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Edited Transcript of BSMXB.MX earnings conference call or presentation 1-Nov-19 2:00pm GMT

Q3 2019 Banco Santander Mexico SA Institucion de Banca Multiple Grupo Financiero Santander Earnings Call

Nov 9, 2019 (Thomson StreetEvents) -- Edited Transcript of Banco Santander Mexico SA Institucion de Banca Multiple Grupo Financiero Santand earnings conference call or presentation Friday, November 1, 2019 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Didier Mena Campos

Banco Santander México, S.A., Institución de Banca Múltiple, Grupo Financiero Santander México - CFO & Deputy Director General of Finance

* Héctor Chávez López

Banco Santander México, S.A., Institución de Banca Múltiple, Grupo Financiero Santander México - MD of IRO

* Héctor Blas Grisi Checa

Banco Santander México, S.A., Institución de Banca Múltiple, Grupo Financiero Santander México - CEO, Executive President, General Director & Director

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Conference Call Participants

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* Carlos Rivera Zermeno

Barclays Bank PLC, Research Division - Research Analyst

* Carlos Gomez-Lopez

HSBC, Research Division - Senior Analyst, Latin America Financials

* Ernesto María Gabilondo Márquez

BofA Merrill Lynch, Research Division - Associate

* Jason Barrett Mollin

Scotiabank Global Banking and Markets, Research Division - MD of LatAm Financial Services

* Jorge Kuri

Morgan Stanley, Research Division - MD

* Ricardo Alonso Garcia

Crédit Suisse AG, Research Division - Research Analyst

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Presentation

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Operator [1]

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Good day, everyone, and welcome to Banco Santander México's Third Quarter 2019 Earnings Conference Call. Today's call is being recorded, and after the speakers' remarks, there will be a question-and-answer session.

I'd now like to turn the conference over to Mr. Héctor Chávez, Managing Director and Head of Investor Relations, who will make some opening remarks and introduce today's speakers. Please go ahead.

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Héctor Chávez López, Banco Santander México, S.A., Institución de Banca Múltiple, Grupo Financiero Santander México - MD of IRO [2]

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Thank you. Good morning, and welcome to our third quarter 2019 earnings conference call. We appreciate everyone's participation today. By now, everyone should have access to our earnings press release and the presentation for today's call, both of which are -- were distributed yesterday after the close of the market.

Presenting on our call today will be Héctor Grisi, Executive President and CEO; Didier Mena, our CFO; and Rodrigo Brand, Executive Director of Public Affairs.

Following the reviews of this quarter results, we will be able to answer your 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 materially differ, 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.

Héctor, please go ahead.

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Héctor Blas Grisi Checa, Banco Santander México, S.A., Institución de Banca Múltiple, Grupo Financiero Santander México - CEO, Executive President, General Director & Director [3]

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Thank you, Héctor. Good morning, everyone, and good afternoon to those of you in Europe. Thank you for joining our earnings call here in Mexico. We are nearing the end of the third and final year of our investment program, focused on transforming our bank from an operating and cultural standpoint.

As we continue improving our performance in the third quarter, we demonstrated again that we are a more client-focused organization, one that is making Santander the primary bank of a growing number of loyal and digital customers. At the same time, we have remained focused on profitable lending. Importantly, we have not compromised on asset quality, which improved year-on-year. Under our strategy, we continue attracting lower-cost individual deposits while further enhancing our ability to cross-sell products.

Driving the loan book on the third quarter were mortgages, credit cards and payroll loans as well as middle-market lending. Net interest income along the higher -- with a higher fees generated by strong credit card usage, once again, drove our core earnings. And despite an uptick in our efficiency ratio and substantially higher effective tax rate, we delivered solid net income growth with ROA up slightly on a 9-month basis.

Our parent company, Grupo Santander, has increased its ownership in our bank to nearly 92%, which leaves 8% of ownership to the minority shareholders. Our resulting free flow of market cap is approximately $800 million with an average trading volume of $6 million per day. Importantly, our company remains part of Mexico IPC index. With regard to our Investor Relations practice, we remain committed to direct and proactive communication with investment community and to maintaining the same level of disclosure, transparency and access to management.

I'm going now to Page 4., looking at Mexico's banking system. System loans were up nearly 8% year-on-year by the end of August. Although a slight uptick from the 7.5% growth seen in the prior quarter, this remain among the lowest level of loan growth during the past 5 years. System commercial loans increased 11% year-on-year as of August with sequential growth moderating to 1%. Year-on-year growth in consumer loans remained stable at 6.4% for the third consecutive quarter among the lowest growth level in the past 10 quarters. On the other hand, we saw a slight pickup in the system deposit growth, up 7.3% year-on-year from 6.1% the prior quarter. Although the local and global macroeconomic environments remain complex and challenging, we are somewhat encouraged by recent developments. Outside Mexico, Central Bank policies were more accommodative. Following the 2 recent interest rate cuts, we expect Banxico to lower rates among another 25 basis points before the end of the year, given current inflation expectations. A clearer picture of government policy will also be supportive. Although we expect economy to finish the year essentially flat, we forecast a GDP growth of just under 1% in 2020 and inflation to rise 10 basis points to 3.6%.

Due to lingering uncertainty, private sector investments remain depressed in Mexico while the government has been spending less. However, employment has been growing within all the sectors of the economy with the exception of construction which contracted 10% year-on-year, rising employment levels coupled with falling inflation, which boosts real wages means the consumer has been holding up well.

Now let's turn to Slide 5 for an overview of Santander loan growth performance. Our loan book was relatively flat on quarter at nearly MXN 700 billion and up 2.5% year-on-year. Total loan growth continued to decelerate to nearly 3% year-on-year from 7% in the second quarter and 10% in the first quarter of this year. Business slowdown was mainly related to softer growth in our commercial loans due to weaker demand and a strong competitive environment. By contrast, individual loan demand remained in -- remained quite healthy. In this environment, high-margin segments almost doubled total loan growth, accounting for nearly 55% of our loans and almost 70% of net interest income from loans. For the full year, we are lowering our loan growth guidance to between 2% and 4% from our prior target of 4% to 6%, reflecting weak demand for corporate and government loans in the current environment. And despite expectations, the retail loans will continue to perform well.

Please turn to Slide 6 for a closer look at our retail loan performance. Starting with consumer loans, our strategy remains prioritizing payroll loans over unsecured personal loans and leveraging our strong position in the middle market and SME segments. Payroll loans expanded 12% year-on-year compared with nearly 10% for the system, allowing us to gain 50 basis points in market share over the last 12 months.

Since we began focusing on driving payroll loans in the first quarter of '17, this segment's contribution to consumer loan has increased from 53% to 62%, and we have gained 180 basis points in market share. Personal loans, in turn, declined close to 9% year-on-year.

Credit card loan growth accelerated to 7% year-on-year from 5% in the second quarter of '19. Credit card usage remained strong at 11%, although a large percentage of our customers continue to pay balances in full. The solid performance in retail lending was mainly driven by the strategy of cross-selling products into our payroll and Hipoteca Plus customers, but also supporting healthy assets, quality and good levels of profitability.

Finally, mortgage loan growth was up over 7% year-on-year, even after the sale of the MXN 1 billion nonperforming loan portfolio in January. Organic mortgage origination remained strong at 12% year-on-year compared with 11% growth for the industry. This represented the fifth consecutive quarter of exceeding market growth in mortgage origination. Our relatively strong performance in this category was mainly driven by our Hipoteca Plus product, which accounted for 73% of total mortgage originations in this quarter. And in addition to cross-selling, credit cards, as I mentioned earlier, through Hipoteca Plus, we were also attracting quality clients whom we are cross-selling other financial products and services and, thus, expanding our share of wallet.

Please turn to Slide #7. As I noted before, our investments in becoming a more client-centric bank continue building our ranks of loyal and digital customers, which grew 27% and 51%, respectively. The digitalization of our products and processes, the expansion and renewal of our ATM network and the transformation to our new branch operating model, all continue contributing to this growth. Digital transactions, which not only significantly enhance our customers' experience but also drive loyalty, increased 600 basis points to nearly 19% of our total monetary transactions. Meanwhile, mobile transactions accounted for 86% of digital transactions, 19 pp higher than last year. As we added new convenient features to our mobile apps, our base of mobile customers also expanded, growing nearly 70% over the last 12 months. We have recently implemented a number of innovative services that are supporting the growth of loyal and digital customers.

Last quarter, we launched Santander TAP, which allows our customers to make instant money transfer to other customers through WhatsApp or other social media, regardless whether they already have an account in Santander or not. Since its launch, Santander TAP has more than 150,000 fixed customers.

During the year, we transformed 880 branches under our new distribution network model, which promotes the use of digital channels and self-service. In total, we now have 494 branches that have been converted. Also under this new model, branch managers are not responsible for the individual P&L and cost of risk.

We have also partnered with FUNO, Fibra Uno, to implement a new service model that offers our customers special service points in several shopping malls owned by this company. In addition to the presence of a customer representative, we're installing full function ATMs in these locations. During this quarter, we opened the first Isla Financiera, which plans -- with plans to open a total of 50 in 39 cities in the coming months.

Also during the third quarter, we announced a new strategic alliance with CONTPAQi, a leading supplier of accounting software for SMEs. With roughly 1 million SME customers, our new partner has 35% market share. Through this alliance, we aim to attract at least 100,000 new SMEs as customers, which implies a growth of 50% in our current customer base within the next 4 years.

With regards to our financial inclusion program, TUIIO, at the end of the third quarter, we had 70 branches across 15 states, serving more than 70,000 customers and reaching a loan portfolio of MXN 198 million. Since TUIIO started operating, more than half of these customers are using debit cards for the first time in their lives.

Now turning to Slide 8. Commercial loans remained flat year-on-year. The solid performance seen in the middle-market loans was offset by a strong contraction in government lending. Corporate loans fell over 3% year-on-year, given difficult comps and some prepayments, while SMEs posted a mild 0.7% growth year-on-year. On a sequential basis, the contraction in the commercial book was mainly driven by lower balances in corporate lending and the contraction in SMEs and middle market loans. It is worth noting that this is the first time during the past 4 years that our middle market portfolio has contracted.

Moving on deposits, on Slide 9. We maintained our focus on increasing deposits from individuals relative to corporate deposits. Individual deposits were up 9% year-on-year as we continue making headway in attracting and retaining retail clients. This was the 11th consecutive quarter with individual deposits expanding faster than corporate deposit growth. Still high interest rates continue to support individual term deposits, up just 15% year-on-year and growing 10 percent points, faster than individual demand deposits. Overall, individuals gained 190 basis points share in total demand deposits and 300 basis points in total term deposits. This brought individual deposits to nearly 32% of total deposits, up from 29% in the third quarter of '18 and 27% in the fourth quarter of '16 when we started to increase our focus on profitability. In contrast, corporate deposits, which, in some cases, we forego, contracted 2.9% year-on-year. In sum, total deposits were relatively stable year-on-year or declined 5% sequentially. For the full year, we are revising down our guidance for total deposit growth to between flat and 2% from our prior target of 4% to 6%. This reflects continued good performance in individual deposits, partially offset by greater focus on profitability with regard to corporate deposits.

Before I turn over the call to the Didier, who will review our capital positions, P&L and full year outlook, I would like to put out the third quarter performance into context. Although Mexico economic environment has remained challenging, we nevertheless continue attracting greater numbers of individual customers. Further, the strategic investments we have been making to drive customers' loyalty and digital transactions are starting to pay off. With the cost of our 3-year investment plan soon behind us and a stronger franchise in place, we have set the stage to maintain profitable growth momentum in the coming years, which what we expect will be more supportive economic conditions in Mexico.

Thank you for your attention. Didier, please proceed.

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Didier Mena Campos, Banco Santander México, S.A., Institución de Banca Múltiple, Grupo Financiero Santander México - CFO & Deputy Director General of Finance [4]

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Thank you, Héctor. Good morning, everybody. Turning to Slide 10, we maintained a sound funding position with net loans to deposit at 99% and liquidity coverage of 180%, well above the regulatory threshold of 100%. We remain very comfortable with our debt profile with manageable debt maturities. Our capitalization ratio increased 87 basis points year-on-year to 16.9%, while core Tier 1 capital was up 81 basis points, reaching 12.3%, and Tier 1 stood at 13.6%.

As you can see on Slide 11, net interest income increased 5% year-on-year. This good performance was supported by steady growth in high-margin loans despite the softer economic conditions. We maintain our focus on profitability across the balance sheet. Interest income from the loan portfolio was up nearly 8% year-on-year with net interest margin contracting 2 basis points sequentially. For the 9 months, net interest margin expanded 21 basis points to 5.69%, benefiting from a 65 basis points expansion in the benchmark interest rate.

Moving down the P&L to Slide 12. We continue generating solid growth in net fees, up just over 7% year-on-year. Credit cards were the main contributor to fee growth, driven by sustained high usage levels, followed by financial advisory. Insurance also performed well, driven by strong cross-selling to our mortgage and payroll customers, along with the performance of our digital car insurance platform out to Autocompara.

Turning to Slide 13. Gross operating income was up nearly 7% year-on-year, driven by strong performance in key areas of our business. Core earnings accounted for 95% of gross operating income, while trading gains increased above our historical average levels of MXN 600 million to MXN 800 million a quarter. Improved prime trading activity supported market making gains. Year-to-date, we posted strong performance with gross operating income up nearly 9% despite the 8% decline in market-related income, once again underscoring the strength of our core earnings.

As you can see on Slide 14, we delivered healthy asset quality with improvements across the board. This despite the current economic slowdown. Loan loss reserves were down nearly 7% year-on-year, reflecting a healthy loan book along with easier year-on-year comps, as last year we made additional provisions for corporate finance loan. Sequentially, loan loss reserves were up 0.5% as provisions for consumer loans tend to be higher in the second half of the year due to back-to-school spending in August and September.

NPL ratios also remained healthy with the NPL ratio stable year-on-year at 2.33%. Overall, it is in line with system levels. Improvements in mortgage loans and, to a lesser extent, in credit card NPLs more than offset a 52 basis points increase in SME's NPLs, which reflect weaker economic performance. However, at 2.52%, these NPLs remained at low levels. This quarter, Nafinsa guarantees for SMEs reached 64% of the SME loan portfolio, up from 52% in the third quarter of last year. Commercial loan NPLs, in turn, were stable. This brought cost of risk down 15 basis points year-on-year to 2.62% in the quarter. Sequentially, cost of risk also showed a slight improvement, down 8 basis points.

So, although the economy is not growing, our asset quality remains healthy with cost of risk currently lower than our 2.8% to 3.0% guidance range. As Héctor noted earlier, overall, we're seeing the consumer holding up, employment growing and real wages arising. However, we are maintaining our guidance range as we expect to increase loan loss provisions in the fourth quarter of this year as we undertake an annual recalibration of our mortgage loan loss provision model.

Now please turn to Slide 15. As we complete our 3-year investment plan to enhance our operating infrastructure and drive digitalization, administrative and promotional expenses increased over 9% year-on-year and 3% sequentially. Specifically, we recorded higher administrative and depreciation costs related to the investment program. For the 9 months, costs were up 9% year-on-year. In the near term, the execution of our operational transformation program continues to impact our efficiency ratio, which rose 93 basis points year-on-year to 45.1%. For the 9 months, this ratio rose 10 basis points year-on-year to 44.7%. For the full year, we expect to meet the low end of our cost growth guidance range.

Moving down the P&L to profitability on Slide 16. Profit before taxes performed well, up 13% year-on-year for both the year and the 9 months. Net income increased slightly over 8% year-on-year to MXN 5.5 billion, while our effective tax rate increased 320 basis points during the period. This resulted in a 9.5% increase in net income during the 9 months period, reaching MXN 16.4 billion, despite an overall weaker business environment. For the full year, we're keeping our 5% to 7% net income guidance range, given the increase in provisions we just noted and softer NII growth, following recent Central Bank's interest rate cuts.

Return on average equity was 16.6%, slightly below the year ago level and down 66 basis points sequentially, reflecting the dividend payments made in the prior quarter. For the first 9 months of the year, ROE was up 8 basis points to 16.5%. Although loan growth was mild, it was more concentrated in high-margin loans. This, along with robust market-related income, generated a solid result in the face of the much higher effective tax rate.

Turning to guidance on our last slide. We continued executing well on our strategy, delivering another quarter of solid performance, despite a still challenging macro environment. As we have mentioned during our remarks, although we are maintaining our net income expense and cost of risk guidance for the full year, we have revised downwards our targets for loan and deposit growth. Our new loan growth target reflects weak demand for corporate and government loans in the current environment, although we expect continued good performance in retail loans. On the deposit front, while we expect individual deposits to continue performing well, we also plan to maintain a heightened focus on profitability with respect to our corporate deposits.

In summary, we continue securing our strategy with focus and discipline, and we remain firmly on track to bring our 3-year investment plan to a successful conclusion. By significantly enhancing the breadth of our products, digital offerings, distribution network and the world customer experience, we're attracting individual deposit at a solid pace and further strengthening customer loyalty. In addition to facilitating and driving cross-selling of products, we have built a much stronger franchise in what continue to be a challenging economic and market conditions.

This concludes our prepared remarks. We're now ready to take your questions. Operator, please go ahead.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from the line of Jason Mollin with Scotiabank.

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Jason Barrett Mollin, Scotiabank Global Banking and Markets, Research Division - MD of LatAm Financial Services [2]

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My question -- my first question is on the sensitivity of net interest income to Mexico's policy rate. If you can give us an update, you talked about that at the end of last quarter how the bank is positioning itself. You talked about, I believe, one more cut this year. If you could talk about expectations for 2020, that would be helpful.

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Didier Mena Campos, Banco Santander México, S.A., Institución de Banca Múltiple, Grupo Financiero Santander México - CFO & Deputy Director General of Finance [3]

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Good to talk to you. We think that there's -- it's highly likely that there's going to be an additional cut by the next -- by the Central Bank. So that will probably have the policy rate ending up about 7.5%. There is still some debate whether the Central Bank will cut further this year. We think that it's only one additional cut. So that will pay -- bring, throughout the year, a 50 basis points reduction, 75 -- sorry, 75 basis points reduction throughout the year. Regarding sensitivity, as we have mentioned in prior calls, these changes through time. Our contraction of 100 basis points in interest rates in a parallel shift implies close to MXN 1 billion impact in net interest income. The way that we are positioning, we have continuously buy fixed income securities in our asset and liabilities strategy and that will provide certain cushion. Obviously, banks will suffer from a decrease in interest rates in the overall environment. We think that depending on how much rates are cut next year and the timing for that, we might see an impact of 10 to 15 basis points contraction in NIM for next year. But obviously, that depends very much on timing of the cuts and the magnitude of those cuts, okay?

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Jason Barrett Mollin, Scotiabank Global Banking and Markets, Research Division - MD of LatAm Financial Services [4]

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That's helpful. As a follow-up, maybe what is the expectation for 2020? What's the base case scenario for rates next year?

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Héctor Blas Grisi Checa, Banco Santander México, S.A., Institución de Banca Múltiple, Grupo Financiero Santander México - CEO, Executive President, General Director & Director [5]

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Right now, we have a 50 basis points cut during -- over -- through next year. However, it's very dependent to what the Fed does in the coming months. As Didier said, we are expecting one cut for the rest of the year of 50 basis points for the entire 2020.

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Operator [6]

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Our next question comes from the line of Ernesto Gabilondo with Bank of America.

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Ernesto María Gabilondo Márquez, BofA Merrill Lynch, Research Division - Associate [7]

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My question is on your expenses line. We saw OpEx growth below your guidance for the year. I think this quarter was mainly explained by the global campaign to reduce costs, especially in advisory and personnel costs. So do you still think there's chance to expect expenses growth slightly below your guidance this year? And how much can OpEx drop next year as you will be ending the investment plan this year?

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Didier Mena Campos, Banco Santander México, S.A., Institución de Banca Múltiple, Grupo Financiero Santander México - CFO & Deputy Director General of Finance [8]

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I think that we've been quite disciplined in executing our investment plan. We think that it's likely given how we have controlled expenses during this year that we may end up on the low end of the range. We're quite confident on that, okay? And for next year, what we have conveyed in the past is that we shouldn't be expecting a significant drop in the expense growth, given the fact that there are certain expenses that are amortized. If you look at the depreciation and amortization line has been growing close to 30%. So that -- even though that represents less than 10% of our overall expense base, that would put some pressure in terms of how fast we can reduce our expense rate. We think that probably something around 200 and 250 basis points above inflation, that will be something that we should be aiming at.

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Ernesto María Gabilondo Márquez, BofA Merrill Lynch, Research Division - Associate [9]

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Just a quick question in provisions. Are you still expecting to create nonrecurring provisions of MXN 600 million related to the recalibration of the internal mortgage model during the last quarter? I believe this kind of provision is considered nonrecurring from what we have seen in Santander Chile. So any comments here will be much appreciated.

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Héctor Blas Grisi Checa, Banco Santander México, S.A., Institución de Banca Múltiple, Grupo Financiero Santander México - CEO, Executive President, General Director & Director [10]

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Yes. It's a recalibration of our model. And yes, you're pretty much right in the magnitude. We're expecting close to MXN 600 million impact for that. And whether it's treated recurring or not recurring, I think that we'll have to discuss it with the banking commission, whether this merits an extraordinary treatment for that. The way we're seeing it is it's part of the business to recalibrate products.

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Operator [11]

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Our next question comes from the line of Jorge Kuri with Morgan Stanley.

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Jorge Kuri, Morgan Stanley, Research Division - MD [12]

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So on trading gains this quarter, which were up quite a bit, is there new tolerance for risk, new instruments that you're using those then -- third quarter represent a new run rate for the bank? Or was this extraordinary and you should go back to sort of like the MXN 500 million per quarter that you've been reporting over the last couple of years? And then on 2020 loan growth, you're -- I think you said in the call that you're expecting 1% GDP growth in 2020. So in that scenario, is something similar to what you did this year, 2% to 4%, the correct expectation for 2020?

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Héctor Blas Grisi Checa, Banco Santander México, S.A., Institución de Banca Múltiple, Grupo Financiero Santander México - CEO, Executive President, General Director & Director [13]

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Héctor here. Regarding our trading gains, we haven't changed our strategies the way we do trading. I think that the overall banking sector benefited this quarter from trading gains, given the dynamics in interest rates during the quarter. And just let me put in context the trading gains that happened this quarter. It represents 4.9% of our gross operating income. It's definitely on the high end of what we have historically done, but it's the average over the -- since we became a listed company, it's 4.1%. We have continuously guided that we should expect trading gains of MXN 600 million to MXN 800 million. So what you referred as MXN 500 million on average that we have been reporting recently, that has been below our guidance range, and we have stated that in our calls. If you look at the 9 months of the year, it's only -- trading gains, it's only 3.1% of gross operating income. So that's well below our -- the average that we usually have in terms of contribution, but it's within the range of MXN 600 million to MXN 800 million, okay?

Then on loan growth, yes, we have -- we are guiding next year, GDP growth to be 0.9%. So I think given the level of uncertainty that we have seen recently in the economy, I think it's still soon for us to provide any guidance for next year loan growth. I -- my initial take would be if employment continues soft as it has been, it has continued -- it's still growing, but it has decelerated significantly. But if employment continues at those levels, then we think that loan demand for individual loans will continue as it has been the case over the last few months. And I think that our loan portfolio reflects that. In terms of individual loans, we reported a 7% loan growth year-on-year. So that's, in my opinion, a consequence of the dynamics in the economy. However, if you look at commercial loans, then there's another dynamic, and we're seeing that economic activity is impacting more corporates and government loans. And those are big ticket transactions. So just gaining or losing one client in the quarter might impact the overall balance of our loan portfolio.

So just to summarize, I think that with a GDP growth of roughly 1% and given the under-penetration of the Mexican banking sector, we would expect loan growth to be faster than that, stronger than that and more lean on the individual loans rather than commercial loans.

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Operator [14]

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Our next question comes from the line of Carlos Rivera with Barclays.

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Carlos Rivera Zermeno, Barclays Bank PLC, Research Division - Research Analyst [15]

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So my question is regarding the loan growth guidance. Obviously, no surprise, given the economy that has been decelerating. I'm doing some numbers. I think the guidance implies basically no growth quarter-over-quarter in the loan portfolio at the low end or 1.8% quarter-over-quarter growth at a high end. So more than trying to get the number exact right for the -- for this year. Just wondering if there's any indication on your pipeline of where the economy might be heading or this guidance basically reflects that conditions remain the same in Mexico, where we have hopes, but nothing ends up actually picking up or materializing on growth, and we end up with a 0.5% quarter-over-quarter? Or you to see some lines of growth, and that's why you're a little bit positive on how the year might end up?

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Didier Mena Campos, Banco Santander México, S.A., Institución de Banca Múltiple, Grupo Financiero Santander México - CFO & Deputy Director General of Finance [16]

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Carlos, I think that the dynamics that we've seen individual loans, we don't expect a significant slowdown in the fourth quarter. If you look at, for instance, mortgage loans, they're growing 7.4% year-on-year and sequentially 2.1%. Credit cards are very, very similar in that regard, growing year-on-year 7.2% and 2.6% sequentially. Consumer loans, mainly driven by payroll loans, are growing 12.1% year-on-year. The overall consumer loan portfolio is growing 5.9%. So these individual loans represent 38% of our loan portfolio, and that's growing, I would say, at these levels. So we expect that to continue. What is more uncertain is what will happen on the commercial loans. And we see different dynamics there. In terms of mid-market companies, even though we reported a contraction in -- quarter-on-quarter, still growing close to 6% year-on-year. So if you look at the balance that we had in mid-market by the end of last year, we think that there's a chance that we will end growing that balance slightly, okay? So literally, we -- what -- whether we end up either being on the high end of the range that we revised or at the low end, it's going to be what will happen on corporates and government loans. And it's quite unpredictable what will happen there. Corporates have been more sensitive during the first quarters of this year. There was a shift in terms of how corporates were funding their needs. And during the first half of the year, issuances in the -- debt issuances in the Mexican Stock Exchange were significantly down, close to 60% down in the first half. Now corporates have tapped more into the local market. If you look at the first 9 months, debt issuances in the local market are only 32% down. So it has picked up activity. So I think that we benefited during the first quarters of having corporates relying more on banks to finance their needs rather than tapping into the local market or international markets.

So I think that it's a combination of those 2 things, both with the markets being more open, corporates financing themselves through the markets and borrowing less debt. So I think that it remains quite uncertain, the loan growth dynamic, but I think that there's more downside, in my opinion, associated more with corporates and government loans.

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Operator [17]

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Our next question comes from the line of Alonso Garcia with Crédit Suisse.

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Ricardo Alonso Garcia, Crédit Suisse AG, Research Division - Research Analyst [18]

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My question is regarding fees. I mean this year, fee -- net fee growth has been well ahead of volume growth and even growth in loans to individuals as you have been acquiring more customers and including cross-selling. So the question is if we should expect this trend to continue to be the case in years to come? Or as loans pick up, should -- fees should grow more in tandem with that? And also considering that sector wide, not really because of regulation or not only because of regulation but because of market pressure considering the possible threat on principal and so on, fees might be under some pressure. So I just want to hear your thoughts on this line going forward.

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Héctor Blas Grisi Checa, Banco Santander México, S.A., Institución de Banca Múltiple, Grupo Financiero Santander México - CEO, Executive President, General Director & Director [19]

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Alonso, I think that the dynamics supporting fee growth are still with transactionality. So that explains more than, let's say, adjusting prices on our products or services. If you look at how much our clients are using their credit cards, the activity has increased at double digits. So the fact that credit cards are growing at that pace is just a consequence of our clients using more their cards, and that is explained as well with the campaigns that we've -- or the programs that we are executing regarding loyalizing customers. Also insurance fees are also associated with our cross-selling efforts and our loyalty program. So -- and those 2 of the fee items are the ones that are driving growth more over the last year.

Regarding, let's say, a regulatory risk, I think that, that would still -- we still have that risk. I think that, at this time of last year, I think that the risk was much higher with how this banking fee proposal came up. And I think that, that has been mitigated, but it's not gone at all. I think that it has been more concentrated regarding transparency and how we disclose what type of fees we charge to our customers and providing all information on a timely basis rather than putting certain caps on the fees that we charge to our customers. So even though it's not gone, that risk, I think, has been mitigated. The involvement, both of the Central Bank and the Antitrust Commission, I think that have played a significant role in helping Congress understand the secondary effects of imposing fees, and one of those secondary effects is that it might create an even higher concentration in the banking sector in Mexico.

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Operator [20]

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(Operator Instructions) Our next question comes from the line of Carlos Gomez with HSBC Global Asset

Management.

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Carlos Gomez-Lopez, HSBC, Research Division - Senior Analyst, Latin America Financials [21]

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I have a question regarding your dividend distribution. You have, obviously, been accumulating capital because your profitability has remained high and loan growth is down. You have (inaudible) payout for around 50%. Is that something that you might want to review? And what will be your optimal level of capital at this point in time?

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Didier Mena Campos, Banco Santander México, S.A., Institución de Banca Múltiple, Grupo Financiero Santander México - CFO & Deputy Director General of Finance [22]

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Carlos, you're right in sense that we are accumulating capital, and our policy is to play out what is in excess of 11% core Tier 1 ratio. In an environment where loan growth is soft as it is right now, that might imply a payout ratio higher than 50%, okay? This is something that there's a lack in terms of when we pay out dividends, it's obviously backward-looking. So the payment that we made in May was associated to the second half of last year earnings. So I think that there's a good chance that we will propose as management to the shareholders' meeting to increase the payout ratio as a consequence of building up capital. We think that an 11% core Tier 1 ratio provides enough cushion to weather any potential negative scenario in the economy or in the banking sector. So whatever we have in excess of 11%, I think that, that would be a good guidance.

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Carlos Gomez-Lopez, HSBC, Research Division - Senior Analyst, Latin America Financials [23]

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Would there be something to do for this calendar year or to propose for the following year?

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Didier Mena Campos, Banco Santander México, S.A., Institución de Banca Múltiple, Grupo Financiero Santander México - CFO & Deputy Director General of Finance [24]

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I think that would be for the following year, given these lags in terms of when we pay dividends.

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Operator [25]

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(Operator Instructions) And that concludes our question-and-answer session for today. I'll now turn the floor back to Mr. Chávez for any final comments.

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Héctor Chávez López, Banco Santander México, S.A., Institución de Banca Múltiple, Grupo Financiero Santander México - MD of IRO [26]

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Thank you, operator. Thank you, everyone, once again for joining Santander Mexico on this call. As always, we wish you to maintain an open dialogue with you, and there is a standing invitation to visit us in Mexico. If you have any additional questions, please don't hesitate to call us or mail us directly. Have a great day.

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Operator [27]

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Thank you, this concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.