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Edited Transcript of BSMXB.MX earnings conference call or presentation 26-Jul-19 3:00pm GMT

Q2 2019 Banco Santander Mexico SA Institucion de Banca Multiple Grupo Financiero Santander Earnings Call

Aug 10, 2019 (Thomson StreetEvents) -- Edited Transcript of Banco Santander Mexico SA Institucion de Banca Multiple Grupo Financiero Santand earnings conference call or presentation Friday, July 26, 2019 at 3:00:00pm 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 Blas Grisi Checa

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

* Héctor Chávez López

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

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Conference Call Participants

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* 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

* 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 Second 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 Chavez, Managing Director and Head of Investor Relations, who will make some opening remarks and introduce today's other 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 second 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 distributed before the market opened today.

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 review 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 the 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 in 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 very much, Héctor. Good morning to everyone and good afternoon to those of you in Europe. Thank you for joining our earnings call this morning here in Mexico.

We continue to make good progress towards our annual performance targets while remaining disciplined with regard to focusing on profitable loan segments, sound asset quality and maintaining a prudent approach to risk management and trading. Net interest and fee income drove solid growth in core earnings. We even managed to reduce our efficiency ratio while executing our investment plan. This also contributed to a solid gain in net income, with high-quality earnings pushing our return on average equity above 17%.

On Page 4, looking now on the key trends in Mexico banking system presented on this slide. Overall industry loan growth moderated in the quarter expanding by just over 8% year-on-year from 10% growth in the prior quarter. This was the lowest loan growth rate registered since October 2014.

System commercial loan growth decelerated to 11% as of May from close to 15% in the first quarter of this year. Consumer loans on the other hand continued to grow at a moderate pace, up 6% year-on-year, reflecting persistently high interest rate. Total deposits were up nearly 8% year-on-year, mainly reflecting the lower growth rates in demand deposits in the third quarter of 2018. Sequentially, total deposit growth came mainly from term deposits while demand deposits growth remained practically unchanged.

With regards to Mexico macro picture, the economic environment remains complex due to global factors as well as tight domestic monetary and fiscal policies. Since the beginning of the year, most sources of growth have been weakening, mainly private investment. Product consumption has also been softening, while we see export being supportive as long as additional trade disruptions do not arise.

Considering that inflation for the year is expected to remain within the target set by Mexico's central bank and that effect could lower rates in the next few months, we expect the central bank to lower its benchmark rate by 25 basis points to 8% near the end of the year. In the context of this environment, we are forecasting another GDP growth of 1% and inflation of around 3.9%, falling further to 3.5% next year.

Now let's move on to Santander's performance on Slide 5. We expanded our loan portfolio by 7% year-on-year to over MXN 700 billion. Loan growth slowed from 10% expansion reported in the previous quarter and was in line with the overall deceleration in demand we are seeing given the current macro environment. Nonetheless, loan growth continues to track within our guidance range. We delivered well-balanced growth across loan segments, driving net interest income higher. High-margin segment accounted for nearly 55% of our loans, contributing almost for 70% of NII.

Turn to Slide 6 for a deeper look at our retail loans. Federal loans expanded close to 15% year-on-year, significantly above our system's nearly 9% growth as we continue to focus on attracting new favorable accounts by leveraging our strong position in the corporate middle market and SME segments.

In contrast, we have been moving away from unsecured personal loans, which contracted 9% year-over-year. This has allowed us to add another 80 basis points of market share in the payroll loan market over the past 12 months and has brought our payroll loans close to 62% of total consumer loans, up from 58% in the year-ago quarter.

Credit card loans expanded just over 4% year-on-year, while credit card usage continues to grow, up 11% this quarter. We continue seeing in the market an increasing number of customers paying their cards in full. We're expanding this product by cross-selling credit card products to our payroll and Hipoteca Plus customers. Once again, I would like to emphasize that we still limit credit cards to existing clients, consistent with our focus on asset quality and higher profitability.

Mortgage loans posted a strong performance, growing nearly 8% year-on-year even after the sale of the MXN 1 billion nonperforming loan portfolio in January. Positive trends in reservation contraction continued to support good demand dynamics. In fact, organic mortgage origination accelerated to nearly 13% year-on-year and marked the 4th consecutive quarter of higher-than-market average growth, which was 10.7% as of May 2019. Our Hipoteca Plus product remains the main driver behind the strong performance, accounting for 75% of total mortgage origination in this quarter.

Please turn to Slide #7 for an update on our client-centric initiatives. Progress on the execution of our investment plan is driving sustained expansion of our base of loyal customers, up 28% year-over-year, as we grow and digitize our branch ATM network and add functionalities to our mobile apps.

We're also driving growth in digital customers, up 50% over the last 12 months, while the share of digital transaction to total transactions increased 650 basis points to over 19%.

We also continue to drive traction in mobile customers, up 70%, as we implement further enhancements to our app. As of June, mobile transactions accounted for 86% of digital monetary transactions, up from 66% in the second quarter of '18. Moreover, loyal to active customers expanded 470 basis points year-on-year, reaching 31% in the quarter alone.

Improving customer experience is essential for us. Some of our initiatives, which you have heard me discuss in the past, include further enhancements and functionalities to our mobile app. Among other upgrades this quarter, we launched Santander TAP, which facilitates money transfer through WhatsApp with more than 90,000 customers involved and 80,000 transactions registered in the first 2 months of operations. We're also participating in Banxico's CoDi initiative to boost digital payments through the use of QRs in Mexico with pilot programs already underway in several cities. Actually, we are one of the first 2 banks to be certified by Banxico for CoDi. All of these initiatives also drive improved customer experience.

Finally, our financial inclusion program, TUIIO, continues to perform well, serving a total of 48,000 customers around 51 specialized branches, reaching a loan book of MXN 135 million. Over 50% of TUIIO clients are using ATMs for the first time ever and have their first debit card in their lives. We are making headway in upgrading and transforming our distribution network and infrastructure, which is helping us drive customer acquisition while at the same time improving our ability to resolve problems, enhance the launch of new financial products and, most importantly, build customer loyalty.

As you can see on Slide 8, commercial loan growth decelerated to nearly 8% year-on-year compared with growth of 11% in the prior quarter. Loan growth was mainly driven by corporates and middle-market loans. We saw a pickup in corporate loan growth, up just over 13% year-on-year and mainly reflecting easier comps. Sequentially, corporate loans were up low single digits. Similarly, lending to the middle market companies and SMEs slowed to 8% and 3% year-on-year, respectively. This deceleration in commercial loans was a function of economic slowdown. Growth in lending to government and financial entities slowed 6% year-on-year but contracted at a similar rate sequentially as we experienced prepayments related to several loans to financial entities. This segment can be very volatile and sensitive to shifting market conditions.

Looking at the full year and considering the current environment, we are lowering our guidance for total loan growth to 4% to 6% this year, down from our previous 7% to 9% growth estimate.

Please turn to Slide #9. Our commercial focus to attract and retain retail clients, including expanding payroll clients, continues to deliver good results, with individual deposits expanding at a higher rate than commercial deposits for the 10th consecutive quarter. High interest rates continue to make term deposits more attractive. Actually, term deposits by individuals increased nearly 18%, more than doubling growth in individual demand deposits.

Individuals continue to gain share of total demand deposits, up 260 basis points year-on-year and 90 basis points from total term deposits. With these, total individual deposits now represent 31% of total deposits, up from 29% a year ago quarter.

Corporates, however, post a mixed performance with term deposits increasing over 12% year-on-year, while corporate demand deposits contracted almost 6%.

In summary, given the challenging macro environment, we are pleased with the performance we have been able to deliver in the first half of the year, particularly in deposits from individuals, one of our key strategic goals. While we are not expecting significant changes on the macro front, we will remain cautiously optimistic for the remainder of the year. In light of the current environment, we are also revising our deposit growth guidance for the year to 4% to 6% from our previous 7% to 9% growth expectation.

Over the past 2.5 years, we have been making significant investments to further strengthen our franchise, with the goal of attracting new customers while driving loyalty. While we plan to normalize the level of investments in the coming year, we will remain fully committed to continue enhancing the customer experience and driving innovation across our franchise.

Let me hand over the call to Didier Mena, who will review our capital position, P&L and our formal guidance. Afterwards, we'll be happy to answer any of your questions. Thank you very much.

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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. Moving now to Slide 10. We maintained a solid funding position with net loans to deposit at just over 94% and liquidity coverage of 175%, well above the regulatory threshold of 100%. We also maintained a sound debt profile with only around 40% of our debt maturing in 2021.

This quarter, we again successfully tapped the fixed income market, issuing local notes, or Certifcados Bursatiles, raising a total of MXN 10 billion for 2 notes of 3- and 7-year maturities and executed in 2 tranches. Our capitalization ratio increased 98 basis points year-on-year to 16.5%, while core Tier 1 capital rose 113 basis points to 11.9% and Tier 1 stood at 13.2%.

Please turn to Slide 11. Net interest income increased 12% year-on-year as we remain focused on driving profitability across the balance sheet, further supported by this high interest rate environment. Interest income from the loan portfolio remained strong, up nearly 14% from the same quarter last year. Our net interest margin expanded 49 basis points to 5.76% during the quarter.

Moving down to the P&L on Slide 12. Net fee growth posted a slight acceleration, up just over 10% year-on-year and 6% sequentially. Credit cards remained the main driver of fee growth supported by higher usage levels along with lower origination costs. Insurance fees also continued to perform well, as we keep cross-selling policies to our markets and SME customers as well as selling car insurance through our digital platform. In contrast, financial advisory fees contracted due to a weak deal flow.

Turning to Slide 13. Gross operating income increased nearly 9% year-on-year and 3% sequentially. We continued to drive solid performance in core earnings, up almost 12% with net interest income growing 12% and net commissions and fees growing at 10%. As anticipated in the prior call, trading gains for the quarter were still below our historical average range of MXN 600 million to MXN 800 million and compared to a very strong performance in the second quarter of last year.

Market-related income continues reducing its contribution to gross operating income. Since the IPO, market-related income has contributed on average 4.3% of gross operating income, whereas this quarter, its contribution was 40% lower than the average. Again, uncertain market conditions compel us to maintain a cautious approach to trading.

Now please turn to Slide 14. Asset quality remains healthy across all key metrics. Loan loss reserves were up 3% sequentially and 12% year-on-year, as provisions in the first quarter of this year and the second quarter of last year were unusually lower. In the first quarter of this year, we benefited from the reversal of MXN 140 million provision in connection with a project finance loan. Remember that since the beginning of the year, banks are required to record recoveries in the provision account, whereas they were previously booked in other income. At the same time provisions in the second quarter of last year were initially lower, reflecting the cleanup of legacy positions, including those related to home builders, mortgages and some corporate loans as well as the closing of some external channels for credit card replacements in prior months.

Our strong focus on prudent risk management resulted in a 23 basis points year-on-year decline in the NPL ratio, which fell down to 2.23%, and is in line with the system. The NPL ratio improved across all segments, with the exception of SMEs, which posted a 33 basis points year-on-year increase to 2.25%, but nevertheless remaining at low levels. Also note that Nafinsa guarantees for SMEs have increased to close to 60% of the SME loan portfolio, up from 52% in the second quarter of last year. Even though asset quality remains healthy, we register a slight sequential increase in NPLs across the board. We will continue monitoring asset quality thoroughly.

Finally, cost of risk improved 20 basis points year-on-year, declining to 2.70% in the quarter and stable year-on-year, with cost of risk for the first half of the year tracking below the low end of our guidance range of 2.08% to 3% for 2019.

Moving down the P&L, as you can see on Slide 15, administrative and promotional expenses increased to just over 7% year-on-year. Depreciation and amortization expenses expanded by 29% year-over-year, reflecting the significant investments that we started 2 years ago. We anticipate expenses to pick up slightly in the second half of the year as we continue executing our investment program, finishing the year with our guidance range to 10% to 12%. Our efficiency ratio improved year-on-year and sequentially, falling to 44.3% supported by the strong top line performance.

Looking at profitability on Slide 16. We delivered net income growth of nearly 9% year-on-year and 6% sequentially. Return on average equity near the year-ago level expanding 90 basis points sequentially to 17.3% benefiting from the MXN 4.8 billion cash dividend paid last May. For the first 6 months of the year, our ROAE was 16.8%. We're particularly pleased with these high-quality results, considering the deceleration in loan growth we began to experience in June, the relatively low market-related income in the quarter and higher effective tax rate.

Moving on to guidance on Slide 17. We delivered solid quarter, effectively executing on our strategy in a more challenging environment. While net income growth in the first 6 months exceeded our 5% to 7% target range for the year, we're maintaining our annual guidance as we expect economic activity to continue to decelerate reflecting greater uncertainty at both local and global levels. Against the backdrop of tight monetary and fiscal policies and volatile market conditions, as noted earlier, we're lowering both our loans and deposits growth guidance to between 4% to 6% from our initial guidance targets of 7% to 9%. We're also maintaining a cautious approach to loan growth, while remaining focused on asset quality and profitability across our portfolio. This will also be the case for the trading side of our bank. The rest of our guidance targets remain unchanged.

As we are close to completing the third year of our investment plan, we're confident that our value proposition for our customers is more compelling, positioning us well to compete in a more challenging market environment and to thrive in the medium to long term. Higher levels of customer satisfaction, growing customer loyalty and expanding base of digital customers and rising retail deposits all continue to reflect the increasing attractiveness of our offering, which is making Santander the primary bank of more of our customers. With that goal in mind, we continue executing our strategy with focus and discipline.

This concludes our 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 is 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 first question is on the credit cycle, specifically for the consumer segment. It's been quite robust, I think, for the system in general as well as for you guys, well, especially relative to the commercial portfolio. We've seen employment figures and wage figures look really strong. What are the risks there? Where are we in the cycle? Do you think there that we could see a downturn on the consumer side in the next 12 to 18 months?

And let me just ask my second question, which is on, as you've just mentioned, you're finishing your investment plan that started 3 years ago. Clearly, the market continues, especially on the technology side, to advance at a rapid pace. Do you think that there will be a similar investment plan for the next 3 years? Will it be of similar size? Could it be downsized? Or do you feel that the investment will actually be less 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 [3]

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Thank you, Jason. Look, let me tell you. On the credit cycle, I mean it's quite uncertain, the environment that we have at this point. Given that basically the government in the first half of the year have not spent too much, there's not enough cash in the economy and that's basically generating what we've seen in terms of slow growth in the economy. And some people basically taking a little bit of precautions in terms of taking some loans and/or spending money at this point.

Hopefully, the government basically starts to spend more money in the second half. They understand the situation, and I believe they are basically going to do that. That could ignite the economy and we could get a better second half. But at this point, I think it's going to take time, and probably it's going to move more towards the end of the year, and then we will probably have a much better start into 2020. But at this point, that's why we are basically lowering our growth expectation in terms of loans due to that fact. Okay?

In terms of the investment plan, you're completely right. We are finishing this year with the MXN 750 million. Actually, we spent a little more than the MXN 750 million extra that we were planning to do. But I mean some of the important investments that we did in that investment plan were mainly infrastructure. ATMs, for example. I mean our -- part of ATMs was the older in the system. Right now, we have the newest on the system and we are up to almost 8,500 ATMs already. We have almost 1,000, what we call, full-function ATMs. So in that sense, we're almost to the quota of market, we need to be there. So the huge investments that needed to be done, for example, our regional offices were completely spread out within the cities that we were present. Now we have all our people together in the same buildings. We have refurbished around 450 branches. So at the end, I mean the investment is going to continue to be important but not as large as it used to be because it's just more concentrated on the areas that we need to enhance and on all the digital improvements that we are making.

Also, it's very important to tell you that we're working more together with the rest of the group. In terms of now, not everyone is basically doing their own app, but we are doing -- just doing one app for the whole group -- I mean for the whole Santander group. That basically means that the amount we're spending is going to be a lot less than we used to spend when we -- everyone used to basically develop their own apps and everything. So we are leveraging on the size of the group in order to help us in that type of things. And we are working together in many different platforms in order to basically spend less money and get more returns.

So I think you're going to see -- I mean a good investment over the next 3 years as well but not as huge versus as we have done. And also the bank is much bigger than it used to be. I mean the revenues and everything are much bigger. So I mean, the size of the investments are going to be important. And we cannot -- you rest assured that we cannot basically stop our investment plan off because our competition is also investing a lot of money. So we will continue to do that.

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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 was very helpful -- sorry.

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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 [5]

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Sorry, Jason. This is Didier. Just to add a little bit on your first question. I think that the critical risk is unemployment. We're seeing in certain sectors employment already contracting. That's the case in construction. So we will monitor that. I think that's the most critical variable for consumer, okay?

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Jason Barrett Mollin, Scotiabank Global Banking and Markets, Research Division - MD of LatAm Financial Services [6]

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That's helpful. Any words on just the tender offer, the status, the timing all of this should be completed?

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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 [7]

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Yes, Jason. At least basically, according to what the group perhaps disclosed, they're expecting the tender offer to be launched in mid-August and to be completed by mid-September. I think that they are on track on executing the tender.

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Operator [8]

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The next question is from the line of Alonso Garcia with Crédit Suisse.

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Ricardo Alonso Garcia, Crédit Suisse AG, Research Division - Research Analyst [9]

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My first question is a follow-up on cost of risk. I mean you are not revising guidance despite being currently below the low end. You mentioned unemployment as the main risk. That's on the consumer side. But I wanted to ask if you are also seeing a potential risk for deterioration on your commercial portfolio. I don't know, how are you assessing the situation of your SME portfolio, for example.

And my second question would be in terms of lending. Is this revision to guidance mainly explained on the commercial portfolio? Or are you also seeing lower-than-expected dynamics in the consumer and mortgages portfolio? Also on loan growth guidance, I just want to hear from you how much of this revision has to do with that consideration of profitability, meaning are you observing spreads in the system currently being -- or currently not pricing correctly the risk out there and, hence, you are not willing to grow at those levels? Or it's mainly because of lack of demand currently?

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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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Thank you, Alonso. I mean basically, let me tell you, I mean cost of risk, we started to see some signs of deterioration. Nothing material, nothing significant. In some of our -- I don't know them -- in some of the portfolios, overall in SMEs. So we decided basically to be a little bit more cautious in what we were doing there because we saw that the cost of risk was increasing a little bit. Also, Nafinsa took a little time to come out with a warranties program, and that basically also makes us a little bit more cautious in the way that we were managing the portfolio. For example, just to let you know, for every 100 solicitations we get, we are basically just authorizing around 32% to 35%. So basically, to let you know that we are being more cautious in what we're doing there given the current environment.

On the rest of the portfolio, what we have seen, for example, in the rest of the commercial portfolio, what we have seen is that the spreads have not gone up. We have strong competition from some of the participants. If you take a look at what's been happening on the market, we have some competitors in the middle market segment being very, very aggressive on loans, mainly short -- I mean, medium to long-term loans, which we believe that the price is not risked accordingly. And we are refraining ourselves to participate in those facilities because we don't see the price in that sense. What we are more concentrated on is in short term, where we'd see that there's a good return for our capital, and we are very disciplined in the way we're doing these things, okay?

In the consumer lending side, we are -- you have seen we are basically concentrated in payroll and concentrated in giving new credit cards to our covered clients. We have grown quite a lot in terms of net new clients and we're concentrated on those. We are basically not going to the upper market, not even in credit cards, given the current situation. So we are being, in our opinion, doing the right thing given the right market conditions that we have at this point.

And in profitability, we're not correcting what we have because due to the fact that we believe that our growth in deposits is going to be healthy, we believe that we're going to continue basically to maintaining our profitability in that sense.

And we're also increasing our investment to be much more competitive in some commission-generating businesses such as insurance and some others. Given the, as I said, the amount of new clients that we have, we have some products that we can sell to those clients and we're concentrated on that.

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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 [11]

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Just to add something on your -- the second question, Alonso. I'll make reference to pages 5 and 8 of our presentation. In the third quarter of last year, we experienced very solid growth, both in corporates and in government entities. In that particular quarter, the entire loan portfolio grew by almost MXN 28 billion. You break it down, it's north of MXN 12 billion from government and financial entities and approximately MXN 10 billion from corporates in that single quarter.

If you look at the recent performance in this quarter, corporates grew slightly less than MXN 3 billion and government loans contracted. So the revision that we're doing on loan growth has to do also with the volatility that we have experienced over the last few quarters in particularly corporates and government entities. So we think that since the third quarter of last year, we've seen the level of corporates and government entities either stable in the first case or slightly contracting in the second case. So our revised guidance has to do or take into account this dynamic.

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Operator [12]

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The next question comes from the line of Carlos Gomez-Lopez with HSBC Global.

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Carlos Gomez-Lopez, HSBC, Research Division - Senior Analyst, Latin America Financials [13]

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Two questions. Can you please tell us once more your exposure to PEMEX and CFE as well as their suppliers? And second, how do you see the business of government lending now given that the largest player is possibly letting some market share go?

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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 [14]

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Thank you, Carlos. I mean in terms of our exposure to PEMEX, we have been lowering the exposure that we have to PEMEX in the past few months. In the past few -- actually, I would say couple of years. Right now, we are at the position in which we feel comfortable with the amount of risk that we have outstanding to PEMEX. We have around less than 2% of our portfolio, and our exposure is less than 1% to its suppliers. And then we are maintaining a very good dialogue with them in many ways. Also, we have a lot of transactional businesses with them that are generating good money. So at this point, we are comfortable with the exposure that we have.

In terms of CFE, we have some exposure to Pidiregas that we have a -- in a couple of them, we have a complicated situation and we're negotiating with them. We're able to solve one of the Pidiregas that we have at the beginning of the year with the solution. Now that one is resolved. So hopefully, we're going to be able to resolve the last couple of them over the next few months.

In terms of our total exposure to CFE, I'm not -- it's less than the one we have outstanding to PEMEX, a lot less. And we're not concerned. It's basically short term, nothing long term that worries us in that sense.

In terms of government lending, we continue -- I mean to -- with the policy that we have, we use -- want to lend to where we have business and we believe that we can get transactional business and payrolls. We continue to be very selective about that. Those loans are really long-term and the rates and the spreads are really low, so we'll concentrate on basically managing the business that is good for us in that sense. So we do not want to see us basically increasing the portfolio much more than we have unless we have to defend our positions.

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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 [15]

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And we're gaining market share as a consequence of the system contracted slightly, and that has to do with Banorte reducing its loan portfolio in this particular segment. According to latest information, as of May, Banorte has contracted close to MXN 24 billion in this segment.

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Operator [16]

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(Operator Instructions) The next question is from the line of Ernesto Gabilondo with Bank of America.

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Ernesto María Gabilondo Márquez, BofA Merrill Lynch, Research Division - Associate [17]

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Three from my side. Can you elaborate which are the sectors that you are perceiving lower credit demand? And my second question is related to your tender offer. Can you share with us what have you heard from investors? I believe you are working with a proxy. So if you can give us any color on what could we expect on the borrowing, it will be very helpful. And finally, if you can remind us your net income sensitivity to a potential reduction in interest rates of 100 basis points.

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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 [18]

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Just a -- Ernesto, this is Didier. Just a clarification. Your first question is associated with which segments we're expecting lower credit demand? Is that right?

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Ernesto María Gabilondo Márquez, BofA Merrill Lynch, Research Division - Associate [19]

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Or sectors, or sectors like construction or I don't know, any sector that you're perceiving lower credit demand.

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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 [20]

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Mainly, what the projects we are expecting less demand is basically in big infrastructure. We have not seen large projects coming to the market as we used to see. Energy also is basically lowering a little bit its demand. Those couple of sectors are basically the ones that we see. And in construction, also, we have seen a downturning towards that. What we have not seen is, for example, in mortgages, people are still very dynamic and the growth is quite good over there. Okay?

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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 [21]

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I couldn't hear well your second question, Ernesto.

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Ernesto María Gabilondo Márquez, BofA Merrill Lynch, Research Division - Associate [22]

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The second question is related to the tender offer. I don't know -- any -- what you can share about what you have heard from investors. And I believe that you are working with a proxy. So any color that you can give us on what can we expect on the borrowing will be very 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 [23]

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Yes. On that regard, Ernesto, we can only comment on what the group has disclosed. And we understand that the process is on track. It is expected that the regulatory approvals are on its way and that the group actually held its shareholders' meeting early in the week. The transaction was approved. And then we're expecting the process to be launched in mid-August and then completed by mid-September. That's what we can share with you.

Regarding the net income sensitivity, as you probably recall, this changes depending on the different positions that we take and how we see the different rates associated with, whether increasing or decreasing rates. The latest number that we have is that 100 basis points could impact close to MXN 750 million, MXN 800 million.

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Operator [24]

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If there are no further questions, I'd like to turn the floor back to Mr. Héctor Chavez for any closing comments.

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Héctor Chávez López, Banco Santander (México), S.A., Institución de Banca Múltiple, Grupo Financiero Santander México - MD of IRO [25]

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Thank you. Thank you again for joining Santander México's conference call. As always, we wish you to maintain an open dialogue with you, and an invitation to visit us remains open. If you got further questions, please don't hesitate to call us or e-mail us directly. Have a great day.

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Operator [26]

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