiterate and do you still believe that you can reach around 400 basis points cost of risk in Brazil?
And my second question was on UK. NII was reasonably weak, but NIM was flat this quarter.
So could you just give us some guidelines on what drove the net interest income weakness? And you also mentioned that you didn't take any PPI provisions in the first quarter, but should we expect any further PPI provisions later in the year?
Thank you.
José Antonio Álvarez Álvarez
Okay. The first question in Brazil is, what you say is basically absolutely true.
We have Brazilian elections in - presidential elections back in - well, in October, in the next month of October. Probably it's too early to make an elaboration, because we don't know even the - which candidates are going to have the main parties, meaning the parties that are sent to the right, that traditional is the main candidate is probably too early to say.
We know some candidates and all the polls are reflecting basically the candidates that are already known. But we don't have a stated quality in this.
But more on that, as José said, economic situation is Brazil has improved significantly, and we are seeing this in the business. We are seeing more in the retail arena than in Global Corporate Banking and corporates.
So we are seeing significant growth in the retail. We are not seeing that yet in the corporate and GCB.
How do we expect this to come? But it's not the case still now.
As a result of this, we've been growing nicely. We've been increasing net interest margin.
And on the other side, the cost of risk, I think it fell 1 basis point quarter-on-quarter. But you go on a like-for-like basis and you compare the cost of risk by segments, it's falling much faster than that.
It's falling both in GCB and in the retail, and we continue to be positive on this regard on a like-for-like basis although I expect the GCB and corporate to pick up probably. The current dynamic is faster growth in retail.
And with this, seek to continue - the unemployment is falling, the demand for credit is picking up. Their interest rates went down dramatically.
So this will help in this space. In the UK, as you said - as you rightly said, we had a relatively weak quarter.
It was a combination of some kind of one-off items. But if I guide you for the entire year, we are betting, we are thinking of this time that we're going to have a relatively flattish NII for the entire year.
The fee income, we think that is going to grow in low-single-digit without taking into account the asset management the change in perimeter, so low-single-digit. So we - I would expect that we're going to be able to grow somehow the revenues.
And as I've said in the presentation, we do not - we expect the cost moderate from the current 8% to be still relatively high or high for our standards, yes. So it's still relatively high, more in the region of 5% probably is what we should expect.
As I said, we are investing a lot in - both in the compliance side, and also in the utilization of the bank and this is putting some pressure on the cost on top of the inflation. You mentioned PPI, that we did not take any charge for PPI this quarter.
We did not. We think it's not needed.
Based on the current consumption, based on the stock of provisions we have in the balance sheet and the current consumption of these provisions at this stage. Unless the behavior changed in a significant way, we think that we don't need more PPI provisions going forward.
Unless the behavior of the change. That's the case.
Sergio Gamez
Thanks, Sofie. Next question, please.
Operator
Thank you very much. The next question comes from Britta Schmidt from Autonomous Research.
Please go ahead.
Britta Schmidt
Yeah, hi. I've got two questions, please.
Coming back to Brazil, the loan yield increased quite strongly this quarter and net interest income is performing well. Could you help us break it down a little bit, how much of the improvement was down to the mix shift and how much is down to potentially assets with pressure coming from the interest rate environment?
And then the second question I would have is in terms of refinancing. Could you give us a little bit of an idea as to how the TLTRO-II maturities fit into your refinancing strategy and how you're going to confront this over the next couple of years?
Do you intend to replace it with some GCB financing? How much of that do you think will be replaced by TLAC issuance?
If you could give us some idea here. Thank you.
José Antonio Álvarez Álvarez
First question - I will elaborate on the first question, the second one I pass to José on the TLTRO. In Brazil, the fact is that we are gaining significant market share across-the-board, particularly in retail.
So you look at the number, well, our market share is growing significantly in car lending, where our market share is north of 20%. We've been gaining market share the last two years and we'll continue to gain market share.
Also, we continue to gain significant market share even faster than in car lending, in payroll-based lending, what is called their Crédito Consignado. And those are the two main drivers of the growth of the loan book, the car lending plus Crédito Consignado.
Also, we are growing in mortgages, how to - starting from very low levels. The production more than doubled, but starting from very low levels.
So it's about gaining market share in these segments. And we, for this reason, we are growing faster than our competitors there.
Let me shift, we are not, in principle, pursuing the mix shift, as the demand is still not yet there incorporate where we want to have more exposure and large corporate. But as a result of, what the events from the last couple of years, probably still not having a significant demand on these segments.
The interest - you mentioned, also the interest rate environment and the cost of risk, the interest rate environment, as you know, the rates came down significantly. We are - the balance sheet - the position of the balance sheet is towards lower rates.
So we got some extra push in net interest margin and net interest income coming from this side. But I think that there is not that much, maybe some, still some cuts in rates but not that much to come.
Going forward, we cannot rule out some regulatory pressure in here and there, not particularly important. But well, the regulator has been more vocal now than it was in the past in relation with some segments, particularly on the credit cards and the acquiring business.
José Antonio García Cantera
Well, TLTRO, we haven't disclosed the total amounts of TLTRO. But obviously, we are very well aware of the amounts that we have to repay.
And at the same time, we have to comply, like you said, for TLAC requirements. We already meet MREL requirements.
We were told our MREL requirements last November. And we already meet MREL requirements.
In terms of TLAC requirements, we're still pending the treatment of equity participations. If the final treatment of equity participations is equivalent to that of MREL, we are very close to complying with TLAC as well.
If it was different, we will have a - currently, we will have a gap of around €15 billion to €20 billion. Last year, in 2017, we issued €19 billion of TLAC eligible instruments.
So the gap is really manageable. And as we issue these instruments, obviously, we are building loans and liquidity that will help repay TLTRO in 2020, 2021.
So from a liquidity standpoint, for us, TLTRO, I'm not going to say is almost irrelevant, but clearly has been factored in, in our financial plans. And we don't see it really today, we don't see an issue in being able to repay TLTRO as scheduled.
Sergio Gamez
Thanks, Britta. Next question, please.
Operator
Thank you. The next question comes from Jose Abad from Goldman Sachs.
The floor is yours.
Jose Abad
Yeah. Hello, good morning.
Three questions, very brief, on Spain. The first one is on the integration of Popular.
You announced this morning the acceleration of the process. Could you give us an update on the size and timing of branch closures of Banco Popular, whether actually the announcement this morning is changing this in any way?
The second is that I think you referred to the Spanish competitive environment as very, very competitive. So - but is this actually changing towards more competitive lately or to a bit less competitive lately?
And we have probably a little evidence of a number of actual local players being a bit more aggressive lately. But I'm not sure whether this is just anecdotal or this is only that you are actually - that you are actually seeing.
And I mean, maybe on volumes, what you are seeing in trends in terms of actually demand would be interesting. And the last thing is actually on Spain is that, obviously, you made this big acquisition.
Actually, Banco Popular last year, you are the number - well, the largest bank actually in Spain, domestically. So could we say that you have no plans - you are closed for business when it comes to making further acquisitions or you are still open to analyze potential targets if the conditions are the right ones?
Thank you very much.
José Antonio Álvarez Álvarez
Well, starting first question, Popular integration, we just - we announced today the absorption of Banco Popular. This is going to take place by the fall, around the fall.
There is some anticipation here. Well, as I already said in the AGM, if we establish, in my mind, we have like three steps, the third quarter integration that was already done and it's about to finish, it was agreed with and we executed mainly in February, but still some spending.
The second one that is IT and operation that is going on along all the process and the third one that when it comes when the - we are ready to integrate from a technological standpoint of view all the branches in Spain, Popular branches working on the Santander IT systems. We should be ready by then after - immediately after the absorption to start to do this integration.
This is going a little bit faster than we were anticipating before. But we provide specific details on this in the Investor Day, specific details of this integration.
Spanish competitive environment, well, you've seen like we are seeing some competitors become more aggressive, in particular segments of the market. And we are starting to see this maybe we are not.
Until now, it's an anecdotal evidence. We don't have more than that.
But well, when I see this, probably I'm not so optimistic about we need to be very careful in matching the spreads going forward. But the environment, as I said, is highly competitive.
More acquisitions in Spain now. We are not - we are focused 100%.
I will say 110% in doing Popular integration and we roll out acquisitions in Spain, yeah.
Sergio Gamez
Thanks, Jose. Next question, please.
Operator
Thank you very much. The next question comes from Rohith Chandrarajan from Barclays.
Please go ahead.
Rohith Chandrarajan
Hi, good morning. It's Rohith Chandrarajan from Barclays.
I'll likely just follow up actually with a couple of questions on NII in Brazil and the UK. So I just to follow Britta's question, actually.
So the loan yield in Brazil was up 23 basis points in the quarter after several quarters of sequential declines. It would be really helpful actually, because that's quite a big step change to understand how much of that is makeshift and how much is kind of right-driven repricing pressures.
So I guess, thinking about the outlook, particularly on the loan yield side. And then in the UK, the loan yield was up a few basis points again.
Having been in decline, particularly with the SVR repricing, do you now think that's pretty much done in the UK? And then, I guess, market expectations in terms of UK rate rises have been pushed back a bit, but when we do get a rate rise in the UK, how do you think loan and deposit pricing would react?
Thank you.
José Antonio Álvarez Álvarez
I'm going to elaborate on the UK side and I pass to José to go into the details of the yield on loans and the deposit cost in Brazil that allow us to increase our NIM. In the UK, all the comments I made before were done under the assumption that we're going to have 1 increase in rates, 25 basis points this year in the UK, no more than 1.
This will help a little bit on the net interest margin, not that much, because the size of the increase is relatively small or the size of the increase we expect is relatively small. But the higher the increase in rates, the more positive impact because the bank - the position of the bank is towards high rates.
More than that, what we have seen in the market in UK, we saw competitive pressure in the mortgage market at the end of 2017. That continues too at the beginning of this year.
Now we're seeing in the last two month, it's becoming - it's stabilizing a little bit, yeah. So - and this is what made us think that we're going to have relatively flattish NII for this year, naturally, with a small increase in rate as I elaborated before.
Now, do you want to elaborate in Brazil, José?
José Antonio García Cantera
If you look at Page 36 of the presentation, in the section we spoke about Brazil, you can actually see the evolution of yield on loans and cost of deposits. Customer net interest margin was 8.4% in the first quarter of 2017.
And in the first quarter of this year it was it was 10.6%. At the same time, net interest rates have gone down to 13.75% in December 2016 to below 7% in December this year.
So this means that a re-pricing of liabilities and the change in the mix of liabilities where we actually substituted the more expensive Letra Financeiras, which is like the three years CDs for customer deposits, helped improve the cost of deposits, which again is now much more related to the actual interest rate and it should remain for the rest of the year. And the change in mix is what explains the fact that the yield on loans has remained flattish.
When we look at each individual component, we are starting to see some margin compression, but because of the change in mix, more towards lending in the retail segment relative to corporates and GCB, explains why the yield on loans remains flattish. At the same time, we are seeing volumes picking up, obviously, as interest rates have come down significantly.
We are seeing more volumes, particularly in retail, and that explains the very good performance that we see in net interest income. And as we mentioned, this is a trend that we would expect to maintain for the rest of the year.
Sergio Gamez
Thanks, Rohith. Next question, please.
Operator
Thank you very much. The next question comes from Ben Toms from RBC.
Please go ahead, sir.
Benjamin Toms
Good morning. Thank you for taking my questions.
There was a decline in UK deposits in the quarter. Can you just talk me through the drivers here, please?
And secondly, in your presentation, you note volumes in Spain being hit by outflows in large companies and institutions. Can you elaborate a little more on that as well?
Thank you very much.
José Antonio Álvarez Álvarez
Do you have any?
José Antonio García Cantera
Nothing on…
José Antonio Álvarez Álvarez
Deposit scene in UK well, we come back to you and we'll elaborate on this, because I - nothing in particular comes to my mind.
José Antonio García Cantera
It's seasonal, it's seasonal. The quarter is in seasonality.
José Antonio Álvarez Álvarez
So while in Spain, naturally - well, in the more - we are reducing the deposit cost, the funding cost, both in Popular and Santander, yeah. So we change the 1|2|3 conditions back in February.
The impact should be around $100 million in the year, in the whole year. So we are starting to see this.
And I do expect the funding costs in Spain, both in Popular and Santander, getting reduced, particularly in the case of Popular. Some of the institutional and big accounts money, we are not paying for those deposits at all as we are running significant excess liquidity.
And as a result of this maybe some of these flows went out. But when we speak about, let's say, stable deposits or retail deposits, including in retail SMEs, somehow operational money from corporates, we are doing well.
We are doing well in Spain. I'm pleased with the developments we are seeing in this regard.
Sergio Gamez
Thank you. Next question, please.
Operator
Thank you. The next question comes from Marta Sánchez from Bank of America Merrill Lynch.
The floor is yours.
Marta Sánchez Romero
Hello, good morning. I've got three questions.
The first is one your ALCO strategy in Spain and Portugal. Are you replacing the bonds that you're setting?
Are you building a healthy maturity portfolio? Are you worried about the effect they bring could have on Spain's credit spreads?
And if you could provide an update on any of the sensitivity to moves in interest rates and credit spreads, that will be helpful. The second question is Santander Consumer.
The cost of risk has doubled from last year. Is this a reflection of IFRS 9?
Are you still benefiting from disposals of write-off portfolios? Where do you see the recurring cost of risk here?
And the third one is a follow-up on the mix shift in Brazil. How is growth in the consumer lending portfolios that you've mentioned affecting the structural cost of risk in the country?
Thank you.
José Antonio Álvarez Álvarez
Can you elaborate on the ALCO strategy?
José Antonio García Cantera
The ALCO, we right now have around €30 billion of ALCO portfolio in Spain. With a yield of around 100 basis points on an average maturity of three years, we have replaced - we sold close to €10 billion.
We've replaced already four. Our idea is to have a sort of neutral - gradually neutral impact on margins.
And that's why we've been talking about a recovery of the net interest margin in Spain as the year proceeds. No major change there, I mean, it's - the portfolio exists to cover interest rate risks.
As interest rates go up, we are very positively geared towards higher rates in Spain. A parallel movement in the interest rate curve of 100 basis points would add approximately €800 million to €900 million to our net interest income in Spain.
José Antonio Álvarez Álvarez
Well, the second question was Santander Consumer Finance. It's true that last year, we disposed portfolios.
This quarter, I think we haven't disposed write-off portfolios and this affect the cost of risk. The cost of risk now is very low in Santander Consumer Finance and we do not expect a change this year, if we see any change, will be for positive, yeah.
So as of today, recognizing that the current cost of risk is below the average across the cycle, but what we are seeing in the ground is still improving. So I expect that should do cost of risk in this business.
And the portfolio disposals, well, we continue to be there, yeah. So maybe next quarter or in the following quarter, we have some of these disposals, yeah.
So depends when we execute this because this is part of our policy. When it comes to Brazil, the cost of risk in the quarter, we reduced, as I mentioned before 1 basis point.
Naturally, we have different behavior. The GCB portfolio is going down, and keep going down, and we keep going down.
The quarter was minus 20 basis points to 1.35%. While the retail portfolio was almost flat, minus 1 basis point of fiscal 2014, the retail portfolio.
The slowdown of the cost reduction is more related with mix than anything else, yeah. So if we go in more detail and we start to see inside the retail, what's going on with payroll-based lending, with the credit card lending, with the - and on a product by product, we continue to see good trends there.
But overall, we are growing. It depends on the mix.
The mix is what explained this variation is more than the overall trend that as I said before, is good.
Sergio Gamez
Thank you, Marta. Next question, please.
Operator
Thank you very much. The next question comes from Daragh Quinn from the KBW.
Please go ahead.
Daragh Quinn
Hi, it's Daragh from KBW. The question on the outlook for profitability in the UK, as loan losses normalize and this looks like the profitability would slip from the current levels.
Is that just the way it's going to be or do you see anything you could do on costs or how would you offset that cyclical increase in loan loss charges? And just a follow-up question on the UK.
If there were no PPI charges this quarter, if you could just provide a little detail on those other provisions of around €60 million and what kind of numbers should we expect there for the rest of the year? And then just on Brazil, sorry to come back to this again.
But just to be clear, you're saying the change in mix the growth in retail is behind the margin loan yield's improvement. If that mix maintains that trend for the rest of the year, does it mean the loan loss charge is going to be higher than you'd guided to?
Or are you saying, you're expecting the loan loss charge to fall in subsequent quarters? Thank you.
José Antonio Álvarez Álvarez
So UK loan losses normalization, well, in the UK - so basically, we are having around 10, 12 basis points cost of risk. We do not expect a material change here maybe events like the one we had at the fourth quarter last year.
But other than that, we do not spend - we do not expect a material change there. Our NPL's trend is still going down.
So we are 1.17%, if I remember well, and went down in the quarter. So I don't expect any material development there.
On the PPI, I already elaborate on this that, well, we are comparing our 2016 provision that is in the €300 million - above €300 million, €327 million. Monthly utilization in the first Q decreased from the 2017 average, in line with our expectations.
The monthly utilization was €20 million last year and now is lower, and we think that - well, as I said, we are comfortable with the current stock of PPI provision. The second question was Brazil.
Now I'm not meaning that we change our view in the arrangement with the cost of risk. Probably in the previous quarters, we talk about 4%, approaching 4%.
We are now 4.35%. I think that is - still is the direction in which we are going.
If we were, and I expect this to happen, growing incorporate on GCB, we will get there very rapidly, yeah. So - but until now, we haven't seen, to my surprise, a little bit growth in these segments, quite the opposite.
We see a reduction in the lending to GCB, particular to GCB. While incorporates, we are relatively flattish, but we are seeing better trends than the ones we saw last year.
Sergio Gamez
Thanks, Daragh. Next question, please.
Operator
Thank you. The next question comes from Andrea Unzueta from Credit Suisse.
Please go ahead.
Andrea Unzueta
Yeah, good morning. I want to focus on the Spanish NII for a minute.
You have guided in the past towards a loan growth for the year. But you've said today that the large corporates and institutional lending is actually coming worse than expected.
Are you still expecting your loan book to grow? And then you have already talked about the ALCO.
How - and you also mentioned that there are some benefits from the funding costs going forward. So how should we think of the Spanish NII going forward?
José Antonio Álvarez Álvarez
So a couple of questions here. The loan growth for 2018, we were guiding you towards some growth.
Probably still the case, depending on we're going to grow - I expect to grow in all the consumer SMEs and corporate-related lending to show 2% or 3% growth of showing relatively flat is going to depend if we do large deals or not with institutions or with GCB. But in terms of revenue, it's going to be in any case, marginal, yeah.
So the ALCO, José already elaborate on this. We reduced significantly the size of the ALCO portfolio, and we are confident and we are reducing the funding cost, both in Popular and Santander, and we are confident that we can reduce this.
In NII, I already told you that we expect in the coming quarters the NII to improve, because the - mainly the decline in funding costs and with volumes growing in the segments I already mentioned to you, probably where it's more difficult to grow at this stage is in mortgages, because of the high amortization we have. And GCB and institutional depends on our pricing.
We are probably more demanding than the average at this stage in pricing in the high-end of the market.
Sergio Gamez
Thanks, Andrea. Next question, please.
Operator
Next question comes from Ignacio Ulargui from Deutsche Bank. Please go ahead.
Ignacio Ulargui
Hi, good morning, gentlemen. Just have two questions.
On one side on cost growth outlook for Brazil, whether you could elaborate a bit on how do you see cost performing in Brazil going forward? And regarding litigation risk, on the Popular retail side, we have seen a number of press comments on ruling that have come out, whether we should expect additional other provisions there or this was already covered at the moment of the integration?
Thanks.
José Antonio Álvarez Álvarez
Growth in Brazil is related with - we are growing the costs above the inflation. But when you analyze in deep the costs, where the costs are growing in relation with the activity.
So, we are gaining significant market share in acquiring business. We are gaining market share in credit card business.
We are gaining market share in payroll based lending. And these activities have variable costs as long as we grow these costs keep growing.
So overall, I expect the cost to keep growing above the inflation, maybe 2% or 3% above the inflation. But as I said, we have very high correlation with our capacity to gain market share and to continue to grow the business.
So it's somehow you allow me to saying that variable cost. Litigation risk, well, we've been quite vocal on this.
We are not expecting any material litigation risk coming out of Popular, different from the one we incorporate in our numbers at the time of the acquisition. So there's plenty of noise around this.
The majority of the noise is related to mainly with the resolution of the Banco Popular. That is not up to us.
While in the other side, our commercial action that with the other line of the - of last year got 80% of the customers' asset. I would offer that it reduce dramatically to very low levels, the litigation risk.
So we are not - nothing new to comment on this.
Sergio Gamez
Thanks, Ignacio. Next question, please.
Operator
Thank you very much. The next question comes from Carlos Peixoto from CaixaBank BPI.
Please go ahead.
Carlos Peixoto
Hi, good morning. Just a couple of questions.
The first one would be a bit on the evolution of cost of risk in Spain, or basically, how do you see it evolving throughout the year? The second question would be if you could give us some color on how much was Popular's contribution to first Q results, namely to net profit and then probably to NII, if you could share some light on that?
And just the final question would be, how do you see the real estate division evolving, namely the cost base in this division now that essential part of the assets has been sold? What should we expect going forward on this front?
Should this progressively become zero in the near-term? How do you see it?
How do you see this evolving? Thank you.
José Antonio Álvarez Álvarez
The first question, cost of risk in Spain, I think around 30 basis points, yeah. So the both, not a big difference between Santander and Popular.
I think around 30 basis points is what you should expect. The second question was about…
Sergio Gamez
Popular first quarter results.
José Antonio Álvarez Álvarez
The Popular first quarter results, I don't have this number in mind because, well, I don't know, you have - we're going to publish a number for Popular, S.A. How comparable is this number with the previous numbers, it is difficult to say, yeah, so it's difficult to say.
It's not comparable, yes, because the quarter costs are not there. The GCB business was already integrated.
So we can provide you the numbers, but I don't have here the numbers. But I will say overall, Popular business, I will say, is going as expected with very good trends in SMEs, that you know is a critical business in which we are focusing in.
And the integration is going on track. The numbers as we split the bank in several pieces already, we have one, TotalBank, Popular Portugal was integrated in Portugal.
Quasar, the real estate portfolio, was disposed. We reached agreements with the joint ventures.
So it's very difficult, the comparison is very difficult. In any case, you're going to have Popular numbers in the first Q.
How representative those numbers are going to be, I will say very low representative. Real estate division, I don't know what - well, what I present there is the numbers of the real estate division that, let's say, remain in the bank balance sheet.
It's still that we have the stakes in Merlin, Testa, Metrovacesa and all the others. And we continue to manage this.
But in the real estate division I expect the losses to come down and to reduce significantly the real estate division already this year. So I set and this is our target, there's no question there.
We're going to reduce to doing multi-tier levels. We can do operations as the one we done in the past so for sure we're going to keep disposing as we speak.
But the losses will come down and probably to be - I don't know, if at the end of this year or next year to disappear from the bank balance sheet.
Sergio Gamez
Thank you. And last question, please.
Operator
Thank you very much. The next question comes from Carlos Cobo from Société Générale.
Please go ahead, sir.
Carlos Cobo Catena
Hello. Thank you for the call, Carlos here.
A quick one on NII in Spain, again I'm sorry to revisit. But could you explain how is the rolling of the lower cost of the 1|2|3 account?
Is that fully reflected in the cost of funding already in the first Q or that will have a gradual phasing? Just to understand NII dynamics in Span.
Quick on SME pressure and price competition, as you said it's still intense. Could you elaborate a little bit on how is the competitive landscape here?
Because now that you control about 0.25 of the market, I would have expected you to have more of a strong pricing power, why has it been difficult to control prices? Who is it, where is the competition coming from, if you could elaborate a little bit here?
And finally, on this topic, are you seeing the central banks taking any steps to kind of inspect or monitor the pricing policy here as we saw the one I think in the past have said that they would monitor where the new pricing would much in the cost of risk and all the required pricing components? That's it.
Thank you very much.
José Antonio Álvarez Álvarez
Okay, first question, NII in Spain, I already elaborated on this. The lower 1|2|3, you haven't seen in the quarter, because we introduced it, if I am right, yeah, the beginning of March, yeah.
So I mentioned also that as a result of this reduction is like €100 million in a whole year, and this will come in the next quarter. But it's not only about this, I also mentioned that the funding costs in Popular are reduced at the same time.
SME price competition, SME as you know, the market is less transparent, down for other segments. It's not a commoditized market.
We are not seeing, probably there is some price competition, but we are not seeing the competition here being as high as it is in the mortgage market and in large corporates, I will say, where we see some competitors being extremely aggressive, particularly those with low market share in those segments. That makes sense for them to trying to gain market share.
And for doing that, we got - they are relatively aggressive on pricing. And the last question, central bank in relation with the pricing policy, you're saying something, no, no, no.
Sergio Gamez
Okay, a little bit here. So thanks everyone for joining this call.
And obviously, the IR team is at your entire disposal for any follow-up. Thank you.
José Antonio Álvarez Álvarez
Okay. Thank you.