Banco Santander (NYSE:SAN) reported third-quarter financial results on Wednesday. The transcript from the company’s third-quarter earnings call has been provided below.
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View the webcast at https://wavedw.santandergroup.net/WS/2610PRANA/Registro
Summary
Banco Santander reported a record underlying profit of 11.2 billion euros for the first nine months of 2016, largely driven by increased customer activity and revenue growth.
The company’s transformation initiatives have improved efficiency by almost 2 percentage points and increased underlying RoTE to 16%.
Revenue grew by 7%, driven by strong net interest income (NII) and record fee growth of 10%, despite limited impact from TSB and Webster acquisitions.
The balance sheet remains solid with a CET1 ratio of 12.7%, and the company generated close to 90 basis points of capital this year.
Strategic focus includes scaling global technology platforms and enhancing customer engagement, contributing to a sustainable increase in profitability.
The company remains committed to achieving a RoTE above 20% by 2028, driven by disciplined capital allocation and transformation initiatives.
Operational highlights include strong growth in Retail, Openbank, CIB, Wealth, and Payments, supported by customer activity and diversification.
Management expressed confidence in achieving targets, despite challenges such as cost of risk impact from Argentina.
Full Transcript
OPERATOR
Good morning, everyone, and thank you for joining Banco Santander’s third quarter. Today’s presentation will follow the usual structure. First, Hector will talk about our results, with a special focus on the performance of our global businesses. Jose will then cover the financial results in more detail. And finally, Hector will close with final remarks before we open the line for Q&A. Before we start, let me highlight two points. First, this is the first quarter in which both TSP and Webster are included in our results, with Webster consolidating from August 20th. Second, to provide a clearer view of the underlying trends, our underlying metrics exclude the impact of Poland as well as integration costs related to TSP and Webster. With that, Hector, over to you.
Héctor Grisi Checa (Consejero Delegado de Banco Santander)
Thanks, Rahul, and good morning, everyone. Q3 was another strong quarter for Banco Santander, demonstrating once again the strength of our strategy and the resilience of our business model. Our underlying profit for the first nine months of 2016 hit a new record of 11.2 billion, driven by strong customer activity, revenue growth, and our growing franchise of 189 million customers, which now includes TSB and Webster. At the same time, One Transformation continues to drive excellent progress towards a simpler and more integrated model.
This is translating in tangible results: efficiency improving by almost 2 percentage points, underlying RoTE increasing to 16%. Our balance sheet remains very solid with robust credit quality and a CET1 ratio of 12.7%. We have generated close to 90 basis points of capital this year, helping us to absorb the impacts from TSB and Webster while maintaining a solid capital position. Overall, our disciplined capital allocation continues to drive strong results and shareholder value creation.
Before I move on, as you may notice, the impact of TSB and Webster on year-on-year trends remains very limited at around 1.3 percentage points across the main P&L lines. Organic sales remain strong with underlying profit growing 14% year on year in constant euros. We continue to deliver strong revenue growth across our global businesses, with revenue up 7%, supported by NII driven by profitable volume growth and record fees up 10%, outpacing NII growth ex-M&A, with strong customer activity across our businesses.
This reflects structural trends as customers do more with us and we capture the benefits of stronger connectivity across the group. At the same time, costs declined excluding TSB and Webster, demonstrating the positive effects of our transformation. LLPs remain impacted by Argentina, reflecting sector-wide trends in the cost of risk. In the rest of the group, provisions grew broadly in line with organic portfolio growth. All in all, these results once again demonstrate the quality and resilience of our earnings.
What we are seeing again this quarter clearly reflects the strategy we presented at Investor Day. Our unique business model combines scale with customer focus and diversification across Europe and the Americas. Together with One Transformation and our network businesses, this continues to drive operational leverage, higher profitability, and strong shareholder value creation. Now let’s talk about our customers. Three structural trends continue to strengthen the quality of our results. First, we continue to grow our customer base. Second, customers are doing more with us, supported by higher engagement, better products, and stronger connectivity across the group, driving fees per active customer up 2%. And third, we continue to structurally reduce our cost to serve as One Transformation continues to scale across the group.
Together, more active customers, deeper relationships, and lower cost to serve are making our profitability more sustainable over time. We continue to deliver on our transformation, driving structural efficiency and gains from levers we control. Simplification and automation have delivered almost 2 percentage points of efficiencies. Our network businesses are generating strong positive jaws. Our global technology platforms are scaling across the group, and AI is now making a measurable contribution. As a result, our efficiency has improved significantly, with further upside ahead.
Our five global businesses continue to deliver strong results, supported by customer activity, diversification, and scale. Retail and Openbank are delivering strong operational leverage from revenue growth and lower costs. CIB, Wealth, and Payments continue to leverage our global capabilities and connectivity to deliver double-digit revenue growth and further efficiency gains. Together, our global business model is driving higher profitability and continued progress towards our 2028 targets.
Now let me take you through each global business. In Retail, we continue to transform our model, combining cutting-edge technology with the expertise and proximity of our teams to deliver the best customer experience. We continue to scale up our global platforms, with the new app now live in five countries and the Customer Interaction Platform available in six following its rollout in Spain. Together, they are enabling a simpler, more personalized, and more consistent customer experience across the markets.
In Commercial, our new model continues to generate strong results in Spain and the UK, connecting high-growth companies with more value-added solutions, delivering 17 percentage points of operating jaws in each market with strong revenue growth and lower costs year on year. At the same time, Webster strengthens our commercial capabilities in the U.S., adding scale, deposits, and further cross-border opportunities across the U.S.–LATAM corridor, leveraging our global footprint.
Overall, retail fees grew 8%, cost per active customer declined 5%, and productivity continued to improve. Profit grew 12% year on year, supported by strong operational leverage and solid asset quality with cost of risk relatively stable ex-Argentina. Looking ahead, we expect profitable growth to continue as we scale our model, deepen customer relationships, and capture additional revenue and cost synergies from TSB and Webster. With Openbank, we are building a more integrated, scalable, and efficient business with a broader customer proposition across our key markets. In Mobility Finance, we continue to strengthen our core auto lending business with 12 new agreements with OEMs, reinforcing our position as a strategic partner. At the same time, we are broadening our offering beyond traditional auto lending, expanding our leasing platform in Europe, and improving the digital customer experience.
In Digital Banking, our customer proposition continues to gain traction. This is reflected in Embedded Finance, where Openbank Pay continues to scale, including the recent expansion of our Amazon partnership to Poland. At the same time, our focus on funding optimization continues to support profitability, particularly in the U.S., where Digital Bank has already raised around $11 billion of deposits since its launch. This is translating into a strong underlying performance, with positive operational leverage driving 13% growth in profit before tax excluding Motor Finance.
As anticipated, profit continues to reflect the end of the electric vehicle tax incentives in the U.S.; the tax rate is now expected to remain broadly stable. We expect profitability to improve as we continue to scale the business and deliver further efficiencies. Santander US is already delivering strong results with clear improvements in profitability, efficiency, and funding. In just nine months, Santander US RoTE has improved by around 2 percentage points, while profit is up 24% year on year excluding Webster, supported by strong operating leverage and lower provisions. Openbank has been an important contributor to this progress, particularly through the improvement in our funding profile, and with Webster now part of the group, our loan-to-deposit ratio is below 100%.
Webster further accelerates this progress, adding scale, a more balanced business mix, and significant cost synergies, and puts us on a clear path to around 80% RoTE by ’28. In CIB, we continue to build a world-class business for our corporate and institutional clients, leveraging the strength of our global network. Our business model combines deep industry expertise, advice, financing, and risk management capabilities, helping us to build deeper strategic relationships with our clients. A good example is our role in the largest offshore wind project in the German Baltic Sea, where we supported our client as debt and M&A advisor, lender, and hedge counterparty.
What continues to differentiate us is the connectivity of our franchise, bringing CIB capabilities to clients across the group in a much more integrated way. A recent airport financing illustrates this very well, with our export finance capabilities supporting a commercial banking client. At the same time, we continue to transform our operating model through global platforms and AI, improving productivity, customer service, and risk management. Strong client activity, efficiency, and capital discipline continue to drive profitable growth.
As a result, profit rose 15% year on year, while maintaining one of the best efficiency ratios in the sector and aggregating new business at a RoTE of around 22%. In Wealth, we continue to deliver solid growth while enhancing our value proposition. Leveraging our global scale and capabilities in Private Banking, we are further strengthening the global advisory model and connectivity across countries and businesses. This is already translating into stronger client activity, with cross-border referrals up more than 40% year on year. In Insurance and Asset Management, we’re increasingly operating as one integrated platform to deliver a more differentiated value proposition.
Insurance is one of the biggest growth opportunities across the group. Our integrated life and pensions model is already delivering tangible results in Spain, where life savings sales increased 43% year on year. In Protection, our specialized sales model in Brazil is driving high productivity and conversion rates while reducing churn through expert advice. This is supporting a 20% premium growth across our co-insurance businesses. Together, these initiatives are making our business more scalable, more resilient, and increasingly fee-based.
Overall, profit rose almost 20%, driven by strong client inflows, fee growth, and continued efficiency gains. Finally, Payments, our high-growth platform business. We continue to combine scale with innovation. In Getnet, we remain focused on reinforcing our value proposition through innovation, including a single-entry platform that allows merchants to accept payments across Europe. The Getnet platform is already processing around 2 billion transactions per month, helping to reduce the cost per payment transaction by 39%. In Ebury, we are accelerating international expansion, product development, and innovation.
This is translating into a strong financial performance, with revenue up 15%, EBITDA margin improving to 34%, and profit more than doubling year on year. Overall, the business keeps building strong momentum with significant upside as we continue to scale our global platforms. Our strong operational and financial performance continues to drive organic capital generation, high profitability, and double-digit value creation. We have generated almost 1 percentage point of capital organically during the year, leaving our CET1 ratio at 12.7% and on track to achieve our global year-end target. Underlying RoTE improved to 16% and is close to 17% at a normalized average CET1 ratio of 13%. Underlying earnings per share grew 21%, reflecting strong profit generation and buybacks, while TNAV plus cash dividend per share increased 11%, even after the initial impact from Webster.
Including the program currently underway, total share buybacks will reach around 9 billion euros, close to our commitment to distribute at least 10 billion euros for ’25 and ’26. I will now hand over to Jose, who will walk you through the financials in much more detail.
José García Cantera (Chief Financial Officer)
Thank you, Hector, and good morning, everyone. I will take you through the group’s P&L and capital performance in more detail. Let me start with two brief comments. First, the group’s P&L includes 40 days of Webster results following its acquisition in August and, obviously, a complete TSB quarter. I will only refer to the impact of TSB and Webster where material. Second, as usual, we present growth rates in both current and constant euros. The difference this period was around 2 percentage points, mainly due to the appreciation of the Brazilian real and the Mexican peso.
Turning to the results, as Hector said, we are delivering record results once again, supported by good commercial activity and structural cost efficiencies generating strong operational leverage. Revenue grew 7% while costs were stable, even with the consolidation of TSB and Webster. Loan-loss provisions were again this quarter affected by Argentina, reflecting sector-wide trends in the country. Excluding Argentina, provisions grew in line with the loan portfolio.
This includes most of the provisions in Openbank Europe booked in the first half as well as restructuring costs related to the execution of our transformation. As a result, profit grew 14% year on year in constant euros, in a very strong position to exceed our risk of more than 14.1 billion profit in 2026 excluding M&A. Total revenue increased 7% year on year supported by deeper client relationships, higher engagement and 17 million new customers over the last 12 months.
All five global businesses contributed to revenue growth. In Retail, stronger customer engagement drove solid growth in both NII and fee. Openbank reported solid NII performance, particularly in Europe and South America. CIB was up 14%, supported by strong client activity across business lines, and Wealth and Payments delivered double-digit growth driven by fee-generating activity, client flows in Wealth and higher volumes in Payments. Excluding M&A, revenue grew 5%, keeping us on track to deliver our mid-single-digit growth target.
Overall, these results demonstrate the strength and diversification of our revenue base. The Group’s net interest income increased 8% year on year, supported by the contribution from TSB and Webster in Retail and Openbank. Excluding their impact, NII rose 5%. Retail delivered a positive performance across most countries, supported by higher volumes and active balance sheet management. Openbank also performed well, driven by volumes and disciplined margin management, particularly in Europe, together with the contribution from our broader presence in South America.
CIB also contributed significantly, led by capital-efficient, high-return activities, particularly in Global Markets. On a quarter-on-quarter basis, net interest income rose 2% on the back of strong trends in Retail Spain and the UK, as well as the inclusion of Webster in Spain. Retail continued to perform strongly with NII up 2% quarter on quarter, supported by improved loan pricing and active balance sheet management. The UK also delivered a strong quarter, with NII up 6% quarter on quarter excluding TSB, supported by higher yields and volumes.
However, the quarter was affected by the normalization of CIB after a strong quarter, the shift towards a lower-risk portfolio mix and day-count differences between loans and deposits in Brazil, and lower UF in Chile. Just these last two effects explain the drop at Group level. Overall, NII is proving stronger than anticipated at Investor Day, as solid activity and a more favorable rate environment in Europe more than offset higher rates in Brazil.
Net fee income increased 7% year on year, supported by customer growth, higher activity and a greater contribution from value-added products as One Transformation deepens customer relationships. This is visible across the Group. In Retail, fees rose 8% with strong performances across most of our footprint. Openbank fees were broadly stable as solid growth in South America was offset by the US, where comparison was affected by high servicing fees in 2025 related to portfolio sales.
CIB delivered a particularly strong fee performance driven by Global Banking activity, especially in the US, where fees grew more than 30%. Wealth continued to deliver double-digit fee growth with a strong contribution from Private Banking, and Payments also performed strongly with fees up 6%, with Getnet total payment volumes increasing 9%. One Transformation remains a key driver of our profitability improvement, enabling us to invest at scale in best-in-class global platforms. These platforms give us the capabilities and customer experience needed to compete with leading digital players, attract more customers, deepen relationships and support growth. At the same time, our global approach reduces duplication and structural costs across markets. This is reflected in our efficiency ratio, which now stands at 42.6%, the best level in 17 years, with both revenue and costs improving at the same time.
In Retail and Openbank, which represents roughly 75% of our cost base, costs declined by 2% even after incorporating TSB and Webster and while we continue to invest in our global platforms, and revenues grew 6% with a strong positive operating jaws. In our network businesses, CIB, Wealth and Payments, costs grew well below revenue, reflecting targeted investments in capabilities that support capital-light growth and recovery. As a result, net operating income was up 12%, increasing from already high levels last year.
Looking ahead, we see further room for cost improvement despite inflationary pressures, without taking into account synergies from TSB and Webster, all of them levers that are firmly within our control. Our balance sheet risk profile remains low, with sound credit quality across the Group supported by prudent risk management and resilient labor markets in most of our core geographies. Asset-quality metrics are impacted by Argentina, reflecting sector-wide trends in the country. However, cost of risk in Argentina improved again this quarter, following the stabilization trend we anticipated earlier this year. Slower new production begins to feed through.
Excluding Argentina, the Group’s underlying credit quality remains solid. Loan-loss provisions grew in line with loan growth, while cost of risk was broadly stable at 1.09%, even after absorbing less favorable FX movements. Retail and Openbank represent over 90% of the Group’s loan-loss provisions. In Retail, cost of risk was stable year on year excluding Argentina, supported by key markets such as Spain and Brazil. In Openbank Europe, cost of risk reflected model updates and growth in Openbank Pay, while in the US it continued to perform well.
In CIB, provisions were affected by a limited number of single names. Our NPL ratio remains low, as the negative impact from Argentina was broadly offset by the positive contributions from TSB and Webster. Overall, credit quality remains resilient; as long as labor markets do not deteriorate, we would not expect material impacts on credit quality. Moving on to capital, we reported another good quarter of organic capital generation. Our CET1 ratio stood at 12.7% after absorbing the 147 basis point impact from Webster. Excluding this impact, the CET1 ratio increased around 15 basis points in the quarter, demonstrating our ability to generate capital while investing in profitable growth.
This quarter we generated 59 basis points of capital from profit, which enabled us to build capital while growing new businesses at a return on tangible equity of around 21%, compensating capital distribution charges for shareholder remuneration in line with our payout target, and absorbing other impacts including regulatory charges in line with our expectations. This solid organic capital generation keeps us on track to end the year at or above our 12.8 target, at the upper end of our 12% to 13% CET1 operating range, after absorbing the remaining regulatory charges and integration impacts from TSB and Webster in the fourth quarter.
Hector, back in.
Héctor Grisi Checa (Consejero Delegado de Banco Santander)
Thanks, Jose. In conclusion, this strong result put us comfortably on track to deliver all our targets. Our business continues to show solid momentum, with One Transformation driving strong operational leverage. This has translated into record underlying profit, a robust capital position and double-digit shareholder value creation. Even excluding TSB and Webster, we are generating more line profit than last year when Poland was still part of the Group.
In summary, our results remain consistent and predictable as we enter the final quarter. We remain focused on profitable growth, further efficiency gains and continued value creation. We are building a simpler, more connected and more profitable Banco Santander, able to create value across different economic cycles. And finally, our financial North Star is clear: to deliver a RoTE above 20% by 28. Disciplined capital allocation, One Transformation, and our global businesses are the engine of our progress.
And the results we are delivering today give us confidence in the path ahead. And now we are happy to take your questions.
OPERATOR
Thank you. If you wish to ask a question, please press Star five on your telephone. And our first question comes from the line of Francisco Riquel from Alantra. Please go ahead.
Francisco Riquel (Analyst at Alantra)
Yes, good morning. Thank you for the presentation and taking my questions. I want to focus on Brazil. So you are positively geared to lower Selic rates, but the cost of deposits has gone up in this quarter. I also see NIM is under pressure. I understand you are also de-risking the loan book. But the cost of risk remains high and NPAs are still trending up. So if you can update on NIM and cost of risk dynamics and what shall we expect for the remainder of the year?
And then, looking more into the medium term in Brazil, the election has changed the outlook for interest rates. So I wonder how much of the uplift to the 20% RoTE target was based on this, on external tailwinds such as lower Selic rates, and how can you offset for that? If you could consider further restructuring. And also related to this, if you can update on the Gravity rollout in Brazil, which I understand is not on plan. Thank you.
Héctor Grisi Checa (Consejero Delegado de Banco Santander)
Thank you, Francisco. Good morning and thank you for your questions. Okay, I believe it’s important when we talk about Brazil to put things into perspective on what sense, first of all to understand that now 80% of the group is basically based upon developed markets. Okay, so the portfolio of the total group is 80% developed markets. Brazil is just 9% of the total portfolio of the bank. So it’s important to understand, and that’s the beauty of diversification, that even when some of the countries are not doing so well, we have a particular situation when in the UK and the US things are going much better than expected.
So it’s important to understand that situation. Also, it’s important to say that when we went to the investor day, our base case, that what Lula was going to win. It’s important to understand that, that just 90 days ago everybody thought that Lula will win. Then things changed. And then things changed so abruptly that Mr. Bolsonaro was going to win. That basically created a rally on the market and you saw the result when the result basically did not come out as everyone expected.
Okay, I do believe that first of all, we believe it’s an overreaction. I mean, when you see rates going all the way to 300 basis points, some of that has come already. 200 basis points is now at 200 basis points. And we will see that situation will be normalizing over the next few months. But it is important to understand now the particular situation that we have this quarter is down basically because of two factors. First of all, you already talked about it is our decision to the recent portfolio and also the decision that we took to change the mix of that portfolio.
So those two things are affecting NII, but will change exactly what we’re doing towards in the future, which would help us exactly managing the cost of risk. All right, so. And you see the mean, you don’t see the benefits of the cost of risk today, but you will see them in the future if you see some of the things that we’re making. I talked about it, some of it last quarter was, for example, commercial 40%. The portfolio is now concentrated in dollars and mainly in Trade Finance.
In CIB, we’re talking about 30% of portfolio is already dollar denominated and is also a lot of it in export and trade finance directed. All right, so we see that the benefit will show later. But this is exactly what we’re doing and this is exactly the way we designed. On the other side. All the upside that we have projected in Brazil for the future is due to one transformation. So we’re doing a huge amount of simplification in our bank. You see exactly how we are delivering already on the cost because one transformation is exactly all about this is exactly simplifying the bank automatizing, having less layers in the structure of management to have a much leaner bank, much more efficient. And this is exactly what we’re going towards to so the plan does not change from what we had is exactly the same one.
And you’re going to see the benefits and the great opportunity that we have today in Brazil. I agree with you that rates are not going to come down as much as we thought in the plan. But nonetheless we have control sensibility. And maybe Jose can explain you a little bit more of what we’re doing in terms of the sensibility. But it is important to say that we don’t have that much sensibility as we used to have in Brazil. All right, so it’s important to acknowledge that on gravity, I must tell you that.
But things are as expected. I mean, we’re going to be able to do the migration at the end of the year, beginning of the next one is exactly what we expected. Some of the suppliers have taken a little bit more time giving us equipment, given the huge demand that is on the market vis a vis computing, because all the data centers in the US et cetera. But we’re going to be delivering that and we are working really hard to have it on time. Okay, so that’s exactly what’s going on there.
But the outlook, what we have is that we see that the model is changing, that we’re concentrated on that and we’re going to deliver on what we have said. I don’t know if you can complete
José García Cantera (Chief Financial Officer)
Anything in terms of sector said. We decrease sensitivity to rates more or less how we had six months ago. So we have now a 100 basis points movement upwards downwards around 30 to 40 million sensitivity to rates. So it’s a lot less than we had six months ago. Let me explain you a little bit more about the risking strategy and what should we expect in terms of cost of risk and the credit quality in Brazil? Okay, so our risking study is already very visible. If you look at 90 plus days as to loans in Brazil, we started from broadly at this level as a system at 3.3, around 3.3% in March 25. Our ratio has now stabilized at 4.1% and the system has iterated, reaching almost 5% in August. So it’s starting to work.
And if you look at early delinquencies, that’s 15 to 90 days, the leading indicator is already improving. We’re starting at around 4.1% in March 25th. And the early delinquency ratio has improved 3.9% in August, while markets subsequently deteriorated up to 4.7. Okay, so with it, Francisco, I believe that I answered your question.
OPERATOR
Thanks very much, Hector. Could we have the next question, please? Our next question comes from the line of Ignacio Ulargi from BNP Paribas, please go ahead.
Ignacio Ulargi (Analyst at BNP Paribas)
Thanks. Good morning everyone and thanks very much for the presentation and for taking my questions. I have two questions. The first one is on costs. Just wanted to get a bit of a sense of how should we think about the cost performance over the coming quarters. You have delivered a very good quarter this time around, despite the perimeter change. Just wanted to to get a bit of sense. If there is a scope for acceleration in the synergies and the cost savings from one transformation, we could offset some headwinds in revenues via costs.
And the second question is on capital. I mean, you flagged that, Jose, in the presentation, but just wanted to get a bit of a sense of the regulatory headwinds that are pending from memory. There should be around 10 basis points still to come in regulatory headwinds and how that will impact the 12.8 that you confirmed during the call. Thank you.
Héctor Grisi Checa (Consejero Delegado de Banco Santander)
Thank you, Ignacio. Okay, so this is what one transformation is all about. It’s all about. I mean, we’re delivering really structural savings. Remember that one transformation is a process in which first we are deeply going into simplification. All right. Then a lot of automation. But at the same time we’re doing quite a lot in the. Mainly, if you take a look at it, it’s mainly retail, which we are really changing the way we work and the way we do things.
Okay. As you can see, year to date cost fell around 2% year on year, excluding M and A. That basically put us on track to deliver the lower cost base in 26Q3, cost fell alone 4% in the quarter. Quarter on quarter, excluding M and A in retail. As I was saying, year to the cost improvement improved around 5% year on year excluding M and A. Reflecting the benefits of what we’re talking about in terms of simplification and automation. The omnichannel model and enhanced digital capabilities is with 73% of the products digital enabled are helping on efficiency and we see transactionality coming up quite a lot and people are using much more the digital based products that we have and that’s helping us quite a lot. So what I see is positive operating leverage will remain a key differentiator for the bank. As a company, we are growing revenue at around 5% with lower cost, improving the cost to income ratio, that’s 2.8 percentage points to 42.6.
And this will continue to be the norm. So the group will continue to that. And you see the operating leverage basically working in terms of synergies and what you were saying about what cost is going to help, what revenue is not coming, we foresee that revenue is going to go up as well. But nonetheless, cost will help out and will give us exactly what we’re looking for in terms of the synergies. I believe that right now it’s too early to tell. Okay.
It’s important to understand that we just took over about a month and a half, have Webster and in that sense we’re still basically looking at ways to execute synergies as fast as we can. I think that the team is already working together. We’re having a pretty good run of things, but I think it’s too early to tell if we’re going to be able to advance synergies on the UK. I believe also that we’re going to be able to deliver exactly the synergies that we tell you that we told you.
The thing is there we have the Part seven. The Part seven I foresee that is going to finish over the first quarter of next year. As soon as we are basically done with the Part seven, I believe we could be able to do the migration and have all the platforms and sometimes their products basically offered to TSP customers towards 3Q27. And that basically will enable us to get to the synergy numbers that we told you. But I have a good outlook, but nonetheless, I don’t want to be ahead of myself in any way on Capital Morning Nacho.
José García Cantera (Chief Financial Officer)
For the fourth quarter we expect supervisory charges roughly around 5 basis points, which also remember that in the fourth quarter we have the operational risk charge that happens once a year, that is around 8 basis points. However, also in the fourth quarter is the most active in terms of asset sales and mobilization, where we expect to see a pretty strong quarter despite market conditions. We are, we have closed already several transactions, some are about to close, so we would expect to do better than 12.8 than at year end.
So, you know, we will report the number that will be above most likely the target we set for the year in terms of capital.
OPERATOR
Thanks very much. Operator. Could we have the next question please? A next question from Andrea Filtri from Mediobanca. Please go ahead.
Andrea Filtri (Analyst at Mediobanca)
Good morning. Thank you for taking my questions. Could you please update us on the buyback of Brazilian minorities and on the operational outlook you have for this unit going forward? When will we see. Hector, the cost of risk benefit that you mentioned and also tax rate was very low this quarter. Can you give us an indication for Q4 and 2027 in terms of tax rate in Brazil? Finally, if you can update us on your Danish compromise application. Thank you.
Héctor Grisi Checa (Consejero Delegado de Banco Santander)
Thank you, Andrea. Okay, so what’s going on in terms of the buyback? I mean, What we see is that we will continue with it. This doesn’t change anything that we have seen and we’re going to go ahead with the same conditions that we basically have expressed. So there’s no change on that in terms of the operational outlook. What I see is exactly what I was telling you in terms of, I see basically One Transformation was quite a lot. All right. We believe that in terms of the cost of risk, I think we have a quite a good outlook in the sense that, I mean, three months cost of risk is stable.
I mean, 3Q26 is at 1.14%. That’s minus one basis point quarter on quarter. The LLP growth was plus 2.8% quarter on quarter, if you exclude M&A, and was driven mainly by auto seasonality, partly offset by the improvements that we have seen in Argentina and the UK. 12 months cost of risk was 1.16%. That’s one basis point quarter on quarter. That’s three basis points year on year. With Brazil, cost of risk at around 425. So if you exclude Argentina, the cost of risk would be around 1.09 and LLP growth around 6%, broadly in line with organic loan growth that we have had.
So it’s important to understand that with the loan growth that we had, cost of risk goes up, but is going to be under control. And towards the end of the year we expect the cost of risk at around 1.15% for 26. It’s slightly, I mean, given the cost of risk in Brazil and the longer interest rates that we see there. But we see it improving towards 1.1% in 27 and 28 as we see the benefit from TSB Webster, because that mix helps us quite a lot. Remember that I said 80% now of the loan portfolio in the bank is in developed countries. So if you see NPLs, the ratio improved to 2.9%.
That’s 3 basis points quarter on quarter and 1 basis point year to date. So coverage is around 64%, flat quarter on quarter. So that’s exactly what I see. Then on the tax rate, Jose, could you comment?
José García Cantera (Chief Financial Officer)
No. We expect to have a relatively low tax rate in Brazil for the coming quarters. This is also benefiting the group. So we do not expect to see significant changes in the coming quarters.
Héctor Grisi Checa (Consejero Delegado de Banco Santander)
Okay. In terms of the Danish compromise, we are already under the HAN supervision and that’s a step, as you know, prior to the Danish compromise approval, which we expect to obtain within the next two or three quarters. I had a conversation with the ECB. They’re taking a little bit longer with us because we have much more complex businesses with AJBs, everything that we have in Latin America, et cetera. But it’s on track. It is important to acknowledge that it will not be an immediate capital release event.
The benefit is better capital treatment for the future insurance growth and availability to add insurance assets over time, specifically to grow a life factory in-house, which we are doing because it’s a great opportunity that we have. Just take a look at the growth in terms of fees on insurance: 20% year on year. So this is a big opportunity for us and also to penetrate the customer base that we have. If you see our natural quota in every single market versus the amount of insurance that we do, it is a lot less.
So that’s a huge opportunity that we have. Thank you, Andrea.
OPERATOR
Thanks, Hector. Thanks, Andrea. Could we have the next question please? Our next question comes from the line of Ignacio Cerezo from UBS. Please go ahead.
Ignacio Cerezo (Analyst at UBS)
Hi, good morning. Thank you for taking my questions. The first one is, sorry, slightly open ended. If you can give us a view on the deposit environment in Spain, UK, US and how that can have an impact in terms of customer spread and NII in the future, if you see basically that as a headwind for net interest income developments in those three countries. And the second one is on the CIB book: $178 billion, growing around 28% per annum, with big growth actually in Spain and the US.
So if you can give us some color on breakdown of that book between different segments, industries, exposure to tech data centers — again that qualitative color, if you want, that can educate our guys a little bit better. Thank you.
Héctor Grisi Checa (Consejero Delegado de Banco Santander)
Thank you, Ignacio. Okay, in terms of what we see in the deposit cost and what we should expect for the deposit cost is we are seeing some migration towards higher-yielding deposits, particularly, as you say, in Spain, the UK and Brazil, but it remains very manageable. Customer spreads are very, very resilient. In Spain we had a one-off that basically moves the number, but you’re going to see that Spain numbers are going to come back down towards the end of the year.
So nothing to worry about that. We don’t foresee anything going on in the US. I think that, on the other side, TSB — sorry, Webster — is helping us out with the deposit mix that we have there. So we believe that it’s going to help us and help us in the margin there. Let me go much more specifically. It’s very important to tell you that we are managing deposit betas and we are protecting them through stronger primacy. That’s a change of the model, and also it’s exactly what One Transformation is all about because we’re concentrated on doing much more with our customers. The moment that you have primacy with a customer, all the transactional deposits come in. So what’s going on in the deposit markets basically doesn’t hurt you as much because the transactional deposits people need to keep them in the current account for all that they need over the month.
So that is helping us quite a lot, and you see those numbers going up in Spain, in Brazil — basically in all the group. We have also a tremendous discipline in pricing, active balance sheet management, and we are growing in stable transactional balances as I explained. Retail Spain, to go a little bit more in detail and be very specific about what’s going on on the line: beta remains very controlled in the quarter. Deposit beta is higher, as I said, as a one-off that we are expecting retail to normalize towards 18–19% in the fourth quarter. In retail UK, the structural hedge and the asset repricing offset quite a lot of the mix pressure, with cost of deposits remaining very stable. And in retail Brazil we’re shifting towards a more granular, lower-cost deposit base.
In the quarter we saw higher deposit costs which were seasonally impacted by a higher number of business days. So all in all, I think we’re doing a pretty good job in deposits and we are actually having a much better deposit base given the transformation that we’re doing. I can tell you that this is the most important thing that the teams in every single country and every single unit of the bank concentrate on: deposits — exactly how to do well in bad times and good times — and we’re concentrated on that.
In terms of CIB growth, I must tell you that we are concentrated in exactly what we do best, which is project finance. Energy and the sectors that are core for us is exactly what we’re doing in these particular markets. I think it’s much better to use our capabilities in CIB; that helps us basically grow in AI very fast, and also in the segments that we know quite well with the customers that we know well. And you see margins basically opening up a little bit and we’re taking advantage of that.
In terms of the concentration that we have, I must tell you in data centers we have less than 1% of the total balance sheet of the bank in data centers, so there’s nothing to worry about. Data centers — it’s important to understand — is project finance. That’s something that the bank knows very well how to do, and what we have seen is that the biggest barrier of entry in data centers is access to energy and electricity. And given that, we are being very cautious in the way that all the data center projects that we come in, we have the energy behind them, and also with the best off-takers, with the best risk available in the market.
So we understand your words, but I must tell you that we are on top of that and this is something that we know how to do very well. I don’t know, Jose, if you want to complement anything.
OPERATOR
Thanks very much, Hector, can we have the next question, please? Our next question comes from the line of Miruna Kirya from Jefferies. Please go ahead.
Miruna Kirya (Analyst at Jefferies)
Good morning. Thank you very much for taking my questions. Firstly, I was wondering if you could help us with the profit bridge to 2027. So I guess this year you’re going to be at 15 billion or slightly above. You guided for more than 20 billion euro 2028, but what is reasonable to expect in terms of profits in 2027? And how much of that would you think is underlying growth from 2026 versus the impact from M&A? And then just to follow up on the customer margins in retail Spain, could you give us more color in terms of how much loan yields declined in the quarter versus the increase in cost of deposits? And you were mentioning before there was a one-off in the quarter on the cost of deposits. So could you clarify what that is, please? Thank you very much.
Héctor Grisi Checa (Consejero Delegado de Banco Santander)
Thank you. So in terms — net, as you have said, we expect to be well ahead of our previous guidance of at least 14.1 billion net profit ex M&A for 26. And we are on track to be above 15 billion of the line of profit, including M&A, for the whole year. What is important to say is that for the numbers that you can run for 27, 28 and onwards, it is exactly what you have and is the track that we’re going to get by 28 to what we guided the market towards: above 20% ROTI.
And then you can make your numbers and you’re going to see that we’re on the right track to get there. So with that, Jose, you.
José García Cantera (Chief Financial Officer)
So average volumes year on year in Spain, loans were up 5% and deposits were also up 5%. So average volumes in the quarter — third quarter this year compared with third quarter last year. Yield on assets was down 18 basis points. This is client averages — so 18 basis points down. In deposits we had an almost 5 billion transaction with a public institution in Spain that distorts the net interest margin in the quarter quite substantially. We would expect the margins to normalize again in the fourth quarter.
The outlook obviously for the margins as rates increase in Spain, and we maintain positive sensitivity to rates, is positive.
OPERATOR
Thanks very much, Jose and Miruna. We can help you offline if you want to get into the modeling details as well. Do we get the next question please? Operator. Our next question comes from the line of Marta Sanchez Romero from J.P. Morgan. Please go ahead.
Marta Sanchez Romero (Analyst at J.P. Morgan)
Thank you very much. My first question is on Brazil. So it’s kind of at a run rate of 2.1 billion euros this year. Consensus has 2.8 billion in 2027 and 3.3 billion in 2028, which is a remarkable improvement. Are you comfortable with that? And then my second question is on the UK. Looks like you’re doing better at managing your pricing, so the customer spread expanded in the quarter, but I see that your loan growth is barely moving and it’s falling well behind the targets that you set out at the Capital Markets Day. So no growth this quarter. I understand that the mortgage market is kind of not doing much, but can you tell us what you’re thinking about in terms of risk appetite, loan growth and pricing?
Thank you.
Héctor Grisi Checa (Consejero Delegado de Banco Santander)
Thank you. In terms of the 2.1 billion euro, I think it’s one of the possible outcomes that we have designed for that. So I mean that could be it. As you have said in terms of the UK, I think that the UK has had a pretty good performance year to date. Profit in the UK grew around 22% excluding the money year on year. That’s basically 4% year on year core revenue growth. Okay. It’s important and the important thing is that you see the effects of One Transformation.
This is probably the best franchise in terms One Transformation is impacting because you see an 11% year on year cost decline in the franchise and a very low cost of risk at about just 12 basis points. So the business is both benefiting from lengthened duration of the structural hedge which we have been implementing and resilient customer spreads. Okay. And we see loan repricing offsetting deposit mix shifts. And this is helping us out. We have, as you have seen, a very disciplined cost reduction and execution of One Transformation. And these structural drivers will remain tailwinds in the franchise going forward.
Also on the second thing you have the integration of ESV that basically further medium-term earnings growth, which helps us quite a lot. As I basically already said on the Part 7 remains on track for completion on the Q1 of 27 and the integration milestones are progressing as planned. So I’m very comfortable that we’re going to get to the numbers we told you in terms of what are we doing in there in terms of synergies. Our 400 million cost synergy targets, as I said, is exactly the number that we are going to come up with.
And combined with the benefits from One Transformation, we continue to see the ROTE improving to around 16% ROTE for 28.
José García Cantera (Chief Financial Officer)
If I may give you some color on the outlook for NII because we remain very constructive on NII. In the UK, loan yields year on year were higher by 3 basis points. Cost of deposits was lower by 3 basis points. So the underlying business, despite the not so favorable interest rate environment, has been managed very, very well. On top of that we have, as mentioned, as Hector said, 119 billion pounds in the structural hedge with an average duration of 2.6 years and a yield of 3.34%.
Remember this is the yield in the third quarter. If we look at the yield for the first nine months it was 3.2% compared to 2.6% in the nine months of 2025. So the combination of very good outlook in terms of volumes, pricing, management and structural hedge give us a quite constructive outlook also for the NII. Thanks, Marta.
OPERATOR
Thanks very much. Could we have the next question please? Our next question comes from the line of Sophie Petersen from Goldman Sachs. Please go ahead.
Sophie Petersen (Analyst at Goldman Sachs)
Hi, here is Sophie from Goldman. Thanks a lot for taking my question. So my first question would be on banking taxes. I know you said that in Brazil tax rate will remain low, but how should we think about the potential removal of the Spanish bank tax? Any view here and also UK banking tax, is that something that we should be mindful of? And then just going back to the deposits, I know you said Spain was a little bit a one-off, but if we look kind of across your market, term deposits or time deposits increased quarter on quarter in all core countries, quarter on quarter. Maybe if you could just talk a little bit about your funding strategy for 2027. How do you see wider spreads impacting your funding costs and how do you plan to fund and are you going to push more further deposits to move away from some of the wholesale funding?
Thank you.
Héctor Grisi Checa (Consejero Delegado de Banco Santander)
Thank you, Sophie. In terms of the banking tax, I mean we don’t have any information up to now. I mean just what you have heard in the press in terms of what could happen in the UK. What I would say is that, I mean we already pay very high taxes in the UK. We’re talking about 45, 46%. If it goes higher, I don’t know. It’s going to be complicated to deploy capital if you get that amount of taxes. But let’s see what happens. Hopefully it’s not the case.
On Spain, we don’t have any information at all right now. As you know it was modified a couple of years ago. Now it’s a real tax. So we don’t have any information about that. It’s very important. I’m going to go and explain exactly what the strategy that we have in terms of the deposit base and you can get an idea and I’m going to talk a little bit about specifically what’s going on. So it’s important to understand first of all that what we’re doing in terms of One Transformation and what we’re doing is very concentrated, and I was saying, on primacy. Okay. When you become number one bank to your customer, the customer basically has a payroll, has everything with you. They have three, four different products together with you. But most importantly they have the transactional deposits.
When you have the payroll and you debit your accounts every six months with payments from school for your children, water, electricity, all the bills basically are deducted to that account and you do the payments from there, it’s very difficult not to leave money on the current account. And that’s transactional deposits. And that’s why we are enhancing our digital offering and everything that we do to make sure that the customers stay with us and have all the transactionality. This is exactly where we can. If you look at every single country in Banco Santander, all of them are increasing the amount of transactional deposits. Why is that? Because that’s exactly what we are concentrated on. And our sales teams in retail in every single part are concentrated on the transactional deposit and customer growth.
If you see the numbers alone in Spain that you were asking about, we’re talking about 445,000 customers in the past 12 months coming into Spain as new customers, have a much better and broader deposit base. Also we are moving to managing deposits better to the detail. So we are very much concentrated on that. We check them. Let me give you a little bit more detail. We have a pricing meeting every Monday in every single Santander unit discussing exactly that: the cost of deposits, how is every single product that the retail is offering to the bank.
And we reprice that and we are very profit oriented towards that and also capital oriented in the terms that RWA and the consumption. RWA is very defined. So you see in everything that we do that we are very much concentrated and very granular about how we do things. You’ll see even people in Salvador de Valla de Brazil talking about cost of deposits, RWA. So that’s in the DNA of the sales teams right now. So that’s exactly how we’re managing things.
And we are so delicate about what we’re doing. I believe I gave you a pretty good explanation of the particular situation that we are in Spain, but I don’t know, Jose, you want to go further into detail into that?
José García Cantera (Chief Financial Officer)
Let me give you some details about betas. The only country where we had a slight increase in betas in the quarter was Spain, from 26 to 28% including CIB; excluding CIB, obviously betas are a lot lower. The UK was flat, but everywhere else betas were down: in Chile, in Argentina, in Mexico, in the U.S. So the overall outlook for the group is actually good. In Spain we remain geared positively to rates. And this is important because when we talk about betas from 26 to 28% we are talking relative to the base that is also used to reprice assets, and 70% of the assets are at variable rates. So clearly, even if betas go up a little bit, the assets will reprice a lot more than liabilities. Our sensitivity in Spain to a 100 basis points interest rate change is 350 million basically. And it increases very quickly as we grow deposits.
So that is why when we look at NII in 2027 we see NII in Spain up mid single digits or maybe a bit better than that. Again, despite that, betas might go up a little bit because, again, repricing clearly outweighs the pressure on deposits. And as Hector said, we are managing deposit cost very well in all countries, but especially in Spain.
OPERATOR
Thanks very much. Can we get the next question please? And this question comes from the line of Antonio Reale from Bank of America. Please go ahead.
Antonio Reale (Analyst at Bank of America)
I have a couple of follow-up questions please. One on Brazil and one on the U.S. actually. So can you please remind us the time lag in repricing between assets and liabilities that you have in Brazil? I mean your funding reprices much faster than your asset side from what I can remember. So if you could just remind us the time lag and what we should expect from your ARCO book in Brazil going forward, which I understand is how you’ve been lowering your rate sensitivity.
So that’s my first question. The second one is if you can remind us how Webster contributes to change your historically sort of negative correlation to rates that you’ve had in the U.S. over the years and maybe just remind us how some of the numbers that relate to the healthcare franchise that Webster has in the U.S. which I think is particularly sticky and maybe the phasing of those funding synergies which also relate to excess liquidity. Thank you.
José García Cantera (Chief Financial Officer)
So in the U.S. we are fully neutral, so we are completely neutral to interest rate changes. The integration of Webster changed the interest rate sensitivity. And we have been managing the ALCO in the U.S. to have completely neutral interest rate sensitivity. In Brazil, we reprice, as you said, a lot faster than assets. Betas in Brazil are around 65% at the moment, which shows you the structure of the liabilities which reprice with the CDI for the most part. And around 40% of the assets rotate every year. So with that you can have quite a good idea how the structure of the balance sheet plays with interest rates. But again, the sensitivity we have today, taking all of that into account, which I think is the important number: six months ago we had 60 to 70 million sensitivity to a 100 basis points change.
We are half of that today. So for the last six months we’ve been working very hard to neutralize interest rate sensitivity in Brazil as well.
Héctor Grisi Checa (Consejero Delegado de Banco Santander)
Antonio, just to get, I mean in terms of the HSA, as you know, I mean it’s a pretty good business. We have overall AUMs of 25 billion. Out of those, 9 billion are deposits that we use in the bank. Okay. And basically it helps quite a lot the franchise. And that’s what I can tell you that will help us out to manage much better. And we’ll. The idea is basically to grow that business.
José García Cantera (Chief Financial Officer)
Funding synergies in the U.S., yes, as we consolidate liquidity management, we can see them coming from two sources: obviously the more efficient use of sources to finance assets because we do not have limits between companies; and the second is that we have lower requirements as we again consolidate volumes. So it’s difficult to give a number. This is something that could be in the region of 50 million, maybe more. But this is going to come over time as we integrate funding and the commercial gap management.
OPERATOR
Thanks. Thanks very much. Could we have the next question please? A next question comes from the line of Britta Smith from Autonomous. Please go ahead.
Britta Smith (Analyst at Autonomous)
Thank you for taking my questions. Just coming back to the deposit competition a little bit more broadly. Do you have any views on whether AI-driven customer behavior might increase competition for marginal deposits in the longer term and how’s the bank positioning itself against that? And on loan growth, maybe you can give some qualitative comment on where you see the marginal loan growth dynamics across your major divisions such as Spain, UK, U.S. and Brazil and how that is expected to trend in 2026 versus 27? So where do you see perhaps improvements in growth? Where do you expect perhaps a little bit of a slowdown?
And then just a final question. I don’t know whether you can or cannot comment on that, but can you shed any color on the remaining stake in the Polish business, please, and your intentions with it? Thank you.
Héctor Grisi Checa (Consejero Delegado de Banco Santander)
Okay, thank you, Britta. Look, I mean, that’s a pretty good question in terms of what we’re looking at in AI. And you’re right, I mean, that’s something that we need to take into account. At the moment we don’t see it as a menace, but I do see that in the middle to long term it’s going to be a situation. So we’re working around it to see how we’re going to interact with agents, et cetera. So we’re working towards that and really understanding what’s the best way to manage all that.
And if we’re going to leave agents be able to do it, I do believe that at this time we shouldn’t allow agents to be able to interact with our apps. But let’s see what the market takes in the future. But that’s something that we are reviewing at this point. In terms of loan growth, in terms of Spain, Ukraine, US and Brazil, I think that we will continue to be very much focused on profitability. Okay? So it’s tremendously important. Our teams, I explained already how we do that and how we manage that. So whenever we see an opportunity that is above our cost of equity, that’s exactly where we grow the portfolios. And we don’t have any specific — I mean, we see the portfolios and we check the mix that we want to have, but we move that every single week, the way we see the evolution of the different portfolios and the evolution of different markets and the products, okay?
So it’s very important that we have that. But we have enough capital to be deployed and to have a really good growth to be able to deliver the numbers that we have promised you and that we plan on delivering. In terms of Poland, what I will tell you is that we are very happy with the position that we have. We have managed it. We have 9.7% of Poland and we plan basically to maintain the position for now.
José García Cantera (Chief Financial Officer)
If I may complement. Excluding Webster and TSB, loans were up year on year for the group 6.4%, and 6% in deposits. We have very strict capital allocation criteria. We invested the capital at a return on tangible equity — the new capital — at a return on tangible equity above 21%, 22%, 23%, which is the minimum we need to draw the profitability up for the group going forward. When you look at risk-weighted asset growth, it’s obviously a lot less than that.
It’s like 1.4% or something, excluding TSB and Webster year on year. The difference is obviously asset sales, guarantees, securitizations. So the whole equation around growth is profitability. We are finding very good pockets of profitability and therefore this is translated into growth. So when we look forward, we can see gross loan growth growing at the levels it’s growing today for the group, which is mid-single digits, with some countries growing higher, like for instance Mexico, and some countries growing a little bit less like the UK. But the overall loan growth for the group at circumstances at around mid-single digits invested at returns above 20% is what will drive the profitability of the group at that 20%, at least for 2028.
OPERATOR
Thanks very much. Could we have the next question please? Next question from Carlos Peixoto from CaixaBank BPI. Please go ahead.
Carlos Peixoto (Analyst at CaixaBank BPI)
Hi, good morning. Carlos from CaixaBank here. A question from my side as well. The first one would be on the NII outlook for Spain. So in the previous guidance — or in the previous quarter, sorry — you mentioned that the second half you expected to be aligned with the first half. Is that still the case? If so, what would be the drivers for the improvements in the fourth quarter? And the second question will be a minor detail on the US, but basically the drop in loans that we see in the US, is it all driven by Webster incorporation? Maybe you could give some color on how the underlying trends are evolving excluding Webster. Thank you.
Héctor Grisi Checa (Consejero Delegado de Banco Santander)
Thank you. So I’m going to give you the US and then José will complement on what you’re asking in terms of NII. Okay, so Webster contributed around 89 million of underlying profit in the quarter, okay? And we have been only consolidating it for only 40 days following the closing. Excluding Webster, profit after taxes grew 24% in the first nine months of 26, and that’s supported by really strong growth in CIB, NII and wealth fees. Okay, so it’s important that the whole front is basically performing quite well.
Total expenses declined 3% year on year, thus delivering strong operational leverage. Provisions fell around 3% year on year as consumer credit performance remains resilient, and that’s basically what we have seen all along, that it’s getting better and better and hopefully is the case. Very strong labor markets in the US and very strong economy. Q3 reflects normalization in CIB following a record Q2. Okay. And the typical seasonality of the auto provisions that I explained.
RoTE including Webster reached 12.6% and we are on track to reach the 18% post-integration of Webster. But I must tell you that, I mean, the franchise by itself before Webster was on track to the 15%. So Webster is basically putting on the table between 2% to 3% to take the franchise by the end of ’28 to 18%.
José García Cantera (Chief Financial Officer)
So again, NII in Spain — I gave you the outlook for 2027. So for the fourth quarter, in the first nine months of the year, NII in Spain is up 8% year on year. We don’t see a reason why we should see a significantly different figure in the fourth quarter. I already explained the one that we have in the third quarter that will reverse in the fourth quarter. There are also some technicalities around Global Markets because the funding of global activities is in NII while the revenues are in trading.
That generates quarter-on-quarter some volatility, particularly in CIB. When you look at NII, CIB is affected by that. But in the context of the overall NII in Spain, it should not change the trends that we’ve seen in the first nine months of the year.
OPERATOR
Thanks very much. Could we have the next question please? Our next question comes from the line of Alvaro Serrano from Morgan Stanley. Please go ahead.
Alvaro Serrano (Analyst at Morgan Stanley)
Hi, I’ve got a couple of at this point follow-up questions, but unfortunately one more on Brazil. I just want to get a sense of when this is going to bottom out — the profits there — and obviously it’s the kind of franchise, given the emerging market nature and the consumer-heavy sort of nature of the business, that if you don’t grow loan book it’s going to be very difficult for profitability to recover. Can you give us a sense of when that loan growth, that de-risking exercise, is going to be over and when we can see loan growth finally accelerate?
Is it now from Q4, is it ’27, is it ’28? Maybe it’s more about cost — maybe some color and direction on that. And my second question is on cost. Obviously very good performance in the UK and the US. I just want to get a sense — in the UK, for example, TSB was about, call it, 800 million of cost base, and year on year your costs only up 100 million or so, less than that in pounds. Is the 800 million the wrong cost base? Because you’ve said these synergies are ahead of us. So can you help us, handhold us, in terms of what the right cost base is to start from there to deduct the savings?
Because it looks like you’re doing a lot better both in TSB and Webster. Thank you.
Héctor Grisi Checa (Consejero Delegado de Banco Santander)
Thank you, Alvaro. Okay, Brazil, as you have said, I mean, we don’t believe that up until what happened on Monday we were actually towards the right track of finishing the de-risking and everything that we were doing, okay? You see basically how the mix changes when you have the mass markets coming down in terms of loans and Commercial and CIB, you see it going up, and you see a little bit of the change of the mix and you see that we are playing in some.
And what I will tell you is that I think it’s too early to tell you that if we’re going to be able to go back to the market right away, given the current circumstances. So what we are looking at and the discussions we’re having with the team in Brazil is that we’re going to be, I mean, doing it day by day and looking at the market the moment it normalizes, okay? The important thing is to go back to the market when inflation is at levels of 4.22% expected — I mean, that’s the last number of inflation that we had from Brazil — and rates at 14%. And mostly what the central bank does, if they increase or maintain the rate as it is, and then we will take it from there. I think that I would love to tell you right now what’s the right strategy. At this point we need to wait a little bit to see the situation come down.
Let’s see if today continues to normalize and they feel less pressure in order to hike rates at this point. But I will tell you that we were ready in order to move and to start basically the motor again, but we need to wait a little bit nonetheless. The important delta of Brazil is One Transformation. So remember that, because it’s very important to see that all the efforts that we’re doing in One Transformation — and also, you were saying we did very well in cost. Look at Brazil. Brazil is actually, with the inflation that they have, et cetera, doing much better than you could expect. So in that sense it’s going to come from there. But it’s important to acknowledge, and I agree with you, that in an economy like Brazil you need to basically come back into the market.
And we will do so, but we will do it in the right way. I think what I tell you also is that we are very much concentrated in the parts of the economy where we believe that they are not affected by these high real rates. And we’re concentrated much on that and will continue to thrive on that. In terms of cost, as you have said, yes, we see opportunities in the UK, mainly because of the synergies that we believe can be ignited after that. The situation is that until you basically finish and get through Part VII, it is important that you’re not going to be able to do anything. But I believe that there are a lot of opportunities in what we have seen in the UK so far and also in the US. The most important integration part is IT, and in IT we have a lot of experience.
Our teams basically have done this in the past and we have the outlook that we can do that. Looks promising, that’s what I could tell you, but looks well and able to deliver, and for sure the numbers that we told you.
José García Cantera (Chief Financial Officer)
So let me give you a bit of some details on the restructuring and non‑recurring items. In the first nine months of the year, we had in the second quarter 250 million related to TSB. In the second quarter we have 416 million related to both TSB and Webster. It’s a bit more in the US than in the UK, so it’s around 40% UK, 60% US. So, you know, those are the charges that have already been taken in the P&L related to the integration of both TSB and Webster.
And Alvaro, you can see in the UK IMS the exact TSB cost contribution on a nine‑month basis. So that hopefully helps you to get to the right cost base for your models. Happy to take you through that offline if you’d like. Operator, could we have the next question please?
OPERATOR
Next question comes from the line of Ruth from KBW. Please go ahead, sir.
Ruth (Analyst at KBW)
Hi, thank you for the time. I just have one final question on — if you could talk a bit about the NII trends in Mexico. 3Q was a little bit weaker than expected. You know, rate cycle is probably going to turn. So if you could give a bit of guidance for Q4, what you expect on loans and deposits, and anything around replicating portfolio. Thank you.
Héctor Grisi Checa (Consejero Delegado de Banco Santander)
Thank you. I mean, as you have seen, Mexico basically continues to deliver very strong profitability levels. We have an underlying ROTE of 21.2% in the country. Year to date, NII grew 4%, driven by, first of all, volume growth and the active balance sheet management that we have, thus offsetting the pressure from lower rates. Remember that the rates came in Mexico quite fast. Q3 NII was down 2% quarter on quarter. That’s mainly driven by the lower NII from CIB Markets and lower volatility.
Also, if you take a look at our portfolio in unsecured loans to individuals, we are lowering the portfolio, given that the outlook that we have is that we want to be a little prudent on that portfolio. So you see that we’re increasing the portfolio a little bit more in commercial, in SMEs, and in CIB, because that’s the way we believe that the market should be going. Cost of risk has been going up a little bit and we want to be cautious in the way we manage those portfolios. It is important to look at it also in terms of the change on the model. Mexico fee growth year to date is 11%, and that’s exactly what we’re doing in terms of concentrated customer primacy, the global businesses, and the net worth effects. And costs are down, even with the inflation that we have in Mexico, 0.9% year on year. And the asset quality, take a look at it, is broadly stable.
Cost of risk is at 2.73%, that’s below a normalized level of 3%. And NPLs improved by 7 basis points to 2.9% quarter on quarter. So we really believe that the franchise performed really well, and we see that it is going to continue to do well.
OPERATOR
Thank you. Hector, could we take the next question please? Our next question comes from the line of Borja Ramirez from Citi. Please go ahead.
Borja Ramirez (Analyst at Citi)
Hello, good morning. Thank you very much for taking my questions. I have two, please, and they’re related to deposits. Firstly, in Mexico as a follow-up, I can see the cost of deposits declined quarter over quarter and there were some indications from competitors that actually the pressures from fintechs may be easing. I would like to ask if you’re seeing that as well and also if you could provide a bit of color on the outlook for cost of deposits.
And then my second question would be on Spain. It’s very helpful regarding the guidance for NII for next year, so thank you for that. I would like to ask how should we think about the deposit volumes in Spain and maybe also in terms of the mix between the current accounts and term deposits. Thank you.
Héctor Grisi Checa (Consejero Delegado de Banco Santander)
Thank you, Borja. In Mexico, look, I mean it’s become a very competitive market with all the new banks, as you say, basically fighting for the cost of deposits. What we’re seeing is basically the top banks of the system getting a little bit more of the deposit base, and what is hitting real hard is the medium-sized banks, where the new banks are making much more pain for these banks. What I see is that our strategy is concentrated, as I have discussed, in terms of primacy and transactionality, and that’s something that is showing pretty good results.
You saw it in the cost of deposits, and we will continue like that. But nonetheless, I mean there’s going to be a lot of competition and we need to concentrate on basically upgrading our IT, upgrading our app to be much more competitive and to get much more customers towards primacy. In terms of Spain, I don’t know
José García Cantera (Chief Financial Officer)
In Spain, let me give you the average balances per quarter this year, which I think shows that we are all talking a lot about competition for deposits in Spain, the newcomers, the fintechs, etc. Let me give you the average volumes that we have had so far this year. In the fourth quarter of 25, 280 billion. 280 billion in the first quarter of 26, 282, 289 in the third quarter; if we exclude one-off, it’s around 284 to 85. So despite all this competition, we are actually increasing the deposit base in Spain at very healthy rates year on year.
As I said, average volumes up 5%. What to expect next year as interest rates go up? Obviously the behavior might change. As you say, we might see some movements from current accounts to demand deposits. However, that is not going to happen, we believe, in size because the increase in interest rates is not that significant to change customer behavior. So yes, there will be some movements from current to demand. We are not seeing it yet, not at all. If it happens, we think it’s going to be relatively small.
So for next year, what do we expect? High to mid single-digit growth in Spain. Having said that, we also had a low growth estimate for deposits in 2016 and we are doing a lot better because basically we are capturing a lot of the primacy, as Hector said, with customers in Spain. So we are not being aggressive at all in deposit pricing, but the way we are competing is through adding value to customers, so generating growth around new customers.
OPERATOR
Thanks very much. This brings us to the end of our conference call. Thanks very much Hector and Jose for your answers. The investor relations team is available at your disposal if you have got further follow-up questions and we look forward to speaking to you next quarter. Thank you.
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