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Banco Santander Central Hispano (NYSE:SAN)
Q3 2021 Earnings Call
Oct 27, 2021, 4:00 a.m. ET


  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Sergio Martinez

Good morning, everyone. Thanks for joining today's Santander nine-month 2021 earnings presentation. As every quarter, our group CEO, Mr. Jose Antonio Alvarez, will address the highlights on the group performance, then the group CFO, Jose Garcia-Cantera, in detail, will comment on the different business areas trends before the CEO jumps into the key takeaways.

And obviously, we'll have plenty of time to answer your questions. Jose Antonio, please?

Jose Antonio Alvarez -- Group Chief Executive Officer

OK. Thank you, Sergio. Good morning to everyone. Thank you for joining us in this third-quarter results presentation.

I think the results show the business momentum we are having with another solid set of results in the Q3. The operating income, pre-provision profit is growing 11% year on year in constant euros. Revenue was up 8%, driven by the rise in volumes, loans, deposits, and mutual funds. And this comes along with a growth in the, it cannot be the other way, increasing customers and greater digitalization that led to strong broad-based revenue generation, efficiency improvement, and higher profitability.

Specifically going to the numbers, Q3 '21 profit was around EUR 2.2 billion, plus 3% quarter on quarter in constant euros, plus 5% in current euros on the back of some euro average depreciation while the currency year on year is different. But in the quarter, the euro depreciated a bit against the basket of our currencies. Nine-month '21 group attributable profit, EUR 5.9 billion. Excluding Q1 extraordinary items nine-month '21, underlying profit is EUR 6.4 billion.

The numbers speak for themselves. We maintain what we call disciplined and solid credit quality, the latter reflected in a cost of credit below 1%. Regarding capital, strong capital generation in the quarter, plus 48 basis points in Q3 enable us to reach a fully loaded core equity Tier 1 ratio of 11.85%, at the top end of our 11%, 12% target range. We continue to deliver an outstanding growth in profitability.

Return on tangible equity stood at 12.6% and a tangible net asset value grew in the quarter and including the dividend per share rose 6.5% year on year. The board, as you know, has approved a new remuneration policy for 2021 with a 50 -- payout set at 40% underlying profit, 50% cash, 50% buyback programs. Interim distribution approximately up in the region of EUR 1.7 billion. So, in short, we are well on track to outperform the full-year '21 goals that we established at the beginning of the year and to reach our medium-term underlying return on tangible equity target on -- in the region of 13% to 15%.

Moving to customers. Well, great success on the digitalization has been a key driver of the revenue and net operating income growth. We recorded a steady increase in total customers. And in turn, our customers are increasingly using our products and services through contact centers, digital channels, and the branches.

As a result, digital customer rose by more than 5 million year on year. Digital transactions were up 39% year on year and grew across all the countries between 20% and 50%. Digital sales as a percentage of total sales stood at 54% in nine-month 2021, plus 10 full percentage points year on year with growth in all products across the board, mainly in the ones related with individuals, mortgages, consumer, deposits, investments. If we look at the last quarter, digital sales reached 57% of the total.

Also, and this is important, we are top three in -- by NPLs in certain markets in which we operate. Going to -- moving to the group's income statement. Exchange rates had a small positive impact in the quarter, as I mentioned before. But year on year, the -- still negative impact, minus 5 percentage points in revenue and minus 3 percentage points in costs.

Looking at the results in constant euro, revenue grew, particularly customer-related revenue. We demonstrate a core discipline in an environment of rising inflation, certainly, inflation is rising, particularly not only in Argentina, that is, well, has been in the case in the last couple of years, also in Brazil and Mexico, and Chile, we have significant inflation now in Europe. Additionally, we had a significant reduction in loan loss provisions to date reflected in the quarter some increase, mainly in the U.S. We delivered a nine-month '21 underlying profit of EUR 6.4 billion, plus 87% year on year.

Now extraordinary items in the third quarter. Recall that we recorded 530 million restructuring costs in Q1. I will give you a brief overview of the performance of this region and global business. And our CFO, Jose Garcia-Cantera, will elaborate further.

Very positive performance across all of them. Once again, the U.S., Brazil, and CIB performance stands out. The global business is performing very well. Wealth Management, Insurance, and PagoNxt delivering according or better than our expectations that our guidance that we gave to you, underscored as usual by our geographical and business diversification.

Each of our three regions contributed roughly 30% to the group profit: Europe, 29%; North America, 29%; South America, 30%; and Digital Consumer Bank, 12%. If we analyze the quarterly trends in core lines, sustaining revenue growth, NII up 1%, positive performance in trading gains in Q3. And the quarter-on-quarter comparison was favored by the single resolution fund contribution in Q2. On the other hand, net income remained stable, impacted by seasonality in Europe and strong figures in CIB and the corporate investment banking business across the board.

I will run you through this in more detail in the following slides. Cost control in the context of higher inflation and increased expenses related with greater activity, higher loan loss provisions, mainly in the U.S. and, to a lesser extent, in the U.K., but as both had some provision releases in Q2. As you already know, in U.S., LLPs tend to have some seasonality in the second half of the year.

NII was 7% higher compared with nine-month 2020 and 1% quarter on quarter. On the back of higher volumes, loans grew 8 billion in the quarter. Deposits grew 15 billion. Regarding margin management versus previous year, as we show in -- a general repricing of liabilities, Europe, North America, and Chile, and improving loan spreads in U.K., Poland, and the U.S.

In addition, there was a positive impact year on year of the TLTRO that you know very well. Naturally, no impact on quarter on quarter. Finally, average interest rates remained lower than in nine-month 2020 despite increases in Latin America, Brazil, Mexico, and Chile, where the rates went up and recently in Poland. These increases will positively impact NII in the coming quarters.

When we go to the fee income, we continue with the recovery from the lows in the second quarter in 2020. The entire range of products saw higher activity levels year on year with some seasonality in the quarter, mainly in Europe. You have the figures in the slide. All the activities show a greater activity.

Payment volumes grew significantly. Cars are growing. Cars turnover are growing in a significant speed. And consumer activity trends continue to improve with strong signs of recovery year on year.

In Q3, mainly the motor finance business has been affected by new vehicle sales that are affected, as you know, by the shortages in the supply chain of the OEMs. And while we have a strong activity, the strongest, probably, the strongest activity we have seen so far in the used-vehicle space. In addition, CIB and Wealth Management and Insurance generated a sharp increase in fee income, representing about 50% of the group's total fee income. Wealth Management and Insurance fee grew 11%, underpinned by the significant increase in assets under management and insurance written premiums.

CIB fees grew 19% with -- on the back of very good activity in DCM, ECM, and MIA. In short, fee income recovery pre-pandemic levels across our footprint, except for the U.K. due to regulatory changes regarding overdraft since April 2020. On the cost side, we continue to see, and this is new, significant rises in inflation in all countries, particularly in Latin America.

In these countries, group costs rose 3.7%. In real terms, excluding inflation costs, were 1% lower after solving higher IT expenses, digital developments, increased activity, and labor agreements. Our efficiency ratio improved 120 -- more than 120 basis points year on year to 45.6%. That is a very good number in the industry, mainly driven by Europe, we recorded the highest efficiency gains.

In Europe, costs were 1.5% lower, making headway in our cost-reduction plan, which we expected to accelerate in the coming quarters increasing synergies. Of note, Spain, with a 7% decrease efficiency in the region, as I mentioned before, stood at 50%, have been improving 7 percentage points year on year. In North America, costs increased 8%, mainly driven by technology expenses, digitalization, amortizations, and a USD 50 million donation to our community foundation in the U.S. that was recorded in the quarter.

Of note was the performance in Mexico, minus 2% in real terms. Efficiency in the region stood at 44%. In South America, increasing costs, plus 9%, was greatly distorted by the very high inflation in Argentina. In real terms, costs declined 3% in the region; Brazil, minus 6%; Chile, minus 1%; and Argentina was flat in real terms.

The efficiency in the region stood at 35% with continued improvement. Finally, Digital Consumer Bank, cost increased due to changes in perimeter, which is the leasing company that we bought in Germany, Sixt Leasing, and the joint venture in Italy that we launched this year. Finally, loan loss provisions. Well, we have a cost of credit in the last 12 months from 90 basis points in the same period of 2020 was 1.27%.

Taking into account the first nine months of the year, only the cost of risk was 0.83, 83 basis points, performing better than expected due to lower provisions in most markets, mainly in the U.S. digital consumer bank, Brazil and Chile together with the net releases in the U.K. The NPL ratio was virtually flat year on year and slightly lower quarter on quarter. Total loan loss reserves stood at 24.5 billion with a coverage ratio of 74%.

In addition, I would like to remind you that the majority of the overlay that we recorded last year is on the balance sheet. We expect to make some releases in Q4 on the back of new macro scenario, which will enable the cost of risk to reach around 80 basis points by year-end. This is our best estimation if nothing changed in our view of the macro scenario. Finally, on capital, I would like to highlight the strong organic generation in the quarter, 48 basis points.

The figure is mainly supported by our net profit, risk-weighted asset management through securitization -- through securitizations mainly. Neutral platform dividend accrual on the back of the new dividend policy that you already know. Additionally, we recorded 16 basis points related to regulatory and related -- model-related capital impact and another 17 basis points, mainly market performance. All in all, the core equity Tier 1 ratio increased by 15 basis points to 11.85% on a fully loaded basis, very close to the maximum level of our range, 11% to 12%.

The phasing you have in the slide 12.26%. Additionally, I would like to comment on the solid results achieved by the group in the EBA Stress Test. In accordance with our expectations, we outperformed clearly our peers that show that the resilience of our business model in scenario -- stress scenarios. So, when we go to the ratios, you have in the slide, the return on tangible equity progressing while EPS is progressing well.

Tangible net asset value per share is still progressing clearly. Also noteworthy is the return on risk-weighted assets. We reached 1.8% versus 1% one year ago. Well, as you already know, our dividend policy, once the ECB lifted the recommendation not to pay dividends, well, we -- the board approved a payout at 40% of underlying profit.

We have interim distribution for a value of EUR 1.7 billion, while half in cash, half in buyback. Today, around 30% of the buyback program was already executed. So, this is where we are in this regard in our dividend policy. Finally, going to ESG.

So, as you know, the bank has strong commitments to ESG. Well, we have stood for a sustainable and inclusive growth of people and business for many years, and we continue working on improving our financial products to support our customers in the transition toward a low carbon economy. We have set ambition to be net zero by 2050, being a founding member of the Net-Zero Banking Alliance, among other guidelines, requires the bank to set the carbonization targets for carbon-intensive sectors no later than September '22. In this regard, we have set and disclosed the first specific Net-Zero Banking Alliance targets for power generation, that is to reduce emissions more than by half in our power generation portfolio by 2030.

In this regard, in Q3, there is a -- we joined the Partnership for Carbon Accounting Financial. It's important to have general standard to harmonize all the numbers that are being published, and we are committed to reach -- to have a standard under which we publish all the numbers related with this. As regard to the Green Finance, well, as you know, we are a market leader in renewable energy. We mobilized in nine months 17 billion, 51 billion since 2019.

As you know, we are a leader in financial renewals. In our core geographies, we continue to lead the renewal project finance league tables year to date by number of deals by Bloomberg and top three by volume in the logic. We have issued on our own 1 billion green bonds, 3 billion total to date, as part of our sustainable debt plan. On the social side, as having a strong presence and being a market leader in Latin America, naturally, our main goal, this is to financial empowerment strategy in the program that we call Santander Finance for All.

It helps people access to the financial system, set up and grow micro business, and also offers financial education. Our microfinance initiatives have already been launched in Brazil, Mexico, Uruguay, Colombia. And it was launched in Peru in Quarter 3. We have reached 6.2 million financial-empowered people since 2019, of which 1.3 million are micro-entrepreneurs, and we are making progress in the share of our -- of women in senior leadership position.

When it comes to governance, well, the board -- you know, the board, the composition of the board, diversity in the board in terms of independency, and also gender and diversity in all the dimensions. We also include ESG metrics in our executive bonus scorecard. In addition, our work on our corporate culture, Santander Way, were reflected in the results of the year. Global engagement survey, where the level of employee commitment reached 80%, considerably higher than the sector average rates.

Finally, I would like to point out that our different ESG initiatives have got significant external recognition alone this year. I'll now hand over to Jose to elaborate over the different business units and regions.

Jose Garcia-Cantera -- Group Chief Financial Officer

Thank you, Jose Antonio, and good morning, everyone. Like always, I will start with a brief summary of the regions, and then I will move into the main countries in the following slides. In Europe, we continue to grow our business while we advance in a common and more efficient operating model. We had volume growth year on year and quarter on quarter in almost all markets, and we expect these trends to continue in the coming quarters.

This led to revenues growing strongly at 12% year on year. And as Jose Antonio mentioned, outstanding cost management, with a strong efficiency improvement, and we also have low cost of risk at 48 basis points. This, in turn, led to net operating income growth of 30% and doubling of profits. In North America, we had accelerated volumes, although U.S.

figures, as I will explain later, are affected by the disposals in the year-on-year comparison. We had a strong profit growth year on year, boosted by cost of credit improvement, mainly in the U.S., and revenue increase. Excluding disposals, total income was up 7%. Return on tangible equity in North America was 13%.

In South America, we continue to strengthen our regional ties, reflected in solid double-digit customer and volume growth. Profit was up 31% and return on tangible equity stood at 20%. In the Digital Consumer Bank, we saw strong profit growth in the third quarter, leading to double-digit growth year on year as well. Now let me go into the main countries now.

In Spain, the stock of loans was flat in the quarter as mortgages offset the decrease in companies. Mortgages recorded the highest new business volumes in the last three years. Results in the third quarter were boosted by a strong net operating performance. Revenue rose 11% in the quarter, while costs dropped 4%.

Regarding provisions, we remain cautious in Spain, but we expect the cost of risk in 2022 to be approximately half of that of 2021. Year-on-year revenue grew 4%, mainly driven by net fee income, especially in transactional and insurance products. Our cost-reduction efforts were reflected in a sharp fall, 7%, improving efficiency by 6 percentage points, while loan loss provisions remained stable. This obviously was reflected in the almost 50% growth in profit.

We expect balance sheet trends to continue in the coming quarters, which should lead to a stable net interest income, while fee income could expand at mid-single-digit rates. Costs should maintain its downward trend. The U.K., the main trends recorded in previous quarters continued. Net interest margin kept improving based on deposit repricing and volume growth.

The mortgage book grew 4%. As you can see in the slide, downward trending costs accelerated as our transformation program delivered savings, partially offset by IT investments and regulatory-related programs. As a result, the efficiency ratio improved 13 percentage points in the first nine months of the year. We recorded another quarter of zero loan loss provisions.

Return on tangible equity in the first nine months was 11.5%. Like in Spain, we expect balance sheet trends to continue in the coming quarters. Assuming no hikes in rates, net interest income should stabilize, while fee income would grow at low single-digit rates. We expect to reach a cost to income below 50% next year, while the cost of risk should gradually normalize.

Brazil showed another -- closed another excellent quarter in terms of volumes, profit, and profitability. We maintained a strong growth rate in new mortgage lending and reached a record high in card sales. We gained 1.6 million new customers just in the third quarter. Turning to results.

Profit was 30% -- almost 30% higher year on year at EUR 1.8 billion and return on tangible equity increased to 22%. We had positive NII performance due to larger volumes as a slight increase in average interest rates, while net fee income also grew in insurance and capital markets especially. We reached record efficiency levels, with costs up 1%, while inflation was up 10% year on year. Loan loss provisions decreased sharply with a very positive cost of credit performance, which fell to 3.6%, 1 percentage point less than a year ago.

In the coming quarters, the structural double-digit volume growth rates should be maintained, which will continue to push up net interest income and fee income. We expect to be able to keep costs growing below inflation and to maintain cost of risk at similar levels. In the U.S., the work conducted over the last several years allowed us to be uniquely positioned to benefit from current market conditions. In volumes, loan performance was impacted by Bluestem portfolio disposal.

Excluding perimeter, growth was 2% year on year, with auto originations increasing 16% versus the same period of last year. Customer funds showed a strong performance, also growing 13%. Year-on-year performance is affected by Puerto Rico and Bluestem disposals, so I will comment on the year-on-year results on a like-for-like basis. Net operating income increased 17% on the back of resilient NII growth of 7%, strong auto leasing results, and fee income.

At the same time, provisions decreased sharply, although we are starting to see signs of normalization. We are very proud to announce that this quarter Santander U.S. donated $50 million to the Santander Consumer Foundation in order to build -- to fund a multiyear program focused on transforming lives of low-income students, young adults, and families across the country. This program will target closing the digital divide and aiding students and families in education programs to boost digital and financial competencies.

In addition, in line with group strategy to deploy capital to the most profitable business and to accelerate growth in the U.S., in the third quarter, we announced two transactions that we have already shared with you: the proposal to acquire all outstanding shares in Santander Consumer we don't own, which is around 20%; and the agreement to acquire Amherst Pierpont Securities. Both transactions are still subject to regulatory approvals. In the coming quarters, we expect high single-digit growth in loans supported by consumer and CIB. Revenue should continue to grow, driven by double-digit growth in NII, while fees might contract slightly.

Cost-to-income is expected to remain at similar levels. In Mexico, lending started to show signs of recovery in the quarter as individuals' positive performance partially offset corporate loan normalization. In the third quarter, NII was favored by volume growth and higher interest rates, while fee income performance was impacted by insurance seasonality in the second quarter and lower financial advisory fees. Costs were affected by inflation, IT projects, and new outsourcing legislation.

In September, cost of credit stood well below 3%. We expect NII plus fees to grow at high single digits next year, while cost should increase below inflation and cost of risk should remain fairly stable. In the Digital Consumer Bank, activity trends generally continue to improve. New lending was 11% higher year on year.

However, in the third quarter, the microchip shortage hampered production and, consequently, the new auto market, particularly in the first part of the quarter. Despite this, in terms of total income, September was the best month of the year to date, driving the strongest quarters since 2019, thanks to recovering fees in Germany and a strong consumer lending and flat used vehicle volumes. This, together with 3% fall in costs and the SRF contribution in the second quarter, resulted in a 32% increase quarter on quarter in underlying profits. For the coming quarters, we expect strong cyclical growth in consumer finance demand.

Cost to income should remain below 40%, and cost of risk should gradually normalize. Turning to the global businesses. In Corporate and Investment Banking, we held leading positions in the rankings of structured finance in Europe and South America and DCM and ECM in most countries where we operate. We are one of the world leaders in financing and advising on renewable energy.

Outstanding third-quarter results shown by revenues, which was up 12% year on year, and the efficiency ratio remained the benchmark in the sector at below 38%. Loan loss provisions started to normalize as well. In Wealth Management, total assets under management increased double digits year on year. Commercial flows year to date in Private Banking and Santander Asset Management reached EUR 14 billion.

These flows account for more than 3% of total volume managed. In Insurance, gross written premiums rose 5% year on year. In summary, total fee income generated, which includes the part accounted for in the commercial networks, grew 11% and total contribution to the group profit increased 16% year on year. Now turning to PagoNxt.

In nine months, revenue increased 41% year on year, boosted by the strong jump in fees, 45% at constant exchange rates. We are clearly on track to achieve our expected second-half revenue growth of close to 50% versus the first half and to reach EUR 1 billion of revenue in the medium term. Now talking about the three components of PagoNxt, starting with Merchant Solutions. Getnet continued to deliver significant growth.

The number of active merchants and total payments volume grew across all geographies. Getnet Brazil continue to increase market share in the country, reaching 16% in total and over 30% in e-commerce. We are developing an integrated offer for European customers with Getnet Europe and the integration of Wirecard's technology assets and talent acquired last January. All in all, we reached a total of 1.2 million active merchants and a total payment volume of EUR 81 billion in the nine months, up 53% year on year.

In trade, our initiatives to support our clients and international trend to expand beyond their domestic markets continue to evolve favorably. One Trade already connects our customers in eight countries, reaching 7,300 active customers, from 4,100 in March 2021, an 80% increase in the last six months. Ebury already has over 15,000 corporate customers, growing over 500 new companies per month. Revenues growing at over 20% versus the first quarter.

Finally, in Consumer Solutions, Superdigital began to operate in Argentina in the third quarter. So, looking forward, we expect revenue in PagoNxt to continue to grow strongly in line with 2021, which puts us on track to achieve the EUR 1 billion revenue target in the medium term. Lastly, we expect to reach more than 2 million active merchants in the medium term. And to finalize, let me now go over the Corporate Centre.

Underlying attributable loss of EUR 1.6 billion in the first nine months is higher than last year due to lower gains on financial transactions. Remember that we had positive foreign currency hedging results in 2020. On the other hand, we have no material differences in NII and cost and significantly lower provisions due to charges in the first nine months of last year for certain holdings whose valuation was affected by the crisis. And now let me turn it back to the CEO for his final remarks.

Jose Antonio Alvarez -- Group Chief Executive Officer

Thanks, Jose. Once again, I think we are presenting to you solid results in the third quarter, consisting across geographies and business and supported by the growing metrics, volume growth that translate into higher revenue, efficiency improvement. Credit quality is solid, better credit quality. We continue to build capital.

And finally, our return on tangible equity is now clearly higher than our cost effect. As a result of this strength, I'm following the lifting of the rotation of the ECB recommendation, we resume our dividend policy. And we continue to focus on improving our profitability while helping our customers and the society in general. We aim to grow our customer base -- I should say, keep growing our customer base, strengthen the loyalty by improving their satisfaction, help them in digitalization, supporting financing, and growing their businesses in a sustainable way with a positive impact for the whole society.

In short, we are seeing a business normalization and our strength underpin our great confidence in our profitable growth ahead. For that reason, we are confident to continue to show progress toward our medium-term target, return on tangible equity, 13%, as I said at the beginning of this presentation. Thank you very much for your attention. And now we will be opening the call for questions that you may have.

Sergio Martinez

Indeed. Thanks, Jose Antonio. So now we can proceed with the Q&A session. First question.

Questions & Answers:


Thank you, sir. The first one is coming from the line of Alvaro Serrano from Morgan Stanley. Please proceed, sir.

Alvaro Serrano -- Morgan Stanley -- Analyst

Good morning. Thanks for taking my questions. My question -- the first question is on capital and maybe if you can provide some guidance -- and thanks, Jose, you've provided already quite a detailed guidance on the P&L. But on capital, as we think about 2022 as well, can you maybe just give us some guidance of what remaining headwinds? Are we past the bulk of the headwind now for several years? Or is there anything remaining? And any thoughts on Basel IV, if that's an additional impact or not? And then I had another question on costs.

You've given the 1 billion sort of guidance. You gave that 1 billion cost-cutting guidance in Europe. Costs in the group were slightly higher in the quarter. I wonder if you can give us your thoughts on your guidance, particularly in the U.K., and why is it proving so difficult to cut costs in the U.K.? It feels like it's been years now since we've been discussing the cost plan in the U.K.

not delivering. What's proving so difficult? And do you think you can get to that billion target? Thank you.

Jose Antonio Alvarez -- Group Chief Executive Officer

OK. I would address the cost issue, and I pass to the CFO the capital question that he can elaborate in more detail. On the cost issue, and particularly, you're referring specifically to the cost-cutting in Europe, we committed 1 billion nominal reduction in cost in the core business, Spain, U.K., Portugal, and Poland. We are progressing well in Spain and Portugal.

In U.K., we are a bit behind, but I do think that we are at the running rate. This year, we're going to be at a running rate of 600 million nominal cost reduction. And for next year, well, I remain confident that we can reach the 1 billion cost-cutting. The lag in the U.K.

is mainly due to some compliance investments that we are making, and this forces us to make these investments, but we remain committed to deliver the 1 billion that we told you in -- by 2022.

Jose Garcia-Cantera -- Group Chief Financial Officer

Well, with regards to capital, so this year, we don't expect any more regulatory charges. For next year, we have a small impact from minorities, and we will have some impact from updating the models, but this should be significantly smaller than the impacts we had in 2021. So, we would expect to be at the upper end of the range throughout the year. On Basel III, well, we need to see the final legislation.

We've seen a draft that was late a few days ago with ILM equal to one. If this is confirmed and the treatment of equity stakes and some other smaller changes, the impact on Santander is going to be very small. As you know, we will not be affected by the output floor. So, with ILM equal to one and some other adjustments, I think the impact will be really small.

Sergio Martinez

Thank you. Our next question, please.


The next question is coming from the line of Fernando Gil de Santivanes from Barclays. Please go ahead.

Fernando Gil de Santivanes -- Barclays -- Analyst

Hi. Good morning. Thank you for taking my questions. So, the first question comes on Spain NII.

And how do you see trends pricing and volumes going forward? This would be one. The other would be to touch a little bit on the U.S. and how do you see the franchise long term without the agreement with Fiat developing. Thank you very much.

Jose Antonio Alvarez -- Group Chief Executive Officer

OK. NII in Spain, well, let's talk where the market is right now. We see significant activity, good activity in the mortgage, individual space, mortgage and consumer lending, good activity in this front, not that good in the corporate sector, where the demand for credit is relatively low. So, the NII has been affected largely, as you know, very well by the level of Euribor, assuming that the Euribor remain where it is with an NII that is going to be in line with what we had in -- what we are showing today.

So, assuming that the Euribor remains that, naturally, the interest rates are -- the balance sheet with the ALCO compositions being very small or nonexistent is -- the position is toward higher rates. On the U.S., you asked specific about the franchises, cosigned the franchise with the agreement of Chrysler. Well, Chrysler, the agreement expires in 2023, but this doesn't mean that we do not continue to do business with Chrysler. As you know, Chrysler, but they don't finance company, but it's going to take for a while before they got -- they are able to underwrite the whole business, particularly in the subprime and near-prime space, where we are a real specialist, and we expect to keep a significant part of the business.

On top of that, we are diversifying out of Chrysler. Naturally, we have now like three different providers. One is what we call internally core business, that it is traditional subprime that we generate in our own, that is the bulk of the business. And the other is Chrysler, in which we have the prime, the near-prime, and the subprime, and that comes from Chrysler.

The prime, normally, we dispose 100% of them or the majority of them, and we keep normally the near-prime and subprime where we are specialists. Going forward, I do expect some impact from this, but not being very significant and not change the dynamic of the franchise, mainly taking into account that we are, for sure, we are going to get agreements with other originators being digital originators as we are working already with them or being traditional originators or other OEMs that may substitute some of the volumes we are getting now from Chrysler.

Sergio Martinez

Thanks. And on the next question, please.


Thank you. The next one is coming from the line of Francisco Riquel from Alantra. Please go ahead.

Francisco Riquel -- Alantra Equities -- Analyst

Yes, and thank you for taking my questions. First one is a general question about Brazil. The bank in Brazil is performing very well, delivering RoTE above 20%. However, the macro risks are increasing with inflation running about north of 10%.

Concerns from fiscal spending driving long-term [Inaudible] swap, GDP growth expectations revised down for '22. So, in this context, the general question is, how do you see the main KPIs in Brazil in the current macro environment, mainly the volumes, margins, the costs, and the cost of risk? And the second question is about the other revenue lines. If you can explain what do you -- more details on what you include here in this EUR 500 million in the third quarter, particularly in Spain, which was much higher than expected, and also in the consumer businesses, Digital Consumer Bank in the U.S. If you can comment also on the nature of these revenues, whether they are recurrent or not.

Thank you.

Jose Antonio Alvarez -- Group Chief Executive Officer

OK. OK. Thank you for your question. Brazil, you asked a very general question on Brazil, led me to make two starting points.

One, we are performing well in Brazil, as you recognize, on the back of market share gains. We are gaining market share across the board, but mainly in the retail space, credit cards, insurance businesses, mainly those business that -- well, on the lending side. And there is a mix effect. We are not growing that much at this stage now on the corporate side.

We are growing mainly in retail. You mentioned what you call -- I don't know how do you qualify the macro-environment having high risk on the back of the fiscal policy and all these things. Well, the inflation is -- naturally has been growing significantly. On the back of this, the Central Bank is increasing rates, as you know, and probably continue to do so.

And the prospects for the inflation are not -- is to come back at a certain level. It's not different than the expectations we have in the mature markets that inflation now is running high and will come back in -- at some point. You asked specifically a question how this affects our KPIs going forward, this macro environment and the cost of risk, and all these things. I do not expect a material impact in the cost of risk other than the one reflected that comes from the mix.

Yes, naturally, the cost of risk as a total probably is going to be higher on the back of having the retail business growing in high double digit and the corporate business growing probably mid-single digit or a bit higher, but significantly lower than the other. So other than this, I don't see a significant impact coming from this side. The critical question here is our capacity to keep the momentum in the business and being a market leader, real market leader in the way we are doing the digital transformation. So, what -- our commercial activities is going very well.

And as a matter of fact, we are about to reach 1 million credit card sales per month, that is quite a number, comparing that we were probably one year and a half ago, two years ago in half of this, 0.5 million or less than. So, the growth, we have high confidence in keeping our business momentum, our commercial activity with good control of risk. Naturally, the environment is going to be volatile because we face elections next year, and some volatility may be expected around elections, presidential elections next year. And some measures could be taking -- looking at the elections next year.

On the other revenue lines, but mainly Spain, I think, is equity method, yes? So --

Jose Garcia-Cantera -- Group Chief Financial Officer

The deposit guarantee and the contributions to the SRF in the second quarter. So it's the volatility associated with both.

Jose Antonio Alvarez -- Group Chief Executive Officer

So, there are some business that we account by equity method that are going back to normal and probably you should expect this line to keep growing, yes, in a sustainable basis because those are business that -- well, some of you know, the Marlins in Spain and the likes that you know that, well, given the economic scenario, we expect this to keep growing in the coming years.

Sergio Martinez

Thanks. Next question, please.


Thank you. The next one is from the line of Adrian Cighi from Credit Suisse. Please go ahead.

Adrian Cighi -- Credit Suisse -- Analyst

Good morning. Adrian Cighi from Credit Suisse. Two follow-up questions from my side, one on Brazil and one on capital. On Brazil, we see NII increase in the quarter by 8.5% in euro terms.

And my understanding is that the first-year impact of rate increases, which you reiterate again, is a negative impact of 63 million from 100 basis points rate increase. This year, the Central Bank has increased rates by over 400 basis points. Are we seeing the impact of these increased rates in these results, i.e., is the underlying results even stronger? Or are these rate increase impacts somewhat delayed? And should we expect them in the coming quarters? We're clearly in the very -- in the middle of a very aggressive cycle. So, any insight of how the timing and quantum of impact from these would be much appreciated.

Sticking with Brazil, we've seen some pretty big moves in FX in recent weeks. Can you update us where your hedging is on this? And briefly, on capital, you had 17 basis point headwinds in the market and others. Can you give us any color as to what drove this given that there are some relatively limited spread movement this quarter? Thank you very much.

Jose Antonio Alvarez -- Group Chief Executive Officer

OK. Let me take first the question in Brazil. I will pass the hedges to the CFO, and I will elaborate also on the capital, yes. So, on the capital into market.

Brazil, you say, while we have a negative impact when the rate goes up, that's true in the short run. In one year, it's minus 63 million or 100 basis points. We increased four -- you said we see the rates increasing 400 basis points. That's true.

But when you look at the numbers and the volumes, what you see is the volumes in retail with very high margins growing close to 20%, OK? The mix effect is very strong. We translate this into 11% growth in NII. We are missing here, like for like, we should be growing the margin in the region of close to 20% year on year. We are growing 11% and partially due to this increase in rates that you rightly pointed that affect us in a negative way.

I should say that the 63 million is on one year. Probably you take this quarter on quarter is -- the impact is more negative at the beginning and less negative as the time goes, and we are able to reappreciate assets and liabilities, but the effect that you mentioned is due to this. I pass the question to hedge. The capital -- the market is basically mark-to-market to valuable of for-sale portfolio, the impacts we have had in Brazil, Mexico, somehow in U.S.

Yes, so -- yes?

Jose Garcia-Cantera -- Group Chief Financial Officer

No, see -- yes, the three largest impacts in terms of the available-for-sale portfolio have been Poland, Brazil, and Chile in the region of 500 million each from the beginning of the year. So, this explains basically the impact on capital. In terms of the hedging, well, we continue to hedge the capital ratio. So, FX movements do not affect the capital ratio, and we continue to hedge expected profits when we think that the market is running ahead of itself.

So now we have some currencies already hedged for next year. And again, this is tactically -- and it depends on our view of the market relative to what the market expects. But again, the most important is the hedging of capital, which we continue to do. So, the ratio continues to be fully hedged.

Thanks, and again, next question, please.


Thank you. The next one is coming from the line of Sofie Peterzens from J.P. Morgan. Please go ahead.

Sofie Peterzens -- J.P. Morgan -- Analyst

Yeah. Hi. Here is Sofie from J.P. Morgan.

So, I just got to do follow-up questions. Just the first one, going back the Brazil net interest income. I get that you have the mix effect. But if I look at the loan growth in Brazilian terms, loan growth was up only 2% quarter on quarter in the third quarter, but net interest income was up 5% quarter on quarter in Brazil.

I was wondering, did you have any auto -- increased auto performance in Brazil or something else that kind of helped? And it's interesting in Brazil -- or it was purely the mix effect? And then my second question would also be a follow-up question. I recognize that on the regulatory front you're saying that next year the regulatory impact will be less. Could you just remind us how much older minorities are [Inaudible]? Is there anything else that we should be aware of in terms of core equity Tier 1 impact outside the regulatory impact? Thank you.

Jose Antonio Alvarez -- Group Chief Executive Officer

OK. Going to Brazil, the other issue on top of the mix and the different growth -- path of growth between retail and corporate business is the ALCO portfolio, yes. So naturally, as the ALCO portfolio now is much smaller and the NII is much smaller than it was, given the size is smaller and the spread is smaller. So those are the two components of this, yes.

So, no more than that. On the regulatory front, I pass the question to Jose.

Jose Garcia-Cantera -- Group Chief Financial Officer

So, we have -- this year, we have the -- well, again, this is subject to regulatory approval still. But the Amherst Pierpont impact will be around 9 basis points. The buyback of SCUSA minorities will be 10 basis points. If we get the regulatory approvals before the year-end, we will account for those this year.

In terms of pure regulatory charges next year, the change in the accounting of minorities will be another 10 basis points next year, which is the only regulatory -- significant regulatory impact that we expect next year. On top of that, again, we will have new models, which could cost us a bit of capital. But again, when we look at the sum of regulatory plus models next year relative to 2021, will be significantly smaller.

Sergio Martinez

Thanks, Sofie. Next question, please.


Thank you. The next one is coming from the line of Carlos Cobo Catena from Societe Generale. Please go ahead.

Carlos Cobo -- Societe Generale -- Analyst

Hello, and thank you for the presentation. I have a couple of questions. One is on Stellantis. You've already touched on the impact in Europe, but it's been reported that they are in the process of reassessing our partnerships in Europe, and I was wondering if you could explain a little bit on that front where are you in the negotiations and if there's any -- if you see any risk of losing some of those joint ventures or any of that part of relationship with them.

And secondly, if you have considered a different approach to capital allocation in the group. And if not, why not? Because running with a tight capital ratio versus the market perception could be preventing the stock from really rerating further. And perhaps unlocking some capital somewhere else in the group, even if you see missed earnings, could help you to run with more comfortable capital buffer that the market may reward? And if you don't agree with that view, why is that? It'd be nice. I know it's an open question, but it will be good to hear your thoughts.

Thank you very much.

Jose Antonio Alvarez -- Group Chief Executive Officer

OK. Taking the question, the first one, Stellantis, the partnership in Europe. We are -- naturally, we are talking to them. And well, we are, I would say, fairly optimistic on continuing the existing relationship and may be the case that we -- well, that we continue to be the preferred partner for them -- or I do expect to be continuing to be the preferred partner for them in the coming years.

So, I do not expect any material change on this. If any, I think it should be positive. On the back of the performance of the joint venture, yes, so it's not other things. So, when we started a joint venture with them, the joint ventures, we are making 250 million net profit.

Now they are making more than 500 million net profit on the back of this excellent outstanding performance, and we expect this to continue going forward. You mentioned capital. Well, our view is different. So, the board took the position, our target on capital is 11%, 12%.

Well, you say more comfortable -- uncomfortable with the capital. We're going to be -- we are close to the upper end of the range, and I'm absolutely comfortable with this for two reasons, yes. When I look at the market, I look at the credit side, our CDS is the lowest in Europe, among the largest banks. So, from a credit standpoint of view, no need.

When you look at the stress test, our score in the stress test is by far lower under the stress scenario. So that's sustaining our view, why we should be in the 11%, 12%. And we are already at the upper end of the range, and we plan to remain there, yes. And we will be at the end of the year.

And next year, we'll be around this. So that's the view. And Jose, you want to add something?

Jose Garcia-Cantera -- Group Chief Financial Officer

Yes. No, just a couple of comments. Amongst the largest banks in Europe, we are the bank with the lowest capital requirement of all. And our MDA CET1 buffer stands today at 340 basis points.

So being capital-scarce resource and the most expensive one, I think Jose Antonio has said it all. But again, we are the bank with the lowest capital requirement among the largest in Europe.

Sergio Martinez

Thanks for the question, Carlos. Next one.


Thank you. The next one is coming from the line of Daragh Quinn from KBW. Please go ahead.

Daragh Quinn -- Keefe, Bruyette & Woods -- Analyst

Hi. Good morning. Thanks for taking my question. One, just a clarification on the comments you made on the cost of risk into Q4.

And I think you mentioned a release of provisions and that that would lower the provision charge, if I understood correctly, to 80 basis points for the full year, compared to 90 basis points as of September. So, I just wanted to clarify that. And then just maybe again on capital. You've indicated you're at the high end of your range, not expecting too much change on that in Q4.

But with lower regulatory headwinds in 2022 and given your guidance on profitability, I'm just wondering, maybe can you not be more specific on why the CET1 ratio wouldn't be moving above that range that you've given? Or is it that those higher profits are being offset by higher RWA growth? Thanks.

Jose Antonio Alvarez -- Group Chief Executive Officer

OK. Let's address the two questions. The first one is the cost of risk, I said in the presentation that we need to update our macro scenario, the overlay that we made last year that remains in the balance sheet, and that this in the region of 2.5 billion has two components. One is coming from the macro scenario.

The other one comes from qualitive assessment of the different portfolios. When we update the macro scenario in the fourth quarter, I don't have the final number, but I guess that the majority of the provision related with the macro scenario in the region of, I don't know, 700 million to 1 billion may be released in the fourth quarter, assuming that the scenario is what we have in mind right now, and this will lead to the cost of risk in the whole year in the region of 80 basis points that I mentioned before. The second question is on capital. Well, when we look at the capital, we have a range that we and the board -- and we think that is the right range for the bank for the perception we have about the risk that the bank is facing.

And remember that, looking forward, naturally, you mentioned risk-weighted assets and potential capital ratio going beyond 12%. This may happen naturally because the capital generation, given our expectations on return on tangible equity, is going to be significant. At the same time, we continue to see the bank as we expect to grow. So, I do expect in the emerging markets to keep deploying capital, growing the business, while I don't see any reason why we shouldn't grow in Latin America more than 10% a year.

In Europe, probably less so. And on average, having a risk-weighted asset growth on the region of, I don't know, six, seven, five, higher than the one we have had in the last two or three years. And well, if we are right, our return on tangible equity in the region of 13% to 15% allow us to pay a combined -- pay a healthy dividend and at the same time to grow the risk-weighted assets significantly more than we did. Finally, we are not growing at that space, naturally, the ratio will go beyond the 12%.

And in that case, the board -- it's up to the board to take the appropriate decisions in relation with capital. But to me, the capital, we have some -- still some regulatory models, things in 2022. Beyond 2022, Basel III for us is not an issue at all. We don't have impact of the output floor.

If the ILM comes equal to one, an operational risk is not going to be an issue for us. And I will say we will have sky -- clear sky to navigate with a risk-weighted asset growth in the region of high -- medium to high single-digit growing and rewarding -- having a dividend policy, consistent dividend policy that our shareholders -- particularly retail ones like very much to get paid in cash.

Sergio Martinez

Thanks for the question, Daragh. Next one, please.

Jose Antonio Alvarez -- Group Chief Executive Officer

Next question.


Thank you. The next one is from Mario Ropero Gaza from Bestinver Securities. Please go ahead.

Mario Ropero -- Bestinver -- Analyst

Hi. Good morning. My first question is related to NII in Spain. You mentioned that you expect NII stability going forward.

What are the assumptions regarding TLTROs embedded in this stability for NII in Spain? Are you assuming that the current conditions will remain in place for the whole year 2022? And then a more general question on the return target. I know that you have a midterm time guideline for the target. Would it be possible to give some indication for next year perhaps on the RoTE target? Or maybe if you can give us some indication about whether you expect RoTE to continue improving versus 2021 year level? Thank you.

Jose Antonio Alvarez -- Group Chief Executive Officer

So NII in Spain, the conditions we're assuming are the current ones, yeah. So, I'm not assuming increasing rates in the cards. So, I'm assuming that we navigate more or less on average with the same level that this year. You know, the Euribor one year is the main -- the one who has the largest impact are not only, OK? So, in general -- as you know, we don't have ALCO positions in Spain.

So, our position to higher rates is pretty, pretty strong, probably the strongest we have had in many, many years. So that's -- but what is on the back of my projections is 2022 and rates being similar to 2021. If those are lower, it affects my projection. If those are higher, it will be up big, big positive.

Return on tangible equity, I do expect the return on tangible equity in 2022 being higher than the one in 2021, yes. So, it's not our policy at this point to give guidance to you. But well, you can project easily. You see trends in our business.

And some indications that we gave you, particularly on provision in Spain, where the cost of risk is going to be significant, is significantly lower. And Jose already gave you an indication of where we expect to navigate on this. You can make your own numbers and you get easily into what may be the development of the group next year, yes? But for sure, I do expect higher return on tangible equity in 2022 than in 2021.

Sergio Martinez

Thanks, Mario. Next question.


Thank you. The next one is from Andrea Filtri from Mediobanca. Please go ahead.

Andrea Filtri -- Mediobanca -- Analyst

Thank you for taking my questions. You've given some detail on the reversals. You expect overlay provisions. Can you tell us where you expect them? And I may have missed if you have given indications on guidance on where the cost of risk outlook is going in the U.S.

I don't know if you could share with us if you expect any impact from IFRS 17 implementation. On capital, is the impact from the implementation of the addendum rules over with what you have taken this quarter? And from the important securitization activity that you're having, should we expect a negative impact in the future on NII? Thank you.

Jose Antonio Alvarez -- Group Chief Executive Officer

OK. The guidance, cost of risk in Spain were, particularly in the SME space, this year, we've been -- sorry, I don't know if you heard me. I don't know the mic was off, sorry. The guidance on cost of risk in Spain, we expect lower cost of risk in the SME space.

I made these comments in the previous quarters that we were taking a prudent view on the SME portfolio in Spain. As you've seen, we've been building a significant amount of provisions this year in relation with all the events that have happened around the pandemia and all the lending related with SMEs. And we expect this to come materially down next year once we feel comfortable with what the evolution of the macro and the expected losses that we have already in our balance sheet for future events -- expected events on the credit side. You mentioned also the U.S.

cost of risk. The U.S. cost of risk this year was extraordinarily low. And this next year, it is going to go up.

It's not going to go up to the levels we've seen before because still, the environment is helpful. And the situation of the motor industry with the used car price being a very high level probably make us to be more optimistic than what is the average across the cycle for 2022, but it's going to go up, no doubt, compared with this year. You mentioned securitization being negative. Securitization, we use this as a tool of -- traditionally as a tool of funding.

In the last two or three years, it's a combination of funding plus capital. So, the market is in a situation in which we are issuing -- doing securitizations and release capital at incredibly low implicit cost of equity, as low as 2% or something like that, yes. If the market remains in this situation, probably we're going to be relatively -- or very active in securitizations, particularly on the consumer portfolio where the market is eager to buy this kind of portfolios. And implicit capital cost when you securitize is extremely low.

It's not the same for all the assets. Jose, you want to add something?

Jose Garcia-Cantera -- Group Chief Financial Officer

Yes. In terms of IAS 17, that refers to leases, if I understand correctly, and we are not aware that there will be any changes to these. But we will look into it and get back to you. But no changes as far as we know were related to the leasing accounting.

Thank you.

Sergio Martinez

So, we need to leave you here. Thanks, everyone, for joining. And obviously, the IR team is at your disposal for any follow-up. Thank you.

Jose Antonio Alvarez -- Group Chief Executive Officer

Thank you, guys. Take care. Bye.

Duration: 37 minutes

Call participants:

Sergio Martinez

Jose Antonio Alvarez -- Group Chief Executive Officer

Jose Garcia-Cantera -- Group Chief Financial Officer

Alvaro Serrano -- Morgan Stanley -- Analyst

Fernando Gil de Santivanes -- Barclays -- Analyst

Francisco Riquel -- Alantra Equities -- Analyst

Adrian Cighi -- Credit Suisse -- Analyst

Sofie Peterzens -- J.P. Morgan -- Analyst

Carlos Cobo -- Societe Generale -- Analyst

Daragh Quinn -- Keefe, Bruyette & Woods -- Analyst

Mario Ropero -- Bestinver -- Analyst

Andrea Filtri -- Mediobanca -- Analyst

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