Banco Santander - Q3 2023

Transcript

Begoña Morenés (Global Head of Investor Relations)

Good morning, everybody, and welcome to Banco Santander's conference call to discuss our financial results for the first nine months of 2023. Just as a reminder, both the results report and presentation that we will be following today are available to you on our website. Let me just highlight that during the presentation, when we refer to global and network businesses, we are following the definition which was given during our Investor Day last February, as the new reporting and full management of the group through global businesses will begin in January 2024. I am joined here today by our CEO, Mr. Héctor Grisi, and our CFO, Mr. José García Cantera. Following their presentations, we will open the floor for any and all questions that you may have in the Q&A session. If you would like to ask a question, please press star and five on your phone.

With this, I will hand over to Mr. Grisi. Héctor, the floor is yours.

Héctor Grisi (CEO)

Thank you, Begoña. Good morning, everyone, and thank you for joining us. Let me share with you what we will focus on today. First, I'll talk about our nine months results in the context of how we are progressing with the strategy we outlined at our Investor Day. José will then review our financial performance in greater detail, and then I'll conclude with a few closing remarks. As you can see, we had another strong quarter, demonstrating the strength and resilience of our unique business model, even in times of market volatility, as well as a solid execution of our strategy. We delivered record profit of EUR 2.9 billion. That's an increase of 20% compared with Q3 in 2022. That's 26% in constant euros.

Profit for the first nine months of 2023 was EUR 8.1 billion, up 13% in constant euros, driven by strong customer revenue growth. Revenue increased by double digits year-on-year, supported by all global businesses and all our regions. Commercial activity remained solid. We added 9 million new customers in the last 12 months, bringing the total to 166 million. We continue to advance towards a simpler, more integrated model through our One Transformation, which is leading to efficiency improvements and growth in profitability. As a result, our efficiency ratio improved 1.5 percentage points year-on-year to 44%. Our return on tangible equity rose 126 basis points year-on-year to nearly 15%, while our earnings per share improved by 17% year-on-year, supported by profit growth and share buybacks.

We further strengthened our balance sheet, generating capital in the quarter, even after deducting the share buyback underway, and liquidity remains at comfortable levels and credit quality is quite strong. All of this led to strong shareholder value creation and attractive remuneration. TNAV plus DPS grew 12% during the last 12 months, and we have increased the cash dividend per share by 39% year-on-year. Moving to the income statement, as always, we present growth rates in both current and constant euros. Profit increases strongly, continuing the positive trends of previous quarters, supported by, first of all, strong top-line performance with growth in all our global businesses. We have improved efficiency as costs increase well below revenue, reflecting our transformation efforts. Double-digit growth in net operating income to more than EUR 24 billion. Normalization of loan loss provisions in line with our expectations.

As I mentioned in the previous slide, these trends resulted in our highest quarterly profit on record, 9% above that of Q2 2023. José will go now into more detail on these points later. These results maintain to on track to achieve our 2023 targets, targets that we reiterate. First of all, good business dynamics led to double-digit revenue growth. Our efficiency ratio improved and remains at the lower end of our target range, even with investments in One Transformation. A strong balance sheet with cost of risk normalizing as suspected and capital ahead of target, with CET1 improving quarter-on-quarter. Our RoTE is close to 15% and should comfortably reach our target at year-end.

Looking closer at capital and value creation, our CET1 ratio has grown year to date from 12%-12.3%, backed by strong organic capital generation after investing in profitable growth, absorbing regulatory impacts, and remunerating our shareholders according to our dividend policy. We continue to grow our shareholder value creation, which was up 12% in the first nine months of the year, and we're increasing our shareholder remuneration with payout up to 50%. In September, the board of directors approved an interim distribution against our first half results, which is being executed as follows: A cash dividend of EUR 0.081 per share to be paid in November, 39% higher than the equivalent in 2022. A share buyback program of up to EUR 1.3 billion that is currently underway....

Since 2021, and after completing the current program, Santander will have bought back 9% of its outstanding shares buybacks, through share buybacks. We are progressing in our new phase of value creation, transforming the bank in the right way by changing our model to improve both cost and revenue. One Transformation, which implies creating a common operating platform and technology for our Retail and Commercial business across all of our geographies, will lead to improved customer service, efficiency, and profitability. In simplification, we have reduced the number of products by 8% in 2023. That's almost 800 less products. In digitalization, we're making good progress with our digital self-service model, increasing the availability of products and services in our digital channels and reducing the use of our contact centers by 16%.

We have set up a fully digital end-to-end onboarding process in Mexico that takes just six minutes to complete. Since its launch in July, we have opened 36,000 new accounts. In the U.S., we have already captured around $114 million in savings from One Transformation and simplification. As you can see on the slide, the initial efficiencies from One Transformation and the impact of our active spread management in a context of higher interest rates, have already contributed 117 basis points in efficiency improvements. Our global and network businesses contribute to the group's profitability and have delivered 39 basis points in efficiency gains. For example, Multilatinas and Multi-Europeans, initiatives to better serve our multinational corporates and SMEs through a regional coverage model, are growing at very high rates, with revenue up by 50% in 2023 year-over-year.

In private banking, we continue boosting collaboration with CIB and corporates, which has generated over EUR 160 million revenue this year, or 13%. In Brazil, we have acquired 117 new relationships that brought BRL 6 billion in net new money. In payments, Getnet already operates in 5 countries. We expect implementation in Chile in the next few months, and in the U.K. in 2024. In auto, we continue to strengthen our relationships with global OEMs. Since January 2023, we have expanded three of our OEM partnerships to new countries. Finally, our Global Technology capabilities have already resulted in a 29 basis points improvement in the efficiency ratio.

Our global approach to technology has allowed us to capture EUR 125 million savings this year: EUR 55 million from the recent deployment of Gravity, EUR 60 million from the new global agreements with vendors, and EUR 9 million from the implementation of new IT and ops shared services. Let's look at how One Transformation is reflected in cost and operational efficiencies. Simplification is driving significant improvements in our cost and revenue per active customer. Process automation is enabling us to spend less time on operations in branches and turn this into a powerful sales and advisory channel. Since our Investor Day, we have reduced the number of operational FTEs per million customers by 5%. We are already deploying global tech platforms to improve customer experience, leverage economies of scale, and spread best practices. We have implemented across the group proprietary backend Gravity, already deployed in three countries and CIB.

This is delivering EUR 55 million in efficiencies in 2023, and we have executed 75 billion transactions this year alone. That's 10% of the group's total. We're expanding our cards platform across the group, delivering real-time digital processing capabilities to our banks and accelerating our business growth, and will generate operational synergies of around EUR 100 million per year when it's fully deployed. Finally, we are being able to transfer the best-in-class products and processes from the country of origin to the rest of the group, which leads to a strong value creation. The contribution of our global and network businesses is clear. In CIB, we continue to grow strongly.

Our global presence has allowed us to grow revenue by 21% year-on-year, as we provide a one-stop shop service to all our clients, capturing cross-border flows and making CIB products and services available to our wealth, retail, and commercial customers across the group and vice versa. As a result, revenue from these two concepts, or network revenue, grew by 27% year-on-year to EUR 3 billion. Wealth Management and insurance grew revenue 22% year-on-year, well above target, boosted by benefits of the Santander network effect. In private banking, a fundamental part of our value proposition is that our customers can move and transact easily from one country to another. Today, customers have EUR 52 billion of assets under management booked abroad. That's 12% higher than a year ago. Our payments business is growing strongly and faster than the market.

Our payments hub has become one of the largest processors of account-to-account payments in Europe. Spain, the U.K., and CIB are already processing a significant payment volume through PagoNxt, while we execute full migration of all the group's A2A payments in the next 18 months. In auto, we continue to prioritize profitability over market share growth in a context of rising interest rates. Global auto revenue was affected by lower lease income in the U.S. and the new regulation in Germany. One Transformation is now being extended across the group, and the increasing contribution from our global and network businesses are helping us to reach our 2025 profitability targets across regions and businesses. Some geographies and businesses have benefited from rising rates, and they should continue to do so in 2024.

As for those countries and the businesses that do not benefit from higher rates, they are already showing signs of improvement. This diversification, which is a clear competitive advantage, will lead to consistent, profitable growth and value creation. The group's RoTE rose 126 basis points year-on-year to around 15%, as mentioned before. José will go now in more detail to the group's performance. Thank you, José.

José García Cantera (CFO)

Thank you, Héctor, and good morning, everyone. I will take you through the main lines of the P&L in more detail. Starting with revenue, there was strong growth driven by customer revenue again this quarter, which made up more than 95% of total revenue and explained almost all the growth in the quarter. This was primarily supported by our retail business, as we actively managed the interest rate tailwinds in Europe and Mexico, and due to the positive fee performance in Latin America. We delivered double-digit growth across most businesses, in particular our network businesses, which made up 38% of total group revenue. The only exception was auto, which was affected by lower leasing income in the U.S.

Revenue at the corporate center also improved by more than EUR 500 million year-on-year, due to higher liquidity buffer remuneration and a lower impact from FX, FX hedging. Most of our revenue growth came from NII, which continued its upward trend, increasing 7% in the quarter, driven mostly by Europe and Mexico. We see upside potential for further growth in the coming quarters. Nine-month 2023 was 16% higher year-on-year in constant euros, on the back of positive sensitivity to rising rates, mainly in Europe and Mexico, and volume growth in DCB, North America, and South America. In terms of profitability, we have improved our net interest margin every quarter since the first quarter of 2021. Gains from credit yields outweighed higher funding costs, thanks to our disciplined deposit remuneration, leading to a clear margin expansion.

In Europe, we are strictly managing deposit costs, especially in Spain and Portugal, where there is excess liquidity in the system and lower credit demand. The U.K. has a more competitive environment, but betas remain in line with our expectations. In South America, deposit rates are more directly linked to market interest rates, which results in negative sensitivity to rising rates. Therefore, as interest rates are starting to decline, we are seeing improved NII trends. In North America, in the U.S., betas continued to increase, although in line with our expectations, while net interest margin in Mexico expanded. Going forward, in Europe, we expect further benefits from portfolio repricing in a context of stable interest rates or a slight increase, which we expect will more than outweigh potential cost of deposit growth, at least in the first half of next year.

At the same time, as I said, we expect to benefit from interest rate cuts in South America. Turning to fees, in an environment of low fee income growth in general, as a result of subdued loan demand and weak consumer activity, our net fee income grew 9% compared to the third quarter of 2022, and 6% year-on-year, with good performance across regions and businesses. Retail banking grew well, supported by a larger customer base and our tailored and targeted value propositions. Our global network businesses represented 42% of total group fees, which, with, with, corporate investment banking and PagoNxt leading the way in terms of growth. Corporate investment banking is increasing its share of leading roles, and PagoNxt continued to expand its businesses, increasing total payment volumes 24% year-on-year, and transactions 32%.

Wealth Management and insurance was slightly up, as customers moved to lower value-added funds that bring in lower fees. However, we saw increased activity in both private banking and Santander Asset Management, with three consecutive quarters of positive net sales. Auto performance increased year-on-year, driven by good performance in all our main markets. In terms of cost, savings from One Transformation initiatives, which will become more evident in the coming quarters, are already offsetting our investments in tech and digitalization. Group costs declined 0.5% real terms. Driving down the transaction cost per active, the transactional cost per active customer, 2% in real terms, as Héctor mentioned earlier. This, in turn, is reflected in efficiency gains led by Europe, which improved six percentage points, with costs flat in real terms.

In North America and DCB, cost increased slightly in real terms, reflecting investments to accelerate transformation. Additionally, costs were also slightly affected by some perimeter effects, such as the incorporation of APS in the U.S. and MCE Bank acquisition, a new Stellantis agreement in DCB. As a result, group efficiency remains at the bottom end of our target range, where we expect it to stay for the rest of the year. Credit quality remains robust across our footprint and in line, or actually slightly better, than our expectations, which is supported by strong labor markets and resilience in used car prices in the U.S. The NPL ratio was stable and in line with expected levels, and we remain comfortably on track to meet our 2023 cost of risk target of less than 1.2%.

Spain continues to perform well, with a twelve-month cost of risk down 9 basis points year-on-year, supported by the quality of the loan book and resilient economic conditions. In other units, such as the U.K., Portugal, and the Digital Consumer Bank, the cost of risk is normalizing from very low levels, and we expect it to remain below or in line with through-the-cycle averages. Mexico is also increasing, although it remains at comfortable levels, mainly due to a change in mix towards unsecured loans, in line with our strategy to improve profitability. Normalization continues in the U.S., in line with expectations. As we mentioned last quarter, cost of risk in Brazil seems to have reached a turning point.

The twelve-month cost of risk decreased for the second quarter in a row, and the NPL ratio improved 28 basis points in the quarter, reflecting the improving macro conditions and our focus on more secured and high-rated customers. To close with our balance sheet structure, we have discussed in previous presentations, our credit portfolio is well-diversified by segment, product, and country. Our balance sheet is low risk. The portfolio is highly secured, with quality collateral, and has low, loan-to-values, average loan-to-values. Loans decreased 2%, year-on-year as a consequence of higher interest rates, reducing credit demand and driving early repayments, especially evident in Europe and especially evident within European mortgages. Positive dynamics continued in North America, South America, and DCB.

On the other hand, deposits continued to grow well, at 4% year-on-year and 2% in the quarter, as deposit inflows more than offset mortgage prepayments. Growth in the year was concentrated mainly in time deposits as customers seek higher rates. Our deposit base is diversified and highly stable. Using LCR criteria, 75% of our deposits are transactional, which are stickier, and a high proportion of our deposits from individuals are covered by deposit guarantee schemes. Mutual funds rose 11%, with broad-based growth across all countries except the U.S., following a year of instability in 2022.

Our fully loaded capital ratio improved to 12.3%, backed by strong organic generation of 45 basis points in a quarter, which included 33 basis point charge in shareholder remuneration, 21 related to the latest program of share buybacks that we are currently executing, and 12 basis points for the cash dividend accrual. We continue to focus on profitable growth opportunities, and this was reflected in a front book return on risk-weighted assets of 2.7%, up from 2.5% in the first nine months of 2022, equivalent to a return on tangible equity above our current group return on tangible equity, which will support profitability going forward. Additionally, we continue to increase balance sheet mobilization and the percentage of risk-weighted assets with positive economic value added, progressing well towards our Investor Day target of 85 in 2025.

Increased profitability will help us continue to build capital over the next few years. We are confident our fully loaded capital ratio will remain above 12%, even after taking into account the final implementation of Basel III in 2025 on a fully loaded basis. That's all from my side. Héctor, over to you. Thank you.

Héctor Grisi (CEO)

Thank you, José. To wrap up, these are the messages I will leave with you. Q3 was another strong quarter, with customer and double-digit revenue growth supported by all region, regions and businesses. We are accelerating One Transformation towards a simpler and more integrated model, which is extracting value from our global and network businesses, driving efficiency gains and profitable growth. We have strengthened our balance sheet and increased our CET1, while credit quality remains strong, in line with our expectations. All of this contributes to double-digit growth in shareholder value creation and increased remuneration, and we remain on track to meet our 2023 targets. The execution of our strategy, the progress we are making in our platforms, and our local leadership makes us confident we can continue to grow and to increase profitability.

We see further upside potential for NII growth from the portfolio repricing and potential interest rates hikes in Europe and positive outlook for the margins in South America. Efficiency, already at the lower range of our 2023 target, is expected to keep improving our revenue and cost as we increasingly realize One Transformation benefits. We expect the cost of risk to end the year better than target, and we expect it to remain at similar levels in 2024. At our Investor Day, we set a RoTE target of 15%-17%. We expect to reach our RoTE above 15% by the year-end and continue to improve significantly during 2024. And we see our fully loaded CET1 clearly above our 12% target, even after the implementation of Basel III in January 2025.

As a result, we expect to progress in our target of double-digit shareholder value creation through the cycle, further supported by our last step towards the full implementation of One Santander, which will enable us to fully capture our in-market and global value. And now, thank you. We would be happy to take your questions.

Begoña Morenés (Global Head of Investor Relations)

Thank you, Héctor. We're ready to start the Q&A session. Can we have the first question, please?

Operator (participant)

If you wish to ask the question, please press star five on your telephone. We already have the first question from Francisco Riquel from Alantra Equities. Please go ahead.

Francisco Riquel (Partner and Head of Equity Research)

Yes, thank you for taking my questions. I want to focus on loan growth in Spain, which has been particularly weak. It's down 10% year-on-year. The sector is -3%. I see that most of the fall is related to CIB, which is down over 20%, but SMEs and mortgages are also weak. If you can comment on the gap with the sector. We know demand is weak, but you are below the sector. And then more broadly in other regions, I mean, loans in the U.K. are also down 5%. The sector is up 1%. Brazil is up by just 3%. The sector is growing 9%.

So if you can elaborate whether you are prioritizing margins over volumes, if you are more prudent on risk-taking at this point in the cycle, so loan growth in general and in Spain in particular. Thank you.

Héctor Grisi (CEO)

Thank you, Francisco. Yes, basically, as you have said, loan growth has not been good in the year, I would say. Spain, mainly, as you basically say, is also being affected by the prepayments in some of the mortgages. If you see the portfolio of mortgages, we have seen. I mean, normally, basically, we go down EUR 3.5 billion. This basically, we have had prepayments up to EUR 6.5 billion so far this year. You're right, the SMEs and mortgages basically have been not demanding credit as much. I believe people are being cautious in the way and trying to see how the economy evolves, even though employment has continued to be strong and demand continues to be strong.

This is, this is a fact, and we have seen the clients basically being cautious. Nevertheless, if you see our portfolio in the rest of the countries, mainly Latin America, it's continued to grow. There, we have been maintaining and being very, very cautious in credit appetite, but also very focused on profitability. So we're growing the portfolio in Latin America in a very good way, but in a profitable way. And also, you have seen that DCB has increased and has a substantial good development during the year, and we continue to see that over the next few months.

So all in all, we are 2% below in loans this year, but we foresee that once clients basically see that rates are starting to stabilize and the market basically has a more clear view of what's going on, I believe that credit will come back little by little. I don't know if, José, if you would like to comment.

José García Cantera (CFO)

No, just one, one final comment. Risk-weighted assets are down EUR 2 billion in the quarter, but it's exclusively due to effects. So if we look, if we exclude effects impacts on risk-weighted assets, risk-weighted assets are actually flat in the quarter, which is what, you know, would matter most for profitability and capital.

Begoña Morenés (Global Head of Investor Relations)

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

Operator (participant)

Next question from Antonio Reale from Bank of America. Please go ahead.

Antonio Reale (Co-Head of European Banks Equity Research)

Good morning, everyone. It's Antonio from Bank of America. Two questions from me, please. The first one is on the profitability outlook, and the second one on asset quality in the U.S. So starting with the first one, you've reiterated your guidance for the full year, which, if I'm not mistaken, implies a net profit of around EUR 10.9 billion for this year. Can you confirm that's right? And how do you see profitability in 2024? It would be great if you could talk us through how you see the main units performing into next year, particularly Europe, Brazil, and the U.S. My second question is with respect to asset quality in the U.S.

There was a big uptick this quarter, and you've been talking about normalization in cost of risk, and now we've seen lower used car prices and higher delinquencies, but neither of them were material changes. So my question is: What's driving this? Can you talk a bit more about what you're seeing, specifically on asset quality? And related to that, I see you've confirmed your 200 basis points cost of risk for this year. What do you expect this number to look like next year? Thank you.

Héctor Grisi (CEO)

Yes. Thank you, Antonio. Okay, on profitability, as I said during the presentation, I reiterate the 15% RoTE, so that basically gives you the numbers that you're looking for, okay? So in that sense, we're pretty comfortable on that. On 2024, as I basically said, we see also the portfolio repricing, so we see a strong first half of the year in Europe, and then we see a strong second half of the year in Latin America, when we see basically the dynamics changing. You have seen that, and you've seen that in the numbers of this quarter, when basically you have seen Latin America basically performing better, okay? So in that sense, that can give you a very good idea, and José will give you more details on that.

In terms of asset quality in the U.S., and I've been saying all along that, in the past few quarters, it's very important to understand that it's always seasonal. If you take a look of what happened, last year in the third quarter, it was actually the same, and we expected that, and we told you so. And but it's important to tell you that it's actually better than we expected, and also it's not gonna go beyond the 200 basis points, as you correctly point out.

In that sense also, we see that the portfolio is performing better in the sense that we see that people with ninety-day delinquencies or above, what it used to happen is we used to repossess about more than 90% of those cars, is basically performing much better, and we are repossessing between 60%-65% of those. If the trend continues like that, and used car prices in the U.S. continue like that, we expect a better performance than we normally expect. It's important that you understand that we have a completely different mix today in the portfolio. The portfolio that we had pre-COVID didn't have as much prime and near prime as we do today. Prime and near prime is at around 41% of the mix of the portfolio.

So that basically tells you that we expect the asset quality to maintain at good levels, and also, the U.S. has been performing with a strong employment as well, and the dynamic as well. So in that sense, I'm comfortable with the numbers we're giving you. José, please, would you like to complement on the profitability?

José García Cantera (CFO)

Yeah, just one final comment on U.S. asset quality. The cost of risk in 2019 was 2.85%, and given the changes in the mix that Héctor mentioned, we don't expect to reach those levels at all, and we would expect a cost of risk in 2024 to be fairly flat, maybe slightly up, compared to 2023 in the U.S. In terms of profitability, well, we still have negative sensitivity to rates in Latin America. So as rates start going down, we will see accelerated momentum in NII, in Brazil in particular, coupled with higher loan growth and flat or slightly improving asset quality.

So clearly, the profitability in South America, as Héctor mentioned, is going to gain momentum throughout the year, which with a much better second half relative to the first half. And in Europe, as he said, we still have a lot to reprice on the asset side. Just one example, in Spain, we have around EUR 80 billion of mortgages. You know that they reprice around 1/12 every month. Well, in fact, we reprice 60% of the total in the first half relative to the second half. So in the first half of 2024, we will still reprice a big chunk of our mortgage portfolio in Spain up year-on-year, as they come to repricing.

So asset repricing, particularly in Spain, and obviously some beta pressures and the cost of deposit pressures, with profitability still improving in the first half of the year. So when you look at the total year, we actually, you know, we remain constructive on profitability, and profitability improving actually in 2024 relative to 2023.

Begoña Morenés (Global Head of Investor Relations)

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

Operator (participant)

Next question from Sofie Peterzens from JPMorgan. Please go ahead.

Sofie Peterzens (Executive Director)

Yeah, hi, here is Sofie from JPMorgan. Just to follow up on the previous question, so could you just remind us what the current deposit beta in Spain is, and kind of how it moved in the quarter, and also how you see the deposit beta moving in the other geographies, mainly U.K., U.S., and I guess also Portugal? So that would be my first question. And then the second question would be around the U.S. tax rate. It was very low this quarter. How should we think about the U.S. tax rate going forward, and what's the kind of normalized run rate? And then, if I may, just if you could comment on any capital headwinds going forward. Thank you.

Héctor Grisi (CEO)

Thank you, Sofie, and if later on, could you explain us a little bit the second question, because we couldn't hear you well. First of all, on deposit betas, I mean, betas today, in most geographies, remain below the initial expectations that we had, okay? And in general terms, they're behaving rather rationally, and we expect pressure to mount in the coming months and the betas to increase. I mean, it's normal because of the dynamics of what's going on, okay? And the geographies, we are present are showing a different behavior. Our CFO now give you a little bit further details on that.

José García Cantera (CFO)

Yeah, Sofie, in Spain, total beta is slightly over 20%, 22%, but if we exclude ex corporate investment banking, corporate investment, investment banking is already almost fully priced. Ex corporate investment banking is 13%. Remember that we have EUR 153 billion of current accounts in Spain with very low volumes, so and the beta there is almost zero. We don't expect any significant change in the behavior in the market in the coming quarters. So we would expect the beta in Spain to gradually drift upwards, but very gradually. Similar performance to what we have seen this year. In the U.K., beta is 35%. If we look at the beta in the quarter, it's higher than that, it's around 50%, so here we would expect higher, gradually higher betas.

But we are pricing assets also higher. The new mortgage pricing in the U.K. today is around 5.7%, so this is going to help withstand the slightly higher betas that we expect next year. For the rest of the countries, Portugal at 9%, Poland, 30%, and in the U.S., it's 32%. Ex-CIB, ex-corporate investment banking is 31%. Very much in line with expectation, not much to comment on that. So bottom line is, we would expect cost of deposits to gradually increase against repricing on the assets in some countries, particularly in Spain, also in the U.K., et cetera.

Sofie, in terms of the tax rate in the U.S. going forward, what I could tell you, and we could basically contact you to give you more detail. I believe that we may improve it, given that we are doing some leasing on electric vehicles, and that basically could help us out in the tax rate that we have outstanding today, okay? But to give you details, we later, we could call you and give you exactly what's going on there.

Well, Your final question, capital headwinds. The only one is, the only significant capital headwind we have is the final implementation of Basel III. Still some detail rulings or regulations need to be written, but bottom line is the total fully loaded impact would be around 50 or 55 basis points. The facing impact, so the charge on January 1, 2025, is gonna be between 15-20 basis points. So again, very much in line with previous expectations. May, may be a touch better than what we expected.

Begoña Morenés (Global Head of Investor Relations)

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

Operator (participant)

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

Ignacio Ulargui (Managing Director)

Hi, good morning. So thanks for taking my questions and for the presentation. I have just two questions. The first one on Brazil: after the performance that we have seen this quarter, where there has been growth, you were guiding before for a bit of an acceleration, and you have been commenting into the quarter, results that we should expect better momentum in the second half. Did you see a moment to change your risk appetite? So we see an acceleration of growth also due to mix changes, as we are seeing in Mexico, and what should we expect for 2024 from Brazil?

And also, if you could share a bit of color on what has been the driver of cost growth in Spain in the quarter, and whether we should expect some synergies coming from Santander in coming quarters in Spain, or it's more restricted to Mexico and the U.S. Thank you.

Héctor Grisi (CEO)

Thank you. In terms of what's going on in Brazil, Ignacio, a couple of points. First of all, what you have been seeing is, as you remember, we changed a little bit the mix, okay? So we're changing a little bit, that the cost of risk is helping us out. First of all, because our some of them, the positions that we took, actually, the credit loans that we gave are basically performing much better than we expected. And the mix also is helping us out, because remember that, the mix that we changed with went a little bit into payrolls and to secure loans, and the mix has also changed and is getting better. We're also seeing that the market is performing much better in terms of of LLPs.

So in that sense, we're open it a little bit. I mean, we're open to a little bit more of, of, giving out loans in terms of going back a little bit to the credit card markets. We are performing very well, but our credit appetite is cautious nevertheless, and, we expect Brazil basically to perform really well in that sense, okay? So you're gonna see really growth in, momentum, also given that the rate is coming down, and we expect the rates basically to continue coming down over the next few months. So this is a double combination in terms of how we manage in the portfolio, and second, because of the way the rates are moving in Brazil. So in that sense, I believe it's gonna be much better.

In terms of the growth in cost in Spain, as you know, we have been implementing One Transformation, okay? So with the implementation of One Transformation, we're spending a little bit to transform a little bit some processes, some things that we're doing, and the way we're managing the bank in that sense. But, and you're gonna see a much better outcome in the next few months due to that fact, because we are, as you know, we are simplification. We're doing simplification, dropping the number of products that we have. We are doing also automation of many different things, and we are pushing our branches basically to move more towards businesses than look at incidents or problems.

So all that transformation that we're making is the one that is pushing us a little bit to spend a little bit more, but it's gonna be in control, and we expect that to continue drop in the next few months. So in that sense, I feel confident that we're gonna be able to do that. Okay? So, in terms of, in Brazil, going back to just tell you, the second half is gonna be much better than the first half of 2024, okay? As we continue to go on and we build up the portfolio, it's gonna be performing much better. Okay? I don't know, José, if you would like to complement.

José García Cantera (CFO)

No. No, as I said, I think the sensitivity to rates gains momentum. So we have already started to see a slight change. Rates have dropped just 100 basis points from 13.75 to 12.75. We expect another 100 basis point drop in the third quarter, sorry, in the fourth quarter, but we would expect probably 200-250 drop next year. So these accumulate. So when we look at year-on-year, third quarter, fourth quarter, we will see rates probably 400 basis points down. So clearly, the second half next year will look much, much better in terms of NII than the second half of this year.

Begoña Morenés (Global Head of Investor Relations)

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

Operator (participant)

Next question from Alvaro Serrano from Morgan Stanley. Please go ahead. Alvaro Serrano, your line is open. Please go ahead.

Begoña Morenés (Global Head of Investor Relations)

Next question, and we'll recapture Alvaro later on. Thank you.

Operator (participant)

Thank you. The next question comes from Sanchez Romero from Citi. Please go ahead.

Sanchez Romero (Director Equity Research)

Good morning. Thank you very much. My first question is on restructuring charges. So I understand your profitability target is underlying. And should we expect any material restructuring charges associated with your new reporting structure? The second question is your outlook on operating expenses in the U.S. You've gone on a hiring spree of investment bankers recently. So what is the outlook for cost, and how much revenue do you expect to generate as a result? And just quickly on your effective tax rate in Brazil for 2024, and what is your expectation regarding any potential changes on interest on capital? Thank you.

Héctor Grisi (CEO)

Thank you, Marta. No, we don't expect any restructuring charges at all, because of the restructuring that we just did in the organization. The other way around, actually, we are moving towards lowering the cost as much as possible in the organization, okay? This is exactly what we're doing. It's very important to understand exactly what One Transformation means, which means exactly simplifying, first of all, okay? And simplifying the amount of products that we have significantly, okay? Second, basically, automation of a lot of the processes, and this is mainly... I'm talking about on the retail, on the retail side, which is quite important, okay? Which means, for example, transformation in countries like Portugal, where we have already gone through a good, a really good transformation.

Basically, now 10% of the things we do in an, in a branch is basically operations and incidents and problems. 90% is taking care of the client. In other countries, such as Mexico or Spain, it's 50% of that. So basically, this is what One Transformation means, and this is what we're doing. So simplification, automation, then we're gonna come in with the platforms. You have seen a little bit what we've been doing with the different platforms that we're deploying. For example, merchant acquiring, that has been deployed already, mostly in Latin America. You see the cost coming down, and you see also that we're getting revenue on quota from our customers. So in that sense, it's very important that you understand what One Transformation is and why are we doing this. Second, in terms of...

Your second question was on operating expenses-

José García Cantera (CFO)

In the U.S.

Héctor Grisi (CEO)

in the U.S. Okay, very important question. What we're doing in the U.S. is just a complement of the rest of our CIB business, okay? What do I mean by a complement? We have become a very large player in CIB. I mean, large for the standards of Latin America, and a very important player also in CIB in Europe, okay? It's important to point out that, 94% of our, of the business that we do there basically is client-oriented, okay? It's very important to understand that. It's just 6% is, is trading. So it's client flow, it's selling FX, it's selling, plain vanilla derivatives, it's doing a lot of trade finance to our, normal clients and midsize and SMEs clients. And this is basically the only piece that we needed, is basically was to complement the U.S.

This is not in any means to really beef up our presence in CIB in the U.S. This basically will complement the rest of our business and also will give us capabilities in four or five particular sectors that complement the rest of the business that we do in Latin America and Europe, in the U.S., which, by the way, we were not making because we didn't have the capabilities. So it's not a huge thing, vis-a-vis the size of the group, but it's important that it's gonna be an important revenue generator. And you're gonna see that revenue is gonna start to pick up in CIB, pretty fast, given that, because it's already a complement, as I was saying, of the rest of the business.

José García Cantera (CFO)

Well, tax rate in Brazil next year, taxes on capital, that's been proposed and discussed. It is not approved, and we are not sure that the final shape of that tax will be the one that was proposed. The finance minister believes that they need to do a more detailed analysis on the impact of that, because the main reason for that is to tax companies that are not paying taxes. The banks are paying already lots of taxes. So I think we need to wait and see what the final shape and form of that tax will take. But by no means is a done deal, and definitely not in the way that it was presented. Thank you, Marta.

Begoña Morenés (Global Head of Investor Relations)

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

Operator (participant)

Next question from Carlos Cobo Catena, from Société Générale. Please go ahead.

Carlos Cobo Catena (Director and Equity Research Analyst)

Hi. Good morning, and thank you very much for the presentation. From my side, a quick question on revenue performance. You explained how NII has been the key driver of revenue momentum. However, you know, going back to the capital market day, I remember that there was a way stronger emphasis on fee income and non-NII revenues, which seems to be, you know, underperforming a little bit our initial expectations. So could you elaborate on that? Is that the market momentum has weakened, but you see that being recovered in the future, or simply that, you know, there's some you are running behind your initial plan? And second, when you talk about the cost of seasonality in the U.S., could you explain a little bit better why is that?

I mean, why there is such a concentration in provisions in the, in the third quarter? It'd be helpful to understand. And lastly, on reporting changes, I don't know if you can share that already, but when you're talking about the Retail and Commercial, new global business line, could you explain if you plan to have, also regional, you know, P&L and balance sheets for each subsidiary, which will be consistent with the consolidated global unit, or we are not gonna have that detail? Thank you very much.

Héctor Grisi (CEO)

Thank you, Carlos. I mean, I think it's important to understand basically the dynamics in the market, no? If you see the fees, for example, in the first nine months, we grew 6% year-on-year, okay? It's basically customer growth and the global network business is basically helping out, no? Mainly CIB and payments, okay? It's important to say that global and network businesses now contribute to around 42% of the total fee income, okay? And by 25, that would increase from 42%-50%. So basically, it's according to our plan, okay? It's important also that risk appetite increase is changing the portfolio mix, okay, and volume growth and transactionality increase is gonna help out, okay? And we see also if... And you're gonna see that it's gonna complement the revenue, exactly what you're asking.

You're gonna see a strong CIB that is basically up 15% year-on-year. PagoNxt is the payment side, and merchant acquiring is up 12%. We have weaker Wealth Management that is around 1%, but it's market conditions, you know, because exactly what's happening in the market. The auto business is generating 5% more across the board, okay? You see very good performance in Mexico and the U.S., and Europe is a little bit impacted by regulatory changes. Retail, you're gonna see a growth of around 5% year-on-year because we had active customers coming in that are helping us out, mainly 2 million active customers that we didn't have, okay?

So in that sense, what I'm telling you is that we see that fees are gonna starting to come up, also helping out by what's the dynamics that we see in South America and Mexico mainly, okay? So in that sense, you're gonna see that it's gonna perform well. And also, as credit picks up, that's also gonna help us in the fee revenue. That's basically what has been one of the laggers, the fee revenue, okay? The seasonality in the U.S. has always been like that. I mean, that's basically the way people perform in this particular market. I mean, it's a little different than it performs in Europe.

And in that sense, it's always been marked in the third and fourth quarter, and normally becomes a lot better when people get more money during Christmas and start to pay us back, et cetera. The dynamic that I basically explained, given that there is a very strong second-hand car market in the U.S., and also that people basically don't want to refinance their cars or don't see the availability of loans and cars for the next few months, that basically shall help us out, and that's why you see better numbers, and I don't see the cost of risk going beyond the 200 basis points. And José gave you a very good explanation of how was the level of the cost of risk before, and what is it today, and we expect it to continue, okay?

And also, the change of mix is helping us out, okay? So it's very important for you to understand that, but this is the way the market has been, always, and you can see it, if you go, all the years behind. In terms of the reporting changes, we're gonna continue to basically, show the countries as a secondary segment, okay? So you will continue to have that information. I don't know if, José, if I left anything out.

José García Cantera (CFO)

No, no, no. I think we will report as we manage the bank, so we will report these horizontal businesses as the primary segments, obviously. But we will continue, as Héctor said, providing all the information from a country level upwards. So you will be able to see the country's performance organized by these businesses and the global performance organized by country. So you will be able to have both views at the same time.

Héctor Grisi (CEO)

Thank you, Carlos.

Begoña Morenés (Global Head of Investor Relations)

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

Operator (participant)

Next question from Álvaro Serrano from Morgan Stanley.

Alvaro Serrano (Managing Director and Head of European Banks Research)

Hi. Sorry for earlier. A couple of questions. One is really a follow-up, and thanks very much for your steer on provisions for 2024. If I can sort of take advantage of, given you opened that door, in the context of what we've seen in the U.S., within that flat provision, what directionally or a bit of color on how could we expect the U.S. to evolve in 2024? And in particular, I took note of your data on repossessions, now 65. It was 58. I think you quoted that number earlier in the year. How quickly do you think the repossessions are gonna go back to historical levels?

Because presumably this is savings, COVID savings, and now you have student loans picking up. Is that something we're gonna see sort of going back to historical levels already in 2024, or do you think it could take more time? Just wanna understand how you're thinking about the U.S. within that flat group context. And the second, hopefully easier one, is on the U.K. You've done pretty well, considering some of your competitors in the U.K. has been a bit of a car crash. Can you maybe talk about the outlook there specifically for U.K., given what we're seeing in the market? Pretty tough competition on deposits. You had your own offering out in September, so maybe you've got a bit more visibility now for Q4 and 2024. Thank you.

Héctor Grisi (CEO)

Yes, thank you, Alvaro. Actually, I was expecting your question on the U.S. So, let me give you exactly what is the important different dynamic that car has to student loans and different things. The car in the U.S. is quite interesting. It's not as in Europe, as in Latin America. Actually, people in Europe and Latin America pay first the mortgage, and then the auto loan, et cetera. In the U.S., it's the other way around. The U.S., if you don't have a car, you don't have a mean to go to work or to move around. I mean, you're completely isolated. So the behavior of the auto loans in the U.S. is completely different to anything you see because of this particular issue. Without a car, you cannot work, and you cannot generate money, okay?

So that's exactly why the performance of the portfolio has turned it in that way, because people basically take a lot of care to that. And that's exactly why the behavior of delinquencies basically keep performing that well. I mean, normally, if the economy complicates, you're gonna see that number of 60 to 62, 63% maybe going up. Let's see how the U.S. evolves and if we have a soft landing or not, that will all depend on that. Also, it's important to acknowledge that we are changing the mix of the portfolio, as we have said already, no? So that's quite important because we are much more concentrating with the funding that we have from our bank to be more in prime and in near prime.

Even though we will continue to do subprime, because it's a business that we know well, and we manage pretty well in the terms of risk and the way, but we are trying to change a little bit the mix of the portfolio. And also, we are offloading some of that risk through asset sales, et cetera. So it's quite important to understand that we are very being very cautious about that and very cautious on the way we're managing cost, sorry, cost of risk, okay? So, I hope I answered your question correctly. And then on the U.K., the U.K., as you have said, we have performed well. We'll end up having a really strong year, okay? We are working really hard to follow a strong strategy in terms of cost. We are also, it's very important, advancing of One Transformation.

We believe there is a huge opportunity there, leading to probably... And the U.K. is leading probably to its best year in bottom line. But it's important that you see that there is an opportunity there in transform it and decrease the cost that we have in that country. So I really do see the U.K. with a huge opportunity. I've been spending a lot of my time there because I believe there is opportunities. NII has grown year-on-year, 9.3%. It's driven by higher rates, as you know, and strong but we have a really strong focus on managing the spreads and profitability, okay? So you'll see that we have been lowering the portfolio of that because we're very focused on that, okay?

You see that in Q3, I mean, we are as the rest of the market at 2.2, but we are offsetting the increased cost of the retail funding and the slowdown of new regulations by basically playing with that, and also using a different mix of the portfolio and trying to see other opportunities, okay? It's important to tell you that we are putting profitability ahead of market share, okay? We have lower risk appetite, as I told you, and we believe that we could have an expansion by doing that.

Begoña Morenés (Global Head of Investor Relations)

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

Operator (participant)

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

Andrea Filtri (Managing Director and Head of European Equity and Credit Research)

Yes, good morning. First question on, if you can remind us of the Brazilian interest rate sensitivity. Second question is a follow-up on several questions from colleagues. If you can actually give us a concrete indication of the structural tax rate in Brazil and in the U.S. in light of the new electric vehicles leasing that you're doing. Is this a structural move, or it's just a one-off that we've seen? Then on capital, given that you're confirming your 15%-17% target, with a 15% for this year, should we not see also a natural acceleration in the organic capital build-up that you should be able to generate? And finally, digital euro, what do you see as risks and opportunities from the digital euro implementation?

Have you budgeted, the impact to your business model, and can you share it with us? Thank you.

Héctor Grisi (CEO)

Thank you, Andrea. Let me do the following thing. Let me answer your question on the digital euro, and then José will basically talk about the structural tax rates and the capital, okay? First of all, it's quite important to understand that the European Commission has published a proposal of regulation last June, okay? Which basically sets a framework, and it's a necessary condition for the digital euro to be launched, okay? They have publicly stated that discussions should not be rushed ahead of European elections in June 2024. And they're saying that, instead, they will examine and in a quiet and slow way by the new commission and the new parliament. So we expect a long negotiation process to achieve a common agreement in that sense.

In parallel, what we have seen is the ECB has just finalized investigation phase of the digital euro, as they said. The governing council published last week the results, and they decided to initiate a two-year preparation phase, as we have heard, basically focused on the actual implementation of it. It will involve finalizing in the rulebook and the selection selecting providers that could develop the infrastructure. This is quite important, and this phase will pave a way to a potential future decision on issuing the digital euro or not. But we see that, it's gonna happen. And as a decision on the digital euro, I don't believe will not be taken before the regulatory proposal is approved, so I don't expect to is released before 2026, no?

And in this context, I mean, us as Banco Santander, we are aligned with the European authorities to design the European the digital euro, also develop the pan-European integrated payments market. It is basically very important that we believe we generate value for consumers, companies, and the financial institutions. And it's also important to say that we will continue to monitor the potential impact the digital euro may have on our banks in Europe, and also it's important for us to have greater clarity as the ECB and the European Commission finalize the regulatory proposal and implementation phase, okay? So that's the way we see it at this point. With this, I will basically pass it to José to tell you.

José García Cantera (CFO)

Hello, Andrea. Brazil, interest rate sensitivity is EUR 150 million to a drop of 100 basis points, all things being equal. Tax rate, in terms of a structural direct tax rate for the group going forward, I think using 30% is the right number. This year is going to be a bit lower because of the tax benefits on EV in the U.S. And then organic capital, well, the higher the profitability, obviously, the higher the organic capital generation. We don't expect any significant regulatory charges other than the ones we mentioned, and obviously always subject to available for sale impacts, et cetera. But we don't see any significant inorganic or extraordinary charges to our capital build-up. So, you're right.

I mean, the higher, the higher the profitability, the better. We also have a very strong focus on asset rotation. We have started a team that is going to be looking at ways of optimizing risk-weighted assets across the group. In the first nine months of this year, we have already rotated the equivalent to around EUR 15 billion-EUR 18 billion in risk-weighted assets. We think we can do more or less EUR 30 billion, or close to EUR 30 billion, EUR 25 billion-EUR 30 billion this year, and that will be the focus going forward. The focus will be to rotate the balance sheet, because we might not be the best tenors of some of the assets that we have in our balance sheet, so on our balance sheet.

So the focus going forward is going to be the optimizing risk-weighted asset consumption and maximizing profitability. So you're right, we would expect the capital build-up to accelerate in the coming quarters.

Begoña Morenés (Global Head of Investor Relations)

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

Operator (participant)

Next question from Pablo de la Torre Cuevas from RBC. Please go ahead.

Pablo de la Torre Cuevas (AVP Equity Research of European Banks)

Hi, and thanks for taking my question. I had a question on credit cards in Brazil. Could you please provide us an update on the ongoing negotiations there between the banking sector and the central bank regarding the new limits on installment and revolving credit card lending in the country? And if possible, could you please give us any indication of the contribution to Brazilian NII of these type to these types of lending, and any estimates that you can give us on the potential P&L impact of the new measures announced? I guess, besides the negative impact to NII, are the measures also likely to impact fee income from lower transactionality? And are there any offsets there, like lower cost of risk or lower cost of funding that we should also think about? Thank you.

Héctor Grisi (CEO)

Thank you. Thank you, Pablo. José will tell you basically about the situation in Brazil.

José García Cantera (CFO)

Again, these are ongoing negotiations. I just already referred to interest on capital. Here, again, the focus is more on corporates than financials. Obviously, there might be an effect on banks, but that's not the main focus. But in our case, it would have a relatively minor impact if it was approved as it has been proposed. But again, we think that will change. Credit cards. The 90-day period for self-regulation is already counting and is finalizing by year-end. We do not expect an agreement here, so probably BACEN, the Bankers Association in Brazil... sorry, the Central Bank in Brazil, will have to regulate.

There is a not minor possibility that we will go to a model in which total interest paid by the customer is capped to total principal, which is called the U.K. model. Again, Santander and FEBRABAN, the Bankers Association, are already working with the Central Bank of Brazil to try to find a best solution. It's very early to comment on the impact, because this type of regulation could have an impact on NII, but there might be ways of offsetting this through commission income, et cetera. Because there is a lot, a significant rotation of the balances in Brazil. So again, working on all of this, very early to put numbers to these changes.

Begoña Morenés (Global Head of Investor Relations)

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

Operator (participant)

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

Carlos Peixoto (Senior Equity Analyst)

Yes. Hi. Good morning. Carlos Peixoto from CaixaBank. A couple of questions from my side as well, and a few follow-up. So on NII, a minor detail, but... or in a minor geography, but in Portugal, you have a 40% quarter-on-quarter increase in NII. This quarter, I see that the improvement in customer spread is actually lower than in the previous quarter. And you do have an increase in the ALCO portfolio, but in any case, I was trying to see if you could have some color on the rationale or on what caused this evolution, and also what should we expect in coming quarters?

And then, on the U.K. and NII as well, I'm sorry if I missed it, but I was wondering, do you expect... I believe that previously you were talking about the high single digit increase in NII in the U.K. for this year. You expect that to be the case still? And how do you see it evolving into next year? Thank you very much.

Héctor Grisi (CEO)

Okay. Thank you, Carlos. NII, I mean, as you said, grew very strongly in Portugal, no? It's been helping us out basically because of the repricing of the portfolio, the rates were going. And I believe that it will continue a good trend towards the end of the year if rates go up a little bit more in Europe, okay? So that will help out, and then will stabilize. And that's my view, because, we see that the rates will stabilize at some time, and we will see more growth in that sense. So, NII should stabilize in Portugal. Okay? In terms of the U.K., I explained to you quite well exactly what's going on.

José García Cantera (CFO)

If I may, before you go-

Héctor Grisi (CEO)

Yes.

José García Cantera (CFO)

Just to give some more color on Portugal. When we look at yield on loans in the fourth quarter of last year, yield on loans in Portugal was 2.4%, 3.3 in the first quarter, 4 in the second, 4.6 in the third. So the yield on loans basically increasing almost at the same rate every quarter this year. Yield on deposits, 4 basis points, 14, 26, 38, also more or less growing at the same pace. So one quarter, there's obviously seasonality, balances, number of days, all of these may explain the differences. But again, when you look at the trends, the trends in Portugal are very consistent. And we would expect, as Héctor said, obviously, there is a limit to the repricing of assets.

Mortgages in Portugal, contrary to Spain, are linked to the six-month Euribor, not the 12-month Euribor in Spain. So the flattening out on the asset side in Portugal is gonna happen a bit faster than in Spain. But again, the cost of deposits in Portugal is really, really low, and we don't see any competition there. So we remain constructive in the next few quarters in Portugal.

Héctor Grisi (CEO)

Thank you, José. Very quickly on the U.K., Carlos. I mean, as I said, basically, I mean, we continue to put profitability ahead of market share, okay? And we have lower risk appetite, given the dynamics in that market, and we combine that, and we would like to combine that with a good performance, where that basically could lead to a NIM expansion. But answering your question, I expect 2023, with a high single-digit growth on, and on, on higher rates, management of deposit cost, while we assume the lower volumes that we have, okay? And that's basically the outlook that we have for the U.K. at this point. I don't know, José, if you would like to comment, but I think with that, I answer your question.

Begoña Morenés (Global Head of Investor Relations)

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

Operator (participant)

Next question from Britta Schmidt, from Autonomous. Please go ahead.

Britta Schmidt (Partner and Senior Analyst)

Yeah, hi there. Thank you for taking my questions. The first one will be on the NII in Spain. The customer spread widened, and you've also increased the ALCO portfolio, but the NIM was flat. So maybe you can explain what's happened there, and also give us an update on the ALCO portfolio. And the second one will be on Chile. We've seen a big decline in NII here. I think the business has guided to a big decline in profits this year. But what do you think is the outlook there for this year? And also, when will the NII improve in 2024? Thanks.

Héctor Grisi (CEO)

Thank you, Britta. I will start, basically give you the overall view, and then José can give you a little bit more of details on both, okay? I mean, Spain, as you say, is one of the countries that has benefited the most from the higher rates, okay? We continue to see, as I said, a strong growth from clients, okay? We have 651,000 new customers, net new customers, in the last 12 months, okay? We see also a strong contribution from the global businesses, okay. Wealth Management is increasing 84% year-on-year, CIB 11%. I'm talking about PAT. And CIB is also achieving a substantial growth and net margin growth, mid-teens, maintaining a superior profitability levels, okay? So you're gonna see that. We expect double-digit NII growth in 2023, okay?

In terms, we see many factors to consider. We see, as José explained you in detail, assets repricing at least during the first half of 2024, okay? Clients continue to grow, and betas will be key in this particular issue. We see no meaningful deposit movements in Spain in reaction to prevailing rates. Yeah, our deposit base is extremely atomized. 80% of our deposit base have an average balance of EUR 20,000, which basically contributes to the stability. Also, it's very important to take into account that the One Transformation I explained is going through in Spain as well, and we're very focused on the product simplification. As I said, we're reducing 21% the product portfolio. We're doing a process of optimization there, okay?

But I see that, exactly that's the trend that is gonna have, exactly as, José basically detailed. I don't know, José, if you would like to complement, but you already gave a lot of detail.

José García Cantera (CFO)

Yeah, Britta, let me tell you, yield on loans, this is the same explanation that we have for Portugal. Quarter-on-quarter, it basically has to do with many small things. But when you look at yield on loans in Spain, from the fourth quarter of last year, at 2.5, first quarter, 3.3, second quarter, 3.8, fourth quarter, 4.3. So very much almost on a straight line increase, and in the case of deposits, also the same, 22 basis points, 53, 72, 19. In the last couple of quarters, 18, 19 basis points increase. So very much flat.

So the point here is that we still have a substantial part of our balance sheet in Spain that will reprice up in the first half of next year. I just used the figure for mortgages, is EUR 77 billion, and around 60% reprices in the first half. So I think the yield on loans will continue. Although the rates, interest rates in Spain might stay, or in Europe, might stay flat, the repricing of assets in Spain will continue for at least the first half of next year. And in terms of the pressure on the cost of deposits, again, most of institutional deposits, corporate investment banking deposits, have already repriced. So the question is: to what extent the cash balances in the current accounts will move to time deposits?

So, to what extent customers have excess liquidity in their current accounts to be put aside for time deposits? And we think that is a limited, it's a very limited amount. So, you know, we see, you know, not a lot of pressure on that particular part of the business for increased cost of deposits. In Chile, we have two balance sheets, so two sensitivities to the balance sheet. One is to rates, and the other one is to inflation. Obviously, the relative movements of inflation and rates is what explains what we've seen. So we have seen already inflation going down, rates going down slower. So as inflation continues to go down and rates follow, we will see the reversal.

So we see NII in Brazil actually expanding, again, gaining momentum towards the second half of next year, but expanding substantially in the second half of next year relative to the second half of this year. Because, again, the relative movement that we have between inflation, which is the UF, and rates.

Begoña Morenés (Global Head of Investor Relations)

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

Operator (participant)

Next question from Hugo Cruz, from KBW. Please go ahead.

Hugo Cruz (Director and Senior Equity Analyst)

I think first time, Hugo from KBW. Just a couple questions. Mexico NII, the growth, QoQ has been quite strong. You know, I guess I'm not gonna ask you why, why it's been stronger than expected, but I wonder if you could give guidance on, for the full year, what kind of NII growth you're expecting in euros? And then finally, on Argentina, quite volatile, and we have elections soon, so I was wondering if you can give, you know, what, what you expect, an impact from the elections, but also if you could give guidance on the earnings for this year and the next. Thank you.

Héctor Grisi (CEO)

Thank you. Okay, Mexico, as you have seen, has been, had a strong growth in NII. It's a combination of many things. First of all, of the rates increase, but most of that is basically because of the change of the mix that we have performed in the country, okay? We saw an opportunity, of basically switching a little bit of the portfolio into credit cards and unsecured loans and payroll loans to individuals, so, to have a much better, structured mix than we used to have before, okay? So Mexico is helped out by the rates, but also by the change of the mix of the portfolio. All right? So it's quite important to, to see that. We see that Mexico will continue to have a really good trend.

I mean, the Mexico, as you have seen, has grown pretty well, pretty nicely over the past few months, and I believe it's gonna grow strongly also in 2024. Okay? The important thing to understand exactly how rates are gonna perform, and that's gonna depend a little bit on what happens in the U.S. All right? But I see that if rates continue to be stable and the economy performs well, I believe that Mexico should develop very good on 2024 and continue to have very good growth on NII. Okay, in terms of Argentina, as you have seen, we have a, I would say, complicated environment, to say the least, about of what's going on.

We really and I wouldn't like to basically make a prediction of what could happen, but it looks that many things may stay as they are. We have, as you know, a potential difference in the exchange rate between the official exchange rate and what's happening in the black market. So in that sense, let's see how it evolves and how the government would like basically to land the difficult task they have in front.

José García Cantera (CFO)

No. Just one final comment here. The way we've managed Argentina is to hedge, obviously, against inflation, and hedging our investment against inflation, and that will continue to be the key element. Obviously, there is a big difference between official exchange rates and unofficial exchange rates. We are aware of that. We are aware of the impact that a devaluation could have on our books, so we are managing that to minimize the impact if that was to happen. And obviously, again, the key is to preserve the value of our investment in Brazil, but basically by managing and investing inflation risk.

Begoña Morenés (Global Head of Investor Relations)

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

Héctor Grisi (CEO)

Next question from Fernando Gil de Santibáñez from Bestinver. Please go ahead.

Fernando Gil de Santibáñez (Head of Research Analyst)

Hi, thank you very much for taking my questions. Three questions, please. First one on Digital Consumer Bank. I see return on tangible book at 11%, still a bit far from the target of 15%, that you have for the plan. Can you please comment the outlook for 2024, please? This is the first one. The second would be about the ALCO portfolio. I see an increase of about EUR 10 billion in the quarter. Can you please refresh the strategy and the level of unrealized losses you have in the portfolio? And finally, on Poland, if you can please comment on the outlook for the extension on the mortgage holidays, please. Thank you very much.

José García Cantera (CFO)

So let me start with Poland. The proposal comes from the current government. We need... You know, we are gonna have a new government, and this will have to go to parliament. So very early stages of this proposal, and I am almost 100% sure that some other form of proposal, if any, will be conducted, because again, this is a proposal of the existing government, not the upcoming government. The ALCO, sorry, also Brit asked about this, and I forgot. We have more or less 27, almost EUR 30 billion of ALCO in Spain, at an average yield of around 3.4%. We expect to end the year at around EUR 30 billion.

We might increase the ALCO a little bit more next year, obviously taking advantage of the higher yields. So depending on how you measure the profitability of this, if you measure this against average cost of deposits or against the marginal funding cost, you have different profitability, but obviously, this is going to add significant push to the profitability of the group next year. DCB, I don't know, you want to comment on DCB and the outlook for the business?

Héctor Grisi (CEO)

Yes, I mean, on DCB, there has been a particular change in the business in this year, no? In DCB in particular, there is one very important. We had really good growth in terms of loans, but the majority of those loans, the vast majority, is basically stock financing, okay? Given the dynamics that the auto market has had over the past few months. First of all, there was not enough production, then the production started, and now basically we are financing a huge amount of the car dealerships. We expect basically to start that the dealerships start moving that inventory out, and that basically will produce more, the normal auto loans, and then will give us the normal NII that we are accustomed to at this point, okay?

So that's basically the way we believe that this is gonna evolve. It is important to acknowledge that also, we have been able to finance a lot of this portfolio with our own deposits instead of going that much to wholesale. And also, you're gonna see a dynamic of what José was telling you about, of selling a lot of these portfolios out into the market once we basically start out giving out loans direct to individuals, okay? So, we believe that the outlook will be good. It's important to see also how the economy evolves, mainly in Europe, and that would also depends on how fast the inventory is moved.

José García Cantera (CFO)

Yeah, one final comment here. Although we have a neutral position into rates in DCB, obviously, the higher the rates, the more difficult the business is, particularly when rates start going up. So once rates stabilize, the business also stabilizes and increases the profitability. The difficulty in managing DCB is when rates actually go up. Because of that, we do not have sensitivity to that movement. Obviously, the customers do not react well to that. So, that one point I wanted to make. The other point is on cost of risk. We would expect the cost of risk in DCB to gradually trend towards the normalized level of around 50 basis points a year, taking into account that this will depend on asset sales, securitizations, et cetera.

So our aim is to try to minimize that, like Héctor was saying, by managing the assets that we have on our books.

Begoña Morenés (Global Head of Investor Relations)

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

Operator (participant)

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

Ignacio Cerezo (Executive Director and Senior Equity Analyst)

Hi, good morning. I've got three follow-ups. First one is on NII in Brazil. I mean, are you sticking to the guidance you gave in Q2, that Q4 will be better than Q3? And if you can give a little bit of color in terms of the pattern of NII expansion next year. Should we be expecting like a linear increase through the year, or you're gonna have some degree of seasonality at some point? Second one is on the U.S. I'm sorry if you have mentioned that already, but what has driven the 13 percentage point decline of the coverage in the quarter in the unit? And the third one is on capital return.

Given your comments around accelerated capital generation as profitability goes up and mindful of Basel IV, but do you see any chances of topping up your capital or increasing your shareholder return in 2024? Thank you.

Héctor Grisi (CEO)

Thank you. Look, Ignacio, in terms of NII in Brazil, I think it's important, I mean, we reiterate, first of all, as I have seen, the worst of the NII is behind us. We continue expecting an improvement both in NIM and NII in the coming quarters, okay? Rates, as José explained to you, have started to curve down. I mean, 100 basis points in the Q3 2023. Our numbers basically tell us that maybe they will come down towards the end of the year to 11.75. So that's basically tells you, reflecting the Q2, declining rates plus credit activity increasing, plus market-related NII no longer a drag, NII improvements. So that basically tells you that we yes, we believe that the second...

Sorry, that the fourth quarter is gonna be better than the third, okay? In terms of what do we see in the future, is exactly as José explained to you, is that we see a trend going upwards, towards more towards the second half of the year, next year, okay? That's the way we see it. It's gonna help out if rates continue to come down and volumes continue to go up, but that's exactly the beauty of the diversification model that we have at this point. All right? In terms of the U.S. coverage, okay, is basically, I mean, the normal seasonality that we have discussed, okay? We have an update in loan-to-values, include the current value of the cars, okay?

In addition, on the quarters, we have CRE charges due to the downgrade rating of several companies in the sector, and Fintech charges due to originations in that sense. But I see that this will normalize towards the beginning of next year, as I said, okay? So in that sense, I don't see a problem with that. Also, there was an increase in provisions, mainly, as I said, I mean, the LTV and the Stage 3 balance with the GST remediation. But other than that, I think it's quite what it was, quite normal. Cost of risk, as I said, is 1.77, okay? And is below the 200 basis points that we indicated as guidance for the year.

Total coverage ratio is about the total loan portfolio, flat year-over-year, 2.7. I don't know if that answers your questions.

Ignacio Cerezo (Executive Director and Senior Equity Analyst)

Yeah.

Héctor Grisi (CEO)

In terms of the capital return, please, José.

José García Cantera (CFO)

No, I think that's for the board to decide. So for this year, the policy has been decided, and that's, that's for the board to decide, obviously.

Begoña Morenés (Global Head of Investor Relations)

Thank you. I believe we have no further questions, so thank you very much, everybody, for your time. As always, the investor relations team remains at your disposal for any and all questions that you may have. Thank you. Bye-bye.