Banco Santander, S.A. (

STD

)

Q2 2011 Earnings Conference Call

July 27, 2011 4:00 AM ET

Executives

Fernando de Asúa Álvarez – First Vice Chairman

Jose Antonio Alvarez – CFO

Presentation

Fernando de Asúa Álvarez

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Okay. Good morning. We’re going to begin the results presentation for Q2. And as we always do I will review the main highlights for the quarter and the group’s results and then Jose Antonio Alvarez will give you more detailed overview of the results of the different business areas and finally I will conclude with our outlook for the coming quarters.

The first chapter of the presentation will deal with the most relevant results of the quarter which I’ll review in the coming slides. First I’ll speak about the Santander group’s ability to continue to generate recurring results in a market environment which is still difficult. We’ve posted a recurring profit of 2.013 billion in the quarter bolstered by the recovery in our commercial revenues that we pointed to in our last presentation. And with that the first half’s recurring profits was 4.12 billion.

In the quarter we have made a one-off provision of 538 million pounds sterling net of tax or EUR620 million in relation to payment protection insurance remediation in the U.K. or PPI. After this charge, attributable profit for the first half was EUR3.5 billion.

The second feature is the group’s NPL which has continued with the same trend as in Q1 with a small rise mostly due to the increase in Spain. On the other hand units such as Santander Consumer Finance in Sovereign have continued to show significant improvement.

Third, we’ve improved our liquidity position in the first half capturing EUR19 billion more than the needs generated by business volumes and maturities and thirdly, we closed the – fourthly, we’ve ended the quarter with core capital at 9.2%, 40 basis points higher than in December. We continue to have very solid capital ratios much to our business model as demonstrated by the results of the recent stress tests carried out on European banks.

I’m now going to review each of these points in more detail. Results, in the second quarter attributable profit were EUR1.39 billion. So that’s the total up to June is EUR3.5 billion. This profit was impacted by the extraordinary provision to cover potential claims in the U.K. related to the payment protection insurance or PPI. PPI is an employment and illness insurance for personal loans which were sold widely by banks in the U.K. mostly before 2008.

Since then, the group has implemented a prudent policy, has not participated in any legal actions undertaken by our main competitors and have continued to settle customer claims in this period. Nevertheless and after analyzing the implication of the latest developments with the rise in the number of claims we have decided to constitute this extraordinary provision of 538 million net of taxes to settle any potential claims.

Excluding this impact, the ordinary and recurrent profit in the second quarter was EUR2.01 billion, bringing the first half ordinary profit to 4.12 billion. These figures once again demonstrate the group’s ability to generate recurring quarterly profit of over 2 billion, which we believe will enable us to close 2011 with recurring profit at around that of 2010. As a result, we continue to predict a total dividend to our shareholders, which will be the same as last year, $0.60 per share, as we’ve already announced.

Lastly, I’ll remind you that the second quarter’s results do not include the 850 million in capital gains resulting from our agreement with Zurich to sell out our insurance factories in Latin America pending authorization from the different regulators, in which we hope to record before the end of the year. These capital gains will be fully allocated to provisions to strengthen our balance sheet even further.

Focusing on recurrent results, in this slide you see the usual charts, representing the contribution and relative share of the different units in the group. Starting on the right, emerging markets have increased their profit significantly, Brazil’s profits up 7% versus the first semester of 2010 in local currency before minorities. Growth, which is impacted by higher tax pressure since the net margin for provisions has risen by 12%.

The remaining countries in Latin America are also showing very positive trends, growing up to 16% in profits before minority interests. Our charitable profits in Mexico reflecting the purchase of minority interests have risen by almost 30%. Sovereign has continued to grow strongly year-on-year, while the UK was affected in the year-on-year comparison by regulatory changes and a low growth and tough competition environment. Profits in Continental Europe on a like for like basis fell 21%, mostly in Spain and Portugal due to a very difficult economic environment and to the reduced availability of generic provisions.

Finally, the Zachodni Bank or BZ WBK, our bank in Poland, during the group in April contributed 94 million in the three months. Jose Antonio Alvarez will now review in more detail the results of the different units.

If we analyze this in depth we will see a different performance of different units depending on the points in the economic cycle of the various markets. In emerging markets, that is between Latin America and Poland, the three main developments are solid gross in basic revenues quarter on quarter due to the greater growth in business volumes.

Operating expenses show the investments in IT platforms in Brazil and Uruguay and in our retail capacity we’ve opened over 150 branches in twelve months, mostly in Brazil but also in Argentina and Mexico. And we’ve increased our head count in retail banking by over 3,000 people so as to improve penetration and customer care in target segments such as businesses, high income individuals, call centers, et cetera.

There’s been a moderate rise in provisions as growth in lending is being offset by lower costs, credit and funding. And then net of all this is a strong growth in profits with mid-double digit rates and with good outlook for the future. We look at the more mature markets in general we’re going to see a recovery of commercial revenues in the last few quarters, which will also benefit slightly from a perimeter effect in our consumer business. Costs have increased due to this larger perimeter and in the last two quarters have been remaining pretty flat.

Net provisions are affected by the reduced release of genetic provisions in Spain which hides the sharp decline of specific provisions in all units. The net result of all of this is an improvement in the underlying business which is not yet seen in the profit lines.

Second item I mentioned in my first slide was risk quality. The groups NPL ratio rose a little in Q2 up to 3.78% with NPL entries almost at the same level as in the first half of 2010 and with a lower risk premium. This increase in NPLs is basically due to Spain and Portugal where we see the trends that we mentioned in previous presentations continues. However, Santander Consumer Finance and Sovereign have continued to improve and for several quarters now have had dropping NPL ratios and rising coverage.

The remaining units have remained basically stable, with minor quarterly fluctuations in Brazil, which was slightly in Q2 in line with the sectors’ trends. As for coverage, it has remained at around 70% for the whole group.

The trends in different areas have been similar to those of previous quarters. We’ve seen a slight drop in Spain and a very strong increase in Santander Consumer Financial up to an excellent 128% after improving once again in the quarter. Sovereign has also continued to improve. On the other hand, Latin America still has coverage levels of over 100%.

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