Banco Santander Brasil SA (BSBR) 2013 Q1 法說會逐字稿

Good morning and thank you for waiting. Welcome to the conference call to discuss Banco Santander SA's results of the first quarter of 2013. Present here are Mr. Carlos Galan, Vice President, Executive Officer and CFO; Mr. Oscar Rodrigues Herrero, Vice President, Executive Officer and 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 at www.santander.com.br/ri where the presentation is available for downloading. (Operator instructions) We would like to inform that questions can only be asked by telephone so if you are connected to the webcast you should email your questions directly to the IR team at ri@santender.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 beliefs and assumptions of the Executive Board as well as 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 and Executive Officer and CFO. Mr. Carlos Galan, you may proceed.

Okay, thank you. Good afternoon and thank you to all of you who are attending this conference call. The table of contents are a quick view about the macroeconomic scenario, highlights about the first quarter, the evolution of the main drivers of the results and the commercial activity and I would like to finish with our final remarks. I would like to mention that in view of the implementation of International Accounting Standards number 19 in Brazil, 2012 figures were restated. This restatement has increased 2012 net profit in BRL33m.

Regarding the macroeconomic outlook, I would like to highlight three points. First, in terms of GDP growth economic activity is recovering versus 2012. Market consensus indicates GDP growth of 1% in the first quarter and 3% for the entire 2013, and maintaining the pace for next year.

Regarding inflation, that's number two, the estimate is it will be within the range of the target determined by the Central Bank, reaching 5.7% in 2013 benefited by a more benign trend for inflation in the coming months and remaining the same level for 2014.

Number three, looking at exchange interest rates, we see stability in exchange rates running in the range between 2 and 2.05 until next year. In terms of interest rates, even though the market survey is projecting a 100 basis points increase to 8.25%, we foresee a more moderate timing cycle. In fact our research department expects the Selic to end 2015 at 8% and stability next year. Finally, we believe future monetary policy steps may still depend on prospects for economic activity and the international environment.

Going through the highlights of the first quarter of 2013 I would like to share six points. First, net profit was BRL1,519m. Q over q shows a 5% decline and 14% year over year. Second, expanded credit portfolio remains flat in the quarter and grew 8% year over year. Three, total revenues declined less than 1% in the quarter and 2% year over year. Four, total costs declined almost 6% in the quarter and increased about 1% in the year. Five, allowance for loan losses grew 9% in the quarter and 12 months. And new NPL formation decreased in the quarter and year over year around 20 basis -- 20%. And finally, a strong balance sheet; our cover ratio reached 124%, our BIS ratio reached 21.5% and we have a comfortable and balanced liquidity position.

In the first three months we had a net profit including 100% of goodwill amortization of BRL1,519m, which represents BRL88m lower compared to the previous quarter and a 5.5% decrease quarter over quarter, and 14.4% decrease or BRL256m in 12 months. This implies BRL1.60 as profit per share in the first quarter.

The structure of our results are based on four lines. First, revenues affected by product mix change, sluggish growth and seasonality. NII decreased 2% in the quarter and 5% in 12 months. Fees and commissions up 2% in the quarter and 9% compared with first quarter 2012. Second, higher allowances for loan losses, but we reached the peak. Total credit provisions totaled BRL3,371m, up 9% both in the quarter and year over year. Cost of credit was 20 basis points lower when compared with the average [2000] book.

Third, general expenses control. Expenses excluding depreciation and amortization decreased by 7% in the quarter and 1% in 12 months. Basically in this quarter the weaker revenue performance was offset by better expenses dynamics. So pre-provision in profit was just slightly better in the quarter.

And four, improvement in other operational expenses. The fourth element is related to lower tax expenses and operational expenses which declined versus fourth quarter and year over year.

Net interest income came to almost BRL7.7b in the first quarter, a 2% decrease in the quarter and 5% over the same period last year. Basically we have two drivers. Revenues from credit operations decreased by 5% or BRL292m and partially offset by the improvement in the line Other Components with BRL153m or 11% better than previous quarter.

Regarding the first, in the quarter we have, first, almost flat average credit portfolio. Second, lower number of working days on income from high margin loans impacted NII in about BRL100m and, third, 30 basis points lower spread, 110 year over year. Regarding the spreads, although we had foreseen the strength, it's worth mentioning that it was a bit quicker than anticipated. Levers of the drop in the spreads are related to the mix shift towards lower risk loans, which has accelerated. For instance, in this quarter, the volume of revolving products decreased which is one of the main drivers behind the mix change. The other one-third is due to various factors, including prices and less volume in overdue loans up to (inaudible).

Regarding the second, which includes a structural interest rate mismatch, capital revenues, income of financial operations grew 11% compared to our weak 4Q 2012 and declined 6% in 12 months.

Looking at the loan portfolio, it has been growing at a more moderate pace. Even considering for the seasonality the trend is below our expectations. The expanded portfolio remained flat in the quarter and grew 8% in 12 months. We have a good diversification between segments, half with individuals and half with corporates.

The evolution by segment is loans to individuals up 7.3% year over year and almost flat in the quarters. Mortgages are the main driver with 31% up in the year over year and 6% in the quarter. On the other hand, credit cards decreased by almost 8% due seasonality and mix change, as I mentioned before. Consumer finance totaled BRL36.2b, down 0.5% in 12 months and 1.6% in the quarter. For cards the strategy is increase our sales via branches and partnerships. Finally, corporate and SME totaled BRL104m, up 8% in 12 months and 0.2% in the quarter. SMEs were affected by seasonality and weaker activity, but it remains our main focus in growth.

We still believe that the portfolio will gain traction throughout the year and we will maintain our focus on growing with credit quality in 2013. In terms of credit indicators, we have two important points. The first one is the early delinquency from 50 to 90 days continues to show a positive trend and is performing in line with the previous quarter. It remains flat in all segments, reaching 4.9% in total with 6.8% in individuals and 3.1% in corporate. In 12 months early delinquency improved 100 basis points, 180 basis points in individuals and 40 basis points in corporate.

Second point is the NPL over 90 days reached 5.8% of the total credit portfolio, up 34 basis points in the quarter and almost 1% in 12 months. The evolution in the quarter is in accordance with the outlook shared with you previously, associated with denominator factor, with the lower upturn in the credit portfolio and the seasonal effect of the opening months of the year.

The delinquency ratio of the individual segment stood at 8%, an increase of 12 basis points in the quarter. This segment accelerated the base and the volume growth decreased to 1.9% in the quarter versus average growth of 7.5% of the previous three quarters. The delinquency in the corporate segment increased by 50 basis points in the quarter to 3.8%.

We still believe the peak of the NPL cycle in this segment will occur in the second Q, while the signs in the origination continues to support an improvement in 2013 initiating probably at the end of the second quarter conditioned to the economic performance. Last but not least, we have an encouraging signal of the NPL formation, a metric that the market follows closely. This indicator drops 50% in the quarter and 20% in yearly comparison.

Allowance for loan losses totaled BRL3.4b, an increase of almost 9% in the quarter and the same volume in 12 months. The quarter movement can be composed in two lights, gross loan losses provisions increased by 3.7%, while the recoveries from written-off loans decreased by 32%. It should be noted that we continue with a positive outlook for the cost of credit evolution this year, improving at least 50 or 70 basis points. As a matter of fact, the cost of credit this quarter is 20 basis points lower than the average last year.

Fees and commissions income in the first quarter reached BRL2.7b, an increase of 2% in the quarter and 9% in 12 months. The first quarter was impacted by the weaker activity and the highlight was income from insurance, which grew 58% mainly due to the seasonal effect of policy renewals which are concentrated in the first months of the year. In annual terms the growth is mainly due to cards, which increased 31% mainly driven by the Acquiring services, insurance with 15% and security and brokerage services growing 27%.

As a part of our strategy to adapt the Bank to a new environment is to improve our commercial productivity and operational efficiency. The Bank has been implementing a plan which improves among others, increased operational leverage, optimize processes and structures, usage of cheaper distribution channels and service level differentiation per client clusters. As a result general expenses decreased 7% in the quarter and 1% in 12 months. Total expenses including depreciation and amortization presented a reduction of 6% in three months and increased 1% over the first quarter of 2012. As you can see, we are trying to deal with capital recurring costs with an increase in our investments.

Regarding performance ratios, we have efficiency ratio reached 44.3% at first Q, a 240 basis point improvement in the quarter, and increase of 0.7 percentage points over the first quarter. Recurrence ratio reached 69.4% in the first quarter, an increase of approximately 550 basis points in three and 12 months. Return on average assets closed the first Q at 1.4%, a decrease of 10 basis points in the quarter and 40 basis points in 12 months. And finally, return on average equity reached 12% in the first quarter, a reduction of 80 basis points against the fourth quarter and 260 basis points year over year.

Assets totaled BRL437b, an increase of almost 0.2% over December 2012 and 9% over the same period last year. Equity amounted to BRL51b, a growth of 1.2% in the quarter and 6% in 12 months. Considering the goodwill, equity totaled [BRL63b].

Coverage ratio over 90 days closed at 124% and continues to be at comfortable levels. BIS ratio reached 21.5%, 70 basis points up from previous quarter, the highest among large Brazilian banks. And basically booked in the tier one, which is 20.1%, while in the tier two it's 1.4%.

Total resources funding and assets under management increased more than BRL6b in this quarter or 1.8% and BRL30b, 9%, in one year. Total funding amounted to BRL217b, remains stable in the first quarter and grew 12% or BRL23b year over year. Assets under management reached BRL141b, an increase of 4% in the quarter and in 12 months. The Bank maintains comfortable levels of liquidity with ratio loans to total deposits below 100%.

Finally, I would like to finish this presentation sharing with you our perception where we stand in the transition of the banking model in Brazil in view of the lower spreads. First, the challenges related to this transition have been increased during the point of the economic cycle in which this transition is taking place, with sluggish economic activity that impacted banking activities and delinquency. For both cases the outlook seen is better. The Bank will resume credit growth as activity is picking up and NPL dynamics should improve going forward.

Second, the Bank is dealing with a change in the product mix portfolio with a spread compression process which is occurring more front-loaded than anticipated. We expect that in the near future the pace of these spread trends to be more gradual. Looking into the year 2013 we think the bulk of the compression has already taken place.

Third, linked to the two previous points, we reinforce the stability and future improvement in asset quality, and maintain our perception that the cost of credit should decrease in 2013 because the better quality of new origination vintages, the mix change and economic pick up.

Fourth, we have been working in reducing the structural costs for the future. The Bank has been quite agile in starting to change its cost base to adapt to a new banking environment. We are confident that the aim to deliver cost growth below inflation is quite feasible and we should see this trend in the coming months.

Finally, I would like to reconfirm that as it was informed and planned, our CEO is leaving his current position to become Chairman of the Group. Our new CEO, Jesus Zabalza, was Head of the LatAm unit. He is a highly skilled professional in commercial activities and the LatAm markets.

Thank you very much for your attention and pleased, I'm pleased to open questions.

Thank you. We will now start the Q&A session for investors and analysts. (Operator instructions). Our first question comes from Carlos Macedo with Goldman Sachs. Please go ahead.

Good afternoon gentlemen. Thank you for the opportunity. I have a couple of questions, the first one regarding your margins. Carlos, if I heard you well, you said you think the bulk of the pressure on margins for 2013 is already in place, but if you could just give us some more color on that. We did see your credit spreads declining through essentially the last three quarters, now down to 11.3%. How much lower do you think that can go throughout the year and what kind of relief do you think you can get on the deposit spread given that the increase in the benchmark rates we would expect the government to implement?

My second question is regarding expenses. You did the fourth quarter -- the first quarter was obviously very solid from that front with year over year growth of around 1% yet you're sticking to growing around inflation. Is there the potential for us to have some positive surprise from the expense front during the year? Thanks.

Thank you Carlos for your questions. Regarding the first one, spreads, we've seen that, as we've mentioned in the presentation, that we think that the mix change process was quicker than we expected. Having said that, we've seen that this is a long trend reality. We think that it will continue, yes, in 2013 and the coming years, but our perception, as I shared with you before, is that we think that it will be more moderate, more gradual. And so in 2013 more or less we are working at this moment with between 90, 110 basis point reduction versus 2012.

And basically this compression will be depend on the growth portfolio and these spreads are an important assumption about how the denominator is going to grow. Later how fast is the overdraft or rollover portfolios are going to grow. Bear in mind, for instance, in order to give you a more color on that, that even though our total portfolio expanded, credit portfolio has expanded 8% in the first quarter, the rollover products such as overdrafts, such as credit cards etc. declined 10% in one year horizon. So basically you can imagine that this mix shift, most of this the impact was already booked in the first quarter, so in order to give you an example.

Regarding the second question on expenses, the Bank acknowledged given that this mix shift is quicker or has been anticipating quicker or has happened quicker than we expected, we are accelerating as well all the improvement in efficiency and commercial productivity, which is not exactly to sell more by person. Commercial productivity involves the use of different channels, the use of a different model of servicing our clients etc. etc. The idea is that clearly to grow for the entire year well below inflation and we think that more or less as an assumption for the entire year growing something between half of the inflation for the entire year. This is more or less the outlook that we have for this line for 2013.

And just to follow-up on that, do you think growing at half of inflation, would that still enable you to pursue your growth objectives in loans and in fees, that would still be within your reach?

Yes. In order to give you an idea, part of our challenge is that you know that we have invested there, now very important. We are still maintaining this case investing for 2013. Now the idea is to leverage this investment in branches, in new IT development, in new products as a priority.

Bear in mind that the Santander franchise is more or less 12% market share in branch network infrastructure while in terms of commercial activity only has 10%. So I think there is plenty of room to leverage our footprint, our actual footprint in order to we are capable with the infrastructure that we have at this moment to live with the potential pick up in the growth portfolio and in the potential growth in services infrastructure. So we don't think this is something that is going to be constrained at least for the short-term.

Okay. Thank you Carlos.

Our next question comes from Mario Pierry with Deutsche Bank.

Hi Carlos. Let me ask you two questions as well. Just on your asset quality, this big deterioration we saw in your corporate portfolio, I know you cannot specify your clients, but I was just wondering if there is a specific industry where you've seen bigger problem?

Also I think you mentioned that you expect corporate NPLs to peak I think in second quarter. Is that what you meant that we should see a peak in the second quarter of 2013? If that's what you said, why do you expect that?

And then my second question is related to your fees, especially your asset management fees. I did not understand the trend here. We saw assets under management growing 5% year on year, but your fees were down close to 15%. So is there anything in particular that happened at the asset management and how should we think about fee income growth for 2013? Thank you.

Thank you Mario. I would like to, regarding the first question I would like to pass that question to our Chief Risk Officer and later I'm going to face the rest of your questions.

Mario, thank you very much for your question. In terms of the asset quality the trend of the evolution in the corporate portfolio delinquency is very much related to the mix of segments. As you probably remember from the previous calls throughout 2012, one of the, I would say, distinctive elements of our business evolution during 2012 was ability to grow our SMEs portfolio. That this is also one of the pillars of our strategy. We believe that our share in the SMEs business is still low compared to the opportunity that we see in the market and we are pursuing that with a differential service proposition using the [BOAs] and some products that we can only offer.

That growth in the portfolio of SMEs in terms of the mix will already, and we've been talking about that in previous calls, we're expecting to see an increase in the NPLs of the corporates. It is obvious that these trend have also been impacted by the limited growth we could see that we saw in 2012 in terms of the economy. That typically has a higher impact in SMEs than in other segments. But I think what we believe that this will be evolving according to our plans and we think have ranges that are acceptable to our policy and credit growth.

In terms of industry, there is not a specific industry where we have seen that deterioration happening. And why the peak in the second quarter? In the second quarter this will happen a combination of three elements. We've been talking and we confirmed that the vintages of the origination since last year are in levels significantly better that what we saw in 2011 and the beginning of 2012. And as those new vintages gain weight within our portfolio, it is obvious that it has to have a reflection in the credit quality of the portfolio. That's on one side.

On the second side, we also expect that as the economy picks up and we already see our first quarter with more activity, the ability and the business of our customers on the corporate segment should have better conditions not only to run their business but also to fulfill their financial debt. That will impact as well, positively impact the portfolio. And thirdly, the increase in the delinquency that we saw in 2012 also is getting out of the portfolio. We are writing off part of the portfolio.

So the combination of the three elements, it will lead us to believe that we shall see the normalization, the stabilization of the NPLs in the portfolio -- in the corporate portfolio in the second quarter.

And, Mario, regarding the, your question about assets under management fees, basically you have in this quarter a seasonal effect because you have less working days.

But looking in a one year horizon basically the impact that we have compared to the growth that we have in assets under management is explained by two effects. The first one is half of the impact is explained by the price effect. Basically the Bank just revised some of the products in terms of commissions or fees and it has impacted throughout all the year. And secondly, there is a mix effect as well where basically products mostly related to equity management which grew less than other products which has lower fees that were related to CDI or fixed income. So basically this is more or less the explanation.

Looking at 2013, while we think that more or less we expect the funds -- 2012 was very flat year. Now we think that we can grow around 10% or around 10% and basically the fees, there is a volatile issue here because there is a success fee as well in some of them, but they should grow in high one/single digit for the entire year.

Great. That's clear. Just to make sure, when you say high single digit for one year, you're talking about the overall fee income or just for the asset management?

No, the asset management fees, fees coming or commissions coming from the asset management. But more or less for the total portfolio we expect more or less similar volumes and we are working between 10%, 12% for the entire year and it is always depending on the credit loan origination, but this is more or less the figures that we are having working for the entire 2013.

Okay. Thank you very much.

Our next question comes from Jorge Kuri with Morgan Stanley. Please go ahead.

Hi. Good morning everyone. I have two questions. The first one is on margins. I'm not sure I understand your expectation of the worsening margins is now behind. If I recall correctly, at the onset of the [existing] cycle you commented that you had hedged your mismatch for around 12 months and that one --- and that would have helped you deliver better margins in the first 12 months of the repricing, and then you would suffer more margin pressure. Given that rates fell mostly during the first half of last year I would expect that your margins will continue to compress all throughout this year as, as you commented, some of those hedges maybe expire by the mid of this year. Therefore your margins are going to fully reflect the lower level of Selic rate by the end of 2013 and '14.

So if you can just clarify what the expectation is. It doesn't seem that even given the 40%-plus decline in Selic that you will reflect that in margins. That's question number one.

Question number two is on if you can help us translate what you think is the improvement in asset quality or the stabilization in asset quality that you're soon to see, how does that translate into provisions for the year? Your provision charge last year was around 7.3% of average loans. I'm just looking at provisions, not deductions and recoveries. So provisions of [BRL14.9b] last year, was 7.3%. What are your expectation as we normalize asset quality in 2013, either on an absolute number in reais or as a percentage of average loans? Thank you.

Thank you Jorge for your questions. Yes, I'm going to clarify. Maybe I didn't make it clear when I was referring to the spread compression that I was thinking, I was referring to credit spread compression. So what I'm saying is that, no, the spread compression increase is not behind. We think that is going to still -- this is a, as I was mentioning, a trend for a long period of time. As a matter of fact, you see five to six years horizon; this is a trend that remained quite stable for the last five years. And with some acceleration or some deceleration, but this is a clear trend and we think that this trend is going to continue looking forward.

But regarding the credit spread, the credit compression, what we've seen is that we think that most of the mix change product explaining our case. And when this spread compression increase we think that with new origination, with the new vintages that there will be more --- or it will be softer for the coming years. So, as you know, reducing more or less, as I was mentioning, 15% comparing the rollover products versus the traditional products and we think that part of this mix shift it was already made.

On the other hand, what we have is that the portfolio has grown very low and this is the other important element that we think is going to help in terms of spreads given that the prices in terms of new origination has stabilized. And we don't see that the pressure that we have in 2012 is going to be the same for this year and we feel that we expect some stability. And, as a matter of fact, the competition at this moment is more rational, I would tell you that. The current cycle maybe is going to help us something in order to stabilize these new prices and the new credit and the new origination. And this is more or less the assumption that we have at this moment or the mission that we have at this moment.

Regarding the other point, the real interest rate mismatch position that we have, as I mentioned in the fourth Q, this is a line that we think that is going to be resilient for 2013 even though a lower level compared to the previous year. As I mentioned in the 4Q, this is a line that more or less on a quarterly basis should be contributing in a more or less neighborhood of BRL1.5b per quarter. So more or less, if we are going to have quarters with higher level as this one, but this is more or less the outlook that we have had in the other component of the NII.

In our situation facing the new [time] and cycle, I would tell you that it's more or less neutral. In one year horizon basically our sensitivity at this moment almost close to zero when considering the new origination and the dynamics of the new prefixed credits. And this is more or less the position that we have. Having said that, we have had some assets in order to immunize this sensitivity because otherwise, as you know, banks usually are in a structural long position. So basically these instruments and this position more or less immunize the situation and that is why we are confident in order to maintain the volume or level that I mentioned in this chapter.

Regarding the provisions performance or the provisions evolution, first I'd like to give you our vision about the cost of trade evolution and later I'm going to (inaudible) to extend Oscar wants to add some color.

But, as I mentioned, all the new early delinquency is improving, that all the signals are telling us that, as we mentioned, that the individual portfolio was stabilizing then the corporates portfolio is decelerating as well. So, as a result, all these elements, that's why we think that we will be running the Bank with running with a cost of credit 50, 60 basis points, as I mentioned in the presentation, lower versus the average that we had in 2012. Which is in 2012 the cost of credit was more or less 5.8% so this year will be more or less in the line or the levels of 5.2%. This is more or less the vision that I have and I don't know if Oscar wants to clarify something else.

I think you've -- the question was answered.

Thank you.

(Operator Instructions). Our next question comes from [Marcello Enriquez] with [BCG]. Please go ahead.

Hi. Good afternoon. Thank you for taking my question. I have a couple of questions. And sorry to go back to the asset quality issue, when you look at the evolution of asset quality, the NPLs, there's like this very important disconnection between the early delinquencies and NPLs over 90 days. So I'm just wondering how confident are you really that this eases in the second quarter.

I understood that the main explanation for deterioration in the asset quality is the corporate. That's because of a shift in mix, more presence of small and medium companies in corporate. But when you look the percentage of SMEs on top of your total credit outstanding, if you compare March 2013 with March 2012, it was actually relatively flat, was a stake of 16.5%/17%. So there, actually there was no, at least in my view, there's no major change in the mix if you compare one year ago. So just wondering if there is any, again, specific issues. It seems like the quality of SMEs could have deteriorated much more or large corporates to some extent so just would like to understand. And then I had more questions. Thank you.

Thank you Marcello. Oscar, please.

Marcello, thank you for the question. But if you can clarify what is the disconnection. Because this type of question, in that there is a disconnection between early delinquency and the delinquency percentage, did I understand you correctly?

Yes, it's because I understood from your speech that the early delinquency there is positive signs that NPLs should [seat] going forward because of this, because of the early delinquencies. But it has, the early delinquencies you see in your chart it has been moving down for a couple of quarters, several quarters, but it has not translated into a better NPLs over 90 days. So I just want to understand as for the first question how comfortable are you that now it is indeed going to improve but it haven't improved in the past.

Really we are confident, I am confident in terms of the on the evolution that we are commenting. As I said and I been already sharing with you in the previous calls, in terms of what is the quality of the new vintages that we are originating.

In the actual disconnect, that disconnect it is very much related to the way NPLs, that the back of NPLs over 90 it's a longer period. So as the early delinquency goes down it takes some time to absorb or to write off that portfolio originated. So it is normal that you will see a delay of two to three quarters before you actually can see that improvement in terms of the over 90.

And we have to take also in consideration that when you look at the mix in terms of corporates it's important to see the trend. And we started to grow stronger in SMEs in the first, basically since the first/second quarter of last year and that, it is a [sizeable] growth because the first quarter typically for us in SMEs is a slower quarter, which has not been the case in the large corporates. So even though it is true that there is not a big differential in terms of growth over the one year period, but the trend in that growth, how that growth has been built in terms of SMEs, it is clear that we are being impacted right now by the new portfolio originated in 2012.

And also, as I mentioned, the portfolio was impacted by the slowest growth in GDP in 2012 and what we have seen there in the market, and giving a little more bit detail, is that corporates and large corporates were better prepared for a slowdown in the economy as they had longer tenure debts and they have raised money in the last few years with longer tenure whereas typically SMEs have more difficulty because their capital structure, it's more dependent on the shorter term financing. So that's why typically have a -- they suffer more when there is a slowdown on the economy like it has happened currently.

So basically this is complementing a little bit of the view that I already share, but you also -- I think it's important to consider that the first quarter typically is, it's bad for us in terms of collections, as you have seen in the numbers. And that's why the combination of all factors lead us to be confident in terms of the trend that we have commented in NPLs and delinquency. It is obvious that the environment it will play an important role in terms of future delinquency, but we don't expect to see significant changes and if those happen we will have to review it.

Okay. Just one quick thing before the final question. In April, which is basically ended, are you seeing any kind of pick up in demand for credit or already seeing signs of evolution in NPL? On both fronts are you seeing improvements on both sides, or how are you see for April, if you could give us some color, against April last year, okay?

In terms of demand we don't see in April anything very much different to what really we've been talking about. It is obvious that now we benefit from months that have more days. So what we see in NPLs and delinquency is that generally, and especially February and March, are showing better numbers that what we saw in the evolution between November, December and January. So we already see a different performance within the quarter.

Okay. Sorry, just one further question on the Acquiring business. Your market share reached 4.8% in March 2013, but I noticed that you removed the guidance for 10% market share by the end of 2013. Should we interpret that -- how should we interpret that, as something that you still focus on that getting the 10% or this is no longer a target for the end of 2013?

The Acquiring business, as we think that we discussed with some of you, this is a key target or a key role for the Bank. Yes, our aspiration and goal is to achieve that percent. Bear in mind that first, our first movement, the first movement in the last two years was focused on SMEs. Basically if you could rate or you could break down the differences of the market share between big corporates and SMEs basically the Bank has already achieved the 10% in SMEs. And basically all the efforts were in order to gain some market share in this segment. Why? Basically because we think that this is the natural clients for Santander. Secondly, because it's the most profitable. And thirdly, because the SMEs for -- as a segment is a key segment in our strategy in medium term.

Now in order to achieve the 10% market share as a whole or for the whole portfolio we are entering in deal with new retail companies since basically second Q or three Q last year. It is taking time in order to gain their confidence because usually this is a process that it's made in different parts. At the beginning they usually give you a percentage. Later when you show that you can deliver the service and the quality that the companies are expecting, later they usually expand some of their transactions to you. And at the end is when you can gain their entire confidence and entire transactionality with different companies.

So this is more or less we are in the way of that. In order to give you an idea, in this quarter we gained some 30 basis points in the market share and this is more or less the goal that we have. But we are not upset. If you ask me if we are going to hit 10% nobody for at the price that we are going to pay, the answer is not. We want to maintain the top profitability in this product and not to jeopardize the profitability of our customers in the products.

Perfect. Thank you very much for that.

Our next question comes from Saul Martinez with JP Morgan. Please go ahead.

Hi guys. Thanks for taking my call. I'm surprised that very little comments were made on the resignation of your CEO and the installment of the new CEO. Can you comment a little bit more on that? That's obviously a major corporate event. What drove that? Who the new CEO is, what he brings to the table? And I have a follow up as well.

Okay. Saul, thank you for your question. I would like to share three ideas with you. The first one is that I expect that once that it's all the legal procedures in place, that you will personally meet him in the near future.

Secondly, that, as you know, when the former CEO became CEO, which was the Chairman of the Board basically signed a contract for a period of time. This contract expired and was planned to substitute the CEO for another person.

This new person, the message that maybe he would like -- he is going to bring us, is going to bring you, is that he is more focused on the commercial activity. He's a specialist in retail, in branches, in the commercial arena. He has been dealing with the LatAm units for the last eight, nine years and the last three years as head of the unit dealing with the different countries, Mexico, Chile, Uruguay, Argentina etc. So he knows the [peculiarities] that every market has regarding the financial industry.

And I would say that we closed a cycle where basically the experience of the former CEO, Marcial Portela, was more focused to create a robust platform, financial platform. He basically -- he dealt with the integration. He dealt with the focus on the different segments or with the pillars of the IT platform, with the pillars of the operational platform as well. So at this stage we think that it's considered more than over and now the priority for the Bank, as it was a priority since the integration, is more focused on the commercial activity. And the nomination of the new CEO is more aiming at that goal than any other thing.

Okay. That's helpful. I guess in that vein, sort of big picture, and I hope this question doesn't come across as confrontational or me being a jerk, but it seems, I think it's fair to say since the IPO the operating performance has been not what you expected. And it seems like every quarter we have some signs of progress perhaps but still struggling.

Is there a point at which the Company, whether staying or management there, decides that something larger needs to be done, whether it's a tie-up with another company, whether it's exiting select businesses, whatever it is, whether something more significant from a strategic standpoint needs to get done? Because it just seems like it's been three-plus years and operationally things continue to be very, very challenging. And if not, what gives you confidence that the current strategy is the right one?

Thank you for, Saul for the question. It's always challenging, but not just for us; it's for everyone. If you look at our competitors, they are trying to adapt their models to the new environment. So this is something that is for the entire competitors in Brazil as it is something that is challenging for everyone.

But regarding our situation, I would say that this is a newcomer. To stabilize a bank after a big integration between two big banks takes time. We acknowledge that we are behind our expectation and that the performance is not as good as we expected. But we have to reckon that you don't make a bank in two days or in two years. I think this is something that takes time and we think that in a three/five years horizon is when we see with more clarity if the franchise that we have been building out, it's good or not. I think that it is too soon and early to qualify the performance.

And I don't think, and this is my personal view, that the market share or the market that we have is a constraint. As a matter of fact, I think that we have a good critical mass. We think always we would like to have some new products or some new segment, but this is something that everybody is always wishing. But I would tell you that I think that we have a solid platform. We have a good network branches. We think that we have a good portfolio of products. And the most important or the two most important, we think that a very good qualified professionals and a solid clients base. We have more than 10m customers and the idea here is how to leverage the relationship with them.

This is a more -- the challenge that I think is going to take time. But I think that while this is possible, that it's no linear. You have ups and downs etc, but I think that to build out a franchise takes minimum of three and five years, as I mentioned. And I don't think that the size that we have is a constraint. I think this is more related to consistency and to adapt to new realities, the challenging reality with a new maybe financial model, like we are facing in Brazil with a different type of new product or credit portfolio.

And I think, personally think that is too leveraged in the credit activity and that part of the challenge in Brazil is to diversity this concentration that we have within margins with the credit contribution, with more services, with more fees, with more transactions. And this is part of the challenges for everyone here. So, once again, the new CEO should contribute to this idea and they should help in order to accelerate this build up the franchise.

How actively up until now -- my understanding is the new CEO has been the head of LatAm. How active has he been involved in understanding on top and in managing the Brazilian operations?

As I told you, has been dealing with the LatAm units for the last eight, nine years. Previously Banco Real integration was responsible for the commercial activity in Brazil so he knows very well and for a long period of time all particularities in Brazil.

Okay. Great. Thanks a lot.

Our next question comes from Regina Sanchez with Itau. Please go ahead.

Yes, hi Carlos. Hi Oscar. Hi Felipe. I also have two questions. The first -- very specific ones, okay? The first one is that you announced the sale of the 30% stake of WebMotors to Carsales. Is it true that WebMotors' stake is now booked under Santander subsidiary that was created as a result of last quarter's restructuring?

And if this is correct and Santander Brasil has a 60.65% of (inaudible) and not anymore 100% because Santusa Holding has the other 39% stake, can you share with us what is the expected gain related to this transaction for Santander Brasil? Can we expect a positive impact on the second quarter results?

And then my second question is regarding the Basel index. That increases quarter over quarter even considering that you had the negative impact of BRL2.4b in the shareholder equity related to the pension plan. I believe the main reason was lower loan growth and also the new Basel rules, that lower risk-weighted factor that was announced by the central bank in March. But have you simulated the common equity Tier 1 ratio under Basel III? If it was already fully implemented, how much it would be? I know the Bank has a very good Basel ratio but I was curious about Basel III common equity Tier 1 ratio. Thank you.

Thank you Regina. Regarding your first question, yes, we announced the 30% sale of the stake in WebMotors. It's an important partnership because we are, as you know, we are always looking for the best partners when we think that we can't add value, as happened in the insurance activity as well and the business. And especially in car sales through the net and this is the biggest and main player in [Australia]. Yes, we are going to book the transaction and we expect -- it depends on all the legal procedures -- we expect to book the profit in the second Q. And more or less the profit net of taxes in local books will be around BRL70m.

Regarding the second question about BIS, yes, you're right. We improved even though the structure with the new rule about pension funds and basically this improvement is coming from three elements. The first one, it's, yes, we have benefited from the new rules, capital consumption issued by the Central Bank of Brazil. The second one, it's we have less consumption in the market risk capital consumption. And the third one is that the Bank is always trying to optimize the capital consumption and part of this improvement in this process was affected by an implementation of optimization that we execute in the first year. And Felipe is going to add some color.

Yes, Regina, when the government announced the package it included, let's say, Basel II features and Basel III features. We mentioned at the time that the overall impact of those together was 50 basis points in the Tier 1 capital, right? Now we've seen already the positive impact of the Basel II element, which is about 90 basis points. So you could claim that the future impact of the Basel III element going forward will be in the neighborhood of 140 basis points in Tier 1 capital.

Okay. Perfect. Thank you very much guys

Thank you. The Q&A session is over and now I wish to turn the conference back over to Mr. Carlos Galan for his concluding remarks. Please go ahead.

Thank you everyone. We extended a little bit more than usual and please don't hesitate to contact us if you have or you want to clarify any more subjects. Thank you very much and good afternoon.

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