Banco Santander México, S.A., Institución de Banca Múltiple, Grupo Financiero Santander México
Q2 2018 Earnings Call Transcript

Published: 28 Jul 2018

[Operator:]

Good day, everyone, and welcome to the Banco Santander Mexico’s Second Quarter 2018 Earnings Conference Call. Today's call is being recorded. And after the speakers’ remarks, there will be a question-and-answer session. For remarks and introductions, I'd like to turn the call over to Mr. Héctor Chávez, Managing Director, Head of Investor Relations. Please go ahead, sir.

[Héctor Chávez:]

Thank you. Good morning, and welcome to our second quarter 2018 conference call. We appreciate everyone's participation. By now, everyone should have access to our earnings release and the company's presentations, which were released yesterday after market closed. Speaking during today's call will be

[Hector Grisi:]

Thank you, Héctor. Good morning everyone and good afternoon for those of you in Europe. Thank you for being on the call with us this morning. Banco Santander Mexico delivered our robust performance across the board this quarter, a big drop in loans and deposits along with higher gross operating income and strong asset quality. We are particularly pleased with the accelerated growth we are achieving on higher margin loan segments and individual demand deposits, while cost of risk has declined consistently for the past three consecutive quarters keeping healthy asset quality level. We are accelerating the pace of our operational, transformational and digitalization strategy while the implementation and cost of these transformation initiatives are impacting our near-term efficiency. Our strategic focus on this allows us to bring higher profitability this quarter is primarily north of 16.5% for the first half of the year. Turning to Slide 4, financial system loan and deposit growth accelerated in the quarter to slightly over 11% during the year as of May mainly driven by commercial loans, which were up over 17%. By contrast consumer growth continues to decelerate gradually from 8.1% during the year as of May. This lowest growth rate over the past two years probably impacted by the high interest rate environment coupled with a macro and political uncertainties. We also saw a pickup in industry demand deposits up about 11.4% during the year. Mexico’s economy continues to grow at steady pace with an employment [indiscernible]. Political uncertainty over Mexico election has eased. And in common President, López Obrador, has been well received by investors and the business community while the uncertainty around market it was brand negotiations. It’s contributing to overall volatility, the new environment is perceived to be market friendly and the country’s positive economic outlook is likely to continue in early 2019. Now let’s move on to our performance our on slide number 5. We expanded our loan book by almost 11% during the year with growth picking up from 8% reported in the first quarter and 4.5% in 2017. High margin loan growth continues to accelerate outpacing the last two quarters to almost 11%. This was mainly driven by middle market and SMEs, which along with credit cards and consumer loans amounted to 55% of the loan portfolio and that grows to 70% of net interest income for the quarter. Lower margin loans were up 10% mainly driven by improved performance in mortgages along with selected growth in corporates and government loans. Turning to slide number 6 on the consumer front payroll loans expanded by 13% during the year outpacing the market by three times as we continue to make progress on our strategy of leveraging our strong position in the corporate and middle market to attract new payroll accounts. This has allows us to increase our share in the payroll loan market by almost 100 basis points over the past 12 months. By contrast personal loan growth has accelerated as we have strengthened our focus on building our payroll franchise. Santander Plus continues to perform volume with a number of registered customers reaching 3.8 million as of June of which 54% are new clients to the bank. Mortgage loans continue to accelerate revenue, up 6% year-on-year from 4% in the previous quarter and 1% in the fourth quarter of 2017. Organic growth excluding the effect of the runoff of acquired portfolios reached over 8% year-on-year. While we are moving ahead in closing the gap with the market, which grew almost 9% this quarter. We expect the runoff to continue impacting mortgage loan growth for the remainder of the year. In April, we launched Hipoteca Plus our new mortgage product which rewards new loyal customers with the leverage rate in the market, 8.59%. Hipoteca Plus is a good example of our new client-centric strategy, where we seek profitable customer relationships and not standalone profitability in every product. This market offers a low rate to customers that bring Santander for a whole market relationship and has proven to be very popular with them. While credit card usage remained strong at 15% year-over-year, this is not fully reflected in loan growth which remains steady at almost 66% year-over-year. As customers continue to pay off their balance [ph] is seen full during the quarter. In addition, we are adjusting our credit card portfolio rebalancing the mixed over to a more profitable product offering. Let’s move to Slide 7. We are making progress on our strategy of transforming our operational model to improve the customer experience and become our client’s primary bank. We continue attracting new clients, driving loyalty and digitalizing our retail customer base. Among the key initiatives, launched this quarter let me highlight the following. The full digital money for new payable accounts, which allows to reduce by certain time it takes to open your account. We also introduced new functionalities to our [indiscernible] and super valid mobile apps, including favorable portability, credit card activation, real time tracking of transactions, subscription to Santander close and credit card claims. And we launched a new digital SME account on the 55 legal firm book recently established by the Ministry of Economy that makes it easier and faster for smaller companies to open bank accounts. Our focus on cost of retention allows to grow loyal clients by 20%, to 2.2 million in the last 12 months only. While digital and mobile customers increased by 32% and 53% respectively, as we continue to stand our offerings. We are very encouraged by the strong growth in mobile monetary transactions, which were up almost 80% year-over-year, accounting for 65% of the e-pay monetary transactions up from 51% a year ago. As you can see from Slide Number 8, commercial loans increased by close to 14% year-over-year. We continue to consistently stand our core segments with growth accelerating to 15% in the middle-market loans, almost 11% in SMEs. Government and financial institutions loans were over 15% year-over-year and 10% sequentially. Growth benefited from an initial comps in both periods when we experienced repayments of a handful of large loans. Corporate loans rose around 13% year-over-year also in the back of initial comps along with our capacity to attract profitable transactions. Sequentially, corporate loans fell 4.2% following the robust growth experienced in the first quarter in 2018 with volatile segment along with our strong focus on profitability. Looking up the full year, we remain partially optimistic and maintain our guidance of expanding loan growth between 7% and 9%. This year, as we continue to focus on profitable growth in the strong competitive environment, particularly in the mobile as well as corporate loan segment. Turning to Slide Number 9, deposits term [indiscernible] performance, up 13% year-on-year and 5% sequentially, expanding both market growth. SMEs were the main contributors to demand deposit growth of 25% year-over-year, while individual deposits grew steadily at 18%. Our strategy of attracting deposits through our successful Santander Plus program, along with our client-centric approach and digitalization initiatives to expand favorable accounts continues to reveal good results. In fact, the expansion in individual deposits both term and demand is outpacing royalty and corporate deposits which is critical to our strategy of increasing support to rebuild clients. Demand deposits were up close to 10%. The high interest rate environment continues to support growth in term deposits which stand at 21% year-over-year, at a 9-week we expect will continue through the remainder of the year. For the full year, we’ll keep on targeted standard deposit featuring 9% to 11%. Looking ahead the positive overall economic environment stand micro dynamics, promising customer – consumer trends and a lower short-term uncertainty lets us to take a more constructive view. In this context, we can continue to secure our production and transformation in more than nine environment. We are committed to redevelopment of our business in Mexico, almost one of the leading bank in the Mexican financial system we’re well-positioned to significantly stand our recent customer base by continue to leverage our strong position in SMEs, middle market, corporate business banking. We are solely focused on attracting new customers and reducing attrition with the role of become a more customer-centric organization and a market leader in profitability, as well. Working towards this goal we’re enhancing the customer experience, developing a culture of quality approach organization and implementing digitalization initiatives while improving our infrastructure and process. I look forward to share additional update to review as we continue to make headway in some of the big initiatives. Let me turn the call to Didier Mena who will now go over the capital position, P&L and items. Afterwards we’ll be answer to your questions. Thank you very much.

[Didier Mena:]

Thanks Hector. Good morning everybody. Please turn to Slide 10. Our funding position remains strong with net loans to deposits close to 91%. And equity coverage ratio returns to that 167% well above regulatory requirements. Our capitalization ratio declined 19 basis points sequentially to 15.5%, mainly reflecting the $4.3 billion cash of dividend payment in June. Our Q1 capital stood at 12.1% and our core Tier 1 at 10.8%. We also maintain a healthy debt profile, with no major maturities until 2022. Actually only close to 25% of our debt matures over the next three and a half years. Now turning to the P&L on Slide 11, net interest income increased 9.5% year-on-year, supported by interest rates which were about 90 basis points higher than the year ago quarter and a better loan mix. The loan portfolio contributed to this improvement, with a 13% year-on-year increase in interest income, more than compensating for the higher interest rates on term deposits. Net interest margin stood at 5.27%, relatively stable year-on-year, but are decline to 25 basis points on the quarter. Expenses associated with the term deposits along with funding of investment strategies by our Treasury, specifically in FX, more than offset increased in interest income from higher interest rates and growth of higher margin loans. Year-to-date, our net interest margin increased 11 basis points reaching 5.39%, while we saw most of the impact from the rising interest rate in 2017, we still expect a positive effect from this increase, during the second half of the year. As you can see on Slide 12, net fee growth accelerate to almost 5% sequentially and was almost 7% year-on-year, insurance was the main contributor to fee growth, reflecting a combination of commercial and operational initiatives to support fee generation to our insurance products. Cash management also performed well, as we maintain our focus on driving transactional activity followed by investment banking which continued to post steady growth. Financial advisory fees in turn reached the strongest level over the last 18 months. Credit card fee growth was good for the quarter mainly due to the currency depreciation effects of the U.S. dollar fee based to Master Card and Visa. Moving on to Slide 13, our operating income increased 8% year-on-year and 6% sequentially. This strong performance was mainly driven by solid growth in core earnings, which accounted for 95% of gross operating income. It was further supported by a significant pickup in operating income which gained in at MXN1 billion above our historical average of MXN600 million to MXN800 million. Now please turn to Slide 13, asset quality remains strong, as we continue to deliver consistent improvement in loan loss reserves and cost of risks. Loan loss reserves were down 11% year-on-year and 6% sequentially, despite the ongoing shift to higher margin segments, benefiting from the cleanup of legacy precisions including consumers, mortgages and some corporate loans last year. In closing of some extended channels for credit card placement last quarter, also contributed to this improvement. Cost of risks in turn improved 61 basis points year-on-year declining to 2.94% in the quarter. And 3.03% for the first half of the year, the NPL ratio increased 17 basis points year-on-year, mainly deterioration in mortgage loans which faced more difficult comps by the year ago quarter benefited from some lower NPLs from the sales of portfolio and a partial deterioration of our floating rate mortgage. Sequentially consumer NPLs posted 20 basis points strong seasonal increase while total NPLs remains relatively stable at 2.46%. In this context, we are lowering our cost of risks guidance for the full year of 2018 by 20 basis points to 3.2% to 3.4%. These new target assumes the possibility of currency to make some additional provisions for a specific corporate loan and we are monitoring closely and a shift in mix as we continue to grow our exposure to consumer loans. Moving onto the P&L on Slide 15, expenses were up 8% sequentially and over 30% year-on-year as we continue to secure our investment plan, in the near-term these impacting efficiency which increased up to 43.5% in the quarter, operational expenses were 60% year-on-year, as we have been expanding the teams dedicated to our branch network, to attract new clients across the business. For the full year, we maintain our guidance of cost increasing by 12% to 14% year-on-year. Turning to Slide 16, a good performance before the prior close to business translation to robust net income growth up over 9% sequentially and 12% compared to the same quarter of last year. Similarly, return on equity for the quarter increased 146 basis points sequentially to 17.3% also benefitting from the MXN4.3 billion cash dividend paid last June. This was achieved despite an increase in effective tax rate of 24.4% this quarter, from 21.7% a year ago. For the six months of the year, a return on equity stood at 16.58%. Moving on to guidance from the Slide 17, we delivered strong quarter with solid execution and build an anticipated performance. While we maintain our loan and deposit targets as well as our expectation for expenses based on the improvement in asset quality to-date. We are lowering our cost of risk to target, in light of these improvements, our constructive deal for more positive economic environment ahead, our solid quarter earnings growth expectations were inclusion of our net income guidance for 2018 to 6% to 8% range from our regional target of 4% to 6%. We’re now ready to take questions. Operator, please go ahead.

[Operator:]

Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] Our first question comes from the line of Jason Mollin with Scotiabank. Please proceed with your question.

[JasonMollin:]

Thank you. My question is related to profitability. We saw very solid 17% for you guys first time in a while for the quarter. And as shown by your changing guidance I think part of the upside, at least from my perspective, came from the lower cost of risk, which in my view I think is a reasonable, I mean, I'm glad you’re seeing those trends. Is this now and clearly you had now the first half and we have to look for the second half, we can figure out what you’re looking for there. But going forward, is this kind of cost of risk that you’re experiencing now more reflective of the expected loss that we could see in 2019 and therefore this could be a big boost to your maintenance going forward? Thank you.

[Hector Grisi:]

Hi, how are you? Nice talking to you. I think that the way we see it is that for many quarters from several years, we’ve got some negative corporate loans impacting our cost of risk, and we think that that’s coming to an end. As we mentioned, we’re providing guidance for the full year that it’s slightly above the numbers that we are achieving year-to-date and that's because we remain cautious on our potential declaration of our corporate loan that are monetary. But we think that we should be seeing leads and leads of those issues going forward. So I would say that the recurring, the cost of rate coming from, let’s say, the individual loan segment should start to be relatively stable. So I think that the levels that we're experiencing right now, we think that it should be sustainable.

[JasonMollin:]

That's great. And maybe just a follow up on the growth in clients, clearly that's a strategic focus to improve the loyal customer base. And that number is looking pretty solid – on your basis according to the presentation on Page 7, 20% increased in loyal customers year-on-year. Is this – what's driving this increase? How can you help us understand if this can continue? Is there – because it seems like these are not new clients in the system, it seems like you're gathering the majority of these clients from competitors. So how high can you go from this 2.2 million loyal customers? Thanks.

[Hector Grisi:]

We are very pleased with the pace that we are attracting and also retaining clients, Jason. I think that the most relevant factor that explains both attraction and retention is our royalty program, that’s what different. We are compensating our clients for their business and this segment we need in the Mexican banking system. Also I would say that all the efforts that we're making in terms of simplifying processes; digitalization is starting to give positive results. Particularly a condition for client to receive benefits in the Santander Plus program is to enroll in digital challenge. So these clients are enrolling in the Santander Plus program, they’re born digitals. So we think that still the Mexico banking sector is at an early stage in terms of the digitalization penetration. And that's where we are moving, we're trying to move relatively fast in decent pace because we consider that the banks that are able to be the first one to offer a complete digital offering for their clients, they're going to keep their royalty. Once you get used to a particular app or digital service from a bank, many become more difficult to switch and we’re experiencing that. In terms of how far we can go, I think that there’s still a significant room both in our client base to turn them into loyal clients. And also from attracting clients since we launch Santander close and our Mexico co-branded car. We have been able to attract 2.5 million clients, new clients. And that’s been in real mean to more than two years. So that’s very encouraging news to us. If you look at how the loyalty behavior of client in different buckets of times that they have been with us, in every single bucket, we’re seeing that that loyalty penetration is increasing. So we’re also pleased with that as well.

[JasonMollin:]

Very helpful. Thank you.

[Operator:]

Our next question comes from the line of Philip Finch with UBS. Please proceed with your question.

[Philip Finch:]

Thank you very much. Thank you, Hector, and congratulations on your 2Q results. My questions specifically is regarding your solid loan growth performance of 10, 10 plus in the second quarter. And yes, I see that your revised 2018 target is following growth of only 7% to 9%. So I just want to ask why are you looking for a slowdown effect of the – or you just trying to the conservative on this front. And the follow-up question is to in terms of your three-year transformation programs. We’re now half way through. So looking that how would you say you’ve done, you’re in line, you’re head of your target. And specifically could you all related 12% to 14% annual cost growth per annum come to an earlier. Thank you.

[Hector Grisi:]

Thank you, Philip. In terms of loan growth we’re seeing – I would think that we’re taking this slowdown. I think we’re being cautious. And I think we’re also being consistent, but we have been doing several quarters. I think that relevant part of our loan portfolio 51%, 55% of it. It’s a very strong base and we continue, we expect that that will continue, okay. We – there are couple of statements that are volatile and what we end up growing in those ends depends on I would say competitive dynamics. We’ve been able to grow our loan portfolio both in corporate and both in government launch, finding a profitable transactions in several quarters in the past that’s have not indicated or – by also compared after based several loans in the past. And as these average ticket in this segment is quite high that these 3 billion, 4 billion, 5 billion Peso, so just a single client today – or single client going to another bank that could have an impact. So always saying that the – let’s say the strategic or remodel to probably this headlines, we feel confident that the grade would continue. It has been for the last 12 months north of 10%. And it’s in these two segments, where we continue experiencing volatility and that’s might bring the overall loan growth to the guided range of 7% to 9%. But it’s not that we’re expecting long on, it’s just a reflection on the nature of these two segments, okay. Then on the three-year transformation plan, you are right, we’re half way there. We’re happy with how things are going. We’re pleased with the certain progress that with me. We would laugh that these would be faster actually, but you take that, I think that I would have say that we’re ahead of that, ahead for execution of the plan I think I would say very in line pretty marked of one day. We have to do. But I think that the benefits of these investment plan, we will start materializing at in the near future. We see the let say the pain initially, but I think that the benefits will start flowing gradually. We think that expenses will continue growing in the range that we’ve seen over the last year and these first six months, drop to 8%, 14%. We don’t think that after we complete this three-year investment plan expenses we’re drop to historical levels for let say inflation rate, for one reason, as you can imagine, we’re investing in technology and systems part of those expenses are capitalized, are reflected in depreciation and amortization. So that will be – that we have an impact in for longer-term, rather than just three years. So basically see expenses trending down and getting closer to the session for the time.

[Philip Finch:]

Thank you very much. Very clear and helpful.

[Hector Grisi:]

Thank you.

[Operator:]

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

[Jorge Kuri:]

Hi, Jorge Kuri here. Congrats on the numbers. I have a question on your guidance. At the high end of your growth target of 8%, that’s net income for the year of MXN19.1 billion, you did MXN9.9 billion in the first half. So to get to the 8%, you need 9.2% in the second half, which is a 7% decline. So given the normal stronger seasonality towards the end of the year, what explains this assumption of weaker second half or what part of your first half results do you think, where at non-recurring in nature. Just trying to get a sense of what the potential upside vis-à-vis your stated guidance. Thank you.

[Hector Grisi:]

Hi, Jorge. You like to the adverse of George, to be getting Jorge. It’s a very good question, once that you’re making. I think that overall, we are being quite cautious in how things look in the second half. We think that the first half most of the results that we are delivering our record. One of the line items that has been quite volatile over the last six to eight quarters has been market related income. The first half of last year what’s very strong in that light and the second half quite weak, okay. In this first half, we had first quarter relatively and a very strong second quarter on average. We are basically in the midpoint of the carrier range of market income that we have provided in the past. So I think that expenses could accelerate somehow for the – from what we’ve seen in the first half and also cost of risk that basically the things that we’d be look at the every single line item or the ones that could produce the numbers that you’re referring.

[Jorge Kuri:]

All right, great. Thanks a lot.

[Operator:]

Our next question comes from the line of Carlos Macedo with Goldman Sachs. Please proceed with your question.

[Carlos Macedo:]

Thank you. Good morning, gentlemen. Question on the client growth is just on the back Jason ask, 20% year-over-year. That’s a fee income is up only 8%, your consumer loans are up only 8%, I think maybe a bigger impact on your deposit base, because you’re getting deposits up 15% on the visual side. And yet your margins only are maybe 10 basis points better this year than last year. I know that you’ve – these clients are having impact, when are we going to see that transmitted into loan growth fee and fee revenues and funding to a bigger degree. They have to wait for the end of investment project that you’re putting together next year or that something that’s going to be ongoing over the next few quarters.

[Hector Grisi:]

Hi, Carlos. There’s a certain dynamics, let’s say, profitability for client. Those clients that have been for five or more years with us, are four to five times more profitable than client have been later than here with us. If we look at how this profitability for client behaves sort of times. We see a significant peak off between years three and four. So this means, if new clients behave in the past in the bank. The benefits of those, let’s say, first we indicate that enter the bank in the second half of 2016. We’ll get to see a significant contribution flooring for the BML until the second half of 2019, okay. It’s not that we’re not see anything yet, but it’s not as strong as we play a signal b. So we have to bear in mind that dynamic, we’re doing different initiatives towards that maturity of this clients for the as of today. We haven’t change dramatically that behavior. So that something that we should expect significant benefit 2019 and over, just because of the dynamics, obviously clients.

[Carlos Macedo:]

Okay, great. So it’s something that you’ll – come at the same time, you’re saying as the end of your expenses or the acceleration expense. Just one question, with these clients that you’ve added, the fair value clients is there – what is the churn like in these clients? Is it much lower, I imagine, it must be much lower than your regular clients?

[Hector Grisi:]

Yes, you see it’s lower. We have it reduced attrition very consistently over the last couple of years. And also something that is quite relevant in terms of attrition with that. When you look at the clients by profitability or by the volume of business that they have with us, those plug-ins that are not profitability or have more business with us, our much less – the chances that will pay – leave the bank reduce significantly. All the way to 3%, in those clients that we don’t have a significant business with them and also have – either we’ll have a very small pay check, it only have limited amount of the profits with us. Then the attrition rate is way higher, it’s close to 20%. So this is a quite remedy for us in the same type. We’re keeping those clients are more profitable to us.

[Carlos Macedo:]

It’s good that’s the client that you have added. They were adding now in the platform that lower or going to make it to the point, whether three to four years in the bank and they for contributing more to you bottom line.

[Hector Grisi:]

Absolutely, we’re expecting that capital.

[Carlos Macedo:]

Okay, great. Thank you.

[Operator:]

Our next question comes from the line of Ernesto Gabilondo with Bank of America Merrill Lynch. Please proceed with your question.

[ErnestoGabilondo:]

Hi, good morning, Hector and Didier. Thanks for the opportunity and congratulations in the result. A couple of question from my side, because we needs follow-up in the loan growth, we know this, you were one of your few banks rolling in financial entities and government loans. So we was wondering if these trends should continue in the next quarters. On the other hand, I believe the macro political scenario for Mexico has improved. You had one thing, why are you assuming that conservative scenario for loan portfolio especially in the second half tends to be the strongest one. Do you think there is room to think more about your upper end of the guidance have produced strong second quarter results? And then my second question is the follow-up on the asset quality. It will look to the cost of risk is 2.9% in the second quarter is well below your new guidance of 3.2%, 3.4%. I would remember you have a trouble incorporate in the energy sector. So we was wondering, if the situation of these corporate improved during the quarter. But you still see risks. If we have a positive outcome on this corporate, could we expect earnings growth for the year to be on the top end of your guidance or even more. We just want to know your perception on how are you thinking of your net income guidance? Thank you.

[Hector Grisi:]

Hi, Ernesto. Regarding the loan growth on government loans, we would be able to get profitable transaction dirt. As you’re probably at work, on the standpoint alone basis, government loans are not that attractive or that profitable. What makes this segment, interesting for us is the fact that they are table business associated with these loans. So that we are quite encouraged about our capacity of winning profitable business in the segment and we will continue, if teaching for transactional in the space. As you can imagine a very comparative market and we will be able to leave in certain transactions here, but as mentioned, this quite volatile and comparative. Then, as just mentioned previously, it’s not that we’re foreseeing a slowdown of loan growth in the second half of the year. In the right way we view that in all the macro economic scenario – the political scenario have should do in most of the ways that we’re seeing at least in the short-term. However, given the productivity that we see both in corporate loans and government loans, we see that there is a chance that is – there are more prepayments that we expect in the second half of the year then we might adopt – in the guidance range. We feel very strong, very positive about high margin loans growing more than 10% and accelerating actually over the last three quarter. We see that we have more control on that rather than these two volatile segments and that’s basically the impacts reflecting in our guidance, okay. Then turning to asset quality more than energy unity [indiscernible] sector. In this particular case that assets being cautious if this client of this project adopts not been – or continues is not being deteriorated then you’re right there is a chance that cost of risk will come below our direct range. It’s just that with information that we have right now will rather be cautious – if it continuously deteriorated then we’ll probably get into our gadget range, okay.

[Ernesto Gabilondo:]

Okay, perfect. Very helpful, thank you very much.

[Operator:]

Our next question comes from the line of [indiscernible]. Please proceed with your question.

[UnidentifiedAnalyst:]

Hi. Thank you for taking my question and congratulations for the results. I have a question on NII, I just wanted to clarify a little bit your thoughts on the dynamics of NII growth. You’re seeing some competitors both in – with stronger growth of NII versus the loan growth. See if we can probably or see or if you can give us some color, if we can see though these line NII growth accelerating towards the end of the year, especially because of the high interest rate environment that Mexico going on today and also because your efforts on the mix side. Should we expect some acceleration in NII growth? Thank you.

[Hector Grisi:]

We think that NIMs should expand over the – what we posted, last year there is we mentioned in past that we think that there is 10 basis points to 15 basis points [indiscernible] for NIM expansion, there are some effect that account for each others, it’s important to – one time definitely interest rate have increased this year and that’s very positive for margin. Then on the other side, the interest rate environment is making clients more of a sensitive to interest rate. So that’s why term deposits have been going at a very strong pace. We think that this is consistent with the macroeconomic environment, if interest rate starts decreasing we think that clients will be constitute to interest rate and then probably there would be a better mix in terms of demand deposits and term deposits, okay. And also something that is volatile in nature, the opportunity that our treasury department sees and tries to execute and that in some cases impacts our operating margins. Overall we think that we should be posting higher net interest margin, as a consequence of both higher interest rate environment and also the impact of both having more demand deposit from individuals and higher mid, non-mid that will be more geared towards higher margin loans.

[UnidentifiedAnalyst:]

Okay. For the 50 bps I mean its expansion?

[Hector Grisi:]

No, 10 to 15.

[UnidentifiedAnalyst:]

10 to 15, okay. Thank you.

[Operator:]

Our next question comes from the line of Luis Fernandez with JPMorgan. Please proceed with your question.

[LuisFernandez:]

Thank you, gentlemen and congratulations on the quarter. I had a question on client addition, but not in a number of loyal customers what not a number of fully details, but a number of companies. As you can provide some figures on SME and middle segment. And I asking this because, when you look to the loan book, we see a well good growth quarter-over-quarter. So I just want to know it is more related leverage on existing clients or the strong figures we are seeing only the details are alsoreflecting on new additions of new company clients. Thank you.

[Hector Grisi:]

Hey, Luis. I think it’s a combination of things, you have to remind the fact the Santander have been historically quite strong in terms of our relationship with business clients. We are the No. 2 bank and basically in the corporate world regardless the sites of its corporates on the way from large corporates to SMEs, and we’re deepening the relationship with this client. So in the past we only basically look that loan business with them. Now we are having a relationship, on part of the initiatives that we are implementing this all the bankers associate with this corporate are cross-selling retail products particularly the favorable business. So we have to be gaining all the way from big corporates to SMEs in this favorable business, also regarding SMEs, if you look at – how deposits are growing from SMEs that’s also be quite strong. So if not that we have seen a particular acceleration in client acquisition from SMEs, you showed that work deepening the relationship with the client. We also have opened some regional services that service not only SMEs, but also mid-market companies and we think that these regional centers are producing quite good results.

[Luis Fernandez:]

Great. Thanks. Just a follow-up to hear. Can you recall us the average rate you charge in each of the segments on SME need on incorporate. And asking this will have a better idea on how the mix on your commercial portfolio may have on your NII?

[Hector Grisi:]

Luis, we don’t provide an information where we can definitely follow-up, how that call did you walk you through how the interest rate looking for different segments.

[Luis Fernandez:]

Great. Thank you.

[Operator:]

Our next question comes from the line of George Friedman with Citibank. Please proceed with your question.

[GeorgeFriedman:]

Thank you very much for taking my question. Most of those were already responded, but just two addition of points. You mentioned to beat about your expectation for margins, but I also like to understand, what is your expectation for interest rates and I know if these could I know be taken into consideration for upside or downside not only this, but next year as well. I’m asking that because we’re not your competitors just mentioned that they would not be surprised if rate objectives table for additional 18 months, and may – even that bit higher than the current levels, which for some of I know our investors that could come with the surprise. and the second question, looking to the asset quality performance, which has been – I’d say good overall, could we expect more normalization in terms of coverage, because coverage at some point, was almost that 150% level, but in the past that you worked with much tighter coverage levels. So, I understand that you could expect positive resolution on none of those corporate cases that were mentioned in this call. So, just wondering if we could see additional coverage of reduction in the next two quarters. So, thank you very much.

[Didier Mena:]

I don’t keep, regarding interest rate expectation; I’ll let Rodrigo Brand comment on that.

[RodrigoBrand:]

Thank you, Didier. Well, our view is that the next three months are going to keep the interest rates – current interest rates for the next year. What we think is that we still see some partnerships for this year and for the beginning of 2019. So, what we think is also together with some uncertainties regarding the qualities with incoming administration, we don’t think Mexico will have a lot of room to diminish interest rates in the short-term. So, we continue to believe that the interest rates will remain around this level, perhaps a deflation – it’s a dimension plan in the coming months, perhaps even Mexico that was increased slightly, the reference rate. So, we think – overall, we think the interest rate scenario will remain very much descent as we are seeking right now. because as I said, uncertainties around the incoming administration, there are also uncertainties and pressures on prices as we’ve seen in the last couple of months in the stationary front.

[HectorGrisi:]

Now, regarding asset quality, George, it also remains that the, it’s an – I mean, it’s a result of applying difference regulation, that is right as straight. So, at the end of the day, depending on probability of default of which loans that we’re giving out, and expected loss. We need to make provisions and then the coverage that we have is what it is now. so that we obviously will continue applying regulatory metrics for our loan book and the approach would be what you will receive.

[George Friedman:]

Got it, perfect. Thank you. Just a quick follow-up on the sensitivity for margins, taking into consideration, what was just mentioned about the process for rates and what you mentioned about the mix in the implications in your NII, would it be reasonable to achieve that margins should not come down in the next year as well?

[Hector Grisi:]

I think that that’s a reasonable assumption, George. We think that the – if the market – if interest rates continue at the level that we have, if our loan mix continues to shift to higher margin loans. I think we will depend on competitive dynamics, whether we see a significant pressure for the NIM to come down for which – if interest rates continue at these levels, we would expect that NIMs to remain stable as well.

[George Friedman:]

That’s perfect. Thank you very much.

[Operator:]

[Operator Instructions]. Our next question comes from Alonso Garcia with Credit Suisse. Please proceed with your question.

[AlonsoGarcia:]

Good morning, everyone and thanks for taking my question. My question is regarding basically, if you can provide an update on the progress you’re making on your investment plan, where it specifically includes the areas as you are investing and it’s currently implementing where are you going to be implemented in the coming months. Part of your cost structure in terms of the full functions ATMs, but also regarding your [indiscernible] what are the new say applications that you have for your workforce on the back-end, and applications you have now for clients on the front-end that’s basically my question thank you.

[Rodrigo Brand:]

Hi Alonso, I think that throughout Hector’s remarks, I think that he provided a good update on the key priorities that we are working on. I just summarized them for you. It’s about re-verification, it’s about reducing the plan that we take from all payroll accounts and also SMEs. We’ve added functionalities to let’s say out app in those SuperWallet. So I think that we are making progress let’s say in simplifying processes, making things simpler for our customers, enhancing customer experience on direct pay. Regarding systems, I think that we are making good progress in terms of our full function ATMs. However, we think, that this is going to accelerate the base at which we installed these ATMs next year. In terms of also our electronic banking, it’s been released in different ways during the second half of the year. We are quite happy with the performance on those two initiatives that are related to attracting and retaining the classic assets of the Santander blocks and at the Mexico credit cards, the numbers we made reference to them throughout the call are quite good. In terms of the change of quotes let’s say planning of initiatives that we have, we’ve made good progress in terms of insurance. As we already finalized the price effects and we into limitation of footprints, PFCs progress of customers. We have partnership with [indiscernible] we have discussed in the past. And we are in the implementation phase, in that regard. We are quite optimistic in the prospects there as clients, as our demands insurance products and we are having the capacity to offer them different alternative that meet their needs. Also in other loans, even though we will like to grow faster than it is implied I think that it’s coming about, as we have north of MXN350 million for auto loans there, but we think that will accelerate in the next three quarter. Our financial inclusion initiatives also performing quite well, we have not more than 5,000 clients already, more than 15 branches and expanding at the pace we think we should be expanding. So overall, I would say that we are pretty much making progress, at exiting price. Still there is a lot more to build up during the next 18 months I believe. Okay.

[Alonso Garcia:]

You have a great competitor. Thank you very much.

[Operator:]

Ladies and gentlemen we have reached the end of the question-and-answer session, and I would like to turn the call back to Mr. Héctor Chávez for closing remarks.

[Héctor Chávez:]

Thank you very much for joining Santander Mexico on this call. We look forward to maintaining an active dialogue with you and you are welcome to digital Mexico. So if you have any further questions please don’t hesitate to call or email us. And have a great day.

[Operator:]

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