Banco Santander México, S.A., Institución de Banca Múltiple, Grupo Financiero Santander México
Q3 2017 Earnings Call Transcript

Published: 28 Oct 2017

[Operator:]

Good day, everyone, and welcome to Grupo Financiero Santander Mexico's Third Quarter 2017 Earnings Conference Call. Today's call is being recorded. [Operator Instructions] 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:]

Thank you. Good morning, and welcome to our Third Quarter 2017 Earnings 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 this morning before the market opened. Speaking during today's call will be

[Héctor Grisi:]

Thank you, Hector. Good morning, everyone, and good afternoon, Europe. Results for the quarter reflect our continued profitability focus. We have had a solid underlying results with good performance in our high-margin segments, while maintaining sound asset quality. Our emphasis on profitability, along with intense competition from markets, resulted in lower total loan growth, as we prioritize high-margin loans that we have told you in the past. Our strategy to drive retail deposit growth continues to show traction, resulting in a strong overall deposit expansion. Importantly, we continue to make progress on our strategic initiatives, and while ROE was higher year-on-year, net income and efficiency were impacted by our trading results this quarter. Later in this presentation, I will go into more detail on our corporate initiatives, as proposed by the board, which do not have any material economic impact. Moving on to the Mexican banking system on Slide 4. The industry posted sound loan and deposit growth as of August, the most recently available public data from the CNBV. So total loans posted a slight pickup in the quarter. Consumer loans continued to post a slight deceleration, reflecting softer economic growth, a temporary increase in inflation, and the impact of high interest rates. In terms of economic activity, weaker ARPU sales and retail activity suggest a moderation in private spending, as inflation seems to be affecting household real income growth despite the strong labor market dynamics, a robust manufacturing sector and a stronger remittance inflows. Activity was also impacted by two earthquakes that killed many people and caused widespread damage in some southern states of the country and the center of the country as well, including Mexico City in late September. The FX rate has shown some pressure, reflecting recent uncertainty regarding the NAFTA negotiation. Looking at Santander Mexico on Page 5. High-margin loans posted solid performance despite loan growth slowing to just over 2%. Consumer loans, middle market and SMEs loans offset a healthy growth rate, driven mainly by resilient demand and the success of our commercial initiatives, even amidst increased competition. This high-margin loans represented 54% of total loans. Both contributed with 70% of net interest income of the loan portfolio in the quarter. By contrast, mortgages, corporate and government loans showed another contraction. These segments, which represented 46% of total loans this quarter, contributed with 30% of loans NII. Turning now to a more detailed review of our loan book. You can see that consumer loans were up 10% year-on-year, and 3% sequentially. Personal loans continued to grow at a healthy pace, while payroll loans rose 9% year-on-year, as we gain traction in efforts to attract new payroll accounts, leveraging our strong franchise in corporate and middle market. Santander Plus was also an important growth driver, up 32% sequentially to 2.5 million affiliated customers at the end of the quarter, of which 51% are new clients to the bank. The strong competition continued to impact some of our problems. This was the case in mortgages, which have subdued growth of almost 2%. Overall growth in mortgages was also impacted by the runoff of the ING and GE portfolios, which they represent around 24% of total mortgages. After adjusting our mortgage strategy at the beginning of the year, we have recorded a normal origination rate. Our mortgage group results, considering this runoff portfolios, expanded at a healthy 8% year-on-year. Credit card loans rose 5% year-on-year at 2% sequentially, while usage was up 17% year-on-year. The Santander Aeroméxico co-branded card showed a strong performance, reaching over 747,000 cards issued since its launch last year, and most importantly, 39% were placed with new customers. We continue to boost the quality of our customer base as we made progress on driving innovation and operational transformation, positioning customers at the center of our strategy by tailoring our product to their needs. This is helping us to reduce attrition and attract new customers, which is key, as a loyal customer that is 4 times more profitable. We have grown net new customers by 140% on the back of our strategic initiatives and non-reduction in attrition. We also now have more than 1.9 million loyal customers, 27% more than last year. We are also advancing transforming our business model, which are focusing on digitalization and mobile banking. Digital customers grew by 51% and mobile customers by 79% alone. Turning to Slide 8. We continue to span selectively in commercial loans while improving spreads. Middle market loans were up 12%, with loans to SMEs, 5% higher as we continue to our targeted large-sized SMEs, while maintaining our medium term focus. Reflecting our margin discipline, corporate loans contracted 14% year-on-year, and government loans were down 1%. The year-on-year decline in corporate loans also reflects initially strong growth of 39% in the year-ago quarter. Note that the corporate and government loan growth accelerated to 12% sequentially, as we are leveraging some attractive opportunities that are aligned with our strategy. Now let me share some of the specific initiatives we are implementing in the middle market and SME to continue to consolidate our leaderships in these segments. In middle market, we're expanding our geographic coverage in Mexico. We are also focusing on transactional services that generate fees, for example, offering investment marketing services to companies in this segment. We are all leveraging our global presence, developing cross-border initiatives, mainly with Santander USA Middle market companies attract 75% of the bank total favorable accounts. In SMEs, we have a differentiated model based on client needs, and are opening more specialized branches for this segment. We provide these customers with financial market solutions, developing end-to-end digital processes and establishing strategic alliances to attract retail clients. For example, we are working with our largest corporate clients to bring the SME suppliers as customers. Moving on to funding on Slide 10. You can see that supported by our client-centric approach for individuals and SMEs and initiatives, such as Santander Plus, deposits rose by 16% year-on-year this quarter. Individual deposits continued to post the fastest growth, up almost 25%, followed by SME deposits, which rose around 13%. While demand deposits were up 14%, time deposits rose 18%, driven by the higher interest rate environment. We aim to boost our business with weekly customers to further reduce our cost of funds and improve margins. In this regard, we aim to bring retail deposits from only 30% of total deposits to 45%, in line with the market average. Now let me turn call to Didier, who will go over our capital position and P&L. And afterwards, I will discuss guidance and the proposed corporate initiatives announced today. Afterwards, we will be happy to respond to all your questions.

[Didier Mena:]

Thanks, Hector. Good afternoon, everybody. Please turn to Slide 11. We maintained a comfortable liquidity profile, with net loans to deposits slightly below 95%, ensuring a strong and flexible funding position. Our liquidity coverage ratio stood at 149%, well above the regulatory requirement. Our capitalization ratio remained strong at 16.19%, up 2 basis points in the quarter, while our Q1 capital stood at 12.83% and core Tier 1 at 11.55%. Moving on to the P&L on Slide 12. We posted robust net interest income growth, up 15% year-on-year and 5.3% sequentially. Interest income from the loan portfolio was up 23% year-on-year, while our securities portfolio contributed with growth of around 33% in interest income. Our focus on high-margin segments, along with higher interest rates enable us to deliver a 50 basis points sequential increase in net interest margin, reaching 5.81% in the quarter. Year-on-year, NIM was up by 80 basis points. We achieved this despite the 2.4% year-on-year loan growth. Turning to Slide 13. Net commissions and fee growth accelerated to 8%, driven by positive dynamics in investment banking and credit card fees. While corporate loan growth reflects our focus on profitability, our Global Corporate Banking group has been actively engaged in corporate and driving financial advisory fees, which were up 60% year-on-year, reflecting increased activity in corporate debts and rose 46% year-to-date. Credit card fees also posted a strong performance, up 25% year-on-year, triple the growth rate from the second quarter. Year-to-date, fee income was up 13%, supported a strong credit card usage, as we are stabilizing the insurance and reward cost from our Aeroméxico co-branded card. Insurance fee growth showed a slight sequential recovery, as good performance in our life and current insurance products is being offset by lower credit related insurance. Net cash management fees dropped 1.8%, as higher fees paid to third-party branches more than offset the higher fees from collections and payment and account management, which have been driven by higher transactionality and client retention. Investment fund fees remain impacted by higher interest rates, which drove higher demand of term deposits. In summary, gross per income increased 10% year-on-year, as our strong performance in core revenues up over 13% year-on-year, was mitigated by the 58% decline in trading gains. While year-to-date, our quarterly average market related income remains within our MXN600 million to MXN800 million range, trading range reached MXN300 million this quarter, reflecting lower FX and interest rate volatility, along with lower client volumes. In terms of asset quality on Slide 15, loan-loss reserves were up 7% sequentially. This quarter, we have to make additional provisions for two corporate loans. We have been monitoring these loans for some time, and have already made some precautionary provisions in the first quarter of this year. Excluding these additional provisions, loan-loss reserves would have been similar to those in the previous quarter. These, together with the shift in mix of our segments, the higher cost of risk, a higher provisions in the consumer segment were the main reasons behind the increase in cost of risk to 3.72% in this quarter. Year-to-date, cost of risk remains at 3.54%, in line with our guidance range for the year. The effect of inflation in salaries, along with two recent earthquakes in Mexico, also affected us at quality and consumer loans this quarter, as we temporarily suspended marketing and collection efforts to support our customers in the affected areas. As a result, consumer loans and P&L deteriorated by 36 basis points year-on-year, mainly reflecting a 58 basis points increase in credit card NPLs, fairly in line with market levels. Commercial loans NPLs fell 93 basis points year-on-year, reflecting the write-off of a portfolio of the homebuilders portfolio. Overall, NPLs declined 56 basis points year-on-year, and 3 basis points sequentially. Turning to costs on Slide 16. Expenses rose 14% year-on-year, reflecting higher expenses related to our strategic plan. The majority of the increase in cost is explained by our IT and digitalization initiatives. Our efficiency ratio rose 135 basis points to 42.7% in this quarter, negatively impacted by lower trading gains and higher provisions. Year-to-date, cost rose 12%, and this is in line with our guidance for the year. Moving to the bottom line. While we achieved a strong underlying results for the quarter with robust net interest income expansion, weaker trading gains and higher provisions masked our good performance. This brought net income up by 4% year-on-year, and down almost 12% sequentially to slightly over MXN 4 billion. ROE, in turn, was down by 222 basis points sequentially, but up 84 basis points compared to a year-ago quarter. Year-to-date, net income increased 18%, in line with our guidance for the year. Let me now turn the call to Hector Grisi, who will discuss our guidance and the corporate initiatives proposed by the board.

[Héctor Grisi:]

Thank you, Didier. Moving on to guidance. We'll reconfirm our outlook for 2017, given our last earnings call. We maintained our loan growth target of 7% to 9% for the year, while loans expanded slightly over 12% year-on-year this quarter. We posted sequentially higher growth, and expect this performance to continue to the fourth quarter, basically, based on the time line we have in the corporate and government sectors. However, due to the volatile nature of this segment, we recognize that there is some downside risk to our target. We also maintained our targets for deposit growth at 9% to 11%, 3.4 to 3.6 cost-to-risk, 10% to 12% growth in expenses and a tax rate of around 21% to 22%. Our expectation of a robust margin performance are close -- are closer to the quarterly average market related result, solid fee generation and a more normalized provisions in the fourth quarter supports our outlook for net income growth in the range of 17% to 20% for 2017. While we are making progress on our strategic initiatives, we know that this will take a few years to contribute to stronger results. We remain committed to our medium-term strategic goal of maximizing profitability across the bank, as we become a more client-centric organization and look forward to sharing our progress on these calls in the coming quarters. Before opening the call for questions, let me discuss a corporate reorganization that is being considered to enable our parent company to continue recognizing its net capital, the minority stockholder invested in the Grupo Financiero Santander Mexico, in compliance with the European Central Bank regulations. As announced this morning, to meet this goal, we are proposing the merger of Grupo Financiero Santander Mexico as merging entity with Banco Santander Mexico as the sole surviving entity to remain listed in Mexico and the U.S. Then we give you some context about this corporate reorganization before going into the texts involved. On June 26, 2013, the European Central Bank issued new regulation regarding consolidated net capital, CRR-575/2013. This regulation states that capital contributions made directly to subsidiaries by minority shareholders can only be computed in consolidated net capital, and the subsidiary is a financial entity that takes deposit from the general public, as these are subject to more stringent oversight. Given that the holding company, Grupo Financiero Santander Mexico, does not take deposits and this entity is where our minority shareholders participate, our parent company cannot count as capital the share-ownership done in the counts of minority shareholders, which currently represents 17 basis points of its capital. For the past few years, we have been working alongside Mexican regulators on the European Central Bank to find a way to satisfy this requirement. Officials at Banco Mexico have several conversations with the SEC to explain the local regulatory framework applicable for banks and financial groups, and the strict supervision they are subjected to in Mexico. However, the ECB applies a strict interpretation of the new regulation during this time, and even the complexity of the situation, the UCB provided an extended period of time to comply with its new provisions. After exhausting all possible avenues, we have determined taking into account that the current system functions, the merger and the transactions contemplated by the merger plan, allow for the group to comply with ECB regulations without materially affecting minority shareholders. If the merger is approved, Banco Santander Mexico will become the sole providing entity, listed in the Mexico and the U.S. Santander-Aeroméxico will assume all the rights and obligation, as well as the liabilities of Grupo Santander Mexico. Now let me quickly review the key steps involved in the process. First, shareholders have to approve the merger and related transactions, including the payment of a cash dividend to be paid to all shareholders of Grupo Financiero Santander Mexico. Second, Grupo Financiero Santander Mexico will be merged into Banco Santander Mexico. Each Grupo Financiero Santander share will be entitled -- each holder will be entitled -- each holder to receive one share of Banco Santander México. Simultaneously, a new financial group will be incorporated in Mexico, where a foreign company will be the sole shareholder. This new financial group will own 74.96% of the shares of the merger Banco Santander México. Third, Casa de Bolsa Santander, our broker-dealer will be sold to the new financial group, as according to Mexican regulations, banks cannot own broker-dealers. Note that in 2016, Casa de Bolsa Santander represented only 0.08% of net income of Grupo Financiero Santander Mexico. An announcement transaction agreement will be established between Banco Santander México, a surviving entity and a broker dealer in order to offer our current customers the same products and services we currently do. At the end of the reorganization, our parent company will be the majority shareholder of the new financial group, which will own 99.99% of the broker-dealer, and 74.97% of the merged Banco Santander Mexico. The merger is subject to certain closing conditions, including approval from the Mexican authorities. The specific details of the merger and transactions involved will be available in the F4 that is being filed tomorrow. There were also a couple of other initiatives that were announced this morning that do not have a material impact on our operations. One is the divestiture of our custodial business and the other is the acquisition of our IT subsidiary from our parent company to provide more flexibility and agility to pursue our strategic initiatives regarding the digital transformation of our operations. This IT operation is part of our global reorganization across every region, where Santander operates, to provide localized services that better serve the local franchise. We are now ready to take your questions. Operator, please go ahead.

[Operator:]

[Operator Instructions] Our first question comes from Carlos Macedo with Goldman Sachs.

[Carlos Macedo:]

A couple of questions. One, margins did go up this quarter, solid performance. A lot of it has to do with pricing, and still, the rate hikes. I wanted to know how much more there is. It's not something that you have in your guidance. Getting understanding how much more relief can you get, or more support you can get from margins going forward, and if they will affect your results going into 2018. Second question on asset quality, a little bit of weakness. Could you describe how much you think of that is attributable to the earthquakes? What do you think is the outlook? I mean, it's not something that is new for Santander. We saw it across your competitors as well. Some pressure on asset quality, particularly SMEs, and consumer as it was in your book. Can you give us an idea of what you're facing, and what should the behavior be going forward?

[Didier Mena:]

Carlo, this is Didier. Nice talking to you. Regarding margins, I think that there's still some room for expansion. Bear in mind that in the fourth quarter of last year, still, interest rates increased significantly. If rates remain steady, as we think they will for the rest of the year, we will experience 192 basis points expansion of the reference rate of this quarter relative to the fourth quarter of last year. So yes, we think that there's still some room for expansion. However, we think that most of the impacts has already gone through our income statement. We think that next year, the tailwinds regarding higher interest rates will not be there. We think that if interest rates remain steady, that there's a chance that they will, we will only experience ROC, an increase of 33 basis points when you compare the reference rate this year relative to a steady 7% next year. So we think that there's just a marginal impact coming next year and onwards. Now regarding asset quality associated with the earthquake, we are monitoring our exposure on a weekly basis. What I could say is that in terms of corporate loans, there's not a material impact at all. And as you rightly pointed out, we think that the impact is going to be in SMEs and consumers. We're still assessing the impact. As you probably know, the banking commission in these circumstances usually provide with certain relief programs. So -- and we have also moved forward with certain initiatives that try to help our clients in these circumstances, such as a problem that we call skip a payment, associated with SMEs. So I would say that we're still in the early stages. The earthquake was literally four weeks ago. So we're still in the process. However, we think that there's going to be an impact in those two segments. I think that probably within the next 3 to 4 weeks, we'll have a better understanding of the impact in terms of potential pressure in asset quality.

[Operator:]

Our next question comes from Jason Mollin with Scotiabank. Please proceed with your question.

[Jason Mollin:]

Looking at your customer base, this quarter, you're showing an impressive increase in net customers of over 1.8 million in September as of September '17, and I believe this number was about 1 million clients in the former quarter, mainly from stemming the outflow. And you've been talking about building more loyal clients with your Santander Plus program. If you can talk about this, I mean, I'm imagining all of these clients are really already in the banking system. So these are not new entrants in this segment. These are probably mostly from other banks. If you can talk about that dynamic and the profitability of these clients initially, and how long it takes to build these clients into profitable ones.

[Héctor Grisi:]

Thank you, Jason. Look, I mean, the customer growth, as you have seen, has been held, first of all, due to the fact that Santander Plus has been a success. I mean, as we told you, we have over 2.5 million clients already enrolled in the program, and the program has been helping us in the deposit growth, as you can see. I mean, it has -- our deposit growth is quite rooted much right on the system. And this is because it's helping us in that sense. Also, it's helping us with attrition. As you know, there is a lot of -- we knew the payrolls in Mexico, there's a lot of rotation there between people, and Santander Plus has helped in that due to the fact that people basically are choosing to stay with us because of the advantages of the program. The [indiscernible], I mean, what we have found out is that loyal customers is four times more profitable than the normal one. Usually, in what we have seen, is that it takes about 1.5 years for a client to mature, and to be fully -- I mean to basically gives us our full potential in terms of revenue per client. And if you see our numbers in terms of revenue per client, loyal client, it has grown quite a lot, which is surprising, because at the beginning, we thought that the clients, as we grew the base, was going to decrease per customer, but it has not been the case. It's actually growing at a really nice pace.

[Didier Mena:]

Probably expanding on what Hector mentioned, let's say that the initial turning point in profitability happens, as you rightly mentioned, close to 18 months. However, the longer the client stays with us, the more profitable the clients are. Just to give you some figures there, clients that have been for five years or more with us are three times to four times more profitable than the clients that have been less than one year with us. So we are just in the initial phase of benefiting from the impact of attracting new customers. We think that the full benefit, we'll get to see it in three to four years. That's actually when the boost in profitability per customer happens, looking at our CRN data. So we think that there's further potential further down the road, and we think that, at this stage, we're not getting to see the full benefits of the attraction of new -- attraction and retention of loyal clients.

[Jason Mollin:]

That's helpful. Maybe just separately, looking at your government portfolio, you grouped it together with financial entities, but you're showing that a substantial, sequential growth, some decline year-on-year. Maybe you can give us your outlook for the government segment. What are margins like? Are they improving? Are they down? Is there risk going into an election cycle? How do you view that business segment?

[Héctor Grisi:]

Look, I mean, that is a segment is quite important for us due to the fact that, I mean, there are payrolls involved that are very stable and very profitable. The problem with it is that, also, there has been a huge fight with our peers in terms of basically position ourselves mainly within the States. And is the fact it has been very tough, and margins, as a fact, have been coming down significantly. And that's how you'll see our portfolio, I mean, coming down as well because competition, and we are focused on profitability and some of our peers are basically focusing on getting more market share, and that has been usually the case and the dynamics. We hope that this not continues to be the case, and we can position ourselves in better ways mainly the States. In terms of what we believe is right now that -- I mean, people are basically not focused on watching the elections, and people are basically concentrating a little bit more in getting this piece of business, and also concentrated on getting payrolls and some other business from the States.

[Didier Mena:]

Also, Jason, bear in mind that when you give a loan to a state, typically have certain enhancements associated with the contributions that the federal government makes to those states. So even though in several states, and obviously, there's going to be some elections there, and also we're going to appoint a new President next year. We think that this framework is quite solid, most of the states, I would say that have relatively solid practices and solid financial position associated with this federal participation. So it's a business that is not a sweet scale. We don't associate significant risk because of the election cycle next year. And as Hector mentioned, when we look at the comprehensive profitability of a client, then we can be very competitive. In those cases where there's just a loan to be given to a client and that's on very thin margins, then definitely, we were not probably the best option for our clients or for our potential clients. But when we have other businesses, like payroll, we can be very competitive. But as long as it makes sense from a profitability standpoint, the contraction that we've seen over the last few quarters is associated with a handful of cases, and the ways that we are compensating that is either protecting the clients that we already have or going after clients that command a good profitability.

[Operator:]

Our next question comes from Carlos Rivera with Citi. Please proceed with your question.

[Carlos Rivera:]

Hi, good afternoon and thanks for the opportunity to ask questions. My first question is regarding your thoughts about the competitive landscape and the outlook for a consolidation. I see I'm thinking about a strategy update as you give at the group level. I'm thinking about the opportunities that you share at that time, particularly on leasing on car loans. In car loans, you only have 1% market share. So are these two pieces of the business that you would probably be interested in developing from scratch? Or would you be considering some acquisitions there? And my second question, just a quick one, regarding the corporate initiatives that you just described, one of those involves a payment of a dividend. So is this dividend regarding the cost of the business? Or would the potential of dividend from the sale of the customer business that was announced several years ago would be additional?

[Didier Mena:]

Regarding the potential consolidation and mainly associated with leasing and car loans. Carlos, I think that our strategy do not rely on making acquisitions. We're planning on building those businesses from scratch. If we find opportunities out there that makes sense from a strategic standpoint and also at a reasonable price, so that the transaction is accretive, then we'll definitely be open for consolidation. I think that the scale and profitability that the bank has in Mexico makes us a very good candidate for consolidation opportunities in the Mexican financial sector. Now regarding the corporate initiatives, the dividend that was announced is mainly associated with, let's say, bringing the equity of the financial growth and the bank at similar levels, so that the exchange can be done on a one-to-one basis. That's basically the rationale behind that dividend. So it's not associated with the custody business. There's just -- there's going to be a sale of that business, but we don't see that sale is connected to providing a payout for that transaction.

[Operator:]

Our next question comes from Tito Labarta with Deutsche Bank. Please proceed with your question.

[Tito Labarta:]

Hi, good afternoon and thanks for the call. I guess my first question, in terms of your guidance, I know you maintained it. But to reach the -- I guess the lower end of the net income growth of 17%, it would imply a very strong fourth quarter with net income, I'm estimating, over MXN 5 billion. I know there's some room for margin expansion, maybe trading gains can normalize and provisions also come down a bit. But just want to hear from you, make sure that -- does that over MXN 5 billion net income per quarter, is that reasonable? Is that doable? And then second question in terms of going back to the government lending, given the recent acquisition announced by one of your peers, where it could have close to 40% market share, I mean, do you see that as an opportunity, where maybe you have to reduce their market share? Or could it be more difficult than you talked about growing in states that they'd be pretty strong with state lending? So I just want to get your thoughts on how that could change the outlook for government lending.

[Héctor Grisi:]

Okay. Thanks, Tito. I mean -- I believe, I mean, as always, we have been very strong on the fourth quarter. It's actually our best quarter every single time, and we believe that it's doable. If not, we will not give you the guidance. So in that sense, we try to be very -- some of you like to say that we are conservative. We are actually very realistic of what we can achieve, and we have our numbers very well reviewed in terms of basically giving you some guidance in that sense.

[Didier Mena:]

If I could just -- just sorry, Hector, just to add on that, we applied the different assumptions that we're making in order for us to get to that, let's say, minimum part of the range. You rightly point out, Tito, that we need to get north of MXN5 billion to get to that range. And that will imply a 14.3% increase relative to net income as of fourth quarter of last year. So far, we have increased 18% net income year-to-date. So we were correct that there are several things that we're assuming that should be pretty well on track, mainly trading gains and provisions. The rest of the business, I think, is relatively sound, robust. So -- and we don't expect any deviation in that regard, but yet, there are some risks associated with these assumptions that we're making not being fully there, okay?

[Héctor Grisi:]

In terms of -- I mean, what you were saying about our competitors' margin, yes, I do believe there is chances to have an opportunity there. This is a fact that our competitor, if they go along with their transaction, they would have a significant peak of the market, and that basically will enable us to basically be more competitive, and also takes the competitor out of the market. So that is always an opportunity. And we will very much focused on basically trying to rally some of these opportunities. However, we continue to grow that portfolio, basically, as Didier told you, because of the opportunities that we believe are associated with this type of [Indiscernible].

[Operator:]

Our next question comes from Jorge Kuri with Morgan Stanley.

[Jorge Kuri:]

Two questions, please. First one is on your corporate reorganization. Do you think there may be a reduction in corporate governance under the new structure where minority investors are going to hold vehicle that is now different than what the majority controller, Santander Spain, is holding vis-à-vis the previous structure where both minorities in Santander México and the parent company held the same vehicle? And to what extent, if there is a reduction in corporate governance or some sort of impact on it, what can you do to alleviate that and make sure that both minorities and majorities will continue to be equally aligned? And my second question is on 2018, and look, I obviously know that you're not giving guidance in 2018. But I guess just reflecting on what has transpired in 2017 for your bank, where the main driver of your net income was the expansion in margins, driven by the higher status. Your NII for the first 9 months of the year was up 15%. It was really all -- margin. Your assets are flat. Your earning assets are flat. Your loan book is up 2%. So it's really more the expansion in status, and so that's really what ended up driving your net income up 18%. So for next year, as you think about 2018, and you obviously want to repeat a good year with high-double-digit earnings growth and without having the benefit of higher status, is there a possibility for credit growth to accelerate materially or for expenses not to be up 12% as they've done year-to-date? And how do you think you can square that, so that you offset the lack of the NIM expansion and provide some other source of earnings?

[Héctor Grisi:]

Thank you, Jorge. Thanks for your question. Okay, I mean, first of all, to tell you that both of the management of the bank and the financial group were not happy we're doing this reorganization. This is something that, unfortunately, we have to do because we were not able to convince the ECB that their Mexican financial groups are well regulated. And that's basically a fact, and the fact that they do not receive deposits, and we couldn't do anything about it, and it was hurting our Santander, as you know, due to the fact that, I mean, we're talking about 18 basis points of capital. And as you know, at this time, I mean, 18 basis points are 18 basis points. So I mean, as a matter of fact, we have to do the transaction. We tried to do it in different ways. Unfortunately, this was the only way we could do it because by Mexican law, a bank cannot own a broker-dealer. So that's a fact. The law in order to do that have to be changed, and unfortunately, that was not possible that way. So we ended up with this transaction, which is not the best, but is the best we can. And just to tell you, the best we can, what we can tell you is, first of all, I am the CEO of the financial group as well as the CEO of the bank, and I have a fiduciary duty to the minority shareholders. And as such, what I can tell you is that -- and also Fernando Borja, who's the lawyer, is here if you want to go more into details. But we can tell you that we are basically -- we'll basically only do in the broker-dealer the only business that the broker-dealer can do. All other businesses that the bank can perform will be changed to the bank. That's first of all. Second, we will try with an SLA structure and an arm's length type of contract to maintain the revenue on the broker-dealer as little as possible in the sense that we will try to manage, and this is my duty and my mandate also from the -- from Santander in Spain that they would like not to damage minorities at all. So that's my mandate, and that's exactly what we will do. And also, each month, by law, we have to publish the statements of the broker-dealer and the statements of the financial group. So you will see transparently exactly how we will be operating this, okay? So -- and I have -- legal responsibility of such is not -- is my mandate, but the legal responsibility that we have as a management and a fiduciary duty to our minority shareholders in order to do it, okay? So in that sense, we will basically keep you informed of all the transactions the way we will manage the group in that sense. And I can tell you that we will do such in the most straight manner as possible. I don't know, Fernando, if you...

[Fernando Mujica:]

Yes, on its component, as far as corporate governance relation, the same thresholds apply for the holding company and the subsidiary. So in that sense, the minority interest are -- have the same right. And in addition to that, it's better to be a shareholder at a subsidiary that generates the income at the holding level. So there will be no impact, and maybe there will be some gain because there will be shareholders of the company's holding income.

[Didier Mena:]

Now regarding your question on 2018 and other potential sources of earnings or revenues, Jorge, I think that, first, even though the interest rate increase has been the major cost of our NIM expansion, it's not the only cost. It's close to 75%, 80% of the expansion, but the change in mix in our loan book also has contributed and also the growth in deposits. So those two things, we expect to continue. And just to put some things in perspective, loan growth, when you look at it, the overall, it's quite modest. But when you break it down into two, let's say, those segments that have been growing more dynamically, we have both these markets and SMEs that command sound margins, and they are growing at an attractive base. Particularly, lead market is growing close to 12%. That's how you rank what our competitors are growing in that space. When you look at our loan portfolio, mid-market and SMEs have gained over the last -- close to two years, 420 basis points in our loan portfolio. So that's relevant. Only of the last year to date, that growth is 240 basis points. So that's -- and we see that trend to continue. Then when you look at those segments that are performing below par, I would say that there are three basic components. The first one, on the individual side, it's mortgage loans, and we are seeing a pickup in origination volumes there. However, that will not compensate or still compensate for the runoff in the ING and GE portfolios. So for the runs, what -- we'll get to see how this origination dynamic will more than compensate that runoff, but we will see now a good trend there. Consumer loans are growing quite nicely at similar levels than what our competitors of the market is growing. And the two segments that, let's say, provide more volatility in terms or have a higher impact in terms of our loan growth is corporate and government loans. We expect that to continue. We'll be taking advantage of growth opportunities, but not compromising profitability at all. We think that the interest rate is more stable. Our investment banking business will increase its contribution. We're working several initiatives, and continued strengthening our teams there. So we would expect that business to increase its contribution. We're also seeing fee income growth accelerating. This last quarter was relatively good. So we expect that to continue. And also, bear in mind, what we've mentioned regarding the dynamic in loyal customers. We think that, probably, next year is not going to be easy, the year that the performance is going to be stellar. But the trend is what, in our view, matters and matters a lot because client, loyal clients increase their profitability by increasing their balances or using other products. So those clients that joined us last year will be in the second to third year with us next year. So that should start flowing to our income statement. And we think that that's going to be another source of potential earnings for next year. But still, we're not providing guidance, Jorge, okay?

[Operator:]

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

[Ernesto Gabilondo:]

A couple of questions from my side. The first one is on [indiscernible]. I just want to know, why are you willing to enter into the micro finance segment under a more competitive environment? What are the competitive advantages of your new business? I don't know if is it offering lower interest rates, technologies, service? My second question is a follow-up on consolidation. We have seen information circulating in the media that Santander México would be interested in Unifin. Given that other peers are on its way to consolidate M&A opportunities, do you think Unifin could make sense if it brings new clients to Santander México? Is this a business that you're interested to look at? Any color will be much appreciated.

[Didier Mena:]

Thanks, Ernesto. [indiscernible] we think that there are 3 things that will differentiate us from, as you rightly pointed out, a competitive landscape. The first one is a comprehensive set of products and services. As a probably know, there's very limited players that offer savings, working capital loans, insurance, transactions, and most importantly, to us, financial education programs. So we have the capacity to offer all these products and services in one shop. And I think that, that makes a significant difference. We think it's probably somehow counter-intuitive, but there's a higher demand of savings in the low-income segment in Mexico than of loans. So we think that the way to attract and retain customers in this segment is by offering counter incentive set of products and services. So that's the first thing that we think is going to differentiate us. The second one is the use of technology. We think that by relying heavily on the mobile pay or pay apps were going to make a difference in terms of how simple we can service these clients. Finally, and probably, it's the most important differentiating factor, I would say, is the goals that we pursue. What we are aiming is to have a social impact. If you look at -- we're extremely successful in this initiative. That will not move the needle at all in terms of scale or profitability in Santander México. So we're supporting this initiative basically because we consider that it's our duty that Santander has benefited significantly for -- from their investment in Mexico. So it's a way of giving back to Mexico part what Santander has benefited from. So those three things, I would say, are the way that we think we can have an impact in the market. We think that by bringing in efficiency, we can offer lower interest rate than with what competitors have out there. I would say that it's just the initial phase. We will start probably a combination of the traditional mobile, and we will incorporate a set of possible technologies, so that we can have some efficiencies and be able to reduce pricing or offer other benefits to potential clients. Now on the -- we don't comment on rumors. We've mentioned that we're interested in starting leasing operations, and we will look at potential opportunities in the market. That's probably what I can say to you.

[Héctor Grisi:]

I mean, as we have tell you -- sorry, Ernesto, as we have tell you in the past, I mean, we're always interested in looking at opportunities. And for sure, we are completely obliged to look at everything. Unfortunately, on Unifin, given it's a public company, and we're a public company, I'm not allowed to discuss anything at this point. But what we can tell you is that, I mean, we will continue looking at opportunities because, I mean, Mexico is a priority for Santander, and we are obliged to look at opportunities.

[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 management for closing remarks.

[Héctor Chávez:]

You're welcome to [Indiscernible]. So if you have any further questions please don't hesitate to call or e-mail us. Have a great day.

[Héctor Grisi:]

Thank you.

[Operator:]

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