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Banco Santander, S.A. (SAN) Q1 2019 Earnings Call Transcript


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Banco Santander, S.A. (NYSE: SAN)
Q1 2019 Earnings Call
April 30, 2019 , 4:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Sergio Gamez -- Global Head of Shareholder and Investor Relations

Good morning everyone and thanks for joining the 2019 earnings presentation. As every three months our group CEO, Mr. Jose Antonio will address in detail the group performance, followed by our group Chief Financial Officer, Mr. Jose Cantera, who will address as well in detail the different business areas performance for the first quarter. And our CEO will take again the floor for concluding remarks. As always we'll have plenty of time to take your questions . So now with no further delays, Jose Antonio, please.

Jose Antonio Alvarez Alvarez -- Vice Chairman & Chief Executive Officer

Thank you. Sergio and good morning to everyone. Thank you for attending this first quarter's results conference call. Well, the quarter has been, from the macro environment relatively challenging. In this environment, we've been able to continue to grow the commercial dynamics with having changed in the quarter -- we continue to grow both in the number of customers being active, being digital customers at the group base. We're transforming this growth in customers into growth in the volumes of loans, deposits and mutual funds. We are growing in the 4%, 5% . So overall , I wouldn't say that the quarter shows a significant slowdown in the commercial activity of the bank and we were able to transform this into a result that in the statutory profit quarter we got EUR1,840 million. That is 10% below the same quarter last year, mainly due to the extraordinary provisions, resulted with it -- as a result of the restructuring we're doing mainly in Poland and in UK in the quarter. Also we have some capital gains from Prisma in Argentina and capital losses due to the disposal of real estate in Spain. Net-net is EUR108 million charge to the P&L, so the underlying profit was more in the line of close to EUR1,550 million in the quarter. So the results are affected mainly in the quarter by what I call here in the slide, market environment. It affects mainly CIB business, so the wholesale businesses as you've seen inside the CIB, the market-related business inside CIB. And the accounting impact that you very well known is the change in IFRS and the high inflation adjustment in Argentina. Argentina, last year as you remember, in the first and second quarter they were producing in the region of EUR60 million to EUR70 million results. This quarter came as a result of the high inflation accounting like EUR10 million, so we had a significant slow down there, yeah.

In terms of profitability, we continued to produce in the quarter a significantly higher return on tangible equity than our peers and the capital generation in the quarter was good. We guide you for an average around the year, around 10 basis points per quarter. This quarter came double than this due to the fact that the risk weighted asset barely grew in the quarter. As a result of this, the core equity tier 1 at the end of the quarter was 11.25%, after absorbing almost 30 basis points of regulatory effects that I will elaborate later on. So, we update you in our mid-term view in our Investor Day at the beginning of this month. So, I have nothing to add to what do we say at the time. And while we still face significant uncertainties in the short run, mainly the lower for longer interest rates and Brexit uncertainties being the main ones but not the only ones.

In the first quarter, as I mentioned, customers continue to grow in a good way. We transformed this into higher volumes. The customer revenue is growing at 4% and that we've been affected in the quarter by the effects I already mentioned. Profitability basically is I'll call it slightly lighter lower, but I would say underlying profitability is progressing well. The solvency I mentioned and credit quality is still improving 40 basis point, NPL down and cost of credit below 100 basis points. So, I wouldn't say there is no news here. So in relation with customers I mentioned that we continue to gain significant market share in some key markets, particularly in Brazil and Mexico, we are gaining share (inaudible) well in the States. And you see in the numbers, the volumes are going well and we are holding up basically the volumes more in Continental Europe where, but consumer finance, that is still growing and is growing above the market.

When it comes to the volumes, I already mentioned, we are growing 4%, 5% both loans and deposits. You see on the loan side, some deleverage is still going on in Spain and Portugal. We are growing very much in line with the market in Spain, although we are reducing our booking mainly in CIB and institutional lending, where the book is falling for different reasons, some of them related with more activity in capital markets, some of them is because profitability by around double digit, while in, SMEs and consumer, we are growing the book and this quarter, the book was basically flat. All the other markets, as I mentioned, we are growing well in the US, Brazil, Mexico, according to our expectations. Remember that we told you in our Investor Day that we expect our Latin American business to grow around in double-digit territory in volumes. The same cannot be applied to customer funds, where we are growing across the aboard, some recovery in the quarter in the asset management. Thus the four quarter last year was very bad in terms of assets under management, due to market conditions. We recovered somehow in the quarter, also the fee income is not still filling through the P&L, just because it was recovery for the quarter.

You have here the numbers quarter-on-quarter, the attributable profit. I already mentioned the figures. You have the comparison with the first quarter and the four quarter. The comparisons, you know that -- the several accounting effect, particularly, that is a negative in net interest income, a positive in provisions. You have here in the P&L compared with the first quarter 2018, what we have is here customer revenue increase, driven by net interest income and fee income. Costs are starting to reflect the synergies we're getting in Europe, particularly in Spain, Portugal, and it will come more from the UK, also in the US that we anticipate to you several quarters ago after the regulatory drive, we're going to see a better cost performance in the US. And as a result of this, the net operating income going up by 1% (inaudible) and profit before tax plus 3% taking into account the benign credit scenario I already mentioned.

Lastly in the net -- the tax rate in the quarter was higher, 36% compared with 34.7% a year ago and minority interest grew 16%, mainly due to the strong performance of Santander Consumers US. In the net capital gains and provision, the number is a charge of EUR108 million. This comes from a positive capital gain on the sale of Prisma, the acquiring business in Argentina, that is EUR150 million positive. Capital loss from the sale of properties is basically the anticipation of future commissions that we should pay for those properties with Cerberus, EUR180 million and restructuring costs in Poland and UK EUR78 million. So looking at the P&L lines, starting with the net interest income, excluding the FX effect is 5% better due to higher volumes. We rose in 7 out of the 10 markets. It was lower in the first quarter for three reasons. We have the TDRs in the US that we mentioned in the previous quarter that is fully compensated for lower loan loss provisions, positive in NII, is a negative in loan loss provision.

Second IFRS 16, the impact is EUR80 million and eliminating this impact, net income will have risen by 1%. On a like-for-like basis it's growing 1% quarter-on-quarter. Fee income was higher than the fourth quarter and year-on-year. I will elaborate on this later on and other operating income, while it was weak, is pretty much related with the activity of CIB and ALCO portfolios that were lower than it was the previous year. Going to the net interest income, you have here the drivers, overall growing 5%, mature market growing 2%, developing markets 8% You see volumes and NIM we matched to get a higher net interest margin in mature markets, increased 2 basis points customer NIM and developing markets some margin compression that we were advising anticipating you mainly in some markets, 26 basis points, down. Those are the main components of the net interest income.

When it comes to fees, I will say fee income 3% up reflecting and what I told you, the number of customers greater loyalty, greater customer loyalty, both in individuals and companies. And well, you see the activity growth in mutual funds and particularly in cars and insurance premiums that are growing very nicely. On the right side of the slide, you have a deeper detail of what's going on with the fee income. Retail banking is growing 5%, wealth management 1% and SCIB that the quarter was weaker, as I anticipated. By markets you have mature markets going down by 3%, mainly affected by CIB that where the activities are stronger in mature markets, is the market making activities while developing markets are still growing in 9%. So those are the components.

In costs, while as I mentioned at the beginning, we are seeing the costs as the result of integrations -- Popular integration both on Spain and Portugal and the cost control in the US, where the cost in all three markets the costs are going down. Also in the corporate center are going down nominal basis. On real-time basis compared with inflation costs are going down in the majority of the markets, but Poland due to the integration of Deutsche Bank operations, Mexico, where you know, we are in an investment plan that drives the cost up and Argentina, well, you compare it with inflation is very high inflation. And when you actualize salaries back with inflation, some quarters come significantly up or down. Cost of credit quality (inaudible) cost of credit south of 100 basis points, NPL is continuing the right way and coverage ratio, as usual, stays very high.

Capital, the quarter was -- capital generation was good in the range of 20 basis points. We absorbed 29 basis points due to the regulatory impact. You have in the bottom which regulatory impacts were there. The IFRS 16 was the most important one, 19 basis points and you have another minus one, including the TRIM that was 5 basis points. Organic capital generation 20 basis points is more changes in perimeter. I mentioned Prism in Argentina, the sale of the acquiring business and always that is pluses minuses mainly related with pension funds.

On the right side, you have the other capital ratio, the other relevant capital ratio, the total capital ratio Tier 1 leverage ratio and all of them. Our numbers are good, and, well, we already comply with MREL requirements as of the end of the quarter. So, the ratios, tangible net asset value per share went up by 3%. We reduced slightly the return on tangible equity. The quarter was a bit quicker. As I mentioned that the bottom line and the underlying RoRWA suffered a little bit as a result of this.

So, I'll hand over to Jose that will elaborate on the different units of the different subsidiaries.

Jose Garcia Cantera -- Chief Financial Officer

Good morning, everyone. Thank you, Jose Antonio. In the quarter, we increased slightly the weighting of the Americas, relative to Europe to 52% due to the higher weighting of Brazil and the US. In terms of underlying attributable profits, seven out of our ten core markets had a positive evolution and we had double-digit growth in the US, Brazil and Mexico.

Before I go into the different units, I want to make some general comments that affect almost all of them. On the one hand, Jose Antonio already alluded to these weak market conditions which affected gains on financial transactions and fee income. IFRS 16 that had a negative impact on net interest income of EUR81 million in the quarter. And compared to the fourth quarter, we had two fewer days that meant EUR190 million less net interest income. Somehow these issues disguise a better trends in the underlying business in the customer business that we have in the different countries.

Starting with Brazil good quarter, again. Following the positive trends we saw in 2018 double digit growth in loans and funds with demand deposits and time deposits, growing 11% and 15% respectively. We continue to gain market share selectively in auto finance 8 basis points, credit cards 103 basis points, payroll based credit 144 basis points, Getnet 132 basis points. So these are just examples of the market share gains that we are producing in Brazil.

Looking at year-on-year profits, significant growth with return on tangible equity at 21%, net interest income increased based on more volumes and fee income with basically raises in all lines. Costs very much under control growing lower than inflation and improving efficiency to record levels down a hundred basis points year-on-year.

Lower loan loss provisions, with cost of credit up 3.88% the lowest in many years and well below 4%, which was our prediction a couple of years ago. Quarter-on-quarter higher profits basically on lower costs and reduced provisions. Net interest income fell due to the impact that I just mentioned IFRS 16 fewer days -- two fewer days. On the other hand, customer-related net interest income increased in the quarter 1% and if we exclude the two fewer days the net interest income increased 3% quarter-on-quarter.

Fee income was obviously as you know, affected by the seasonally higher fee income that we had in the fourth quarter associated with the renewal of the insurance policies.

In Spain, we are progressing according to our plan in the integration of Banco Popular. We have already integrated 600 branches, which is more or less 40% of the total and the plan is to finish the integration in July. Underlying profit fell 11% year-on-year, particularly affected this quarter by capital markets activity and ALCO portfolio management. Excluding these impacts profit would have grown mid single digits . We had positive evolution of net interest income due to significant improvement, as you can see in the cost of deposits and reduced fee income, mainly due to weak wholesale businesses and mutual funds. Costs were down 6%. If we exclude the higher costs in some activities on Openbank cost in Spain in the retail bank in Spain were down 8% in the quarter, showing the benefits of the integration with Popular. Provisions were down, cost of credit was 34 basis points in the quarter, which is already a low level.

In terms of activity, since December total customers are up 50%, digital customers up 350% . This is translated in more activity and a significant growth in deposits that increased EUR6 billion in the quarter, double-digit growth in demand deposits that more than offset the fall in time deposits. Again, more customers, more operations and as some examples, for instance, we had new insurance premium contracts up 16% and point of sale turnover up 12%. Stock of loans remain unchanged, over the fourth quarter fell 3% year-on-year mostly due, as Jose Antonio said, to the contract to the decline in the stock of mortgages and the deleveraging in wholesale banking and public institutions. Compared to the fourth quarter, gross income was 3% higher and better conditions of the 123 accounts and the impact of the lower -- obviously we had a contribution to the Deposit Guarantee Fund in the fourth quarter, more than offset the lower accrual of interest, fewer number of days, as I said, and the ALCO portfolio, the negative impact of IFRS 16 . So overall , a good performance in net interest income, when we look at the underlying customer trends.

Costs were lower and provisions increased coming from a particularly low level in the fourth quarter. Looking ahead, we see flat to slightly positive net interest income and as it will benefit from the change in the conditions of the 123 account, while costs will continue to reflect the optimization measures carried out as the integration of Banco Popular progresses.

Moving to Santander Consumer, it continued to grow, backed by commercial agreements and the increased sales through digital channels. For example, in March, we signed an agreement with Hyundai Kia to acquire 51% of their financial arm in Germany, which will strengthen our leadership in the country. New lending rose 2% despite that actually car sales in Europe were down 3% and this is due to the fact that our brands are gaining market share all across Europe. First quarter profit was up 1%. By lines gross income increased, mainly due to higher net interest income, higher volumes and slightly lower funding costs . Operating expenses were flat despite business growth. The efficiency ratio improved by 119 basis points year-on-year.

Loan loss provisions were stable despite the impact of higher portfolio sales in the first quarter of last year. We had none this year. Cost of credit at 38 basis points is below the average through the cycle. Looking ahead, we see our business growing faster than the market and cost of risk normalizing. In the United Kingdom, our business was carried out against the backdrop of very strong competition, particularly in mortgages and the uncertainty associated with Brexit.

Lending went up slightly year-on-year, fueled by mortgages and other retail loans that we are up EUR4 billion year-on-year. We continued to reduce commercial real estate. Customer funds changed to more than demand deposits. That continued to increase, up 2%. First quarter underlying profit was 16% lower year-on-year due to reduced gross income. We had, as I said, pressure on mortgage margins and lower SVR balances. Also lower fee income from corporate banking activities and reduced gains from financial transactions. Slightly increasing costs, up 1% due to investments in technology and projects although in real terms, costs were down 1%.

Cost of credit remained at very low levels, only 7 basis points in the quarter. In addition, we had a restructuring charge of EUR 66 million associated with the closing of 140 branches and the renovation of another 100 branches. The closure affecting 1200 employees. Looking ahead in terms of revenues, we continue to see a strong competition therefore a strong pressure on net interest income, particularly now that all interest rate hikes seem to have been pushed forward significantly. Costs however, should be flat or down in real terms.

Looking at other units, I will go very briefly over the main of the ones, although you have all the details in the appendix. In Mexico, our strategic focus is threefold, on the one hand transform our retail and commercial banking, improve customer attention models and focus on digitalization. All of this is reflected in greater customer attraction and retention and the launch of new businesses. Loyal customers, year-on-year are up 28%, digital customers are up 57%. We had a stronger growth in lending, especially large companies and payroll based lending. Growth in funds were driven by deposits of individuals and SMEs. Profit was 12% higher year-on-year, underpinned by net interest income, double-digit growth due to volume and interest rates and the fall in provisions, cost of credit, which improved to the best level in the last six years. In short, greater loyalty and activity, higher profits and profitability with a return on tangible equity of 20%. We expect these trends to continue in the coming quarters.

In the US , we had an excellent quarter with good evolution of both volumes, with lending increasing at double digits as well as the main P&L lines where attributable profit actually increased 35%. Year-on-year, the good performance was driven by increase in gross income costs and provisions. Profit grew strongly quarter-on-quarter benefiting from seasonal factors. Remember that in the fourth quarter, at Santander Consumer, trends tend to be the weakest of the year with higher costs and higher provisions, while those in the first quarter tend to be the lowest. Also remember that in the fourth quarter of last year, we had a methodological change in the accrual of troubled debt restructuring, TDRs, with almost no impact on the bottom line, but there was a top line impact of EUR150 million.

In summary, in the appendix, you have all the details of the impact of these adjustment by line. In summary, positive evolution, we expect will continue in the coming quarters with again seasonality in Santander Consumer with a stronger first half relative to the second half. In Chile, the economy is growing at 3%, is expected to grow 3% this year and next year, and on the back half, these loans are growing well, growing at 8% and also improving the mix of customer funding. All demand deposits, time deposits, mutual funds are also growing. Underlying attributable profit was up 1% , very much affected by lower inflation in the quarter. Inflation was zero. And because of the inflation adjusted products, these had a negative impact of EUR45 million. Already in April inflation was 0.3% and we had a gain of around EUR20 million. So , this tends to be some volatility associated with this, but again the underlying customer, the trends in terms of customers and business are very positive and we would expect them to continue so in the coming quarters.

In Portugal, strong lending with clear gains in market shares in almost all products. Our new production market share is in the region of 20% for almost all the products. The stock of loans dropped year-on-year due to portfolio sales last year, more or less EUR1 billion. Deposits are up 9% year-on-year. Profit's also up 7% year-on-year due to higher revenues, lower costs, reflecting the synergies of the integration of Banco Popular and provisions which were at slightly positive.

In the quarter, S&P upgraded the rating of our bank to BBB and it was chosen as the brand with the best reputation in Portugal among the banks in Portugal. In Poland, the acquisition of Deutsche Bank Poland has strengthened our competitive position in the country and we are now the second-largest bank in the country. The integration obviously explains the abnormally high year-on-year growth rates that you see in the P&L and the balance sheet. The very good business performance is not driven all the way down to the P&L because of higher contribution to the banking tax which by the way it's not tax deductible. And lastly, we had a EUR12 million restructuring charge in the quarter affecting the closure of 70 branches and more or less 1400 employees.

Finally in Argentina, the business was very conditioned by the very high inflation, 50% inflation, 50% depreciation of the Peso and almost 70% interest rates. Attributable profit was EUR161 million, including the capital gain from the sale of our stake in Prisma. Excluding these, the underlying profit was EUR11 million. There was an inflation adjustment of EUR53 million, the monetary adjustment was EUR38 million and through currency adjustment EUR15 million.

On the business side, we see positive performance of customer revenues and positive cost control. Finally, on the corporate center, the underlying profit was hit by higher costs associated with foreign currency hedging. And in the net interest income, we also had higher costs, higher financial costs or due to higher stock of issuances and the impact of IFRS 16. In terms of cost, 1% lower here we had two forces in opposite directions. On the one hand, we had the simplification measures and the streamlining. On the other hand, the investments in global projects. Also IFRS 16 had a positive impact on costs. Lastly we include here a loss of EUR118 million from the sale of a portfolio of real estate assets to Cerberus Capital Management in the quarter. And now, I'll turn it back to Jose Antonio for his closing remarks. Thank you.

Jose Antonio Alvarez Alvarez -- Vice Chairman & Chief Executive Officer

Thanks Jose, let me to finish this presentation. Yes summing up a little bit what the environment in the Q1. Well, in this environment that was not great, we increased our customer volume and customer base. The underlying trends are solids. Year-on-year growth in customer revenue, cost control and lower loan loss provisions. The capital generation was good in the quarter, as we mentioned before. And tangible net asset value per share significantly increased 3% in the quarter. So underlying RoTE return on tangible equity higher than our competitors, affect by market weakness in the quarter. In the very shorter view looking forward, we see a deterioration in the macro scenario with lower growth expected in our markets. Probably we should expect on component growth of 1.5% GDP growth.

In this environment we're going to have mixed trend volumes, probably growing, keep growing around double digit in the Americas. And growing the customer base but not that much in volumes in Europe. We expect good cost control. The synergies and efficiencies we announced in the Investor Day and the cost of credit remained relatively low levels. And our aim is continue gain market sharing in our main markets and improve our profitability and strengthen our balance sheet.

Let me to finish through elaborating the two operations we announced the same month. The first one was the voluntary tender offer for the 25% of the shares of our subsidiary in Mexico . This is very much in line with the strategy we announced and it meets our financial criteria with a expected return on investment of 14.5%. At the same time, for Santander minority shareholders, this is an opportunity to monetize their shares and gain exposure to a global bank and diversified bank like Santander. We believe we do this offer because we believe in the financial sector in Mexico and the potential growth going forward through a higher banca legislation and large numbers of customers in the country.

Second operation, we announced in the same month was we signed a Memorandum of Understanding with Credit Agricole for our custody and asset servicing businesses. This operation is also consistent with our strategy. The business are very complementary in a business where the scale matters a lot. We get a better position in the combined entity to be facing competitor in this niche of the market in Europe and the Americas. Well, this operation as we already communicate to you, will produce at the closing an estimated capital gain of EUR 700 million, that we expect to record in extraordinary charges and provisions. Overall the line of extraordinary charges in provisions at the year and the quarter was minus EUR108 million. Overall in the year will be basically zero, positives and negative will offset each other. This operation has also had a slightly positive impacting capital 3 basis points and the profit going forward -- expected profit going-forward based on the business plan of the combined entity will mean a slightly increase in our EPS.

Finally, just to remember you our main targets -- financial targets that we announced to you in the Investor Day. I think the quarter in the underlying basis shows a that we are progressing toward our goals. We are showing that the business is growing as we were expecting in America. In the Americas we are showing that our efficiency gains that we announced to you in Europe and you see in the numbers in Europe that we are starting to gather momentum there. And the capital generation has been good in the quarter and we've been able to offset the regulatory headwinds and this will transform as we are expecting higher profitability and translate in higher dividend and higher profitability for shareholders.

Thank you and now we remain at your disposal for the questions you may have.

Questions and Answers:

Sergio Gamez -- Global Head of Shareholder and Investor Relations

Thanks, Jose Antonio. Indeed we have now time to open the Q&A , so please operator we can proceed with the first question.

Operator

Ladies and gentlemen, the Q&A session starts now. (Operator Instructions) The first question comes from Jose Abad from Goldman Sachs. Please go ahead

Jose Maria Abad Hernandez -- Goldman Sachs Group Inc -- Analyst

Hello, good morning and thank you very much for the presentation. Two questions from my side. The first one is, was the impact from the regulatory equivalents with Argentina, really positive? And also, I mean a follow-up question on this is whether actually the positive impact from this, in case there is one, is included in the 50 bps impact from management actions that you guided in, in deed in your Investor Day?

The second question is on litigation. There was an article in Expansion I believe last week, talking about the Supreme Court in Brazil forcing Santander to compensate workers from Banespa from their bonuses back to actually in 1986. The article quantifies the potential impact of actually north of BRL1 billion. So I think it will be useful for us actually if you could actually clarify, what's the potential impact from these and any litigation reserve that you may already have against these contingencies. Thank you very much.

Jose Antonio Alvarez Alvarez -- Vice Chairman & Chief Executive Officer

Thank you, Jose. I will elaborate on the second question. I pass the first one to the CFO that will elaborate on the equivalents in Argentina, that was approved, as you know, by the EU in April or in March?

Jose Garcia Cantera -- Chief Financial Officer

In April.

Jose Antonio Alvarez Alvarez -- Vice Chairman & Chief Executive Officer

Yeah. So the article you referred -- the case you referred in the court in Brazil, well, it's related, as you know the litigation related with labor claims in Brazil is pretty high. As a matter of fact, the provisioning we have in the balance sheet for labor claims is close to BRL4 billion in the country and we appealed this ruling of the court. And we think that we are well provide for the plenty of -- for the significant litigation labor claims that we have in Brazil were well provided, not only specifically for this one, for the overall litigations claims that we have that is a very high number, taking into account one by one.

Jose Garcia Cantera -- Chief Financial Officer

Specifically , the article referred to BRL1 billion, so we're talking really EUR150 million worst case scenario and again this is a process that will take quite a long time. We don't expect this to be actually -- to finish at least within the next seven, eight years. And I didn't get the first question?

Jose Antonio Alvarez Alvarez -- Vice Chairman & Chief Executive Officer

The first question was about the equivalents in Argentina, clearing for the EU, the European Union, Argentina, the regulatory equivalence, how much of this impact our capital (inaudible).

Jose Garcia Cantera -- Chief Financial Officer

6 basis points.

Jose Antonio Alvarez Alvarez -- Vice Chairman & Chief Executive Officer

6 basis points. Yeah. So this is new for those who are not familiar with this that as a matter of fact, the significant reserve requirements in Argentina, and when we gather deposits, we need to reserve with the Central Bank, some of these deposits for regulatory reasons and those deposits had risk weighting. When the local regulator is declared equivalent by the EU, the risk weighting goes to zero and this is a reduction in risk weighted assets and translating what Jose said, 6 basis point of capital.

Sergio Gamez -- Global Head of Shareholder and Investor Relations

Next question please.

Operator

The next question comes from Vanessa Guy from JPMorgan. Please go ahead.

Vanessa Maria Pilar Guy Vazquez -- JP Morgan Chase & Co -- Analyst

Hi, good morning. My first question was on capital. I was wondering if you could provide some guidance on what capital impacts you would expect over the next coming quarters for 2019? And my second question is regarding the US and how the Chrysler agreement is progressing? Thank you.

Jose Antonio Alvarez Alvarez -- Vice Chairman & Chief Executive Officer

So on capital, we guide you in Investor Day 50 basis points -- yeah, 50 basis points to 60 basis points, we already had in the quarter 30s, another 20 basis points to 30 basis points to come. Yeah, so this is what this is going to come from -- what we expect to come from the regulatory headwinds including many items there, yeah.

On the other side, question related with Chrysler FSA, we are still holding with FSA, what I will qualify as a constructive dialog, in relation with the business we are operating for them in the US. I cannot at this point tell you where this dialog will end, but I will say at this point that (inaudible) comes through different. We are looking for a solutions, how to make the business, how to have a better business for both, helping them to sell more cars and having a sound and solid finance business going forward.

Sergio Gamez -- Global Head of Shareholder and Investor Relations

Thanks Vanessa. Next question please.

Operator

The next question comes from Alvaro Serrano from Morgan Stanley. Please go ahead.

Alvaro Serrano Saenz de Tejada -- Morgan Stanley, -- Analyst

Good morning. A question on capital and then on restructuring for me. On capital, you've built 20 basis points in the quarter from organic generation. Can you maybe give us some color why it's higher than your usual 10 basis point run rate? Is it faster DTA rundown or something that we could extrapolate? And when we look forward, you've obviously done Mexico the buyout, you've done the MoU with CASA. Can you maybe walk us through an updated list of some more efficiency and optimization, we could look forward to? So you've talked in the past about UK model. We've got the 6 basis points that you just mentioned on Argentina is can we look forward to further securitizations? You've got a stake in (inaudible) that presumably is a source of capital, just some general color on that.

And the second on restructuring -- I was -- can you maybe give us a feel for the timing of the restructuring in Spain and UK? I think you mentioned Spain for July the last headcount reduction, but in the UK given the revenue trend. It's very difficult for any substantial change in those revenue trends, at least in the short term, given the rate outlook. If you could maybe this talk us through, you mentioned costs flat versus inflation this year, but can we look forward to further reductions and when those restructuring and those reductions might happen? Thank you.

Jose Antonio Alvarez Alvarez -- Vice Chairman & Chief Executive Officer

Okay. Going into the first question, capital generation in the quarter, 20 basis points compared with our guidance on average 10 basis points, I will say -- I will stress the word average. Yeah, on average we generated 10 basis points, this quarter came better. The reason is we are being more efficient in managing risk-weighted assets, at the same time, we have much more demand in, I mentioned in the -- when I was talking about Spain, we have much more demand in particularly, in those exposures that, well, we think are below the cost of equity and for that reason, we are heading at, what we qualify in our Investor Day as a lighter capital model. And this is the reflection of this.

You mentioned also Mexico and the buyout in Mexico and the agreement with the Credit Agricole that has more positives in capital. Well, but I will not -- the capital management as you can imagine became a priority for the group several years ago with the higher capital requirements and we are refining all the capital models with a internal big project that is called -- that is managed by the CFO office. We are improving significantly the tools to match capital across the group and some of this is going to be reflected in the numbers going forward. So being more efficient on one side, inducing the capital in new operations, on the other side being -- having margin developments in a way that provides a higher return.

The second question was restructuring Spain. You mentioned the Spain, UK timing. Of course, I'll talk about the timing in Spain. We called the unions, I think it was yesterday, to have the first meeting in a week, next Monday I think, to start the negotiation process with the unions. Well, it's very difficult to say when the process is going to finish. On the other side, the integration process -- the branch integration process that Jose also mentioned, we already integrated 600 branches out of 1,600. We expect to finish the 1,600 branches integration at the end of July more or less and after that we start the reduction of number of branches, provided that we reach an agreement with the unions that we're going to have the discussion in the same time. So in our mind it has been to finish the process this year in Spain.

You mentioned UK. UK, we guide you to a strict cost control and at the same time ,in the Investor Day, we guide you to a return on tangible equity in a tougher revenue environment higher than the current one. This mainly will be done through the cost still that we plan to grow some businesses in the UK. We are growing CIB and the related business but we are suffering and we are betting on a tough environment for the mortgage business, that is the one who is more affected at this stage and we expect to have to be able to show a better cost control, not only better cost control, probably some reduction in cost going forward is something that expect to get.

Sergio Gamez -- Global Head of Shareholder and Investor Relations

Thanks, Alvaro. Next question please?

Operator

Your next question comes from Carlos Cobo from Societe Generale. Please go ahead.

Carlos Cobo -- Societe Generale -- Analyst

Hello.Thank you very much for the presentation. And a couple of questions from my side. In the UK, as a quick follow-up, not only that you've seen some cost inflation, NII is weak, fees are not particularly strong. I was wondering whether you are considering more actively the potential cut in the 123 account, as you did in Spain, as a way to compensate the profitability challenges in the UK. Second, in Spain, cost of risk was just slightly higher than the run rate last year. I was wondering if you could provide some color here, outlook for the whole year and whether there is any exceptional or some seasonality that you tend to charge higher provisions in the first Q. Thank you .

Jose Antonio Alvarez Alvarez -- Vice Chairman & Chief Executive Officer

You mentioned the UK, we're going to take, I will say -- we are managing the business and we're going to take measure both on the business front and in the cost front. In the business front, you mentioned the 123 account. We don't have a specific decision for this specific account at this stage. But it is sure that we should look for a new sources of revenue and at the same time that we reduce the cost that this is the plan going forward in the UK.

The cost of risk in Spain, I will expect the cost of risk in Spain to remain nothing new. The quarter was a small spike but I will expect to be in the region of 30 basis points, in the 30s, yeah, for the year, nothing new here in this front.

Sergio Gamez -- Global Head of Shareholder and Investor Relations

Thanks, Carlos. Next question please.

Operator

Your next question comes from Ignacio Ulargui from Deutsche Bank. Please go ahead.

Ignacio Ulargui -- Deutsche Bank AG -- Analyst

Hi, good morning. Just have two questions, one on the Brazilian NII. If you could update us on the trends that we should see, you have been guiding for a high-single digit supported by loan growth? What are the recent downgrades that we have seen in GDP may affect a bit lending demand and how do you see that?

The second question on the competitive landscape in Spain, particularly on the mortgage market, and the implication of the new mortgage loan. How do you see that should impact margins going forward? Thanks.

Jose Antonio Alvarez Alvarez -- Vice Chairman & Chief Executive Officer

Well, NII in Brazil in the quarter, as you know, came down. This is more due to the non-customer related activities, last year interest rates of -- the previous year in 2017 interest rate came down sharply as a result of this in 2018. We've got significant revenue on this. On the customer front, I remain -- we've been guiding due for double-digit kind of growth in the country and we've been guiding you for a lower growth in NII, so mid maybe to high -- mid to high or mid-single digit in Brazil. So some margin compression we expecting in Brazil.

When you refer to Spain, as you said rightly, the market remains fairly competitive not only in mortgages, I will say all across the board. It's true that we managed this quarter to increase our net interest margin on customers. You saw it through a reduction in the funding costs at the same time a slight increase in the deal we are getting from our assets, so we are happy with this.

You specifically referred to mortgages. Mortgages remains fairly competitive. I haven't seen a extra reduction in prices from the one we had one quarter or two quarters ago, remains competitive, but it is true that we managed to get a higher yield due to the fact that in the quarter we remained flat on the loan book, but grew SME lending and grew in consumer lending. That reflects into higher yield in the loan book. At the same time we reduced the funding costs, as I said. Mortgages, I will say the market remains competitive. I don't expect a big -- the figure to remain where it is at this stage.

Sergio Gamez -- Global Head of Shareholder and Investor Relations

Thanks Ignacio. Next question, please.

Operator

The next question comes from Andrea Filtri from Mediobanca. Please go ahead.

Andrea Filtri -- Mediobanca -- Analyst

Yes, good morning. Two questions, One on capital and one on hedging. On capital, there have been changes to CRD rules, I'm talking to CRD V and specifically to the SME support factor and to the possibility to exclude from intangible deductions some software components. Could you give us your indicative impacts for next year? And can you also clarify on the regulatory headwinds, I was left at 50 basis points and then before maybe you said 50 basis points to 60 basis points and finally, the TRIM impact, when you guided the 50 basis points, is it all in 2019 or there is still a part in 2020 regarding the low default portfolio? On the hedging, could you update us on your hedging strategy and how you're adjusting to a more dynamic use of this tool? What was the P&L cost and the capital impact in Q1? Thank you.

Jose Garcia Cantera -- Chief Financial Officer

Okay, so hedging, the strategy remains the same. So we hedge the capital ratio, so that is why despite the risk weighted assets due to currency depreciation went up EUR8 billion in the quarter, there was no impact on the capital ratio. The cost of that strategy in the first quarter is more or less 4 basis points of capital. We also hedge the P&L let's say on an opportunistic basis based on the outlook that we have and the risks that we see in the different countries. Right now, we have fully hedged the pound and the Mexican peso and 75% hedged the expected results that we have in Brazil. The cost of that in the first quarter was EUR60 million. On the other hand, obviously, you have the positive of the translation of the results in local currencies into Euros all throughout the P&L.

Jose Antonio Alvarez Alvarez -- Vice Chairman & Chief Executive Officer

On the numbers you asked about capital depicted 50 basis points regulatory headwinds is for this year, is for 2019. We already absorbed, as I said before, 29 basis points, so we expect the rest to come along the year.

When you were referring to the CRD V eventually impacting changing in SME support factor and intangibles, as you know, we have a significant exposure to SMEs mainly after this decision of Popular, although a significant portion of the SMEs around the world are in a standard model, yes. So we have the SMEs in the corporate business in UK, US and Latin America and still standard model, we have our own internal rate based model for Spain. So but we have significant exposure there and changes in the support factor effects us accordingly.

In intangibles you mentioned this. Well, intangibles there is a door open there to have a discussion of what the intangibles, we've been very vocal on this, because we think that in this -- at this particular juncture where we are investing significantly in digitalization so what means basically investing in software, there is an (inaudible) treatment when you invest yourself and (inaudible) when you buy from someone else. When you invest yourself its intangibles and you did that 100% from capital. When you buy from someone else the treatment is totally different. We've been, as you know, our software -- we control our software and we continue to invest significantly in our software. This will be a significant deal for us. It's very difficult to say at this stage because software, there are different type of software. For how long the software remains being useful for the bank is probably too early to call, but we have intangibles, if I remember well is EUR2.8 billion or something like that in the balance sheet. How much this may be affected, I have no idea at this stage. That is too early.

Sergio Gamez -- Global Head of Shareholder and Investor Relations

Thanks Andrea. Next question please.

Operator

The next question comes from Mario Ropero from Fidentiis. Please go ahead.

Mario Ropero -- Fidentiis -- Analyst

Fee income trends in Spain, which has been very negative quarter-after-quarter for a while, presumably due to corporate and investment banking. So I was wondering if you can give us an indication on the weight of this business in the fee income line. And when do you expect this line to bottom out? And then on the NPL ratio in Spain, I noticed that it has remained flat since mid-2018. So, please, if you could comment and clarify what's going on here? Thank you.

Jose Antonio Alvarez Alvarez -- Vice Chairman & Chief Executive Officer

Fee income in Spain, as you rightly mentioned, went down by 3% is explained basically for CIB activities. If I look for the whole year, I will expect some growth in this slightly positive. Some growth in fee income, assuming that the CIB business behaves in a normal way, I will say having the same activity than last year. The other question was about NPLs.

Jose Garcia Cantera -- Chief Financial Officer

NPLs in Spain.

Jose Antonio Alvarez Alvarez -- Vice Chairman & Chief Executive Officer

Well, NPL, well, we're still in -- the credit quality in Spain for -- it has good trends. I don't remember exactly the NPL number it is flat. Probably, you're right, but I don't have in my mind any significant probably in the reduction of both non-performing assets. I mean, both loans and properties, we are progressing a good pace in the reduction of this and also the provision of this, we feel comfortable with the level of provisions, we have already for all of these as provisions.

Sergio Gamez -- Global Head of Shareholder and Investor Relations

Thanks, Mario. Next one please.

Operator

The next question comes from Daragh Quinn from KBW. Please go ahead.

Daragh Quinn -- KBW -- Analyst

Hi, good morning. A question on Spain, just with a view on the new incoming government. We saw the Socialist Party campaign on the idea of a minimum effect of corporate tax rates in Spain. And I'm just wondering if you see any risk to the amount of taxes you pay out of the legal entity in Spain.

And then a second question on asset quality and provisions in the UK and the European consumer finance business, you've indicated before that you expect to see a normalization of credit charges there. I was wondering if you could just update us again on A, the time that it'll take for those provisions to normalize and at what level do you expect them to normalize? Thanks.

Jose Antonio Alvarez Alvarez -- Vice Chairman & Chief Executive Officer

So in Spain, well, it's too early to say, yeah. So the tax rate in the Spain, well, it's too early to say. Naturally, it was (inaudible) for the legal entity in the Spain to the corporate tax in the Spain. And as you know, our corporate tax is already higher than the other sector. Well, I'm not going to speculate on higher or lower tax rate at this stage.

In asset quality, provisions you mentioned in UK consumer finance, yes, so we told you in the Investor Day that we are having a cost of risk lower than the expected loss across the cycle. The distance in the consumer finance, we have been having around 40 basis points, 40 basis points or even lower. And the expected loss is basically double than this. We are not seeing any sign of deterioration in the credit quality and probably for this year, if I need to bet, probably will remain closer to the 40s than to any other number, but well we have always in mind that if our models are right, at some point it should normalize. Your question is when, probably to seek when we need to look at the unemployment numbers. Yeah, the unemployment number is the main factor that drives the cost of credit -- cost of risk in our consumer business, not only in Europe, also in US (inaudible).

And with the UK , we gave you the figures. Our basic book in the UK it's mortgages is 80% of book. Yeah, so the remaining 20% is a mix between corporate and some consumer lending, a small fraction. As do our loan to value is one of the lowest in the market and our front book will be much more conservative than some of our peers there and on our buy to let exposure is low. Well, when you have a cost of risk that is south of 10 basis points, well, (inaudible).

Jose Garcia Cantera -- Chief Financial Officer

Obviously, the one way to go.

Jose Antonio Alvarez Alvarez -- Vice Chairman & Chief Executive Officer

Yes, it's only one way to go, that is up. When? Well, again, (inaudible) retail business our exposure is with households and the main driver as in consumer finance tend to be unemployment, yeah, so we have not seen any sign of deterioration of unemployment rates, all across Europe including UK.

Sergio Gamez -- Global Head of Shareholder and Investor Relations

Thanks, Daragh. Next question please.

Operator

The next question comes from Your next question comes from Britta Schimdt of Autonomous Research. Please go ahead.

Britta Schimdt -- Autonomous Research -- Analyst

Yeah, hi there. I've got two questions please. In Brazil, one of the competitors on the credit card merchant acquiring business has changed pricing on selected credit card transactions and I was interested to get your opinion on whether you think that will have any impact on Getnet or the merchant acquiring fees in Brazil. And secondly, could you let us know what the IFRS 16 impact was on costs? I might have missed that. And can you confirm that this likely cost reduction was already part of the business as usual costs being flat that you've given at the Investor Day?

Jose Garcia Cantera -- Chief Financial Officer

So, if you want, I'll take the second and let me give you the -- throughout the P&L, IFRS 16 in the first quarter had, as I said, a negative impact on net interest income of EUR81 million and costs were reduced by EUR59 million, so net bottom line net impact was negative EUR22 million. And when we look at cost trends, obviously this is a one-off , so obviously this will affect the year-on-year comparison this year, but obviously we consider this as a one-off.

Jose Antonio Alvarez Alvarez -- Vice Chairman & Chief Executive Officer

In relation with Brazil, competition in acquiring business, well, new competitors came to the market. This is a market that was a market basically where two competitors, five-six years ago. We came along with our proposal in Getnet. We went from very low market share or almost no market share to close to 15% market share. And the last two or three years, with newcomers into the market, newcomers with a strong proposition particularly for e-commerce, related and the small tickets and the market is becoming much more competitive. But you know, the fees in this market were significant. There were three sources of revenues in the market, the interchange fee, the flow business that was significant because the payment date was like 20 plus, B plus 20. So the business was significant in this front, the income generation from the front. And finally rent of the gadgets that the merchants use for this purpose. The competition is coming in the -- I will say, in the three fronts. Our business is, I think is much resilient than others because our business is not just a acquiring business, it is a business that we bundled, the acquiring business with banking services, some lending embedded there and a package mainly to the small merchants in the market. So we were expecting somehow this competition to come sooner or later. It's coming now and we expect to keep gaining market share and approaching us over time to a market share closer to 20%, that was our original aspiration when we started this business six years ago, seven years ago, and we've got from 1%, 2% to 13%, 14%, close to 15%. And we expect to keep going up in our market share in a more competitive market and with lower unitary fee income, but higher volumes. Don't forget the volumes, the volumes that we've been gaining market share, growing well in double-digit close to 20% year after year. In the previous year, we were even growing at 30%. We expect to keep growing significantly in this business.

Sergio Gamez -- Global Head of Shareholder and Investor Relations

Thanks, Britta. Next question please.

Operator

The next question comes from (inaudible) from Barclays. Please go ahead.

Unidentified Speaker -- Barclays -- Analyst

Hello, thank you for taking my question. My question is regarding the US and the cost. I see that the cost of Santander bank is still up on a cost income ratio at 77% more or less. I wonder what further actions you have in mind, in order to come this figure down? Thank you.

Jose Antonio Alvarez Alvarez -- Vice Chairman & Chief Executive Officer

So performance in cost is -- I'll do the performance in costs only in the last quarter -- the last couple of quarters has been good in the US still you're right our cost income compared with our peers -- SBNA compared with our peers in the market is still very high and we're working on this in two different fronts, yeah. So one front is getting more internal synergies in the -- that means that as you remember, we are managing the US as a separate business, one side, private bank and another side, consumer finance and other side SBNA and another side CIB, and in the New York branch and the broker dealer. When the holding company came along on the regulatory pressure, we build -- we are still in the process of building the holding operations in the US and we are in a project that is what they internally call one Santander that means exactly one operation in the US where we can extract synergies from the operation. Having said that, and you should expect a good cost control volume forward in the US, this is just one part of the business.

On the revenue side, when we compare ourselves with our peer, our revenues are weaker. In this regard, we are progressing well and we are starting to show significant progress, not only in consumer business, but (inaudible). In SBNA, we are showing some progress in CIB business where our revenues are growing -- starting from very low levels, close to 20%. Our C&I business is showing significant progress. The multi-family (inaudible) business that we have basically in New York is showing significant progress and still we have more things to do in the retail arena with the households and individual customers.

So on one side and we mentioned in the Investor Day that one of the key elements for improving our profitability in US was the operating leverage. We have a high cost income, as you rightly mentioned, and we expect to keep this well under control or even in some cases going down and at the same time being able to improve with infrastructure, we have the revenue lines in the segments I mentioned to you. And with these two elements, we expect to reduce significantly our cost income and improve our profitability in the US, in SBNA in particular.

Sergio Gamez -- Global Head of Shareholder and Investor Relations

(ph) Fernando , last question, please.

Operator

The last question comes from Carlos Peixoto from Caixabank-BPI. Please go ahead.

Carlos Peixoto -- Caixabank-BPI -- Analyst

Hello, good morning. Hey, thank you for taking my call. My question will be on the corporate center. I was wondering if you could shed some light on the evolution of the funding costs at the corporate center which went up 14% quarter-on-quarter, if I'm not mistaken 27% year-on-year. That would be -- well, yeah, that would be my only pending question . Thank you.

Jose Garcia Cantera -- Chief Financial Officer

I think there's nothing there. We've had more issuance along the way compared with the first quarter of last year, particularly to comply with MREL requirement. As Jose Antonio said, we already fully comply with the requirements of the SRB. There is nothing special there. And also the cost of the hedging, which are included as part of the cost of the corporate center, which I mentioned were EUR60 million in the quarter.

Sergio Gamez -- Global Head of Shareholder and Investor Relations

So, thanks very much everyone for joining and obviously the IR team is at your disposal for any follow up. Thank you.

Jose Antonio Alvarez Alvarez -- Vice Chairman & Chief Executive Officer

Thank you.

Duration: 69 minutes

Call participants:

Sergio Gamez -- Global Head of Shareholder and Investor Relations

Jose Antonio Alvarez Alvarez -- Vice Chairman & Chief Executive Officer

Jose Garcia Cantera -- Chief Financial Officer

Jose Maria Abad Hernandez -- Goldman Sachs Group Inc -- Analyst

Vanessa Maria Pilar Guy Vazquez -- JP Morgan Chase & Co -- Analyst

Alvaro Serrano Saenz de Tejada -- Morgan Stanley, -- Analyst

Carlos Cobo -- Societe Generale -- Analyst

Ignacio Ulargui -- Deutsche Bank AG -- Analyst

Andrea Filtri -- Mediobanca -- Analyst

Mario Ropero -- Fidentiis -- Analyst

Daragh Quinn -- KBW -- Analyst

Britta Schimdt -- Autonomous Research -- Analyst

Unidentified Speaker -- Barclays -- Analyst

Carlos Peixoto -- Caixabank-BPI -- Analyst

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This article is a transcript of this conference call produced for The Motley Fool. While we strive for our Foolish Best, there may be errors, omissions, or inaccuracies in this transcript. As with all our articles, The Motley Fool does not assume any responsibility for your use of this content, and we strongly encourage you to do your own research, including listening to the call yourself and reading the company's SEC filings. Please see our Terms and Conditions for additional details, including our Obligatory Capitalized Disclaimers of Liability.

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