Banco Santander - Earnings Call - Q2 2025

Transcript

Raul Sinha (Global Head of Investor Relations)

Good morning and welcome to Santander's first half 2025 results presentation. We are delighted to be joined by our CEO, Héctor Grisi, and our CFO, José García-Cantera. We will start with the presentation and then come back for your questions. Héctor, over to you.

Héctor Grisi (CEO)

Thanks, Raul. Good morning, everyone, and thank you for joining Santander Results Presentation. We will follow the usual structure. First, I will talk about our results with a special focus on the performance of our global businesses. Then, José, our CFO, will give a deep dive on the financials, and I will conclude with some final remarks before opening up for Q&A. Before starting the presentation, let me remind everyone that we have announced an agreement to sell our business in Poland. Given that, until the deal is completed, we are still managing Poland as prior to the announcement. All figures in this presentation include Poland. We are approaching the end of our strategic cycle, well ahead of our plan.

Thanks to our disciplined capital allocation, which is further improving profitability up to 16% post-AT1, with our CET1 ratio at 13% and 88% of our RWAs generating returns above our cost of equity. After our latest inorganic transaction, we decided to accelerate the execution of our EUR 10 billion share buybacks and upgrade our share buyback target, so we now expect to distribute at least EUR 10 billion to our shareholders through share buybacks for 2025-2026, subject to regulatory approvals. Q2 was another record quarter, demonstrating the strength of our strategy and the resilience of our business model in a more challenging environment.

Our quarterly profit hit a new record of EUR 3.4 billion, making H125 the best first half ever driven by strong revenue growth across global businesses and our solid franchise of 176 million customers that continues to grow, having increased by more than 8 million year-on-year as we improve customer experience leveraging our global platforms. We achieved this as we continue to invest for the future through One Transformation, making excellent progress towards a simpler and more integrated model. This has helped us to improve our efficiency and increase our post AT1 RoTEE by almost one percentage point to 16%. Our balance sheet remains solid with a strong capital ratio, which ended the quarter at 13% at the top end of our 12%-13% operating range.

All this contributed to strong shareholder value creation, with TNAV plus dividend per share growing 16% despite the depreciation of some currencies across our footprint. Going into more detail on our income statement, our P&L remained very solid. We delivered strong top-line growth with revenue up 5% in constant euros, supported by NII, which increased 1% or 4% excluding Argentina, and also by new record fees, up near double digits, supported by significant customer growth and the network benefits we're capturing through our global businesses. Expenses grew below revenue, showcasing the positive effects from our transformation. We reiterate our target of lower cost in current euros in 2025. We are once again demonstrating the sustainability of our results with 5% growth in net operating income.

Our prudent approach to risk is also evident in our robust credit quality trends, with a cost of risk that is consistently improving year-on-year. As a result, profit grows by double digits year-on-year. Lastly, this quarter we had positive and negative one-off charges that were not part of our ordinary business and are fully compensated in the net capital gains and provisions line. All in all, as we have shown over time, our results are sustainable and less volatile than peers, even in an increasingly challenging environment. We are ahead of plan in executing our transformation, which continues to boost our operational leverage, structurally improving both revenue and cost performances. Simplifying and automating processes and our active spread management have already contributed 243 basis points of efficiencies since we started.

Our global businesses continue to drive the group's profitability and have delivered 104 basis points in efficiency gains. Our proprietary and global tech capabilities have generated 87 basis points in efficiency so far, surpassing the levels which we expected to reach by the end of 2025. As we said last quarter, there is still more upside over the medium term from our strategy for both revenue and cost. Retail and consumer, which represent 70% of our revenue, have significant upside as we progress on the implementation of common platforms across all our global footprint. The rest of our revenue comes from wealth, CIB, and payments, which are more fee-driven and will deliver additional efficiency improvements as we continue playing to our network strengths. All our global businesses delivered revenue growth while we improved group's profitability.

Customer activity continues to drive revenue growth across all businesses, double-digiting wealth and payments, and also strongly in CIB. Profit also grew at double-digit rates in every business except consumer, which remained broadly stable year-on-year and improved significantly in the second quarter. In terms of profitability, we're already above the target we set for 2025 in most of the cases, with an efficiency ratio that is improving at group level. The combination of our global businesses and our geographic footprint is a powerful example of how diversification works, putting us in a great position to navigate the challenges ahead. Higher-than-expected interest rates support some of our retail franchises, while other parts of our businesses, such as consumer and certain emerging markets, perform better with lower rates.

It is this diversification that allows us to deliver recurring strong results, consistent profitable growth, and value creation even under more challenging circumstances. Overall, the record first-half performance, the execution of our strategy, and our diversification keep us on track to achieve our full-year profitability targets. In retail, we are transforming the way we operate to become a digital bank with branches, combining cutting-edge technology with expertise and proximity of our teams. This combination is very powerful. It enables us to match the customer experience of digital-only competitors while offering personalized support and advisory through our branch network. Over the last year, we have gained almost 3 million active customers, increased 3% our deposits, and digital sales are up 16%. A key initiative is our new-based AI global CRM, already being deployed across the group.

In Spain, we completed the rollout of this CRM in the branch network during the quarter, boosting agent productivity by 23% in our assisted channels. On the cost side, automation is reducing operational complexity, allowing teams to focus more on customer interactions and value-added activities, and reducing manual activities to improve our cost to serve by 2% year-on-year. We are progressing in the rollout of our global platform. This quarter, we achieved a major milestone. We completed the migration of Gravity in Spain, following last quarter launch in Chile. This brings us closer to becoming the first major Western bank to operate fully in the cloud and has already resulted in tangible benefits. Response times are 15% faster. Running costs have dropped over 65% in Spain.

Deployment speed has improved from one month to just two days, and customers now enjoy a faster, more agile, and intuitive digital banking experience. Retail profit was strongly year-on-year, driven by solid revenue across most countries. Costs declined in real terms while credit quality remained solid. In a more demanding environment, NII grew 3% year-on-year, excluding Argentina, reflecting our focus on profitability and disciplined margin management. Fees rose 8%, supported by higher customer activity. As we said last quarter, by enhancing customer experience, reducing operational complexity, and fostering connectivity, we expect our transformation to continue driving customer growth and lowering cost in euros. In consumer, we continue to advance in our priority to become the preferred choice for our partners and customers by delivering the best solutions and increasing our cost. Competitive advantage across our footprint. We are converging towards platforms.

The recent launch of Openbank in the US, Mexico, and Germany has proven highly successful, attracting EUR 6 billion in incremental customer deposits. We are expanding and consolidating partnerships, offering global and best-in-class solutions integrated into our partners' processes. Zinia, our checkout lending platform, continues to gain traction, with more than 200,000 new customers onboarded in Q2. Consumer profit was relatively stable year-on-year in a context of lower car volumes in Europe, which began to show signs of recovery towards the end of Q2 and was supported by a solid cost of risk performance. Quarter-on-quarter profit grew 16%, driven by strong net interest income and fees, as well as solid underlying LLP trends, mainly in the US, which was also benefited from some seasonality. Costs remained flat, reflecting the benefits of our transformation. Our focus is clear. We prioritize profitability over volume.

We are currently originating at RoTEEs above 16%, well ahead of our bac kbook. At the same time, we're lowering funding costs. Retail customer deposits grew 10% year-on-year and now represent 62% of total funding, up 5 percentage points year-on-year. We are accelerating our transformation, which keeps bringing cost savings, and we actively manage capital to maximize returns, redeploying it from lower-return businesses to most profitable opportunities. As a result, we expect profit and NII to improve through the year as we continue to originate at attractive profitability levels, lower funding costs, and accelerate our transformation. In CIB, we are building a world-class business to better serve our corporate and institutional clients across our footprint while maintaining the same low-risk profile.

Number one, we continue deepening our client relationships by expanding our advisory capabilities in the U.S., building on our areas of expertise to accelerate growth across the group. As a result, we are gaining market share and more relevant roles in investment banking. In the U.S., for example, we have won 30% more deals than last year, with better roles in a market where overall deal count has fallen by 11%. Number two, we're strengthening our position in our core markets, leveraging our centers of expertise. A good example of this is our record half in global markets, with revenue of 25% driven by, first of all, client flows, the investment banks, investment, sorry, we made, and the collaboration with global transactional banking and global banking. Third, collaboration with other businesses is also a key growth lever.

CIB provides FX solutions to retail, product development, and structuring to wealth, and a full suite of products, including capital markets and advisory to commercial and auto. Even in a more challenging context in Q2, CIB delivered solid results with revenues up 9% year-on-year, leading to the highest H1 revenue on record, supported by a higher NII increase and fee growth across the business lines, and the exceptional performance of global markets in Q1. All this while we maintain one of the best efficiency ratios in the sector and a RoTEE above 20%, reflecting our focus on profitability and capital discipline. In wealth, we are building the best wealth and insurance manager in Europe and the Americas. Number one, in private banking, we remain focused on expanding our fee business and consolidating our global position through value-added solutions.

This quarter, we launched Beyond Wealth, our new global family office service, and opened a dedicated service center for non-resident customers in Spain. Number two, in asset management, we strengthened our position in alternatives with the launch of the Real Estate Co-living Opportunities Fund. Third, in insurance, which represents one of our most relevant growth opportunities, we're accelerating our strategy across two verticals: life and pensions, with new lines such as retirement in Spain and unit-linked products in Mexico, and property and casualty, expanding high-growth businesses such as health and Autocompara. These efforts have supported a 6% year-on-year growth in gross return premiums. Fourth, promoting connectivity and collaboration with other businesses, mainly CIB and retail, is also a major growth driver for wealth. Collaboration fees increased close to double digits. In summary, all this supports strong growth and high profitability.

Profit grows 24%, driven by strong commercial activity and double-digit fee growth across businesses. Efficiency improved 1.5 percentage points year-on-year and RoTEates close to 70%, making wealth an extremely efficient and profitable business for the group. Finally, payments, where we hold a unique position on both sides of the value chain. In merchant acquiring, we're among the largest players in Latin America, Spain, and Portugal. We are focused on expanding our global platform with a single API to serve all our customers, and we have already integrated several partners in Mexico, Argentina, and Uruguay. As a result, Getnet total payments volume keeps growing strongly, which is helping us to consolidate our presence in core markets. PagoNxt Payments is leveraging the best proprietary technology to deliver account-to-account payments processing, FX, fraud detection, and other value-added services.

Volume processed by our payments hub was four times higher than the same period last year. In cards, where we are amongst the largest issuers globally, with 106 million active cards, we continue to expand the business, offering best-in-class products to our customers. This quarter, we have introduced Pay Smarter in Spain, a new initiative designed to enhance the security, control, and benefits of credit card usage, encouraging greater adoption among our customers. We also continue to expand our joint value proposition with Getnet, now available in Spain, Chile, and Portugal, and following the recent launch also in Argentina. Payments delivered a strong quarter with double-digit revenue growth year-on-year, both in cards and PagoNxt, and cost under control, driving 47% profit growth. Finally, PagoNxt EBITDA margin improves to 29%, backed by Getnet, with one of the best ratios among our competitors.

We expect revenue growth, cost efficiency, and CapEx optimization to continue driving profitability in the coming quarters. Our strong operational and financial performance is improving profitability and driving double-digit value creation for the ninth consecutive quarter. Post AT1 RoTEE was 16%, up nearly 1 percentage point year-on-year, reflecting the high levels of the new business profitability. Earnings per share rose to more than EUR 0.43, supported by strong profit generation and fewer shares following the buybacks. As a result, we continue to grow our value creation, which, in terms of TNAV plus cash DPS, increased 16%, reflecting our disciplined capital allocation and, again, the impact of our share buybacks. Buybacks remain one of the most effective ways to generate shareholder value.

Yesterday, the board of directors approved a new buyback program up to EUR 1.7 billion against 2025 results, which, as the ECB has already granted the corresponding approval, will start to be executed tomorrow. Since 2021, and including this last program we are announcing today, we will have repurchased around 15%-16% of our outstanding shares. These programs have been executed at an average price of EUR 3.9 per share, providing a return on investment of approximately 20% to our shareholders. I will leave you now with José, who will go into our financial performance in more detail.

José García-Cantera (CFO)

Thank you, Hector, and good morning, everyone. I will go into more detail on the group's P&L and capital performance, but before I do that, let me make a couple of comments. First, this quarter, we have recorded two one-offs, obviously not part of our ordinary business, of the same amount but opposite directions.

A net capital gain of EUR 231 million from the sale of our stake in CACEIS. Amount that we decided to use to strengthen the balance sheet in Brazil. Second, as we always do, we present growth rates in both current and constant euros. We have a difference of around 5 percentage points between them, again, this quarter, mainly due to the depreciation of the Brazilian real and the Mexican peso towards the end of last year. As the CEO explained, we are yet again reporting record results this quarter for the fifth quarter in a row. Revenue grew 5% with a good performance in costs, in line with our objective for 2025. Cost of risk remains stable in the quarter, supported by robust labor markets and prudent risk management.

There are several positives and negatives in the other results line, but the concepts that explain most of the significant jump in this line year-on-year are the write-downs in PagoNxt and the temporary levy on revenue earned in Spain, which were accounted for last year. Finally, on the right-hand side of the slide, you can see the upward trend in profit, which grew 4% this quarter, on the back of understanding NII performance, which rose 2% quarter-on-quarter, cost control, an- better loan loss provisions. Total revenue increased 5% to EUR 31 billion, on track to meet the target for the year in a less favorable context than initially anticipated. This was underpinned by growth in number of customers and interactivity with us across all businesses.

All our global businesses contributed to revenue growth, which was mainly supported by another record half in CIB, up 9% year-on-year, driven especially by global markets and our growth initiatives in the US. We had 14% revenue growth in wealth, with record assets under management and strong commercial trends. Payments was up 17%, with double-digit growth in NII and fees, both in PagoNxt and cards, which was fueled by higher activity levels. We showed a strong performance in retail and consumer. In retail, particularly due to good NII and fee income in most countries, and in consumer, supported by net interest income growth, both in Europe and in the US. The group's NII increased 4% year-on-year, excluding Argentina. Almost 85% of the group's net interest income comes from retail and consumer.

However, this quarter, most of our businesses contributed to the overall positive growth year-on-year, which was supported by our active asset and liability pricing management, most evident in consumer, both in Europe and in the US, with improving loan yields and a funding structure with a larger share of customer deposits. Also in retail, especially in the U.K., Chile, and Mexico. Lower funding costs related to market activities in CIB, and the measures that we have been taking in the last few quarters to adapt the sensitivity of our balance sheets to pRoTEect NII on the new cycle of interest rates. A good example of this is retail, where NII increased across most countries and remained fairly flat in Spain and Brazil in a less favorable context for interest rates. As you know, we have positive sensitivity to rates in Spain and negative in Brazil.

Net interest income grew 2% quarter-on-quarter, primarily due to the performance of net interest margin, which improved in the quarter for the same reasons that I mentioned before, while it fell only 10 basis points year-on-year without Argentina. This performance is in line with our guidance of NII going slightly up in 2025 in constant euros, excluding Argentina, and slightly down in current euros, guidance that we reiterate. We generated another record half in net fee income, reflecting our transformation efforts to promote connectivity across the group, deploy high-value-added products and services, and provide the best customer experience. Net fee income grew close to double digits, well above inflation and cost, on the back of strong activity in general, customer growth, and a mix that is more weighted towards value-added products and services. Retail showed good performance across our footprint with solid consumer growth.

CIB grew 9%, up from record levels last year, after an excellent first quarter, and this second quarter was supported by the good performance in GTV, and as we continue executing our growth initiatives, particularly in global banking in the US. We had a 20% increase in wealth, with strong growth in all business lines, backed by record assets under management and a greater share of fee businesses. We showed double-digit growth also in payments, both in PagoNxt and cards, supported by high activity levels, as Getnet's total payments volume increased 15%, and cards spending rose 9% year-on-year. As we detailed in the first quarter, this year consumer is affected by the impact of a new insurance regulation in Germany and also by lower car registrations in Europe.

However, strong fee income growth in consumer US came mainly from servicing fees on auto portfolios sold under our capital light strategy, which is helping to partially offset this impact. Our strategic focus on insurance is also delivering tangible progress in consumer across Europe and LATAM, with rising penetration expected to translate into higher fee income generation as activity gains momentum. One Transformation is key to understanding why we're improving our profitability in every single market, leveraging the connectivity of our global businesses, providing economies of scale and scope. As a result, we expect sustainable improvements in operational leverage as we further implement the structural changes to our model. These improvements are already very evident, as demonstrated by the evolution of our cost base in absolute terms that translates into better efficiency levels, which are amongst the best in the industry.

In retail and consumer, which are leading our transformation, costs remain well under control, down 1% in real terms, even after absorbing wage inflation in some of the countries and upfront cost of rolling out global platforms. Retail and consumer represent 70% of our cost base, and we expect them to showcase the benefits of One Transformation going forward. CIB, wealth, and payments are more fee-driven. Cost in these businesses grew 6%. However, showing positive operating jaws with a double-digit fee increase, as I just explained. We had a strong cost performance also in the quarter, which was affected by Argentina. Excluding Argentina, cost remains flat, even after our investments on transformation and initiatives for future growth. As a result, net operating income rose 5% from last year, and our efficiency ratio improved to 41.5%. The best in more than 15 years.

As Hector said, we reiterate our guidance for lower absolute cost in current euros for 2025. The risk profile of our balance sheet remains low, with robust credit quality across the footprint on the back of strong labor markets and easing monetary policies in general. Loan loss provisions increased 6% year-on-year, reflecting our efforts to reduce NPLs and also some deterioration in Brazil in the context of higher interest rates and inflation. Excluding the provisions allocated to accelerating write-offs, the increase would have been just 3%. Credit quality continued to improve year-on-year, as reflected both in the NPL and the cost of risk. The NPL ratio fell further and is now at 2.91%. Remember that much of our NPL portfolio has collateral. Guarantees and other provisions that account for more than 80% of total exposure.

Cost of risk improved 7 basis points year-on-year and remained stable in the quarter at 1.14%. Despite proactive management actions to lower NPLs, as I just explained. In retail, cost of risk improved across all our main countries and was also slightly down in the quarter, with significant improvement in Mexico, compensating a weaker performance in Brazil. In consumer, cost of risk improved both year-on-year and quarter-on-quarter, with notable improvements in the US, where we are seeing a resilient customer behavior. Stronger used car prices, and stable labor market. We anticipate a stable cost of risk going forward, as we do not foresee a deterioration in employment levels. Moving on to capital, as you know, we have been improving our capital productivity and accelerating our capital generation for some time.

Our CET1 ratio increased to 13% and stands at the top of our 12%-13% operating range. This quarter, we generated 54 basis points of capital from attributable profit and asset rotation initiatives more than offset organic risk-weighted asset growth. Since the asset rotation typically concentrates in the second half of the year, we would expect net organic capital generation to accelerate meaningfully in the next two quarters. This enabled us to accumulate capital after compensating capital distribution charges for shareholder remuneration and AT1s, and absorbing other charges, including some regulatory headwinds, which this year will be lower than initially expected, as some of them have been postponed to 2026. As a result, we expect regulatory charges of around 20 basis points in the second half of 2025. These figures do not yet reflect the impact from our recent inorganic transactions in Poland and in the U.K.

We continue to deploy capital to the most profitable opportunities and leverage our global asset desks mobilization capabilities to maximize capital productivity. Our disciplined capital allocation delivered a new book return on risk-weighted assets of 2.8% in the quarter, equivalent to a return on tangible equity of 22%. That is above that of our back book. We are selling credit risk at a RORWA of approximately half of that figure. All these actions underpin our growing profitability and consistent capital generation. A critical capital redeployment is a top priority for us. Our recent organic transactions are a clear example of our consistent application of a strict capital hierarchy under which we prioritize organic profitable growth and ordinary distributions, while any bolt-on acquisition must be complementary to our strategy and deliver attractive financial results, at least in line with those of any organic investments, and exceed share buybacks.

We announced the disposal of Santander Polska at three times our initial investment, which is expected to generate around 100 basis points of capital. As buybacks remain one of the most effective ways to generate risk-free shareholder value, we decided to use half of this excess capital to accelerate the execution of the share buybacks that we announced at the beginning of the year and improve our target to at least EUR 10 billion for 2025 and 2026 earnings. We will deploy the remaining half excess capital into the acquisition of TSB at highly attractive returns while we enhance our strategic positioning. We are deploying capital at least at 20% return on investment capital. The deal will be EPS accretive from day one, and it will increase group EPS by around 4% by 2028. We are buying TSB at around five times earnings post synergies.

At the same time, TSB will contribute to the group with a low risk profile. It will accelerate Santander U.K.'s transformation, improve connectivity across the group, and increase our exposure to mature markets and hard currency. During 2026, we expect that organic capital generation will provide additional room to deploy capital in line with our capital hierarchy. That's all from my side. Hector, over to you.

Héctor Grisi (CEO)

Thanks, José. In conclusion, this is a great first half. We are well on track to achieve our 2025 targets that we reiterate. Good business dynamics supported a revenue increase backed by all our businesses, with fees growing in high single digits at the same time that we reduced cost in euro terms. Cost of risk improved year-on-year and is also in line with our target of around 1.15% at the end of the year.

We grew the CET1 ratio again to 13%, so it now stands at the upper end of our operating range as we profitably grew our business organically at group shareholder distributions and absorbed some regulatory impacts and one-offs. Our RoTEE increased to 16%. On track to reach our target of circa 16.5% in 2025. TNAV plus cash dividend per share is growing at double digits. In summary, very positive first half, which we expect to consolidate in the second part of the year to achieve our targets, even in an environment of higher uncertainty than initially anticipated. We anticipate revenue to continue evolving along similar lines, with NII growing slightly in constant euros, excluding Argentina, and fees increasing in line with the guidance we provided at the beginning of the year.

Cost should improve during the rest of the year as we continue to capture the benefits of our transformation, and we expect the cost of risk to remain stable, supported by resilient labor markets. The strength of our business model is clear. Our unique combination of customer focus, scale, and diversification, with consistent execution of One Transformation, delivers profitable, predictable, and sustainable growth and creates long-term value for our shareholders, our customers, and our teams. Before we move to the Q&A session, I would like to announce our next Investor Day, where we will deep dive on our strategy and goals for the next three years, which will take place in London on the 25th of February of 2026. Now, we will be happy to take your questions. Thank you.

Raul Sinha (Global Head of Investor Relations)

Thanks, Héctor and José. Let's move to the Q&A. Operator, could we have the first question, please?

Operator (participant)

If you wish to ask a question, please press star five on your telephone. And our first question comes from the line of Francisco Riquel from Alantra. Please go ahead.

Francisco Riquel (Partner and Head of Equity Research)

Good morning. Thank you for the presentation. I have two questions. The first one is NII in the U.K., which disappointed this Q2, particularly in deposit costs. And despite the structural hedge, if you can please comment on the Q2 dynamics and update your NII guidance for the U.K. going forward and how this could affect your recently revised RoTEE target for this unit after the TSB acquisition. And my second question is top-up provisions in Brazil. What is the problem here? What segments are the most affected? Despite the top-up provisions to accelerate the write-offs, the NPL ratio is approaching 7%. So you can please update on the outlook for NPLs and cost of risk in Brazil going forward. Thank you.

Héctor Grisi (CEO)

Thank you, Francisco. Okay. First of all, it's important to say that the U.K., as you know, is a work in progress, okay? I believe that one of the biggest opportunities of Santander is here. We have a big transformation underway here in the country, and we're very focused on profitability, okay? You have seen the deposit margin discipline that we have. We have delivered strong net operating income. And also better fees and focus on becoming the number one bank for our customer. It's important to say also we have had some tailwinds from the structure hedge that we have, and José can give you in detail exactly what's going on there. Also, it's important to acknowledge that we have a cost savings from transformation of around 3.5% that is showing off in the numbers. Twenty-five is going to be slightly up in NII.

Bottom line is impacted by the transformation cost, first of all, the branch closure mainly that we have done there as the program that we actually announced the first quarter, okay? We believe also that the cost of risk is basically going to normalize levels of around 8%-10%. It is important to say that our commitment to the U.K. is reinforced by the TSB acquisition, okay? That will contribute in improving our RoTE from 11% in 2024 to 16% expected in 2028, okay? Also, for 2025, we expect NII to be, as I said already, slightly up, driven by the focus on the margin management that we have already stated, the structural hedge that we have. What I said, I mean, cost should be down. I don't know, José, if you'd like to complement a little bit on the hedge.

José García-Cantera (CFO)

In the first quarter, there was a normally high volume of mortgages ahead of the end of the stamp duty exception. This was corrected in the second quarter. We also had substantial early repayments. When you look at margins, actually volumes, margins, they are behaving very much in line with what we expected, excluding this one-off from early repayments. Average volumes for loans were down 3% in the first half relative to the first half of last year, but net interest, the yield on loans, was up 28 basis points. Similarly, deposit volumes were down 4%, but cost of deposits was down 25 basis points. The improvement in net interest margin, client net interest margin in the first half relative to the first half of last year was actually 53 basis points from 1.66% to 2.19%. Very good net interest margin performance from customers.

Again, as Hector said, we reiterate the guidance that we gave for the whole year. Again here, let me reiterate, there is a transitionality or a very different behavior between the first quarter and the second quarter. Because we mostly have a mortgage portfolio, we are more affected in relative terms than others for the early repayments.

Héctor Grisi (CEO)

Thank you, Francisco. In Brazil, okay, despite the challenging environment, we will make meeting returns in Brazil. That's basically around the same returns we did last year. As you have seen, fees are going up quarter-on-quarter despite the one-off that we had in insurance. One Transformation is basically impacting and helping us out in many ways to manage much better the bank. Putting into perspective, Brazil is only 9% of our loan book, okay? It is very important. Also, diversification is helping out and is offset by the U.S. and Europe and the power that we have in terms of basically managing the books as we see fit.

It is important to say we are operating for profitability, okay? We are changing the mix on the portfolio given the environment, and we are concentrated on secure lending for individuals. Example, what we are doing in auto, where we are the number one lender in the country, and payroll loans, which we believe are an opportunity given the current environment. Credit cards, for example, we are diminishing what we are doing there. Instead of placing and doing 400,000 cards per month, we come down to 250,000, trying to be and only giving credit cards to our customers, okay? It is important also to tell you that cost of risk losses did not change, okay, relative to our expectations. It is very important to say that.

Given the macro environment, we wanted to be conservative and strengthen the balance sheet. That is why we took the gain from CACEIS to do that and to do the PMA. That is basically what it is. Nonetheless, we believe that we are going to be around the levels that we told you at the beginning in terms of cost of risk, basically at levels at around five or below.

Raul Sinha (Global Head of Investor Relations)

Next question, please, Operator.

Operator (participant)

The next question from Ignacio Ulargui from BNP Paribas. Please go ahead.

Ignacio Ulargui (Research Analyst)

Thanks very much for the presentation and for taking my questions. I have two questions, if I may. The first one is just looking to One Transformation, and I am sure that you will probably give us much more color on that during the CMD in February.

Just wanted to get a bit of a sense of what would be the potential direction of travel of costs at a group level going forward if you think that the trend of declining costs could be maintained going forward. The second thing is on capital. I mean, following José's comments in the call that credit capital generation would be stronger. I mean, you give us a sense a bit of how much that growth improvement could be and whether there could be a scope for incremental distributions in full year 2025 results beyond the EUR 3.2 billion announced from the disposal of Santander Polska. Thank you.

Héctor Grisi (CEO)

Thank you, Ignacio. Okay, first of all, I would tell you that costs remain under control. As you have seen on the first half. We're down 0.4 in euros year-on-year.

We reiterate our guidance to deliver lower costs in current euros in 2025 versus 2024. H1 costs down in absolute terms and cost growth remaining below, and revenue growth in costs in euros. As we see, short-term costs are higher as we invest. It's very important to understand what are we doing, okay? If I give you some particular examples, we're deploying Plard in Brazil, in Mexico, and in Chile. At the same time, we still have [Pampa], the old platform, basically running at the same time. Even with that, we are actually being able to lower costs because we're controlling costs in all levels. What this will tell you, this is a transitional year in that sense. Even with that, we're able to decrease costs given what we're doing. It's not just that. We're already deploying platforms in every single place.

For example, also the version 24 of our new app is being redeployed now in Brazil. At the same time, we are basically shutting down what we had before and doing the same in every single country. I believe that One Transformation is driving positive growth. The cost to income ratio improved to 41.5% in the first half of 2025, below the 42% target. I believe we continue to do so.e're very well under control on cost and basically working really hard to maintain it.

José García-Cantera (CFO)

In terms of capital, Nacho, organic capital generation, thinking about how much capital we are going to be generating from profits, it's going to remain at the same level, might be a little bit better in the second half. Risk-weighted asset growth tends to be lower in the second half because asset rotation initiatives tend to concentrate in the second half.

If you look at the first half, in the first quarter, we did around EUR 2 billion in risk-weighted assets, EUR 12 billion in the second quarter. We still are targeting between EUR 40 billion-45 billion. Most of the asset rotation initiatives tend to concentrate in the second half. Also, although we guided for around 60 basis points of regulatory charges this year, around 20-25 have been postponed to next year. Now we are looking at, let's say, around 40 basis points. We still have 20 left. With all of these, I think you have all the numbers to look at what the capital ratio could be by the end of the year. What we said, and we reiterate, is that excess capital above 13%. Subject to regulatory approvals and the board of directors, will be distributed as share buybacks. Again, subject to regulatory approvals and the board of directors.

Raul Sinha (Global Head of Investor Relations)

Thanks, Nacho. Could we have the next question, please?

Operator (participant)

Next question from Andrea Filtri from Mediobanca. Please go ahead.

Andrea Filtri (Managing Director, Head of Mediobanca Research)

Good morning and thank you for taking my questions. You're only 45 basis points away from your best-case scenario on One Transformation implementation. Does this mean that we have already seen the benefits of this transformation, or could you go below 41% cost income in coming years? If so, what is the next stage? The second question is on consumer, which is representing a drag to group RoTE. Why is that, and when will we see this segment no longer dragging down group profitability? Thank you.

Héctor Grisi (CEO)

Thank you, Andrea. First of all, I think that you're going to have a lot of fun in the Investor Day because that's exactly what we will be talking about in terms of One Transformation.

I really do believe that you're seeing the tip of the iceberg on what we're doing there, given that, as I explained to Ignacio, we're still basically running and deploying some of the platforms and running the old platforms at the same time. As I said, 2025, 2026 are transitional years. For example, Payments Hub, which is very powerful, and already, as I told you, I mean, a lot of our payments are going through there, are still running in parallel lines because, for example, the regulator in Mexico has not allowed us to close down transfer. I'm still basically running two platforms at the same time, the same with the credit card platform, the same in many of the different things that we're doing.

Once basically these platforms are finished and deployed in all the countries, you're actually decommissioning the old ones, decommissioning teams of FTEs that are basically doing manual processes, etc. Remember that transformation also is simplification. If you have seen, for example, product catalog in the group on front is basically down more than 40%. We'll continue to do so in the following years. We'll continue to lower products and simplify what we do. The backend is a little bit more difficult, but once, I mean, we are in runoff with some of the portfolios, this actually will help us also on the operation side because we will be able to decommission a lot more than we do today. All in all, just to answer your question, no. I think we're going to be able to deliver much more than we have in front of us today. In terms of consumer.

I don't know, José, if you would like to come into that one.

José García-Cantera (CFO)

No, I think. I would separate three components in consumer. Consumer includes Openbank that is doing very well. We already have $5 billion in deposits in the US, over $5 billion from 150,000 customers. The strategy in the US is working. We will be adding more products over the next few quarters to be a full-fledged bank, digital bank in the US with Openbank. That's going very well. In Europe, it has around EUR 20 billion in deposits and also capturing clients very well. Openbank is doing as expected, and I would say going even faster than we expected in the US. Auto US, Auto US is doing very well. You can see that the cost of risk is a lot better than we expected. We see stability in NII.

Obviously, as we do less EVs, we will see an expansion of NII. We have already seen that, but it will accelerate towards the end of the year and next year. Obviously, the consequence is that we will have to pay more taxes. Tax rate is still below 10% in the US, but it will gradually normalize, again, starting in the third, fourth quarter due to the impact of EVs. Next year, it should gradually increase. The weakness, and you're right, is in consumer Europe. This is due basically to the impact of rates. Although we have no sensitivity to rates in consumer Europe, this is a business that is very sensitive, highly sensitive to volumes. The car registration in Europe are down in most countries. We're suffering a little bit from volumes. If you look at quarter-on-quarter, cost of risk is already normalizing.

We are very constructive in terms of the returns, the path to normalization of returns in consumer Europe, quarter after quarter in the coming quarters. Lower rates will definitely help with volumes. We are seeing that already. Lower rates will help with cost of risk as well.

Raul Sinha (Global Head of Investor Relations)

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

Operator (participant)

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

Alvaro Serrano (Managing Director)

Hi. Kind of two follow-up questions. You've made a 16% RoTE in the first half. Obviously, the target for the full year is 16.5%. It's a step up. Maybe you can talk us through sort of big picture what's going to drive that step up. The follow-up, which I think might be part of the exchange, is around consumer. José. Hector, I've heard your comments around the medium-term outlook.

I'm wondering, that 10% return in consumer at the moment, how much is it dragged down by the launches of Openbank in the different countries, both in Europe and the US? I'm just wondering if there's a front book-back book dynamic there. The second question, also a follow-up on Brazil, on the provision side, when do you expect the peak in provisions? Obviously, rates are still high for the time being, but expect to come down early next year or late this year. When would you expect provisions to peak? Because there's still a bit of room until you reach that 5% cost of risk charge that you've guided for. Thank you.

Héctor Grisi (CEO)

Thank you, Alvaro. First of all, it's important to say that if you saw this second quarter, we're already at 16.2% in terms of RoTE, okay?

It is important to assess that it's also due to the change of the model that we're doing, becoming number one bank to our customers, because One Transformation is not just about cost. It's also about changing the model about how we manage clients. As you have seen, we have already increased tremendously the number of active customers, the amount of products that we sell to these customers. That's why you see fees, for example, in retail, you see fees numbers basically going 8% year-on-year. This is basically because we are selling much more products to our customers and penetrating that client base at the same time that we gather new customers. We will continue towards that, and that's helping us basically to go not just depend on the NII, but also to get fees and commissions that are helping us in the bottom line.

It's very important to understand that, and we do believe that we're going to be able to tell you and to get to the RoTEs that we indicated in the guidance. In terms of consumer, I think José gave you a pretty good explanation of what's going on there. It is important to say that also Manheim in the US has helped us quite a lot. It's very strong. It's up six points. I was looking at the numbers that I explained to you every quarter about delinquencies and also delinquencies above 90 days. We are repossessing no more than 65% of the cars. That's basically still far away from the pre-COVID levels that we were around 90%. We are looking at the different mix of the portfolio and how it's basically performing. We see, as José told you, that the worst is behind us in terms of that.

Also, volumes are getting much better in terms of the registrations that we see in Europe. I see that all in all, that is basically helping. Also, Openbank is helping us to get better margins. As you have seen, we already gathered really good amount in deposits on the U.S. It has been a huge success. More than 140,000 customers coming in, deposits about $5 billion. That is basically helping us to manage that and to fund that operation. We have a little bit of cost, yes, because of the deployment on that, but that will be basically amortized over the next few years. It is important to say that Openbank in the U.S. just started with the deposit gathering. We are going to have a full-fledged commercial bank towards the next few months in terms of where we are implementing that.

For example, in Germany or in Mexico, we have a full bank already operating there with very good, and I would not say in Mexico, with very good results. In terms of Brazil, what I could tell you about is we wanted, as I said, to be conservative, and that is why we basically did the PMA. We wanted to be conservative because we see what is going on in terms. It is important to understand the dynamics of the country. You have real rates that are nine and a half points. That is probably in the OECD, the largest real rates. We are talking about rates at 15% with inflation on 5.62, plus the spreads, etc. You can imagine that we have some SMEs and some mid-sized corporates that are suffering a little bit given those rates.

I hope that with basically rates coming down, we will be able basically to drop the cost of risk in one sense, also get better margins because we see that if rates come down to the levels we expect in Brazil towards 12%, we are going to be about 20% RoTE. In that sense, we believe that we are under control, that the worst is over now, and that we understand exactly how the portfolio is performing.

José García-Cantera (CFO)

If I may add very quickly on consumer, it is true that there is a, let us say, a game of production, right? Post-COVID, the profitability of post-COVID production was extremely high. Then it was significantly lower. Now the post-COVID production is coming to an end. The low production, the low profitability production of the years following COVID is gaining relative weight. As we produce, the new production is actually significantly higher profitability.

In the next few quarters, as the old low profitability production. Matures and we substitute that by the profitability, the production that we are producing today, which is significantly higher, we should also see much better returns in consumer. Also remember that consumer Europe has the Swiss franc mortgage provisions in there, which obviously is affecting results. Again, pre-tax profit in the U.S., Auto U.S. is up 42% year-on-year. Pre-tax profit in Europe is flat year-on-year. Again, despite these negative trends, the business is performing well. Truly, I mean, we are quite optimistic about the next three, four, five quarters to see a normalization of both cost of risk and profitability of the portfolio. No, in Brazil, when is it going to normalize cost of risk? If you look at the three-month cost of risk, it was 4.5% every quarter last year. 4.5%, 4.5%, 4.5%, 4.5%.

In the first two quarters of this year, it was 4.9%. We guided for something like between 4.7%-4.8%. We are slightly above what we expected. Obviously, rates at 15%. We did not think they were going to get to that level. They are going to stay at that level probably until year-end. More importantly, when you look at the NII in the context of significantly higher rates, we have been repositioning the balance sheet a lot for lower rates. When we look into 2026, the market expects rates to go down 250 basis points. The balance sheet today would react to that extremely well. We do not think cost of risk, as Hector said, on average will go above 5% this year. Again, the provisions we have taken using CACEIS. Capital gains is a post-model adjustment because we want to be conservative. Rates at 15% ahead of elections next year.

Again, BAU cost of risk is below 5% in the first half, and we think it will remain more or less at this level for the rest of the year.

Raul Sinha (Global Head of Investor Relations)

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

Operator (participant)

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

Carlos Peixoto (Senior Director)

Yes, hi, good morning. A couple of questions from my side as well. The first one will actually be related with the warehouse provisions at the corporate center. You booked EUR 98 million there this quarter. The previous one you had already booked EUR 99 million. I believe that those were related with NPL sales. I was wondering if this is also the case this quarter. Also, if you could give us some clarity, some visibility on what geographies those NPL sales relate to.

Also, should we expect this to become the normal quarterly run rate of loan loss provisions at this unit for upcoming quarters? Just going back to Brazil, if you could give us some view on what you expect and on what to expect in terms of NII evolution over the coming quarters, considering the risking of the portfolio you are mentioning, the fact that the volumes are down as well. How will that play out in terms of the final print for NII? Thank you very much.

José García-Cantera (CFO)

Provisions at the corporate center, as we explained and Hector explained during the call, these were taken to basically accelerate charge-offs to lower the NPL ratio, which is below 3%, 2.91%. We do not think this is recurring. We should not expect this to happen every quarter in the coming quarters.

This was a, let's say, a decision to accelerate charge-offs to bring the NPL below 3%. Do not expect the same level of provisions at the corporate center going forward. NII in Brazil. I just referred to how we have been repositioning the balance sheet for the rate environment that is going to come next year. Let's go a little bit in detail about the first half. Average balances for loans were up 5% year-on-year in the first half, and yield on loans was up 63 basis points. Deposits, and this is the key going forward, were up 8%. Demand deposits was up 6%, and time deposits was up 9%. Obviously, the deposits is where you see the sensitivity, and the yield of deposits was up 131 basis points.

Net-net, we had a customer margin that contracted 68 basis points year-on-year, despite which NII was actually up year-on-year in Brazil, slightly up. We have been working a lot on improving not only the quality of the asset side, but the quality of the liability side. There is what we think is where the gain is going to come in the coming quarters. Rates are at 15%. The market expects rates to go down 250 basis points, maybe to 12.5% by year-end. In 2027, we should see rates at around 12% on average. In our models, at 12% rates, the return on equity of the bank moves to 20%. We are quite confident that if rates are on average to 12% in 2027, the return on equity in Brazil will exceed or be at or exceed 20%.

Again, this is due to the work that we have been conducting in the last few quarters to improve the quality of the asset side, but mostly the quality of our funding structure and our deposits.

Raul Sinha (Global Head of Investor Relations)

Thanks very much, José. Next question, please, operator.

Operator (participant)

Next question from Ignacio Cerezo from UBS. Please go ahead.

Ignacio Cerezo (Equity Research Analyst)

Yeah, hi, good morning. Thank you for taking my question. I've got one and coming back, summarizing a little bit actually some of the questions my colleagues have done. If I'm doing the numbers right, actually your second half of the year on a group basis needs to be around 5%, 6% higher than the first half in terms of net profits to get to the guidance. If you tell us geographically, where is that growth going to come from?

Especially considering that, I mean, the currency headwinds seem to be compounding a little bit actually, and you have seasonality in the U.S. The second question is on the regulation. I mean, the 20 basis points you're postponing or shifting back into 2026. If you have any color, preliminary information basically on what is going to be the underlying regulation in 2026 over and above those 20 basis points. Thank you.

Héctor Grisi (CEO)

Okay, Ignacio, in terms of what you're basically asking in terms of where do we see basically the second half, I could tell you that first of all, I explained in detail already a lot of the details that we're doing in One Transformation, how we're focusing on basically becoming the number one bank to our customers. How do we see that?

It is very important to say that we have a really consistent track record of implementation in everything that we say, okay? Once, and that makes us confident that we will achieve our targets, as I said. Based on the macro outlook for 2025, we expect, first of all, to reiterate our guidance of EUR 62 billion in revenue for the year, despite the 5% headwind from FX translation that we have seen. On the first half, revenues are growing 5% year-on-year in constant currency, we spread this to growth and continue to the second half given by improving consumer revenue momentum. That's basically up mid-single digits. We see also continued strong growth in payments and wealth and also CIB. Remember that CIB had a second tough Q2 due to the fact that markets were basically after Liberation Day for eight weeks basically completely off.

That basically is helping us out because we believe that is not going to be the case on the second half. In retail, revenues up 1.6% in the first half, flat NII, but fees growing at 8%. What I said about One Transformation, very important. We're doing much more business with our customers. We're penetrating the client base. We expect that revenue basically to continue basically doing well. Maybe flat is for the full year, but we will continue to see growth in fees. At the country level, we expect Mexico growing revenue, high single digit. The U.K. up, low single digits. And offsetting low single digit declines that we see in Brazil and in Spain. All right? In consumer, we expect revenues to grow mid-single digits, both in the U.S. and Europe, driven by NII, which is also expected to be up mid-single digits, okay?

And in CIB, as I already explained, we continue to expect the growth to mid-single digits for the year. If the market basically is strong, that also maybe is going to give us an extra tailwind. In wealth, revenues were up 14% in the first half, and we expect low double-digit growth for the full year. That basically tells you 100% of what's going on there, no?

José García-Cantera (CFO)

Just one final comment. Remember that the other results line in 2024 was abnormally high. You already saw a substantial improvement in the first half. We would also expect a better second half relative to the year, to last year. Again, yeah, we are confident that we will meet our 16.5% return on tangible equity in the year. Absolutely.

Raul Sinha (Global Head of Investor Relations)

I think there's a question there.

José García-Cantera (CFO)

I think it's early days.

I think this 2025 basis points is the SME model in Spain that we need to recalibrate. Other than that, we see very little else at this point, but again, we need to wait to see the calendar of inspections, etc., by the ECB, which will come later in the year. I think for purposes of estimating capital, I would use more or less the same amount that we had this year. We'll see if we have a different guidance towards the end of the year. We'll communicate that. Today, I don't see anything different from what we saw in 2025.

Raul Sinha (Global Head of Investor Relations)

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

Operator (participant)

Next question from Chris Hallam from Goldman Sachs. Please go ahead.

Chris Hallam (Managing Director, Head of European Financials Research)

Thank you for taking my questions.

Hector, you talked earlier about the parts of the business in Brazil where you still feel confident versus where you're looking to pull back slightly in credit cards, I think. Is that a temporary phenomenon or should we assume that's the new normal? How would that feed into the NII growth algorithm in terms of volume versus margin? On the topic top-up in Brazil, I guess why now? Was there a specific sort of proximate cause within Q2 to trigger that? Aside from obviously the availability of proceeds from CACEIS. Then second question on the U.K. and the AXA headlines last week. I understand you already have a provision in place here, but it would be prejudicial to disclose the amount.

I guess in broad terms, is the potential delta on that provision, i.e., whether it would need to be sized up or down, material to the CET1 walk for 2025 or 2026? Thank you.

Héctor Grisi (CEO)

Thank you, Chris. In Brazil, it's not exactly a pullback. I mean, as we know, and I have explained basically in the past, we are very flexible in the way we manage our portfolios. We manage the portfolios as we see fit. What we basically started looking in Brazil was that open market was starting to be pretty difficult to manage. We decided basically to concentrate on our own customers and to just give credit cards to them. Open market, we will go back when we see basically a much better market, even though labor market is still strong in Brazil and the economy is doing much better than we have seen.

Nonetheless, I think it's important to be conservative at this point and move the portfolio when you have these high rates basically to other more secure things that, like I was telling you about auto and about payroll loans, which are what we call Consignado, which is much better in terms of cost or risk at this point. They would basically, exactly as you were saying, this NII volume versus margin because we have now basically investing in things that have less margin than we used to have when you basically have much more credit cards and unsecured personal loans. We will go back to them when we'll see basically the economy in a different way and we see rates starting to come down and a better macro scenario. This is exactly what we do and we manage the portfolio. Look, very active.

Our teams basically see pricing and they basically change the way we manage the portfolios on a weekly basis. It's important to say that that's the way we manage that. This, as you were saying, is temporary. I do believe that when market basically clears up and we believe that it's a strong thing, we will back into that and then margin could be a little better. Also, basically José explained to you that when rates basically go to 12%, our returns and the way we basically have positioned the portfolio will give us a lot better margin and a much better position and much better returns, as you have seen. In terms of the AXA situation. Regarding the U.K.'s court decision in relation to the claim. We disagree with the outcome and we are seeking to appeal.

We do not expect the net impact of the judgment to be material for Santander given the provisions already made and the potential legal actions available. It is important to say also that no customers have suffered a loss as a consequence of the claim brought by AXA or the judgment. Given this is an ongoing legal matter, we are not able to comment any further, unfortunately.

José García-Cantera (CFO)

Just specifically if the capital path is going to be affected by this. Look, our pre-provision profit is going to be EUR 37 billion, EUR 38 billion this year, something like that, between EUR 35 billion-EUR 38 billion. This is immaterial, really. Why now Brazilian provisions? It is because the capital gain happened right now. We think, given the level of rates, given we have presidential elections next year, we think we want it to be prudent. It is as simple as that.

Raul Sinha (Global Head of Investor Relations)

Thanks very much.

Could we have the next question, please, operator?

Operator (participant)

Next question from Cecilia Romero from Barclays. Please go ahead.

Cecilia Romero (Director, European Banks Research Analyst)

Thank you very much for taking my questions. I have two, one in Spain and another one on litigation. The first one in Spain, cost of risk is down quarter-on-quarter, but still running higher than peers. Given [backdrop] continued to be very supportive, how do you see Spanish cost of risk developing through the rest of the year? What is your view on the medium-term trajectory? In terms of Spanish NII, could you walk us through the expected dynamics in customer spreads for the remaining of the year? Given current trends with NII up quarter-on-quarter, do you now expect NII to perform better than the guidance of -5% for issue earlier? The one on litigation is on Mexico.

Mexico Antitrust Regulator has issued preliminary findings naming several banks in a potential case of fee fixing on the first credit card payment. Can you comment on the status of this investigation and whether it could impact your expectation for fees in Mexico going forward? Thank you.

Héctor Grisi (CEO)

Okay, I will go to basically, thank you, Cecilia. First of all, on the litigation in Mexico, we cannot comment on this point. There is no basically information about it that we can tell you. That one is as much as I can say. In terms of what we are doing, Spain's cost of risk, as you have seen, as you have said, is coming down. We are actually performing very well. The Spanish economy and the labor market are quite strong. We see that that will continue towards the end of the year.

We do not see basically any changes whatsoever on that. On the other side, actually, we see the market coming very strong. We see also good demand of credit on mortgages. We see credit cards going up, a little bit of consumer loans coming in. Nothing to report there. I think it is much better than we expected.

José García-Cantera (CFO)

In terms of NII, if I remember correctly, we guided for NII down in Spain 6%-7%. Obviously, NII is behaving better. Now we think it will do better than that, maybe down 4%-5%. We are still building the ALCO portfolio, adding government bonds at well over 3%. We bought some ALCO portfolio in the second quarter. The asset hedges are coming to an end. We are not hedging the repricing of mortgages anymore at this level of rates. Within rates are close or about to stabilize.

We obviously put all the funding floating already. The hedging is still some hedging coming from the ALCO portfolio, not a lot more though. The improvement is coming from cost of deposits. Cost of deposits first half this year relative to last year is down 30 basis points. Now cost of deposits is 67 basis points relative to 98 last year. Extremely good deposit cost management. That is what is going to drive the better NII performance we expect this year relative to the guidance we gave in the previous quarter.

Raul Sinha (Global Head of Investor Relations)

We have the next question, please, operator.

Operator (participant)

Next question from Peter Smith from Autonomous. Please go ahead.

Peter Smith (Analyst)

Yeah, good morning. Thank you for taking my questions.

Just to follow up on Spain, the volumes ex repos were weaker year-on-year in Q2 and also compared to the trends that we have seen in Q1 and remain below the market. Now that you have improved the customer spread, at what sort of level of customer spread would you need to see volumes pick up again to continue on an NII growth trajectory into 2026 and 2027? And then just to follow up on the provision on Brazil, I mean, with rates expected to be lower, there is obviously going to be a volatility on the elections to be managed. What would need to happen for the provision in Brazil to be released back into the P&L or to be used towards provisions in the future? What are the macro parameters that would need to improve? Thank you.

Héctor Grisi (CEO)

Thank you, Peter.

On your question on Brazil, it is important to tell you that we, as I said before, and José already explained, we do not see expected losses to change. Okay, we basically continue on the same trend over there. In terms of what we see in terms of Spain. [crosstalk]

José García-Cantera (CFO)

The increase in cost of risk in Brazil is not coming from individuals. Employment levels are very strong. The economy is doing very well. It's coming mostly from companies and the increase in Chapter 11 bankruptcies due to higher rates. Some of the higher leverage companies are suffering because of the level of rates. There is a limit to the deterioration in asset quality, obviously, because this only affects a very small portion of our balance sheet.

Again, with strong levels of employment, the ones we have today, and with the expectation of lower rates, it's because we believe clearly cost of risk will go down next year. These are the variables that really matter. It's really important to mention that the increase in cost of risk is not retail, it's not individuals or SMEs, it's mostly mid-size large companies that are having problems with interest rates.

Héctor Grisi (CEO)

Thank you, Peter. Let me give you a little bit of the dynamics of what's going on in the Spanish market, okay? Given the recent events and everything, we're seeing a drop, an important drop in spreads and in margins because of tremendous competition in the market, okay? We are being very, very disciplined in order to manage and to concentrate on profitability, okay?

It's important for you to understand that some of our competitors have decided to do mortgages, and I would say all the way down to [1.65]. We don't think that that's the right thing to do. We believe that the market basically is not profitable to do them at those levels, and we are being very disciplined in that. The volumes that we're basically doing are at much better margins than those. When are you going to see us back doing much more bigger volumes? When the spreads basically go to the right level. We do believe that the market would basically change and react to that and be more, I would say, more, the right word in English is, no, be more intelligent or smart in the way we're managing the margins.

In that sense, we have all the firepower, but we are basically expecting that the market will basically be much better. We're concentrated also on our big customers and in-house customers and taking advantage of that. Also, you can take a look at what we're doing in terms of fees and penetrating the customer base. What we're doing in credit cards, for example, volume in credit cards in Spain grew really strongly these past six months because we believe there is an opportunity in the consumer side, as I said. Even though also we see some of the SMEs basically coming back to the market. We are basically fulfilling that volume demand and also CIB with a lot of interesting opportunities. We are basically going back to the market in that sense.

I do believe that we could have much better volume, but we need a market that is smart and organized in order to be able to do that.

Raul Sinha (Global Head of Investor Relations)

Thanks very much, Héctor and José. This is the last question. This brings our call to an end. I would like to thank everybody for joining us on what is a busy day. If you've got any follow-up questions, the whole investor relations team is available at your disposal through this week. Thanks very much and have a good rest of the day.