Consumer loan growth was relatively stable at 12%, while system deposits grew 15% year-on-year.

Transcription

1 GRUPO FINANCIERO SANTANDER MÉXICO, S.A.B. DE C.V. TRANSCRIPT FIRST QUARTER 2017 EARNINGS CONFERENCE CALL FRIDAY, APRIL 28, :00 AM US ET, 8:00 AM MEXICO CITY TIME Good day, everyone, and welcome to Grupo Financiero Santander México s First Quarter 2017 Earnings Conference Call. Today s call is being recorded, and after the speakers remarks there will be a questionand-answer session. For opening remarks and introductions, I d like to turn the call over to Mr. Héctor Chávez, Managing Director, Head of Investor Relations. Please go ahead, sir. Héctor Chávez: Thank you. Good morning, and welcome to our First Quarter 2017 Earnings Conference Call. I appreciate everyone s participation. By now, everyone should have access to our earnings release and the Company s presentation which were released this morning before the market opened. Speaking during this call will be Héctor Grisi, Executive President and CEO, Didier Mena, Chief Financial Officer. Also joining us is Rodrigo Brand, Deputy Director of Public Affairs and Communications, all of whom will be available to answer questions during the Q&A session. Before we begin our formal remarks, allow me to remind you that certain statements made during the course of this discussion may constitute forward-looking statements which are based on Management s current expectations and beliefs, and are subject to a number of risks and uncertainties that could cause actual results to differ materially, including factors that could be beyond the Company s control. For an explanation of these risks, please refer to our filings with the SEC and the Mexican Stock Exchange. Now, let me turn the call to Héctor Grisi. Héctor, please go ahead. Thank you, Héctor. Good morning, everyone. We are pleased to report our first quarter of 2017 results, that demonstrate our success in delivering strong profitability, despite ongoing uncertainty in the macro backdrop mainly in México. We are focusing here on the customer at the center of all we do, and we have since a year ago. Our commitment to becoming more productive means prioritizing innovation investment and scaling operating efficiencies, while our focus on profitability and stiff competition has affected volumes, we are proud with our sound asset quality and profitability across the board. Moving on to México banking system, on the next slide, total system loan growth as in February, the most recently available public data from the CNBV, rose slightly to around 12% year-on-year, due to higher interest rates and lower expectations of economic growth. Consumer loan growth was relatively stable at 12%, while system deposits grew 15% year-on-year. Competition, you have seen, is very strong, particularly in consumer loans, with several smaller players growing in the high teens at the expense of margins, while larger banks are expanding their loan books at rates of 7% to 11%. Given the attractive long-term opportunity of the Mexican financial system, key competitors have also announced significant investments to expand capacity and to update their IT platforms. 1

2 Economic activity in the quarter was healthier than anticipated, supported by a resilient domestic consumption and subdued volatility in financial markets. For example, car sales grew in the high teens, while healthy growth in the formal jobs and retail sales continued, along with slightly growing consumer confidence. Still, given the uncertainty regarding US policy and inflation above Banco de México targets, we remain cautious about the economic environment going forward. As you can see on Slide Number 5, we expanded the loan portfolio by 8% year-on-year, maintaining a strong focus on profitability. Individual, SMEs and middle-market loans posted a solid performance consistent with our strategy while we continued to see a contraction in corporate and government loan growth, as we are not willing to sacrifice returns on volume growth. As a result, the share of corporate and government loans over total loans fell to 24% this quarter down from 27% in Individual loans were up 6% year-on-year, and we see resilient consumer demand. We are experiencing stiff competition in this market, particularly in mortgages. While we see resilient consumer demand, we are experiencing stiff competition in these markets, particularly in Mortgages. Mortgage loan growth continued to decelerate to 4% year-on-year this quarter from 7% in December last year. Some of our competitors are pursuing very aggressive pricing to win market share, at the expense of lower margins and profitability. While we remain focused on prioritizing profitability, we are adjusting our strategy to sharpen our competitive position and further strengthen our ranking as the second largest player in the market. In addition to bringing our rates closer to market levels, starting this month, we launched a unique mortgage product that offers a tailored interest rate based on the customer profile. Credit card loans increased 6% year-on-year and posted a slight sequential decline tied to seasonality. While credit card usage increased 19% YoY this is not fully reflected in loan growth as an unusually high number of customers paid their balances in full last March. The Santander-Aeromexico co-branded card continues to perform well. We have reached 500,000 customers, of which 34% are new clients. This card represents 12% of our own total credit card portfolio. Consumer loans expanded 9% year-on-year and were relatively stable quarter-on-quarter. Payroll loans were up 10% year-on-year as the Santander Plus program continues to gain traction, reaching up to 1.5 million customers affiliated to-date, of which 51% are new clients. We are also leveraging our strong franchise in the middle market to attract new payroll accounts contributing to loan growth in this segment. Turning to the next slide, commercial loans increased 9% year-on-year, driven mainly by the good performance in the middle-market. Middle-market loans posted strong performance, accelerating 17% from 15% in the previous quarter. SME loans rose to 10% year-on-year, reflecting our strategy to target mid to large size SMEs, maintaining a risk-return focus. This quarter we launched a dedicated CRM platform and an online on-boarding process to enhance the customer journey and to continue to drive growth in the SME segment. As anticipated, corporate loans increased 12% year-on-year, while the government segment showed a decrease of around 9%. This mixed performance reflects our discipline in margins, and the inherent volatility in the segment. Moving to funding, robust deposit growth continues, up 15% year-on-year, rapidly increasing its contribution to fund our business. Our initiative is focused on offering a client-centric approach for individuals and SMEs regarding deposit growth. In fact, individual deposits posted the fastest growth, up 29% year-on-year. Demand deposits spanned within the mid-teens, while market volatility and high interest rates fueled demand for low-risk investments relative to mutual funds, contributing to the 16% rise in term deposits. 2

3 We have demonstrated our ability to achieve consistent profitable growth in a challenging environment. Our strategic initiatives aimed at increasing loyalty and attracting new clients have enabled us to increase the number of net new customers by over 120% from May This was mainly achieved by a reduction in the attrition of 28% this year. We have also made good progress expanding the number of loyal and digital clients, up to 21% and 61% year-on-year, respectively. The increased contribution on global corporate banking to overall results illustrates the success of our strategy in prioritizing profitability over volume, improved execution by our financial market teams and sharper focus on fee business. Today, our bank is better positioned to grow profitably, while maintaining market share and we look to the future with confidence. As always, we are committed to ensuring sustainable returns to our Stakeholders as a reflection of our excellent customer service, its strong value proposition and disciplined execution. Now, let me turn the call to Didier, who will go over our capital position and P&L. Afterwards, we will be happy to respond to questions. Before that, let me take this opportunity to thank Pedro Moreno for his significant contribution and dedication to the Company and to the bank. As we announced a few weeks ago, after more than 12 years at Santander and 30 years at the group, Pedro had to step down as VP of Finance and Administration for Santander México. He played an integral role in positioning Santander México as one of the leading financial groups and leaves a high-performing team that is well-positioned to deliver on our strategic initiatives. I also want to welcome Didier as a speaker today. Though many of you may have met him already, this is his first time presenting our results. Please be kind to him. Thank you very much. Didier Mena: Thanks, Héctor. Good morning, everybody. I m pleased to have met most of you already, and I want to confirm my deep commitment to maintaining communications with the market. Above all, I m very proud to be part of a team that will make Santander México market leader in profitability and sustainable growth. Now, please turn to Slide 10. We maintained a comfortably liquid balance sheet, with net loans to deposits at 95% this quarter. This ensures a strong, efficient and flexible funding position, enabling us to take advantage of future growth opportunities. Our liquidity coverage ratio stood at %, well above the regulatory requirement. This month, the CNBV renewed Santander s designation as systemic financial entity, which implies a 120 basis points buffer to be phased in over four years which we already comply with. In addition, our capitalization ratio increased 99 basis points during the first quarter, to 16.7%, mainly reflecting our robust results and lower risk-weighted assets. Our Tier 1 capital stood at 12.9%, and core Tier 1 at 11.5%. Moving onto the income statement on Slide 11; net interest income remained robust, up 15% year-onyear, and 4% sequentially. Results for the first quarter show the benefit from the internet rate hike that took place last year and progress on our commercial strategy. Net interest income growth was mainly driven by the loan portfolio, which posted a 24% year-on-year increase in interest income, in line with the previous quarter. 3

4 Net interest income from our securities portfolio, which represented 18% of total net interest income, increased by almost 22%. As a result, net interest margin rose 15 basis points sequentially, and 41 basis points year-on-year, to 5.27%, as we continue to benefit from higher interest rates. Net commissions and fees were up 9%, mainly driven by a 41% rise in investment banking fees as we closed several transactions in our pipeline, given attractive market conditions. Cash management represented the high share of fees reflecting the higher transactionality and client retention, driven by our Santander Plus program. Credit card fees resumed growth this quarter, but still reflect issuance and reward costs from our Aeroméxico co-branded card, as well as the impact of the peso depreciation, as some of our credit card fees are dollarized. Note, however, that higher credit card usage resulted in an 18% increase in earned fees. Insurance fees fell 2%, reflecting soft mortgage-related insurance tied to the slowdown in mortgage volume, offsetting the good performance in our life and car insurance products. We are also seeing a gradual improvement in SME demand for credit-related insurance. Summing up, gross operating income was up 15% on the back of strong net interest income growth, and pick up in late fees and market-related income, of 1 billion pesos, significantly above our estimated quarterly average of around 600 to 800 million pesos. Results also reflect our focus on asset quality. We continue to bring down our non-performing loans ratio, reaching 2.38% in the quarter, achieving a 59 basis point year-on-year improvement, consistent with our risk appetite. We are also pleased with the good sequential performance in asset quality reported in our retail loans. Let me highlight the year-on-year reduction of 109 basis points in mortgage NPLs that resulted from the sale of a portion of the legacy ING past-due portfolio. Commercial loans, non-performing loans, fell 62 basis points year-on-year, as the year-ago quarter was still impacted by past-due loans and homebuilders that were written down in the second quarter of Loan loss reserves increased 8% sequentially, maintaining our active and cautious approach in managing our portfolio. This quarter, we made precautionary provisions related to a couple of corporate clients. Excluding these additional provisions, loan loss reserves would have remained practically flat, sequentially. This was also the main reason behind the 4 basis points year-on-year increase in cost of risk, to 3.49%. Looking ahead, we continue to proactively monitor our loan book, maintaining our strong focus on risk management. Looking at costs, on Slide 15, expenses increased 8.6% year-on-year. Note that the IPAB associated costs grew almost 20% in line with the strong growth in deposit and other funding sources. Excluding IPAB, operating cost rose 7.5%, mainly reflecting higher provisional fees, advertising, and depreciation and amortization, among others, related to our strategic plan. Our efficiency ratio improved 180 basis points, down to 40.6%. Note, however, that costs associated with this initiative have just started to be reflected in our P&L, and we expect to see progressive increases throughout the year as we move ahead executing our three-year investment plan. In summary, we reported a solid bottom line, with net income up 28% year-on-year, reaching 4.5 billion pesos, with a return on equity up 380 basis points, reaching 15.1%. Our strong bottom line performance underscores the resilience of Santander México business, against a volatile global backdrop as we execute our strategic initiatives and focus on risk-weighted assets, returns and efficiency. 4

5 Moving on to guidance. While this has been a very strong quarter, we remain cautious going forward given the overall macroeconomic and political uncertainties, and reconfirm our outlook for 2017 given in our last Earnings Call. We re committed to implementing our strategic plan to position Santander as a true client-centric bank with a strong focus on profitability, and look forward to sharing our progress on these calls in coming quarters. We are now ready to take questions. Operator, please go ahead. Ladies and gentlemen, at this time, we will be conducting a question-and-answer session. If you would like to ask a question, please press star, one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star, two if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary you pick up your handset before pressing the star keys. One moment, please, while we poll for questions. Our first question comes from the line of Mario Pierry with Bank of America Merrill Lynch. Please state your question. Mario Pierry: Yes, good morning, everybody. Thank you for the call. Let me ask you two questions, please. Last quarter, you provided net interest margin guidance, for margins to go up 25 to 30 basis points this year. According to our numbers, your margins are already there. So, does it mean that all of these interest rate hikes that we saw in México, are already reflected in your net interest margin and you expect them to remain at these levels? Or do you still think there s room for you to re-price some of your loans? Related to this question also, I wanted to ask, when do you think that we could see some asset quality problems because of the higher interest rate environment, higher inflation environment that we re seeing in México? My second question is related to your press release. You mentioned that you increased provisions because there are a couple of corporate clients that you think are could be under pressure. Without giving any specific names, I was just wondering if you can give us more details, in regards to which sectors these clients operate, if this is a problem that you think is related to FX, or just a little bit more detail would be greatly appreciated. Thank you. Didier Mena: Good morning, Mario, nice talking to you. Regarding net interest expansion, net interest margin expansion that we indicated last quarter, I think that it s important to understand how interest rate increases will impact net interest margins throughout the year. If you look at weighted average, by the time that interest rates increase, during the last quarter, the fourth quarter of last year, there was an increase of 200 basis points, 204 basis points actually. This quarter, the increase that we experienced in the referenced interest rates was 254 basis points. What we are expecting next quarter is 274. The following quarters, we show less impact or less increase. Particularly in the last quarter of this year, we re going to see what we expect, probably something around 160 to 180 basis points increase. So, looking at this trend, the major impact that we will see in net interest margin is during the first half of this year. As you rightly say, we already saw the what we consider the most relevant impact, of interest rate hike in our net interest margin. We think that there is potential upside if we continue to change the 5

6 mix of our loan portfolio as we show in the presentation. We are gaining share in mid-market and SME, which have a higher margin than mortgages and corporate loans. If we continue doing that, I think that there is a potential that the net interest margins could expand a little bit more than what we indicated during our fourth quarter call. Thank you, Mario, it s Héctor Grisi. To your second and third question, let me go quite quick through them. First of all, in terms of asset quality and if we see any problems in the future. Let me tell you that, I mean, we re very cautious as you have seen in the rhythms that we did we re having a growth mainly in consumer loans because we foresaw that the market could complicate. Reality has been that it has not been the case, and the cost of credit has not increased. So, we re quite impressed about the performance of the portfolio overall, and we don t foresee that a situation could complicate, if rates only go up 50 basis points more in the rest of the year. But, I mean, as you have seen, the numbers in consumption, and you have seen the numbers in terms of growth in employment in México and everything, the situation seems under control. We don t foresee that at this point, and that s what we are basically I mean, stepping a little bit and pushing a little bit more the machinery to grow a little bit more, given that we were extremely cautious at the beginning of the year. Looking moving to the provisions, I mean, yes, we have these two particular situations that we had already on the portfolio. These are not new loans; these basically come from the past. They were already budgeted and unfortunately the companies have not performed as we expected and we are basically had to do these provisions and maybe we ll have to do some more provisions about those couple situations. Those are individual situations in the construction/energy sectors, and it may continue to be the case, and we ll see in the continuing quarters. But it s basically not what is important to tell you, Mario, it is not because of the FX or the situation that had happened currently in the market, these are old situations. Mario Pierry: Okay. Any idea of how much provisions you have to build, or you have to take this quarter, specific to these two clients? Well, it all depends, I mean, on the negotiations we have with them and how we the evolution that they could have. I mean, that could increase, basically, our cost of risk guidance to I mean, it s going to continue between 3.3 and 3.5. I mean, it s not going to affect it. Mario Pierry: Okay, perfect, thank you. Thank you, Mario. 6

7 Thank you. Our next question comes from the line of Tito LaBarta with Deutsche Bank. Please state your question. Tito LaBarta: Hi, good morning and thanks for the call. A couple questions, also. First, in terms of your loan growth, I noticed your GDP growth, you picked it up a little bit for next year although you reduced it a little bit this year. So, I just wanted to understand how that s going to impact loan growth this year and next; I know you re already facing some competition which is why you ve slowed down growth. But with GDP, as you expect it to be below 2% for two years, do you see loan growth continuing to slow, and also, given the competitive environment? Then, my second question, I know you said you re maintaining your guidance for the year, although just looking at the strong first quarter you had, you d be running around 15% earnings growth. So, I just wanted to understand, I understand the uncertainty in México, but is some of that also your tax rate remained a bit lower, around 22%. You still expect that to go up to 24%, 25%. Also, trading gains were a bit high, around 1 billion pesos. Is that going to come down the next few quarters? Just wanted to understand how you reached the net income guidance that you ve given, given the strong quarter you had? Thank you. I mean, let me tell you about the loan growth in the portfolio. We are basically going to be I wouldn t like to say that basically this is going to be another strategy in the whole portfolio. I think you have to be, in these particular type of markets, very concentrated in different segments and take positions in each segment, first of all. Second, what we have done is we have, instead of basically putting pricing at and discussing pricing every single month, now we do it every 15 days due to the fact that the market is so volatile and changing so much, that we need to adjust in the different segments due to the competition. So, at this point, I will maintain my position in the guidance we gave you. I think we ll go currently with that, and let s see how the market reacts. As we told you, we always basically focus on profitability as our most important thing. Also, there are some particular areas, as we discussed in the presentation, for example, mortgages, that we need to protect our market share. So, we may be taking some decisions on that and basically give better conditions to our existing clients in some particular situations. But, this is going to be looked at segment by segment. I won t speak over all of the portfolio. Okay? In terms of the tax rate, I ll leave it up to Didier to tell you, but before Didier talking about that, let me tell you, in terms of trading and everything, I mean, the bank fortunately was very well-positioned by the situation of the elections in the US and everything that has been going on in the market. We were fortunate on that. I think, I mean, there s still a lot of volatility. We are being cautious in terms of taking positions. We are basically more concentrated on looking at the flows of our clients and making profitability out of them. Though, I would say that we re going to try to be very consistent in terms of the returns we give on trading, and we want to be very cautious on the way we manage things. 7

8 Didier Mena: Regarding the tax rate, as you probably know, Tito, there is an inflationary accounting still in México associated with taxes. There will be a higher inflation, and we benefit from that. That s why we re seeing lower implicit tax rate than the one that we were indicating. I would say that we remain cautious with uncertainty, due to specific uncertainties. We also, if we see comments by President Trump affecting potential renegotiation or walking away from NAFTA. So, those are the types of uncertainty that still we remain cautious about the potential impact that this could have in the environment, in the business environment in México. If the performance in our second quarter is as strong as the one that we had the first quarter, we will definitely review our guidance in our next call. Tito LaBarta: Okay, thank you, that s very helpful. Maybe just one follow-up, I guess, on the macro and the uncertainty you mentioned. Looking, I guess, specifically, your GDP growth guidance for 2018 where you have 1.6% further deceleration from this year. I understand there s a lot of uncertainty, but I just wanted to understand what you re kind of thinking about to get there. Is it because of the presidential election in México next year, continued uncertainty because of that, I just wanted to understand, maybe what you re seeing on the macro level that s kind of contributing to ongoing slow growth, not just this year, but also next year? Let me go through our numbers. As you mentioned, we don t see we haven t changed our numbers for Today we got the numbers for the preliminary number for the first quarter. It was above expectations; it was 2.7% year-over-year growth rate in the first quarter. However, we think that, as Didier mentioned earlier in the call, uncertainty regarding to the US and the NAFTA negotiations. Also, the fact that, in the second half of the year, we see that México will start to see a lot of uncertainty regarding the election process in We don t believe that it could have an effect on investments, basically. That s why we have, right now, a cautious position in 2018, slightly below consensus. But basically, that s it. It s because we do think uncertainties from the second half of 2017 until the second half of 2018, could delay investments and this could have an effect on the GDP growth for Tito LaBarta: Okay, thank you very much. Thank you. Our next question comes from the line of Philip Finch with UBS. Please state your question. Philip Finch: Good morning, Héctor, Didier, thanks for the presentation. I ve got a couple questions as well. The first is regarding the capital position, where we saw a decent improvement in the quarter, following after the special dividend back in December last year. Can you just explain, first of all, what were the drivers for this? Was it to do with risk changes in risk weightings at all, or is it just retained earnings? Secondly, 8

9 linked to this, where do you see that common equity Tier 1 ratio going to over the next nine months or so? What is an optimal level for you to operate at? Secondly, in terms of costs or operating expenses, you mentioned in the presentation that your three-year initiative costs haven t really kicked in and we should see that coming through in the during the rest of the year. Given that you ve got cost guidance of 10% to 12% on a full year basis, does that mean we re really going to see the costs rising, sort of back-loaded towards the end of the year where we really see costs spiraling upwards? Thank you very much. Good morning, Philip. Regarding your question on capital position, the main driver for doing the AT1 transaction that we undertook last at the end of last year, was to take advantage of regulatory schemes in México which provide the capacity to issue these types of instruments. I would say that those banks that are listed as ourselves are the ones that take the most advantage of these regulations. So, what s basically changing the rather than having core Tier capital, we base that by AT1 and this is the amount was US$500 million. That issuance represents 1.5% of our capital ratio. We think that we keep our Tier 1 ratio remaining close to 12%. For the question regarding risk-weighted assets, given the fact that our loan portfolio is growing only at 8%, risk-weighted assets have not increased that substantially. Regarding costs, we have this 15.3 billion peso investment program for the next three years. We have put in place a Committee that oversees the 16 projects or key projects associated with this investment plan. Every single week we re looking at the performance of these projects. We are being very strict in terms of the expenses that we incur in these projects. I would say that it has been probably a slow start in the execution of these projects. We think that, as the year goes by, you re going to see an increase in the bottom line with the guidance provided during last quarter. Philip Finch: Thank you very much. Just a follow-up, given it s a three-year program at 15 billion pesos over the threeyear period, the cost growth guidance of 10% to 12% for this year, can we assume this is going to be ongoing at this level for the next three years? Didier Mena: Yes, Philip. We think that it s going to be around those numbers. Philip Finch: Okay. Thank you very much. Thank you. Our next question comes from the line of Carlos Macedo with Goldman Sachs. Please state your question. Carlos Macedo: Thanks, morning, gentlemen. I just really have one question, loan growth, going back to that if you could. I mean, you guys, you said that growth you basically became a little bit more conservative now in the first quarter, and then things could improve going down the year. My question is, do the increase in rates, 9

10 do they affect the affordability of loans for your clients? Is that something that we should be concerned about and that could cap the amount of loan growth you can deliver in the year? Or is that just the increase doesn t really matter too much. Do you think that you re going to be able that there will be demand at the prices that you d be willing to offer, presumably at higher nominal rates, to the client? Thank you, Carlos. I mean, what we have seen is basically that demand has not slowed given the increased rates. Even though the rates have increased I mean, significantly, in terms of what it came from, we re, historically, at very low rates in México, in these scenarios. What we have seen and what we have seen mainly, for example, in consumer loans and everything, is that people basically have continued to demand those type of loans and the competition has been very hard. You try to move the range upwards just a little bit, it s complicated, and then people get offering from different participants. So, to be concrete about the response is demand has not slowed down. The credit quality has not worsened, and on the other side, we continue to see the demand to be very high. So, we foresee that I mean, the market continues to have demand for this. We have a particular situation in credit cards in which we saw a lot of people basically amortizing or paying down their balances in credit cards, mainly in January and February. It was normally seasonality is like that, but it has been the year that we have seen a much more amount of credit cards basically being paid. I believe what has happened is that consumers were concerned about the hike in rates and the hike in the FX, and basically were much more keen on paying down their balances. Then, when the situation basically came to a little bit more normal or less volatile, then people basically started to spend again. Carlos Macedo: Okay, thanks. So, maybe the opposite side, you say that the competition is as strong as you mentioned, is there a chance that, as with the rates going up and you re not being able to pass them through, that there is some pressure on spreads that you re able to charge on consumer loans, or would that be a step too far? No, no, that could be the case, yes. I mean, to answer your question, look at what happened in mortgages. I mean, mortgages, basically, we were a little bit more aggressive in terms of increasing their rates, and then the competition basically decided to absolve the increases in rates and look what happened to the market. Now, you have some of our competitors growing a little bit more than us. Carlos Macedo: Okay, so would that be is that part of the would that be a risk for the margin expansion, or is that just something that might cap the peak of the margin expansion? It could be a risk, that s why basically we are speeding up to increase our deposits and to increase our money base in order to help us in the cost of funding. That s what we are basically being very keen about, and that s why Santander is basically one of the main drivers of that. 10

11 Didier Mena: Also, Carlos, it s important to bear in mind the fact that we are moving into a client-centric bank, so it s not about only looking at the specific products. So, it s the entire relationship that we have with a client. If, for some reason, spreads come tighter in, let s say, mortgage loans, then the relationship that we have with those clients, we might enhance profitability by attracting the payrolls, the deposits or cross-selling them credit cards. It s looking at a more comprehensive relationship with the client. Carlos Macedo: Perfect. Just one follow-up question then, just trying to understand. The amount of competitiveness that you re seeing on the asset side, have you seen equal competitiveness on the liability side or is that still more incipient? No, it s more incipient. I mean, we have not seen people following us, in Santander Plus type of situation. I think that I mean, there are some basically the stiffened competition basically in the term deposits, that s basically where the competition is, but not on the day to day. Carlos Macedo: Okay. Okay, but we have seen a few beef up beef up on the competition on that. Carlos Macedo: Okay, perfect. Thank you so much. Thank you, Carlos. Thank you. Ladies and gentlemen, as a reminder, if you would like to ask a question in today s call, please press star, one on your telephone keypad. Our next question comes from the line of Carlos Gomez with HSBC. Please state your question. Carlos Gomez: Hello, good morning. Two questions. First, you mentioned that you are a bit more optimistic and you might accelerate growth a little bit. Where, in particular? I mean, would you be more aggressive in mortgages? Would you be more aggressive in credit card? Where do you think that you can afford to be more optimistic now than, let s say, three months ago? Second, your capital optimization exercise at the end of last year, you mentioned that you want to have a 12% Tier 1 capital. Is there room for further issuance of convertible of continued convertible bonds, or any other capital optimization measures, or you are done for now? 11

12 Okay, thank you, Carlos. In terms of I mean, of where we re going to be competing the most, I mean, mortgages are a huge asset. That s a priority for us. We would like to maintain our, basically, market participation in that segment. We re going to be also protecting our market participation in some of the other products, depending on profitability, mainly. We re not going to basically go chase the market down without taking into account profitability. Mortgages is a key product for us because of and it s going to be at least more important for us in terms of loyal clients. That s where we re going to concentrate ourselves on, and that s what we re going to be focused on in terms of mortgages. The different approach, I believe, I mean, in credit cards, we re exactly where we want to be. We have a strong growth, nice growth. In a market that basically we believe we re doing the right thing. As you know, we re launching a little bit of pilots in different sectors of the economy that we haven t been before, and we re going to be exploring that and we re going to tell you about that in the next quarter, all the results of the pilots. In the other sectors that we basically, or continue to, basically to perform well, is SMEs, that is key for us. It s basically been, in my opinion, one of the best performing segments of our portfolio, not just from the loan side, but also on the transactionality, and also on the deposit side, on the liability side. We re going to continue to do the same thing in middle-markets, and concentrate on, again, generating a little bit more piece out of our investment banking business that is basically performing much better and very well. Didier Mena: Regarding the capital our capital position, Carlos, I would say that we will always have the discipline to look at ways to make it more efficient. Having said that, there is little room as we stand right now, to make any further issuances. As you may know, we have a Tier 2 security outstanding. We are two years away from having the possibility to call it, and we just issued the AT1 security. We almost issued the full amount of the capacity that the Mexican regulations allow. So, I would say that, through the next probably couple of years, we see little possibilities of doing, I would say, material issuances to make it more efficient. However, we continuously analyze different alternatives to make our capital as efficient as possible. Carlos Gomez: To go to the other side, you are sticking to your 50% payout ratio? I couldn t hear Carlos Gomez: Yes, are you 12

13 Yes, yes. Absolutely, yes. We it s not a written policy, but we have paid out since we were listed, the 50% of our net income. Carlos Gomez: Thank you very much. Ladies and gentlemen, as a final reminder, if you would like to ask a call a question in today s call, please press star, one on your telephone keypad. Again, if you would like to ask a question in today s call, please press star, one on your telephone keypad. One moment, please, while we re-poll for any additional questions. There are no further questions. That does conclude our question-and-answer session. At this time, I will now turn it back to Mr. Héctor Chávez for closing comments. Héctor Chávez: Thank you very much for joining Santander México on this call. I look forward to maintaining an open dialogue with you, and you are welcome to visit us in México. If you have any further questions, please don t hesitate to call or us. Have a good day. This concludes today s conference. Thank you for your participation. You may disconnect your lines at this time. This transcript may not be 100 percent accurate and may contain misspellings and other inaccuracies. This transcript is provided "as is" for the convenience of investors, without express or implied warranties of any kind. While efforts are made to provide an accurate transcription, there may be material errors, omissions, or inaccuracies in the reporting of the substance of the audio presentation. Investors are advised to listen to the audio presentation to which this transcript relates. 13