Banco Santander Q2 2024 Earnings Call Transcript

Quartr
Provided by Quartr
July 24, 2024

There are 12 speakers on the call.

Operator

Good morning, everybody, and welcome to Banco Santander's conference call to discuss our financial results for the first half of twenty twenty four. 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. Hector Grisi and our CFO, Mr. Jose Garcia Cantera.

Operator

Following their presentations, we will open the floor for all and any questions you may have in the Q and A session. And with this, I will hand over to Mr. Grisi. Hector, the floor is yours.

Speaker 1

Thank you, Begonia. Good morning, everyone, and thank you for joining us. Today's presentation will follow the usual structure. First, I will talk about our H1 results in the context of our strategy. Then Jose will then review our financial performance in greater detail and then I will conclude with some final messages.

Speaker 1

As Begonia said, we will then open the floor for your questions. The main highlights of our results in the first half of twenty twenty four are the following. Q2 was another record quarter for Santander, which shows the strength of our strategy and the resilience of our business model. Profit reached BRL3,200,000,000 that's 20% above Q2 'twenty three even after the impact of EUR 450,000,000 of one time charges, net of taxes and minorities. Excluding them, recurring profit was €3,700,000,000 in Q2.

Speaker 1

Profit in the first half reached €6,100,000,000 also a record high, up 16%, supported by the strong customer revenue growth in all regions and global businesses. We continue to accelerate one transformation to become simpler, more automated and more integrated. As a result, our efficiency ratio improved by 261 basis points to 41.6%, the best in 15 years. And our return on tangible equity rose 137 basis points to 15.9% or 16.3% if we analyze the impact of the temporary levy in Spain. Finally, our solid balance sheet with a sound capital ratio, solid credit quality and a strict capital discipline helped us reach strong profitable growth and shareholder value creation, with TNAV plus dividend per share increasing 12%.

Speaker 1

Let's stop for a moment in our income statement. As always, we present growth rates in both current and constant euros. This quarter, there were no material differences between them. Since last quarter, we have reported variation in constant euros in all countries except Argentina, which is shown in current euros to mitigate the distortions from hyperinflation. In Q2, we have taken a prudent approach again and used an inflation adjusted exchange rate for the Argentine peso given the significant divergence between inflation and the official effects.

Speaker 1

Although it has little impact when comparing half years, distortions are more significant when we compare with Q1. Our P and L is strong from top to bottom. Revenue was all time high with record NII and fees supported by all global businesses and regions. 2nd, expenses increased below inflation and below revenue on good cost management, and cost has been stable for 4 quarters in a row. 3rd, we have reported net operating income growing double digit for 9 consecutive quarters, demonstrating the sustainability of our results.

Speaker 1

4th, loan loss provisions continue to normalize as expected. The highest profit ever, as I mentioned before, was achieved even after one time charges. These were 210 additional Swiss mortgage provision in Poland, reaching coverage of 100 percent, EUR 240,000,000 from the write down of our merchant platform in Germany and Super Digital in Latin America that will I will explain in more detail later on. Additionally, we have positive and negative one offs impacts in Brazil, which do not affect profit and have been netted in the underlying P and L. This, as you can see, is a strong first half of the year with solid commercial and business dynamics that already puts us ahead of our plan for 2024.

Speaker 1

As a result, we have upgraded some of our targets for the year. We have increased our revenue growth target to high single digit with better NII and fee income. We have improved our efficiency ratio target to around 42% as accelerating one transformation leads to higher operational leverage. And we have raised our ROTE target to above 16% versus the previous 16%. We are also confirming the rest of our targets for the year.

Speaker 1

Cost of risk is expected to remain stable at around 1.2% on active risk management and strong labor markets. As a reference, year to date cost of risk was 1.17% even with additional provisions that I just described in Poland. In capital, our CET1 ratio ended June at 12.5 percent with a strong organic capital generation in line with our target to be above 12% even after the Basel III implementation. One transformation and the operational leverage it brings are behind a record performance, structurally improving both revenue and cost performances. Simplifying and automating processes, plus our active spread management, have already contributed 266 basis points of efficiencies since we started.

Speaker 1

Our global businesses continue to push the group's profitability and have delivered 87 basis points in efficiency gains. Finally, our Property and Global Tech capabilities have generated 71 basis points in efficiencies so far. As we have often said, we are going back to basics, which supports value creation based on profitable growth. How? By focusing on offering customers the best products and user experience and by obtaining the operational leverage from our global platforms and common tech.

Speaker 1

This is reflected in the performance of our global businesses. Our Retail and Consumer businesses efficiency ratio improved by 4.80 basis points and 2.70 basis points, respectively. In CIB, we are building a world class business, leveraging our expertise to grow in the U. S, maintaining our risk profile. Revenue grew 6%, another record supported by the strong performance and client flows in the U.

Speaker 1

S. Wealth continued its strong growth, improving efficiency and profitability And in payments, where we managed over 100,000,000 cards in the group, we have significantly improved profitability. As a reminder, in Q1 of last year, we had a onetime fee from a commercial agreement in Brazil. Excluding this impact, payments revenue would be 6% up and efficiency would have improved by 113 basis points even after investing in the global platforms. In the coming 5 slides, I will review the advances on each of our global Let's start with retail, where we are working to become the number one bank for our customers.

Speaker 1

It is a great example of the benefits from 1 transformation. Innovation helps to offer the best customer experience. In Mexico, for example, our new digital processes helped onboarding time and led to a record 90,000 digital account openings just last month. Our common operating model across our banks, automation and digitalization frees up time of our people to focus on commercial activities. Dedication of resources to noncommercial activities has dropped 8% versus last year.

Speaker 1

Deployment of our global platform has continued. In the U. S, it has been successfully completed. Within the group, Gravity is already operational in Spain, the U. K, Mexico, Brazil, and Chile, and it is processing a number of transactions that is 20% higher year on year.

Speaker 1

Financially, we're extracting the potential from today's favorable conditions in our footprint as we benefit from our diversification. We carefully manage margins in the higher for longer rate environment in Europe and keep capturing the benefits from our negative sensitivity to rates in South America and while we achieve a strong capital sorry, a strong operational leverage across the group. As a result, our profit grew 35% year on year, RoTE up 430 basis points to 18.1% on the back of revenue up double digit and good performance of NII and fees with all regions growing, especially Europe and South America. Cost is well under control, down 4% in real terms, reflecting the structural benefits from our transformation and provision and cost of risk fairly stable at comfortable levels. In consumer, we strive to be the partner of choice for our customers.

Speaker 1

Our best in class global solutions are integrated into our partners' processes. For example, last year, we launched a new digital onboarding to pure direct auto players, which allows them to offer their customers the completion of their auto finance online end to end in very little time. We are progressing well in deposit gathering to increase NII stability and autonomous funding across the interest rate cycle. Deposits were up 14% year on year, supported by our digital solutions. We expect positive trends to continue helped by the launch of our deposit gathering platforms.

Speaker 1

Deploying global platforms is key to scaling our business, reducing cost to serve and improving profitability. In checkout lending, we recently launched Stoltman's loans with Apple in Germany through Sinea, which we are looking to spend to other European countries. Consumer had a great quarter on its operational leverage, which resulted in double digit growth in net operating income and a 4% profit increase in H1, with number 1, strong revenue, driven by positive commercial dynamics with higher volumes, mainly in Europe and Brazil, good NII performance and 27% fee growth from insurance. Number 2, costs falling 3% in real terms on the execution of our strategy and efficiency plans executed last year. And third, higher provisions, mainly Swiss franc mortgages and expected cost of risk normalization in Europe and the U.

Speaker 1

S. Volumes and good profitability levels of the new business makes us confident that consumer will end 2024 with a profit growth of around double digit even after the normalization of provisions. We are building a world class CIB business for our clients that leverages our strengths and global footprint to grow profit while maintaining the same low risk profile. We are deepening our client relationships and increasing our capabilities in the U. S, building on our areas of expertise to accelerate growth across regions.

Speaker 1

Our collaboration in the U. S. With the rest of the group is starting to pay off with several firsts. For example, we made our 1st corporate share buyback for a U. S.

Speaker 1

Company and we were appointed global coordinator for a U. S. Listed IPO for the first time ever. In Mexico, we are creating a significant partnership within the Mexico U. S.

Speaker 1

Corridor, leveraging our global markets and U. S. PAM build out initiatives, and these are just a few examples from a long list. As a result, revenue in CIB in the U. S.

Speaker 1

Rose 33% year on year. This strong growth reflects the benefits of our U. S. Banking build out initiative, which will become even more evident in the coming quarters. We continue to spend and strengthen our centers of expertise, including key industry groups such as chemicals, technology and paper and packaging.

Speaker 1

Our CIB business is capital light, very much linked to customers and with fees growing at a good pace year on year. Our active capital management continued to support greater origination and high profitability levels. In essence, CIB had great results, increasing revenue in H1 6% year on year, even after a record first half in 2023, making H1 the best ever, with fees growing at double digits and the vast majority of our growth coming from customer flows. Moving on to Wealth Management and Insurance. We continue to build the best bank private bank and insurance manager in Europe and the Americas.

Speaker 1

How? Number 1, by improving customer relationships through the best service and right solutions, resulting in double digit growth in private banking customers. 2nd, collaboration with other businesses, especially retail and CIB, which is a major driver for growth and allows us to capture network bandwidths. Collaboration fees increased by 12% year on year. 3rd, developing global platforms across all three businesses and digitalize our distribution and advisory capabilities to improve customer experience and promote growth.

Speaker 1

A good example of this is Autocompara, our auto insurance comparison engine that operates in 6 countries and which we are expanding to new segments and businesses. In summary, we're accelerating growth and maintaining high profitability. Attributable profit rose double digit on strong private banking activity in a favorable interest rate environment with total fees from all three businesses growing at double digit and costs topped slightly in real terms. Finally, efficiency improved 2 30 basis points year on year and RoTE rose to 3 50 basis points to over 80%. Finally, payments, where we have our unique positions on both sides of the value chain, 1 issuing where we manage more than 100,000,000 cards group wide and second in merchant acquiring.

Speaker 1

In merchant, we are the 2nd largest acquirer in Latin America and a market leader in Spain and Portugal with the right balance between growth and profitability. We are gaining market share in most markets as we strengthened Getnet's customer value proposition with new global solution. An example is dynamic currency conversion in Mexico, which has helped GetNet to become 2nd in Mexico with a 20% market share a 47% EBITDA margin in Q2. We continue to migrate significant volumes of payments to PagonEX global platform to leverage the group's scale. The transactions managed globally through PagonEX payments surpassed €1,000,000,000 per year during the first half of this year with 50% growth quarter on quarter.

Speaker 1

The rollout of Plard, our global cards platform, is on track. We continue to increase the number of debit cards managed in Plard at a good pace, and we're starting the migration of the debit portfolio. We plan to manage around 15,000,000 cards through Plart in Brazil by year end. As I mentioned earlier, we recorded one off charges in PagonEX from the write down of investments. 1 is the discontinuation of our merchant platform in Germany we announced in June as we are focusing on our current acquiring value proposition in our core markets, where we have a very competitive business.

Speaker 1

The other one is our decision to write down Superdigital, a natural step to promote the use of common platforms across the group and maximize operational leverage. These decisions will enable a more stable and profitable business, reducing fixed cost going forward. Excluding these impacts, underlying performance was very positive. Profit in payments was up 30% year on year on good revenue performance, costs falling in real terms while we invest in our common platforms and sound credit quality in cards. Pagonec's EBITDA margin improved to 20%, one of the best among competitors.

Speaker 1

We expect the consistent execution of our strategy, efficiency and CapEx optimization will continue to drive profitability in the coming quarters. Today, results show that our strategy has enabled us to deliver outstanding profitability growth in H1, with double digit shareholder value creation for the 5th consecutive quarter. RoTE was 16.3%, up 134 basis points year on year, reflecting the high levels of profitability at which we are originally originating new business. EPS rose to nearly $0.37 that's around 20% year on year and we delivered 12% growth in shareholder value creation, supported all by strong profit generation, our strict discipline in capital allocation and share write backs. We have repurchased around 11% of our outstanding shares in the last 3 years, returning around EUR 6,500,000,000 through buybacks and providing a return on investment of 19% to our shareholders.

Speaker 1

I'll leave you now with Jose to go into our financial performance in more detail. Please, Jose.

Speaker 2

Thank you, Hector, and good morning, everyone. Like always, I will go into a bit more detail in the P and L and the capital ratio. But let me start by making some general comments. The first one is that our record profits include, as Hector mentioned, dollars 450,000,000 from one offs coming basically from the write downs in PagoNEXT and additional provisions in the Swiss franc mortgage portfolio in Poland. We also had a one off in Brazil related to capital gain from the transaction we announced with Sodexo, but we used that amount to strengthen the balance sheet, so no impact on the bottom line.

Speaker 2

We achieved these results as our transformation continues to drive operational leverage with very positive momentum both in Europe and in Latin America at the same time. Revenue grew 9% with the highest NII and fee income in our history and costs were down slightly in real terms. As a result, operating income was up 14%. Provisions increased even after including the CHF 200,000,000 increase in Swiss franc provisions that we took in the quarter. On the right hand side, you can see the upward trend in profit quarter on quarter at 12%, which was driven by top line growth with lower cost and provisions fairly flat, as I just mentioned.

Speaker 2

Let me now spend a couple of minutes on the reasons why we're starting to use a new inflation adjusted exchange rate in Argentina rather than the official one. We have observed a significant divergence between the official exchange rate and inflation, and we have decided to follow a prudent accounting approach. The new exchange rate is a result of adjusting the official exchange rate with a differential between the inflation in Argentina and in the U. S. This is a very conservative approach and a much more conservative way of recognizing the actual value in euros of our results and our investment in Argentina.

Speaker 2

And this should mitigate the volatility that the currency might experience in the future, as you all remember, was the case in 2023. Following these accounting rules, we have recorded a full Q1 and Q2 impacts from this adjustment in Q2, which does not significantly affect the year on year figures, but it has significant impact and causes some distortions when we look at quarter on quarter. And I will try to show these differences in the coming slides. For instance, NII would have is dropping is down 4% in the quarter. But if we exclude Argentina, the group's NII would have gone up 2%.

Speaker 2

Something similar happens with fees. Instead of decreasing in the quarter or increasing 1%, they would have increased 3% and costs would have been fairly flat. If this exchange rate does not materialize, we would revert this adjustment and account for the results that we are not recognizing today. But it looks to us that this is a prudent, more conservative way of recognizing our investment and results in Argentina. There was a strong total revenue growth driven by customer revenue again this quarter, which made up more than 95% of total revenue.

Speaker 2

This strong growth was primarily supported by Retail. Retail accounts, as you know, for more than 50% of our businesses and is growing at double digits with very good performance in NII across regions and fee is also growing, especially in the Americas and also consumer, which is reaching good profitability levels in new businesses and a strong loan growth in Europe and Latin. Corporate Investment Banking also had a good quarter as revenue reached an all time high both in the quarter and in the first half of the year, particularly in Spain, in the U. S. And in Mexico.

Speaker 2

Also double digit growth in Wealth, as I mentioned as Hector mentioned, driven by solid commercial activity in Private Banking and in Asset Management. Payments also performing very well. Particularly, we exclude a onetime positive impact recorded in Brazil in the Q1 of 'twenty three, as you remember, which we explained and Hector just mentioned, where we had a one off from an agreement with Mastercard. And finally, the Corporate Center's higher liquidity buffer remuneration was offset by higher TLAC MREL issuances and the negative impact from FX hedging. Most of our revenue growth came from NII, which continued to increase in the quarter if we exclude Argentina, particularly driven by Retail, Consumer and CIB, which represented 95% of group's NII.

Speaker 2

On the slide, you can see that we are in this small box in red, putting the figure that we would have recorded if we had used the official Argentina exchange rate. So this is important. Keep this in mind and to show again that what we have decided to do is a prudent accounting of our profits coming from Argentina. NII rose 11% year on year, supported by all businesses and regions on the back of very active price management in Retail Europe, especially in deposits, also higher volumes and the benefits of negative sensitivity to interest rates in South America in Consumer South America in Retail South America and in Consumer, sorry, which is now very evident in Brazil, especially in Brazil and Chile and very good levels of activity in Corporate Investment Banking. In terms of profitability, we have improved net interest margin year on year, explained by higher yield on assets as we continue repricing our books, but also very good management of deposit costs, which more than that basically outweighted the pressures that we are seeing.

Speaker 2

It's true that the margin is expanding, as you can see, if we exclude Argentina or if we had used the official exchange rate. So overall, the margin management, pricing management on both the asset side and liability side is really strong. We are we see a slight deterioration, though, if we use our official exchange rate or our adjusted exchange rate, although it's not very significant in the quarter. Going forward, we would expect some marginal margin pressure in Europe that will be more than compensated by positive contribution from the Americas and our consumer business. In the context of low fee growth in general across the sector as a result of subdued loan demand, we generated another record quarter in fee income at €6,500,000,000 with solid growth all across the 5 businesses.

Speaker 2

Retail increased 3%, basically driven by Brazil, North America and Poland. Outstanding performance in Consumer on the back of very strong Insurance businesses. Corporate Investment Banking also grew from already very high levels in the first quarter in the first half of last year, especially in the U. S. Wealth, supported by very strong private banking activity and payments that, as we mentioned, was affected by the onetime fee recorded in Brazil last year.

Speaker 2

Structural efficiency gains are from our transformation program are very evident quarter after quarter. Cost income was 41.6%. The best level that we have reported for the last 15 years and one of the best in the sector is already better than the levels that we guided for 2024. Costs declined quarter on quarter, were very flattish if we exclude Argentina after having been stable for the last three quarters with revenue growing steadily quarter after quarter, improving and increasing operational leverage that we obviously expect to continue to have in the second half of the year and into 2025. Average inflation continued its gradual decline, down from 12% a year ago to below 4% this quarter.

Speaker 2

In this context, cost fell 1% in real terms year on year. Despite that, as you all know, we have some lag effects from higher inflation on salaries and other costs and our investments in transformation. By businesses, costs remain well under control in Retail, Consumer and Payments, which represent 80% of our cost base. And 80% of the increase, as you can see on the bottom of the chart, came from CIB, reflecting our strategy to reinforce our Corporate Investment Banking franchise. In fact, if we exclude this investment, costs in the rest of the group would have decreased 3% in real terms.

Speaker 2

Credit quality remained very much under control. Obviously, it's supported by a stable economic environment and our active risk management all across the group. Cost of risk was 1.21%. Remember that we look at the last 12 months. If we look at the first half of the year, cost of risk was 1.17%, even including the increase in the provisions for the Swiss franc mortgage portfolio in Argentina.

Speaker 2

So we are very much on target to reach the 1.2% for the year, and we reiterate that target. In the second half, we expect that trends in Consumer and Mexico will be closer to more normalized levels, but this will be offset by a better performance in Retail Europe and South America. Turning to capital and closing my section here. Our CET1 ratio remains at a very comfortable level, backed by strong organic capital generation and significant risk weighted asset rotation. This quarter, we generated 52 basis points organically, supported by our asset rotation initiatives to compensate organic risk weighted asset growth.

Speaker 2

We recorded 25 basis points charge for shareholder remuneration in line with our 50% payout. And finally, there was a 7 basis point negative impact mainly related to intangibles, the valuation of available for sale portfolios and others. There were no significant regulatory impacts in the quarter. We continue to deploy capital to the most profitable growth opportunities and expand our asset mobilization capabilities to maximize capital productivity. Our disciplined capital allocation has resulted in a new book return on risk weighted assets of 2.9% in the quarter, which is equivalent to a return on tangible equity of 23%, well above that of our back book at 16%.

Speaker 2

Our centralized asset management desk, which aims at optimizing capital deployment, is achieving outstanding results. In the first half, we disposed of an amount of capital equivalent of €30,000,000,000 in risk weighted assets at a cost of capital of half of that of the new originations. In addition, the onethree of our balance sheet that matures every year is being substituted by the more profitable new businesses at this return on tangible equity of 23%. The combination of these actions explain the expanding profitability and the increasing capital ratio. Let me turn it now back to Hector for his conclusions.

Speaker 1

Thank you, Jose. As our results clearly show, we continue to make good progress towards the targets we set for 2025 in our last Investor Day, thanks to our unique business model and the execution of our strategy. With the strong and increasing organic capital generation and execution of our capital allocation plans, further improving our profitability to above 16%. And by growing both profit and profitability sustainably, we have been able to deliver 12% value creation to our shareholders. We said it in our Investor Day, and I want to remind you again, we have entered a new phase of value creation for our shareholders.

Speaker 1

In conclusion, the benefits from the execution of our strategy are very evident: a strong growth in revenue with flattish cost and around 20% growth in EPS and the worst ever H1 profit with all time high NII, fees and net operating income backed by strong performance in other businesses and regions Sustained progress in our structural change to a simpler and more integrated model, leveraging the group's scale, is driving both high revenue and lower cost to achieve the best efficiency ratio we have ever reported in the last 15 years. Our rock solid balance sheet and robust credit quality are contributing to growth and double digit shareholder value creation. As a result, we expect to exceed some of our targets for 2024. We are upgrading our revenue growth target to high single digits, efficiency to around 42%, and as we deploy capital to the most profitable growth opportunities, we are improving our profitability target to above 16%. Our focus at Santander is to be reliable in providing returns that compound on an always increasing quantum of tangible book value consistently and through the cycle based on both business and geographic diversification.

Speaker 1

The progress over the last 10 years to simplify and align our model in all our businesses and now deploy our own tech stack is already evident and now depends on execution to continue to deliver on our primary target of double digit TNAV plus EPS growth through the cycle. And now we will be happy to take all your questions. Thank you.

Operator

Thank you, Jose and Hector. We can start the Q and A session now please.

Speaker 3

Thank you. We already have our first question from Sophie Petersen from JPMorgan. Please go ahead.

Speaker 4

Yes. Hi. This is Sophie from JPMorgan. Thanks a lot for taking my question. So my first question would be on the risk transfers.

Speaker 4

Did I hear correctly that you saw SEK 30,000,000,000 of risk weighted asset disposals in the quarter? And maybe you could just talk about the decline in risk credit assets. I see risk credit assets, especially in Spain, were down around 2% quarter on quarter, in digital consumer bank, minus 1% quarter on quarter. But in both entities, the loan book grew by 3% quarter on quarter. So how should we think about these SRTs or securitizations?

Speaker 4

And what will be the revenue impact going forward from securitizing some of the loans? And also related to that, if you could just remind us on the regulatory capital headwinds coming in the second half? And then my second question would be on Eberi. There has been quite a few press articles suggesting that you're looking to potentially IPO Eberi. Can you just remind us what the tangible book value per share is for the or tangible book value for these businesses?

Speaker 4

How much revenue do you get from Ivery? And what your kind of plans for Eberi is? Thank you.

Speaker 1

Thank you, Sophie. I mean, first of all, I mean, our policy basically has been to as Jose was explaining in detail to rotate the balance sheet as much as we can. This is basically a very important change for us given the high capabilities that we have to originate assets, okay? So this is basically helping us to rotate and also giving us a new basically, I would say, a turbocharger in the sense that with every single time that we sell something, we basically reuse that capital or redeploy the capital within the organization at a much better price. So that's exactly what we're doing and rotating the capital in a much better way.

Speaker 1

As Jose was explaining you, we rotate a third of the balance sheet every year. And since we're very focused on profitability, we're actually reinvesting better and better. And that's actually a new way of basically managing the balance sheet of the bank. Then Jose can give you a little bit of the details in terms of what you were explaining about it. In terms of regulatory capital, as we told you, our guidance is basically to be above 12% after regulatory charges etcetera.

Speaker 1

So we continue to basically hang on to that number 12% above 12% will be and as I said and Jose basically reiterated we're going to be above the 12% after Basel III as well. And in terms of the IPO of Iburi, we'll give you the details Jose will give you the details on that. Thank you, Jose.

Speaker 2

Hi, Sophie. First of all, the EUR 30,000,000,000 was risk weighted assets in the first half. So more or less 40% of this is SRTs, but the rest is other types of transactions like asset sales, hedges, etcetera. The cost of mobilizing this EUR 30,000,000,000 was around in ROTE equivalent, okay? We always look at ROWA, but just to use the same currency everywhere, in ROTE equivalent, the cost of mobilizing this $30,000,000,000 was slightly below 10%.

Speaker 2

And we reinvested the capital, as I said, at 23%. So there was at least 13 percentage points difference on this $30,000,000,000 in risk weighted assets. Dollars 30,000,000,000 in risk weighted assets is close to 4 $1,000,000,000 in capital times this 13%. So on an annualized basis, we generated increased profits with the same capital of around $500,000,000 We expect to continue doing this. The demand for private credit is significant.

Speaker 2

We have a very busy second half of the year. It's difficult to replicate the same figure in the second half of the year because of holidays, etcetera, but we expect to mobilize much more than last year. And as you can see from the figures I gave you, this is very profitable. Capital headwinds this year, we still expect 20 to 30 basis points in the second half of the year. Basel III, as Hector mentioned, fully loaded.

Speaker 2

And when we mentioned fully loaded, is fully loaded even taking into account those impacts that come in 2029, we will be comfortably above 12%, and the day 1 impacts will be very relatively small, as we mentioned before. And in the case of February, we are always looking at ways of managing the capital and maximizing capital usage. So there was some news that we are contemplated on IPO in April. Again, we are looking at all types of alternatives to maximize the capital. This is one of them.

Speaker 2

That doesn't necessarily mean that this will be executed. And again, this will be put as one of our several capital management initiatives that we have across the group.

Operator

Thank you. Can we have the next question, please?

Speaker 3

Next question from Ignacio Ulargui from BNP Paribas. Please go ahead.

Speaker 5

Hi, good morning. Thanks for taking my questions. I have two questions. The first one is on the revenue performance. We have seen a very good performance in Europe, probably a bit better than what we expected at least I expected at the beginning of the year.

Speaker 5

LatAm has been lagging a bit behind with Brazil being softer. How should we think about the revenue performance going forward in the second half? When you have upgraded the revenue guidance to high single digit from the 9% currently, So we expect second half in line with these levels, kind of getting a bit of a sense whether LatAm should offset the weakness of Europe that you have flagged Jose during the call in margin? And the second question is on the UK, if you could elaborate a bit what should we expect in terms of NII for the U. K?

Speaker 5

Looks NIMs are stabilizing. So try a bit of getting your thoughts on the outlook for the U. K. Thank you.

Speaker 1

Thank you, Ignacio. I mean, 1st of all, let me tell you, as you have said, revenue has been very strong, much stronger than we believed at the beginning. Rates have helped, but also the good performance of our different businesses. As you know, we're very focused on profitability in the way we're restructuring things and that basically is paying off, all right? I believe that, I mean, revenue will continue basically to give good results.

Speaker 1

I don't see that LATAM has a weakness. I see that, actually LATAM is going to be doing very well in the second half. And you can see also very good results coming out of what they're doing in retail in Brazil, okay? And also Chile is doing quite a good performance. Mexico, basically, on retail, we're changing the mix and that's why you see the flat NII on there, but I mean it will continue to give very good results.

Speaker 1

So we expect a very good second half of the year in terms of revenue. And in that sense on basically what you were asking about the U. K, U. K. Whispered a better second half.

Speaker 1

First of all, we see that the market is a little bit more rational. Competition has been much rational than we saw during the Q1. Q2 has stabilized. We also some of the strategies have done in terms of betas are paying off, okay? So I believe that all in all, U.

Speaker 1

K. Will have a much better second half of the year than we have seen. In terms of detail, basically, it's more rational behavior. As I told you, fees are not going to be doing that well due to the switcher campaign that we structured and both benefits will come over in the 3rd and 4th quarter much better than the way we basically saw it. And what you're going to see is also a very good cost control, because we have cost control initiatives coming into the U.

Speaker 1

K, which are going to make the business perform much better than we saw. I don't know, Jose, would you like to complement a little bit on the revenue side, but

Speaker 2

I think I'm sure that you will ask about NII. You mentioned that revenue in Europe is better than you expected. At the beginning of the year, we guided for a drop in NII in the Eurozone. We now see NII in the Eurozone, particularly in Spain, Portugal, etcetera, up mid single digits. Obviously, rates are higher for longer.

Speaker 2

So much better performance in NII. We have hedged a substantial amount of our balance sheets in the euro zone, basically through the ALCO portfolio, hedging the assets, particularly mortgages and also swapping our fixed liabilities into variable liabilities. And it means that the sensitivity of our NII in Europe going forward is going to be significantly lower than we had before. So as Hector mentioned, we expect fairly stable, maybe a slightly down NII in Spain in the second half of the year and next year. But at the same time, we continue to see good momentum coming from South America, Brazil and particularly Chile.

Speaker 2

So we are constructive on the future evolution of NII and revenue in the second half.

Operator

Thank you. Can we have the next question, please?

Speaker 3

Next question from Ivaro Serrano from Morgan Stanley. Please go ahead.

Speaker 6

Hi, good morning. Can I ask a couple of follow ups? On just wanted to caution the comment you've just made around mid single digit in Spain NII, that implies, I think almost 9% reduction half on half, which is feels a bit substantial. So I don't know if I've done my math very quickly wrong or if you can sort of add a bit of color on that. And then on the performance and fees in the U.

Speaker 6

S, could you give us a bit of color on the obviously very strong performance, but if you can maybe sort of give us some kind of color on split on is it ECM, DCM, just to perform an opinion of how sustainable it is going forward. If I can slip in a third, you've mentioned over 12% capital, but I thought the target was 12.5% at the end of the year. So can you just confirm that's the case and we should still expect the 20, 30 basis points regulatory headwinds? Thank you.

Speaker 1

Thank you, Alvaro. First of all, let me talk about capital. In capital, we have always said we're going to be above 12%, okay? And that basically has been the guidance. We're at 12.5% right now and we set as Jose basically reiterated that we're going to be above 12% even after Basel III fully loaded, okay?

Speaker 1

That's exactly the guidance. In terms of performance in the U. S. Fees, okay, the majority is basically the CIB business. The CIB is the one that is driving and also a little bit in terms of good performance in retail that we're having a little bit also in the U.

Speaker 1

S. But CIB is the main driver, okay? It's been growing it grew 38% year on year, 1.3% quarter on quarter. As you know, CIB business is cyclical, so we have pretty good mandates. The business is basically doing well and also a very good connection in between what we're doing with the U.

Speaker 1

S, as I explained during the presentation, with the business in Latin America and the business in Europe. What's happening and let me explain a little bit is some of the businesses that we used to do in terms of DCM that we wouldn't get because we wouldn't be seen as a dollar house were becoming 1 and you see us top 3 in the league tables right now in Latin America doing dollar transactions not just to the corporates but also to the governments. I mean when UMS did their transaction at the beginning of the year, dollars 7,500,000,000 we were one of the principal book runners in the transaction. So you're starting to see that because of the beef up that we did in the U. S.

Speaker 1

So that's starting to pay off. I believe that with the 4 teams that we added, I think which is going to complement the rest of the business and we continue driving fees up, but let's see what happens with the cyclicality of the business. On the other side, retail is also performing well in fees and we believe that it continued to do so over the rest of the year. In terms of what we gave to you in terms of Spain, okay, party performance, loans are starting to reprice lower at lower rates, but deposits betas are behaving very well. This is helping contain the cost of deposits.

Speaker 1

Also as Jose explained you in detail, ALCO volumes are helping and the lower cost of the hedging which were not in place before are now are in place. So it's going to help us. NII, as Jose said, is reaching its peak, but I expect NII to grow mid single digit in 2024, better performance than we expected at the beginning of the year. And it's also because of the higher for longer rates environment that we're experiencing, okay? I don't know if Jose would like to add something.

Speaker 2

[SPEAKER CARLOS ALBERTO PEREIRA DE OLIVEIRA:] Yes. In terms of details, Alvaro, no, I mean, it's first half against first half, NII in Spain is up 15%. So if we grew 0 in the second half, the year on year would be around 7%. So I don't understand where you get the minus 9%. If I go quarter on quarter, NII in Spain was started in the Q3 of last year, 1.74%, 4th quarter, 1.74%, 1st quarter of this year, 1.82%, 2nd quarter, 1.84%.

Speaker 2

4%. We would expect the 1.84% to be the peak and then slightly down in the second half, probably to very, very similar levels that we had in the second half of last year. And we expect to be able to keep that same level in 2025. In terms of capital, 20 to 30 basis points headwinds, taking into account that we generate 20 to 30 basis points BAU, you should expect our capital ratio to be basically at these levels by year end. The guidance of 12% is post Basel III fully loaded.

Operator

Thank you. Can we have the next question, please?

Speaker 3

Next question from Marta Sanchez Romero from Citi. Please go ahead.

Speaker 7

Thank you very much. I've got a couple of follow ups in the U. S. So you're still struggling to deliver positive jaws. When do you think things will turn around there?

Speaker 7

Do you think that we will see positive jaws in the second half of the year? In the U. S. As well, your P and L still remains pretty supported by tax credits. Can you help us understand how the tax line will look like in the next few quarters?

Speaker 7

And then

Speaker 5

if

Speaker 7

I may ask, do you think the new reporting is helping investors understand Santander better? Because judging by your low PE, I think not. So I would like to hear your thoughts there. Thank you.

Speaker 1

Thank you, Martha. Okay. Let me explain you a little bit what's going on in the U. S. If you look at by business, you're going to see that retail is actually having lower cost than it used to have because of the transformation, even with the strong investment we're doing in transformation.

Speaker 1

But we have done a really good cost reduction and we believe we're going to perform better. The yields are negative due to the fact that we're investing in CIB and CIB as you understand, I mean, cost a lot to do it. So if we're going to have a second half that is better, it's going to start looking better, but it's going to depend on the cyclicality of the CIB business and some of the still people that are coming into the team that will start to come in, in the next few months. As you know, there is a period of garden leave, etcetera. But the main reason is the investment we're doing in CIB, which by in any way is not creating a big investment bank or anything like that.

Speaker 1

This is basically, as we said, complementing the rest of the business that we have. Our size is not going to be huge. It's the size of a really small boutique, but it's helping us out to beef up and to help us in the remainder of the business. And you can see fees are starting to basically be up due to that fact, okay? In terms of the P and L, it's quite easy to understand.

Speaker 1

The DTAs are basically what we said last year that when we started doing the electric vehicles. I mean, we signed contracts with some OEMs that are generating these GTAs and that's why you see that the P and L is affected by that and it's going to continue due to the fact that we'll continue to be absorbing I mean that volume. So we have now 3 things and this is basically leases on electric vehicles that are creating the DTAs in the U. S, all right? And you're going to see that throughout the year.

Speaker 1

In terms of the new reporting, it's very important to understand what we're doing. The new reporting is helping us a lot in the way we are managing the business on a day to day basis, okay, because it's making us work together. It's making us spend a lot less. In the past, for example and let me give you a really stupid example. I mean, we used to have 10, 11 different apps in 10 different banks.

Speaker 1

Right now, we're just having 1 app being deployed in all the countries. For example, 1 app is being deployed. Today, it's being deployed in all of Europe. The last deployment we did was the U. K.

Speaker 1

And then we're deploying Brazil and then we will we're deploying also the U. S. So what happens is basically you use the same around eightytwenty and that's the goal that we're basically going through investing just once and those 80% common, 20% customization per each country. So that basically will enable us in the future through these global platforms to work much better in a much cheaper way. We gave you a pretty good example in what we're doing in acquiring.

Speaker 1

When acquiring when the acquiring platform was deployed in Mexico, it took us in 18 months to number 2. And you saw the results that I explained, I mean, how EBITDA is growing. And I showed you in the presentation that it's helping us quite a lot in terms of positioning ourselves to be very competitive and with really high margins in every single market. And it's just one platform, the one that is being deployed. Now this platform is being deployed down to Chile, is being deployed to Argentina and we will deploy it in Europe in the near future.

Speaker 1

So this is basically helping us to work together and to manage the business in a much better way. Then in terms of how do you see the businesses and the way they're reporting, I mean you're going start getting used to it because it's going to be a lot easier for you to understand every single business in the way we're managing it. We're reporting now, as you can see, the operational leverage that we're getting by working together in which revenue is going up, cost is staying stable and is giving us a really profitable run. So it's very important that you understand that. Also, let me give you a great example.

Speaker 1

In CIB, where we have been working together for a long time, the same FX factories that we use for Mexico, Brazil, Spain or the U. K. Are completely the same and it's the same product and we just made them once. So that basically tells you how we're going to be able I mean, how we have been able to make it a really profitable business with growing revenue every single year and with profitability at around 19% that I gave you. So this is exactly the points that we're doing and I believe that this will enable us to give a lot more value to our shareholders.

Speaker 1

There is no way we're going to give you more value if we don't work together and do things in a much cheaper way.

Operator

Thank you. Can I have the next question, please?

Speaker 3

Next question from Francisco Riquel from Alantra. Please go ahead.

Speaker 8

Yes. Thank you. So two questions for me. The first one is on NII in Brazil. You still maintain the guidance of growth in the high things for the year.

Speaker 8

Mid things would imply a quarter on quarter fall during the second half, if you think this could be the case or not? I mean, because select rates have been expectations of cuts have been pushed out. So if you can comment on the main drivers of the NII in the coming quarters and also update on the sensitivity of the NII to sell rates in Brazil? And the second question is about NII in the U. S.

Speaker 8

We have seen it's bottoming out in this second quarter, but I have also seen the deposits falling for a couple of quarters now. So if you would need to pay up for deposit gathering in the second half of the year or not, in this context, if you can also comment on the plans to launch OpenBank, what shall we expect there? Because when I look, for example, at the Digital Consumer Bank, the deposits are growing there by 20%, but net interest margin is still falling despite the shift to retail deposits. So you can comment also on these NII trends here. Thank you.

Speaker 1

Thank you, Francisco. Let me start with Brazil. First of all, as you have seen, I mean, very strong and solid numbers coming from Brazil. NII once again very strong quarter, up more than 3% and is up more than 22% in the year, okay? What's behind the performance?

Speaker 1

It's a combination of the healthy volume growth, the change in mix and lower rates, okay? It is true. 1st of all, rates outlook has changed. The market is expecting a smaller than initially anticipated rate cut by the year, by year end and this ultimately means that NII growth will be a bit less intense than what we thought at the beginning of the year. That's a fact, okay?

Speaker 1

Having said that, we still expect Brazil NIL to grow in the mid teens mark by the end of 2024. It's a good performance that should continue in 2025. And let me tell you that to take the opportunity that Brazil has delivered a 16% RoTE. We believe that the end of the year should end up between 2016 2017, a strong profitability improvement is not just relying on NII growth, but on the good delivery on fees also, the cost contention that we have had and expected cost of risk stable during the year. So I remain very optimistic in Brazil and the ability to continue spending the profitability as you have seen.

Speaker 1

In terms of Open Bank in the U. S, Open Bank will come into the U. S. With a deposit gathering facility towards September, October. Okay?

Speaker 1

We expect that to come. The first phase is deposit gathering and I believe it would be quite successful. We had a pretty good plan in place and then we'll come and we'll be improving the platform as we see fit. In terms of deposits, the deposits the transactional deposits that SBNA has had remained stable during the year. What is what you have seen the movement in deposits in the U.

Speaker 1

S. Is basically the deposits that we have in CIB, which are the ones that we decide on profitability, what's better for us or not. So sometimes because of profitability, we basically let them go and we move out as we see fit. So there is no problem into that and we will continue to see that working profitability towards every business that we do.

Speaker 2

One quick comment on DCB Europe margins and profitability. The new business we wrote in 2021 was extremely profitable. This was post COVID and we had historically high profitability levels. This year is going to stay this production is going to stay in our books for 3 years. So it's still in our books in 2024.

Speaker 2

It will gradually disappear between 2024 2025. The new business that we are writing in 2024 is at ROTEs of around 20%, road wash of 2.3%, 2.4%, which is much, much higher than 2022 and 2023 annual productions. So you should expect in 2025 a very substantial pickup in profitability in margins and in profitability in Consumer Europe because of this in and out of the different productions and the fact that there was an abnormally high profitability in the year following COVID.

Operator

Thank you. Can we have the next question please?

Speaker 3

Next question from Alvaro Fernandez Garajabal from UBS. Please go ahead.

Speaker 6

Hello. Good morning and thanks for taking my questions. I have 2. First, we assume you're aiming for the upper end of your RoTE target for next year. So that is 17%, which implies a meaningful profit increase in 25% versus 24%.

Speaker 6

So my question is, geographically, where is that earnings growth going to come from? And second, related to previous questions, we have seen revenues improving in the U. S. Over the last couple of quarters with volumes up, customer spread expanding and fees coming quite strong. So basically, how sustainable is this revenue pickup going forward?

Speaker 6

Thanks.

Speaker 1

Okay. Thank you, Alvaro. Let me start with the U. S. To tell you, I believe, I mean, the U.

Speaker 1

S. Revenue is going to continue to do pretty well. But the profitability is always the most difficult in the second part because of seasonality in terms of what happens to us in provisions. So what you're going to see is revenue continue to go up, quite fairly strong. Let's see how we do in fees, as I said, due to the cyclicality of the CIB business, but revenues will be doing fine.

Speaker 1

In terms of the seasonality, let's see how we do in terms of the provisions, but we believe and the indications that we have had in terms of provisions show us that they're coming better. The LTM numbers that we have in provisions for the U. S. Are much better than last year. So it's looking well.

Speaker 1

And so the U. S. Shall have a much better year than last year. In terms of the REPI and 2017, Jose, if you'd like to comment?

Speaker 2

Yes. Obviously, we expect profitability to continue to increase on the back of increased Sorry, what I was saying is that we expect our profitability to continue to increase on the back of a higher operational leverage. Our transformation program is delivering very positive jaws that we expect to maintain, particularly in consumer and retail in 2025. The negative the sensitivity to rates in Europe has been much decreased, as I mentioned before, and we should have positive tailwinds coming from NII in South America, both Brazil and Chile. So definitely, operational leverage is what we will continue driving increased profitability.

Speaker 2

In terms of cost of risk, no signs of deterioration. And looking into the next few quarters, we see no signs that we will require to increase our provisions going forward. So if you put all of this together, again, this means that our profits should continue to increase going forward.

Operator

Thank you. Can we have the next question, please?

Speaker 3

Next question from Benjamin Thomas from RBC. Please go ahead.

Speaker 9

Good morning. Thank you both for taking my questions. The first one is on Brazil. You used a €350,000,000 gain to top up your provisioning. I think that's the strategy you've adopted before, but how comfortable are you that you will not need to do further top ups in Brazilian cost of risk going forward?

Speaker 9

And are the top ups that catch up? Or can we assume that the top ups will mean a structurally lower cost of risk in Brazil in the coming years? And then secondly, in the UK, in the deck, you mentioned that 100% of your hedge income is already locked in for 2024. This suggests that either you do not have any maturities this year or you pre hedged some of your maturities. If you have been pre hedging, what proportion of 2025 structural hedge maturities have you pre hedged?

Speaker 9

And what rate did you look in at given that swap rates have been volatile? And do you expect the tailwind from the structural hedge will overwhelm the headwinds on NII in the U. K. In 2025? Thank you.

Speaker 1

Thank you. Okay. Let me go to Brazil, okay? First of all, it's very important to tell you that increase in provisions exclusively linked to the loan growth that we have in the country, okay? Cost of risk as you have seen is flat quarter on quarter, EUR 4.77 and credit quality in Brazil remains sound and solid.

Speaker 1

It's very important to understand that the recent vintages that we have are performing very well and no signs of deterioration. So it's performing better than we expected. It's very important to understand that we're also changing the mix a little bit on the portfolio. Just to explain you a little bit. For example, credit cards, where in 'twenty one we were making around 800,000 to 900,000 credit cards per month.

Speaker 1

Today, we're just growing by 400,000 credit cards a month and just to our client base. So the important thing and the big change is exactly that we're not going to react to the upper market, which was the one that hurt us quite a lot during 2022 and 2023. So that's exactly the change of mix that is helping us. Also, it's very important to understand that we're very focused on profitability and we have been very opportunistic and we used the proceeds of a corporate transaction to further reinforce the balance sheet at this point. And we reiterate that the 2024 guidance of delivering is a flattish cost of risk versus 23, okay, excluding the one offs.

Speaker 1

So that's what I see in terms of Brazil. In terms of the U. K, Jose, please.

Speaker 2

[SPEAKER JOSE MARIA ALBERTO PEREZ DE SOLAY:] So as you know, obviously, the strategy is to keep the structural hedge position in line with core deposits to protect the balance sheet ahead of decreasing interest rates. Following the recent increase in market rates and in order to protect the NII, we have accelerated the planned investments for 2024, amongst other measures. So the sensitivity we have today is to 100% decrease in parallel decrease in rates in the U. K. Today is £120,000,000 compared to minus £220,000,000 a year ago.

Speaker 2

So roughly, we have half of the sensitivity today that we had a year ago. The current hedge is structural hedge is GBP 114,000,000,000 compared with GBP 106,000,000,000 in December. So this is related to my comment before, with a duration of 2.5 years. In December, it was sorry, 2.5 years. In December, it was 2.4 years, and the yield is slightly over 2%.

Operator

Thank you. Can we have the next question, please?

Speaker 3

Next question from Carlos Peixoto from CaixaBank BPI. Please go ahead.

Speaker 10

Yes. Hi, good morning. So my first question was actually the follow-up in Spain. I'm sorry to introduce something on this again. But did I understood correctly?

Speaker 10

And the message was that in 2025, NII should be roughly aligned with the second half of this year, where you already expect to drop somewhat towards the mid single digits growth in the full year that you are mentioning? And then my second question would actually be on the U. S. EV's tax rebate that you have been booking. I was just wondering if you could give us some color on how the rebate works in the sense that or basically for how long is it in place?

Speaker 10

Is it something that we should also witness next year? And also is it this federal level rebate or something at the state level? And to what extent the potential changes in political changes in the U. S. Could drive that to disappear or not?

Speaker 10

Just to have an idea on the timeframe for which this is valid right now. Thank you.

Speaker 1

Thank you, Carlos. All right. I mean, I think in the Jose gave a pretty good explanation of what's going on in terms of how do we see things. It's important to understand what Jose explained you about what we're doing on the hedges, the ALCO position that we have that will help us throughout the year even if the rates come down. I think we're probably in the best ever position in that sense.

Speaker 1

And even as we say, I mean, the NII would slightly come down over the second half and then we'll see that we will have a pretty good run towards and let's see how rates basically behave. But I don't know, Jose, if you'd like to complement, but it's basically

Speaker 2

It's exactly what I said, Carlos. It's exactly what you said. We expect NII to go down slightly in the second half of the year. The year on year growth, 24% against 23% will be somewhere between 5% to 7%. And then next year, NII should be fairly flat relative to the second half of the year, which means that NII should be down slightly low single digits.

Speaker 2

Because again, and this is using the forward rate curves today. So if this was to change, obviously, we would need to update these estimates. But using forward curve rates today, that's our best estimate for NII in Spain next year. And as Hector mentioned, this is thanks to the substantial reduction in NII sensitivity that we have conducted in the Eurozone in the last year, year and a half.

Speaker 1

Thank you, Carlos. Okay. On the U. S, let me walk you through exactly what happens. Okay.

Speaker 1

First of all, let me tell you that it's federal, okay? We don't know if this is going to be sustained, if there is a change of government in the U. S. Or not. I mean, I don't want to speculate on that one.

Speaker 1

Exactly what happens is every single time we do a lease on an electric vehicle, we buy the vehicle in the bank. Okay? So what you see is basically a situation in which we own the vehicle and then we get the cashback or the tax credit and you show the cross credit in 1 lump, okay, during the month in which we do that, all right, to be exactly how it goes. So you don't see the impact in the revenue, but the impact you see it in the taxes. So that's exactly how it works.

Speaker 1

I don't know if I'm being correct of I mean if I'm being clear in the way I'm explaining to you this, but it's exactly how it works, all right? So what we have done is that we have a program, what we have signed with the OEMs that we're doing this for, depends on also the capacity that we have to absorb those DTAs because this is not unlimited. This is not, I mean, we have to have depends on the balance sheet that we have and we have calculated the numbers exactly that we can absorb and this is exactly what we negotiate with the OEMs. I don't know if you understood in the future or not. Hopefully, it continues to be

Speaker 5

like that.

Speaker 2

Okay. Okay.

Speaker 1

And we don't know if it's going to happen in the future or not. Hopefully, it continues to be like that.

Operator

Thank you. Can we have the next question please?

Speaker 3

Next question from Miruna Quirea from Jefferies. Please go ahead.

Speaker 11

Good morning, Geptor. Good morning, Jose. Thank you for taking my questions. I just have a couple of follow ups please on points we touched on before. Firstly, in the U.

Speaker 11

K, your NII was slightly up quarter over quarter in Q2. So just wondering how you see this progressing from here? And is it fair to say that Q1 was probably the low point on NII? And it should start building from here supported by the hedge? And what is the shape of this into H2 and also into next year?

Speaker 11

Secondly, just a clarification on your U. S. Business. You were talking about some seasonality into the second half of the year in provision. Could you please explain what is driving this seasonality?

Speaker 11

And then lastly, for Brazil, also taking into consideration your comments about changing the mix of your business, when do you expect to see a full normalization in cost of risk? And around what level would this normalization be? Thank you.

Speaker 1

Thank you. Okay. So as I said in the U. K, we see that we're going to have a second half better than the first half, okay? Market is more more rational both in the margins and in the betas.

Speaker 1

And on top of that, cost as I said is going to be slightly better than the first half of the year. Q2 NII is showing signs of improvement, okay? And as I basically explained and we see that betas are not going to go up. So that basically will help us. In terms of revenue, we see mid to single digit decrease.

Speaker 1

In NII, down mid single digits versus last year. And fees down low double digit due to the fact that I was explaining about what we're doing with the switcher campaign and the higher cashback. You're going to see that it's going to be much better in 2025 because exactly we're preparing the bank towards that. Also we're very focused on profitability. It's very important that you understand that, okay?

Speaker 1

We're not using capital below our cost of equity. So we're being very tough on that and that's exactly how we manage that. And then, Jose, I would like to

Speaker 2

Yes. Sorry, one quick comment. The mortgage dynamics in the U. K. Seem to suggest that margins in this business will pick up substantially from the Q4 of this year into next year, just as an additional comment.

Speaker 2

Brazil cost of risk, we still believe the cost of risk this year should be somehow below cost of risk last year. Remember that when you look at cost of risk quarter on quarter, it was a substantial increase in the 4th quarter when we look at year on year ex the Q4 and we look at cost of risk for the full of 2024, we would expect to see an improvement in the cost of risk. So year on year, because the Q4 will come out in the Q4 of this year, you should see the most significant improvement in cost of risk in the Q4. And then provisions in the U. S.

Speaker 2

Are normalizing, cost of risk this year should be somehow around 2% or slightly below 2%.

Operator

Thank you. Can we have the last question, please?

Speaker 3

Last question from Alberto Nigro from Mediobanca. Please go ahead.

Speaker 5

Yes. Thanks for taking my questions. I have just a few follow ups. So the first one is on U. K.

Speaker 5

If you can give us more color on the contribution of the U. K. Structural edge in the second half of this year and in next year? And the second one is again on Brazil, following your comment on the change of the loan mix, should we expect a normalization of the cost of risk in the next year and see an absolute decline of total provision next year? Thank you.

Speaker 1

Okay. In terms of Brazil, we're changing the loan mix, but we are very flexible and very dynamic in the way we change the loan mix over there depending on what we are seeing and how the vintages are behaving, reacts If inflation is coming down and we see the rates coming down, we might change the mix again and we might be a little bit more aggressive. And I couldn't tell you up at this point what are we going to do because we revised the strategy every single month of what we do and also the pricing, okay? So I don't know what the mix is going to be in Brazil in 2025, but I must tell you that we're working in a very dynamic way. This is a very dynamic market and you need to be on top of it, all right?

Speaker 1

So I couldn't tell you at this point, but I mean everything basically is and we do change the mix to sustain the cost of risk at the reasonable levels and that's the intent that we have in order to manage that. All right?

Speaker 2

So U. K. NII, I think I gave you all the details to calculate that. I gave you the maturity, the rates, the amount and everything else. In terms of cost of risk in Brazil, rates this year are expected to stay at 10.5% by year end but to drop significantly next year, and that should help.

Speaker 2

In addition to the structure of the balance sheet, lower rates next year in Brazil will help not only in terms of NII, but also cost of risk. It will be a gradual improvement. We need to see exactly how we will build the business in 2025 in Brazil, but definitely lower rates should help.

Operator

Thank you, Jose. Thank you, Hector, and thank you all for your attendance. And if there are any further questions,

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Earnings Conference Call
Banco Santander Q2 2024
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