Banco Santander (Brasil) S.A. Management Discusses Q4 2013 Results - Earnings Call Transcript

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Banco Santander (Brasil) S.A. (NYSE:BSBR) Q4 2013 Earnings Call January 30, 2014 10:45 AM ET


Carlos Alberto López Galán - Chief Financial Officer, Vice President Executive Officer, Investor Relations Officer, Member of Executive Committee, Member of Asset & Liability Management Committee, Member of Compliance Committee, Member of Financial Committee, Member of Human Resources Committee and Member of Legal Committee

Oscar Rodriguez Herrero - Head of Risk Management Area, Vice President, Executive Officer, Member of Executive Committee, Member of Asset & Liability Management Committee, Member of Compliance Committee and Member of Risk Committee


Marcelo Telles - Crédit Suisse AG, Research Division

Saul Martinez - JP Morgan Chase & Co, Research Division

Regina Longo Sanchez - Itaú Corretora de Valores S.A., Research Division

Jorge Kuri - Morgan Stanley, Research Division


Good day, and thank you for waiting. Welcome to the conference call to discuss Banco Santander Brasil S.A.'s results of the fourth quarter of 2013. Present here are Mr. Carlos Galán, Vice President Executive Officer, CFO; Mr. Oscar Rodriguez, Vice President Executive Officer, CRO; and Mr. Luiz Felipe Taunay, Head of Investor Relations. The live webcast of this call is available at Banco Santander's Investor Relations site, (sic) [], where the presentation is available for download. [Operator Instructions]

Before proceeding, we wish to clarify that forward-looking statements may be made during the conference call relating to the business outlook of Banco Santander, operating and financial projections and targets based on the beliefs and assumptions of the Executive board, as well as on information currently available. Such forward-looking statements are not a guarantee of performance. They involve risks, uncertainties and assumptions as they refer to future events and hence depend on circumstances that may or may not occur. Investors must be aware that general economic conditions, industry conditions and other operational factors may affect the future performance of Banco Santander and may cause actual results to substantially differ from those in the forward-looking statements.

We would now like to pass the word to Mr. Carlos Galán, Vice President Executive Officer, CFO. Mr. Galán, you may proceed.

Carlos Alberto López Galán

Thank you. Good afternoon, and thank you for attending Santander Brasil 2013 results conference call. The table of contents summarizes the topics that will be covered: A quick view about the macroeconomic scenario, the highlights regarding 2013, the evolution of 2013 performance and commercial activity. I would finish with a final remarks.

But before I start, I would like to mention 2 points. First, in the 4Q 2013, we had BRL 1.5 billion of additional net revenues, mainly originated by the conclusion of the sale of Santander Brasil Asset Management and complemented with the addition of [indiscernible] refis tax amnesty. These 8 items were offset by nonrecurring expenses of the same amount, so there was not an impact on the bottom line. For more details, see Page 30 of the earnings results. It's worth noting that in order to ensure a better understanding of the period results, all the figures in this presentation show the managerial results excluding these events.

Second, the capital optimization process that we announced in September was executed on January 29. We issued 3 billion additional Tier 1 and 3 billion Tier 2, and we already distribute the same amount of capital. The transaction was well received by all stakeholders and markets and our strong capital position was upheld while a more efficient capital structure was achieved.

On the next page, regarding the macroeconomic outlook, I would like to highlight 3 ideas. First, in terms of GDP growth, market consensus shows a moderate growth for 2014 and a slight recovery for 2015. It is expected that GDP growth for both years will be around 2%.

Regarding inflation, we share the market view that the Central Bank will manage to keep inflation within the inflation target ceiling for 2014 and 2015. It will continue to run around 6% in 2014 and 5.6%, 5.7% in 2015.

Third, looking at interest rates, exchange rates, we think that Brazil is ahead of curve versus other emerging market countries. After 325-basis-point adjustment, the Selic rate is very close to the peak. We expect another hike of 50 basis points, reaching 11% for 2014. And in terms of exchange rate, we see a gradual depreciation of the Brazilian real for 2014 and 2015, which should lead to an improvement of the current account balance.

Even though Brazil's macro outlook remains challenging, as recent financial volatility is recurring, we are confident with fundamentals and in terms of employment stability. Therefore, in our scenario, we do not foresee a sovereign debt movement.

On Page 6, going through the highlights of 2013, I would like to share 6 points. First, net profit amounted to BRL 5.7 billion in the year, 10% lower than 2012 and flat in the quarter at BRL 1.4 billion. Secondly, expanded credit portfolio grew 3% in the quarter and 9% year-over-year. Third, revenues, NII plus fees, decreased 1% quarter-over-quarter and 4% year-over-year.

However, other revenues, net of allowance for loan losses, continued to present a positive outcome. They grew 2% in the quarter while they remained flat on a yearly basis. The fourth point, operating expenses excluding depreciation and amortization increased 5% in the quarter and 3% over 2012, below half of the annual inflation. These NPLs over 90 days improved 180-basis-point in the year, with improvements in individuals and corporates. Allowance for loan losses decreased both on a quarterly and a yearly basis. Sixth, and finally, a strong balance sheet. The bank remains in a comfortable position in terms of coverage ratio, liquidity and capital.

On Page 8, the 4Q 2013 results amounted to BRL 1,409 billion, flat against the previous quarter and 12% lower than the same quarter last year. Regarding the full year, we had a net profit, including 100% of goodwill amortization, of BRL 5,744 million, a 9.7% decrease or BRL 618 million in 12 months. This implies a profit per unit of BRL 1.51 in 2013.

Page 9. For a few quarters, we have been discussing the changes that are taking place in the industry and the measures the bank is putting in place to position itself in this new environment. The themes are: the increased focus on collateralized lending, with lower spreads but also lower cost of credit; increased segmentation of the client base; and efforts to improve efficiency and productivity.

The encouraging point on this -- of this quarter is that, for the first time in a prolonged period, credit-related NII increased and credit-related NII after provisions maintained its improvement trend for the third consecutive quarter. This is in line with the expectation that we shared with you previously. In relation to the latter, it increased about BRL 290 million, or 10.2% in the quarter. As a result, approximately BRL 250 million reduction in loan loss provisions in the quarter together with the increase of BRL 40 million in credit-related net interest income. We believe that net spreads will continue to improve in the next quarter. This is a signal that we have already overcome the initial stages of this transaction process.

Let me run through the major lines. Revenues, they were affected by moderated credit growth, product mix change and sluggish economic growth. NII decreased 4% in the quarter and 8% in 12 months. And fees and commissions increased 9% in the quarter and 10% over 2012.

Lower allowance for loan losses, as we anticipated. Allowance for loan losses totaled BRL 11.7 billion, a decrease of 9% in the quarter and 11% year-over-year. Cost of credit reduced 50 basis points in the quarter and 110 basis points on the annual terms.

General expenses control, with annual growth below inflation, reflecting our efforts to increase productivity and efficiency. Total expenses increased 5% in 3 months and 3% in 12 months.

The fourth point is an improvement by 7% year-over-year of the other operating income expenses, reflection of our efforts and initiatives to normalize the contingency levels, especially contingencies for labor [indiscernible] claims.

As a result of previous dynamics, profit before taxes improved 6% or BRL 102 million in the quarter. And with higher taxes in this period, the final outcome is a flat net profit evolution quarter-on-quarter.

Regarding net interest income, I'd like to comment 4 points. Net interest income came to BRL 29.8 billion, a reduction of 8% over 2012. In a quarterly comparison, NII decreased 4% or approximately BRL 310 million, which is explained by the decrease of almost BRL 390 million related to line orders, which more than offset the increase of around BRL 75 million in the credit- and deposit-related NII.

Credit-related NII grows approximately BRL 40 million in the quarter. This is good news, an increase after 5 quarters of consecutive decreases. As we shared with you previously, this sign out suggests the beginning of a stabilization process. The trend change in the quarter is explained by factors. First, better or higher evolution in average credit growth in the period. And secondly, the lower reduction of the average loan portfolio spread. This quarter, the spread declined approximately 10 basis points, while in the average of the 5 previous quarters it declined 50 basis points per quarter. This movement is related to origination price management refinement and deceleration in the pace of the mix change of the loan portfolio.

Credit-related NII after provisions increases for the third consecutive quarter, in a more robust way in the last 2 quarters. In fact, it improved 10.2% quarter-over-quarter. We believe in the maintenance of this improvement for the coming quarters.

Regarding the line orders, which includes capital remuneration, results from a structural interest-rate risk mismatch and treasury activities, keep in mind that this is a volatile line. The 4Q was more modest in comparison to the previous one, which had a stronger outcome. In this quarter, we reduced gains from market activities and, as a result, we posted a figure below the average of previous quarters.

On Page 11, looking at the loan portfolio. The expanded portfolio reached BRL 279.8 billion, an increase of 2.6% in the quarter and 9% in 12 months. We have been growing in line with private banks. We have a good diversification in our credit portfolio between segments, half with individuals and half with corporates.

By segments, we have loans to individuals up 2% quarter-over-quarter and 6% year-over-year, with mortgages and credit cards, due to seasonality, as the main growth drivers in this quarter, with 9% and 10%, respectively. And in annual terms, mortgages grew 33% and revolving credit decreased by 4%. Consumer Finance totaled BRL 38 billion, up 3% in 3 and 12 months. SMEs decreased 2% quarter-over-quarter and 8% in 12 months.

I do like to reinforce that SMEs remains a strategic focus for us. However, the evolution of this segment reflects the more moderate pace of economic activity throughout the year, as well as our efforts to prioritize the profitability of this business.

On the other hand, we have to bear in mind that in Brazilian GAAP, the discounting of performed [indiscernible] credit card flows is not accounted in the credit portfolio. If we adjust for this, the quarterly evolution would be positive in 1.3%.

Corporate increased 4% in 3 months and 19% over December 2012. This segment was benefited by the FX movement. Without this effect, the portfolio would have grown 2.5% in the 4Q and 14% in a year.

Looking at credit indicators on the Page 12. The early delinquency from 15 to 90 days remained flat against the previous quarter at 4.7% in the total, with 6.7% in individuals and 2.9% in corporate. We continue to see stabilization in this indicator, as we commented in the previous call. Nevertheless, new vintages [ph], another forward-looking indicator, has been showing improvement in the retail segments for individuals and SMEs. Information is shown in the annex of this presentation.

Regarding the NPL over 90 days, this reached 3.7% of the total credit portfolio, down 80 basis points in the quarter and down 180 basis points in 12 months. Evolution in this quarter is slightly better than we have anticipated. For individuals, delinquency improved 90 basis points in the quarter, reaching 5.1%. And for corporate, delinquency improved 70 basis points to a 4.4% level.

Moreover, the NPL formation metrics, which adjusts the 90-day NPL change for charge-offs and renegotiated loan evolution, improved 20 basis points in the quarter. The NPL positive evolution, both in individuals and corporate, is due to a combination of elements: better quality of in [indiscernible] origination, better evolution of the credit portfolio, and a mix change in the products and recovery process performance.

As a consequence of the asset quality improvement, the allowance for loan losses totaled BRL 11.7 billion in 2013, a decrease of 9% in the quarter and 11% in 12 months. It is the third consecutive quarter that we have observed a reduction in the allowance for loan losses, which is now almost BRL 1 billion below the first Q '13 level.

The annual evolution of credit cost implies a decrease of 110 basis points. It has been accelerating throughout the year and finished in the upper range of the expectations that we shared with you in the beginning of last year.

We continue to see a moderated and gradual improvement in the cost of credit for the sort of macro outlook discussed previously. It should be mentioned that the increase in the income from recovery of written-off loans reflects the fact that the bank is increasing the amount of resources deployed in this activity.

I would like to remind you that, excluding cash recoveries, when a written-off loan is renegotiated it does not impact the allowance for loan losses, since the increase on income from recoveries is offset by the increase in gross allowance for loan losses.

In the next page, we can see how fees have evolved. Total fees and commission income in 2013 reached BRL 10.7 billion, an increase of 10% over 2012 and 9% in the quarter, mainly due to more business and transactions.

The highlights in the quarter were: Card fees grew 20% in 12 months and 11% in the quarter, strictly due to the increase in credit card transactions, reflecting the previous seasonality and the growth of acquiring services revenues; income from collection services grew 12% in 12 months and 7% in the quarter, the latter upturn being primarily due to the increase in the volume of settled collections in the period, which is partially explained by seasonality, and also by the increased penetration of this product in our client base; others, which included a diversity of items and products, was positively impacted by the increase in the appraisal services related to mortgage and car finance; finally, insurance fees presented a 25% growth year-on-year and 38% in 3 months, being impacted by the new regulation issued by Sussex [ph], the insurance sector regulator, who changed the rule for recognizing policies' renewals. They used to be highly concentrated at the beginning of the year and, as a result, we now recognize in December 2013. If we exclude this effect, the insurance fees would have grown by 16% in 12 months and 4% in the quarter, while total fees [indiscernible] would have moved up by 9% and 4%, respectively.

On Page 15, regarding costs. It's well known that the 4Q cost figures are always impacted by a few seasonal factors, especially in the personnel line, with the annual collective bargaining agreement, and other impacts renewals concentrated in general expenses. As a result, the quarter shows a 5% increase. However, in annual terms, total expenses including depreciation and amortization increased 2.9%, below half of inflation over 2012.

As we discussed in previous quarters, the productivity and efficiency improvement are multi-year goals. We have been working in a special program, which comprises various initiatives such as commercial processes review at the point-of-sale, number of headquarters building optimization, the improvement of branch commercial distribution, call centers integration and general processes optimization. We have created a special fund in order to avoid nonrecurring impacts derived from these plans and to assure that our cost base line grows well below inflation in the years to come.

Regarding performance ratios, efficiency ratio reached 49.5% in 2013, an increase of 320 basis points over 2012. This is basically explained by the top line pressure we previously presented. Recurrence ratio reached 65.5% in 2013, an improvement of 440 basis points in 12 months. Return on assets closed 2013 at 1.3%, a decrease of 20 basis points year-over-year. And finally, our return on equity reached 11% in 2013, a reduction of 190 basis points against 2012.

On Page 17, assets totaled BRL 479 million, an increase of 5% in the quarter and 9% over December 2012. Equity, excluding goodwill, amounted to BRL 53 billion, flat in the quarter and an increase of 6% in 12 months. Considering the goodwill, equity totaled BRL 63 billion.

On the next page, coverage ratio over 90 days improved almost 29 percentage points in the quarter to 179% and continues to be at a comfortable level. As we have indicated, the bank does not have a target for coverage ratio. The quarterly and annual increase of the coverage ratio was strictly due to a bigger reduction in the balance of nonperforming loans over 90 days, given the improvement in the quality of the portfolio and the improvement in the renegotiation practice, with a prudent stance with regards to provisions recoveries that I referred before.

BIS ratio reached 11.2%, the highest among large Brazilian banks, 150 basis points lower than the previous quarter. And it's basically composed of Tier 1 customers [indiscernible]. The reduction of the BIS in the quarter is due to 100 basis point affected by the implementation of the new rules of Basel III since October 2013, more or less we are talking about DTAs and risk-weighted asset consumption in the large corporates, and the other 50 basis points were impacted by credit growth and dividends distribution.

On Page 19, you can observe a vigorous growth on the deposit activities, which reflects our strong counts [indiscernible] on our clients and on [indiscernible] with them. Total funding from clients amounted to BRL 222 billion, an increase of BRL 23 billion in 12 months, which is higher than the increase in the total credit portfolio of BRL 16 billion in the same period, improving the loan-to-deposit ratio about 400 basis points in the last 12 months, reaching 102%. We would like to highlight the good performance in our core deposits, demand and saving deposits, which have increased 8% in the quarter and 22% in annual basis.

Total funding plus assets under management amounted BRL 388 billion, up 4% in the quarter and an increase of BRL 36 billion or 10% in 12 months. Assets under management reached BRL 145 billion, up 0.5% in the quarter and an increase of 7% in 12 months.

Finally, 2013 has been a challenging year for the bank and for the financial system. Structural changes are taking place but the resulting business model that will emerge will be more sustainable and resilient.

Since the new CEO joined the bank in the middle of 2013, the bank entered in a new cycle. Customer orientation and improving the quality and profitability of our retail franchise is a focus. Since then, the bank has reorganized its management and incorporated new, skilled professionals with a strong commercial retail orientation.

Order, the bank is undertaking several initiatives and measures aiming at boosting customers’ linkage and enhancing the relationship with them with a special focus in services and deposits-related activities; reduction of NPL ratios and allowance for loan losses with a more resilient business mix; increased productivity and efficiency. And the result of all above will improve our profitability. It's going to be a long journey but we are confident that we are in the right direction.

I would like to highlight 5 items in our 4Q results that suggest that we are in the right direction and that we are starting to bear fruits. In the quarter, credit-related NII grows after 5 consecutive decreases in the previous quarters. This is related to the lower spread compression seen in the quarter related to a more normalized speed of asset mix change in the quarter. What happened in the quarter is aligned with our view that the pace of change in mix would abate and we expect a more normalized change in mix base going forward.

Credit-related NII, after loan loss provisions, increased for the third consecutive quarter, and we believe, it will continue increasing in the coming quarters. NPLs improved both for individual and corporates. It is the third consecutive quarter we observed a reduction in the allowance for loan losses. Our operating expenses grew close to half of inflation in the last 12 months, reflecting our efforts to improve efficiency and productivity. The robust growth in deposit-related activity is a reflection of the renewed focus in increasing the linkage with our clients.

Looking forward, it's paramount to continue improving the loan portfolio quality and to pursue relentlessly productivity efficiency gains and to continue the efforts to increase customer loyalty, there's no sectionality [indiscernible] with them, and to ensure the right offer of products and services for each customer cluster. These are our key targets to adapt the bank to their new banking environment. Thank you.

Question-and-Answer Session


[Operator Instructions] The first question comes from Marcelo Telles of Credit Suisse.

Marcelo Telles - Crédit Suisse AG, Research Division

I have actually 2 questions. The first one on asset quality. I mean, you clearly had a very strong improvement in delinquency indicators in the quarter and I was wondering at what stage you think you are in terms of that improvement? Do you think that you can improve delinquency rates further? And this will probably lead to additional -- you think this can lead to additional reduction in provisioning expenses going forward? And the second question is regarding the OpEx performance. So can you remind us a little bit what you think your target is for OpEx in the years to come? I think you mentioned you want to go -- grow below inflation. Do you think this is still, let's say, possible this year if -- in a, let's say, in a rising inflation scenario, do you think they can -- and also the efforts to get new clients and improve the image further -- the image of the bank? I mean, do you think this could eventually due to be a little bit higher or closer to inflation on the OpEx front?

Carlos Alberto López Galán

Regarding the first question, Oscar is going to answer you.

Oscar Rodriguez Herrero

Thank you, Marcelo. We don't provide guidance in terms of asset quality and provisions for loan losses. But what I could say is that we do expect a further improvement in terms -- in the delinquency ratios. It would be at a -- with a trend that is not going to be as it was in the last quarters. It should slowdown, the improvement, and refer more to the impact in terms of the credit mix. And as a consequence, we expect as well a reduction in the provisions for loan losses.

Carlos Alberto López Galán

Marcelo, and regarding the other question. Well, as you can -- as we discussed, the improvement in productivity and efficiency is a multiyear task. The bank has launched a plan for the next 3 years, including 2013. And in order to basically maintain the same pace that you have seen in 2013, not just for 2014, but they count for [indiscernible], for the years to come. This is a very tough task, given the environment -- the exchange rate environment and inflation environment that we have. But that's why the bank launched several initiatives that aim -- some of them I shared with you in the presentation. In order to assure this, that we are going to achieve this goal, not just for 2014 but for the next 2 years, as well. Basically, the fund that we made is basically -- maybe not achieving this goal, and to make sure that all the initiatives, they have enough funds and enough source of funding, in order to deploy all the measures that they're going to help us in order to deliver this trend for the next 2 to 3 years. So basically, yes, more of the same. I mean, well below inflation is the target for 2014 and 2015.


The next question comes from Saul Martinez of JP Morgan.

Saul Martinez - JP Morgan Chase & Co, Research Division

I have a couple of questions, as well. One of them is just more of a high-level theoretical question, more of a theoretical question, one is a more -- very specific question. The first question is how management thinks about returns on equity and costs of equity? Obviously, with the higher rate environment in Brazil, I think it's reference rate to 10.5%, swap rate even higher than that. You can argue that the cost of capital, cost of equity for companies is pretty high. Your ROEs clearly aren't necessarily where you want them to be, 10%, 11% the way you measure it. The capital reduction, the dividend will obviously improve that. But how does management think about the process of getting to an ROE that meets its cost of capital, over what time period do you think that occurs? And just checking -- I'd just like to know how more -- how management thinks about ROEs, cost of capital and how you plan on getting to a stage where you start to create value?

Secondly, the more specific question on asset quality. Obviously, very impressive in terms of NPL evolution provisioning. 15- to 90-day NPL ratios, however, kind of flat. Did go up a little bit for corporate. They haven't really improved much and typically fourth quarter sees improvements in early-stage delinquencies. Anything there that worries you? Should we read much into that? Why -- I guess, why haven't you seen a more notable improvement in early-stage delinquencies?

Carlos Alberto López Galán

Regarding your first question, clearly, the management is not happy with the profitability that we have been delivering. Secondly, we saw the new report about the cost of equity adjustment that you made because of the interest rate environment, et cetera, et cetera. In that case, I would tell you that the way that we see it, it's on a longer horizon. It's not in the short or on a yearly basis. So basically, the cost of credit is more stabilized in order to deliver a profitability above this cost of equity defined internally.

And thirdly, I would tell you that, clearly, all of the challenge on the task that the senior management that we have here is to improve, to make a catch-up versus our competitors in terms of profitability. As I said in the presentation, it's going to be a long journey. I mean, it's fair to say that we have -- we still have, after the optimization, the equity optimization process, we have still -- have an excess of capital. But putting aside this excess of capital, the profitability has to be improved.

And basically, this improvement is going to come from 2 sources. Improvement in the leverage ratio that we have, so it means that improving or increasing our commercial and credit activity. And secondly, with bearing in mind of our distribution policy that we have going to maintain for the coming quarters and for the coming years. And secondly, improving the bottom line. Clearly this is something that is going to take several years and this is part of the plan that we have established for the next 3 years.

So having said that, I mean, the gap that we have with our competitors, I mean some of them is explained by the excess of capital, but some of them is clearly explained by the lower profitability that we have, more specifically, in -- when we are talking about our spreads net -- our spreads after provisions that clearly are well below our competitors. And this is one of the key factors that we should improve in the coming quarters and that should improve and should help in order to deliver a higher bottom line. Regarding the second one, Oscar is going to answer you.

Oscar Rodriguez Herrero

On regards to the 15 to 90 days, the evolution, the trend that you can see in the number, it is very much the result of the policies -- the credit policies that we implemented in 2011 and 2012. And if you see each that 15 to 90 days, it already show an improvement -- significant improvement in 2012. Since then, we've been pretty much maintaining our credit policies, the vintages [indiscernible]. So some improvement, but not as strong as it was in the last quarter.

And that 15 to 90 days ratio, it is very much impacted by the vintages showing that improvement. It is, therefore, the stability that you see, it shows that the level of vintages has been something that we're going to continue to maintain and very much care about the quality of the origination that we have. It is also impacted in 2013 by the increased weight that the renegotiations have in the 15 to 90 days, which is normal after the increase that, that portfolio saw in 2013. And it is within the quality standards that we plan on our collections program. I answered your question?

Saul Martinez - JP Morgan Chase & Co, Research Division

No, that was very helpful. Just a follow-up, would you be willing to share what you do think your cost of equity is, Carlos, if you think the rate curve isn't necessarily reflective of an adequate perception of how to think about cost of capital?

Carlos Alberto López Galán

It's in the range between 16% and 16.5%. But basically this is more or less the cost of equity that we manage internally. Okay?


The next question comes from Regina Sanchez of Itaú.

Regina Longo Sanchez - Itaú Corretora de Valores S.A., Research Division

I have 2 questions. The first one, I think is also for Mr. Oscar. I'd like to have a rough idea, let's say, how much of the renegotiated loans were in previous years? I mean, nonperforming loans or out of the [indiscernible] or maybe the increase in allowing 1 billion [indiscernible] in the fourth quarter of renegotiated loans as a percentage, and how much was previous in NPL? Because that might have helped it, I mean the decline in NPL ratios in this quarter.

And then my second question is more regarding the strategy of the bank in the loan portfolio going forward. I think we saw [indiscernible] lending and also SMEs portfolio shrinking in the fourth quarter and during the entire year of 2013. If you could share, I mean, if there are strategic movements to maybe start to post increase in this portfolio, especially favorable [indiscernible] lending that you see an increasing competition in the marketplace? But it's still a very good product considering it's a faith [indiscernible] portfolio and still with good returns. So I appreciate both answers.

Oscar Rodriguez Herrero

Regina, with regards to your first question, I would like to point that most of the improvement in NPLs is been generated by the improvement in the quality of the origination. So out of the 80 basis points that we see improve, around 50 basis points it's explained by the better quality of origination and 30 basis points is explained by the effort in the collections process and the renegotiation of the portfolio. You can also consider that, even when we look at the NPL formation, including charge-offs and renegotiations, it still shows an improvement of 20 basis points in the quarter, stressing the improvement in the overall quality of the credit.

Carlos Alberto López Galán

Regina, regarding the other question, I would tell you 3 or 4 points. The first one is that it's true, when you are looking at the credit portfolio that this year has shrunk versus the previous one. But bear in mind that part of the credit activity with SMEs is focused on the acquiring business and the acquiring business is not included in the credit portfolio. So basically, when you include the acquired business in SMEs, for instance, in the 4Q, the performance was slightly positive. As I mentioned, something around 1%, 1.5%.

Having said that, well, as a second point, well as I mentioned, we are more focused on the linkage with the SMEs. So the deposits and fees were much, much higher than the credit performance, including the acquiring business. And this is the priority with SMEs, to create a much more stronger customer base with them, with more relationship with them. And thirdly, the third point is that in this cycle, yes, the bank tightened the origination, prioritized more the linkage and the profitability with these clients.

And bear in mind that basically, we are in a new stage of the cycle. We expected that to recover the same pace of growth that we have seen in the credit portfolio for SMEs previous to 2013. So basically, what you could expect for 2014, it's more of the same, the growth that we had in previous years. And after one -- once that we normalize the cycle with them and that, clearly, it's a segment that we strongly believe the bank has a gap versus our competitors and that we should increase our SMEs customer base.


[Operator Instructions] Our next question comes from Jorge Kuri of Morgan Stanley.

Jorge Kuri - Morgan Stanley, Research Division

I have 2 questions. The first one is on your merchant acquiring business. I noted that a year ago, in your 4Q '12 presentation, you mentioned that your market share was 4.5% and that the target for year end 2013 was 10%. In your current presentation, you now have 5.8% market share, so roughly a little bit over 1 percentage point gain over the last 12 months, and you no longer have a target specified there. So can you just walk us through why you didn't get to the 10%? Why you only won 1 percentage point? Is it going to take you another 5, 10 years to make 10 percentage points? Is that no longer the case?

I just want to understand what the dynamics in that business are, which clearly you haven't delivered as, I guess, the market expected? That's the first question. The second question, and again, I'm sorry, I know this is something that a lot of people have asked, but exactly a year ago you said that the industry was going to grow around 15%, which was the right forecast. We saw yesterday from the numbers reported by the Central Bank that total loans in the industry grew 15%. But you did say last year that you were going to grow faster than the peers, faster than the industry. And you actually grew half of that, you grew 7%.

So now the message is the same now, you're saying the industry is going to grow probably around 15% and we are ready to grow faster. So I just -- if we can get a little bit better level of confidence on why this time around that will be the case? What has really changed for you in order to be able to do that? I think that will be great.

Carlos Alberto López Galán

Thank you, Jorge, for your 2 questions. Okay, regarding the first one, it's true what you have said. I mean, we -- and I mentioned before, we accelerate, somehow, the pace of increasing our market share in this product in 2013. Nevertheless, we have to bear in mind that we start from scratch in 2 years, 3 years ago, and that we prioritized all the acquiring business, firstly, with our SMEs segment. And with the SMEs segment, we are quite happy.

We basically, in a proxy [indiscernible] because they are not official figures, but we think that we have reached the 10%, or close to the 10%. And clearly, in order to achieve the 10% in the total portfolio, clearly we have to accelerate the pace with the big retailers that maybe they are not as profitable as the SMEs, which was their focus on the beginning of this process, but they give you more volume. In order to achieve the 10%, the big retailers are a key segment in order to change and to work with. So that reason that we would like to accelerate and the 10% is still a target for the bank.

We have been trying to make an agreement with the GetNet in order to accelerate the pace for all because for the big retailers, the proposal is a little bit different versus the small and medium companies. We have to adequate the offer in terms of IT solution. And for that reason, one of the decision taken is to be more flexible in the time-to-market process with GetNet. We've seen that in a couple of weeks, we will be announcing the final agreement with them.

And with one -- one of the purposes is to accelerate the pace in servicing the big corporates and delivering the IT solutions with a complete, or with a more accurate opportunity. The second point -- regarding the second point, yes, it's true. But there are 2 important facts, that the events that happened in 2013, while different that we were foreseen at that state. The first one is that, when we discussed the 15%, we were discussing that the fund conversions in terms of public banks and private banks. It didn't happen. As a matter of fact, it happened the opposite.

And we widened [indiscernible] the pace between publics and privates. Once again, maybe we are going to make a wrong outlook for 2014. We think that this convergence is going to happen more in 2014 rather than 2013. That's why we think that the private banks, so Santander is included in these private banks, should be improving and should be growing slightly better than 2013.

The other important event is that, clearly, we in 2012, or the end of 2012, enter in a delinquency cycle. And the bank prioritized the improvement in the quality -- in the asset quality and improvement in all the delinquency ratios, more than to grow the volume and more than to gain some market share. We discussed that in the middle of this year. And while the bank thinks that all the asset quality is in comfortable levels, that said, now we are -- we should enter into a new cycle where basically the bank is not going to gain market share in all segments, in all products, in all activities.

No, the bank first is going to prioritize to maintain and to remain the levels of delinquency at the minimum, the 4Q ratio that we have shown. And to be somehow aggressive in several fields and several products where the bank has -- is comfortable or we think that we have a differential approach. Such as, first, acquiring. Then, even though we reduced the pace, we have a still gaining some market share. This is the idea for 2014 and for the coming years. More specifically, it should be even strengthened by the GetNet agreement.

Secondly, we feel that the bank is not happy with several tier markets, such as rural [indiscernible] or it is [indiscernible] products. So the bank is trying to improve the performance in these 2 markets, basically because we have a low market share and we should aspire to improve or to increase our presence closer to our [indiscernible] -- to our market share. And the third is clearly the payrolls. The payrolls where the bank didn't perform in line with peers for several reasons. I explained some of them that the older channels outside the net core branches were not very good managed. We were not successful in the -- how to manage and deploy profitability with other internal [indiscernible] channels. And the bank is trying to improve, first, all these products.

Payrolls -- we are convinced that payrolls should be for 2014 an important product in terms of growth. Collateralize [indiscernible] both, we expect that [indiscernible] such as mortgages, payrolls, they are going to grow faster than other products and that's why the bank has to make the turnaround and improve the profitability first in the internal channel and later complementary with other initiatives that maybe we are going to add some added value and some other volumes in, in this both [indiscernible].

So what I am going to say you is that, first, the priority is to maintain the asset quality as a first vector. And the second one, to be or to -- we are experiencing this, to gain some market share in several products where either the bank has low market share or we have -- we think have a different approach proposal or that they are going to give us some opportunities. And this is in a context where, for the private banks, we think that 2014 will be an environment more positive in terms of credit evolution.


[Operator Instructions] The Q&A session is over and I wish to hand over to Mr. Carlos Galán for his concluding remarks.

Carlos Alberto López Galán

Well, thank you, everyone, for attending this conference. And if you need further information, please don't hesitate to contact us. Thank you very much.


Banco Santander's conference call has come to an end. We thank you for your participation. Have a nice day. You may now disconnect.

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