Banco Santander S.A. (NYSE:SAN) Q3 2020 Earnings Conference Call October 27, 2020 7:00 AM ET

Company Participants

Sergio Gámez Martínez – Global Head of Shareholder and Investor Relations
Jose Antonio Alvarez – Chief Executive Officer
José García-Cantera – Chief Financial Officer

Conference Call Participants

Francisco Riquel – Alantra
Alvaro Serrano – Morgan Stanley
Carlos Cobo – Societe Generale
Fernando Gil de Santivañes – Barclays
Sofie Peterzens – JPMorgan
Jernej Omahen – Goldman Sachs
Ignacio Ulargui – Exane BNP
Adrian Cighi – Crédit Suisse
Stefan Nedialkov – Citigroup

Sergio Gámez Martínez

Good morning, everyone, and welcome to the 9-month 2020 earnings presentation of Banco Santander. As every quarter, we have as speakers, our group CEO, Mr. Alvarez; and our Group Chief Financial Officer, Mr. García-Cantera. Our CEO will address the group performance for the nine months of 2020. and then our CFO will follow-up with business update review in more detail before a jump into the key takeaways of the quarter by our CEO, and obviously, happy to answer your questions during the Q&A session afterward. So José Antonio, please. The mic is yours.

Jose Antonio Alvarez

Okay. Thank you, Sergio, and good morning to everyone. First of all, I hope that you and your families, friends and relatives are doing well. Allow me to go straight to the third quarter results. I will qualify these results this quarter a very positive quarter within the environment arising from the COVID crisis. We have improved, significantly, the quarterly trends in business activity and results. On activity, if the second quarter was pretty strong on the corporate side, the third quarter will recover significantly, the activity coming more for individuals. And this reflects in the underwriting of both mortgages and consumer lending as long as the growth in deposits.

The profit in the quarter was €1.75 billion, 14% increase in underlying terms compared with the previous quarter, 18% higher in constant euros. All the regions are performing better than in the previous quarter. In the first nine months, we maintained a solid top line performance. The pre-provision profit under this scenario, and I want to stress you this, in constant euros, grew 3%, driven by resilient customer revenue and our cost reduction plan.

In credit quality, I will elaborate later on in more detail, €76 billion out of the €115 million or €14 billion that we had in moratory payment holidays already expired, and the behavior has been pretty good. Only 2% went into stage 3. While the future continues to be highly uncertain, but for this year, at least we expect a lower cost of return, the one we guide you in the first Q, that was 1.4%, 1.5% cost of risk, now probably going to be more around the 1.3% for 2020.

On the capital side, we continue to build capital, with a strong capital generation, 40 basis points in the quarter after the dividend accrual of 13 basis points. This morning, in the AGM, we present to shareholders and they approved the – a scrip dividend of €0.10 per share on a cash dividend for next year to be paid in cash next year, provide that the regulators allow us to do so. So if we go to the P&L, straight to the P&L, what we see is first, as mentioned, exchange rates, the impact was significant in the quarter. You see bolt-on revenues is between 6 and 9 points in the different lines of the account. This has been particularly strong in the real in Brazil, the impact.

And you see the difference in those two figures. Excluding the impact of – looking at the business in constant euros, the income remained stable, as the decrease in activity and lower interest rates were offset by higher volumes, some management of market volatility and lower cost of deposits. We accelerate our cost reduction, and we have good news, good perspectives for the coming quarters. As a result of our underlying profits, show significant resilient, and net operating income rose 3% year-on-year in constant euros. Finally, higher loan loss provisions due to COVID-19-provisions, although this quarter came more in line with the second than with the first quarter where did the overlay that you already know. In the charts over the right, you can see how earnings peaked strongly in the quarter with the following detail.

By lines, the revenue grew 7% quarter-on-quarter. Well, growth in net interest income, highest NII in the last 7 quarters, mainly driven by Spain, UK, U.S. and Brazil. So pretty well spread across the board. Up – turn in net fee income, as a result of higher activity, and this happens all across our 10 markets. We recorded lower gains in financial transactions in the second quarter, CIB did a very good quarter, that we couldn’t repeat in the third quarter. Costs were up 3%. And this partly reflect adjustments that we did in the second quarter due to the expectation of lower personnel costs in the year related with the expected performance.

As a result, net operating income was up 11% quarter-on-quarter and higher than the Q3 2019 that I will say, as I said at the beginning, is remarkable. Loan loss provisions fell 14% due to the high level of provisions related to COVID-19 in the second quarter. We go – the main trends of the last quarter are supported by all the regions. You see all the regions growing revenues, all the regions having a good cost control. And very positive pre-provision profit performance, increasing in all the regions with highly resilient NII and efficiency improvement.

Going to capital. In the quarter, we finished the previous quarter 11.84%. We continue to generate capital and a strong generation, 40 basis points organic generation in the quarter. We accrued 13 in order to be able to pay dividend next year, if allowed to do so. Additionally, we had several positive impacts from corporates' transactions of 10 basis points, mainly related with the share buyback of SCUSA and negative impact from regulation market and exchange rates. In Q4, we could have a potential positive impact from the software of around 20 basis points, so slightly higher, and a negative change, around 10 basis points, from other regulatory impacts. This is our – so that’s the reason why we expect to end – to finish at the end of the year around 12%. That is a low at the top end of our target range.

In relation with profitability ratios, remarkable that our efficiency ratio improved a little bit compared with 2019. This is, again, remarkable. The underlying return on tangible equity recovers from the first half of the year, still far away from what the one we had in 2019. And the tangible net asset value stayed basically flat, but it’s suffering from the continuous depreciation of the currencies, particularly those currencies in Latin America, and the mainly the real, the Brazilian real. If you go to the business activity on the group. Normally, we don’t go in that much detail with the activity, but let me to guide – given the current situation in which we are living, let me to guide you. Where is the activity?

The average new lending is coming back to a more normalized levels. In the previous quarter, we have a strong government support that underpinned the growth in the quarter. Now you see that we are lending €1.1 billion a day in constant euros. That was pretty much the same figure that we had back in February. So some kind of normalization in the volume of lending and – compared with the previous quarter. If you go into more specific details. You have the mortgage – the new mortgage lending by regions, and there’s a significant recovery from the previous quarter. And the consumer lending happens pretty much the same. It happens all across the regions. And we saw a substantial recovery in the second quarter – in the third quarter, sorry, compared with the second quarter.

Well, in relation with SMEs and corporate lendings, you will see that we came back after the spike in the second quarter when we were pretty active providing loans warranty by different governments to – particularly to SMEs and corporates, it’s coming back to a more normalized level where the government supported programs is non-material at the end of the quarter in September. In CIB, large corporates, after the spike that happened mainly in March, the situation is back to normal and is fairly, fairly stable at this point. It may not surprise you.

Everybody expect digital sales are booming and – as a result of the pandemia and the digital adoption of more and more customers by the day. Yes? You have the figures in the screen. The digital customers, digital sales, are growing. And the mobile is the preferred channel that the customers are using more and more. And this, in my view, will come here to stay in the future. If we analyze a little bit the details of the P&L. Well, NII was around €24 billion, no material change year-on-year. Net income was strongly impacted in the – mainly in the second quarter by lower transactions volumes and regulatory changes in several units.

From the global business point of view, both Wealth Management and Insurance and CIB increased fee income and represented 46% of the total group fee income. This quarter, we can again perceive a gradual recovery of net fee income associated with normalization of activity. When it comes to costs, I will say good developments here. Cash nominal costs are falling, Europe around 6%; North America, 2.3%; and South America are growing 1.9%. Overall, the group nominal costs are falling 2.1%, and we continue to expect positive developments in this front.

In relation with Europe, we expect to achieve the €1 billion target we established last year in April. We expect to achieve at the end of this year since April 2019 until December 2020, probably we’re going to be there. In relation with credit quality, at this stage, you see like two fronts. On one front we are providing much more based on the models and the scenarios. The scenarios we are using are not far away – are not mimetic, but they are not far away from the ones the IMF is using. And as a result of this, our provisions, loan loss provisions are going up 58% year-on-year. And this is still – the extra provisions basically remain in the balance sheet based on the models and the scenarios we are using.

On the other side, on the credit quality side, we are not seeing a significant deterioration on the credit quality. So the cost of credit going up as a result of the provisions based on scenarios and models. NPLs, traditional definition, still performing very well. And loan loss reserves in the book in the balance sheet stood at around €24 billion, which represents 2.6% of the total loan book. On top of that, and this is the first line of defense in this situation, our pre-provision profit is around €25 billion and is fairly stable the last couple of years.

So finally, let me, too, elaborate a little bit on the moratorias, the payment holidays. You have the figures that probably you are familiar with. The total group moratoria was €114 billion. You have by products and by regions. The main amount was in mortgages. The 2/3 of the moratoria – more than 2/3 is already expired. And well, if you see the behavior of those customers you have, where are those customers, 82% are stage 1, 16% in stage 2 and 2%, as I already mentioned before, in stage 3. You see by regions, you have pretty much, with some variations, the same picture. What remains – and this is a behavior that – well, probably is better than the one we were expecting a couple of month ago.

And this is – well, you may say that the government programs protecting incomes is helping a lot in this regard. The amount of loans still in moratoria is close to €40 billion. You have the split there. Out of this €39 billion, €24 billion are mortgages, €3 billion consumer loans and €12 billion SMEs and corporate. You see where this payment holidays moratoria. By countries, you have two countries that are relatively small in terms of the loan book, Portugal and Chile, where the government extend moratorias for a longer period of time, usually one year. So you’re going to see this moratoria stay there.

And the other two is UK and Spain. That you see the figures compared with the loan book. Both in UK and Spain are relatively small, in the region of 2%, 3% to 4%, 5% of the total loan book. So – and this is – we don’t expect a behavior materially different than the ones who that despite – mainly taking into account that you have the figures in light blue that around 89% in Spain and 83% in UK are secured loans to individuals. So I hand now to José García-Cantera, our CFO, to elaborate about the trends in the regions and the countries are we – and I come back at the end to sum up and to give you our vision for 2021. Thank you.

José García-Cantera

Thank you, José Antonio. Good morning, everyone. Despite the global nature of the pandemic, our geographical and business diversification continues to work. The very strong results that we had in the first quarter are predicated upon a very – our diversification between the three regions and the businesses that José Antonio has commented. We had positive year-on-year volume performance across all geographic regions and global businesses. The decrease in the quarter is explained by the sale of Puerto Rico, the sale of a non-performing loan mortgage portfolio in Spain. I will refer to these two in a minute, and also lower volumes in CIB. We had increase in pre-provision profit in North America, South America and our global businesses.

And the other only decreases that were recorded were in Europe. Excellent underlying profit of our global units, with CIB growing 30% year-on-year, and Wealth Management and Private Banking with a stable year-on-year profits, but activity clearly picking up in recent months. Now if we turn to Spain. We have reached already 13 million customers, and we continue to support families and businesses through many initiatives for the recovery of the economy. For example, we have granted 180,000 payment holidays in mortgages and consumer loans. And we had a market share in the government support program for SMEs and corporates of 27%. All the while, we remain prudent, ensuring no deterioration in the portfolio’s risk profile. We reached more than 5 million digital customers, with more than 300 million accesses in the quarter, leading in customer experience rankings.

In terms of commercial activity, loans fell 2% in the quarter due to the sale of this non-performing loan mortgage portfolio that I mentioned, that amounted to €1.5 billion. But obviously, we had an increase year-on-year, boosted by SMEs and corporate loans. If we move to the income statement. Profit was 53% higher in the quarter due to the positive performance of customer revenue, in turn, due to the sharp increases in net interest income, up 11%, fee income up 5% quarter-on-quarter. On a year-on-year basis, we recorded a decline in total income, which was obviously the result of low interest income, smaller ALCO portfolio, the fall in net fee income due to reduced transaction volumes and also lower income from our real estate subsidiaries. We had a positive cost performance, dropping cost down 10% year-on-year.

And the non-performing out ratio, that dropped by 125 basis points in recent months, mainly due to the sale of this non-performing loan mortgage portfolio. Looking ahead, we remain positive about the top line performance, net interest income and net fee income, and more positive towards credit quality in individuals, although somewhat less so for SMEs, given the current environment and the uncertainty. If we move to Santander Consumer Finance. We continue to see strong signs of recovery in most of the countries where Santander Consumer Finance operates, while – with new businesses actually outperforming the market.

In the third quarter, underlying profits increased 10%, thanks to an almost 30% jump in net fee income, which is linked to volumes returning to precrisis levels. In the quarter, new business volumes were up 37%. Looking at nine months, underlying profits continued to be heavily impacted by provisions. However, net interest income increased 1%. And costs were down 3%, thanks to our efficiency programs and COVID-19 actions implemented in the second quarter. Cost of credit remains low for this type of business.

Looking forward, we would expect the new business in the coming quarters at similar levels to those recorded in the third quarter, with costs and loan loss provisions under control. In the UK, we had a strong quarterly uptick in underlying attributable profit, driven by a continued increase in volumes. We are actually seeing very, very strong new demand for mortgages. Mortgage applications in recent weeks, has been very strong, and this should be reflected in the net interest income in coming quarters, also driven by bounce back loans. We reduced the cost of the 1|2|3 account in May and in August, and this can be seen in the reduced cost of funding.

Increased fee income, mainly due to CIB activity and costs that remain under control, while loan loss provisions were significantly lower in the quarter, down 19%, with the cost of credit below 30 basis points. In terms of nine-month results, continue to be impacted by COVID, in addition to regulatory – regulatory changes affecting overdrafts, although somewhat compensated by lower costs. Looking forward, we expect to see similar trends to those that we’ve seen this quarter, improving net interest income and continued efficiency savings, with no significant changes in loan loss provisions. This, of course, is conditioned by the Brexit negotiations.

If we move to Brazil, has once again recorded an excellent quarter, both in terms of results and volumes, while we remain focused on capturing growth opportunities. Positive performance in mortgages, reaching record high new mortgage lending in the last month, in the month of September. In cards, just in September, for instance, we sold 450,000 cards. And in wholesale banking. Very positive evolution also in GetNet and the auto finance subsidiary. Underlying attributable profit rose 21% quarter-on-quarter, driven by consumer revenues. Costs were 3% higher. Half of the growth in costs is explained by the collective labor agreement.

Provisions declined in the quarter. We don’t foresee a worsening in the cost of credit in the coming quarters. We expect it to remain stable or even improve slightly given the current economic forecasts. Brazil economic outlook continues to improve. The IMF forecasts regarding GDP growth in 2020 improved from minus 9% in June to minus 5.8% recently. Analyst consensus actually is even better than this, expecting a drop in GDP this year between 3% and 4% and the current account deficit is 1%. These – with all of this, we would expect the Brazilian real to show a better performance in the coming quarters. In short, Brazil has again proved its balance sheet and results strength despite the current environment. And we remain optimistic about the future, both in terms of profits and absolute amount of profits and also in terms of profitability.

In the United States, during the quarter, SCUSA increased its ownership stake in the consumer finance entity to 80.25%, and we completed the sale of the retail and commercial bank in Puerto Rico. This sale amounts to €2.2 billion in loans and €3.5 billion in deposits, which obviously explains why volumes show this performance. However, we had a strong year-on-year growth excluding these in loans and consumer loans and consumer funds, boosted by corporate demand and incentive programs. In the quarter, profits were 79% higher, mainly due to lower provisions, lower cost of debt, better performance in leasing and control costs. Underlying attributable profit decreased 24% year-on-year, primarily due obviously, to COVID provisions. Net operating income was flat. And the reduction of costs, down 5%, offset total income decrease.

In Mexico, most branches – the bank continued to operate normally with reduced staff, and we also saw digital activity picking up substantially. Loan growth year-on-year was driven by the corporate side, while credit cards continued to be affected by lower activity arising from lockdown measures. Compared to the previous quarter, profit increased slightly as lower loan loss provisions and higher customer revenue were offset by the fall in gains on financial transactions, which were especially or exceptionally high in the second quarter and the rising costs driven by several projects and higher IT expense.

On the other hand, we had good performance year-on-year due to better revenue performance and improved efficiency. Profit was weighed down by higher loan loss provisions. Cost of credit stood around 3%, and we expect a stable or even decrease ratio in the coming quarters. These results show a very positive trend in customer revenue, reflecting the improvement in our franchise and high profitability, with a return on tangible equity of 15%. Lastly, in the corporate center, we can see results improve 11% compared to 2019. On the one hand, we had positive impacts coming from gains on financial transactions amounting to €440 million. Basically, foreign currency hedging and the top positive trend in operating expenses continued, improving 12% compared to last year.

On the other hand, we had a negative impact on NII of the larger liquidity buffer. And other results and provisions increased due to one-off provisions for certain stakes whose values were affected by the crisis. And now let me hand it back to our CEO for his closing remarks.

Jose Antonio Alvarez

Thank you, Jose. A couple of minutes' conclusions for 2020 results. I will say, a strong capital bill, following continued organic capital generation. Strong operating performance in taking into account the scenario, increase in underlying profit in the quarter. We have robust credit quality, and we set a new cost of credit estimation for the full year 2020. As our Chairman said in the AGM, with these trends and with the results we already got, we expect in the whole year to be around the €5 billion mark net profit for the – a very, very complex year.

Talking about the outlook for 2021. I should recognize that it’s a very brave exercise given the uncertainty that surround – coming from the health situation, the effects and how long it’s going to last, the COVID-19. We expect positive trends in revenues, particularly in Europe, due to – we expect the repricing of liabilities continue to go forward and also a – some help for higher lending volumes, mainly the Americas, in 2021. In net fee income, well, CIB and Wealth Management should continue to deliver relatively well. In cash, I already told you last quarter that we were more optimistic about our capacity to reduce costs.

And we are committing now an additional €1 billion net savings reduction in the next two years in Europe as a result of our One Europe project, thanks to quality and diversification of our balance sheet, better than expected customer behavior, as I explained before, and based it on – well, the current estimations, mainly coming from IMF, we are confident that we will maintain or continue to improve the cost of credit in the P&L once we use the overlays we built along this year. Regarding capital, we are top end of the range in our target range, and we will have more flexibility going forward in the way we match and allocate capital and the way we remunerate our shareholders.

We continue to generate capital organically without sacrificing either business growth or the improvement of our long-term return. And we expect an underlying return on equity in line with our traditional cost of equity. As the Chairman explained this morning in the AGM, we are unlocking our potential for organic growth going forward. Our scale creates significant opportunities for organic value creation, which we realized through structural change. The One Santander that we are starting in Europe, the combination of open bank and consumer finance and creating one of large payment platforms in the world on the back of GetNet and with the project of trade for SMEs.

This will allow us to generate more revenues and additional cost efficiencies. In summary, I will say, our business model, diversification and the change we are doing provide a strong platform to continue to generate value for our shareholders. Thank you. And now we remain at your disposal for the questions you may have.

Sergio Gámez Martínez

Thank you, José Antonio. Thanks, José. In this, we have around 0.5 hour, 4 minutes for Q&A. So please, operator, go ahead with the first question.

Question-and-Answer Session

Operator

[Operator Instructions] From Francisco Riquel from Alantra. Please go ahead.

Francisco Riquel

Yes. I would like to start with asset quality, if I may, in particular, the new cost of risk guidance of 1.3%. If you can give us details of what shall we expect by – for the main business areas and where the reduction comes from. I understand this mainly from Brazil and SCUSA. What will be the new cost of risk that you are expecting in these two regions?

And what makes you more comfortable for these two units? Also, any other relevant changes in other units for the good or for the bad, Consumer Finance in Europe or UK, Mexico? And then also, in particular, Spain. The transformation ratio into NPLs from the moratoria is the highest of all the units at 7%, and the macro is tougher. So what shall we expect in terms of cost of risk for Spain for this year and next year?

Jose Antonio Alvarez

Okay. Let me to take – to elaborate on the asset quality, the new cost of risk guidance. As you rightly elaborated, if we look backwards, the quarter, the main business areas that came better than expected particularly was SCUSA in the U.S., where behavior, both in originations and recoveries on the back of the price of the used cars in the U.S. produce significant reduction in the net cost of risk. The same happened in Brazil. Probably you see this morning, the Central Bank of Brazil published that the number of families in default now is the lowest in the last 9 years. So it shouldn’t surprise you that as a result of this, our view about the cost of risk in Brazil, going forward, is fairly, fairly positive, and I would say, that it will remain stable or maybe may go down in the next year.

We – as you know, we build the overlay. We haven’t used the overlay. And with the current trends we are seeing, we are fairly optimistic on this. So all the relevant changes that you mentioned, you mentioned UK, you mentioned Mexico, we don’t see major change there. And finally, you mentioned Spain where – well, the provision this quarter went up. And well, as you know, we have a large SME book in Spain in which we did a significant overlay, but it’s the most sensitive area, going forward, the SME books.

And well, we need to be prudent on this because, as I elaborated at the beginning, uncertainty is still pretty high. It’s not the same to have a pandemia that lasts for another six months, that having a pandemia that last for nine month or one year, mainly in Spain where the tourist sector plays a significant role in the overall economy, and well, small variations in the timing of the pandemia may produce significant impacts on this.

But overall, I feel confident with the trends in the – in relation with the asset quality overall. Well, you mentioned, I forget to elaborate, in Consumer Finance in Europe, the behavior has been pretty, pretty good. Yes? So I’m relatively confident that with the scenario we are in, the scenario we are matching at this stage, the cost of risk will go down next year in the Consumer Finance in Europe. So those are the trends we are seeing across the board. Overall, we remain constructive, recognizing, again, that the uncertainty of the scenario is pretty high.

Operator

Alvaro Serrano from Morgan Stanley. Please go ahead.

Alvaro Serrano

Two questions, on costs and capital, please. On costs, you’ve announced the €1 billion further cost synergies. Can you maybe give us a bit of color where that’s coming from in terms of regions or businesses, if that’s going to materialize in a big charge to fund that in Q4 maybe? And related to that is your consideration because it’s a very, very material cost cutting exercise, is that – should we expect any impacts in terms of market share, volumes, your ability, your commercial sort of reach could be affected by such a cost cutting plan?

And secondly, the question on capital. You’ve had 15 basis points regulatory impact in the quarter. I think you’ve called out a further 10 basis points left. If I look beyond in Q4, what are the regulatory impacts that are left if we put aside Basel IV? And in general, what – you’ve obviously accrued the dividend. What gives you such a high confidence that you’ve proposed to the AGM would – they’ve approved the €0.10 dividend. You’re, I think, the second bank in Europe that does that. How confident are you that the SSM is going to allow those dividend payments?

Jose Antonio Alvarez

Let me to take the first question, and I will pass José the capital one and maybe elaborate about the dividend and the ECB. On the cost, the €1 billion I was referring to was €1 billion for the project one – the One Europe project and where this cash reduction comes from is mainly from the UK and Spain, although we have some – also some cost reductions in Portugal and Poland. But given the size of the different franchise, I will think – I will tell you that it’s more or less related with the current size of the franchise. Probably you’re going to accelerate a bit more in the UK; and Spain, that is now minus 10%, is going to be – the pace of the reduction is going to be lower than the current 10%.

And in the UK, happening in the opposite. And the others, some cost-cutting in the Portugal and Poland. So you raised a very good point, the commercial reach and the – how much this may affect our capacity to keep volumes and market share. I do expect that the – with the current trends and the current trends are fairly, fairly well established, I will say. So it’s not just the pandemia. Before the Pandemia, transactions in the branches were falling at 8% a year. The transactions were growing at 40%. The pandemia accelerate this.

And on top of this, when you look at sales, the volume of sales through digital channels continue to increase. And more entry into territories of high value-added products, like the ones – you have the open bank example. And you look at open bank operating in pure 100% digital mortgages. You see that open bank is doing the same volume of mortgage equivalent at 200 branches or something like that, yes? So this tells you that digitalization produce a commercial reach that – well, given the granularity of the branches in Spain, the large number of branches, you can create a different morphology of the branches, yes?

So it’s not just the number of point-of-sale. It’s the type of point of sale you have, yes? So probably it’s less number, more size per branch. Yes? So now, José, do you want to elaborate on capital?

José García-Cantera

Yes. Alvaro, the – some of the inspections that were scheduled for this year following COVID were postponed for next year. They haven’t started yet. So we don’t know for sure at this point which ones will be closed next year. A conservative estimate would put the impact well below the regulatory impact that we had in 2020. So we see – we continue to see our capital ratio moving at the upper end of the 11% to 12% range over the next 12 months at least.

Jose Antonio Alvarez

Well, how confident are we about the ECB or the SSM allowing to pay dividends? Well, we are making our case. So in our case is what we are telling you right now. So a strong pre-provision profit, that is on whole. We are not decreasing our pre-provision profit that give us enough power in – as the first line of defense in order to offset potential negative outcomes coming from the credit side given the uncertainty of the scenario. And this is our case.

And, well, not to subordinate bank shareholders to other shareholders or other sectors or companies asking us to keep the lending going at a cost of potential dividends for the shareholders. Yes? So we are making our case. Well, based on what we’ve done since the pandemia started, we increased the lending. We provided liquidity all across the board. We continued to generate results. And based on this, we are asking them to allow us to pay dividends. It’s 100% up to them to allow us to do so or not, yes?

Operator

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

Carlos Cobo

One question on NII and your outlook for next year, specifically, Spain and the UK. In the UK, in particular, we’ve seen some pickup in new pricing and also lower swap costs. So do you see a recovery in NII from here? Or should we take it to have the – in Spain, same thing, but on the opposite? The Euribor is putting some pressure on the sector. How do you see NII evolving in 2021? And that’s pretty much it.

Well, maybe a quick question on mortgage formalization costs. We’ve seen recently a new sentence in a first instance code, but it’s kind of going – following a collective lawsuit, like a class action against the Spanish banks. And this seems to be a read across for the sector. Do you see that as a potential risk that could increase the post potential provisioning needs here contrary to the previous jurisprudence where courts has been ruling on a case-by-case basis?

Jose Antonio Alvarez

Okay. Let me to elaborate on NII, both in UK and Spain. As you’ve seen in the quarter, positive developments there. That within the – in the UK, will be translated in the future. In Spain, we remain also positive, not as strong as in UK on the back of what you already mentioned, the Euribor is getting more – 12-month, is getting more and more into the negative territory. But in both case, we think, with different extension, that we’re going to remain in positive territory going forward. What you’re referring to, the mortgages, well, I think you referred to the upfront fee which are on the mortgages.

That was one case. I don’t see this having the capacity to progress on the upper courts and being a case – an overall case as the others that we have seen. But – well, again, this is a fairly common practice, not only in mortgages, it’s also in consumer loans. It’s all going to lending to corporates is – it’s everywhere. So – but what I do not expect this to come an issue for the industry.

Sergio Gámez Martínez

Next question comes from Fernando Gil de Santivañes from Barclays. Please go ahead.

Fernando Gil de

I would like to touch a little bit on fees. And what is driving the new policy in Spain about fees and the change? What do you expect in the change of fees from November on? This is the first question. And the second question, you mentioned that the cost restructuring is coming mainly on Spain and the UK. Are we thinking in the UK on branch reduction only or people? Or what other measures could be done to try to make a good guess on what is coming in the UK?

Jose Antonio Alvarez

Okay. The new policy, you – what you call new policy in Spain, this is a reformulation. What we’ve done is a formulation of the current strategy to have more customers that work, have the bank as their first bank, and this is a step in this direction through. But the most important is happening on the back, is a – we are betting on a significant, not only in Spain, also across Europe, in a significant simplification of the product range that will allow us to have a more transparent offer at the same time to reduce costs in a significant way. We don’t expect a big deal in phase out of this reformulation of our current products mix. It’s more simplification of the product range. As a result of this simplification, a significant cost reduction and more transparent relationship with the customer. And the second question was about...

José García-Cantera

Costs in the UK, the details.

Jose Antonio Alvarez

Costs? The details of costs in the UK. So in UK, well, we are doing already this. Some of the costs, till now, came basically from some significant remediation process that had complexity at the corporate center and headquarters level, like the PPIs and others came to an end and coming to an end. At some point, we got a significant number of people, thousands of people working on this. And this is coming to an end, and we are reducing costs there. On top of this, we have a restructuring of the call centers that is going on.

This restructuring is through incorporation of new technology. The number of people working in call centers in the UK is thousands, 4,000, 5,000. We are introducing new technology. And this allow us to simplify and to provide better service to the customer on the back of the new technology we are including there. The same can be applied to other areas in the headquarters. It’s not that much of our branches, where the number of branches was already reduced significantly. It’s more about central services, IT, and the way we serve customers at the corporate – not exactly at the corporate center, other different corporate centers level or centers of services that we have across UK And in the case of Spain, nothing to add particularly on this, yes?

Operator

The next question comes from Sofie Peterzens from JPMorgan. Please go ahead.

Sofie Peterzens

Here is Sofie from JPMorgan. So in your presentation, you mentioned that you’re combining Openbank with the Santander Consumer Finance. Does this mean that you’re going to start offering mortgages in the markets that Santander Consumer Finance is currently present in, but where Openbank is not? So for example, Scandinavia, Germany, Italy?

And then how should we think about this kind of merger between Openbank and Santander Consumer Finance? What does it really mean for Santander? My second question would be around the financial transaction tax that is coming, this saying from January next year. What impacts, if any, do you expect this to have on Santander? And do you think there is a risk that Spain could also introduce the banking tax in Spain?

Jose Antonio Alvarez

Thank you, Sofie, for your question. The first question, the combination of Openbank and Consumer Finance, as you know, Consumer Finance is a large consumer finance platform across Europe with 15 – we are working in 15 countries, all the large countries in Europe. And on the other side, we have a retail bank, full pledged retail bank through Openbank.

What we try to get out of this combination is, on Santander Consumer Finance, we got 20 million, I should call then – I shouldn’t – I cannot call them customers at this stage because they are basically borrowers that got along from Santander through third-party channels. With this combination, we try to provide a full offer, not only a long, a full offer in the combination with Openbank. You mentioned specifically mortgages. Mortgages is not, at this stage, the main task. So we continue to produce consumer loans.

We’re going to develop the point of sale, the checkout lending and all these things at the beginning and having our retail offer in the different banks we have across Europe. At the same time, these banks, we have – I don’t know exactly the number of banking license we have in Europe, but we’re going to reduce significantly, and we’re going to operate through a limited number of banks, probably three, it’s not yet established.

And the others will be branches of those banks with a technology of Openbank and with the capabilities through third-party channels of Consumer Finance. I think this combination is powerful and will allow us to grow significantly, the business, and transform many of these, I call before, borrowers into customers of the new entity. You mentioned the financial transaction tax impact on Santander, none or marginal. And we’re going to pass to the customers naturally. It’s true that volumes may get to reduce, and this may affect fees on brokerage, but those are so small that, in any case, it’s immaterial in terms of the P&L, yes?

Operator

The next question comes from Jernej Omahen from Goldman Sachs. Please go ahead.

Jernej Omahen

I have two questions, please. The first one is the follow-on on the dividend. And I’d like to understand better or if you could share with us rather, how does the process work currently between a bank like Santander and the SSM, the supervisor? I struggle to imagine that Santander there would put a dividend proposal on the AGM and make it public as a consequence without the least having a very extensive discussion with the supervisor, whether that’s appropriate or not. I would like your comment on that.

And then the second question, on the processes. When are you actually expecting to hear from the SSM on the decision on the dividend? And just a follow-up. José Antonio, you talked about how Santander makes the case to the SSM for dividend approval. And you referenced strong pre-provision profits, increased lending and generated results. And I think everybody on this call agrees with this. But I guess the key feature of the SSM then was that it didn’t discriminate amongst banks. And it doesn’t discriminate amongst banks regardless of their operating and financial strength. Implied in your answer, I think, is a notion that this will change. So are you expecting the SSM to start differentiating amongst banks that can and can’t distribute in the future?

Jose Antonio Alvarez

Thank you, Jernej. You asked me how the process work with the SSM. Well, we have our own responsibilities and the SSM has – they have their own responsibilities and got basis. What we’ve done this morning in our AGM was based on the current result generation and our expectation for the future. We put for approval at the shareholders' meeting a cash dividend for next year. This is our assessment of the situation, yes?

So what do we expect from the SSM? The SSM is going to do data analysis on the – what this – I don’t know if this is already established. But like what I hear is they’re going to have some outcome by December this year, yes? So they’re going to say something in December, the recommendation or no recommendation or, as you say, they are – they may be worried about discriminating between banks.

And well, I’m not in a position to elaborate about their thinking. We make our case. We think our case is strong. And on the basis of this, we propose this to the shareholders, yes? So it’s what I can tell you at this stage. It’s no more, no less, than we are responsible on behalf of our shareholders. And also, we need to take, naturally, of bondholders and the clients and the customers and all these things. But the numbers support our claim, and this is what we think and what we expect to be recognized by the SSM at the appropriate time. And this – my expectation, will be by December, yes? José?

José García-Cantera

If I may, just remember that our minimum capital requirement is now 8.5%. So at 11.5% fully loaded, we have 300 basis points of capital. And in the worst crisis that we’ve had in decades, the bank is generating capital. So even before – or even after accruing for the dividend, the capital ratio is going up. And we are not leaving any requests from any client without being attended. So I think it’s – all of these, it’s a strong case to allow bank – the Santander to pay dividends going forward.

Operator

The next question comes from Ignacio Ulargui from Exane BNP. Please go ahead.

Ignacio Ulargui

I just have two questions. One is, what should we expect in terms of the current revenue growth in LatAm? And you have commented a lot about UK and Spain. How do you see LatAm in terms of consumer volumes that we have seen a recovery? So a bit of outlook on fees and NII in Brazil, Mexico, mainly to be honest. And the second one, it’s on the restructuring charges that are associated to the €1 billion of cost savings. And then did you plan sort of like a similar level to the ones that you took in 2019 for the previous €1 billion, around €600 million? Or how do we expect them to happen? And just a very quick one, what is the level of cost of equity that you have in mind, historically, the bank has had to a normalized level?

Jose Antonio Alvarez

Okay. The first question, Ignacio, your question was about revenue growth in LatAm. So we see – we continue to see – and speaking in local currencies, yes? So the exchange rate comes on top of this. In local currency, I expect the volume growth to be significant. You have seen the numbers in Brazil. Our volume growth is significant. Also, some growth in Mexico, although the economic situation right now in Mexico is significantly worse than it is in Brazil, but positive volume growth.

We – translating this into higher revenue, basically, I do expect some negatives coming from what happened this year, with the special check in Brazil, where the regulator, particularly in the payments space, may act in some direction. So overall, I’m positive in growing revenues there. But probably, we’re going to grow much faster revenue – sorry, volumes than NII on the back of probably some margin compression and regulators stepping in some areas, particularly related probably with fee income, maybe also with some pricing like they did in Brazil at the beginning of this year. Restructuring charge, well, we have – don’t take this for granted.

We need to go into a process with established all the negotiation. But what I have in mind is a payback of 1.5 to 1.7, 1.8 years in the restructuring costs in relation with the cost reduction. The cost of equity, I was referring in our annual report we present every year. And I don’t know how – it’s called IRP.

I don’t know how do you call it. Every year, we publish our cost of equity there. And you take the last couple of years, if I remember, while the lowest has been in the 8%, 8-something percent and the highest that have been in the 9-something percent, yes? So this is the range we have had. And this is the – take this as a range to use when we’re referring to the cost of equity. Naturally, it’s not the case right now, yes? But now there is a significant regulation going on that distorts all these metrics, yes?

Operator

The next question comes from Adrian Cighi from Crédit Suisse. Please go ahead.

Adrian Cighi

Two follow-up questions, please. One, on the 2021 outlook, you now expect the underlying RoTE to be in line with your cost of equity, which you just defined as to 8% to 9% range. Current consensus is expecting an RoTE of less than 6%, despite already incorporating a cost of risk of around 130 basis points, which is in line with your guidance. Can you maybe help us bridge the gap, just in broad strokes? And the second one is on inorganic growth. The Santander Chairman supports consolidation but remains reluctant to be a part of it at the moment. What catalyst would be necessary for Santander to be involved in M&A in Europe or the U.S.?

Jose Antonio Alvarez

In the first question, while it’s probably – you have your expectations. Probably if the cost of risk is pretty much the same, probably we – our view about revenues is more optimistic than yours, yes? So it’s the only way on costs. So we continue to expect cost reductions in Europe. I already mentioned this. I already elaborate on this. On the other side, I also elaborate on looking – seeing the NII, both in UK and Spain, stay in the positive territory. And the fee income, naturally, with all the caveats about the uncertainty related with the COVID, being also positive. So we expect positive revenues, cost-cutting, negative nominal costs, and this should translate into a relatively or healthy P&L compared with the one of this year, yes?

So this is my view at this stage. When you’re referring to an organic growth, well, M&A in U.S., in Europe, okay, so we’ve been reluctant because at this stage, we struggle to belay equity story that works, so – in which we are able to secure properly in the middle of this scenario. Now we are concentrated in matching what we have in front of us. And we don’t need to get complicated in our – and to devote our management capabilities to other things than the ones we are currently matching. And this is the main reason, yes?

So not other than this one. And because, traditionally, we did plenty of inorganic growth on the back of getting the scale, yes? And while we already got the scale in the majority of the markets, almost all the markets in which we are in, and well, when people ask me, why not to go in Spain with 20% or around 20% market share? I don’t need to scale. And this happens in the majority of the markets in which we are working.

And we are much more focused in the internal transformation, with the projects we mentioned, the Chairman mentioned in the AGM, One Europe, the One Europe project, the combination of Consumer Finance and Openbank, and finally, to build the payments platforms across the group, both for acquiring business and SME trade-related business, yes? So this is the main focus. We want to work on this on top of matching the current business in a highly uncertain environment that require all our attention, yes.

Operator

The next question comes from Stefan Nedialkov from Citigroup. Please go ahead.

Stefan Nedialkov

I just wanted to probe a little bit the 2021 guidance. So when the pandemic started back in March, you came up with some guidance in terms of expected impact for 2020, and in retrospect, that ended up being quite optimistic. Obviously, it’s been very uncertain times. But what makes you more confident this time around in giving 2021 guidance which is substantially above consensus, as Adrian noted? And related to that, when we look at your stage two breakdown for loans that are on the moratoria versus those that are not, it looks like the Stage two ratio is around 16% versus 6% for the group as a total. Can you just give us some color on how you’re thinking about the potential transition from stage two into three of the moratoria loans next year?

Jose Antonio Alvarez

Okay. The first question is a very fair one, given the uncertainty of the macro scenario in which we are living. So at the beginning of this pandemia, nobody was expecting what has already happened, maybe what is still in front of us. But what make us – well, we – you asking us about guidance. We give you, first, any scenario that is next or very much in line with IMF scenario. And second, we’ve already seen the reaction of the different actors in this crisis. We saw the reaction of the central banks.

The Central Bank reacted. In some cases, reducing – slashing dramatically rates in U.S., in UK, in Brazil, also in other markets, and this has an impact. At the same time, they provide liquidity. They provide their TLTRO III. And we saw the reaction of the central banks stabilizing the markets. And they’re going to continue to do so based on what they are telling yous almost on a daily basis.

So this is one side. On the other side, the governments are stepping in two directions. One direction was to provide warranties for lending to the SMEs and corporates. For example, in some countries, it’s very important. In Spain, we got – we grew lending, and we got €27 billion of warranties for the SMEs and corporate book. Now €27 billion is warranted by the government. And the government showed this willingness to continue to support economic activity with new lines for investments.

So this is – we already know this. We didn’t it know before. And looking forward, my expectation, and is only my expectation is nothing. I do expect, based – that once the pandemia, let’s call, comes to an end and coming to an end means that we have an effective treatment or a vaccine or a combination of both, I do expect the governments to keep these schemes going for a while until the economy start to recover.

We may be wrong naturally on this. I mentioned a couple of times, uncertainty. Uncertainty is the worst – the word, probably, I repeat the most in this scenario, but we tell you our views and base it on what views we are building our impressions about the future and the trends about the future. When you mentioned the stage two and stage three, well, let me to remember. On the moratoria, we have kind of two – behind the moratoria, we have kind of two different type of customers. The ones who are taking a financial advantage, because, in some moratoria, there is a financial advantage for the customer, and some customers took it. So this means that it costs us money in our P&L because we are, in some cases, lending money for free. They took this.

Some other customers that they took because they fear about the future or they were in bad situation. Having more than 2/3 of the moratoria’s pie, and I showed you the behavior, and the remaining moratoria that’s still there, the majority is secured lending. Keep in mind that, for example, in Spain, people in mortgages – it’s much, much cheaper to pay the mortgage than to rent a house, yes? So – but it’s not 20% cheaper, maybe 60% cheaper or 70% cheaper. So I do not expect a significant deterioration on mortgages. And as you show in the presentation, the overwhelming majority of the moratoria stays in mortgages. Naturally, we are having significant rate in migration in our portfolio when we analyze this.

And as a result of this, risk weighted assets grew in the region of €7 billion, €8 billion. That means that probably, we are downgrading €30 billion, €40 billion of the loan book to different ratings, probably in the corporate, large corporate sector. And this is going from one stage to another. And this is a process that will continue based on our future expectations. But not at this stage, particularly worried about moratoria.

Maybe I need to make a caveat, SCUSA, what I mentioned at the beginning of – I think it was in the first or second question, one of your colleagues make, that the behavior in SCUSA in the auto market in U.S. is extremely good, much better than the one we were expecting, particularly on the back of the price of used cars. In the U.S., that currently still is 15% above of the prices of last year. And this reduced, dramatically, the loss given default in this business. And I don’t know, to be honest with you, how long it will last this. For this year, our projection is more or less optimistic than the current situation, but it’s what it is.

But there is – there are naturally significant levels of uncertainty around all our forecasting, particularly on the cost of risk front, yes? Also, maybe that – well, we may face more severe pandemia, and we have another lockdowns like the ones we had back in the spring that we are not forecasting. We are somehow – you allow me to say, we are forecasting kind of current situation till the spring and having some remedies after that, yes? So maybe treatment machine or less incidence of the COVID. But I agree with you that, what, we are in unchartered territory, yes? And I am not particularly well equipped to a forecast health issues, yes?

Sergio Gámez Martínez

Okay. I’m afraid we need to leave it here.

Jose Antonio Alvarez

Okay.

Sergio Gámez Martínez

Thanks, everyone. And yes, obviously, the IR team is your – for your disposal any time the rest of the day. So thanks very much, and see you next quarter.

Jose Antonio Alvarez

Please, guys, take care of yourself. Bye.