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

Good morning, everyone, and thank you for joining Santander's First half 2026 Results Presentation. Today's presentation will follow the usual structure. First, Hector will talk about our results with a special focus on the performance of our global businesses. Jose will then cover the financial results in more detail. Finally, Hector will close with the outlook before we open the line for Q&A. Before we start, I would like to highlight that this is the first quarter in which TSB is included in our results after the acquisition closed on the 30th of April. Our underlying metrics exclude the impact of Poland and TSB in duration-related restructuring costs to provide a clearer view of the underlying trends. With that, Hector, over to you..

Thanks, Raul, and good morning to everyone. Q2 was another record quarter for Santander, demonstrating again the strength of our strategy and the resilience of our business model. Our quarterly profit hit a new record of EUR 3.8 billion, making H1 '26 the best half ever driven by strong revenue growth across global businesses and our growing franchise of 182 million customers, up by more than 12 million year-on-year, including the 4 million TSB customers, we welcome to the group in May. We achieved this while executing on transformation, making excellent progress towards a simpler and more integrated model. This is translating into tangible results. With efficiency improving by 3 percentage points and underlying ROTE increasing to 15.6%. Our balance sheet remains very solid with robust credit quality and a strong CET1 ratio of 14%, which includes the impact of TSB. In this context of high capital levels and underlying ROTE adjusted for excess capital is close to 17%. All of this continues to translate into strong shareholder value creation with INAP plot dividend per share growing 19%. Before I move on, let me make a brief comment on TSB. As Al mentioned, TSB closed on April 30, only contributing with 2 months of results, so the impact on year-on-year trend is limited. Jose will provide more detail where relevant later in the presentation. Our P&L remains very solid, with underlying profit growing 14% year-on-year. We delivered strong top line growth with revenue up 6% in constant euros, supported by NII increasing 6% on the back of margin resilience and profitable deals growth as well as record fees, up 7%, rising across all businesses and countries. This reflects structural trends driven by deeper customer relationships and stronger connectivity across the group. Revenue grew while we reduced cost once again, showcasing the possibility and the positive effects of our transformation. LLPs were affected by Argentina, reflecting sector-wide trends in the country. Excluding Argentina, provisions were broadly stable year-on-year. Finally, in H1 we recorded EUR 245 million gross impact related to Motor Finance in Openbank Europe, most of it booked in Q1. All in all, as we have shown over time, our results are sustainable and less volatile than peers even in challenging environments. What we are seeing again this quarter clearly reflect the strategy we presented at Investor Day. Our unique business model combines global in-market scale with customer focus and diversification across Europe and the Americas. And the model keeps delivering consistent results higher revenue, lower cost, improved profitability and stronger shareholder value creation. Now let me talk about our customers. The structural trends continue to strengthen the quality of our results. First, we are attracting more customers. Second, customers are doing more with us. Active customers are growing faster, and fees per active customer increased by 3%, reflecting higher engagement and broader use of our products and services. Third, we continue to improve our efficiency across the group. Together, these 3 trends met or profitability improvements increasingly sustainable over time. As you can see, we continue to deliver on our transformation, driving operational leverage through structural improvements that are under our control. Simplification and automation have delivered more than 1 percentage point of efficiencies. Our network businesses are generating strong positive jaws, and our global technology platforms continue to improve productivity, while we start to capture benefits from AI. Our 5 global businesses continued to deliver strong and balanced growth, driven by customer activity, diversification and scale. Retail and Openbank illustrate the power of our model. Revenue grew 4% and costs fell by 3%, driving higher profitability through operational leverage. At the same time, CIB, wealth and payments demonstrate the power of our global capabilities and connectivity, driving strong revenue growth and improving efficiency. Together, these businesses, combined with our focus on disciplined capital allocation are driving high returns and solid progress towards our targets. Let's now look at each of them. In retail, we continue to transform our model, combining cutting-edge technology with the expertise and proximity for our teams to deliver the best customer experience. Our customer interaction platform is live in 5 markets and is now ready to roll out in Spain. It helps us to personalize customer interactions at scale, improving conversion and strengthening customer primacy. In Commercial, our new model is delivering excellent results in Spain, with revenue up 17% and cost down 3% year-on-year. We are better aligning our service model with customer needs, improving their experience while reducing our cost base. Using advanced analytics, we identified high-growth companies and connect them with more value-added solutions deepening relationships and capturing a greater share or their financial needs. Following this success, we are now rolling out the model across Brazil, Mexico, U.K., Chile and Portugal. As a result, retail fees grew 6%. Cost per active customer declined 6% and productivity keeps improving. Overall, retail's underlying profit grew 12% year-on-year, driven by strong operational leverage while asset quality remained robust with cost of risk improving excluding Argentina. As you probably know, Webster also reported another strong quarter yesterday, demonstrating again the quality of the franchise with a 17% ROTE, excluding transaction costs, and continued volume growth. Overall, these results were in line with market expectations. Looking ahead, we expect profitable growth to continue as we scale our model deepen customer relationships and capture additional efficiencies from TSB and Webster. This quarter, we closed the acquisition of TSB, a highly strategic transaction and we have taken the first steps in the integration process, which is progressing according to our plan. It adds a scale in the core market. It strengthens our funding mix through a high-quality deposit base and enhances our risk profile through a low-risk mortgage portfolio. The combination accelerates the execution of our strategy, enabling us to simplify the business capture significant efficiencies and improved the profitability of Santander UK. This will help us deliver an RoTE of around 16% in Santander U.K. by 28%, supported by a least EUR 400 million of synergies. With Openbank, we are building a more integrated scalable and efficient business supported by our global digital platform. We are broadening our customer proposition to become our customers' primary digital bank. In Mobility Finance, we're expanding beyond traditional out lending with new solutions, while we continue to scale our embedded finance business through Openbank Pay, which already serves more than 2.6 million customers. At the same time, our focus on funding optimization keeps supporting profitability through significant cost savings, especially in the U.S. This is already translating into a strong underlying performance with solid revenue increase, lower cost and credit quality under control, driving 15% growth in profit before tax, excluding motor finance. As anticipated, profit is affected by the end of electric legal tax incentives in the U.S. The tax rate is now expected to remain stable. Looking ahead, we expect profitability to improve as we continue to scale the business, optimize funding and deliver further efficiencies. In CIB, we continue to build a world-class business for our corporate and institutional clients leveraging the strength of our global network. We are now moving from building capabilities to scaling our franchise, translating them into stronger client relationships. What differentiates us is the connectivity to our franchise, bringing together Santander capabilities to serve our clients in a much more integrated way. A good example is a client aerospace sector, where commercial banking, CIB and private banking have worked together throughout the company's growth journey from day-to-day banking to financing, advising on the latest capital raise and connecting it with private investors. At the same time, we continue to transform our operating model through global platforms and AI delivering high productivity and better customer service. For example, our automated price in global markets allow us to serve more clients and improve funding decisions. Even in a more challenging environment, strong client activity continues to drive profitable growth as we focus on efficiency and capital discipline. As a result, profit rose 17% year-on-year while maintaining one of the best efficiency ratios in the sector and originating new business at RoTE of around 23%. In wealth, we continue to deliver solid growth while executing our strategy, leveraging our global scale and capabilities. In private banking, we're strengthening our advisory proposition for ultra high net worth and family office clients while leveraging our international franchise to connect clients with the best of Santander globally. As a result, customer assets and liabilities grew 15% and client cross-border referrals increased by more than 20% year-on-year. In insurance and asset management, we're increasingly operating as 1 integrated platform to deliver a more differentiated value proposition. Insurance is one of the biggest growth opportunities across the group. We continue to strengthen our position in Spain and Portugal while extending our model to other markets such as Brazil, Mexico and Chile. We have integrated life and pensions in Brazil and Portugal. In health, we continue to roll out the innovative solutions such as One Care in Portugal and SouteCompara in Brazil. This is already supporting double-digit premium growth across our core insurance businesses. Together, these initiatives are making our business more scalable, more resilient and increasingly fee-based. As a result, profit rose 19%, driven by strong commercial momentum across all our business lines. Finally, payments, our high-growth platform business. We continue to combine scale with innovation, strengthening our position across the global payments value chain. In Getnet, we launched the first identic payments use case in Latin America, positioning us as a forefront of the next generation of digital commerce. Our Gated platforms processed around 15 billion transactions in the last 12 months alone and support multiple payment methods across markets driving much better efficiency. And in Ivory, the recent private placements reinforces its long-term growth potential. This is translating into a strong performance on the financial side with revenue up 17% and EBITDA margin improving to 33% and profit increasing fourfold year-on-year, resulting on a Rule of 40 score about 50%. Overall, the business keeps building strong momentum with clear upside as we continue to scale. Our strong operational and financial performance continues to drive capital generation, higher profitability and double-digit value creation. Our CET1 ratio rose to 14% on track to achieve our year-end target comfortably above our 12% to 13% operating range. Underlying routing, improved to 15.6% and is close to 17% at normalized CET1 levels with further upside from M&A and ONE transformation. Underlying earnings per share grew 20%, and Tina plus cash dividend per share increased 19%, reflecting strong profit generation and the impact of buybacks. We have received the approval from the ACB for a new buyback program for up to EUR 1.8 billion against '26 results. Once the corresponding corporate approvals have been obtained, total share buybacks, including the program currently underway will reach around EUR 9 billion close to our commitment of distributing at least EUR 10 billion for '25 and '26. With that, I will now hand it over to Jose, who will take you through the financials in more detail.

Thank you, Hector, and good morning, everyone. I will now take you through the group's P&L and capital performance in more detail. But before I begin, let me make 2 brief points. First, as sector and Rahul mentioned, the group's P&L includes 2 months of TSB's results following its consolidation in May. I will only refer to its impact were material. Second, as usual, we present growth rates in both current and constant euros. This period, the difference was not relevant. Turning to performance. As Hector mentioned, we are yet again delivering record results in the first half with solid commercial activity and structural cost efficiency, generating strong operational leverage. Revenue grew 6% on the back of a solid business activity, while cost declined even after incorporating TSB. Loan loss provisions were impacted by portfolio deterioration in Argentina reflecting sector trends in the country. Excluding Argentina, provisions were broadly stable year-on-year. The other results line includes motor finance provisions in Openbank Europe of around EUR 245 million, largely booked in the first quarter. As a result, profit grew 14% year-on-year in constant euros, keeping us firmly on track to deliver our guidance of more than EUR 14.1 billion of profit in 2026, excluding M&A. Total revenue increased 6% year-on-year, in line with the target we set for 2026. This growth was underpinned by deeper client relationships, higher levels of engagement and a total of 12 million new customers over the last 12 months. All global businesses contributed to revenue growth, which was mainly supported by another record period in CIB, up 16% and backed by growing client flows across business lines with a notable acceleration in global banking fees. In retail, on the back of a stronger customer engagement reflected in solid NII and fees and in Openbank, which performed well, supported by higher net interest income and fees. Payments & Wealth did well in fee-generating activities, customer inflows in wealth and strong volumes overall. Fee growth continued to outpace NII in line with our guidance, reinforcing the quality and diversification of our revenue base. The group's net interest income increased 6% year-on-year. The vast majority of our net interest income comes from retail and Openbank. But this time, CIB also contributed significantly to the overall growth, supported by capital efficient, high written activities, mainly in Global Markets. Additionally, NII was resilient in retail across most countries, driven by volumes and active balance sheet management. Openbank delivered solid NII growth, supported by higher volumes and margins, both in Europe and South America. On a quarter-on-quarter basis, net interest income was up 3%, excluding TSB for similar reasons, particularly in retail in Spain and Chile. By country, Spain delivered a particularly strong quarter with NII up 8% versus the first quarter driven by solid commercial momentum, improving margins and active balance sheet management. Brazil NII grew 2%, both quarter-on-quarter and year-on-year even as interest rates are normalizing more slowly than initially expected. All in all, this reflects a stronger and more resilient NII profile than anticipated in Investor Day guidance. As the benefits from higher for longer rate environment in most markets more than offset the more moderate contribution from Brazil. Net fee income increased 7% year-on-year, supported by customer growth, increased activity and a better mix towards higher value-added products, driven by our network businesses and on transformation. This is visible across the group. Retail rose 6% with solid performances, widespread across our footprint backed by customer growth. Openbank fees increased 6%, especially in Europe and Brazil, supported by new business volumes and higher insurance activity. In CIB, the sharp pickup in fees was driven by a strong global banking activity across markets, especially in CIB U.S. where fees grew 40%, up from already high levels last year, reflecting the success of our U.S. build-out initiatives. In wealth, fees rose double digits, supported by client inflows mainly in private banking, and we saw 8% growth in payments, driven by high activity levels across all business lines with total payment volumes increasing 10%. One transformation remains a key driver of our profitability improvement, leveraging our global platforms and connectivity to deliver operational leverage. This is reflected in our efficiency ratio, which improved year-on-year to 42.8%, supported by strong underlying business dynamics with revenue increasing and cost declining 1% year-on-year, down 5% in real terms. In Retail and Openbank, which are leading our transformation and represents 75% of our cost base, cost declined by 3% and even after incorporating TSB and as we continue to roll out our global platforms and revenue grew 4%, resulting in very positive operating jaws. In our network businesses, CIB Wealth and payments costs grew below total revenue and fee income, reflecting targeted investments in capabilities to drive capital-light growth, maintaining high recurrency levels. This excellent performance resulted in an 11% rise in net operating income, up from already very high levels last year. Looking ahead, we remain on track to reduce costs despite inflationary pressures. ONE transformation on our targeted cost management actions are the 2 levers that remain firmly within our control. Our balance sheet risk profile remains low with sound credit quality across our footprint even in a more complex environment, supported by prudent risk management and resilient labor markets in general. Having said that, metrics in the first half continue to be impacted by Argentina, reflecting sector-wide trends in the country. However, the cost of risk declined quarter-on-quarter, showing the first signs of stabilization as the impact of lower new production begins to feed through. Excluding Argentina, the group's underlying credit quality remained very solid. Loan loss provisions were broadly stable year-on-year and cost of risk improved 2 basis points, even after absorbing less favorable FX movements. This reflects the resilience across most of our markets, which more than offset the pressure we are beginning to see from a slower-than-expected rate normalization in Brazil, particularly in corporates and SMEs. Our nonperforming loan ratio remained low as the impact from Argentina was broadly offset by the contribution from TSB. Our NPL portfolio has collateral guarantees and provisions that account for almost 90% of its total exposure. Retail and Consumer represents over 90% of the group's loan loss provisions. In retail, cost of risk improved excluding Argentina with solid performances in key markets such as Spain and Brazil. In Openbank, cost of risk was stable, even with the impact of Argentina, supported by continued strong trends in the U.S. CIB was affected by a limited number of single names in Europe and Brazil. As of today, we are not seeing a significant deterioration in employment and credit quality remains stable. As long as labor markets remain solid, we would not expect material impact in credit quality. As resilience across most developed markets is expected to keep offsetting pressures in Brazil and challenges in Argentina showing the benefits of diversification. Moving on to capital. We delivered another quarter of strong capital generation. Our CET1 ratio stood at 14% after absorbing the 55 basis point impact from TSB. Excluding this impact, the CET1 ratio increased by 20 basis points, demonstrating once again our ability to generate capital while investing in profitable growth. We generated 27 basis points of net organic capital in the quarter driven by disciplined capital allocation to high return opportunities with a new business RoTE of around 21% and by a strong contribution from our risk transfer initiatives, which offset 31 basis points of risk-weighted asset growth. This strong capital generation keeps us on track to end the year in line with our 12.8% target after absorbing the impact from Webster in the second half of the year and further regulatory impacts during the rest of this year, leaving us close to the upper end of our 12% to 13% CET1 operating range. Hector, back to you.

Thanks, Jose. In conclusion, this has been our strongest first half ever, putting us in an excellent position to deliver our '26 targets with our performance running slightly ahead of plan. Our businesses continue to show solid momentum with ONE transformation improving both revenue and cost, driving strong operational leverage. As a result, we delivered record underlying profit, a robust capital position and double-digit value creation. Even excluding TSB, we are generating more underlying profit than last year when Poland was still part of the group. In summary, our result remains consistent and predictable with very positive trends that we expect to continue in the second half of the year. On the back of this strong first half, we remain confident in our delivering sustainable growth and creating value for our shareholders. Our financial Northstar is clear to deliver an RoTE above 20% by 2028. This is about execution with precision, disciplined capital allocation, ONE transformation and scaling our global businesses to accelerate value creation and that is exactly where we are consistently delivering. And now we are happy to take your questions.

Thanks very much, Hector. Let's begin the Q&A session. Operator, could we have the first question, please?

The first question comes from Francisco Riquel from Alantra.

Yes, I want to start with Spain particularly NII. If you can update on your guidance for the year, the mid -- the low to mid-single-digit growth because first half has been above expectations. And particularly also comment on 2 points here, which is loan growth, which I see is up 8%, but retail is just 0.6%. So strong CIB this Q2, how sustainable into the second half? And also on the ALCO bond portfolio is up almost EUR 20 billion in the first half of the year. You can update on your size and Alco strategy, size and duration. And my second question on Spain, if you can comment on the early retirement plan, just agreed with the trade unions. And if you can update on your cost-to-income target for Spain once this plan is fully implemented.

Hello, Francisco. Thank you for your question. So in Spain NII, I'm going to give you -- I mean, as you have seen, the first half profit is up 12% year-on-year. It's mainly driven by 4% revenue growth with an increase in active customers. It's very important that you see that we're growing 20,000 customers per quarter on a net basis, okay? It's very important to acknowledge the benefits of ONE transformation. Cost is down 3%, okay? And efficiency ratio improved 240 basis points year-on-year to 33.6%. So you're going to see -- what you're seeing is exactly the operating leverage that we promised on ONE transformation, which is more revenues and less cost. That is what is helping us quite a lot. Trading gains of around EUR 132 million year-on-year from the lower activity markets in CIB after a record first half in '25, the quarterly drop is driven by a one-off from stake valuation in Q1. LLPs fell by 1% with strong asset quality and the portfolio sales in retail offsetting single names in CIB and other results were around EUR 33 million worse even to the transformation cost, okay? On the Alco, Jose will tell you, let me talk about a little bit about the loan growth. So what we're concentrating in here is always profitability, okay? Where we see the margins and an opportunity. We see it on a weekly basis. It's a very dynamic process. And what we're doing is managing capital in such a way. So where we see opportunities we deploy capital. So that's exactly what we're doing and how you see the portfolio growing. And we started, for example, in the first half of the year, growing in mortgages in a really strong way because we saw an opportunity when the rates basically help us out in that sense. So with that, I will give it to Jose to explain you about the ALCO as well.

Let me split my question or take the question into 2 different parts. So the business, the client business. Obviously, rates went up slightly in the quarter, and we have negative positive sensitivity to rates, which obviously helped, particularly with a very good management of the client base. We have added -- we are adding around 5% new clients on an annualized basis, and many of these are transactional. So when you look at the cost of deposits, because we are growing transactional accounts, it's been -- has performed very, very well. So the first component of the very good performance in NII is the consequence of our commercial strategy. Second, the ALCO portfolio, we have EUR 60 billion of ALCO at a yield -- average yield of 3.3%, 6-year duration. This is a slightly more than we had anticipated because we are -- as I said, we are growing in current accounts more than expected, more than planned because of the success of our strategy of our commercial strategy. And because we want to keep the interest sensitivity stable around EUR 500 million per 100 basis points, we increased the ALCO portfolio to this EUR 60 billion. We plan to keep it at this level. We don't plan to increase the ALCO portfolio above this level. Right now, the interest sensitivity is below EUR 500 million is EUR 450 million, more or less, so we want to keep it at this point. And the third point is that is the other hedging strategies that we commented in the past are doing very well. The liability, repricing of mortgages or fixing the repricing of mortgages, all of these is also contributing very well. So the first half NII was up 7.7%, and we see the trends continue into the second half. So we see no reason to see a different trend in the second half relative to the first half.

[Operator Instructions] Next question comes from Ignacio Ulargui from BNP Paribas.

Thanks very much for the presentation. I just have 2 questions, if I may. The first one is on the activity levels. I mean we have seen a very strong fees and have highlighted in the presentation, strong activity across the board in retail, CIB most of the units. I just wanted to see how do you see that activity going forward, especially in terms of lending and deposit growth and was quite gurus to see strong retail deposit growth in the quarter. So if you could elaborate a bit more on the strategy in terms of covering deposits, I think that will be very helpful. And the second question is on cost of risk evolution. So for the first half, you have had a stable 115 bps, which is slightly above the initial target that you gave for the plan of 100 to 110 bps. You flagged in 1Q results on rate rated now that Argentina has been a big driver of that increase in cost of risk, how should we think about that in the second half, should we expect a normalization. And I would also like to -- I mean if you could give a bit of color on how should we think about the cost of risk in Brazil in the light of the comments that you made, Jose about SMEs and corporates being a bit more stressed given the level of rates? And also if you could elaborate a bit on the U.S. performance, which has been very strong in the quarter in cost of risk.

Okay. Thank you, Ignacio. So very big questions. Okay. Let me give you to you. First of all, the activity levels, we are on track to delivering. I mean I think it's important to say, as Jose said in his presentation, that one is a key profit generator and it's exactly what we are delivering, okay? We're exceeding I would say that we have a strong momentum within our business, and we are on track to exceed some of our targets set up for the year. And our outlook is looking better for the retail and commercial businesses in Europe as well as for Openbank. We continue to expect fees to grow faster than NII. This is ONE transformation at the mid- to high single digits, excluding the M&A. Also, I would say that on asset quality, we continue to expect a broadly stable outcome with the cost of risk around 1.15%, right? The acquisition of TSB and Webster will improve the cost of risk towards, I would say, 1% to 1.2% range over the '27, '28. In the second half, we expect some improvement in the cost of risk in Argentina so the harvest was the first quarter. If you remember, it came down a little bit on the second one, but it's still hitting us. But we have under controlled the portfolio. We stopped lending in Argentina. And actually, we are much better than our peers there. And we're going to see that the cost of risk in Argentina is being offset by the usual seasonality of the U.S. in auto. So that basically tells you how strong is the diversification in the group, helping us out in some places when some places get here by some things. So all in all, I expect in '26, PBT to continue to improve in H2 over H1. We expect an effective tax rate for the year around 27% and at the lower end of our usual 27% to 28% range. And as I said, we are on track to exceed our above EUR 14.1 billion net profit, ex M&A guidance for the year, all right? So in terms of where we see cost of risk evolution, I already explained you what do we see there, in particular in Brazil, I think it's important to say the following: in Brazil, what we have seen is a dynamics of the single names that I explained to you. But it is important to say that nonetheless, we see that the worst is over, my point of view. Why do I see that? Because we have been making really good decisions in terms of how the mix of the portfolio is going. So if you take a look at, for example, our CIB portfolio and the commercial portfolio, both of them are 30% in dollars and 40% in dollars, respectively, so what that basically tells you is that we're going much more to the exporters, trade finance and those kind of things. And that's why you see margins diminish a little bit in the whole overall portfolio. On the individual side, basically going much more to the affluent segment and concentrated in auto loans. So margins constructed a little bit, but the cost of risk, you control it a little bit more. So I don't see cost of risk basically getting worse than the 4.2% that we expect for the whole year. So I see that is where Brazil is going. So -- and then you asked me a little bit about the U.S., correct? So U.S. is a great example of the ONE transformation benefits. H1, the profit is up 26% year-on-year and EUR 989 million. Efficiencies improved 4 percentage points to 45.8%. RoTE is 2 percentage points to 13.2%, right. Q2 total revenue is up around 9% year-on-year, Q2 '26 fees are up 22% year-on-year, this is CIB and Wealth hoping in here. And Q2 '26 NII is up 4% this is driven mainly by CIB and the funding optimization in Openbank. If you remember, Openbank now, and I explained that last quarter, a whole -- I mean the whole of our funding is not anymore wholesale. It's funded by the deposits and SBNA and Openbank. So actually, that is helping us quite a lot. In terms of Cost. Cost of risk is 12 months fell 10 basis points quarter-on-quarter to 1.47. Remember that in auto, we always have seasonality. So second, sorry, third and fourth quarter will be higher on those, but we see that the labor markets are quite strong in the U.S., it has. So I mean we have a outlook on those.

Thanks, Hector. I think we left out in terms of the first question on early retirements. So just going back to PacoRice's question, apologies, Paco, Hector, would you mind addressing that?

Yes. So yesterday, we -- so basically, we signed yesterday, the agreement with the unions. I think it was a pretty good result. This is going to help us out to do what is needed to be done towards the end of the year. And I think this will help us in delivering exactly the ONE transformation that we told you about, and that's going to help us managing much better what we're doing in Spain all the way.

Thanks very much, Hector. The cost of that are already in the other results line within restructuring. Can we have the next question, please?

The next question comes from Alvaro Serrano from Morgan Stanley.

Kind of a follow-up on Brazil and another one on capital. On Brazil, I mean I take note of your comments around cost of risk factor. But INVO was a pretty good result for the group and regionally, Brazil in terms of revenues wasn't great either. So the question is sort of how much of that weaker fees and trading you think is due to sort of company-specific, i.e. potentially disruptions from implementation very or do you think it's purely macro and more importantly, what to expect on the revenue front over the next few quarters? And if -- as we think about Brazil, can gravity offset those revenue sort of headwinds as we look forward? And the second question is on capital. You've had another good capital print this quarter. I can't help but see that the model updates are now turning to tailwinds second quarter in a row. And from memory, I think you Jose, you've given us the guidance for the full year of 20 basis points headwinds, which I suspect needs updating. So I don't know if you can give us any color on that in and should we expect any regulatory headwinds from now on given the changes of ECB from ECB policy?

Thank you, Alvaro. I mean overall, Brazil, I believe that given current macro scenario, I think we have had a really good performance. As you can see, ONE is delivering and I believe there's still more to come, okay? So the macro environment, you know it quite well. The economy is experiencing a soft landing. Growth is expected to remain resilient in '26, we believe, and several discussions on sustainability of growth after the October elections with our best case is that Mr. Lula repeats. Activity continues to surprise on the upside. I mean, it's very supportive, as you have seen by strong fiscal stimulus, the resilient household consumption, favorable exports and still very tight labor market, as you have seen. Although credit is increasingly reflecting a restrictive monetary policy, the Central Bank has started a really gradual easing cycle, both tighter external financial conditions and stick inflation expectations are limiting the room for significant costs as you have seen. So the curve is basically flat at the levels that it is today. Our business in Brazil is important to say, represents 9% of the group loans and remains very resilient. Diversification is working. Higher rates and inflation in Brazil are offset by a strong performance in Europe and other businesses. So it's very important. Again, the model of the group diversification. NII increased by around 2% year-on-year is basically mainly driven by Openbank and CIB, as I explained to what we're doing with the mix of the portfolio. We are really focused on profitable products, profitable segments, and we need to lower the pressure from the ALM portfolio and we expect a similar run rate for the second half. Gross it's very important to take a look at this is ONE transformation. Cost is increased by 3% below the rate of inflation is higher, as you were saying, because of the higher IT costs related to ONE transformation and the gravity migration and as well as a little bit of Tavalisse. -- remember that ravages we send them to the custom -- to the cost. So now we have it in there. The cost of income ratio because of that is 14.5% in the half, and we continue to focus on improving the principality. It is very important. The transactionality as far as ONE transformation to lower the deposit cost, and this is helping us out. Nonetheless, the margin is less because of what I was explaining about how we're managing the mix on the portfolio. So this is very important to take into account, all right? So in terms of all provisions increased 3% year-on-year on the quarter. This is basically the single names and provisions from Openbank because Openbank, since we're increasing auto loans is actually giving us a little bit more of provisions. But nonetheless, the cost of risk remains stable at around 4.14%, and it will remain stable and no more than 4.2% for the rest of the year. So it's important to acknowledge the scenario that we have in Brazil. Integrate curves have shifted higher for longer, and we continue to believe that the business in Brazil can improve its returns in the next few years to around 20%, driven by the execution of ONE transformation. We also changed our new CEO came in on the sixth of July. So we have very good, I mean, outlook, and I think we'll do the right changes in order to make the business much more into ONE transformation and concentrate on that. On the capital, Jose.

Alvaro, the positive impact of what we call supervisory regulatory charges in the first quarter had more to do with the implementation of CRR as we updated some of our models. So it was not really related to direct supervisory actions. We still think that we will have around 15 to 20 basis points charge negative impact from supervisory actions in the second half of the year. So if you look at our capacity to generate capital and as we are improving profitability, we think that from the 12.5% post Webster, roughly that we are, at the moment, 14%, minus 150 basis points for Webster the roughly is 150. We think we should be in line or above our target of 12.8% by the end of the year. But yes, we would still expect some negative impact in the second half of the year.

Thanks very much. Could we -- operator, could we have the next question, please?

The next question comes from Cecilia Romero from Barclays.

My first one is on rate since Investor Day. We've seen rate expectations have generally moved higher across your core markets, so despite the potential headwind in Brazil, do you see the overall change of a net tailwind to the group's low to mid-single-digit NII CAGR target for the 2025 to 2028 period? And if so, could you give us some guidance of where within that range do you now expect NII growth to land and then my second question is on Mexico outlook. Mexico macro and policy backdrop has become more ascendant, particularly following the move towards the annual SNC reviews. Do you see risk to your Mexico growth expectations as a result of prolonged trade uncertainty affecting investment decisions. More recently also Nubank has received approval to operate as a bank in Mexico. How do you expect that to affect the competitive environment? And do you see any implication for pricing deposit gathering or customer acquisition across the sector?

Thank you, Cecilia. I would tell you that in terms of the guidance, I already explained a little bit the dynamics of the NII, how do we see the second half. I think that we're still in line to deliver what we said on the Investor Day in terms of the NII for -- on '28. I think that the group is very strong, also executing on transformation, as I said. So I think we're lined or slightly better given the dynamics that we have seen, but I mean, still a long way to go. And -- but I think that the group is basically doing what needs to be done to deliver on what we have said. So all in all, I think that I'm positive on everything. In terms of the Mexico competitive environment and everything that you have said, let me give you a little bit of an overview of what I believe in Mexico trends are going to be. First of all, the negotiations are going to start in the following 2 weeks. I do see that there are going to be hard negotiations, but the treaty has a particular clause in which basically says that either comes not an agreement between the 3 parties, the treaty will renew itself automatically for one more year and on and on until 10 years, okay? So I'm not so worried about that because I do believe that if they don't come to an agreement, they will basically repeat it one more time. My view is that Mexico needs the U.S. as much as the U.S. needs Mexico and also with inflation control, et cetera, they need the manufacturing capabilities and the low labor costs from Mexico. So I do believe that we'll come to an agreement. Also, it's important to acknowledge that Mr. Trump uses all these things as a negotiation weapon basically to submit the countries to whatever he wants. But I do believe that Mexican understands very well where it stands. I was in Mexico a couple of weeks ago. The dynamics are good. Consumption is picking up. So I see a better outlook for the second half of the year. Nonetheless, it's important to acknowledge that this is going to play out in some sort of way. On the other side, the competitive environment, I mean, as you know, we don't discuss competitors, but I see that the competitive environment is under control. And in what sense that I do believe that -- even though cost of risk went a little bit up in some of our peers, we have maintained the discipline to play on the portfolios that we believe are the right ones. We continue to see that there is a lot to do and a lot of profitable things to do in Mexico. We are deploying a little bit more capital to CIB and to the midsized corporates and SMEs because we believe it's the right place to do. Rates are basically at a very competitive level in Mexico and the exchange rate has sustained the drop that the Banco de Mexico has in terms of rates. So I do believe that the market is under control. What we have decreased a little bit is our participation in credit cards and personal loans, which we believe could damage not that they would damage, but they could basically not be as profitable as some of the others because of the cost of risk. So we've been cautious on those. But we've been increasing in terms of lending in auto and mortgages, which are much more secure and also a little bit on payrolls, all right? And so that's the dynamics and positive in Mexico. I think it's going to be second half that is going to be hard because of that. But nonetheless, I do believe we're going to be able to deliver our numbers and deliver the year in quite for the next few years. On the competitive environment, what I would say is that it's good that some of our competitors are becoming banks that makes the level fit the same for everyone. And I see a lot of competition for deposits, but I mean the prices that have been paid for time deposits are pretty big, but they are not -- I mean not substantial players are, I mean, no substantial movements of clients towards those higher-yielding deposits given some past situations in the market. So I mean, all in all, our deposit growth has been really good. If you see the funding cost of our Mexico franchise, is becoming much more competitive. And this is because ONE transformation again. I'm sorry to take so long to answer your question, is concentrated on transactional deposits, and this is exactly what we're doing, becoming #1 bank to our customers and that's why if you see margins are basically becoming much better in Mexico, as Jose explained before.

Let me add some color on net interest margin. The group's net -- or net interest income. The group net interest margin in the second quarter is the highest of the last 12 months. So obviously, we are structurally since -- we have structurally a positive sensitivity to rates basically driven by the positive sensitivity in Spain and now with TSB in the U.K. We have a negative sensitivity in Brazil, but rates in Brazil are stable or high. So this level of net interest margin is first explained by the levels of activity, which again, are doing very, very well, and we would expect that volumes are sustained as the activity with these clients remain. But obviously, the way we are structuring the balance sheet management, again, with an overall positive sensitivity to rates means that the net interest margin that we are seeing in the second quarter is explained by that. So looking ahead, looking into the next 3 years, it's very difficult. But obviously, the first year of the next 3 years, it's better. And clearly, the outlook for net interest margin for the rest of the year, as I said, for Spain, interest income, I see no reasons that these trends should change in the second half of this year.

Thanks very much. Operator, could we have the next question, please?

The next question comes from Ignacio Cerezo from UBS.

A couple of questions actually. First one is if you can give us a bit of an overview or some opinions basically on when do you think the head count numbers on a group basis are going to start falling down? So you're cutting cost actually in many geographies already, but the headcount numbers, I think they're stable quarter-on-quarter. They're still down year-on-year, actually, but a little bit of information on how that metric basically can be evolve in the future? And the second one is on Webster. I mean if you can give us an update basically on when do you think the closure of the deal is going to happen. And again, we've obviously heard the risks about the possibility of delays or even in extreme case, actually cancellation of the deal because of political interference, if you can give us your view basically about that.

Thank you, Ignacio. So I mean in terms of headcount numbers, what we're doing is, first of all, executing on transformation, and we're going through simplification, automation and you'll see that numbers are going to start being better on and on. I mean the last number I have seen on the group, I think it's 180,000 down from..

Yes, obviously, TSB is incorporated in the second quarter okay, I see. So even with TSB, if we look at December '25 to June '26, headcount is down over 2,000 people. And if we obviously take TSB into account, headcount is down 3% or 4% but the headcount reduction is the consequence of implementing ONE transformation. And as we've discussed in the past, this is a long-term trend that should continue going forward. So the focus is not the headcount reduction percent. The headcount reduction is obviously the consequence of implementing ONE transformation.

Thank you, Jose. In terms of Webster, what I would tell you is that yesterday, we got the authorization by the ECB to continue with the transaction. We have a very constructive engagement with all supervisors and the approvals needed to close the transaction during the quarter. Also, as you all know, we received the OCC approval, and we have just received, as I said, the ECB approval. The process is proceeding fully in line with our expectation and to close on the second half of the year, as we have said. So no news on that Ignacio.

Thanks very much. Operator, could we have the next question, please?

The next question comes from Andrea Filtri from Mediobanca..

The first is on capital. It looks like it's trending ahead of targets, and we're seeing signs from Brussels of potential easing of regulation. The first question for you is do you feel like you will have a capital reserve soon. And where are you on the Danish compromise approval? I seem to recall that you were expecting approval by June 2026. The second question is on your other provisions. They have been higher than expected. I wondered if this are reflecting restructuring charges to accelerate on transformation. And if it is so, can you quantify how much sooner you could hit your cost targets? Or if you could even go beyond your objectives?

Thank you, Andrea. So on capital, I will Jose will ask you in detail. In terms of the Danish compromise, yes, as you have said, we're expecting it in the next, I mean, a couple of months or so. I think that everything has been done or the governments has been completed and everything that is needed and is being submitted to the ECB so we're just expecting sooner rather than later, okay? In terms of other -- I mean, what you have seen exactly what you're saying in terms of ONE transformation and it's exactly when the execution is generating. What we are very concentrated on right now is on the simplification part. This is still a long way to go. If you look at the amount of products in the catalog, I mean, we started 3.5 years ago with 10,000, we went down almost to 4,000. I mean we still have a lot of things to do. A lot of automation needs to be done in some of the banks, eliminating the legacy. There is a lot of applications that we need to eliminate. So it's not an easy job. It's a lot of housekeeping and it's going to take us long time. So but nonetheless, you see this evolution coming in every single quarter, okay? And you will continue looking at this for the next until '28 and I believe this is a dynamic process. It's never going to end out because we always can get better. And this is exactly what we're doing. What I can tell you is that now it's within the culture of the whole organization, everybody is on track of delivering those, but simplification is of the essence in order to be able to be very competitive in the future. What I see is that, yes, we're going to get to the cost targets. And we maybe slide a little bit, I mean, let's see, but because some of the -- some of these situations, you get high inflation in some of the countries, et cetera. So I don't want to overpromise. I want to tell you that we will deliver exactly as we have said for '28. That would be my best guess, but I mean it's slightly positive, I would say. On capital...

No. Yes, the Danish compromise, we expect the approval in August, Hector said, so it should come any time now. Reality is there is much talk about easing capital requirements directly or indirectly for banks in Europe reality is that there is nothing concrete on that. In fact, on a daily basis, what we see is no change in the supervisory actions of the ECB. So I think it's premature to assume that all these, like you said, rumors or comments or talk will end up having a significant impact on capital for European banks. So far, we are not seeing it at all.

Thanks very much. Operator, the next question, please.