Banco Santander México, S.A., Institución de Banca Múltiple, Grupo Financiero Santander México
Q1 2015 Earnings Call Transcript

Published:

  • Operator:
    Good day everyone, and welcome to the Grupo Financiero Santander Mexico’s First Quarter 2015 Earnings Conference Call. Today's call is being recorded and after the speakers’ remarks there will be a question-and-answer session. [Operator Instructions]. For opening remarks and introduction, I would like to turn the call over to Mr. Hector Chavez, Managing Director, Head of Investor Relations. Please go ahead, Sir.
  • Hector Chavez:
    Thank you. Good morning and welcome to our first quarter 2015 earnings conference call. We very much appreciate everyone’s participation. By now, everyone should have access to our earnings press release and the company’s presentation which were released this morning before the market opened. Speaking during the call will be Marcos Martinez Gavica, Executive President and Chief Executive Officer. Also joining us are Pedro Moreno, Deputy President of Administration and Finance; and Rodrigo Brand, Deputy General Director of Public Affairs and Communications, all of whom will be able to answer questions during the Q&A session. Before we begin our formal remarks, let me to remind you that certain statements made during the course of our discussion today 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 may be beyond the company’s control. For an explanation of these risks, please refer to our filings with the Securities and Exchange Commission and the Mexican Stock Exchange. On today's call, Marcos will provide an overview of our performance this quarter, including a review of Mexico’s market and financial system trends. Marcos, please go ahead.
  • Marcos Martinez Gavica:
    Thank you, Hector. Good morning and good afternoon for the people who is in Europe, and thank you for joining us in this earnings call. This, commercially speaking was a good quarter. We reported strong loan growth by maintaining our focus on asset quality. We have expanded our loan book by 15% year-on-year, exceeded macro growth rates, and achieving a positive performance across our segments, particularly in SMEs, mortgages and middle-market. Consumer loans also reported strong growth but were affected by ongoing softness in credit cards. Growth of our deposit base was also strong, up 14% year-on-year, and in particular demand deposits has increased by 23% year-on-year. This was achieved while improving MPN ratios and we're using risk on a sequential basis. In terms of efficiency, as anticipated operated expenses in the quarter reflect a higher ranch base and the impact from the deposit insurance fee, and I will provide more details about this in a few minutes. As you know, we are also close to finalize our expansion plan, we have total 194 new branches open since the fourth quarter of 2012, and there are few branches to be opened before the end of the second quarter this year. This quarter we also completed acquisition of the 3.2 billion peso consumer loan portfolio from Scotiabank as announced last November. There are more than 39,000 loans acquired were effectively added on our portfolio as of April and will increase our share in the personal loan score segment by approximately 230 basis points. In the next page in terms of the macro, we see consistent evidence of economic recovery. Even though the manufacturing industry show a slight slowdown in the first quarter of the year we expect an improvement performance going forward as economic activity in the US accelerate in the coming months. At the same time, we continue recovering of formal employment and higher salaries having them to translate into moreover a consumer spending indicators. For example, we size as measured by us increased by 5.7% year-on-year in the first quarter of 2015, accelerating from 1.9% in the fourth quarter of last year. In addition, domestic phase also accelerate in the first quarter of 2015 expanding 22% year-on-year. So while we remain cautious about the strength of the consumer, these indicators allow us to be optimistic about the future. We maintain our GDP growth estimates of 2.2% for 2015 and expect GDP growth of 3.8% in 2015 as the continuous strength of the US market continues to drive the manufacturing sector. This forecast already considered the impact of SMP announced budgetary cost for 2016 announced by the government early this month. We also seem to have rate increasing to 3.5% in the second half of the year and 4.5% in the 2016 with inflation declining to 3.2 percentage year and righting to 3.5% next year. Moving to the financial system, as anticipated we continue to see positive signs of recovery in loan growth during the quarter following the pickup that began last November. Total system loans rose 10.9% year-over-year in February, the more recent public data. All segments posted a positive performance except cash which continue to decelerate during the quarter and actually slowing credit cards consumer loans for the systems rose 9% year-on-year. We expect overall lending activity to maintain this positive trend as economy continues to recover. The system in terms of deposit also performed well, up 11.7% and continued the upward trends shown in the third quarter last year. In this context Santander Mexico expanded our total portfolio, loan portfolio by 15% year-on-year with both retail and corporate loans posting a strong performance. Retail loans were up 16% while corporate rose 15% continued to pick up since last quarter. Our focus on our core market has allowed us to increase the share of this segment in our total loan portfolio since our IPO in the third quarter of 2012. As you can see in the pie chart at the bottom of the right, SME rose 9% to 12% and mortgages from 20% to 23%, and while consumer loans including credit card remained a key segment in our strategy, their share fell from 18% to 16% reflecting the weakness in the Mexican consumer over the last two years. Looking ahead, we should see this segment increasing share of our business following the trend we began to see during the past two quarters. And now moving to individual loans, we grew our portfolio by 13% year-on-year within market rates across our segments. Mortgage loans, our largest individual product continue their strong volume growth, up 15% year-on-year. We continue to expand significantly above market rate leverage our right product offering and remainder living mortgage originator in the country. Most importantly consumer loans excluding credit card rose 20% year-on-year, more than doubled market growth of 9%. This was driven by our renewed focus on payroll loans after improving our processes and by continued growth in personal loans. Sequentially, consumer loans increased 30%, credit cards however remain weak despite continued penetration of the open market as usual, it is still affected by the fiscal reform. Nonetheless with our system the growth rate in this product, we have achieved even though more than 1600 new cards played during the acquired from just contributed loans. Now that they continue to maintain our standard as we tap the open market. The commercial loans rose 18% year-on-year with important contribution for all segments. We maintain our leadership position in the high potential SME market expanding this portfolio up 24% year-on-year, significantly above market. We remained focused on further developing this profitable market while maintaining our prudent approach to risk. In the middle market loans also posted a strong growth of 15% year-on-year, doubling the market. And the corporate loans expanded 15% year-on-year as anticipated this quarter which indicated the last long life granted in the fourth quarter last year was compensated at effect with new loans origination. Finally, loans to government and financial entities rose 20% year-on-year, principally reflecting lending to their poor state owned companies in the country. We have achieved this partial payment by Pemex [ph] following a strong loan demand last quarter. In terms of funding, our restructure you send there our high end compliance, our ongoing focus on SMEs and the branch expansion program continues to support the positive growth while sequentially deposit were seasonal flat, demand deposit were off 15% year-on-year optimizing cost of funding with term deposit of 14%. Let me highlight the good behavior on demand deposits, up 23% year-on-year, doubling the market. As well as SMEs and middle marketing demand deposits which expanded about 20% during the period. We maintain robust liquidity, with the loan to positive ratio of 100% which together we are strong capitalization of 16.6% provided from to further expand our loan book as demand increases. Additionally our maturity profile positional well for anticipated increase in interest rate this year. Finally this quarter we've also began to ratios as per regulations which are comfortable about the required limit. And now look into the NPL, net interest income was up 1.3% quarter-on-quarter and 10.4% year-on-year reflecting 15.1% in net interest income from the loan portfolio excluding credit card and the 14.6% increase in net interest income coming from investment in security which more than offset the weaker performance in credit cards. The spectral recovery in consumer activity under precision of the Scotiabank portfolio affected this month should contribute to provide a net interest income growth. Net interest margin for the quarter remains stable at 4.87% on sequential basis despite the good performance in the next income due to the proportional increase in productive assets. Moving onto commissions, the willingness in credit card financial advisory and capital market fees that was mainly driven by external stock push and more than offset the good performance in insurances, cash management and in business on field [ph]. As you may know, this area last year we have been seeing lower credit card users market wide reflecting concerns of heavier types of provision result from the fiscal reform. At the same time we continue to incur new replacement costs through telemarketers to tap beyond the markets which allows us to row this portfolio about the market levels. The reassume caller, credit cards were the largest contributor to federal percent in affect for the fiscal reform was inactive. They however credit card transfer in terms of sequence rather insurances and cash management. Financial advisory fees were particularly weak this quarter reflecting the lower execution of last energy on infrastructural project, furthermore, year-on-year and quarter-on-quarter comparison reflect that the first and fourth quarter of 2014 were our stronger quarters in terms of impairment banking operations. Remember that this line is volatile as it depends on the project execution and the market condition. Nonetheless, we maintain and struck by client which is expected to materialize as the business environment improves and the market conditions recover. Loss operation income was up to 8% year-over-year reflecting a strong performance in net interest income with trading games back in line with our estimated quarterly average ratios around $700 million and $800 million. More significantly, despite the willingness in fee generation, loss operated income was 3% sequentially which in our record saw pricing 4 million peso mark. Then we also have the 94% loss operated income what composed bank revenue. In terms of asset quality, loans reached to average level after which an unusual low in the fourth quarter of last year resulting from the comparison period. Much importantly, loan loss grew 6% year-on-year significantly below the 16% increase in the loan portfolio, positively declined quarter-on-quarter, down 19 basis points and fell 32 basis points year-on-year, increasing the covenant ratio to close to 100%. We also achieved a sequential improvement in asset quality across practically all business segments resulting in empty years declining with 3.58% in the quarter. Then we highlight the declines of 57 basis points in consumer NPL and 24 basis points in SMEs. Despite the low volume in credit cards, NPLs for the product improved 33 basis points quarter-on-quarter. Moving down the NPL, while expenses increased 8% year-on-year, this includes a 23% increase in the deposit insurance fee or [indiscernible] 40 basis points over from - remember the international account in standard, these line item would not be included within expenses, excluding the insurance fee deposit, deposit fees, operating expenses would have increased by 7.1% year-on-year, in the mid-range or high guidance for expenses which also includes this fee. Personal expenses was 15% reflecting the 15% increase in the overall in fee to support business growth and expansion plan. Administrative expenses were flat as our efficient cost management is offset in both, the incremental cost of the new branches, as well as personal expenses. Note that 66 branches which represent one-fifth of the branch expansion plan were opened in the last quarter of 2014 and most of the expansion started to materialize this quarter. This represents 1.6 percentage points of the increase in expenses. Excluding the impact from the new branches, the precision and impact expenses would have increased as slightly about inflation. So while efficiency ratio rose 0.5 percentage points year-on-year with 44.8% remember that it was impacted by the factor I just explained as well as weaker than anticipated activity in both credit cards and fee related business. Going forward cost are expected to remain relatively flat sequentially as we maintain our efficient expense management, this together with a strong gross operated income driven by earnings, as anticipated to allow progressive improvement in efficiency the following quarters. The full impact of the 550 basis points increase in the effective tax rate up to 23.5% from 18% a year ago resulted in 1.4% year-on-year decline in net income and at 12 ROE for the quarter. With tax profit loss 5.8% during the period and we anticipate it will increase progressively throughout the year driven by the following factors. One, the financial margin is expected to maintain and abort train as we continue to build a loan and securities portfolio. Second, fees are also anticipated to show other than performance as the project pipeline materializes. Third, provision are anticipated to remain in line in our guidance as we maintain origination standards. And finally, cost are expected to remain relatively stable in the following quarters as we keep our efficient expense management. We believe a combination of these factors can not only sequentially cover net income and in ROE during the year. To finish, finally, moving onto guidance, we maintain our outlook for the year provided on our previous finished calls. This is based on the strong performance achievable most of the segments, once again, we did on a caution optimistic view of the recovery of the Mexican economy, particularly following the recent pickup in consumer activity. This means that we expect loan growth to range between 13% and 15% in the year with consumer loans expanded between 12% and 15%, mortgages 10% to 12%, and SMEs by 22% to 25%. To anticipate the process to grow between 10% to 12% during the year, as we continue to run forth our new branches and economy recovers. At the same time, cost of risk is expected to range between 3.4% which 3.6% in 2015. We also believe operating expenses will increase between 6% and 8% as we continue to maintain tight cost controls while investing in our strategic business. Remember, this growth doesn't include the deposit insurance fee and the reversal of the employee professional programs that refers the other real cost of operations. This shows we're building a prepack earning increasing by 15% to 20% with an expected target rate between 23% and 25% for the year as it converges to normalization. With this we finalize the presentation and we are ready to take your questions. And please go ahead.
  • Operator:
    [Operator Instructions] And we'll take our first question Thiago Batista with ETOF [ph].
  • Unidentified Analyst:
    Hi guys, thanks for the opportunity. I have two questions; the first one is on margins and the second one on the cost of risk. On margins, we saw that your loan margins were flat Q-on-Q but contracted a bit year-over-year, despite the fact that your portfolio is faster on consumer and SME the last 12 months. So my question is, could it come into your view on the loan margins, going forward how do you believe margins will perform during the year? And my second question about the cost of risk, your guidance for the cost of risk for the year is 3.4% to 3.6% but in the first quarter your cost of risk was only 3.1%, so my question is do you see your provision expansions increasing during the year or maybe your cost of risk would be below the guidance?
  • Marcos Martinez Gavica:
    Well in the phase one, at this moment it's stable, the NII, but we are expecting that it will be becoming a better one as the year will be passing because of the mix of the portfolio. And in the cost of risk, this quarter was a better one. We don't see it will be a deterioration in the portfolio, it is that we're maintaining our guidelines just to be conservative but no surprises that we are expecting to have.
  • Unidentified Analyst:
    Okay, thank you.
  • Marcos Martinez Gavica:
    And then maybe at the end of the year what you will see is that the home builders because of the way that we have to administer the NPL they will be affected at the end of the year because it will happen that half past a day 18 months after not paying and you will have an impact there but it's only an accounting issue. On the other side, if you see the Pemex suppliers, that have been affected the contractors of Pemex are not included in this quarter. And the Scotiabank - at the end the Scotiabank portfolio that we have acquired will affect because we are tied in close quality of portfolio but it has to be reflective in the cost of risk and the NPLs by around 400 million pesos.
  • Unidentified Analyst:
    Okay, thanks for the answers.
  • Operator:
    And we'll take our next question from Philip Finch with UBS.
  • Philip Finch:
    Good morning. Marcus, thank you for the presentation, I have got a couple of questions as well. My first question is regarding your loan growth which has shown really good across the board growth in recent quarters but one exception is credit cards, we sure have seen really sluggish. Now this just seems to be an industry trend as well but from your expectations going forward what sort of improvement can we expect in this segment if any at all? And secondly - my second question, you've maintained your guidance for pretax earnings growth of 15% to 20% for this year, in the first quarter it was only 5.8% growth year-on-year, so going forward what are going to be the key drivers to get to your guidance? Thank you, Marcus.
  • Marcos Martinez Gavica:
    In the phase one, talking about credit cards, yes, we think that this tendency would take a while to change because the government insist in fiscalize people by the use of the credit cards even though now they are aware that this has been result of this strategy and they are started to be worried. To do something different it will take some time but fortunately people are not using the credit card but is using personal loans and favorable loans, that's why if you see we are growing 20% that portfolio, that is not only twice the market is doing it but is very different 28% that we were growing some quarters ago. Then in the combination of both of the portfolios is that we're expecting to grow between 10% and 12%, that is not a bad growth for this very profitable segment and we're expecting that government is going to do something about the credit cards in their second half of the year, and it will help us with more in 2016 than in 2015. And talking about the pretax earnings, I will ask Pedro to give you an explanation about that.
  • Pedro Moreno:
    Yes, you are right, now we are growing only 6% year-on-year, and we have spent to accelerate this to the range between 15% to 20% at year end. The drivers for getting that is mainly the income line, we are now already we go to a double-digit growth where in 10% growth year-on-year and accelerating to 15% at the year end. This will be the natural and development of the net interest income of the portfolio we are building up, and at the same time we expect a sound work operation in the fee income line, this is the one that is affecting mainly this first quarter result. Due up to this acceleration the income that the expenses will be controlled, this quarter we have jumped up to 8% because we recognize from the very beginning the impact of the branches opened last year, as well as the inflation accrual for all the expenses, and this will be relatively flat quarter-on-quarter in the future. And with the expectations we have to maintain the normal research growing below the reedom of our loan book, this will lead you mathematically to this acceleration and to achieve our target, so we maintain that as very feasible.
  • Philip Finch:
    Right, thank you Pedro, thank you Marcus.
  • Operator:
    And we'll take our next question from Marcello Telles with Credit Suisse.
  • Marcello Telles:
    Hi, good morning gentlemen, thanks for your time. I have…
  • Marcos Martinez Gavica:
    Could you speak louder please because we can't hear you Marcello.
  • Marcello Telles:
    Sure, can you hear me better?
  • Marcos Martinez Gavica:
    Yes, much better.
  • Marcello Telles:
    Thank you. Now I have two questions, the first one is regarding your guidance for earnings growth, more pretax earnings growth, do you expecting 15% to 20% earnings growth for the year but if you look at the growth rates from the first quarter as you see over first quarter last years, we see - you are well below that. So how confident are you that you're going to be able to deliver this 15% to 20% growth in pretax earnings? So what's going to be the main driver of improvement so that you can match that guidance going forward? And the other question is regarding your SME portfolio, clearly you've been executing very well the growth in that portfolio, and my question is how comfortable are you that you're not going to face delinquency or incremental delinquency in that portfolio going forward because they are being growing very strongly and we've seen that happen in some other segments over the past years, so what makes you comfortable that it's not going to happen this time? Thank you.
  • Marcos Martinez Gavica:
    You're welcome. Well, starting with the SMEs portfolio we feel very comfortable in the way that it was been behaved this portfolio for the last five years. And what we are doing at this moment is to grow more in the medium than in the smallest one. And our expectation is that they will behave even better than the portfolio has been doing in the past because they are more formalized companies and because we are expecting a better macro economical scenario in the future that is what happened in the past. Saying that we still have some kind of guarantee in 60% of the portfolio and we are not using it because it's behavior has been a better stable one. Then we feel very comfortable about that. And in the phase one as Pedro has told just in the last question, we are expecting to grow the prepacks earning because then the financial margin is going to top during the year until 15% and the fees that has been very weak this quarter - not only because of the credit card operation but because internal banking, a pipeline has not been executed but it will be doing during the year, and the cost will be stable, that's the reason why we seem the income and maintaining the cost in control will allow us to have a pretax profit between 15% and 20%.
  • Marcello Telles:
    Perfect. Thank you very much.
  • Operator:
    And we'll take our next question from Saul Martínez with JP Morgan.
  • Saul Martínez:
    Hi, good morning guys. I'm also struggling for 2% to 15% to 20% pretax earnings growth but I guess you guys have addressed it on a couple of questions. So I'm just going to ask one more detailed question on the Scotiabank acquisition, I think it's a 3.2 billion peso portfolio, can you just give us a sense for what the incremental lift off is to your NII, remind us again. And forgive me if you already did discuss this but what kind of provision you're going to take against that and essentially what kind of pretax earnings benefit, how accretive is this acquisition to your bottom-line?
  • Marcos Martinez Gavica:
    Well, Scotiabank operation this first year in 2015, we are estimating a zero impact in our net income, and this is due to the methodology for research that we have to create, anticipated the expected loss. So provisions will be created in one shop, this month of April. This will be obsessed by the net interest income generated by expenses related to the operations so profit will be fewer this year. And then gradually the portfolio will be maturing, we will release provisions and the interest income will remain, so this will happen in the year 2016 and 2017. The tenure of this portfolio - the duration is like 1.8 years, so it will be over in 2017. But just as a summary, this impact here is zero and positive in the coming two years.
  • Saul Martínez:
    But the negative impact is in one shot though in April and then you get the incremental benefit on an ongoing basis. What if - can you share with the average yield is on your portfolio? This is similar to the data?
  • Marcos Martinez Gavica:
    Yes, very similar. The yield of this portfolio is like the standard consumer loan growth or 20% spread.
  • Saul Martínez:
    20% spread?
  • Marcos Martinez Gavica:
    Yes.
  • Saul Martínez:
    That's helpful. Thank you very much.
  • Marcos Martinez Gavica:
    Welcome.
  • Operator:
    And we'll take our next question from Martin Lore with Atkinber Securities
  • Martin Lore:
    Good morning Marcus and Pedro. Thank you for the call. I really have one question, in the government segment we've seen that the strong long growth is sustainable going forward?
  • Marcos Martinez Gavica:
    Well, while we are sustainable - another, maybe other percentage of growth as 20% where we say is that we have very well related position in the new projects, the infrastructure ones that is going to happen, the pipeline that is waiting to be executed. And what we are seeing is that even though they are like bridged loans to have the possibility to syndicate before after that or in the next future to be replaced by a market operations, we will maintain these loans on this participation in the origination in most of the projects, that's why we are confident that it will be very busy business - the government loans related to SME substantially, and in some times full year for that kind of project that will lead us to maintain a higher amount in these loans but it won’t be a payment in loans, it will be transitory loans.
  • Martin Lore:
    Okay. And what are clause that you undertake here for the rest of the year?
  • Marcos Martinez Gavica:
    I cannot give you assured what amount because it all depends at the time that the projects can be executed but we're expecting that starting this quarter the activity will be in place.
  • Martin Lore:
    Okay. Thank you very much Marcos.
  • Marcos Martinez Gavica:
    You're welcome.
  • Operator:
    And we'll take our next question from Victor Galianno [ph] with Barclays.
  • Unidentified Analyst:
    Hi, thank you for the opportunity. Just two questions for me, one follow-up, I'm afraid to say on the financial margin for cost. I just want to make this clear and I apologize if you did mention this earlier, but - are you assuming that benchmark rates are higher in the second half of the year than they are in the first half of the year and is that part of the higher margins story. That's my first question. My second question is about costs, and really what I want to understand is kind of the quarterly impact of the roll out of your branched network, is this pretty much done now, so are we going to see very little incremental cost impact from the roll out to the branch network? Thank you.
  • Marcos Martinez Gavica:
    You're welcome. In the second one, because we have almost practically finished our branch expansion, what we are expecting from now on is normalizing the cost and that you will see in the future is a behavior as much as slightly higher than the inflation. Then you're not going to see the rate that you have seen in the past, as Pedro told you, the impact was in the first quarter and we see this amount will be stable during the year. And thus while we feel that this won’t be any surprise and that's why the growth of the income will be higher in compare with the behavior of the cost, and yes, we're expecting an increase in the interest rate or around 50 basis points in the second half of the year that affect to the margin in 1000 million pesos, annually speaking.
  • Unidentified Analyst:
    Okay. So you would expect an impact of about 500 million in the second half from benchmark rates?
  • Marcos Martinez Gavica:
    I would.
  • Unidentified Analyst:
    Thank you.
  • Operator:
    And we'll take our next question from Chelsea Consco [ph] with TIAA Craft.
  • Unidentified Analyst:
    Hi, thank you for the call, I just have two questions. One is related to your loan deposit ratio, it's slowly been increasing pretty much each quarter and based on the guidance in this year it seems that it will also increase further. So I'm wondering where you comfortable in terms of loan to deposit ratio, how high will you let it get? And then my second question is related to the mortgage segment, on a year-over-year basis it seems that the NPLs increased rather significantly, so I'm wondering if you could elaborate a little bit on that and also tell us what is your loan to value in the market segment?
  • Marcos Martinez Gavica:
    This is related to the ING acquisition of the portfolio and I realized that Pedro can give you more details about that.
  • Pedro Moreno:
    Well, as you remember when we acquired the ING portfolio we did it 49% and - so it means that we already calculated that this impact will occur, we knew the quality of the portfolio, I can assure you because being a very, very profitable acquisition for the bank and this was already discounted in our predictions for non-performing loans, excluding that the behavior of the own generated mortgage portfolio at the bank is one of the best qualities in the system. We are focused on high end customers, so we are not going into a low end performance which are mortgage scheme. And I can tell you the cost of risk of mortgages is below 1%, so we are very satisfied with the quality, we are not preserving the duration of the new vintages. So we are very happy with the standards of our origination and we will keep it. The non-performing loan ratio will improve and the ING portfolio will mature. So we are not worried about that. And the rest of the assessment are also behaving very, very well, we are very happy with the new vintages of all businesses; consumer loans, credit cards, SMEs. So we're really very, very confident on that.
  • Unidentified Analyst:
    And what is the average loan to value including ING?
  • Pedro Moreno:
    At the origination level it's 85%; in the portfolio it's like 65%, loan to value.
  • Unidentified Analyst:
    Thank you.
  • Operator:
    And we'll take our next question from Arturo Langa with Itau BBA.
  • Arturo Langa:
    Good morning. I think my questions were answered, so that's it for me. Thanks.
  • Marcos Martinez Gavica:
    We cannot hear you.
  • Arturo Langa:
    Yes, my questions were answered, thank you. No questions from my end.
  • Marcos Martinez Gavica:
    Okay.
  • Operator:
    And we'll take our next question from Carlos Gomez Lopez with HSBC.
  • Carlos Gomez Lopez:
    Thank you for taking the questions. And two of them on tax, I hope next guidance for 23% to 25% for this year? Could you also remind us what your guidance would be for the coming years, 2016 to 2017 and have you found any further opportunities to optimize your tax rate as you did last year? The second question would be regarding the Scotiabank portfolio, it's 39,000 loans, do you - do the loans also include the relationship that you keep - that you bring accounts, hardly now plan to sometime there and your assumption for retention of this portfolio? Thank you.
  • Marcos Martinez Gavica:
    I'll help with the second one. This 39,000 loans is not only an opportunity to increase our margin or the income of the bank, what is really the attractiveness of this portfolio is the possibility to bring them to the bank and to make them clients of the bank, not only a portfolio but new clients for the bank. We haven't had enough time, more than for amounts, preparing the teams of the bank and doing the strategy to bring them and to share at least this client with Scotiabank in the future but preferably to bring them and to make them new clients for the bank and it is starting - doing approved office for - an important number of them to give them a restitution in credit increasing the actual balance because most of this portfolio is in the middle of the time of the duration then we have the possibility to offer them again the amount who was the original one in new loan, originated inside of the institution and that gives us a possibility to start working to them, and saying that in the taxes, Pedro can you…
  • Pedro Moreno:
    Yes, we maintain the guidance for this year and our taxes will be around 24%, 25%. And let me remind you that the regulatory tax rate in Mexico is 30%, and we have feed for the next year it goes to 26%, and in the year 2017, 28%; and going forward we have spent to maintain this. And as you can see we are always looking for taxes strategies and tax management, this 28% guidance would have includes - already 200 basis points of tax improvement but of course we will continue trying to find out something else but it's realistic to think that 28% can be a standard normalized tax level for this bank.
  • Operator:
    And we'll take our next question from Chelsea Consco [ph] with TIAA Craft.
  • Unidentified Analyst:
    Hi, just following up on my other question which I don't believe you answered on the loan to deposit ratio. It seems it's been rising and you expect to continue to increase considering your guidance for deposit growth this year. So I'm just wondering how high you expect that ratio to get and what's the comfortable level for you?
  • Marcos Martinez Gavica:
    Yes, that's right. We are close to 100% on to the positive ratio which is very healthy. And we have volume a bit more the loan book than the positive phase but nevertheless, we feel very comfortable at levels around 110%, 115%, very easily manage because don't forget that Mexican financial system is very liquid; and there are lot of demand for issuances of institutions like ours, we are not - almost not using this tool but it should be very, very easy to get liquidity at very, very attractive prices. And probably you have not these but we - it's the first time we have published the liquidity ratios that will be enforced from now on for basil free relation [ph] and as you can see we are at 116% so very comfortable above the minimum regulatory standards which in Mexico is now-a-days 60%. So we manage liquidity without difficulties and we foresee the next year to be comfortably above 100% in this ratio. I'm finding ourselves with many, many instruments in the market, we felt increasing the cost of funding.
  • Unidentified Analyst:
    Okay, thank you.
  • Operator:
    [Operator Instructions] And we'll take next question comes from Carlos Gomez Lopez with HSBC.
  • Carlos Gomez Lopez:
    Just one final question, a follow-up on asset quality, as it was mentioned before your first quarter has been better than what you write for. How long would you have to wait until you decide to modify your guidance for the year?
  • Marcos Martinez Gavica:
    Sorry Carlos?
  • Carlos Gomez Lopez:
    How long would you have to have what you have one, two, three good quarters before you decide that you could modify your guidance for cost of credit for the year?
  • Marcos Martinez Gavica:
    Well, even though we are maintaining the guideline as we've told you before, we are just expecting some methodology impact in the portfolios, especially in the home builders, that at the end of the year we have to register the last portfolio that is not affecting at this moment the risk. And in the Pemex contractors, we have issues about how they are going to behave in the restructure of different contracts for them. Actually Pemex is negotiating with the most important contractors supplier, and because they are changing the conditions to them, not only in terms of the income but in terms of the time that the contracts includes, we think that it will be necessary for some of them to restructure the loans. And as you know, when you restructure a loan, the Mexican regulation asks you to out in NPL in the loan and it happens from payments that assure you that you have - that the company has the possibility to pay the loan and because we don't know how much of this contractors I went to be restructured we prepare to leave this guidance and to wait one quarter or two more quarters until they finish the negotiation between Pemex and the contractors.
  • Carlos Gomez Lopez:
    Thank you very much.
  • Operator:
    And we'll take our next question from Martin Lore with Atkinber Securities
  • Martin Lore:
    Marcos, what is your response to the old sector Pemex [ph]?
  • Marcos Martinez Gavica:
    Our spoke sure [ph] to Pemex?
  • Martin Lore:
    Yes, the only factor if you feel Pemex contractors.
  • Marcos Martinez Gavica:
    All I have got is 6% of the total portfolio and Pemex is half of it, 3%, that is a 1.5% to the contractors.
  • Martin Lore:
    Okay. Thank you very much.
  • Marcos Martinez Gavica:
    You're welcome.
  • Operator:
    And that does concludes the question-and-answer session. I would now like to turn the conference back over to our host, Hector Chavez for additional or closing remarks.
  • Hector Chavez:
    Thank you, operator. Thank you very much too all of the participants for joining Santander Mexico on this call. We look forward to maintaining an open dialogue with you, and you are very welcome to visit us in Mexico. If you have any further questions, please don’t hesitate to call us and/or email us.
  • Operator:
    That does conclude today’s conference. Thank you for your participation.