Banco Santander México, S.A., Institución de Banca Múltiple, Grupo Financiero Santander México
Q1 2017 Earnings Call Transcript

Published: 28 Apr 2017

[Operator:]

Good day, everyone, and welcome to the Grupo Financiero Santander México 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’d like to turn the call over to Mr. Héctor Chávez, Managing Director, Head of Investor Relations. Please go ahead, sir.

[Héctor Chávez Lopez:]

Thank you. Good morning and welcome to our first quarter 2017 earnings conference call. We appreciate everyone’s participation. By now, everyone should have access to our earnings release and the company’s presentation, which were released this morning before the market opened. Speaking during this call will be Héctor Grisi, Executive President and CEO; Didier Mena, Chief Financial Officer. Also joining us is Rodrigo Brand, Deputy Director of Public Affairs and Communications, all of whom will be available to answer questions during the Q&A session. Before we begin our formal remarks, allow me to remind you that certain statements made during the course of 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 Stock Exchange. Now, let me turn the call to Héctor Grisi. Hector, please go ahead.

[Héctor Blas Grisi Checa:]

Thank you, Héctor. Good morning, everyone. We are pleased to report our first quarter 2017 results, which illustrates our success in delivering strong profitability despite volume [ph] uncertainty in the macro-backdrop mainly in Mexico. We are focused on keeping the customer at the center of what we do, as we have said things over a year ago. Our commitment is to becoming more productive in advertising, innovation, investments and scaling operating efficiencies, while our focus on profitability in a stiff competition have affected volumes we acquired through sound asset quality and our profitability across the board. Moving on to Mexico banking system, on the next slide, total system loan growth as in February, the most recently available public data from the CNBV [rose slightly by 1%] [ph] year-on-year due to high interest rates and lower expectations of economic growth. Consumer loan growth was relatively stable at 12%, while system deposits grew 15% year on year. Competition 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. The larger banks are expanding their loan books, a rate of 7% to 11%. Given the attractive long-term opportunity of the Mexican financial system, key competitors have also announced significant investments in system capacity and to update their IT platforms. Economic activity in the quarter was better than anticipated, supported by the season 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 retails sales continued, along with slightly worrying [ph] consumer confidence. But still given uncertainty regarding the U.S. policy and inflation above Bank of Mexico targets we remain cautious about the economic environment going forward. As you can see on Slide #5, this under [ph] the loan portfolio by 8% year on year, maintaining a strong focus on profitability. In the meanwhile, SMEs and middle-market loans posted a solid performance consistent with the study. While we continue to see a contraction in corporate and government loan book as we are not willing to sacrifice returns for volume growth. As a result, it shows corporate and government loans’ overall total loans were 24% this quarter, down from 27% in 2015. Individual loans were up 6% year on year. While we see a seasoned [ph] consumer demand, we’re experiencing stiff competition in this market particularly in mortgages. Mortgage loan growth continued to decelerate to 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 remained 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 our unique mortgage product that offers a favorable [ph] interest rate based on the customer profile. Credit card loans increased 6% year-on-year and posted a slight sequential decline, tied to seasonality. While 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 own total credit card portfolio. Consumer loans expanded 9% year-on-year and were relatively stable quarter-on-quarter. Payroll loans were up 10% in the year. And the Santander Plus program continues to gain traction, reaching up to 1.5 million customers affiliated [ph] 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 this segment. Turning to the next slide, commercial loans increased 9% year-on-year, driven mainly by the good performance in the middle-market. Middle-market loan 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 a risk-return focus. This quarter we launched a dedicated CRM platform, and online enrolling process to enhance the customer journey and to continue to drive growth in the SME segment. As anticipated, corporate loans increased 12% year-on-year, while the government segment showed an increase of above 9%. This mixed performance reflects our discipline in margins and inherent volatility in this segment. Moving to funding, robust deposit growth continues, of 15% year-on-year, rapidly increasing its contribution to fund our business. Our initiative focused on offering innovative products and a 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 funded in the mid-teens, while market volatility and high interest rate fueled the demand for low-risk term instruments relative to mutual funds contributing to the 16% rise in term deposits. We have demonstrated our ability to achieve consistent profitable growth in a challenging environment. Our specific initiatives aimed at increasing loyalty and attract new clients have enabled us to increase the number of net new customers by over 120% in May - from 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. Increased contribution on Global Corporate Banking to overall results illustrates the success of our strategy, [if we are banking] [ph] profitability over volumes, improved execution of our financial market teams and sharper focus on key regions. And today our bank is well positioned to profitability, while maintaining market share. And we look to the future with confidence. As always, we are committed to issuing sustainable returns for our stakeholders as a reflection of our excellent customer service, with 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 components of the bank. As we announced a few years ago, after more than 30 years at Santander, and 30 years at the group, Pedro has 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 world-leading [ph] financial groups, and leads 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. Thank you very much.

[Didier Mena Campos:]

Thank you, Héctor. Good morning, everybody. I’m pleased to have met most of you already. And I want to confirm a deep commitment to maintaining of good communications with the market. Above all, I’m very proud to be part of a team that will make Santander Mexico as market leader in profitability and sustainable growth. Now, please turn to Slide 10. We maintain a comfortable liquid balance sheet with net loans to deposit plus 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 120 basis point offer to be staked [ph] in over four years, which we already complied with. In addition, our capitalization ratio increased 99 basis points during the first quarter to 16.7%, mainly reflecting our robust results and lower risk weighted assets. Our Tier 1 capital stood at 12.9% and core Tier 1 at 11.5%. Moving on to the income statement on Slide 11. Net interest income remained robust, up 15% year on year and 4% sequentially. Results from third quarter show the benefit from interest rate hikes that took place last year, a 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 a higher transactionality and client retention, driven by our Santander Plus program. Credit card fees resumed growth this quarter, but still reflect issuance and reward costs from our Aeroméxico co-branded card, as well as the impact of the peso depreciation, as some of our credit card fees are dollarized. Note, however, that higher credit card usage resulted in an 18% increase in earned fees. Insurance fees fell 2%, reflecting soft mortgage-related insurance tied to the slowdown in mortgage volumes offsetting the good performance in our life and car insurance products. We are also seeing a gradual improvement in SME demand for credit related insurance. Summing up, gross operating income was up 15% on the back of strong net interest income growth, as pickup in net fees and market related income for MXN1 billion significantly evolved our estimated quarterly average around MXN600 million to MXN800 million. Results also reflect our focus on asset quality. We continue to bring down our non-performing loans ratio, reaching 2.38% in the quarter, achieving a 59 basis points year on year improvement, consistent with our risk appetite. We are also pleased with the good sequential performance in asset quality reported in retail loans. Let me highlight the year-on-year reduction of 109 basis points in mortgage NPLs, that resulted from the sale of a portion of the legacy ING past due portfolio. Commercial loans, non-performing loans fell 62 basis points year on year as the year-ago quarter was still impacted by [type-2 loans on home business that were reaching] [ph] 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 points year on year increase in cost of risk to 3.49%. Looking ahead, we continue to proactively monitor our loan book, maintaining our strong focus on risk management. Looking at costs on Slide 15, expenses increased 8.6% year-on-year. Note that IPAB associated costs grew almost 20% in line with 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. 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 a return on equity up 380 basis points reaching 16.1%. Our strong bottom line performance underscores the resilience of Santander México’s business against a volatile global backdrop, as we execute our strategic initiatives and focus on risk-weighted asset returns and efficiency. 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 a true client-centric bank with the strong focus on profitability, and look forward to sharing our progress on this growth in coming quarters. We are now ready to take questions. Operator, please go ahead.

[Operator:]

Ladies and gentlemen, at this time, we will be conducting a question-and-answer session. [Operator Instructions] Our first question comes from the line of Mario Pierry with Bank of America Merrill Lynch. Please state your question.

[Mario Pierry:]

Yes. Good morning, everybody. Thank you for the call. Let me ask you two questions, please. Last quarter, you provided net interest margin guidance for margins to go up 25 to 30 basis points this year. According to our numbers, your margins are already there. So does it mean that all of this interest rate hikes that we saw in Mexico are already reflected in your net interest margin, and you expect them to remain in this level or do you still think there is room for you to re-price some of your loans? Related to this question also I wanted to ask, when do you think that we could see some asset quality problems, because of the higher interest rate environment, higher inflation environment that we see in Mexico? And 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 sector these clients operate, if this is a problem that you think is related to FX, or just a little bit more detail, that would be greatly appreciated. Thank you.

[Didier Mena Campos:]

Good morning, Mario, nice to talking to you. Regarding the net interest expansion - net interest margin expansion that we indicated last year, 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 - if net interest - sorry, interest rates increased, during the last quarter, the fourth quarter of last year, there was an increase of 200 basis points, 204 basis points actually. This quarter the increase that we experienced in the reference interest rate was 254 basis points, where we are expecting next quarter is 274 basis points. 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. So looking at this trend, the major impact that we will see in net interest margin is during the first half of this year. As you rightly said, we already saw what we consider the most relevant impact of interest rate hikes in our net interest margin. We think that there is potential upside, if we continue to change the mix of our loan portfolio as we show in the presentation. We are gaining share in mid-market and SMEs, which have higher margin than mortgages and corporate loans. So if we continue to doing that I think that there is a potential that net interest margin could expand a little bit more than what we indicated during our fourth quarter call.

[Héctor Blas Grisi Checa:]

Thank you, Mario. It’s Héctor Grisi. Yes, for your second and third question [maybe we will go] [ph] 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, I mean, we are very cautious as you have seen in the meetings [ph] that we’ve been having our growth mainly in consumer loans, because we foresaw that market group completely [ph]. Reality has been that it has not been the case and the cost of credit has not increased. So we’re slightly impressed about the performance of the portfolio overall. And we don’t foresee that a situation could complicate if rates only go up 50 basis points more in the rest of the year. I mean, 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, I mean, stepping a little bit and pushing a little bit more the machinery to grow a little bit more, given that we were extremely cautious at the beginning of the year. Talking - moving to the provisions, I mean, yes, we have these two particular situations that we had already in the portfolio. These are not new loans. These basically gone from the bad, they were already budgeted. And unfortunately, the companies have not performed as we expected and we are basically have to do the provisions. And mainly we have to do some more provisions about those couple of situations. Those are mainly into situations in the construction/energy sectors. And it may be continue to be the case, and we’ll see in the continuing quarters. What is not - What is important to tell you, Mario, is not because of the effects of the situation that have happened currently in the market. These are old situations.

[Mario Pierry:]

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

[Héctor Blas Grisi Checa:]

It will depend, I mean, on the negotiations we have with them and how the evolution of the rate could have. I mean, that could increase basically our cost of risk guidance to - I mean, it’s going to range between 3.3 and 3.5. I mean, it’s [one more than] [ph] effective.

[Mario Pierry:]

Okay, perfect. Thank you.

[Héctor Blas Grisi Checa:]

Thank you, Mario.

[Operator:]

Thank you. Our next question comes from the line of Tito Labarta with Deutsche Bank. Please state your question.

[Tito Labarta:]

Hi, good morning and thanks for the call. A couple of questions, also. First, in terms of your loan growth, I noticed that your GDP growth, you picked it up a little bit for next year although you reduced it a little bit this year. So just want to understand, how that’s going to impact loan growth this year and next. I know, you are facing some competition, which is why you slowdown growth. But with GDP as you expected to be below 2% for two years, do you see loan growth continuing to slow and also given the competitive environment? And then my second question, I know you said you’re maintaining your guidance for the year although just looking at the strong first quarter you had, you’d be running around 15% earnings growth. So just want to 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 next few quarters? Just wanted to understand, how you reach that in the net income guidance that you’ve given, given the strong quarter you had. Thank you.

[Rodrigo Brand de Lara:]

I mean, let me tell you about - the loan growth in the portfolio. We are basically going to be - I wouldn’t like to say, basically, this is going to be another strategy in the whole portfolio. I think you have to be in this particular type of market very concentrated in different segments, and bring [ph] decisions in each segment, first of all. Second, what we’ve got is we have - instead of waiting to put a pricing at - and discussing pricing every single month, now we do it every 15 days due to fact that the market is so volatile and changing somewhat, so that we need in the address in the different segment due to the competition. So at this point, we 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, a very strong particular area, as we discussed in the presentation, for example, mortgages, that we need to protect our market share. So we may take some decisions on that, and we’ll basically give our conditions 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 delivered to the year and to tell you, but before we are talking about that let me tell you about - in terms of trading and everything, I mean, the bank fortunately was very well positioned and by the situation of the elections in the U.S. and everything that has been going on in the market. So we were fortunate on that. I think, I mean, there’s [still a number] [ph] 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 returns we give on trading. And we want to try to be very cautious on the way we manage them.

[Didier Mena Campos:]

Regarding the tax rate, as you probably know, Tito, there is an inflationary accounting still in Mexico, as we say we practice. So with the higher inflation, we benefit from that. So that’s why we’re seeing lower inflation [ph] tax rate and one that we were indicating. I would say that we remain cautious with uncertainty, specific uncertainties with - we also, if we [comment especially in the form] [ph] affecting potential renegotiation of 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. So if the performance in our second quarter is as strong as the one that we have the first quarter, we will definitely review our guidance in our next call.

[Tito Labarta:]

Okay. Thank you. That’s very helpful. Maybe just one follow-up, I guess, on the macro and the uncertainty you mentioned. So looking I guess specifically at your GDP growth guidance for 2018, where you have 1.6%, so further deceleration from this year. And I understand there is a lot of uncertainty. But just want to understand what your kind of thinking about to get there, because of the presidential elections in Mexico next year, continued uncertainty because of that. I just want to understand maybe what you’re seeing on the macro levels that’s kind of contributing to ongoing slow growth, not just this year, but also next year.

[Héctor Blas Grisi Checa:]

Let me go through our numbers. As you mentioned, we haven’t changed our numbers for 2017. So maybe we got the numbers for - the preliminary number for the first quarter, which was above expectations, 2.7, year-over-year growth rate in this quarter. However, we think that as Didier mentioned earlier in the call, uncertainty regarding to the U.S. and the NAFTA negotiations, were also the fact that in the second - in the second half of the year we see that Mexico will start to see a lot of uncertainties regarding the election process for 2018. We don’t believe that it should have an effect on the environment basically. And that’s why we have right now our [cost position in 2019] [ph] is slightly below consensus, but basically that’s it. It’s because we’re still seeing uncertainties from the second half of 2017 until the second half of 2018 [in corporate] [ph] investments, the main investments. And this could have an effect in the GDP growth for 2018.

[Tito Labarta:]

Okay. Thank you very much.

[Operator:]

Thank you. Our next question comes from the line of Philip Finch with UBS. Please state your question.

[Philip Finch:]

Yes, good morning, Héctor, Didier, thanks for the presentations. I’ve got a couple of questions as well. Firstly, it’s regarding the capital position, where we saw a decent improvement in the quarter following obviously the special dividend back in December last year. Can you just explain, first of all, what were the drivers for this? Was it to do with changes in risk weightings after all or is it just retain earnings? And secondly linked to this, where do you see that common equity Tier 1 ratio going to over the nine months or so? What is an optimal level for you to operate at? And 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 the full-year basis, does that mean we’re really going to see the costs rising from a back-loaded, towards the end of the year, where we really see costs spiraling upwards? Thank you very much.

[Rodrigo Brand de Lara:]

Good morning, Philip. Regarding your question on capital position, the main driver for doing the 81 transactions that we undertook at the end of last year was to take advantage of regulatory schemes in Mexico, which provides capacity to issue these types of instruments. And I would say that those [vacs that reset] [ph] our sales are the ones that takes the most advantage of these regulations for what’s basically changing the - rather than having core tier capital, we base that by 81. And this is - the amount was $500 million. That issuance represents 1.5% of our capital ratio. We think that [Technical Difficulty] 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%, risk weighted assets have not increased that substantially. Regarding costs, we have this MXN15.3 billion investment program for the next three years. And we have got in place the committee that oversees the 16 projects, so key projects associated with this investment plan. So every single week, we are looking at the performance of these projects. So we’ve been very strict in terms of the expenses that we incur 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, you’re going to see an increase in [Technical Difficulty] in line with the guidance provided during last quarter.

[Philip Finch:]

Thank you very much. So just a follow-up, given it’s a three-year program of 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?

[Didier Mena Campos:]

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

[Philip Finch:]

Okay. Thank you very much.

[Operator:]

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

[Carlos Macedo:]

Thanks. Good morning, gentlemen. I just really have one question, loan growth, going back to that if you could. I mean, you guys, you said that growth - you basically became a little bit more conservative now in the first quarter, and then things could improve going down the year. My question is, do the increase in rates, 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 that you can deliver in the year? Or is that just - the increase don’t really matter too much? And do you think that you’re going to be able - there will be demand at the prices that you’d be willing to offer presumably at higher nominal rates to the client?

[Héctor Blas Grisi Checa:]

Thank you, Carlos. I mean, what we have seen is basically the demand has not slowed given the increased rates. I mean, even though the rates have increased I mean significantly in terms of where it came from, where historically very low rate in Mexico in different scenarios. So what we have seen and what we have seen mainly for example in consumer loans and everything is that people basically have continued to demand those type of loans and the competition has been very hard. I mean, you try to move the range of [indiscernible] is complicated. And then people get offering from different participants. So to be concrete about the response is demand have 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 pursue that. I mean, the market continues to have demand for this. We have a particular situation in credit cards, in which we saw a lot of people basically are more biting [ph] or bringing down their balances in credit card mainly in January and February. You have normally seasonality is like that, but during the year that we have seen a much more amount of credit cards basically being paid. I believe what happens is that consumers were concerned about the hike in rates and the hike in the FX. And basically, we’re much more keen on paying down the balances. And then when situation basically came to a little bit more normal or less volatile, when people basically started to basically spend again.

[Carlos Macedo:]

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

[Héctor Blas Grisi Checa:]

No, no. That could be the case, yes. I mean, to answer your question, I mean, look at what happened in mortgages, I mean 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 look at what happened to the market. Now, you have some of our competitors growing a little bit more than us.

[Carlos Macedo:]

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

[Héctor Blas Grisi Checa:]

It could be a risk. So that’s why basically we are beefing up our - basically, to increase our deposits and increase to our money base in order to help us in the cost of funding. And that’s what we are basically being very similar [ph]. And that’s why Santander is basically one of the main drivers of that. And also, Carlos, I think it’s important to remind the fact that we are moving into a client-centric bank. So it’s not about only looking at the specific problem, so the entire relationship that we have with the clients. So if for some reason the spreads become tighter in, let’s say, mortgage loans, the end relationship that we have with those clients, we might enhance profitability by attracting the payrolls, the deposits or the [concerning the MA] [ph] credit card. So it’s looking at a more comprehensive relationship with the client.

[Carlos Macedo:]

Perfect. Just one follow-up question then, just to trying to understand the - the amount of competitiveness you’re seeing in the asset side, have you seen equal competitiveness on the liability side or is that still more incipient?

[Héctor Blas Grisi Checa:]

No, it’s more incipient. I mean, it’s more incipient. I mean, we have not seen people following us in Santander this type of separation. I think that, I mean, there are strong, basically, a stiffened competition basically in the term deposits. That’s basically where the competition is, but not on the day-to-day [ph].

[Carlos Macedo:]

Okay.

[Héctor Blas Grisi Checa:]

Certainly not there, okay, but we have seen [a new big front, we saw some of the] [ph] competition on that.

[Carlos Macedo:]

Okay, perfect. Thank you so much.

[Héctor Blas Grisi Checa:]

Thank you, Carlos.

[Operator:]

Thank you. [Operator Instructions] Our next question comes from the line of Carlos Gomez with HSBC. Please state your question.

[Carlos Gomez Lopez:]

Hello, good morning. Two questions, first, you mentioned that you are a bit more optimistic and you might accelerate growth a little bit. Where in particular, I mean, would you be more aggressive in mortgages? Would you be more aggressive in credit card? Where do you think that you can afford to be more optimistic now than, let’s say, three months ago? And second, your capital optimization exercise at the end of last year, you mentioned that you want to have a 12% Tier 1 capital. Is there room for further issuance of convertible - continue convertible bonds or any other capital optimization measures or you are done for now?

[Héctor Blas Grisi Checa:]

Okay. Thank you, Carlos. In terms of, I mean, of - well, it’s going to be, I mean, competing the mortgages as you have said, I mean, that’s a priority for us. We like to maintain our basically market participation in that segment. And we’re going to be also focusing on market participation in some of the other products depending on profitability mainly. I mean, we’re not going to basically go and chase the market [with perfectly with] [ph] profitability. Mortgages is a keyword for us because of - and it’s going to at least more important for us in terms of [loyal clients] [ph], that’s where we’re going to concentrate ourselves on. Okay? And that’s what we’re going to be focused on in terms of mortgages. In the different products, I believe, I mean, in credit card we’re exactly where we want to be. I mean, we would have a strong growth, nice growth. I mean, in a market that basically we believe we’re doing the right things. As you know, we are launching a little bit of pilot in different sectors of the economy where we haven’t been before. And we’re going to be exploring that and we’re going to tell you about that in the next quarter around the results of the pilot. And in the other sectors, we basically continue to basically to perform well in the SME. That is key for us. And it’s basically being, in my opinion, one of the best performing segments of portfolio, not just on the loan side, but also on the transactionality and also on the deposit side, on the liability side. And we’re going to continue to do the same thing in middle-market, I mean, and concentrate as well on it. Again, relating, as we [need more piece] [ph] out of our investment banking business, that is basically performing much better and very well.

[Didier Mena Campos:]

Regarding our capital position, Carlos, I would say that we’ll always have the discipline to look at ways to make it more efficient. Having said that, there is little room as we stand right now to make any further issuances, so 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 the capacity that the Mexican regulations allow. So I will say that, to 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.

[Carlos Gomez Lopez:]

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

[Héctor Blas Grisi Checa:]

I couldn’t hear, you know…

[Carlos Gomez Lopez:]

Yes, as you…

[Héctor Blas Grisi Checa:]

Yes, yes, yes. Absolutely, yes. It’s not recent policy, but we have paid out since we were listed, the 50% of our net income.

[Carlos Gomez Lopez:]

Thank you very much.

[Operator:]

[Operator Instructions] One moment please while re-poll for any additional questions. There are no further questions. That does conclude our question-and-answer session. At this time, I will now turn it back to Mr. Héctor Chávez for closing comments.

[Héctor Chávez Lopez:]

Thank you very much for joining Santander México on this call. I look forward to maintaining an open dialog with you. And you are welcome to visit us in Mexico. You have any further questions, please don’t hesitate to call or e-mail us. Have a good day.

[Operator:]

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