Banco Santander, S.A. (SAN) Earnings Call Transcript & Summary

Welcome to the Banco Santander's First Half '23 Results Presentation. [Operator Instructions]

Good morning, everybody, and welcome to Banco Santander's conference call to discuss our financial results for the first half of 2023. Just as a reminder, both the results report and presentation we will be following today are available to you on our website. I am joined here today by our CEO, Mr. Héctor Grisi; and our CFO, Mr. José García-Cantera. Following their presentations, we will open the floor for any and all questions you may have in the Q&A session. [Operator Instructions] With this, I will hand over to Mr. Grisi. Héctor, the floor is yours.

Thank you, Begoña. Good morning, everyone, and thank you for joining us. Let me share what we will focus on today. First, I'll talk about our half 1 results on the context of how we are progressing with the strategy we outlined at our Investor Day. José will then review our financial performance in greater detail, and then I'll conclude with a few closing remarks. Despite the challenges, the financial system experienced at the beginning of the year, Q2 was another strong quarter for Santander, demonstrating the strength and resilience of our strategy and unique business model even in times of market volatility. We delivered a record profit of EUR 2.7 billion, an increase of 14% compared with Q2 in '22. That's plus 17% in constant euros. In the first half of '23, profit was EUR 5.2 billion, up 7% supported by robust customer revenue growth. Revenue increased double digits year-on-year, supported by all regions and global businesses. Global and network businesses are contributing around 40% of total group revenue. Our numbers of customers grew by 9 million year-on-year, taking the total to 164 million. And loans increased by 1% and deposits by 5%. The group continues progressing towards a simpler and more integrated model through One Transformation, the program that is accelerating our structural model change to drive efficiency improvement and growth in profitability. As a result, our efficiency ratio improved 1.3 percentage points year-on-year to 44.2%, and our net operating income grew double digits. Our return on tangible equity, RoTE, rose 80 basis points year-on-year to 14.5%, while our earnings per share improved 13% year-on-year, supported by greater profit and share buybacks. At the same time, our strong balance sheet with solid and sound capital ratio, liquidity at comfortable levels and robust credit quality, contributed to solid profitable growth, value creation and shareholder remuneration. These results allow us to deliver value creation in terms of TNAV plus DPS year-on-year of 11%, of which represents an increase of more than EUR 6 billion in the first 6 months of the year. Moving on to the income statement. Firstly, remember that as we usually do, we are presenting growth rates, both in current euros and constant euros. This quarter, there was no material difference between them. As I have just mentioned, profit increased in the first half supported by, first of all, a strong line performance with all the regions and global businesses growing; cost in line with our expectations, growing 1% point below the rate of inflation; double-digit growth in net operating income to approximately EUR 16 billion, which demonstrates the strength of our results; and loan loss provisions normalizing in line with our expectations. These trends resulted in our highest quarterly profit on record, 4% higher than in Q1, even after the following impacts, net of taxes recorded in Q2. Thus, the SRF contribution of more than EUR 200 million, an additional Swiss mortgage provisions in Poland of EUR 140 million and one-offs in Brazil of EUR 137 million. José will go into more detail on all of these points later on. This was a great first half that makes us confident that we will deliver our 2023 targets. Good business dynamics are translating into double-digit revenue growth, our efficiency ratio improved as a result of good cost control and revenue trends. Our cost of risk remains contained in line with our target of keeping it below 1.2% at year-end. CET1 was 12.2% after profitably growing our businesses organically and at a comfortable levels, allowing us to accrue funds to meet our shareholders' remuneration targets of a 50% payout. Our RoTE also grew year-on-year to 14.5%, on track to reach our target, that would already be close to 15% if we don't analyze extraordinary banking tax on revenue earned in Spain. As we announced at our Investor Day, we have entered into a new phase of value creation that will help us grow TNAV per share plus DPS at double digits during the -- or through the cycle. I'd like to spend a couple of minutes updating you on the progress of our transformation plan, now that we are 6 months down the road from our Investor Day. We are transforming the bank in the right way. Because we are structurally changing our model to improve both cost and revenue. We are making great progress in the implementation of One Transformation, creating a common operating model and technology for our retail business across our entire footprint to better serve our customers and to improve efficiency and increase the size and profitability of our customer base. We are delivering across the 3 pillars of One Transformation. In simplification, we already have reduced 5% our number of products, nearly 400 fewer products in 2023. We are progressing in our digital self-service model, increasing the availability of products and services in our digital channels and reducing the use of our contact center by 17% just alone in the first quarter of '23 compared with the same period last year. We are digitalizing the onboarding process end-to-end in Mexico. This initial pilot has resulted in a 36% growth in digital accounts per month compared to those in 2022. And we have already captured around EUR 70 million in savings so far in the U.S. from transformation and simplification initiatives. As you can see on the slide, the initial efficiencies for One Transformation and the impact of our good sprint management in a context of higher risk, higher interest rates, which our CFO will cover later in depth, have already contributed 85 basis points in efficiency improvements. Our global and network business keep contributing to the group's profitability and have already delivered another 43 basis points. Multi-Latinas and Multi-Europeans, our initiatives to better serve our multinational corporates and SMEs through regional coverage model, are growing at a very high rate with revenue increasing by more than 70% year-to-date. In Asset Management, we have progressed to enter the alternative business, starting to serve upper market and institutional segment, and has reached more than 2 billion commitments already. In Payments, we have deployed Getnet in Portugal and Argentina in the first half, and we expect to launch in latest in Chile in the second half. In Auto, we're increasing managing OEMs and retail relationships globally, expanding our partnerships in Europe to LatAm and the U.S. We have recently onboarded new partners in the U.S., leveraged the existing agreements in Europe, which are expected to materialize in around EUR 4 billion of new business per year. We have also deployed a new pan-regional leasing platform in 2 markets, and more countries will be added throughout '23 and '24. Finally, our global technology capabilities have already resulted in 36 basis points improvement in the efficiency ratio. Our global approach to technology has allowed us to capture EUR 80 million in savings this year, mainly driven by: one, efficiencies from the recent development and deployment of Gravity in 2 countries, which has contributed with EUR 31 million in savings in the first half; and new global agreements with vendors, which represent around EUR 40 million in cost reduction year-to-date. The actions that we are beginning to carry out as a part of One Transformation, which we are expanding across the group, are starting to be reflected on cost and on operational efficiencies. As you can see on the slide, simplification has already driven significant improvements in our cost and revenue per active customer ratios. The solid progress we are making with the process digitalization and automation to capture efficiencies enables us to spend less time on operations in branches and turn the branch network into a powerful sales and advisory channel. Portugal has already taken out most of the operational activities from the branches, freeing up branch employees so that they can spend more time supporting customers and commercial activities. We're extrapolating this to other of our banks. In only 6 months, through One Transformation we have already reduced the number of operational FTEs per million customers by 3%. We're already deploying global tech platforms to improve customer experience, leverage economies of scale and extend best practices. Open digital services, as we call it, ODS, our cutting-edge front-end platform, allow us to deliver a best-in-class omnichannel experience to our customers. At the same time, that Gravity, our award-winning [indiscernible] platform, drives significant efficiencies versus mainframe technology. We have integrated both in the U.S., so we will operate it on an end-to-end cloud-based retail technology stack core and omnichannel, which is already tested and will result in significant improvements in service quality and customer experience. Our global and network businesses continue to contribute to this new phase of value creation. In CIB, we continue growing strongly after record performance in 2022, beating the market. Our global presence has allowed us to grow at 24% year-on-year, well above the average of annual growth target of 10% for the period '22-'25. Because, first of all, we can provide a one-stop shop service to our clients across all geographies, thereby capturing cross-border flows; and because we bring CIB products and services to our wealth, retail and commercial clients across the group and vice versa. As a result, revenue related to these 2 concepts, which we call network revenue, grew 27% year-on-year to EUR 2 billion. Wealth Management and Insurance grew 25% year-on-year, well above our target, and this has been boosted by the finance benefits obtained from the Santander network effect. A fundamental part of our value proposition in Private Banking is our unique combination of local presence and local reach -- global reach. Our customers can move and transact easily from one country to another, and that's the reason why customers have EUR 50 billion in assets under management booked abroad, 10% higher than 1 year ago. Our Payments business is also growing very strongly. 2 years ago, we began to move our Payments business onto scale global platforms. And as of today, our Payments Hub platform already manages a significant part of our payments in Eurozone, and we are progressing in another key countries such as Brazil, Mexico and the U.K. We are in the process of expanding our cards platform across the group, delivering real-time digital processing capabilities to our banks, accelerating our business growth as well as generating operational synergies of around EUR 100 million per year during the next 2 years alone. First delivery of the platform will be live in Brazil by the second half of 2023. In Auto, we continue to prioritize profitability of our market share growth in a context of rising interest rates. Our One Transformation plan, which is making us more -- much more efficient and the increasing contribution of our global and network businesses, is helping us reach our 2025 profitability targets across all regions and businesses. As I mentioned earlier, the group's RoTE rose 80 basis points year-on-year to 14.5% and would be around 50% if we didn't annualize the extraordinary banking tax in Spain, which is in line with the group's targets for 2022 -- sorry, '23 and '25. José will now go in more detail to the group's first half performance. Please, José?

Thank you, Héctor, and good morning, everyone. [Technical Difficulty] which made up 95% of total revenue [Technical Difficulty] all the growth in the quarter. This excellent performance was supported by Europe as we take advantage of interest rate tailwinds and Latin America driven by growth in volumes and fees. Digital Consumer Bank benefited from asset repricing actions and gains on financial transactions due to FX hedges. We also saw a strong performance across businesses. The only exception was Auto, the result of lower leasing income in the U.S., which, as in previous quarters, was affected by an increase in the share of end of lease vehicles repurchased at the dealership. Revenue at the Corporate Centre also improved, up nearly EUR 400 million due to higher liquidity buffer remuneration and a lower impact from FX hedging, which negatively affected revenue last year. Most of our revenue growth came from NII, which continued its upward trend, increasing 6% in the quarter alone, driven in particular by Europe. We see upside potential for further growth in the coming quarters. First half 2023 was 15% higher year-on-year in constant euros with positive sensitivity to raising rates, mainly in Europe and Mexico, and volume growth in Auto, North America and South America, which more than offset negative interest rate sensitivity in Brazil, Chile in Auto. In terms of profitability, we have improved our margins every quarter since the first quarter of 2021. We continue to actively manage or create spreads to make the most of the higher interest rate environment. Gains on credit yields outweighed higher funding costs. Thanks to our disciplined deposit remuneration strategy adapted to each country's specific needs. In Europe, we are strictly managing deposit costs, especially in Spain and Portugal, where there is excess liquidity in the system and much lower credit demand. The U.K. has a more competitive environment in line with our expectations. In LatAm, deposit rates are more directly linked to market interest rates, which implies negative sensitivity and will benefit margins when rates start to decline over the next few months. Finally, in the U.S., deposit betas are higher due to the heightened competition following the collapse of Silicon Valley Bank. All in all, net interest income sensitivity to interest rates has resulted on EUR 500 million above the assumptions that we shared during our Investor Day. Therefore, we are well on track to meet our double-digit NII growth guidance for 2023. Turning now to fees. In an environment of low fee growth in general as a result of subpar loan demand, weaker activity, consumer activity and higher margins, our net fee income grew at 4% in the quarter compared with the same quarter last year and 5% in the first half year-on-year. CIB and PagoNxt are leading the way in terms of growth. CIB is increasing its share of leading roles and mandates, and PagoNxt continued to expand total payment volumes, which rose 25% year-on-year and transactions 32%. We also had a very good performance for Cards with turnover increasing 9% year-on-year with fees growing 20%. Retail banking also continued to grow well, primarily driven by an increase in customers and transactionality. Wealth Management and Insurance grew less as customers moved to lower-risk fixed income products with lower fees and margins. However, we saw volume improvements in both private banking, net new money of EUR 6.5 billion, and Santander Asset Management over EUR 3 billion net sales. Auto performance year-on-year was affected by the new insurance regulation in Germany in the first quarter, but recovered significantly in the second quarter. In terms of costs, our transformation efforts that Héctor talked to you through earlier are paying off. Despite initial investments, cost in real terms are growing below the rate of inflation across most of our footprint. Reflecting the savings we are beginning to generate and restrict cost control. This, in turn, is reflected in efficiency improvements led by Europe, which improved 7 percentage points, thanks to strong revenue gains, together with a 2% fall in costs in real terms. As a result, group efficiency is already at the bottom end of our target range where we expect it to remain for the rest of the year. Credit quality remains robust across our footprint. The non-performing loan ratio remained stable in the context of an expected soft lending and strong labor markets as unemployment is a key driver of credit quality. Of note, were the positive trends in Brazil, driven by the more selective lending policies that we introduced 1.5 years ago. We said in the fourth quarter of last year that we believe the Brazil NPL ratio had already peaked, and trends so far this year support that view, having improved almost 60 basis points year-to-date. In terms of cost of risk, we remain comfortably on track to meet our 2023 target to remain below 1.2%. Spain continues to perform well with a 12-month cost of risk down 16 basis points year-on-year, supported by the quality of the loan book and improving macro conditions. Normalization in the U.S. continues, but is more resilient than anticipated. Brazil remains elevated due to the unsecured individual borrowers portfolio, but we are seeing signs that cost of risk has stabilized. Brazil's 12-month cost of risk at the end of June was 4.74%. But if we annualize the first 6 months, that improved to 4.5%. Mexico is increasing from low levels, mainly due to a change in mix towards unsecured loans, which require more provisions upfront and, obviously, is more profitable. Other units such as the U.K., Portugal and the Digital Consumer Bank, are rising, but from a very low base and should remain below or in line with through the cycle averages. Moving on to our balance sheet structure. As we have discussed in previous presentations, our credit portfolio is well diversified by segment, product and country. Moreover, our balance sheet is low risk. The portfolio is highly secured with quality collateral and has low average loan to values. Loan growth year-on-year was flat in constant euros as growth in auto and consumer was offset by falls in CIB, mainly in Spain from very high levels in 2022; mortgages, driven by early repayments in Europe; and slowing demand from corporates, also in Europe. We saw positive dynamics in North America, South America and DCB. On the other hand, deposits continued to grow well, up 4% year-on-year, following a EUR 3 billion increase in the second quarter in constant euros, reflecting new customer capture with more than offset mortgage prepayments. We saw growth across the bank, concentrated mainly in time deposits as customers seek higher rates. Our deposit base is diversified and highly stable. Using LCR criteria, 75% of our deposits are transactional, which are stickier, and a high proportion of our deposits from individuals are covered by deposit guarantee schemes. We have not seen any unusual movements in deposits in the year-to-date following market turmoil, particularly in the U.S. In fact, deposits in the U.S. grew in the quarter and remained flattish year-to-date, which implies that we are gaining market share in deposits and with an average cost which was well below our main competitors. Mutual funds have begun to recover, up 4% year-on-year following a year of instability in 2022. To close, let me cover capital. Our fully loaded capital ratio remained at a comfortable level of 12.2%, backed by a strong organic capital generation, which was again 10 basis points net of dividend accrual in the quarter. We accounted for the buyout of the minority shareholders in Mexico, which cost 4 basis points in terms of capital. We also had a series of other small positives and negatives this quarter that almost offset each other. We continue to focus on profitable growth opportunities, which is reflected in a front book ROA of 2.9%, up from 2.5% in the first half of 2022, which is equivalent to a return on tangible equity in excess of 15%, so in excess of the current group return on tangible equity, which will support profitability going forward. Additionally, we continue to increase balance sheet mobilization and the percentage of role of risk-weighted assets with positive economic value added progressing well towards our Investor Day target of 85 in 2025. This increased profitability will help us continue to be capital over the next few years, and we are confident our capital ratio will remain above 12% even after taking into account the final implementation of Basel III on January 1, 2025. Let me turn it back to Héctor for his concluding remarks. Thank you.

Thank you, José. In summary, Q2 of '23 was another strong quarter supported by customer growth, double-digit revenue increase and also backed by strong performance by all the regions and businesses. We are accelerating the structural change to a simpler and more integrated model through One Transformation, spreading the initiatives all across the group, which is driving efficiency improvement and also profitable growth. A rock-solid balance sheet and robust credit quality are contributing to growth, value creation and shareholder remuneration. In summary, we have a very strong first half of the year, and we are confident that we will achieve our 2023 targets and remunerate our shareholders in line with our 50% payout policy, supported by our global and network businesses while we continue with our structural model transformation. We see offset potential for further net interest income growth in the coming quarters as tailwinds in Europe and Mexico are expected to remain and inflation and interest rates in our largest Latin American countries seem to have peaked or nearly peaked, resulting in a positive outlook for margins in the next 6 to 9 months. Cost of risk is normalizing in line with our expectation in a context of an expected soft landing of the economy and strong labor markets. We continue to see resilient customer and corporate behavior in most of the geographies. Group RoTE has reached 14.5% in the first half, and we expect to close above 15% at the end of the year. All in all, our TNAV plus cash dividend is growing at a double-digit, well on track with our target of average growth through the cycle. And now we would be happy to take any of your questions. Thank you.

Let's open the Q&A session, please.

[Operator Instructions] We already have the first question from Carlos Peixoto from CaixaBank BPI.

The first question would actually be on Brazil, margin stabilized quarter-on-quarter, still a bit under pressure year-on-year. I was wondering what type of evolution you expect for the rest of the year? And also on cost of risk, what's the outlook there? Then the second question would actually be on capital. So basically, the capital generation in this quarter was only 3 basis points, a bit below the run rate you have discussed in previous quarters. I reckon that this partially has to do with the Mexico minorities incorporation, but I was wondering how do you see this evolving throughout the rest of the year? And also, what is behind the increase in RWAs in this quarter?

Thank you, Carlos. What I'll do is I'll [ answer ] the first question on Brazil, we'll give you a comment on capital and then José will tell you a little bit about what's going on with increasing RWA, okay? In terms of the Brazil margin quarter-on-quarter, as we said basically, is explained by the following. On loans, since 2021, we have become much more conservative and growth -- and grown volumes very selectively, changing the loan mix to lower risk, okay? So we mainly get out of credit cards, went on to Consignado, Auto loans and mortgages. On deposits, also the fast increase in rates has meant a rapid rise in the cost of deposits, okay, as well as a change of the mix on the deposits. Rates are staying higher for longer has prevented that the cost of deposits from coming down, impacting NII. Remember that in Brazil, we have negative sensitivity to rates, okay? So Brazil NII in the second quarter of '23 is already flat, okay? As we said, and José was very precise on that, the worst seems behind us, and we are already seeing a reduction on the average cost of deposits and we also see an improved customer spread, okay? So we expect NII in the second half of '23 to be higher than the first half of the year, leading to a flat NII in the year with a substantial improvement in '24, okay? In terms of the cost of risk, not only the macro outlook is improving, but since '21, I explained, we've been very selective in the approach of the new lending extension and focusing to more secure and higher rate customers, as I explained, okay? This is showing good results, and we believe the worst, as I said repeatedly, is worst -- sorry, the worst is behind now. Cost of risk in the second quarter is already improving versus the first quarter, and the vintages are showing really good performance, as we have seen. So we don't expect cost of risk that will deteriorate in Brazil in '23 versus '22, excluding the one-off that -- which implies staying close to around 4.6%, okay? And then to be on capital, to be very precise, we expect to generate at least 10 basis points of organic capital on average per quarter with the current shareholder remuneration policy that we put in place. As a result, we will be on track to meet our target to be above 12%, even when the final implementation of Basel III comes into effect on January 1 on '25, okay? And with that, I don't know, José, if you can comment on RWAs, please.

Thank you. So Carlos, you're right, loan growth was 0, but risk-weighted assets grew more or less 2%. Half of that growth is due to FX as we consolidate the Latin America, basically, the peso and the Brazilian-based assets into the group. Of the other half -- half of the other half, so a substantial amount corresponds to a stock finance. And this is due to the recovery of the new auto business in Europe, and this will eventually translate into auto loans. So this is obviously short term that will eventually lead higher profitability going forward. When we look at the outlook, as Héctor said, we don't expect any significant regulatory or supervisory capital impact in the second half of the year. We see no inorganic charges in the second half of the year. Obviously, it looks like the available-for-sale portfolio valuation also will stay relatively stable. We see improving profitability, as we have mentioned, particularly driven by higher NII in the second half. And risk-weighted assets that should be probably under control. So net-net, we see a stronger capital -- organic capital generation in the next couple of quarters, again, leading to a capital that will remain well above 12% every quarter and building up sufficient capital to be above 12% post-Basel III.

Next question from Alvaro Serrano from Morgan Stanley.

A couple of questions, please, from my side on U.S. and Spain. U.S. has obviously done much better in provisions. I know you've touched on it, Héctor, but maybe you can give a bit more detail as to why the provision was so low in the quarter. Is it collateral? Is it default rates? And when you think about the rest of the year, maybe you can update us about the guidance, what do you expect in cost of risk for the full year? I think you gave us some color in Q1, maybe an updated view on the moving parts there. And the second question on Spain, deposits much more stable this quarter, previous quarter. I wonder if you can give again a bit more color on the deposit migration remuneration. And when do you -- would you expect NII to peak in Spain? I'm extrapolating Spain, Portugal, which I assume it's the same dynamics.

Thank you, Alvaro. Okay, let me give you outlook in the U.S., okay? And I explained it, it's basically the same dynamic that I've explained to you on the first quarter, okay? Credit provision, as you know, decreased as credit quality is remaining robust and credit near charge-offs actually, what we call realized losses, show better-than-anticipated performance. And this is basically on the back. Used prices continue to be strong, okay, as I explained, and declining at a slower pace than we previously anticipated. The change in auto loans portfolio mix towards small prime. Do you remember that I told you that before 2018, we had a lot more sub-prime than prime and the change on the mix has helped. Also, we have robust and better-than-expected labor market in the U.S., okay, which is sustaining that, okay? And auto customers that are delinquent, exactly as I was explaining in the first quarter, for more than 90 days are rolling into charge-off status at historical low levels, okay? Normally, they were above 90%, 95%. Last quarter, they were around 59%; this quarter, around 67%, okay? So it's still much better than we expect and much better than it was actually happening pre-COVID, okay? And in 2023, we expect cost of risk to continue on the normalization at around 2%. And after 2 years of artificially low figures, given COVID, et cetera, as I was saying, normalized level should be below pre-pandemic. Cost of risk at around -- remember, pre-pandemic was around 285. It's never going to get there, okay, because of the change of mix and what I was explaining, okay? In terms of the Spain, okay, in Spain, the deposits, I mean, continue to be stable, okay, at around -- we have around [ EUR 299 billion, ] okay? We have excess liquidity in Santander Spain to the LTVs around 78%, and this is the case for the whole Spanish system that is around 80%. Quarterly decline is most linked to CIB deposits, flat in retail in the quarter despite the early repayments of mortgages, okay, compared to the same period of 2022 and the increased volume of deposits moving off balance sheet products. Also, what we see between the first half of '23 versus the first half of '22 is plus 0.9%, okay? So we have a different change of the mix with time deposits going up at around 61% up year-on-year, while demand deposits are going down around 5% on the back of the higher rates, driven by the growth of CIB, which allows us to maintain also our -- and maintain a stable net liquidity position, okay? In terms of what I was saying, NII, we don't expect to peak yet. I mean, we have still revisions, and I will have José explain you in detail exactly how we see NII evolution in Spain.

Alvaro, let me talk about the Corporate Centre because Santander is, say, more than Spain because this is going to give you a better view of our euro sensitivity to rates in Spain. So we have assets of EUR 330 billion, 60% floating, 40% fixed. This fixed includes the ALCO, which is EUR 27 billion that we've been buying recently with an average duration of 6 years and an interest rate of over 3%. We also have intra-group transactions, et cetera, money markets that are fixed, but these are very short term. So they will reprice a short-term EURIBOR actually goes up. Of the floating EUR 200 billion, EUR 65 billion will reprice or reprices with 12-month EURIBOR. We expect the -- if we use today's 12-month EURIBOR compared with the average of the first half. So let's assume that the EURIBOR remains flat in the first half of next year, we have at least 50 basis points pickup in the repricing of this part of the portfolio next year. And then we have 60 -- sorry, EUR 30 billion with reprices with a 6 months, EUR 40 billion with the 3 months and EUR 65 billion with 1 month. So we would still expect significant repricing upwards in the first half of next year as interest rates in Europe may go up once or twice. But as they stabilize, we will still have significant repricing of a big chunk of the portfolio in the first half of next year. So obviously, the asset yields are expected still to expand well into 2024. Obviously, margins will depend on the cost of deposits, but we are, as Héctor said, we are not seeing any pressures today to increase the remuneration of retail deposits. We are already paying almost LIBOR for CIB deposits, institutional deposits, but we don't see any pressures on the retail side of deposits, which means that probably the peak in net interest margins will not happen until well into 2024 in the Eurozone.

Next question from [indiscernible]

I wanted to ask about NII in the U.K. and in the U.S. If you can please update your guidance in the U.K., I see lending is weak falling, local mortgage market is declining, asset spreads are low, the deposit beta is still relatively low. How do you see all this dynamics going forward on the NII? And also in the U.S., you are gaining market share, but are you gaining new clients or are you paying up for deposits? How do you see the EBITDA compared to the local peers and also in absolute terms going forward and the NII there in the U.S.?

Thank you, Francisco. Okay. Let me give you the details, okay? In the -- let's talk about -- first about the U.K. NII was up double digit in the first half of '23, okay? It was driven mainly by higher rates and the strong focus on managing spreads and profitability, although the U.K. tends to be more competitive than other European markets, as you know, okay? So we're putting profitability ahead of market share, okay? And we have a lower risk appetite, but we're expecting good performance to continue, leading to a NIM expansion, okay? So we expect it to stabilize towards the second half, okay, 2023 with a high single-digit growth on higher rates and despite the lower volumes that we have because of what I just explained about profitability, okay? In the second quarter, NII was flattish, okay? Higher yields on loans did not offset the higher cost of retail funding and the slowdown in new originations, okay? In terms of the betas, José will tell you afterwards that I tell you about what's going on in the U.S. In terms of the U.S., overall, as you have seen, has done better than expected given the change in mix towards prime, okay, as I explained in detail, lower yield, but also better risk profile and the lower credit provisioning is helping us, okay? NII is flattish in the quarter and year-on-year on funding pressures on the wholesale and retail. As you know, a lot of this is funded by wholesale as well and a common trend across the sector, which has been partially offset by higher yields that we have. Santander U.S. betas are above what we expected, but lower than the average of our peers, just to give you exactly what's going on. And we expect NII to be down mid-single digits on lower originations and also the higher funding pressure, again, in line with the peers. However, given the strong behavior that we have on the labor market and seeing the performance on the first half, the U.S. NII could do better than we expect, okay? U.S. NII is not the only one that has done better. Cost of risk and profitability are also better than expected in the country, okay? So José, I don't know, if you can comment on the betas, please?

On the betas, in the U.K., when we look at the cost of deposits today relative to the level of rates today, that's around slightly below 30%. It's increasing slightly in the quarter 3 percentage points, we still think that, that will continue. So the U.K. is a market with less excess liquidity than Spain, for instance. So we would expect, as Héctor said, margins probably -- they were stable in the second quarter relative to the first, and we would expect them to remain more or less flattish in the third and probably slightly going down from there. In the U.S., as Héctor said, we kept our deposits flat paying less than our regional bank competitors. The beta in the U.S. is 36.8%, up 2 percentage points quarter-on-quarter. So after the spike that we saw in February, March, the betas in the U.S. have remained very stable. And we are actually increasing deposit market share at a lower cost than our competitors.

Next question from Ignacio Ulargui from BNP Paribas Exane.

I have 2 questions. One is on the Spanish loan book. You could update a bit on the trends that we have seen in the quarter, year-on-year rate, you see an 8% decline. If you could elaborate a bit on what are the dynamics there and what we should expect going forward? And the second question is a bit at a group level. If I just look to the first half cost of risk is around 106 basis points. You are sticking to the guidance below 120 basis points. I mean, is there any reason besides the U.S. where we could see some deterioration in the second half that makes you to keep that conservative guidance, which could imply a run rate of around 135 basis points, 140 basis points in the second half to make the 120 basis points?

Thank you, Ignacio. Let me tell you a little bit about what's the dynamics on the Spanish loan book, and then José will talk about your second question, okay? In the Spanish loan book, the dynamic that we have seen is quite clear, okay? We have seen low demand of credit, okay, which is impacting us a little bit, mainly also, we have seen an increase on the prepayment mainly on the mortgages, okay, because of the increased rates. Remember that a lot of a big percentage of our portfolio is on variable rates and floating rate. So in that sense, that's a dynamic that we have seen. And also we have seen, due to the increased rates, the corporates and the SMEs being more cautious in new credit demand, okay? And the dynamics we believe throughout the year, continuing that way. Let's see what happens at the beginning of the year and also if we can see more confidence a little bit on investment, okay? But now we see the dynamics in that way. Please, José, on the second one?

Ignacio, cost of risk. Well, we see cost of risk normalizing in the U.S., as we discussed, also in Mexico where we are seeing the normalization of the cost of risk as we change the business mix. In Auto, it will very much depend on the amount of loans that we are able to sell, but it should remain stable in the second half of the year. So we feel very comfortable that we will beat our 1.2% guidance for the end of the year. We expect it to be better than the 1.2% that we gave as a guidance.

Next question from Sofie Peterzens from JPMorgan.

Yes, this is Sofie from JPMorgan. So could you just explain that the difference between your reported net interest income, which was EUR 10.5 billion on the underlying, EUR 10.7 billion, what explains the EUR 200 million delta? And are there any more one-offs in net interest income that we should be aware of coming in the short term? And then the second question would be on the capital headwinds. You mentioned that you expect it to remain above 12%. But could you just outline what capital or core equity [indiscernible] headwinds you are expecting in the coming quarters or at least on the year-end? And also, if you could remind us what the Basel IV impacts are?

Okay. Thank you, Francois. So José will explain you the NII evolution. On capital, let me reiterate exactly what I said, and then José can expand a little bit. So as I told you, we expect to generate at least 10 basis points of organic capital on average per quarter, okay? And we -- that is included with the current remuneration policy that we have, okay? So as a result, what I told you, we will be on track to meet our target to be above 12%, also with the final implementation of Basel III comes into effect in 2025 to be precise on that point. José will comment a little bit more on that and explain you the NII evolution.