Title

Presentation

Begona Morenes: Good morning, everybody, and welcome to Banco Santander’s conference call to discuss our financial results for the fourth quarter of 2022. Just as a reminder, both the results report and presentation we will be following today are available to you on our website. I’m joined here today by our Executive Chairman, Ms. Ana Botín; and our CEO, Mr. Héctor Grisi. Following their presentations, we will open the floor for any and all questions you may have in the Q&A session. Before I hand over the floor to Ms. Botín, let me remind you that on February 28, Santander Investor Day will take place in London where our top management team will present the group’s strategy and mid-term outlook and plans. You can find all relevant information on how to register on our corporate website in case you have not done so already. We look forward to your participation. With this, I will hand over to Mr. Botín. Ana, the floor is yours.

Ana Botin: So thank you, Begoña, and good morning to everybody. Thanks for joining us. So 2022 was marked by the tragic return of war to Europe. It has not been an easy year and certainly very different to what we all expected 12 months ago. Clearly, this has impacted, in a big way, the economic and macro environment. I believe we’re in a new era that these conditions of high inflation and higher rates will be here for a while. Central bank, of course, tightening monetary policy, increased rates. Remember, we had 6 years of negative rates in Europe and quite a few years in the U.S. The result of all of this is that we have a lot more uncertainty, and Santander has shown with the results we published today that we are well prepared to deal with this.

We’re actually quite accustomed to dealing inflationary environments for many years, including the last ones, of course, in Latin America. We delivered record results, and — I want to stress, and achieved our 2022 commitments that we set before the war in Ukraine started. This is thanks to our customer focus, our scale, both in market and global, and this is what’s driving the profitable growth that you have seen. We actually increased loans by — and deposits by nearly EUR 140 billion. We welcomed 7 million new customers to the bank. We increased revenues and profits by double digit. This is a record profit. And I want to stress also that most of this increase is driven by the improvements in the operational model that we have been executing.

And profitability, of course, increased again with a RoTE of 13.4% and a strong EPS growth of 23% in the year. Last but not least, we continue to strengthen the balance sheet, not just capital but our overall balance sheet. So let me give you some details of that. If you look at the income statement, you can see continued progress in the execution of our strategy reflected in the revenue growth. I said already that this has a lot to do with more customers and more volumes. There is also some impact from higher rates, especially in Europe and North America. And as you’ve seen in Q4, this should continue into the new year. Net interest income rose 16%, improving quarter-on-quarter. We increased fee income. Very importantly, fee income supported by our global businesses, i.e., by our global scale businesses, by payments and increasing network benefits across our geographies.

We managed to grow our costs below inflation in all regions, improving the efficiency ratio, and the focus on improving operational performance led to a record net operating income of EUR 28 billion. This is equivalent to 2.7% of loans. We are proud of the sustainability and the low volatility of our results across the cycle. This is something which is not new. But it’s really important to highlight why this happens. This happens because 95% of total revenues is net interest income and fees. This compares with 80% in our global peers. And this is incredibly important because of the sustainability of our results and the quality of our results. We really believe that, again, in challenging times, our model is better. The cost of risk ended the year at just under 1% as per our target, which we set in January of last year.

And this all results, of course, in the record profits — attributable profit of EUR 9.6 billion. Héctor Grisi, who is here with me, our new CEO, will give you more details about all this later. So I want to now focus on our shareholders. The increased profitability — and this is not new. This has happened year after year with the exception of COVID allowed us to increase shareholder value creation. Our RoTE of 13.4% was exceeding our year-end target, exceeding our European peers’ profitability. And as I said, this is on the back of both strong profit growth but also the reduced number of shares following the buybacks. We’ve bought about 5%. Our earnings per share grew 23%, which, again, is ahead of our peers. We delivered 6% growth in shareholder value creation, even with the negative impact this year from interest rates, which affected the balance sheet.

And of course, part of this has already begun to reverse in January. If we exclude this temporary impact, growth would have been close to 10%. We expect a 16% increase in cash DPS against 2022 results. In the next few weeks, we will announce the second dividend, which will include, again, cash and buybacks. And at current prices, share buybacks, we believe, are still one of the most effective ways to generate shareholder value. In the last 2 years, as I said, we’ve repurchased 5% of outstanding shares. This doesn’t include the one we will be announcing soon. And the return on investment is about 18% for our shareholders. So just looking at our balance sheet, and I think here it’s important to give the message that we — this is a holistic management of the balance sheet.

Capital, of course, is important, but so is credit and liquidity, and the overall risk profile including credit remains medium low. It has once again proven to be predictable based on our diversification and the control we have of our portfolios delivering on the guidance we set 12 months ago. And the NPL ratio improved cost of risk in line with target. Liquidity, extremely important for us. We have a very conservative position. It’s not just that the balance sheet remains funded by very high-quality liabilities based on stable customer retail deposits in core markets where we are market leaders or top 3. It’s also that our liquidity ratios remain well above requirements. And this is even after the TLTRO accelerated through payments. As you can see, the LCR ratio stood at 152% in December.

And last but not least, we again delivered on what we said at the beginning of this year of having a CET1 above 12% every quarter. Our capital performance this year was better than many of our peers. Our capital levels have again shown the strength of our model. They would — maybe amongst the least volatile in the latest European banking stress test. Very importantly, we have continued to be very disciplined in how we allocate our capital, and we have reached the target we set a year ago of keeping profitability of 80% of our RWAs above cost of equity. This compares with 70% last year and improved the front book RoRWA, this is really important, to 2.6%. The back book is at 1.77%. So if you ask me what is the biggest progress we’ve made this year is really leveraging what is unique about Santander, which is that we have both in-market scale and global scale in large markets with growth potential.

And again, these numbers show the success and the strength of our model and our strategy. First, in-market scale in each of our core markets, here, you have it run by lending. It’s a strong competitive advantage. We’re among the top 3 lenders in 9 out of our 10 core markets. In the U.S., we have an at-scale U.S. auto business that benefits from the network — Santander network in terms of OEM relationships. And compared to our local peers, we are already leaders in profitability in 4 out of these 10 markets. And in a fifth in Brazil, we’ve been #1 in profitability in 2 of the last 4 years. But really where the biggest opportunity lies is in that our global reach and our global scale and divisions like CIB, Corporate Investment Banking and Wealth Management, I’ll tell you about this now in a few minutes, and further leveraging our auto and payments capabilities generates a differential revenue and growth — profitable growth opportunities.

And these 4 segments, and this is important, today represent more than 30% of total group revenue. In 2022, 30% these 4 divisions of total group revenue and over 50% of the profit, much of which would not be possible without this collaboration and network that Santander provides. We will explain more about this in Investor Day. But just to share with you what we’ve done this year because we’ve been working on this, not just in ’22 but before that. So again, this in-market scale in each of our geographies has proven that it’s a key competitive advantage. Héctor will cover that in more detail, and we’re still working on that, by the way. But our global scale is already providing us with this value-added network, which is unique — a unique combination.

And let me just share some examples. The best example this year, as I said, the proof is in the pudding, is Santander Corporate Investment Banking. We are leaders in Latin America. We’ve built a strong franchise in Europe, and we’re strengthening our position in the U.S. We are recognized as global leaders and have been in the top 3 over the last 10 years in businesses related to energy transition and infrastructure, both of which are expected to grow in a significant way in the next few years. Here, we got not just in our footprint but globally. We’ve created a global network for CIB customers that generates revenue that local countries cannot generate a loan. And this cross-border collaboration revenue, not achievable by local banks and which we measure, we’ve measured for several years, was EUR 3.4 billion in ’22 and represents 50% of CIB total revenue and is growing at 33% last year.

Again, this is a differential performance versus our peers. There’s no other bank that has this combination of being very strong in market and very strong in certain verticals globally. So we’ve outperformed peers, as you can see in revenue and profit growth, efficiency and profitability. The other global division that has made huge progress in the last few years is Wealth Management. This is a very high-return business. We are executing on — same as we’ve done for CIB for the last few years, on our global platform plans, and again, already, we have a better efficiency ratio compared to peers. What we are doing in terms of private banking services for our customers that purely local banks cannot provide by connecting this service to our private banking customers, we brought in more than EUR 51 billion of AUMs. And again, in 2022 was not an easy year for this business.

Our revenue growth and our profitability outperformed both in private banking and asset management. And the last one would be insurance, where we have achieved gross written premium growth of almost double our peers. We have 2 other network businesses that are really increasingly being used by the countries. And just very briefly to say that even though this is not a global division, we are actually a worldwide leader in auto financing. We are clearly #1 in Europe in terms of both volumes and profitability. We’ve built — we are building proprietary platforms with a competitive edge, leasing, subscription, buy-now-pay-later, digital tools for our OEM partners. And our U.S. auto business is already benefiting from this competitive edge. We’ve started to replicate this model in South America, building common tech to deploy leasing activities and other products.

This is not the only network effect, but let me just focus on the global relationships with OEMs and our knowledge of this business means that, for example, in Chile and Mexico, we went from no presence to about market share in just 3 years. And in Mexico, congratulation Héctor, by the way, we broke even in March 2022. But the key number is that today, around 40% of our business in the Americas is related to our OEMs partnerships in Europe. This business would not be available to local auto finance companies. In payments, we managed 97 million cards globally. This would make us 1 of the top banks or top 3 of 4 banks in the world by number of cards. And of course, customers that have a car tend to do more business with the bank. We’re expanding our merchant capabilities.

Again, our acquiring business, Getnet, was ranked among the top 3 merchant acquirers in Latin America. Getnet, again, has rapidly grown in Mexico. As we left a third-party provider, we moved from a market share of 14% in 2020 to 20% in ’22. And as you know, this is a key product to engage our customers and be able to do more business in the bank. We are currently #2 by total payment volume. Again, we would not have been able to do this in Mexico without our network and the Santander value added as a group. Very importantly, there is no immediate effect, but that’s going to be seen in the next few years. We are bringing all of our customer payments globally into a single cloud-based modern payments platform, which will deliver, in future years, many more benefits.

We are executing on this plan, and it will generate savings already these 2 years as well as having a much more modern, agile platform. So again, all this is supported by our tech investments as a group, which are many of them you’re seeing in the numbers we deliver at a high level. Much more on this and how we’re going to continue delivering not just great results for customers but for shareholders, we will cover that at Investor Day. So let me just end with saying that the strong position of our local banks and this progress we’ve made serving our customers is seen in the growth in customer numbers. We now — we’ve grown 7 million up to 160 million customers. That’s an 8% increase. We’re making strong and very clear advantage in the digital space, which is accelerating.

Our digital customers already reached 51 million digital transactions, are — at 80% of the total, exceeding both our customer and digital activity levels. We’re improving customer experience, and very importantly, we’re delivering these results in the right way. We’re taking a very important step to integrate further our environmental, social governance issues into the day-to-day. We created a green and energy transition finance team, which reports to the CEO, to the CIB and the CEO to embed consistent practices in green finance across all our business units, including how we help our retail customers, not just our big customers, transition. We see a huge opportunity here as well as a huge responsibility to support the transition of our customers to a green economy.

You have here the targets. We are ahead of our targets. We committed to do EUR 120 billion of green finance. We are at EUR 91 billion. We are — we remain a global leader in renewables financing, #2 in the world by deals and volumes. We’re moving forward in a net-zero ambition. We have 3 new interim targets to decarbonize our portfolios. Importantly, we are now accelerating this in consumer. We did EUR 5 billion mainly electric vehicles but also bicycles and others. And in Wealth Management, we’re also making progress. We had achieved EUR 53 billion of our commitment of EUR 100 billion AUMs in socially responsible investment. None of this would be possible without the work we are doing with our teams and our culture. It’s something which is maybe not evident in the numbers, but it is behind the numbers.

And to me, it’s at the core of our success. And I’m very excited about what Héctor brings to the table here. No pressure. It’s our ability to build a culture of teamwork, attract and retain the best team members and, of course, work as one Santander but, very importantly, also our work to help financial inclusion. And again, you can see the results of these efforts, both internally and externally. We have highly engaged employees, where we are within the top 10 of the financial sector. We measure this. We are very proud of the progress in gender quality. By the way, we were named again #1 bank in the world, and #2 company globally in terms of diversity — gender diversity last — I think 2 days ago, by Bloomberg, and really closing the gap to 0 hopefully soon on the pay gap.

We have many more women in top management roles. We set ourselves a 50% increase from 20% to 30% a couple of years ago. By 30 — sorry, by 2025 to be at 30%. We’re very proud to be at 29% this year. Financial inclusion is a hugely important goal for us. It’s also good for the country. It’s good for the economy and, of course, will help us down the road. But we reached the 10 million financial inclusion actually 3 years ahead. We set it for 2025, and we’ve been named the world best bank for financial inclusion by Euromoney. And of course, we continue to be a benchmark in the sector with women representing 40% of the group’s Board of Directors. We believe strongly that diversity is not just the right thing but leads to better business outcomes and better decisions.

So I would like to leave it here, and then Héctor will now go into more detail into the group’s performance.

Hector Grisi: Thank you, Ana. As you say, no pressure. So good morning to everyone. Let’s go back into the income statement for a little bit. As usual, we are showing the growth rates both in euros and constant euros, okay? As you can see, there was a positive impact from exchange rates from around 6 — 5 to 6 percental points. These are partially offset by the FX hedge and the corporate center, okay? We’re including gains on financial transactions here as well. In constant euros, revenue grew at a faster pace than previous quarters, as you can see, and cost faced to inflationary pressures but continued to increase below the rate of inflation. Thanks to this performance, net operating income exceeded EUR 28 billion, which is, as the Chair said, a new record.

In loan loss provisions, there are different forces impacting the year-end performance. There were COVID-19-related LLPs releases in 2021 and additional LLPs in 2022 relating mainly to update macro assumptions and some of the normalization that we have had. I’ll explain this later in much more detail. This year also registered higher charges related to regulatory funds, new resolution schemes and lower minority interest and tax burden. Q4 was impacted mainly by the deposit warranty fund. The bank levy charges of approximately EUR 300 million after tax and EUR 127 million because of the AML settlement we did with the U.K. authorities. All in all, it’s a record year in NII, revenue, preprovision profit and profit supported by our geographic business diversification.

As I said, diversification is resilience. During the year, in all regions, as you can see, we increased volumes, specifically deposits, okay, quite strongly and also revenue while we reduced cost in real terms and maintained our credit quality under control. Regarding profit and profitability, South and North America ended 2022 with outstanding profitability levels. There was a notable recovery in profit and RoTE in Europe. DCB, with its strong presence in Europe, improved its profitability and profit, showing the benefits of consistent execution of our strategy. In CIB and Wealth Management, we also produced excellent performance, with profit growth of 31% and 15%, respectively. In addition, revenue growth in our payments businesses like PagoNxt and cards increased at high double digits and above the target.

Our diversification and scale are key to improving results and profitability as well as being essential for stability. I will go now through the main P&L items in much more detail. As you can see in this chart, starting with the quarterly trends in constant euros, a strong revenue improvement quarter-on-quarter supported mainly by all regions and global businesses. The last quarter of this year was EUR 1.4 billion higher than in Q4 ’21, boosted mainly by NII, EUR 1.2 billion exactly. Looking at Q4 versus Q3 in detail, NII maintained a consistent upward trend. Q4 increased 6% versus Q3, mainly driven by Europe, 13%, mainly in Spain with a 25% growth and another strong quarter in North America after record NII in Q3. South America also rose 6% due to Argentina and Brazil, 1%, while Chile continued to be impacted by the negative sensitivity to interest rate rises and the lower inflation.

As you can see also, net fee income continued to recover with positive trends, mainly South America, DCB and in the global businesses. Trading income increased last quarter, driven mainly by Spain and the corporate center, the FX hedge. And as you can see in the chart, as the Chair has already mentioned, this is in line with a very small portion of our total revenue. Finally, other income decreased in Q4 affected by deposit warranty fund charges that I already explained and detailed. Moving on to the full year. NII rose 16% in constant euros. NII rose 9% with growth in Europe, plus 19%, North America, 7% and South America, 6%. If we look at the main drivers of the NII and NIM improvement, we have broad-based growth in loans and deposits. Loans were up in all regions, low single digits in Europe and high single digits in North America and DCB, with double digits in South America.

The global businesses grew also. Of note, CIB plus 11%. Likewise, deposits also increased strongly in all the regions. Interest rate hikes mainly benefited the U.K., Poland and Mexico and are not yet fully reflected, as you have seen in Spain, Portugal and the U.S. But Brazil, Chile and DCB are still affected by the negative sensitivity to the interest rate rises. The group net interest margin increased to 2.5 — 2.53% from 2.41% in the fiscal year ’21. It’s mainly supported by our cost deposit management. Given that there was no economic benefit in maintaining most of our TLTRO positions following the change in conditions announced in October, we were able to accelerate TLTRO repayments and have repaid EUR 61 billion to date, mainly in Banco Santander, which has repaid EUR 56 billion out of the EUR 61 billion in total that we had.

We expect this positive NII performance to continue in 2023 as we still have room for improvement as interest rate increases have not yet been fully passed in some of the countries. We are also rebuilding our ALCO positions from their current low exposure, mainly in Spain, and we are taking advantage of the higher yields by doing that. The rise of interest rates would generate an increase in NII over a 12-month period of around EUR 2 billion to EUR 2.5 billion, considering the forward curves that we have in the interest. On fee income, we have positive performance in all regions. Europe is up 3%; North America, 6%; and South America, around 11%; DCB also up by 3%. This performance was supported mainly by greater activity in high value-added products and services, as you can see on the right-hand side of the slide.

Let’s move on to cost. The sharp increase in inflation led to an overall increase in cost. However, in real terms, costs fell by 5% as we continue to improve productivity and cross-border collaboration. Our efficiency ratio is one of the best in the sector: 45.8%. We improved this year, and we were able to end 2022 close to our target despite the inflationary pressures and the lag in some regions between its impact on cost, almost — which is almost automatic mainly in Latin America, and the uplift to revenue from higher interest rates, which will continue to fit through the coming quarters. Structural changes in our operating model are driving new productivity gains. An example of this is Europe, which have better efficiency ratio and where we have significantly reduced the cost base over the last few years.

Also, we are working transformation, simplification and on reducing the cost to serve while maintaining service quality. For example, in Spain, the cost to serve per customer fell around 7%. Turning to the risk performance. LLPs grew year-on-year due to, first, COVID-19-related provisions released in 2021, as I previously said. The additional EUR 1.4 billion of macro provisions in 2022, mainly Spain, the U.S. and the U.K., part of which results and part against the fund already constituted. Brazil and Poland — and Q4 was also impacted by the normalization that we had in the U.S. and a one-off that we had in CIB in Brazil. In terms of cost of risk, we are not seeing significant deterioration. We have improvements in Brazil to 0.61% and Mexico, 1.95%.

Normalization continued in the U.K. and the U.S. from extremely low levels in 2021, and Poland was impacted by the mortgages. In Brazil, quarterly cost of risk peaked in the year in Q2, having declined in Q3 and Q4, excluding the one-off. The full year also will have been in line with our previous estimates. In summary, in an uncertain environment, we met our 2022 cost of risk target, and we have taken measures over the last few years to improve the risk profile. Moreover, there is no significant worsening of the variables that have the greatest impact on credit deterioration in the countries where we operate, mainly unemployment. This performance was supported by a high quality of our portfolio. The NPL ratio was 3.08% better year-on-year, with improvements mainly in Europe and DCB.

It fell 145 basis points in Spain year-on-year, in part due to the portfolio sales we executed. Total loan loss reserves stood at around EUR 23 billion, and the portfolio distribution by stage remained mostly stable. On the right-hand side, there is a brief overview of our loan portfolio structure. 65% of the total portfolio, as you can see, is secured mostly with real estate collateral. 80% of loans are mostly concentrated in mature markets. In developing markets, Brazil accounts for just 9% of the group total exposure. And if you see it by segment, our mortgages have low average LTVs. The consumer lending portfolio is very well collateralized short term and has high returns. The SME and corporate portfolio is covered with around 50% warranties.

Lastly, 2/3 of the CIB portfolio is investment grade. In other words, a very portfolio. It’s important to address that the loan portfolio has a medium-low risk profile and is very predictable. The main economic variables that most affect our business are expected to remain resilient across — along all the footprint. This, coupled with the group focus in recent years on balance sheet strength, has allowed us to improve our credit risk profile and face the current environment with really great confidence. Let’s look at the main countries. In Spain, we have significantly reduced the average LTV of the mortgage portfolio. It’s around 62%. Our corporate portfolio improved its rating and the ICO portfolio performed better than expected. The macro environment also is better than in previous crisis, and employment, as our Chair said, is much more resilient.

In the U.K., 12% of the portfolio is floating. The simple average LTV for mortgages is around 40%, and less than 5% of the portfolio has LTVs below 80%. New business vintage delinquency rates are stable and without any sign of deterioration, and from a macro perspective, the U.K. has a very low unemployment rate. We are also very positive in Brazil and the U.S. as we are very well positioned to face the context of the normalization that we’ve been having. Let’s go in detail to Brazil, okay? We have — as you can — as you have seen, a very different economic environment. We have demonstrated, first of all, that our risk management capabilities are strong enough to face a very challenging scenario. Our cost of risk in Brazil has remained below 5% over the past 7 years and, on average, closer to 4%, with greater stability than our local peers.

Additionally, during these last years and lately starting last quarter of 2021, we have taken cautionary actions in order to improve the structure of the portfolio. Let me explain it in detail. We have been very more selective in origination to increase exposure basically to lower risk collateralized portfolio like mortgages, agro or payrolls. As you can see in the graph on the bottom left side, we have increased the secured loans by weighting by more than 10 percentage points. We have also enhanced the profile of our customers. The weight of the new vintages with best ratings has increased from 79% to 84%. This has been reflected in 90-day delinquency ratio, which has improved from 4% in the old vintages to 2% in the new ones. Finally, in the right side of the slide, you can see what the cost of risk increase in the last 2 years was, mainly driven by personal and auto loans portfolio, which has recently improved very much in the trends.

All in all, given our risk management, the enhanced portfolio mix and the new lending profile, we don’t expect a deterioration of the cost of risk on a like-for-like basis in 2023 in Brazil. Now let’s go and focus on the U.S. With regard to credit in 2022, performance was better than initially expected. As you know, most of Santander U.S. provisions come out of our auto businesses, where the anticipated credit normalization began later than we would have thought but is now materializing. When looking at the slide, a key variable for 2023 performance will be loan loss provisions performance in auto Credit. Here, we see in detail. First, the normalization of credit performance will continue to do — throughout 2023 and increase the cost of risk driven by 2 years of loan losses due to COVID stimulus and the pandemic-related factors.

Number two, the portfolio mix shift towards better quality. The percentage of the prime FICOs in the loan portfolio has increased since 2016 from 14% to 41%. The higher mix of prime loans implies better credit profile and decreases the cost of risk. It is important to note the significant progress made in establishing a full spectrum out of business funded by our consumer deposits. Currently, 30% of the portfolio is retail-funded versus 17% in 2019. As the risk profile normalizes in the U.S., European regulation is more demanding with regard to classification by stages, thereby requiring greater provisions. All combined, we expect cost of risk to increase in 2023 but remain below prepandemic levels of in — that we had — of 2.85% in 2019 as the improved portfolio mix will support the asset quality.

Now let’s discuss capital. We are very comfortable with our capital position. We are in line with our target to be above 12%. And once again, the numbers show the strength of our organic capital generation. During the year, there was 138 basis points of gross organic generation, of which 62 basis points were assigned to shareholder remuneration. This increase was partly offset by impacts from markets and models. We have embedded a culture across the organization that puts capital efficiency at the heart of all decisions and from key strategies at Board level to the day-to-day origination process. As a result, we have an enhanced portfolio management and increased our balance sheet rotation. Levers that have been implemented are securitization, asset sales or risk transfer through credit protection and also using warranties.

The group return on risk-weighted assets of 1.8% was boosted by higher margins, spend discipline and efficient capital deployment. And front book, the return on risk-weighted assets was 2.6%, with all regions meeting or improving their profitability targets. RWAs with positive EBA increased from 70% to 80%, with key improvements in the company segments in Spain, the U.K. and the U.S. mainly in 2022. Thank you.

See also Best Dating Apps in 2023 and 15 Biggest Neuroscience Companies in the World .

Ana Botin: Thank you. Thank you very much, Héctor. And let me now — allow me to sum up before we go to the Q&A. And just to briefly summarize our results for ’22 and our targets that we are setting for ’23. As I said, 2022 was a year that again surprised us and was unexpected on many fronts. We faced many things, and I want to emphasize this, out of our control. But we did deliver with our focus on what we do control, and the proven success of our strategy and business model and focus on execution enabled us to deliver these excellent results. We continued to grow customers and met all our targets, improved customer experience. You can see this in the growth in revenues and profits. We continued to improve our businesses and operating model and profitability as we invested for the future.

We continued to deliver strong risk performance and capital generation. And again, all of this is reflected in greater shareholder remuneration and value creation. I’m not going to dwell on this, but I just want to reiterate that when we said the 2019 medium-term plans, we were not counting with COVID, we’re not counting with the war in Europe, and we have delivered in spite of that on every single one of our targets and almost delivered on efficiency in spite of the high inflation. And this is really important because we have done this at the time — at the same time as we’ve strengthened our business and operating model and our cultural transformation. So again, I want to stress that we have not just delivered in the medium-term plan in ’22.

We have set the foundations to allow us to grow profitably into the future and deliver for our shareholders’ increasing returns. As we look ahead, we are confident that all of this places us in a very unique situation vis-à-vis peers. We are confident we can continue to increase profitability and that this will be done at the same time as we drive growth, double-digit revenue growth, again supported by both greater activity and the change in our model, more customers and also the higher interest rate environment. We have significant tailwinds in Europe, with the current curve — this is a significant amount, over EUR 2 billion. Maybe Héctor wants to give some more details later. Further improvement in our efficiency ratio. We do expect cost of risk to pick up during the year, in part driven by the normalization of provisions in the U.S. that Héctor covered, and you can see in the slide he shared.

Again, based on current economic consensus, we are seeing the cost of risk remaining below 1.2% in ’23. But very importantly, we are confident that revenue growth will continue to outpace growth in provisions and costs. And of course, this is what leads us to a projection of — and the guidance we’re giving on return on tangible equity above 15% already in ’23. Last but not least, I’ve said it before, I am absolutely and we are absolutely convinced that it’s our purpose and how we want to be different, that it’s going to enable Santander to deliver today and into the future. This has been our guide since 2015 and is still our guide. It’s part of our culture. It defines how we do business and, again, will allow us to continue progressing together as a team.

We are here to help people and businesses prosper. Our aim is to be the best open financial services platform by acting responsibly and earning the lasting loyalty of our people, customers, shareholders and communities. And this is what will drive future growth and customer loyalty, increase profitability and drive greater shareholder remuneration and value creation. So thank you so much. Begoña, over to you.

Begona Morenes: Thank you, Ana. I think we can open the floor for the questions.

Operator: . And we already have our first question coming from Francisco Riquel from Alantra.

Francisco Riquel: Congratulations for the results. Two for me. First, cost of risk. In Brazil, I wonder if you can comment the coverage ratio that you have now provisioned for the one-off NPL in CIB that you mentioned. And what is the calendar of provisions left for this single name in ’23? And in this context, if you can give guidance on the cost of risk that we should expect for Brazil with and without this one-off just to assess the underlying trends in asset quality. Second in cost of risk is the U.S. business. You’re guiding for a net charge-off in ’23, below pre-COVID levels. Are there listed peers in consumer finance there in the U.S. are already above recovery in ’22? So I wonder if you can reassure us why SCUSA will outperform in this cycle.

How much are internal reasons because of the derisking? And how much is because you are more optimistic in the macro and interest rates? And last question is on capital, if you can please update on the regulatory headwinds left for ’23.

Ana Botin: Okay. Let me take that first, and then Héctor, you might want to complement this. So on Brazil, cost of risk. First, we do not comment on single customer names. The provisions we’ve made in ’22 are, we believe, prudent and follow both our internal and auditor’s guidance. We believe we are covered sufficiently for now. What’s important is that we are guiding for cost of risk for the group to be below 1.2%. And excluding the one-off in ’22, we are expecting cost of risk in Brazil to be stable. I would let Héctor maybe or José in terms of coverage and other trends in Brazil. In the U.S. And again, I will pass over to Héctor also, but I just want to stress something which is really important. Since 2016, we have derisked our consumer business in the U.S. We have worked together with the group, and we have worked together with our retail bank.

So 2 very important data points is because thanks to this combination where we see our business in the U.S. to be very different from our retail peers, we are now at 41% of our auto business being prime, 41%. It was 14% in 2016. That’s one of the big reasons why, yes, we expect normalization but not to the previous levels. By the way, 30% of our business in the U.S. is now retail-funded because we do have retail deposits and leveraging on OEM relationships. We won Mitsubishi and others — actually Mitsubishi only in the U.S. recently. So this is really important. And not an important point, as in Héctor’s slide you can see this, is we sold the riskier portfolio we had in SCUSA, which was Bluestem. We’ve done many more things to simplify the business the last few years, but these are the 2 bigger points.

Again, I don’t know if Héctor would like to add something. On capital, our guidance is very clear. We expect to continue to build capital. I believe Héctor mentioned we do not have any significant regulatory headwinds in ’23, but please comment on that again. I think on capital, what’s important is we have been building capital for the last 7 years. We raised a big amount of capital when I arrived in 2015. We reached the level of capital of 12% last year. We said it will be above 12% every quarter. We are now in line with peers. And what’s important, we’ve shown again this year, it’s less volatile than other peers. So Héctor or José, would you like to add on — Héctor on cost of risk in Brazil? Anything else on coverage on the U.S.?

Hector Grisi: Cost of risk, I mean in terms of Brazil, Ana as you have said, I mean, it’s quite clear. We have changed a little bit the mix what we were doing. We took the decisions where we needed to take them. And I know I see it very stable, and that’s exactly the guidance we’re giving that we’ve in that. And in terms of the coverage, as we — as I have said, we have EUR 1.4 billion of overlays that we did both in the U.S. and Brazil to cover . So I will feel very comfortable with what we have done and with the amount of reserves and provisions that we have in both of them. In terms of the U.S., you have explained it perfectly well. The change of mix basically changes the outlook of what we used to have before. So we don’t believe that the cost of risk is going to go back to ’19 levels.

And actually, what we have seen is the trend is a little bit positive than we expected at the beginning. And in terms of the capital, I don’t know, José, if you would like to comment, but what I have seen is .

Jose Garcia-Cantera: Exactly. We don’t expect any significant supervisory charges in 2023. The charges in 2022 were very much in line with our expected 25 basis points or so for the year as a whole. In this quarter is when we had the impact of the new models in mortgages Spain and SME Spain. And again, most models or all significant models have already been updated. So we don’t expect any significant charges going forward. In terms of coverage provisions, et cetera, the EUR 1.4 billion macro provisions we made in 2022, for the group as a whole, we believe, are sufficiently prudent to support the guidance of a cost of risk of below 1.2% for next year.

Operator: The next question is coming from Ignacio Cerezo from UBS.

Ignacio Olmos: The first one is on the U.S. If you can give us a little bit of color on the difference in terms of loan yield and the cost of risk of the different FICO buckets to get some flavor basically on how relevant that is that you have increased significantly in the weight of FICO above 640 versus below 600. So if you can give some numbers basically again to get a better reference on that. The second one is if you can clarify the tax rate you’re using for your guidance in ’23 on a group basis. And the third one is if you can update us on the Basel IV impact that you’re expecting.

Ana Botin: Ignacio, I mean the FICO yields on the portfolio, as we say in Spanish is , and maybe Héctor can answer that. But what I can tell you is that what really is important is that we have sold Bluestem. That was a source of significant risk, which we sold, I have to say, exactly the right time. Second, that independently of the margins, which come up and down depending on competition, clearly, 41% in prime or above, it’s a very different risk profile. And to be honest, I mean, I don’t know, Héctor, if you can add a bit more color on that in a few minutes. In terms of taxes, in — our effective tax rate was 33% in ’21. We have still — I think in ’22, we’ll be somewhere around 29%. And in ’23, nominal taxes — right, nominal taxes were not expected to change.

Yes, you will have this tax on revenues from Spain, which we estimate, and we were instructed by our accountants and market authorities to put it in ’23, and I think that’s EUR 225 million, but that’s not going to be seen at the tax level. It’s going to be seen on the revenues. But yes, we are not expecting any change in nominal tax rates. And the last one was on…

Jose Garcia-Cantera: Basel IV.

Ana Botin: Basel IV, which maybe…

Jose Garcia-Cantera: Final implementation Basel III. We — as you all know, we still don’t have the final proposal — regulatory proposal. We have had some positive news for us, like the multiplying factor ILM equal to 1, which was finally included. As you all know, also, we are not affected by the output floor. We are going to be affected by some other items like the operational risk. But until the final legislation is written and approved, it’s difficult to give an accurate estimate. But what I can tell is that is not going to be significant, and we should be able to build plenty of capital in the next 2 years to compensate for any impact that we may have.

Hector Grisi: Ignacio — sorry, Ignacio, just very quickly on your first question. Okay, I don’t have the exact detail on the FICO of what you’re saying. But if you go to the page on the U.S. on the presentation of the left-hand bottom side, you can see there exactly what’s the mix that we have. So you have the rates that are basically 41% in the portfolio, that this is prime and near prime, which is basically what we have done in changing the mix that we have. And we couldn’t have done that unless we had the funding from SBNA that is basically now funding a big percentage of the portfolio. So this portfolio is mainly funded for that, and I can give you later the details on that. But that’s basically the change of the mix that we have at this point. So the risk is a lot less than we had before. You can see how it has been growing and changes completely. And 30% is funded with our own deposits, okay? So it’s quite important to understand that.

Begona Morenes: Thank you, Ignacio. We will get back to you from IR with the yields on the FICO, don’t worry.

Operator: The next question is coming from Ignacio Ulargui, BNP Paribas Exane.

Ignacio Ulargui: I have two questions, 1 a bit more focused on costs. If we look at the performance of the bank in developed economies, it has definitely been able to control inflation quite well. It has not been that — the case probably in Lat Am. Just wanted to see if there is any kind of additional initiatives that you can push forward to control a bit more cost growth in the region. And the second question is linked to the deposit franchises. Given your global footprint and the different experience that you have had in different interest rate cycles, how do you see banks performing or behaving in terms of deposit betas? I mean so we expect a material acceleration of deposit betas in Europe, or based on your Lat Am experience, you think that, that should be more controlled.

Ana Botin: So let me just give a high-level question. And then maybe Héctor, you can help me here. So in terms of cost control in Lat Am, let me just say that within the cost of risk — sorry, cost guidance we’re giving, to , we expect to be — in the U.S., we’re making structural changes. We started this a year ago. As you know, we’re not able to change the model until 12 months ago because of minorities and other issues. So we believe that cost will be flat or down in the U.S. Again, please confirm this for me. In South America, there will be stable. We are focused on cost control. Given the lingering effects of inflation, we believe that, that will be more or less flat. You will see some increase in Mexico. Again, in Europe, we expect to have cost.

But again, we are giving cost-income guidance because of inflation and uncertainties there. So there’s some space. But as you saw, Spain, for example, cost came down around 5%, if I remember correctly. It was 5% for the whole group. In the U.K., we had good cost control. We expect that to continue going forward. So it depends very much on the countries. And in Lat Am, South America, I believe, is sort of flattish. U.S. is flat to down, and Mexico will be up, but Héctor, you can help me here. Deposit franchises. I mean this is important, and we have grown deposits in many of our core markets, including in the U.S. This is really important. We do believe increased competition. But again, here, what’s important is the net interest margin. We expect that to expand, not just because of the fact that we are not paying a lot of our deposit franchises.

Remember, we’re retail. We’re not paying retail franchises when rates were negative. At some point, yes, we will start paying for deposits, but we’re in a strong competitive in-market position, and we believe the structural changes in the model with better service and better digital capacity will help us to do better there. So I don’t know if you want to add anything there on the cost control in Lat Am, Mexico, U.S. or other countries, Héctor.

Hector Grisi: Yes. Just in cost control. I mean, as you can see, I mean, Latin America is much more difficult, given that people are used to it and a lot of it is indexed of what we do, but we have been able to maintain it below inflation in most of the countries. The important fact here and the important change of what we used to do is that we’re working together much more. And we are developing a lot of our software together and decreasing the amount of risk that we are — sorry, the amount of expenses that we are generating in all of the countries. As our Chair has explained, for example, I mean, the acquiring platform was developed by Getnet and is being used in the rest of the countries. Also, the important fact is that the way we are handling the different expenses is very much controlled, and we have implemented one of the main drivers that is basically all what we do in infrastructure, and we’re maintaining it to the minimum.

So in that regard, we believe that we’re going to be able to control costs below inflation, which is, I believe, the most important point and to maintain, as we have said, under the guidance that we have given. In terms of the deposit franchise, I can give you some of the beta deposit that we have. In Spain is around 25% to 30%. The U.K. is around 30%. The U.S., around 40%, and Brazil is around 80%. It’s very automatic. But what also we can tell you is that in the last quarter, we have been able to also increase deposits in some of our most important markets. Take a look, for example, deposit growth in the U.S. was 20%. Mexico in the last quarter outpaced our competitors in that sense. And we have been — we’re going to be very much focused on that in the whole franchise and in the different parts of the bank to really enhance our deposit-gathering business.

Operator: The next question is coming from Alvaro Serrano from Morgan Stanley.

Alvaro Serrano: I apologize I’ve got a follow-up on U.S. and one on — a new one on Brazil. On the U.S., I’m looking at your charts on the right-hand side on Slide 25 that you showed the delinquencies — early delinquencies. My understanding is that the vintages of the second half ’21, in particular, the vintage of 2022 were the ones that deteriorated most. It shows yours and from competitors, but it looks like you’re showing an improvement. So maybe you can comment on apart from the general comments you’ve made, specifically on the latest vintages. Is that what’s giving you confidence? Or maybe some commentary there. And within that guidance of the cost of risk in the U.S., maybe you can share what the car price assumption you’re using for this year.

I know your competitors are expecting mid-teens reductions, but I don’t know what you’re factoring in that cost of risk. And then on Brazil, just some commentary maybe on the NII growth that we can look forward to this year. It’s obviously been slow as you had already guided to in the second half of ’22. I don’t know if with the latest sort of rate expectations, should we expect only growth in the second half, as you were saying before, or any updates on the Brazilian sort of dynamics.

Ana Botin: So thanks. I’ve actually — just give another high level — apologies for that. I think it’s important to put vintages and more specific questions in the U.S. in the context of the country. I think it’s really important to understand that our U.S. business is fundamentally much stronger than it was 3 or 4 years ago, including the consumer business. It’s a business we understand, we know how to manage, we are in control. The cost of risk this year was better than guided. The leases is what linked to car prices, maybe that’s lease sales that may be Héctor can address that. But what is important is we’re very confident that we can deliver 15% through the cycle returns in the U.S. I also want to point out that in the last 3 — 4 years, actually ’19 to ’22, medium-term plan, the U.S. was the country that added most value to the group in euros.

Actually, the combination — and this is after all cost to TNAV, FX in euros for shareholders. U.S. and Brazil were the top 2, delivering 50% of the total shareholder value creation. This is really important as you think about where we put our capital. It has proven to be anti-cyclical because of the 2 extraordinary years we had in the U.S., almost EUR 5 billion in dividends last year and more coming this year. And we’ve looked at this business inside and out. It delivers very good returns to shareholders way over the cost of equity through the cycle. So again, it’s important to put this in the context that it’s a business we know. It’s a business we understand. It’s a business that is leveraging the group, that is leveraging the retail funding, which we are using to derisk and compete successfully with U.S. banks in prime and near prime.

We won Mitsubishi, as I mentioned, and hopefully more to come. Having said that, Héctor, could you address the latest vintages, please, and car prices in a minute? Brazil, again, as I said, U.S. and Brazil the 2 countries that have generated 50% of the value creation in euros after everything is assigned, 50% of the value creation in euros to shareholders in the ’19-to-’22 year plan. Brazil has a negative exposure, I mean, negative sensitivity to rising rates. I believe this should reverse once rates stop going up in the second half of the year. But again, Héctor, maybe you want to add on the car prices, Manheim Index and others?

Hector Grisi: Sure. Look, I don’t know without specificity exactly what’s going on in the vintages. But what I can tell you is what we have seen, and the trend is that the new vintages are performing much better than expected. And why is that? Because first of all, we changed, as we have said, a little bit the mix but also the risk profile in the sense that we — since we were very much focused on profitability in that regard, the risk that we are seeing in those vintages is a little better because profitability was of the essence in what we did, and we were very much focused on that, and profitability based on the model that we have is based on risk. So in that sense, what tells you is that we were very much focused on that.

And also, as I told you before, the trend is much better than we have seen. And we could see that it’s going to perform better than it did in the past. In the second one, we should see growth in Brazil in the to for NII. So in that sense, we see that this is going quite well. We are being very cautious in Brazil in the way we manage risk. And in that sense, as the Chairman already said, I mean, we have negative sensitivity in the interest rates, but the growth of the portfolio basically offsets that. So as you have seen, I mean we’re going to continue expanding the NII in that sense.

Operator: The next question is coming from Marta Sánchez Romero from Citi.

Marta Sánchez Romero: The first one is regarding your real estate exposure in Spain. Would you say a restructuring is due? And would it make sense to use some of your extra NII to clean up? The second question is about the U.S. top line. It has been somewhat weak moving backwards. Your customer spread is moving backwards. We’re seeing competition for deposits in the U.S. So can you give us some color on what to expect for NII and fee growth in the U.S. for 2023? And the last quick question, what’s the tax rate you expect in Brazil for next year? It’s been quite low this year at just 30%. Yes.

Ana Botin: So in terms of real estate in Spain, I’m going to need a bit of help here from Héctor and José, but we are not expecting — so our main exposure in Spain today has nothing to do with what we had back in 2008. So the developer’s exposure is at very low levels. Remember that Spain has not built many homes for the last 12, 14 years. So one of the most resilient housing markets in Europe or definitely in our 10 core markets, we expect it to be Spain. There’s been a big deleveraging of families. Employment remains very high. And at the end, our real estate exposure is mostly in the individuals, in mortgages, and that is — we expect it to be resilient. And again, as in the U.K., very much based on employment levels, which will fall but from historic highs.

So in terms of restructurings in real estate, there’s nothing that is anything material that would affect our guidance or our performance in Spain. If you go back, for example, where were the earnings, not just Santander, but as a sector in 2008? A big chunk of this was in real estate developers. Today, that is, I’d say, minimal, very small. And we have restructured these. These are listed companies that is a mark-to-market, and it’s actually doing pretty well. So there is nothing there that would cause any concern in terms of the numbers, again, in Spain. In terms of the U.S. top line, I think Héctor has explained that but can give you more details.

Hector Grisi: There is one important point, Marta, that I think is important I didn’t say. I’m sorry about that. The important and the top line what you’re saying, you’re right. And the main problem is the leasing, okay? What’s been happening in the market, we used to get a lot of the cars back, and we used to make a lot of money on the leases because the car prices and the Manheim were up, and we were making a lot of money. And what happened is 2 situations. First of all, people saw that car prices — used car prices went up. So some of the people did an exercise the lease option, and that basically eliminated a huge amount of the profit that we were making on that. On the second hand, what were happening, there were no new cars.

So people basically exercised the lease option due to the fact that there were no new cars to get a new one. So those 2 things hit us hard last year in terms of the top line because leasing is a great profit center in the U.S. So those are the 2 particular things that hit us, and that’s why you look at the top line in a different way. It’s not loan loss provisions. It’s mainly the lack of revenue because of the leases, okay? So it’s quite important to understand that. And just to give you a piece of detail in Spain. As the Chair has said, I mean, we don’t have a huge amount of exposure in developments or anything like that. It’s mainly EUR 60 billion to EUR 70 billion in — around there in terms of mortgages, okay, that is individual mortgages.

And what is important to say is that 75% of those mortgages are on floating rate and 25% only on fixed rate, okay? So the portfolio will start resetting mainly in April through the end of the year.

Operator: The next question is coming from Carlos Cobo Catena from Societe General.

Carlos Cobo Catena: Carlos from SocGen. One is on the ALCO book in Spain. If you could quantify how much of the increase in NII this quarter coming from the top-up in the ALCO portfolio and what would be the existing size and the total target. Also, if you have similar plans for the other Continental Europe balance sheet to grow the ALCO. I think that’s it. I mean the other questions have been answered already. If you could specify — it’s not a big issue, but the double-digit growth in revenues, the target for 2023, would that be in constant euros as well as 2022? Or that would be a nominal.

Jose Garcia-Cantera: Yes, let me…

Ana Botin: Sorry. Let me — just 1 second, and yes, I’ll let you José and Héctor. But I just want to say on the ALCOs that the effect in Q4 is minimal from the euro ALCO. I think we explained in the past, we had a very small position. We have rebuilt some of that, and I’ll let Héctor and José address that. But there’s another issue about the other ALCO is that we have a much higher proportion than other peers in terms of the hold-to-collect — much smaller, sorry, much smaller, which means that this has hit our capital and our TNAV this quarter, but this should come back in the fall. I would’ve been more conservative in how we account for that. In terms of the euro ALCO, it’s still very small relative to a, say, neutral hedge position. So there is space to continue building that. But maybe you want to address that, Héctor or José.

Jose Garcia-Cantera: Yes, very quickly. At the end of the year, we had EUR 11 billion, more or less in euro ALCO. We’ve been building that in the fourth quarter. So as the Chair said, the impact of that in the NII in the quarter was really not significant. Our plan is to gradually build an ALCO, reaching a neutral position, not this year, maybe in 2 or 3 years. We know that we have a very, very low ALCO portfolio, and we want to gradually increase the size of the ALCO portfolio. We will do it, not only buying Spanish government bonds. We want to have a diversified portfolio, German, Italian, French bonds as part of that portfolio going forward. This is a significant difference relative to the way we built our ALCO portfolios in the past.

Ana Botin: Yes. In terms of the double-digit revenue growth that is in current in euros. So we are guiding to double-digit revenue growth in euros. I think that was the other question that you asked, yes. Let me just say — just to expand on that. I mean one of the reasons that our TNAV hasn’t grown as much as we believe it will grow in the future is that for the reason I said before. So if you look at ’19, ’22 period, 50% of the value creation was from Brazil and the U.S., and I’m talking in euros after all the effects. Reason for that is, of course, that the U.S. and Brazil did really well but also that Europe did not do as well. And you’re beginning to see that change in ’22. I was just checking numbers, and please take this with a grain of salt.

I know Begoña will say and others. But if you look at 2008, Santander made about EUR 800 million in Banesto and somewhere around EUR 2 billion — it was a different criteria, but just for orders of magnitude, EUR 2 billion, close to EUR 2 billion in the Santander network. In 2022, Spain is back to . I know conditions are very different and everything — and of course, how we delivered those profits, a big chunk of that was with real estate developers. Today, that is minimal to the previous question. So there is a big opportunity to continue improving not just in Spain, as I said, but also in Europe, and that’s why we’re guiding to double-digit revenue growth. And again, as you’ve seen this year, the big delta will continue to be in Europe for different reasons: operating performance as well as the tailwinds in interest rates.

Operator: The next question is coming from Benjamin Toms from RBC Capital Markets.

Benjamin Toms: Firstly, on loan growth in the U.K. It feels like the mortgage market is about to go through a very sharp downturn. Can you give some guidance on loan growth that you expect in the U.K. for 2023? And then secondly, on Swiss franc mortgage and Poland. Can you just update us on the assumptions you’re listing for the provision there, please, and how those assumptions compare to peers?

Ana Botin: So I will let Héctor with the Swiss franc. But just on the U.K., it’s a market that I’m very familiar with. We’re expecting to improve profitability in 2023. We are focusing more on margins than volumes because there is a very competitive and challenging environment. Our cost of risk is minimal. Right now, we come out, I believe, if not — I think, the best on stress test. And so we have a lot of focus on quality of the portfolio, with a 40% loan to value. And it is important, as I said before, the macro context on employment. And this is the key one for us in terms of how we will perform, not just net interest income and revenues but also overall profitability, including in the U.K. So I don’t know if — by the way, the U.K. is the only country where, as you know, both the IMF but also in our numbers, we are expecting a recession, a negative growth for the whole 2023, okay?

But again, unemployment, even if it — so GDP contracting, I think our numbers are 1.3% but from very low levels. So we are monitoring very carefully our portfolio. Again, the return on mortgages is still very attractive above cost of equity. And I don’t know if you want to complement that Héctor and address, please, if you can, the Swiss franc mortgage question.

Jose Garcia-Cantera: Swiss franc. We increased the coverage of the Swiss franc portfolio to over 40% at the end of last year, around 45%, which is very much in line with the figures we have for our competitors at the end of the third quarter. Probably we are basing that on our experience of the recent court rulings locally. So it’s important to stress that we are already above the KNF-recommended level in Poland. So we feel comfortable with that level. And again, we will be assigning provisions to this portfolio in the future based on the experience of court rulings. We are, as you know, still expecting a very important ruling from the European Court of Justice, particularly related to the capital returns. So again, this is a very fluid situation. Future provisions, again, will be assigned depending on court rulings locally.

Operator: We have a question coming from Andrea Filtri from Mediobanca.

Andrea Filtri: Yes. Could you please provide more geographical visibility for the main countries behind the double-digit revenue growth for 2023? And we got that this targeted in euros, the question before was if it’s in constant euros or if it is adjusted for the future FX. The second question is on your EUR 2 billion to EUR 2.5 billion rate sensitivity. Can you please elaborate the assumptions behind that, i.e., which forward curve are you using and what date? And what deposit betas are you assuming in each country for your guidance? And just finally, if you could give us the detail of the structural hedge on the U.K. portfolio.

Ana Botin: Yes, please, let me just correct something in terms of revenues. I said current euros. Now it’s in constant, the double-digit revenue growth. In terms of the — but it is the same, right? We also — we’re guiding — actually both should increase, both constant and also current. The EUR 2 billion to EUR 2.5 billion rate sensitivity, that’s based on the current forward curves. I mean, I think that was the date we did the presentation, but my team can — and the IR can give you more detail on that one. In terms of deposit betas, actually, Héctor went through that in another question. Maybe you want to repeat it, the deposit betas. I’ll leave you go through that again, but he answered that. And in terms of geographic visibility and guidance, we will give detail on that in Investor Day, but I do want to stress one thing.

This is not just about geographies. This is also about the global businesses and the Santander network, which has been one of the key advances we’ve made in the last few years, and there’s a lot more opportunity to leverage these global businesses as we’re already doing and showing with CIB, Wealth Management and payments and auto to a lesser extent. So we will give you more visibility how this benefits the individual geographies in the coming Investor Day. I think I answered all those questions, and maybe you want to repeat the deposit betas? And then maybe José?

Hector Grisi: Yes, the betas, as I said, are 25% to 30% in Spain; in U.K., around 30%; in the U.S., around 40%; and Brazil around 80%. And as you know, very automatic due to the fact that is indexed.

Jose Garcia-Cantera: Yes. So the way we’ve done the interest rate sensitivity is on the static balance sheet at the end of December running the forward rates on the 31st of December for each currency with the betas that Héctor just mentioned. So no assumption on volume growth or repricing. So when you look at our double-digit revenue growth, double-digit revenue growth for next year means roughly EUR 5 billion increase in revenues. And what we are saying is that between EUR 2 billion to EUR 2.5 billion of that will come just from interest rate sensitivity, most of which is in euros, obviously. So I mean the structural hedge in the U.K., which was the final question, it’s pretty stable at around GBP 100 billion, so GBP 100 billion, more or less, structural hedge in the U.K.

Operator: The next question is coming from Daragh Quinn from KBW.

Daragh Quinn: Just a follow-up question on Brazil and the outlook for the cost of risk in 2023. I think you said you expect it to be stable. Is that relative to the actual number reported in 2022, the 4.8% or the underlying one of 4.6%, which excludes the one-off that we saw on Q4. And then a second question on Spain and the outlook for NII. Maybe just if you can give some sense of what kind of magnitude of NII growth you’re expecting for next year. And to what extent do you think that NII growth, maybe not just for you but for the industry as a whole in Spain, will generate more political risk in this year of elections? And then finally, sorry, just a quick question on the European consumer finance or the Digital Consumer Bank.

It’s probably one of the unique businesses in the group, which relies more on wholesale funding or group funding. Maybe just if you could give a comment on your outlook for how that funding will reprice in 2023 and the impact you see on margin for that business over the next 12 months?

Ana Botin: Okay. So the first one is easy. It’s excluding the one-off. So excluding the one-off, so around 4.6% is the number that we published. That’s — the stability is roughly stable. We’re not saying a number. I’m saying roughly stable, excluding the one-off. Investor Day probably will give a more detailed guidance or not. We have to decide exactly how much we give. I just want to go back to the group because, again, what Santander offers is a group. It’s not just a specific country. And I think what matters is that we delivered less than 1% cost of risk in spite of one-off, in spite of inflation, in spite of things being very different, please. This is exactly the work we have been doing, and we are increasing, and Héctor is fully focused on how can we combine this unique global scale with in-market scale so that Santander, as a whole, makes more money, is more profitable and creates more value.

So — but again, 4.6% is roughly stability. Net interest income in Spain. Again, details will be given in Investor Day, but I do want to reiterate what I said before. We are still below the levels — way below the levels, again, very different market but a much better quality of earnings to date and what we had before. Spain is growing the number of customers. Spain is gaining market share in deposits. I think Héctor mentioned that, I think, around 15% last year. Spain has grown 700 — or 600,000 new — 700,000 new customers last year. So what you’re seeing in Spain is a combination of very important, a change in the model already, and we will tell you more about where that is going in the next few years. And also the tailwind in interest rates and, as the CFO explained, a very conservative ALCO in euros, which, of course, mainly benefits Spain.

DCB, that’s one I know well. So DCB is obviously like our consumer business in the U.S. These are businesses that are more hard-hit by higher rates. In spite of that, we’ve actually improved our return on tangible equity to 14%. We, as you know, joined up DCB with Openbank. So we have now a digital bank helping to fund our business in DCB with very good growth in deposits. And by the way, very cheap deposits. So if I remember correctly, the EUR 10 billion, EUR 11 billion of Openbank is at around 5 basis points cost. So that is helping. In terms of cost of risk, and I can say that. So if you look at — so we’re seeing a normalization of cost of risk with all the caveats and less risky portfolio and so on that Héctor explained in the U.S. We are seeing a normalization again in the U.K. from very, very low levels, and we will see some normalization in DCB.

And all of that is included within the less than 1.2% cost of risk. More details to come. I think any…

Jose Garcia-Cantera: Just a couple of things. On NII Spain. As I said, the EUR 2 billion to EUR 2.5 billion is mostly in euros and, to a great extent, in Spain. And quarter-on-quarter, fourth quarter over third quarter NII in Spain was up 25%. So I think you can have a pretty good idea what NII is expected to do in next year in Spain. Funding in DCB. DCB has around 1/3 of its balance sheet funded with deposits. As interest rates go up, that offers a great opportunity to improve the funding structure of DCB. And we have plans to grow deposits at DCB in Germany and in some other countries but mostly in Germany over the next couple of years by a significant amount. So this should help keep our spreads in DCB at very attractive levels.

Begona Morenes: Thank you. We have around 10 minutes remaining on the call. So let’s try and make this brief. Next question comes from Sofie Peterzens.

Sofie Peterzens: Yes. This is Sofie from JPMorgan. Sorry to go back to Brazil asset quality. But if I look at your NPL ratio in Brazil is now over 7.5%, but also coverage in Brazil has weakened quite significantly. In the past, you always had over 100%. Now it’s below 80%. I’m just wondering — and then in addition, you have 20% unsecured. Why do you feel comfortable with 80% coverage in Brazil? Shouldn’t it be closer to 100% and also considering that you have 20% unsecured lending in Brazil, is it fair? And most of these loans seem to have been originated when rates were kind of in the low single-digit range. Isn’t it fair to assume that NPLs probably will continue to trend up in Brazil? And if not, why not? And then my second question would be on the hedging policy. Could you just remind us how much of your FX is hedged? And how much is it costing Santander per year to hedge the P&L and capital?

Ana Botin: So we’re very comfortable with our provisions in Brazil. Let me remind you that provisions are now forward-looking. We’ve made a macro overlay, for the whole group, that a lot of our portfolio in Brazil is secured and is actually really resilient. We’ve seen the deterioration already, and 80% is more than enough. Again, we follow IFRS, which are now very much forward-looking provisions. So the provision doesn’t mean that, that is the cost of risk. Provisions is the expected cost of risk. We had a big discussion if we should not change the cost of risk to expected cost of risk because of the way the accounting now is very forward looking. So we are very comfortable with our provisions in Brazil for the existing risk.

Let me also say that our cost of risk in Brazil has been between 4% and 5% over the last 7 years. That includes 3 years with almost 10% decrease in GDP. Today, Brazil, we’re expecting growth in the GDP next year, employment to be very resilient. So we’re actually quite confident that both Brazil and Mexico would grow more. You’ve seen it in the recent IMF, and employment levels in both countries have been very resilient. Again, that’s one of the main factors in the final loss of the cost of risk. In FX, we cover — José or Héctor?

Jose Garcia-Cantera: Yes. As you know, we have basically the following strategy. So we hedge the capital ratio. The 12% of using group risk-weighted asset and CRR calculation. So what is — at 12%, we don’t hedge. The hedge is done at forward rates. So for TNAV impact, which is what I guess you’re asking the question, Sofie, is indifferent how much we hedge because for TNAV impact — to predict a TNAV impact, you just take the equity invested in non-euro countries and apply forward rates on a yearly basis. And by doing that, you can estimate the impact on TNAV because, again, we hedge the excess over 12% at forward rates. And obviously, we have tactically hedges for our P&L, but those flow through P&L. So when we hedge expected profits, those hedges come through the P&L.

Begona Morenes: Thank you very much. We’re going to have time for 1 last question. Don’t worry. We can see that there are 3 pending that IR will take care of after this call. Can we have the next question from Britta, please?

Operator: The next one we have from Britta? Okay, from Britta Schmidt from Autonomous Research.

Begona Morenes: We’ll try and contact her after this call. There are no more questions, Ana.

Ana Botin: So thank you, everybody, for joining us. As you’ve heard, we are very confident that we’ve built a very, very solid base for delivering future growth and profitability for all our stakeholders, including increasing shareholder remuneration. We look forward to seeing you at Investor Day. We’ll provide more details as to how we’re going to be delivering over the next 3-year plan. Thanks again for joining us and see you soon.