Banco Santander Brasil SA (BSBR) 2012 Q3 法說會逐字稿

Good afternoon and thank you for waiting. Welcome to the conference call to discuss Banco Santander Brasil SA's results of the third quarter of 2012. Present here are Mr. Carlos Galan, Vice President, Executive Officer, CFO; Oscar Rodriguez Herrero, Vice President, Executive Officer, CRO; and Mr. Luis Flex Cardamone, Head of Investor Relations.

The live webcast of this call is available at Banco Santander's investor relations site www.santander.co.br\ri, where the presentation is available for download. All the participants will be on listen-only mode during the presentation, after which we will begin the question and answer session when further instructions will be provided.

(Operator Instructions). We would like to inform that questions can only be asked by telephone, so if you are connected through the webcast, you should email your questions directly to the IR team at ri@santander.com.br.

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 belief 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 Galan, Vice President, Executive Officer, CFO. Mr. Galan, you may proceed.

Thank you, everyone. Good afternoon, and thank you to all for attending this conference call.

The table of contents for today are the following. First, a quick view about macro scenario; secondly, highlights about the third quarter; thirdly evolution of our results and the main drivers. And we will be summarizing with the final remarks.

Regarding the macroeconomic outlook, I would like to share three ideas.

First, we have revised downward the growth for this year, and now, our estimate is aiming at 1.5%. The activity has been weaker than we thought and has lagged behind our previous outlook, even though indicators are improving with the sales activity index, etc.

We still expect GDP growth to gain momentum in forthcoming quarters, although we have to recognize the pace and fundamentals on the recovery have been disenchanting. It will take longer than expected for the economy to resume expanding at 4% year-over-year pace, which is the prospect for 2013, supported by all stimulus measures taken by the Government.

Secondly, in terms of inflation, the estimate is that the year 2012 could end around 5.4%, and remaining at this figure next year.

Thirdly, looking at interest rates and exchange rates, we foresee stability for both at the present levels for the months to come; for exchange rate between 2% and 2.05%, and for interest rate ending 2013 at 7.25%.

In this slide, you have 8%, which is basically the Focus [survey] projection. Overall, our view is we are going towards some moderate recovery with non-inflationary pressures above present levels.

Going through the highlights of third quarter compared to second quarter, I would like to highlight the following points.

Number one; net profit declined 6% in annual terms, and improved 11% in profit before taxes, and 2.5% profit after taxes versus previous quarter.

Number two; the loan portfolio and funding grows in line with private peers. The loan portfolio grew by an annual 10%, and funding on balance grew by an annual 12%.

Number three; positive [growth] and efficiency improvement.

Total revenues are showing a positive trend, up 17% in annual terms, helped by NII and costs growing around 11%.

Number four; allowance for loan losses decelerating to 41% year over year versus 47% in the first half.

And number five, we have very comfortable capital and coverage ratio we will address later.

In the first nine months, Santander's net profit, including 100% goodwill amortization, totaled BRL4,731 million, which represents 5.7% lower than the same period 2011. In the quarter, we made BRL1,501 million, a 2.5% increase versus the second quarter, which was BRL1,464 million. These figures improved the profit per share in BRL0.04 in the quarter.

The structure of our results are based on four factors.

A, top line revenues which grew at double digits. Basically operating revenues, NII plus commissions income, came in at BRL10,653 million, less than 1% lower than previous quarter, and 13% higher than third quarter in 2011. In accumulated terms, NII grew 18.7% in 12 months, a 3.2% decrease in the quarter. Commissions up 11.4% compared with 2011, and improved 7% in the quarter.

B, provisions expenses are decelerating. In 12 months, grew 41% and fell 15% in the quarter.

C, cost control. General expenses increased 9.2% year over year, and 3.8% in the quarter, including amortization up 11%, and a 5% increase in one year and three months respectively.

D, higher expenses at bottom line in two elements. Other operating expenses grew 15%, due to higher expenses in credit cards, basically due to the acquiring business, higher volume of litigation and other lines. And the second line is the higher corporate tax, 6 points higher compared to the previous quarter. That's why profit before taxes improved 11% Q over Q, and profit after taxes just decelerated to 2.5% Q over Q.

In the first nine months of this year, NII grew close to BRL3.9 billion, close to 19% compared to the first nine months of 2011. 80% of this increase came from [credit] margins. This growth is based on volume and spread expansion, since the average spread in 2011 is 26 basis points higher than the average of 2012.

Third quarter NII was down 3.2%, or [BRL260] million versus second quarter. Approximately 75% of this difference is explained by the line denominated others, which was essentially impacted by the decrease of [BRL160] million in treasury gains. Without considering these effects, NII would have fallen 1.3%.

The NII performance is explained by deceleration in the spreads, [falling] basis points in credit and 7 basis points in the deposit line, basically in line with the Selic drop. And regarding the credit, three-fourths of the decline in this quarter was explained by the mix and just one quarter was explained by the pricing.

And later, we have moderated increase in volumes, just 1.5% up in average volumes of loans versus the previous period. I would like to highlight that even though the compression, the third quarter is higher, 30 basis points, than the same period in 2011.

Looking at the credit portfolio, credit portfolio amounted to BRL207 billion in the third Q, and grew 10.1% in 12 months, and 0.8% in the quarter. This sluggish growth is in line with our peers due to weaker economic conditions and tighter credit standard admissions. We see this as a temporary effect.

Looking at the segment we see the following figures and trends.

Individuals' loans were up 0.8% Q over Q, and 9.5% in annual terms. Consumer, which basically are car loans, decreased almost 1% in the last three months, and grew 11% in one year, though if one includes the car finance portfolio originated at Santander's branch network, which is one of the trends that we have in the Group at this moment, volumes actually increased by 2.1%, leading to a market share gain in the quarter.

SMEs, which is benefited from our acquiring business, grew 19.5% year over year, and 3.5% (sic - see page 14 - 3.6%) Q over Q.

Finally, Corporate performance was particularly weak. If we include other [operation] line, business link to corporate activity, we fell [0.5%] Q over Q, and we grew only 6% in annual basis.

In terms of products, we have credit cards growing 18% year over year, mortgages growing 23% year over year, and payrolls growing 13% year over year.

In this presentation, you can see that we have included all credit ratios,15 to 90 days, which captures loans overdue between 15 and 90 days, over 90 days, and over 60 days. 90 days NPL ratio reached 5.1%, which represents an 80 basis point and 20 basis point increase year over year and Q over Q respectively. In the third quarter, delinquency on Individuals was the main driver, deteriorating 40 basis points.

[This means] delinquency cycle was led by some cluster of customers over leveraged. So with better economic conditions, recovery actions and measures taken for new origination portfolio, should support the stabilization for the months to come, as the early indicator is suggesting.

In fact, over 90 NPL is stable in September over August, and early delinquency ratio NPL 15 to 90 days for Individuals improved by 50 basis points for the second quarter in a row, indicating a positive future trend.

Regarding Corporate, 90-day NPLs ratio for enterprises increase 10 basis points in the quarter, and 30 basis points in the 15/90 days NPL. Corporates were more impacted by two elements; the first, the weak economy impacted new production, as we saw in the lower grade growth for big corporate; and second, change of mix with more SMEs.

The current market environment continues to be challenging, while GDP growth is starting to pick up in the last couple of months. If it continues, we could have positive impact on credit quality. In other words, we think we reached the peak in this quarter, and the delinquency rate is likely to stabilize in 4Q, and we expect a gradual decline over time in 2013.

Provision expenses came in at BRL3,228 million, decreasing 15% in the quarter and coming back to first quarter levels. Nevertheless, the quarter volume is 34% higher than the same period in 2011, and 41% bigger in accumulated terms compared with nine months this year with the same period in 2011.

As we indicated, we reached [EBIT] in the second quarter, and now we should evolve in coming months aiming the 2012 levels, considering our present mix.

Recoveries, collections, have fallen 31% in the quarter, and 23% year over year, recovering the expected average of BRL400 million level per quarter.

Finally, the cost of credit shows an increase due to the method which considered the result of allowance for loan losses accumulated in 12 months. Considering just that three months period, cost of credit for third quarter was 110 basis points better than the second quarter, but it's still 70 basis points higher than the third quarter 2011.

Looking at fees and commissions, this fees and commissions total BRL7,386 million in the first nine months 2012, up 11.4% year over year, and 7.3% in the quarter. This quarter performance is mainly based on the higher number of transactions and contribution of credit cards with 23% quarterly growth, current account services with 4%, and brokerage services with 24%.

Related to the first one, we have to emphasize two elements related to our acquiring business. First, to highlight the good evolution of our [car] business. Revenues and transactions more than doubled. We are already offering our services to 364,000 merchant affiliates, and this supported the growth of about 27,000 new active SMEs in the quarter in our customer base.

Secondly, we align to market standards the recognition criteria from cash basis to accrual of commissions from installments operations with no interest, with additional impact of BRL80 million for the quarter. It should be noted that approximately two-thirds of this impact would have been recognized in the 4Q.

In the quarter, excluding this effect, the current commission would have grown 11%, and total commissions 4%, which is in any case a robust performance.

Total expenses, excluding amortization, total BRL10,445 million in nine months, up 9.2%, or BRL883 million, in one year. In annual terms, we have been running around 9% for the entire year.

The third quarter grew 3.8%, BRL129 million, compared to the second quarter, and was impacted by higher administrative expenses, marketing and advertisement campaign, and more expenses in call center, and provisions due to wages increases in personnel.

The amortization line grew 30% and almost 13% in [12] and three months, which was explained by two components. First, the business expansion and the investment in our infrastructure with 90 new branches, and the business expansion with new 2,350 employees.

And second, we have to note that the quarter included BRL34 million in accelerated amortization of several assets. Excluding this effect, the quarter would have grown 4.5% closer to the net run rate, and total general expenses would have grown 3.8%.

Regarding performance ratio, I'm going to refer just in accumulated terms. Efficiency ratio reached 43.5% in nine months, 260 basis points improvement in one year. Recurrence remained at the same level of 63%. And in terms of profitability, return on assets was 1.5%, reducing 20 basis points compared to nine months 2011. And our return on average equity reached 12.5%, a decrease of 200 basis points in 12 months.

Assets total, BRL429 billion, an increase of 2% in the quarter, and in 12 months. This evolution is far below the high teens revenue growth which indicates the more efficient usage of our balance sheet.

Core equity amounted to almost BRL52 billion, growth of 1.7% over June 2012, and 8% over September 2011. Considering the goodwill, equity totaled BRL65.8 billion, and basically remained stable.

In terms of ratios, current ratio over 90 days remains at comfortable levels reaching 136%, and in line with previous quarter. BIS ratio improved 20 basis points, basically supported by 50 basis point improvement in Tier I, and recovering some temporary effect which impacted the second quarter.

Funding on balance amount to BRL203 billion, up 12% versus third quarter 2011, and 4% higher than the second quarter this year. Funding on balance improved more than BRL21 billion, which is line with the credit growth volume for the same period, and was driven basically by funding from clients with more than BRL16 billion.

Considering assets under management, total funding reached BRL337 billion, an increase of 9% in 12 months and 1% in the quarter. It's worth mentioning our solid liquidity position, which along to the positive ratio of 102%, basically remained stable compared to previous periods.

To conclude, I would like to emphasize four ideas. Number one, we have been running our revenues in double digits, with a higher level of spread than 2011 and positive [JOS].

Number two, the economic activity and growth has been much weaker than we expected, impacting our commercial development and delinquency, whose elements influence a lower credit activity and impacted our profitability.

Number three, nevertheless, as economic indicators are likely to improve, GDP gaining momentum, consensus for the fourth quarter and 2013 is a recovery of 4%. And early delinquency decelerating, we are suggesting we will accelerate commercial activities reaching over the course of 2013 what we think is sustainable for [private peers], double-digits growth in commercial activities.

And number four, we expect a different composition of results in 2015 with more productivity, more efficiency, lower credit cost, lower spreads, and more balance sheet optimization.

Thank you very much.

Thank you. We will now start the Q&A session for investors and analysts. (Operator Instructions).

In order to ensure that everyone has a chance to ask a question, we request that each participant asks only two questions. (Operator Instructions).

Jorg Friedemann, BofA Merrill Lynch.

Thank you very much for the opportunity. I'd like to make a couple of questions. First of all, in terms of the evolution of your margins, I know that -- I know not only in your case, but also in your peers' case, treasury revenues have been softer this quarter. So I'd like to understand if anything extraordinary happened in this quarter, if you could share a little bit more thoughts. And if in your specific case the hedging of your portfolio, you [super tax] are your margins in the next quarter, in the fourth quarter.

And then I will come with my next question. Thank you.

Thank you, Jorg. Well, related to your question with two elements, treasury gains. Basically, if you remember, we mentioned, if I'm not mistaken, in the first quarter that more or less average for this line, which is by nature volatile, should be around BRL375 million/BRL400 million per quarter. If you can see, it's -- maybe if you look at the IFRS criteria, it's clearer that you're going to see the compression or the decrease of about BRL160 million, as I mentioned.

Regarding the second point of your question, the hedge that we made for the entire year, you can expect more of the same in the 4Q, which means basically you just see it basically for the entire year the line others. It has been higher than the previous year and has been very [resilient]. And basically, the volatility is explained for the trading gain contribution, which in this case, this amount was -- this quarter was a little bit lower compared to the previous quarter. But in terms of the hedge, the hedge is for the entire year, and as I was mentioning, the fourth Q will be in line with what we have contributed in the previous quarter.

Perfect. I know that in a separate line that you consumed part of your excess provisions. That came down from BRL550 million last quarter to BRL450 million this quarter. And, as a matter of fact, provisions, I think, have been the most negative surprise that you, I know, have found since you implemented your guidance last year. So I'd like to understand how you believe that the excess provisions should evolve going forward, and if you are still maintaining your prior guidance, given that on top of the recent results, it has been clearly more difficult to meet.

Thank you.

Well, I'm going to answer the first part of the question, and later, I'm going to let our Chief Risk Officer, Oscar Rodriguez, to explain in more detail the provisions evolution and the provision performance.

Regarding the general, or the -- I don't know how you call it, the general provisions for trade portfolio, basically, I just see it this year -- this quarter was 100 basis points lower than previous quarter, but the previous quarter was 75 basis points higher than the previous quarter. So basically, there is a swing in a quarterly basis, but we don't consider that is very much real.

Basically, you see a longer [series] in delays, four/five quarters. We have been running these lines around -- in the neighborhood of BRL500 million as general provisions.

Regarding the guidance, if you remember, we didn't make any specific guidance for the delinquency or for the day-to-day performance. Why? Basically because, well, we thought it was much more important to [synergize] other elements, other lines of the net income.

Regarding the guidance for the 2013, which is basically, I guess, what you are asking me, what we are going to do is to review in the fourth Q the entire 2012 results, and we'll be giving you some light about how we are going to see the 2013 performance. Given the new environment, that clearly is quite different what the environment that we expected, as I mentioned in the -- previously for 2012, not just in terms of economic growth, but in terms of industry framework.

So if you don't mind, I believe to -- I'd like to ask you to address this question with more [clarity], and our commitment is to give you some light in the fourth Q regarding the 2013 performance.

Related to the credit provisions evolution, Oscar?

Jorg, as we mentioned in other calls in the past, we do believe we -- that the provision regulation here in Brazil is already very conservative. Therefore, we are comfortable with the level of provision that we have, level of coverage that we have. We don't have a target, a specific target, but we do increase in the future the addition of provisions if we consider that is necessary according to the market environment.

Up to this point, we don't have any plans or any vision of doing so, but it is something that it needs to be adjusted depending on what we see in the market performance.

Perfect, Oscar, but just complementing this point, do you feel comfortable to continue consuming part of these excess provisions that are currently running at BRL450 million?

Jorg, as I said, we are comfortable with the level of coverage that we have with -- of provisions coverage, and as I mentioned in the question, we don't have any plans to change at this point. We don't have any plans to change the level of additional provisions, to use it or to reinforce it. But it is something that will always depend on what the evolution in the market and in the [car] portfolio, but we don't have any plans to change that at this point.

Carlos Macedo, Goldman Sachs & Co.

I have a couple of questions. The first one is back on the margins, we're looking at your credit yields. They were down significantly in the quarter. I know you said that a lot of this was driven by mix which changed in the quarter and affected those yields. I was just wondering if that change in mix is completed, what should we expect from the yields on your credit book going forward, and obviously the impact. An important thing here is to see the impact that will have in your margins going forward.

The second question has to do with expenses. I know there was some impact from some events in the quarter, but now your expenses are expanding at a rate that's faster than your peers. And obviously, with the pressure coming on your margins, is there any thought what should we be looking at for expense growth over the next 12 months and maybe next year? I know that you only give us greater guidance in the next call, but I was -- given the importance of this expense line and how it's coming above peers, I was wondering if there's anything you can give us ahead of time.

Well, regarding to your first question around spreads, what we expect for the entire 2012, I mentioned in the presentation it's -- for the entire 2012 year to have something between 20 basis points/30 basis points higher in average terms versus the entire 2011. Clearly, in the coming quarters and the coming months, what we expect given that the mix with -- the new origination mix is with lower spreads, with products [such as] real estate, or such [apparel] is growing more than [on core price] products, clearly, it's going to decelerate. But if you see our performance, one of the targets that we have is to defend the spreads as much as possible, even though we acknowledge that the (inaudible) coming, or the vision that we have for the coming quarters is acceleration in this line. But we expect this acceleration to be in a moderated way. This is our outlook for the short term.

And the mix is much more important, and if you remember, with some of you we have discussed this thesis, we think that it's more important, the mix. In order to explain, the spreads rather than the prices (inaudible), and the mix explained, as I mentioned 75% of the spread evolution, and just 25% is explained by the prices.

So we think that it's going to happen the same in the new origination, in the new spread evolution for the 2013 year.

If you permit me then, given the importance of the mix, the trend in your credit spread inverted this quarter. Was there a significant change in the nature of the loans you originated this quarter?

Well, first, with some of you we shared this situation. We thought that in the third Q, we were going to come back to the first quarter levels. This is something that we were anticipating. Most of you knew, and it was part of the -- for two reasons. Because the new origination effectively, the new origination, the new products basically, are collateralized, more collateralized with lower spreads, and it was going to impact; and just technical events that happened in the second period versus the third period.

But the most important thing is the first reason, as I explained that in the car portfolio, clearly, the outlook that we have, not just for the fourth Q but for the entire 2013, the portfolio is going to change the shape with more collateralized products versus the uncollateralized products. And this mix is going to [affect] the spreads. What we expect is a moderate evolution in this line for the entire 2013.

Regarding the expenses, I mentioned that basically we have been running the [amount] with 9% growth for the entire 2012. I think that we are going to end this year more or less at the same pace. Clearly, this element is under revision for next year. Clearly, linked to my previous answer with spreads, this line has to be lower next year. It has to be lower in order to offset the spread compression that I mentioned and we are foreseeing for 2013. This is once again something that we would like to discuss next quarter.

In order to give you an advance, what we would like to see for next year is something close to the inflation level for 2015.

Okay. Thank you, Carlos. That's what I wanted. Thank you so much.

Mario Pierry, Deutsche Bank.

Let me ask you two questions as well. Both of them are related to asset quality. I was just trying to get more color from you when you showed that your early delinquencies are improving. If you can be a little bit more specific in which segments are you seeing the improvements. Is it auto loans? Is it credit cards?

And then a second question related to that is do you think the provision charges next year in 2013 that they can fall on a nominal term basis?

Thank you, Mario. Do you mind? I will ask Oscar to answer your two points.

Mario, thank you. Thank you very much. What we saw in the -- when we explained at the beginning of the year the trend in terms of delinquency, we pointed out, and Carlos also pointed out in his presentation, that it was very much related to the over-leverage of part of the customers in Brazil, and also other deterioration in the car portfolio related to the new cars, financed with lower levels of down payment.

We've seen since then that our origination, all the [vintages] in the outlook for [autos] have improved significantly, and are currently running at lower levels or at better levels of quality than the ones we had prior to 2011. So we see clearly an improvement in that portfolio.

We also see an improvement of all the origination of the Individuals all across, as we are now focusing, and we have made some adjustments in terms of the credit policy for the origination of new loans.

So in summary, we have seen, and we're seeing an improvement in Individuals all across in the delinquency ratio.

The second question was related to 2013. As Carlos said, we don't offer guidelines in terms of loan loss provisions. We haven't done that in the event in London. But it is clearly that as the delinquency improves, we also see a normalization of the level of provisions growing with the credit and adjusted for the mix that, as Carlos has stated, it is a very relevant matter in the portfolio here in Brazil. So cost of credit should improve, looking at 2013.

Marcelo Telles, Credit Suisse.

My question is still related to asset quality. You seem to have still an upbeat expectation on asset quality already for the fourth quarter and for next year. But when I look at the numbers that were reported, actually, there was quite a bit of charge-offs in the quarter and a lot of -- and a big increase in the renegotiated credit, which probably helped to lower your NPLs, not to mention even your 15 to 90-day NPL as well.

And if you adjust for the charge-offs, for instance, your 20 basis points deterioration on a 90-day basis actually will probably be as high as 90 basis points. So there was a very, very different trend from what we saw for what the other banks reported. And if you look at new NPLs formed in the quarter, they were up 28%.

So that seems -- in my view, there was a significant deterioration in asset quality in the quarter. So what makes you confident that delinquency will not deteriorate further in the fourth quarter or beginning of next year? Because the numbers, because of the charge-offs and the renegotiated credit, in my view, they do not look good at all.

Thank you.

Thank you, Marcello. And I'd like to clarify that in this quarter, we have expanded the information, including their renegotiation, which was something that we haven't included yet, or we didn't include in previous quarter. And I want to let Oscar to answer your question, Marcello.

Marcello, thank you very much for your question, because I think it will allow us to clarify a few items related to the evolution of the credit quality.

First of all, in regarding the charge-offs, you probably remember that we pointed out, and actually we're presenting that in the evolution of the NPLs that you see in the presentation, that we had -- we sold our portfolio in the first quarter of credit that was in the balance sheet, and it was fully provisioned. And we mentioned that in this [financial quarter].

That sale logically had an impact in terms of the charge-offs of the second quarter that were lower than normal. So you probably need to adjust the evolution or the trend considering this fact. I don't know if you have considered or not. You didn't mention it in your comment.

Then you also mentioned that we have increased the renegotiations, which I think it's something normal. And I feel very comfortable with that portfolio, because as Carlos mentioned, Brazil is in a situation where despite the fact of lower growth at the macroeconomic level, the level of unemployment remains at very low levels, which means that the customers that are running into problems, it is not a question that they don't have a salary to pay out their debts, it's a question that they have over-leveraged. And [what] we were offering is conditions for them to actually pay their debts to the bank since they have a salary. They have money, and it's much a question of the right [tenure] and the right spread or interest rate level for them to be able to fulfill their obligations.

And that's what we've been doing, and that's what we see our peers doing as well. So that will, in fact, allow to have a more healthy credit quality in the portfolio.

We don't talk about our peers, but I can say that if you look at the NPLs evolution, the over 90 days and the 15 to 90 days in arrears, in both of them, you have to take in consideration the mix. And when you open up the mix between Individuals and Enterprises, you'll see that the trend is not that different. We might be a little bit behind of the [scale], but we are in line with what you see in the peers for both Individuals and Enterprises, considering that also in our portfolio we've been growing faster the SMEs credit than the large corporates credit, which obviously has a mix effect in terms of the index.

Therefore, we feel comfortable that the signs that we have presented, and that were [due], as I'm sure you are all doing, looking to more details into the numbers that we have presented today, you will see that the trend is positive and that we are starting to see that the worst of the delinquency problem is getting behind our back.

Did that answer your question?

Saul Martinez, JPMorgan.

A couple of questions. I guess I'm going to beat a dead horse on the asset quality issue. I too am a bit confused. It seems like there's a lot of cross currents in the asset quality number. And as Marcelo mentioned, the formation of bad loans this quarter was very, very high; pretty alarming levels if you consider the size of your portfolio.

But to a point that Oscar mentioned, you mention that loan -- your cost of credit will normalize at a lower level considering the mix of loans that you now have, which is a safer mix of loans. I think you've improved. This quarter, I think your cost of credit was a little bit over 6%. If I annualize that, '10 and '11, your cost of credit was something like 5%.

What do you think? And I'm not asking you to give a guidance for next year, but what would you think is a more normalized cost of credit considering the mix shift that you had? How much over time can you see that your cost of credit will fall?

Thank you, Saul. And, Oscar, do you want to start answering Saul?

Let me try to answer your question. You said that the level of -- what is the number of you used, the portfolio? The problematic portfolio has grown. As I explained in my answer to Marcelo, the way we see the evolution of the credit quality, it is clear that during 2012, the slowdown in the macroeconomic environment impacted significantly the Corporate portfolio and the quality of the Corporate portfolio, not only for the index in terms of the delinquency, but also in terms of the growth that has slowed down significantly over [years] in the past.

We also explained that we identify in the Individuals portfolio, and also in the Auto portfolio what was the nature of the problem that led to an increase in terms of delinquency related to the over-leverage of some customers, and the credit policies applied in some of the financing of the new autos.

What we see is that -- we've seen is that the combination of both effects has been having and building in an impact in the overall credit quality. And as we consider in the last quarter, we maintain the expectation that this third quarter should be the peak in terms of the asset quality deterioration.

Going forward, what is the level of provisions that we --? And here, I think you're trying to ask what is the level of the cost of credit with the new level of mix. This is highly impacted by the mix, and it is highly impacted by the speed at which the economy recuperates.

So I don't want to give you our guidance, because the chance of giving you the wrong number because things that I cannot control are significant.

Therefore, we will see an improvement going forward based on the mix of segments that we're going to be growing and the product mix, but the level at which we're going to get is going to depend very much on how fast and how intense is the improvement in the economy.

Let me complement that a little bit what Oscar mentioned, and then to give you a clearer reference. Even though we don't know the split of how it's going to happen, clearly, our first target in terms of cost of credit, normal existing cost of credit, should be more or less recovering the level that we saw, as I mentioned, pre-2012, as I mentioned before. So we mean something between 2011 or previous quarters. This is the first target that we could see as our first step in the [normal season] on cost of credit.

And once again, as Oscar was mentioning, it's going to depend on the how fast or how we are going to develop in terms of mix. Mix, once again, it's third quarter explanation how we are going to impact in the revenues, but how they are going to impact the loan loss provision as well. So it's extremely important to analyze the mix and the portfolio mix that we are going to have in the coming quarters.

So pre-2012, let me just make sure I understood this. So on a normalized basis, your cost of credit should be more comparable to 2010 and 2011 than 2012? Is that correct?

It's our first approach, yes.

Yes, okay. And second quick question, more specific. You've had very high levels of contingency cost for a while now, and I think your other operating expense line provisions for labor contingency, I think it was BRL500 million rise this quarter. I don't have the exact number in front of me. But can you comment a little on that? Because that's been a fairly sizeable number for a while. What you expect there? Do you see some relief in terms of those provisions for labor, provisions for contingency costs?

Yes, this line, which is in our [pre-release], you are going to see that basically has grown 18% in annual terms in the other expenses. And basically, the line which impacted or explained most of this evolution was all expenses related to credit cards, and more specifically, everything related to the acquiring expansion, the acquiring business expansion.

It grew 53% year over year, and basically you see other expenses, operational expenses grew more or less BRL400 million in annual terms. And basically, the expenses with credit card activity grew the same amount. So basically, this line explains the growth in nine months 2012 versus nine months 2011.

In terms of litigations, if you remember, we started three or four quarters ago an initiative in order to normalize, because if you remember in 2011, this line grew much faster than inflation and much faster than other lines in this point.

So you see this year decelerated helped by this initiative that we took and we implemented and executed in 2012. And what you can expect for the coming quarters is a normalization, which means -- which a normalization means. It should be growing in line with inflation. This is a line that there is no surprise. It's adjusted by one index, and this index is quite similar to the inflation. So this is more or less the performance that we expect for the litigation in the coming quarters.

But once again, these other operational expenses, they were what's impacted, and they are going to be impacted for the acquiring business. And if we maintain the activity in the acquiring business, then we would like to, as we anticipated to you, to accelerate the pace is happening in the revenues. And the other part of this activity is related to the operational expenses which are registered, booked in this line, and clearly, it's going to grow as well.

Regina Sanchez, Itau.

I have a question on fee income growth, which was quite positive this quarter, growing more than 7%. But you mentioned it's definitely meaning credit cards; that was up 23%. And you mentioned in the release that there was an impact this quarter of BRL80 million related to the change of the criteria to recognize revenues from interest-free installment transactions. But even excluding this BRL80 million, credit card fees would have grown 11% quarter over quarter.

I would appreciate if you could explain exactly how was this change in the criteria of this fee recognition of interest-free installments. And how positive was the impact of the acquiring business to help this fee-income line?

Thank you.

Thank you, Regina. Well, as I mentioned, maybe I'm going to try to be clearer now. Basically, the change criteria is to follow the market standard for acquiring business. And the [Portuaria y Logistica], as you know, basically we were booking the Portuaria y Logistica following the [accrual] criteria, and the market standards on a cash basis. That's why --

Sorry. The Portuaria y Logistica, we were accruing all the business, and that market standards are following the --

Actually, the Portuaria y Logistica, we were accounting on a cash basis, and now we are going to a competence basis. So that's the change that took place. But it's important to mention that from the BRL80 million, two-thirds of that would have recognized in the fourth Q. So the impact of that change is relatively short dated on the dynamics of this account.

And related to that contribution, as I was mentioning, in order to [hide] that most of the credit card commission expansion, it's driven by the acquiring business, I mentioned that basically the commission contribution from the acquiring business more than doubled in 2012 to 2011. But this is something that we don't disclose yet. But clearly, this line was supported mainly for the acquiring business in not just the more new affiliates that we have, but the more activities with these affiliates.

Okay. Thanks, Carlos. Could you repeat what you said that the two-thirds of the BRL80 million -- I didn't get that part. It was going to be booked in the fourth quarter. Is that what you said?

If the accounting change wouldn't have taken place, two-thirds of the BRL80 million would have been recognized in the fourth Q 2012 anyway.

Okay, great. Thanks a lot.

Victor Galliano, HSBC.

Well, my questions have really already been asked, but if I could just ask in terms of a follow-up on the cost side, what are you looking for here in terms of further expansion of branches and employees looking to 4Q and into 2013?

Thank you, Victor. Clearly, our expansion, our first approach for expenses line is that we would like to more or less grow in line with inflation. And clearly, one of the elements that we are under revision, it's the branch expansion. Maybe we are going to moderate the branch expansion, which means that basically we are going to -- it's going to take us a little bit longer than we have been running 'til now.

Do you remember since we started with the branch expansion we have opened, if I'm not mistaken, 270 or 280 branches, which means in the last 2.5 years, 100 branches per year? And the idea is to moderate this pace for the coming quarters.

Regarding the commercial activity, part of the expansion is explained with investment and services which we [reforce] during all this process. And the idea now it's to be more moderate as well in the hiring new commercial staff. And what we are going to try is to gain some productivity with the new infrastructure and with the new teams incorporated throughout 2012.

You see that in one year we have increased more than 2,000 employees, basically most of them related to commercial activities in order to support the real estate product, in order to support the SMEs products, etc.. The idea now it's to impose with this new infrastructure more productivity from the investment that we made in the last two years.

So if I could just ask a quick follow-up here. Can you just remind us when you concluded your IT integration process, and is part of the idea at growing your costs at the rate of inflation for next year being driven by you extracting synergies and efficiencies from that?

Well, you know that we still have been working in order to capture synergies. Otherwise, yes, naturally speaking, we wouldn't have improved. We wouldn't have made synergies. We would have been running the Bank in a higher pace, in a higher level of expenses. And basically, the Bank is taking advantage of the synergies in order to compensate investment and other expenses expansion in a more focused commercial activity.

This is going to continue. Once again, it's nothing new. It's an ongoing process. But the idea maybe in terms of expansion, in terms of investment, we are going to moderate in the coming months.

Regarding the IT integration, it was already finished. It's completely executed and implemented in 2011. Having said that, there are always things that should be improved, platforms that should be updated, IT development that should be made to better service our customers. And this is part of the business as usual that the Bank is involved.

But in terms of big IT investment, most of them they were made. And something that you know is we are going to open the new IT data center next year. I don't know if it will be finished the end of this year. And throughout 2013, we want to open the new IT data center in Campinas. But once again, most of the investment was made for not just the IT data center, (inaudible) but for most of the expansion and the IT integration.

Okay, thank you.

Fabio Zagatti, Barclays.

I know it has been a long call already, but sorry to stress this subject, but I really noted your comments that you would expect the situation to stabilize 4Q, and eventually improving through 2013. But I recall from the previous conference call that Santander has also guided for NPLs to have stabilized in previous quarters, particularly in 3Q. It's a scenario that has not obviously materialized.

So how should we feel comfortable that the assumptions in your credit risks models being used to project a rosier scenario for asset quality are valid? Maybe if you could share with us some hard data you have from Santander's underlying credit conditions, it would be very helpful.

And I have a second question. Thanks.

Thank you Fabio. Oscar, please.

Fabio, when we talk about some type of guidance for the NPL evolution in previous quarters, in the last quarter, we mentioned that actually we were expecting a normalization of the NPLs in the third quarter with potential for improvement in the fourth quarter. It is true that there was a change compared to what we said at the beginning of the year, but it was also true that the market environment changed significantly, and it was not expected by any one at the level of deceleration that the economy had in this first semester. We've been looking at revisions of the downgrade of growth at the macro level quarter after quarter.

So we do -- we always look at our internal data [what is showing], and we always realize as well that we can be impacted at any given point in time, but it will just be happening in the market as well.

You asked us for some hard data in terms of why are we confident this time regarding the improvement. I think we showed you, and we disclosed this quarter for the first time, the 15 to 90 days evolution, NPL evolution, and that shows an improvement, a significant NPL improvement at the Individuals level.

It also shows that the level of 15 to 30 NPLs, despite the fact that there's an increase in the quarter very much related to mix of segment and to the growth into the SMEs portfolio, but it's also showing the data converging around a level that if you compare it to the industry, it is one of the lowest levels of NPL that we have in the Corporate segment.

So that is hard data that leads us into expecting an improvement in the NPL [premiums].

I mentioned in one of the earlier questions also that when we look at the [vintages] of our outer finance business, when we look at the vintages of the Individuals portfolio and the SMEs portfolio, they are showing for the new origination better quality than what we showed even before 2011, which is also a clear indicator of the improvement in quality.

What is [interesting], and we're administrating, is what is the portfolio of our leverage customers and the portfolio originated in the new out of new car finance with down payment lower than 20%, that is what we're administrating and it has been impacting the credit quality.

But the new origination is better. The portfolio originated with these customers all leveraged and new cars, it's already frozen and it's been taken care of through new measures of collections and refinance when appropriate. And, therefore, the hard data would lead us believe that if the economy at the macro level continues in the line that Carlos mentioned in the presentation, you can see this normalization of the asset quality in our [results].

Thanks, Oscar, but I really understand the scenario has changed since the beginning of the year, but I was really more interested in understanding from you what has changed from the previous quarter, when you guided for a stabilization or an improvement in asset quality.

90 days ago when you were reporting 3Q results, you clearly guided for stabilization of asset quality, and it has not been what we saw during the quarter reported this morning.

Yes, what has changed, do you mean in the quarter? So let me see if I understood correctly your question. What you're saying is we were guiding for a normalization in the third quarter of the NPLs, and what you're asking is why that is not happening. Is that the question?

Exactly.

Okay.

Let me put it differently. What went wrong?

I don't think anything went wrong. It is much more a matter of timing. What I can tell you is if we look at the over 90-day number, not the index but the number for Individuals between the month of September, between the month of August and September, it is already the same number in [NPLs], which means that it is true that in the third quarter, we saw an increase. And it is much more a question of timing actually than that of the guideline that we gave.

So we still see that the normalization happened. It's just that we missed for a couple of months the stabilization that we mentioned in the last quarter.

Okay. So my next question is on the scenario for earnings growth in ROE. And although you have repeated that an official guidance for 2013 may not be provided yet, may I ask you please to share with us maybe more general terms how exactly Santander plans to eventually improve its ROE in an environment of falling margins and increased competition?

I guess that it would also be interesting to hear from you about your initiatives to improve efficiency and how will you expect to reduce the pace of OpEx growth to inflation levels in 2013, as you had mentioned in your initial remarks.

Thank you.

Yes, well, I'm going to try to answer in a quick way. Yes, profitability is one of our challenges and we know that we are behind our target. And the idea is, well, basically, as you see for instance, the top line was very good, and this year, it was impacted by the delinquency cycle.

We think that one of the benefits that we have is that our base, given the fact that our base is a little bit lower than our peers, it should be helping us in 2013.

And secondly, we have to bear in mind that, basically, as I was mentioning, we are going to adjust some other lines in order to compensate, to offset maybe the spread compression.

In a nutshell, what I'm going to tell you is that most of our targets for 2013, not just for instance regarding the branch expansion that I was mentioning, are going to be all to improve our productivity, improve our efficiency, with all the investment that we made in terms of divestiture and in terms of investment of commercial activity.

Basically, what we are going to focus is to gain productivity and gain, or try to take advantage of the investments that we made in terms of this new investment to produce the revenues that we expect for 2015.

Carlos Firetti, Bradesco.

I would like to ask a question regarding your net interest income, more specifically, the impact of your asset liability management [policy].

As Luis Flex always explains us, there is this year a positive impact on your net interest income from the effect of your (inaudible) [policy]. I'd like to know a little how do you see this impact next year, especially considering that we've reached probably the end of the cycle of reduction in the interest rates; i.e., from what I remember, it seems that the views you gave in the past was that this effect was lasting; not only impacting the numbers in 2012, but would also continue impacting somehow in '13.

Has something changed? Should we continue expecting this positive impact for '13?

Thank you.

Thank you for your question. Yes, as I mentioned before, yes, you can check with the information throughout 2012 and older, which is basically booked hedge for asset liability balance has been very resilient, more or less RBL1.8 billion per quarter, and clearly in a higher level versus 2011. What I mentioned, the hedge was made for the entire year. And what you can expect for 2012 -- for the fourth Q is more of the same.

Looking at 2013, well, we have to think about that. We haven't planned how to pace the asset and liability hedge for 2015, as I was mentioning before, and we will give you more light and more information in the next quarter.

Thank you. The question and answer session has now ended, and I wish to hand the call back over to Mr. Carlos Galan for his concluding remarks.

Well, thank you, everyone, for attending the call. I think it was a long call. But in any case, if you have further questions, please don't hesitate our Investor Relations department. We will be pleased to answer any doubts, any questions that you can ask.

Thank you very much.

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

Thank you.