Banco Santander, S.A. (NYSE:SAN) Q4 2022 Earnings Call Transcript

Banco Santander, S.A. (NYSE:SAN) Q4 2022 Earnings Call Transcript February 2, 2023

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.

Photo by Towfiqu barbhuiya on Unsplash

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.

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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.

Q&A Session

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.?