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Edited Transcript of SANMEXB.MX earnings conference call or presentation 28-Apr-17 1:00pm GMT

Thomson Reuters StreetEvents

Q1 2017 Grupo Financiero Santander Mexico SAB de CV Earnings Call

Oct 18, 2017 (Thomson StreetEvents) -- Edited Transcript of Grupo Financiero Santander Mexico SAB de CV earnings conference call or presentation Friday, April 28, 2017 at 1:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Hector Chavez

Grupo Financiero Santander Mexico, SAB de CV - Head, IR

* Hector Grisi

Grupo Financiero Santander Mexico, SAB de CV - Executive Chairman & CEO

* Didier Mena

Grupo Financiero Santander Mexico, SAB de CV - CFO

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Conference Call Participants

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* Mario Pierry

BofA Merrill Lynch - Analyst

* Tito Labarta

Deutsche Bank - Analyst

* Philip Finch

UBS - Analyst

* Carlos Macedo

Goldman Sachs - Analyst

* Carlos Gomez

HSBC - Analyst

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Presentation

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Operator [1]

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Good day, everyone. Welcome to the Grupo Financiero Santander Mexico first-quarter 2017 earnings conference call. Today's call is being recorded and after the speakers' remarks, there will be a question-and-answer session.

For opening remarks and introductions, I would like to turn the call over to Mr. Hector Chavez, Managing Director, Head of Investor Relations. Please go ahead, sir.

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Hector Chavez, Grupo Financiero Santander Mexico, SAB de CV - Head, IR [2]

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Thank you. Good morning and welcome to our first-quarter 2017 earnings conference call. Appreciate everyone's participation. By now everyone should have access to our earnings release and the Company's presentation, which were released this money before the market opens.

Speaking during this call will be Hector Grisi, Executive Chairman 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 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 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 (technical difficulty).

Now let me turn the call to Hector Grisi. Hector, please go ahead.

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Hector Grisi, Grupo Financiero Santander Mexico, SAB de CV - Executive Chairman & CEO [3]

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Thank you, Hector. Good morning, everyone. We are pleased to report that our first-quarter 2017 results which demonstrate our success in delivering strong profitability despite growing uncertainty in the (inaudible), mainly in Mexico.

We are focused on treating the customer (inaudible) as we have said since about a year ago. Our commitment to becoming more productive means prioritizing innovation, investment, and scaling operating efficiencies. While our focus on profitability in stiff competition has affected volumes, we are proud to have (inaudible) quality and our profitability across the board.

Moving then to Mexico banking systems on the next slide, total system loan growth as in February, the most recently available public data from the CNBV, slowed slightly to around 12% year on year due to high interest rates and other expectations of economic growth. Consumer loan growth was relatively stable at 12%, while [system] deposits grew 15% year on year.

Competition, as 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.

Economic activity in the quarter was healthier than anticipated, supported by the Brazilian domestic consumption and subdued volatility in financial markets. For example, car sales grew in the high teens, while healthy growth in the form of jobs and retail sales continued, along with slightly improving consumer confidence. But still, given uncertainty regarding US policy and [inflation at both] Banco de Mexico 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 both -- focus on profitability. Individually it means our middle-market loans (inaudible) by solid performance consistent with (inaudible) as we continue to see a contraction in corporate and government loan growth as we are not willing to sacrifice returns for revenue growth. As a result, it shows corporate and government loans of overall total loans at 24% this quarter, down from 27% in 2015.

Individual loans were up 6% year on year and we see (inaudible) in consumer demand we are experiencing stiff competition in this market, particularly in mortgages. Mortgage loan growth continue to accelerate 4% year on year in 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 [varied] interest rate based on the customer profile. Credit card loans increased 6% year on year and (inaudible) sequential decline tied to seasonality. While the credit card usage increased 19% year on year, this is not fully reflected in the 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 to the bank. This card represents 12% of our overall total card portfolio.

Consumer loans expanded 9% year on year and were relatively stable quarter on quarter. Federal loans were 10% in the year as the Santander Plus program continues to gain traction, reaching up to 1.5 million customers activated today of which 51% of those are new clients. We are also leveraging our strong franchise in the middle-market to attract new payroll accounts contributing to loan growth in these sectors.

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 sized SMEs, maintaining our risk-return focus.

This quarter we launched a dedicated [CRN] platform and an online onboarding 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 governments segments showed a decrease of around 9%. This mix performance reflects our discipline in margins and the inherent volatility in these segments.

Moving to funding. Robust deposit growth continues, up 15% year on year quarterly increasing its contribution to fund our business. Our initiative focused on offering (inaudible) and client-centric approach for individuals and SMEs are driving deposit growth. In fact, individual deposits posted the fastest growth of 29% year on year. Demand deposits The non-deposit standard in the mid-teens while market volatility and high interest rates fueled demand for low-risk instruments relative to mutual funds, contributing to the 16% rise in time deposits.

We demonstrated our ability to achieve consistent, profitable growth in a challenging environment. Our strategic initiatives and an increasing loyal and attract new clients have enabled us to increase the number of net new customers by over 120% since May 2016. 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 of global corporate banking to overall results illustrates the success of our strategy in prioritizing profitability over [use], improve execution by our financial market teams, and sharper focus on fee business and today our bank is better positioned towards profitability while maintaining market share and we look to the future with confidence. As always, we are committed to ensuring sustainable returns for stakeholders as a reflection of our excellent customer service, strong value proposition, and disciplined execution.

Now let me turn the call to Didier, who will go over our capital position and P&L. And 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 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 of Santander Mexico. He played an integral role in positioning Santander Mexico 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. While many of you may have met him already, this is his first time presenting our results. Please be kind to him.

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Didier Mena, Grupo Financiero Santander Mexico, SAB de CV - CFO [4]

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Thanks, Hector. Good morning, everybody. I'm pleased to have met most of you already and I want to confirm my deep commitment to maintaining (inaudible) the market. Above all, I'm very proud to be part of a team that will make Santander Mexico's market leader in profitability and sustainable growth.

Now please turn to slide 10. We maintain 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 184.76%, well above the regulatory requirements. This month the CNBV renewed Santander's designation as systemic financial entity, which implies a 120 basis points buffer to be baked in over four years which we already comply with. In addition, our capital efficient 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 on to the income statement on slide 11. Net interest income remained robust, up 15% year on year and 4% sequentially. Results for the first quarter show the benefit from interest rate hikes 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.

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 highest share of fees, reflecting the highest 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 Aeromexico 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 a 19% increase to earned fees.

Insurance fees fell 2%, reflecting soft market-related insurance back to the slowdown in mortgage volumes, offsetting the good performance in our life and car insurance products.

We are also seeing a gradual improvement in SME's demand for credit-related insurance. Coming up, gross operating income was up 15% on the back of strong net interest income growth, a pickup in net fees, and market-related income of an MXN1 billion, significantly above our estimated quarterly average of MXN600 million to MXN800 million.

Results also reflect our focus on asset quality. We continue to bring down our nonperforming loans ratio, reaching 2.38% in the quarter, achieving a 59 basis points 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 (inaudible) portfolio. Commercial loans, non-performing loans fell 62 basis points year on year as year-ago quarter was still impacted by pass-through loans from home builders that were reaching down in the second quarter of 2016. 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 point 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 deposits and other funding sources. Excluding IPAB, operating costs rose 7.5%, mainly reflecting higher professional fees, advertising, and depreciation and amortization, among others, related to our strategic plans.

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 MXN4.5 billion, with our return on equity up 380 basis points, reaching 16.1%. Our strong bottom-line performance underscores the resilience of Santander Mexico business against a volatile global backdrop as we execute our strategic initiatives and focus on risk-weighted assets, returns, and efficiencies.

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 are committed to implementing our strategic plan to position Santander as the true client-centric bank with a strong focus on profitability and look forward to sharing our progress on these goals in coming quarters.

We are now ready to take questions. Operator, please go ahead.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Mario Pierry, Bank of America Merrill Lynch.

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Mario Pierry, BofA Merrill Lynch - Analyst [2]

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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 Mexico 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 reprice 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 environments, higher inflation environments that we are seeing in Mexico?

Then 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 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.

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Didier Mena, Grupo Financiero Santander Mexico, SAB de CV - CFO [3]

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Good morning, Mario; nice talking to you. Regarding the 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 margin throughout the year.

If you look at weighted average, by the time that the interest rate -- net interest or interest rates increase, during the last quarter, the first 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 will show less impact or less increase. Particularly in the last quarter of this year, we are going to see what we expect probably something around 160 to 180 basis points increase. 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 said, we already saw -- what we can see are the most relevant impact of interest rate hikes in our net interest margin. We think that there's potential upside if we continue to change the mix of our loan portfolio. As we showed in the presentation, we are gaining share in this market and SMEs, which have a higher margin than mortgages and corporate loans, so if we continue doing that I think that there's a potential that the net interest margin could expand a little bit more than what we indicated during our fourth-quarter call.

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Hector Grisi, Grupo Financiero Santander Mexico, SAB de CV - Executive Chairman & CEO [4]

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Thank you, Mario; it's Hector Grisi. To your second and third question, let me go around quite quick to them. First of all, in terms of asset quality and if we see any problems in the future, let me tell you that we are very cautious, as you have seen in the (inaudible), that we had in our growth mainly in the consumer loans because we foresaw that the market will complicate.

The reality has been that it has not been the case and the cost of credit has not increased, so we are quite impressed about the performance in the portfolio overall. And we don't foresee that the situation could complicate if rates only grow 50 basis points more in the rest of the year. If you have seen the numbers in consumption and you have seen the numbers in terms of growth in employment in Mexico and everything, the situation seems under control so we don't foresee that at this point. And that's what we are basically testing 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.

Moving to the provisions. Yes, we have two particular situations that we had already in the portfolio. These are not new loans; these have basically come from the back. They were already budgeted and, unfortunately, the companies have not performed as we expected and we are basically -- have to do these provisions and maybe will have to do some more provisions about those couple of situations. Loans (inaudible) into situations in the construction/energy sectors and it may be continued to be the case and we'll see in the continuing quarters.

But it's basically not -- what is important to tell you, it's not because of the effects of the situations that have happened (inaudible) in the markets. These are all situations.

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Mario Pierry, BofA Merrill Lynch - Analyst [5]

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Okay. Any idea how much provisions you have to build or you have to take this quarter specific to these two clients?

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Hector Grisi, Grupo Financiero Santander Mexico, SAB de CV - Executive Chairman & CEO [6]

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It will depend on the negotiations. We have examined how the -- the evolution that they could have. That could increase basically our cost of goods guidance during -- it's going to continue to turn 3.3 or 3.5. It's (inaudible) affected.

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Mario Pierry, BofA Merrill Lynch - Analyst [7]

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Okay, perfect. Thank you.

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Operator [8]

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Tito Labarta, Deutsche Bank.

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Tito Labarta, Deutsche Bank - Analyst [9]

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Good morning. 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. I just want to understand how that's going to impact loan growth this year and next. I know you are 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 are maintaining your guidance for the year, although just looking at the strong first quarter you had, you would be running around 15% earnings growth. So just want to understand -- I understand the uncertainty in Mexico, 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%?

And also trading gains were a bit high around MXN1 billion. Is that going to come down the next few quarters? I just want to understand how you reach the net income guidance that you've given, given the strong quarter you had. Thank you.

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Hector Grisi, Grupo Financiero Santander Mexico, SAB de CV - Executive Chairman & CEO [10]

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Let me tell you about the loan growth in the portfolio, we are basically going to be -- I wouldn't like to say basically this is going to be an overall strategy in the portfolio. I think you have to be, in these particular type of markets, very concentrated in different segments and make decisions in each segment first of all.

Second, what we have done is we have -- instead of basically putting pricing 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.

And as we told you, we always basically focus on profitability as our most important thing, and also there's some particular areas as we discussed in the presentation, for example, mortgages, that we need to protect our market share. So we may be take some decisions and we basically give (inaudible) to our existing clients in some particular situations, but this is going to be looked at segment by segment. I wouldn't speak overall of the portfolio.

Okay. In terms of the tax rate, I leave that to Didier to tell you, but before Didier talking about that let me tell you about -- in terms of trading and everything, 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. So we were fortunate on that. I think there is still a level 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. So I would say that we are going to try to be very consistent in terms of the returns we give on trading and we're going to try to be very cautious on the way we manage them.

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Didier Mena, Grupo Financiero Santander Mexico, SAB de CV - CFO [11]

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Regarding the tax rate, as you probably know, Tito, there is an inflationary accounting still in Mexico associated with taxes. With a higher inflation we benefit from that, so that's why we are seeing a lower base in this tax rate than the ones that we were indicating.

I would say that we remain cautious with uncertainty, specific uncertainties. We also -- these comments by President Trump affecting a potential renegotiation or walking away from NAFTA. So those are the types of uncertainties that still we remain cautious about the potential impact that this could have in the environment, in the business environment in Mexico.

If the performance in our second quarter is a strong is the one that we had in first quarter, we will definitely review our guidance in our next call.

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Tito Labarta, Deutsche Bank - Analyst [12]

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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 at your GDP growth guidance for 2018, where you have 1.6 further deceleration from this year. And I understand there's a lot of uncertainty, but I just want to understand what you are kind of thinking about to get there.

Is it because of the presidential elections in Mexico next year? Continued uncertainty because of that? I just want to understand maybe what you are seeing on the macro level that is contributing to ongoing slow growth; not just this year, but also next year.

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Hector Grisi, Grupo Financiero Santander Mexico, SAB de CV - Executive Chairman & CEO [13]

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Let me go through to our numbers. As you mentioned, we haven't changed our numbers for 2017. Today we've got the number for, the preliminary numbers for the first quarter is just above expectations, (inaudible) year-over-year growth rate at the end of this quarter. However, we think that, as Didier mentioned earlier in the call, uncertainties relating to the US and the NAFTA negotiations were also the fact that in the second half of this year we see that Mexico will start to see a lot of uncertainties regarding the electoral process from 2018.

We don't believe that this will have an effect on investment basically and that's why we have right now, of course, a position in 2018 slightly below consensus, but basically that's it. It's because we don't think uncertainties from the second half of 2017 until the second half of 2018 could affect investments, delay investments. And this could have an impact on the GDP growth for 2018.

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Tito Labarta, Deutsche Bank - Analyst [14]

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Okay, thank you very much.

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Operator [15]

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Philip Finch, UBS.

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Philip Finch, UBS - Analyst [16]

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Good morning, Hector, Didier; thanks for the presentations. I've got a couple questions as well.

First is regarding the capital position where we saw a decent improvement in the quarter following -- obviously you did a 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 changes in risk weightings at all or was it just retained earnings?

And, secondly, 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 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 are already going to see the costs rising sort of backloaded towards the end of the year where we really see costs spiraling upwards? Thank you very much.

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Didier Mena, Grupo Financiero Santander Mexico, SAB de CV - CFO [17]

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Good morning, Philip. Regarding your question on capital position, you know the main driver for doing the 81 transactions that we undertook at the end of last year was to take a passage of regulatory schemes in Mexico, which provides the capacity to issue these types of instruments. And I would say that those banks that are listed (inaudible), otherwise that take the most advantage of these regulations.

So what's basically changing, rather than having core tier capital, we base that by 81 and this is the -- the amount was $500 million. That issuance represents 1.5% of our capital ratio. We think that this (inaudible) our Tier 1 ratio remaining close to 12%.

And the question regarding risk-weighted assets is given the fact that our loan portfolio is growing only at 8%, you know risk-weighted assets have not increased that substantially.

Regarding cost, you know we have this MXN15.3 billion investment program for the next three years and we have put in place the committee that oversees the 16 projects, so key projects associated with this investment plan. So every single week we're looking at the performance of these projects. We are being very strict in terms of the expenses (technical difficulty) in these projects.

So I will say that it has been probably a slow start in the execution of these projects. We think that as the year goes by we are going to see an increase (technical difficulty) lines to -- with the guidance provided during last quarter.

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Philip Finch, UBS - Analyst [18]

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Thank you very much. Just a follow-up, given it's a three-year program at MXN15 billion over the three-year 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?

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Didier Mena, Grupo Financiero Santander Mexico, SAB de CV - CFO [19]

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Yes, Philip, we think that is going to be around those numbers.

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Philip Finch, UBS - Analyst [20]

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Okay, thank you very much.

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Operator [21]

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Carlos Macedo, Goldman Sachs.

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Carlos Macedo, Goldman Sachs - Analyst [22]

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Thanks. Good morning, gentlemen. I just really have one question: loan growth, going back to that if you could.

You guys 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, 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 don't really matter too much and do you think that you are going to be able -- there will be demand at the prices that you would be willing to offer, presumably at higher nominal rates to the clients?

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Hector Grisi, Grupo Financiero Santander Mexico, SAB de CV - Executive Chairman & CEO [23]

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Thank you, Carlos. What we have seen basically is that demand has not slowed given the increased rates. Even though the rate has increased significantly in terms of where it came from, we historically have very low rates in Mexico in different scenarios.

So what we have seen and what we have seen mainly for (inaudible) consumables and everything is that people basically have continued to demand a set of loans and the competition has been very hard. And if you try to move the wage upwards a little bit it's complicated and people get offering for 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 then 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 taking down their guidances 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 you are aware, much more keen on paying down their balances. And then when the situation basically came to a little bit more normal or volatile, then people basically starting to basically spend again.

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Carlos Macedo, Goldman Sachs - Analyst [24]

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Okay, thanks. So maybe the opposite side. If you say that the competition is a strong as you mentioned, is there a chance that, as with the rates going up and you are not being able to pass them through, that there is some pressure on spreads that you're [here to build a charge] in consumer loans or would that be a step too far?

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Hector Grisi, Grupo Financiero Santander Mexico, SAB de CV - Executive Chairman & CEO [25]

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No, no, that could be the case. To answer your question, look at what happened in mortgages. Mortgages, basically, we were a little bit more aggressive in terms of increasing the rates and then the competition basically decided to absorb the increases in rates and loop it up into the market. Now you have some of our competitors running a little bit more than us.

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Carlos Macedo, Goldman Sachs - Analyst [26]

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Okay, so would that -- would that be a risk for the margin expansion, or is that just something that might cap the peak of the margin expansion?

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Hector Grisi, Grupo Financiero Santander Mexico, SAB de CV - Executive Chairman & CEO [27]

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It could be a risk. That's why basically we are beefing up our rates to increase our deposits and to increase our money base in order to help us in the cost of funding. And that is where we are basically being very similar. (inaudible) is basically one of the main drivers of that.

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Didier Mena, Grupo Financiero Santander Mexico, SAB de CV - CFO [28]

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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, to the entire relationships that we have with a client. So if, for some reason, interest rates become tighter in let's say mortgage loans, then the relationships that we have with those clients we might enhance profitability by attracting the payrolls, the deposits, or than the cross-selling them a credit card. So it's looking at a more comprehensive relationship with the client.

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Carlos Macedo, Goldman Sachs - Analyst [29]

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Perfect. Just one follow-up question then just to try to understand the amount of competitiveness you are seeing in the asset side. Have you seen equal competitiveness in the liability side or is that still more incipient?

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Hector Grisi, Grupo Financiero Santander Mexico, SAB de CV - Executive Chairman & CEO [30]

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No, it's more incipient. It's more incipient -- I mean we have (inaudible) Santander Plus type of situation. I think that there are some basically different composition basically in the time deposits. That's basically where the competition is, but not on a rate to rate. (multiple speakers) You will have seen a little bit from the competition on that.

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Carlos Macedo, Goldman Sachs - Analyst [31]

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Okay, perfect. Thank you so much.

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Operator [32]

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(Operator Instructions) Carlos Gomez, HSBC.

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Carlos Gomez, HSBC - Analyst [33]

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I have two questions. First, you mentioned that you are a bit more optimistic and you might accelerate growth a little bit. Where in particular? Would you be more aggressive in mortgages? Could you be more aggressive in credit cards? Where are you think that you can afford to be more optimistic now than, let's say, three months ago?

Second, your capital optimization exercise happened last year. You mentioned that you want to have a 12% Tier 1 capital. Is there room for further issuance of continued convertible bonds or any other capital optimization measures or you are done for a while?

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Hector Grisi, Grupo Financiero Santander Mexico, SAB de CV - Executive Chairman & CEO [34]

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Thank you, Carlos. In terms of where we are going to be, competing with mortgages, as you have said, that's a priority for us. We would like to maintain our basically market participation in that segment and we are going to be also protecting our market participation in some of the other products, depending on profitability mainly. We are not going to basically go out chase the market without taking into account profitability.

Most of these is key (inaudible) because of -- and this is going to be a more important product in terms of (inaudible) clients. That's where we are going to concentrate ourselves on and that's what we are going to be focused on in terms of mortgages.

The different terms I believe -- I mean in credit cards we are exactly where we want to be. I think we have strong growth, nice growth in a market that basically we believe we are doing the right things. We are -- as you know, we are launching a little bit of pilots in different sectors of the economy that we haven't been before and we are going to be explaining that and we're going to tell you about that the next quarter and all the results of the pilots.

And in the other sectors that we basically are continuing to basically to perform well is SME; that is key for us and is basically being, in my opinion, one of the best-performing segments of our portfolio. Not just on the loan side, but also on the transactionality and also on the deposit side, on the liability side. And we are going to continue to do the same thing in middle markets and (inaudible) generating a little bit more piece out of our investment banking business that is performing much better and very well.

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Didier Mena, Grupo Financiero Santander Mexico, SAB de CV - CFO [35]

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Regarding 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 at right now to make any further issuances, but 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 81 security and we almost issued the full amount of capacity that the Mexican regulations allow.

So I would say through the next probably couple of years we see limited 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.

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Carlos Gomez, HSBC - Analyst [36]

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And to go to the other side, you are sticking to your 50% payout ratio?

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Didier Mena, Grupo Financiero Santander Mexico, SAB de CV - CFO [37]

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I couldn't hear. (multiple speakers) Yes, yes, absolutely. Yes. It's not written, written policy, but we have paid out since we were listed at 50% of our net income.

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Carlos Gomez, HSBC - Analyst [38]

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Thank you very much.

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Operator [39]

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(Operator Instructions) There are no further questions. That does conclude our question-and-answer session. At this time I will now turn it back to Mr. Hector Chavez for closing comments.

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Hector Chavez, Grupo Financiero Santander Mexico, SAB de CV - Head, IR [40]

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Thank you very much for joining Santander Mexico on this call. I look forward to maintaining an open dialogue with you and you are welcome to visit us in Mexico. If you have any further questions, please don't hesitate to call or email us. Have a good day.

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Operator [41]

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