Banco Santander Brasil SA (BSBR) 2013 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 2013. Present here are Mr. Carlos Galan, Vice President, Executive Officer, CFO; Oscar Rodrigues, 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, 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 through the webcast, you should email your questions directly to the RI 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 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, Executive Officer, and CFO. Mr. Galan, you may proceed.

Good afternoon, and thank you [all] for attending Santander's Brasil third quarter results conference call.

The table of contents summarizes the topics that will be covered -- a quick view about the macroeconomic scenario; highlights of the first nine months of 2013, [evaluation] of the third quarter performance and commercial activity. We'll then finish with [some] final remarks.

But before I start, I would like to draw your attention to the fact that from this quarter onwards acquired service commissions are reported, net value of the amount transferred, as interchange to other banks in order to reflect more appropriately the nature of operations and to convert to international accounting standards. This reclassification impacts the lines -- fees and commissions income and other operating income and expenses. In order to [ease] comparisons, this reclassification is also reflected in prior periods. It's worth noting that this change does not impact the bottom line in this quarter, nor in the previous ones.

On the next page, regarding the macroeconomic outlook, I'd like to highlight four ideas. First, recently the market reviewed up GDP expectations for 2013 and down for 2014. Anyhow, it's expected that GDP growth for both years will be around 2% and 2.5%.

Secondly, regarding inflation, we share the market view that the central bank will manage to keep inflation within the inflation target ceiling for 2013 and 2014, reaching 5.8% in 2013 and 6% in 2014.

Third, looking at interest rates, given the more hawkish tone of the Brazilian central bank, it's expected that Selic rates will reach double-digit levels.

And finally, in terms of exchange rate, the market [analysts] project some depreciation of the Brazilian real in the next 18 months.

On page 6, going through the highlights of the first nine months of 2013, I would like to share six points. First, net profit amounted to R$4.3 billion in the first nine months of the year, 9% lower than the same period last year and flat in the quarter at R$1.4 billion.

Second, expanded credit portfolio grew 2% in the quarter and 11% year on year.

Third, revenues, NII plus fees, increased 1% quarter over quarter and declined 4% year over year. However, other revenues net of allowance for loan losses is starting to present a more positive outcome. They grew 8% in the quarter, while they decreased 2% on a yearly basis.

Fourth, operating expenses excluding depreciation and amortization increased 5% in the quarter and 2% over the first nine months of 2012, well below the annual inflation.

Fifth, NPLs over 90 days improved 75 basis points in the quarter, with improvements both in individual and corporates. Allowance for loan losses decreased both on a quarterly and yearly basis.

And finally, a strong balance sheet. The Bank remains in a comfortable position in terms of coverage ratio, liquidity, and capital.

On page 8, the third quarter results amounted to R$1,407 million, flat against the previous quarter. And in the first nine months of 2013, we had a net profit, including 100% of the goodwill amortization, of R$4,335 million, 8.9% decrease, or R$421 million, in 12 months. This implies an annualized profit per unit of R$1.52 in the first nine months of 2013.

On page 9, for a few quarters we have been discussing the structural changes that are taking place in the industry and what measures the Bank is putting in place to position itself in this new environment. The [themes] are increased focus on collateralized lending, with lower spreads but also lower cost of credit; the increased segmentation of the client base; and efforts to improve efficiency and productivity. The [third] quarter results continue to reflect those issues.

An encouraging point of this quarter is that for the first time in a prolonged period credit-related net interest income after loan loss provisions increased. This is in line with the expectations that we shared with you previously. It [increased] about R$340 million, or 13.4%, in the quarter.

As a result, the approximately R$500 million reduction in loan loss provisions in the quarter more than compensated the reduction of around R$150 million in credit-related net interest income. We believe that net spreads will continue to improve in the next quarters. This is a signal that we have already overcome the initial stage of this transition process.

Let me run through the major lines. Regarding revenues, revenues affected by moderated credit growth, important product mix change, and sluggish economic growth. Net interest income increased 1% in the quarter, and decreased 8% in 12 months. And fees and commissions decreased 0.5% in the quarter and increased 9% over the first nine months of 2012.

We had lower allowance for loan losses, as we anticipated. Allowed loan losses totaled R$9.3 billion, a decrease of 16% in the quarter and 8% year over year.

Cost of credit reduced 90 basis points in the quarter and [0.5] basis point on the annual [trends].

In terms of general expenses, we are showing control with running rate close to half of inflation. Total expenses increased 2% in three months and 2% in 12 months. Excluding depreciation and amortization, operating expenses increased 5% in the quarter and 2% in 12 months.

Although other income expenses are down in the yearly comparison, it increased substantially in the quarter. The quarterly increase had main two drivers -- (a) labor provisions increased R$175 million as a result of our review of the [average ticket price and new entrants]; (b) credit card expenses increased close to R$90 million, mainly because in the second [tier] the provisions for air miles expenses, known as super bonus, had one-time positive impact in view of prior renegotiations with airline companies. The final outcome is a flat net profit evolution quarter over quarter.

On the next page, we can see the NII evolution. Net interest income came to R$22.6 billion in the first nine months, a reduction of 8% over the same period last year. In the quarterly comparison, NII increased 1%, or approximately R$80 million, which is explained by the increase of R$250 million related to the deposits and others, which more than offset the decrease of around R$150 million in credit-related NII.

In relation to the latter, the [non-portfolio] growth was not enough to offset the 58-basis point drop in spreads in the quarter. Again in this quarter, we expect compression predominantly explained by our mix change. About 70% of the spread compression in the quarter is due to this effect. It has to be said that we think the mix effect [after] a few quarters ago, it was only about a shift in product mix. More recently, the impact of this change in (inaudible) has started to increase its importance.

Some of the product dynamics continue to be similar to what we shared with you last quarter. The overall balance of revolving products [has caused a] 13% down on a year-on-year basis and 4% down in the last quarter. In terms of outlook, [our definition is] that we still believe that the pace of this change will [abate] in the future.

Another encouraging element is the fact that not only the (inaudible) spreads of some important products, like personal credit and working capital, are higher than one year ago, but also for [e-products we start] to see a convergence between the yield of the portfolio that is rolling off the books and the new origination spread.

Last, but not least, the credit-related NII after loan loss provisions went up in the quarter R$340 million, or 13.4%.

Regarding the line totals, which includes capital remuneration results from [extra interest, rate risk, mismatch, and personal activities], the good evolution in the quarter is more explained by a strong quarter in activities in the market.

Looking at the loan performance on page 11, it has been growing slightly above private banks. The expanded portfolio reached R$272.8 billion, an increase of 2% in the quarter and 11% in 12 months. We have a good diversification in our credit portfolio between segments, half with individuals and half with corporates. [Near marketplace] continued to outgrow other types of loans, both for corporates and households.

By segments, we have loans to individuals, up 2% quarter over quarter and 6% year over year, with mortgages as the main driver, with 32% growth in 12 months.

Consumer finance totaled R$37 billion, down 1% in the quarter and up 1% in 12 months. We have [decelerated] the other loans growth, however in line with the market, maintaining our market share in the quarter.

SMEs decreased 3% quarter over quarter and 1% in 12 months. I would like to reinforce that SME remains a strategic focus for us. However, considering the challenging economic scenario, it's not [ripe to see] a transition in this segment. [The more and more related economic growth and the large impact of the new country origination standards provisioning are the reasons for the net slowdown].

Corporates increased 5% in three months and 16% over September 2012.

Looking at credit indicators, the [NPLs] from 15 to 90 days increased by 20 basis points against the previous quarter, reaching 4.7% in total, 6.8% in individuals and 2.8% in corporate. After a few quarters, (inaudible), we see a stabilization in the quarter. Also, please note that (inaudible) and other forward-looking indicators showed improvement in all segments. This information is shared in the annex of this presentation.

The NPL over 90 days reached 4.5% of the total credit portfolio, down 75 basis points in the quarter and down 66 basis points in 12 months. The evolution in the quarter is slightly better than we had anticipated. For individuals, [delinquency] improved 110 basis points in the quarter, reaching 6%. And for corporates, delinquency improved 30 basis points, to 3.1% level.

Moreover, the [NPL performance metrics] which adjust the 90-day NPL change for charge-offs and renegotiated loan evolution improved 10 basis points in the quarter.

Next page, we see the allowance for loan losses evolution. The allowance for loan losses totaled R$9.3 billion in the first nine months, a decrease of 16% in the quarter and 8% in 12 months, reflecting the improvement in asset quality. The annual evolution of allowance for loan losses implies a decrease of 100 basis points in the cost of credit, better than the expectations that we shared with you in the beginning of the year. We continue to see a moderated and gradual improvement in the cost of credit [for the sort of macro outlook] discussed previously.

We should mention that the increase in the income from recovery of [written-off] loans reflects the fact that the Bank is increasing the amount of resources deployed in this activity. I would like to remind you that excluding cash recoveries when a written-off loan is renegotiated, it does not impact the net loan loss provisions, since the resulting increase of income from recoveries is offset by increased gross allowance for loan losses.

Now, in the next page, we can see how our fees have evolved. As mentioned in the beginning of this presentation, [card fees] are from now on reported net of the amount transferred as interchange to other banks. Had this change not taken place, credit card fees would have increased 26% on a yearly basis, instead of 20% reported, and 4.9% on a quarterly basis, instead of 3.7% reported. Also, total fees would have grown 11.3% on a yearly basis, and 2.1% on a quarterly basis. From now on, all figures are based on the new criterion.

Total fees and commissions income in the first nine months of 2013 reached R$7.8 billion, an increase of 9% over the same period of 2012 and a decrease of 0.5% in the quarter.

The highlights in terms of annual revenues growth are card fees grew 20% in 12 months due to more transactions and higher revenues from acquired services. I would like to remind you that in the third quarter of 2012 we pointed out that there was an accounting change for credit cards [that] anticipated R$80 million revenues in that quarter. If we exclude this base effect, card commissions would have grown 25%.

Insurance fees presented a 15% growth year over year.

Current Account fees grew 12% over the first nine months of 2012.

In the quarter, although some lines improved their performance, like asset management fees and collection services, the quarterly evolution was negatively impacted by two issues. First, securities brokerage and placements, which is a volatile line, decreased close to R$50 million in the quarter, or nearly 34% quarter over quarter, due to the lower commissions from restructuring of capital market transactions that seems to have impacted most of the players. And (b), weaker new loan originations, leading to lower [points, or origination] fees.

Regarding the cost evolution, it is [true] to Santander to ensure [a decrease] in the structural cost base by improving our commercial productivity and operational efficiency. It's well known that the third quarter cost figures are impacted by a few seasonal factors, especially in the personnel line with the annual rates reducing profit. While it is better to look at the annual evolution, the increase in the cost base in annual terms is far below the inflation levels.

Total expenses including depreciation and amortization presented an increase of 3% in three months and 2% over the first nine months of 2012. The Bank has implemented a multiyear plan which include, among others, increase operational leverage, optimize profits and structures, [operate deeper] distribution channels, service levels [be consistent] per client clusters. Everything in order to gain efficiency and to assure that our structural costs grows at [less than] half of inflation.

Regarding performance financial ratios, efficiency ratio reached 46.4% in the first nine months, an increase of 290 basis points over the same period of 2012. This is basically explained by the top line pressure we have discussed.

Recurrence ratio reached 65.3% in the first nine months, an improvement of 420 basis points in 12 months.

Return on assets closed the first nine months of 2013 at 1.3%, a decrease of 20 basis points year over year.

Return on equity reached 11.1% in the first nine months, a reduction of 190 basis points against the same period of 2012.

In terms of assets, assets total R$455 billion, flattish in the quarter and an increase of 6% over September last year.

Equity excluding goodwill amounted to R$53 billion, a growth of 1% in the quarter and 8% in 12 months. Considering the goodwill, equity totaled R$64 billion.

Our coverage ratio over 90 days improved almost 19 percentage points, to 151% in the quarter, and continues to be at very comfortable levels. It's worth mentioning that the quarterly increase was [strictly] due to a bigger reduction in the balance of non-performing loans over 90 days, [leading] the improvement in the quality of the portfolio.

BIS ratio reached 20.7%, the highest among large Brazilian banks, 80 basis points lower than the previous quarter, and it's basically composed in Tier I capital. In the quarter, we had R$1.3 billion decrease in the amount of subordinated debt eligible for Tier II, due to a reduction of the [residual] time to maturity.

On page 19, total funding from clients amounted to R$210 billion, an increase of R$17 billion in 12 months which is higher than the increase in the total credit portfolio of R$60 billion in the same period, improving the loan-to-deposits ratio [above 200] basis points in the last 12 months.

We would like to highlight the good performance of our core deposits, demand and saving deposits, which have increased 7% in the quarter and 21% annually.

Total funding plus assets under management amounted to R$373 billion, flat in the quarter and an increase of R$35 billion, or 11%, in 12 months.

Assets under management reached R$144 billion, flat in the quarter and an increase of 8% in 12 months. The Bank believes that in order to strengthen the linkage with clients, we must focus more on the investment activities of our clients.

Finally, I will finish this presentation sharing some final remarks. Santander continues to prepare itself for the new banking environment. Results dynamics are still impacted by the factors that we have been discussing for a while -- more [delayed] economic activity, (inaudible) mixed with products with lower spreads and costs of credit, and focus on improving the efficiency and productivity.

The positive element in the quarter is that after a few quarters this is the first time credit-related NII after loan loss provisions increased versus the previous quarter. We believe this is an inflection point.

Moreover, there are elements that allow us to be more positive on the spread evolution in the medium term. First, although we have been surprised by the pace of mix change in the last quarters, we still believe that the pace of mix change will slow down in the future.

Another encouraging element is the fact that not only the (inaudible) spreads for the majority of products more recently are higher than one year ago, but also because we're starting to see a convergence between the [yield of the portfolio, loan loss, metrics, and the net interest spreads].

These are signals that we have already begun to surpass the initial stage of this transition.

Focus on improving efficiency and reducing cost of credit are key priorities for the Bank for the quarters to come. But more importantly, looking further ahead the focus is to improve client [transactionalities] and ensure the correct product service offered for each client cluster. In this regard, we continue to deepen our client [implementation in the person] to become the bank of choice of our clients. We want to become a truly client-led bank, instead of a product-led one.

Last, but not least, we believe that there are many [banking] opportunities in Brazil and although the GDP growth will not accelerate in the next 18 months, we do not anticipate any negative disruption in the macro outlook for Brazil.

Thanks for your attention. And we will start the Q&A session.

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

Jorg Friedemann, Merrill Lynch.

Hello. Good afternoon, Galan, Felipe, and Oscar, and thanks for the opportunity to ask questions. Actually, I have just one question, but I should take some time explaining my points as for about that.

I heard in the Portuguese call your explanations supporting that this quarter is the beginning of an inflection point, as you just reiterated. And in my opinion, undoubtedly asset quality is improving, and even surging renegotiation with airlines companies could not overshadow better NPLs.

However, I confess I do not share the same confidence in core revenues to label these results as an inflection. I noted that your net interest income, [sub-attractive provisions], increased 14% quarter on quarter in my calculations.

However, I also noticed that both recoveries and Treasury results achieved the highest figures ever shown by the Bank since its IPO in 2009. As a matter of fact, Treasury, which I calculated using IFRS accounting, more specifically gains and losses with financial assets and FX variation, achieved R$818 million, versus an average of R$403 million in 2009. In addition, recoveries in my calculation achieved R$836 million, versus an average of R$350 million in 2009. So, the difference from the average, which positively impacted NII after provisions in the third quarter, achieved R$901 million, or 20% of the total.

I think everybody welcomes the positive changes that allowed your improvement in your recoveries line. However, this is not core revenues [as a credit NII is]. And once asset quality stabilizes, it should naturally come down, as well. In addition, I think Treasury resulted (inaudible), especially in the current environment.

So, if you consider that the new normal, let's say, would run at 60% above the historical levels, you would still have to grow revenues or reduce provisions by more than R$500 million next quarter to grow risk-adjusted NII.

So, my question is, do you really believe fourth quarter can show an increase in the NII after provisions? If the answer is yes, where would this come primarily from?

Thank you.

Jorg, thank you for your question. It's a long question, and I'm going to try to address it with two different components. The first one, when you look at NII, because you have mentioned NII only as NII. We discussed the credit-related NII provisions, or what is more common or well-known as the net spreads coming from the credit [margin]. And later, the rest of the components that are included in the NII line.

I like to separate, because they have two different dynamics. Regarding the second one, the latter, regarding the [over-]contribution in NII, which as I mentioned include several activities -- the position in the balance positioning, the Treasury, the capital remuneration (inaudible) -- this is, as I already mentioned before, more volatile because it depends on the markets for good or for bad.

[Either way, you see the series in the last year], it has been quite resilient, in the neighborhood of R$1.4 billion, between R$1 billion and R$1.4 billion and R$1.7 billion, which is the volume that we [are seeing] in the third year.

And regarding this line, which once again it's a little bit more volatile, if you compare for instance our results in IFRS, I'd like to clarify one thing. The results coming from Treasury or the results related to market activities that you will receive in IFRS, they don't match exactly the contribution that we have in the Brazilian [document].

In other words, if I'm not mistaken, if you see IFRS, the amount that is shown is around R$800 million. In order to give you an idea, usually the consideration, or reconciliation, with IFRS and the Brazilian document, you have to discount around R$200 million. So basically, more or less, we are talking about a market contribution, a result from market activity more or less in Brazilian documents around R$600 million.

Well, yes, you can argue that this is a little bit above the average. As you know, it has been mentioned in the previous call that more or less we should expect in the neighborhood of R$400 million to R$450 million. And you can consider that this quarter was well below the average. And it was a good quarter.

On the other hand, when you are discussing about the spread credit NII or the margin related to credit, yes, we are confident. We think that it's more resilient evolution, to good or for bad. As we mentioned, we feel that all the elements that we have suggested that we have an inflection, and that we believe we are going to have more spread compression in terms of gross credit contribution. But when you discount the provisions on the cost of credit, we think that the net spreads for credit margin should be more positive in the coming quarters.

Why? Basically because we feel that we have space to reduce the cost of credit, which will be higher in terms of (inaudible), which is the case in this quarter, than the impact that we have in the credit margin contribution. So, as a matter of fact, when I explained that in real terms this quarter we improved 340 basis points, I would tell you that it's basically recurrence evolution of the net spread credit margin in the quarter. There is nothing that is considered as [non-recurrence], at least in our perception.

This is part of the different dynamics and different [interviews] that we put in place in the recoveries area and in the risk management, et cetera.

So, that's why we think that this trend, it should be more supportive and it will continue in the coming quarters. The credit NII related to the credit portfolio in terms of net contribution will be in positive and will be higher in the coming quarters. This is more or less the outlook that I have.

On the other hand, the other line, the other contribution NII, yes, maybe it's good or bad. It's going to be more depend on our performance in markets during the volatility that it has, but we are confident that the NII credit contribution in net terms will be more positive for the coming quarters.

OK. Perfect. Thank you.

Saul Martinez, J.P. Morgan.

Hi, everybody. I have a couple of questions. First, as a general question -- in fact, it's kind of a follow-up on the previous question. It's a general question. I won't preface it with a lot of background information, and I'll let you answer it however you'd like. The term -- inflection point -- seems to be being thrown around, and I guess my question is, quite simply, how confident are you that earnings have reached an inflection point this quarter?

Clearly, there were some good things in the quarter which you highlighted. There were also some things that didn't allow you to grow earnings. When should we start to see an improvement in terms of the quarterly progression of your earnings power from what seems to be a very, pretty depressed base?

The second question is kind of related, and it's more specific to you mentioned obviously legal contingencies in the other operating expense line being one of the headwinds for quarterly earnings progression. And I know it's a very difficult line item to forecast on a quarterly basis. And you mentioned that there were some changes in your methodology, I believe, for labor provisions.

But does this seem to be --? Should we consider this quarter to be an abnormally high quarter in terms of other operating expenses in terms of legal contingencies? And I guess, just how should we be thinking about that line going forward, with the understanding obviously that this is a pretty volatile line item?

Thank you, Saul, for your two questions. Regarding the first one, well, we are confident for two reasons. The first one is that in terms of credit margin, we think that the spread compression is going to decelerate. And the second one, we think that with all the signals that we have in terms of quality credit performance and indicators, et cetera, et cetera, we think that the cost of credit is going to maintain the trend that we have seen in this quarter. And in net terms, the magnitude of growth, it will be positive. That's why we feel that this is the inflection point.

But, give me clarify something. Even though we have improved, according to our methodology 40 basis points, the net credit spreads contribution this quarter, we are very far away from the net credit spreads that are shown by our competitors. And we don't think we have -- or, we don't have any difference in our portfolio profile or in the type of client that we have. That suggests that we are supposed to close the gap that we have in terms of credit spreads contribution in our portfolio versus the peers' ones.

So, that's why all the signals that we have are suggesting, showing us that we are in the inflection point.

The magnitude. Well, maybe the magnitude it's a little bit more difficult to guess and to clarify, but the trend for us it's clear that we've seen that it's going to improve in the coming quarters.

Regarding the second question, yes, we are aware of the volatility of the legal litigation and labor litigation. You know that for good or for bad, we revise, or review, and we assess the methodology and the way the prices that we have to create provisions to comply with the amount of litigation that we have managing. But I would say that in order to have a reference looking forward, I think that it's most fair to take into account the new reference, because the reference is more updated that we have.

And looking forward, I would tell you that maybe the only new variable that we have to consider is the new [entrants]. Given the fact that we are in an efficiency program, maybe the new entrants is going to affect, for good or for bad, the new level of labor litigation.

In summarizing, in order to estimate or forecast for coming quarters, I would say that it's fair to consider the volume of this quarter as a reference in order to foresee an evolution of this line for the near future.

OK. That's helpful. So, just to be clear though, you think that we've -- your best guess is we've reached bottom in terms of earnings?

When you are meaning earnings, are you meaning in bottom line?

Bottom line. Yes, I'm not talking about net interest income, Carlos. When I say inflection point, I'm really talking about whether all of the good things that have happened -- some good, some bad -- but whether the good things that you say are happening, whether that's going to be translated into better earnings progression, because up until now it really hasn't.

In terms of -- once again, we have more quality with the NII credit evolution, because it's more resilient. It has -- the movement are softer than the other line. And, yes, in this line we feel more comfortable in order to confirm that we think that this is an inflection point in terms of net contribution.

We don't have the same clarity, once again, in the other line of NII, where basically it's more volatile. If we maintain the same pace that we have seen the previous quarter, the (inaudible) will be achieved. But this is something that is more volatile. That's why on one hand we are more confident with the net credit contribution that it's going to be more positive in the coming quarters, and I have more doubts about the volatility and the contribution that we'll have in the other line.

This is more or less the reason on the view that we have in terms of NII.

OK. I was asking about profits, though.

Well, in terms of profits, yes, we would like to say that this is another line, but we know that there are other lines that may impact us. For instance, the litigation. Other lines. But in general terms, I would say that this is the running rate that the Bank has, as it has shown in this quarter and the previous one. This is more or less.

I don't see a big clarity of a big driver that is going to change in a very dramatic way in the coming quarters. Maybe what we are going to see it's a smooth, slightly improvement in the quarters to come.

OK. That's helpful. Thank you very much, Carlos.

Mario Pierry, Deutsche Bank.

Good afternoon. Let me ask you two questions, as well. The first one is with regards to your NPL ratio. You have shown significant improvements over the last two quarters. It's almost like you're catching up to your private sector peers. So, I was wondering how much of this improvement, Carlos, do you think is related to the change in the loan mix of your portfolio? Or, how much of this really reflects the fact that the Bank has been a lot more conservative in granting credit?

And then, also staying with the question on asset quality, just to make it simpler, basically what I understand you're saying is that spreads are improving and the provision charges are likely to decline in 2014 relative to 2013. Is that how we should interpret what you're saying?

Thank you, Mario. If you don't mind, I'm going to pass the question to Oscar. Do you have or you need further clarification, I will address them.

Mario, the evolution and the improvement in the NPLs ratio is first as a result of adjustment in the credit policies that we have been applying since the end of 2011. And that has been focused mainly in adjusting the credit cost to the [strict] levels and specifically to a credit cost that we believe is more sustainable in the current environment in Brazil.

It's also true that the market, and we as well, have grown at a faster pace in the credit products like mortgages, like BNDES, that present a lower credit cost, and therefore it's helping to improve the overall credit cost of the portfolio.

Also, if it's one or the other? I think both of them are complementing and making the improvement of the credit quality happen. If you ask me which has been more important in the last two quarters, I would say that the credit policies applied have had a more significant impact. But, on the long term, the mix is going to support that improvement to remain solid and sustainable in the long run.

I don't know if I answered your question.

Yes, that's clear. So, basically what you're saying is that we could also see further improvement in NPLs as the change in loan mix continues to take place. Correct?

Excuse me, Mario. Could you repeat your second question, please?

No. No. So, I just wanted to clarify what you're saying. You're saying that you see the improvement in NPL primarily due to changes in policy and that we could still see benefits in the NPL ratio going forward due to the change in the loan mix. I just wanted to know if that's how we can summarize what you said.

(multiple speakers) if you had an additional question.

No. No additional question. I still have the other question I think Carlos was going to take.

What is your other -- the question we haven't answered yet?

The second question was, if I could try to summarize what Carlos was saying, is that you're seeing better spreads but provision costs are coming down. If it's fair for us to assume the provision charges in 2014 can be lower than they were in 2013?

We don't give guidelines in terms of provisions. But 2013, you're seeing a decrease in the level of provisions quarter by quarter. It is a fair assumption that 2014 you will not have the higher provisions that we saw in the first semester.

In terms of cost of credit, again as -- I believe that there is room still for improvement in the approval with guidance on that area.

All right. Thank you.

(Operator Instructions) Carlos Macedo, Goldman Sachs.

Good afternoon, Carlos, gentlemen. I have a couple of questions, actually. The first question is more towards your strategy in payroll loans. We see that your portfolio, even if you exclude acquired loans, has been contracting on a year-on-year basis, whereas your peers have been really pushing into the segment. If you can give me some color on what you expect out of that particular, very attractive on a risk-adjusted basis, segment and what you expect to do there and what the general outlook for that specific segment is?

And then I'll ask my second question.

Thank you, Carlos, for your question. Well, yes, as I mentioned in the Portuguese conference, we have not performing very well with payrolls, even though we consider that this is a very important point to enhance linkage with individuals.

Well, there are mainly two reasons. The first one, as you know, we bought a portfolio a couple of quarters ago, as a matter of fact two years ago. And basically since then we didn't have bought more portfolio, and that's why we have a [ramped-down] portfolio in these acquired (inaudible). The reason is because we didn't feel comfortable with the collateralization, with operational procedures, and that's why we postponed [entering] new purchases of payroll portfolios.

The second one is that when you look at in our peers, all of them they make [publishing] or they are quite institutions that [retire], specialize in payroll, which is not our case. In our case, basically we have been growing with our organic franchise, with our organic network franchise, and with our banking correspondent.

Looking at this process, our organic process, we are not being very happy with the performance, and that's why we had the review, all the process end to end, in order to make sure that we can service in a better way, that we can manage the product in a much wiser way. And that's why we have been working on and to improve to and strengthen all the process and looking at 2014 as a new time in order to increase the volumes with this product.

Once again, we still believe [in payroll], and bear in mind that the Bank has more than [four] payrolls, and this is one of the two [points] for the Bank. But the idea, and we have to acknowledge, that the process has to be improved, and that's why we prefer to postpone and to be focused on to strengthen all the product offering and the [communications] channels in order to make sure that it's a profitable product looking at 2014.

OK. Thank you. The second question is related to that, in part, and looking in part to 2014 a little bit more qualitative. What would you judge, Carlos, is the appetite of the Bank for credit now? You guys are growing your expanded loan portfolio at 11%, which is kind of in line with your private sector peers. The visibility for next year still not very clear. What do you think --? How would you compare the current appetite of credit for the Bank with the appetite a year ago, just so that we can get an idea -- without giving guidance for next year -- but just to get an idea of what we can expect in terms of growth for next year?

Well, as I mentioned before, the quality of (inaudible) originations is a priority. We learned the lesson in 2012, if you remember, when in our case all our peers and we later had the [digestion]. So, this is something that even though we would like to grow and to be a little bit more aggressive, the quality of the [loan] origination is something that we are not going to open or to barge in. As a matter of fact, you can see that all the new [emphasis] are still performing even better than the previous quarter, and this is something that we would like to maintain.

Looking at 2014, even though you know that we are not going to make any guidance, we can share some thoughts. The first one is that, first, we are more moderate positive in terms of the current growth of private banks. We think that public banks, they are going to decelerate in 2014 and they are going to create more space for a little bit more ground for the private banks.

How much? Well, considering that today our credit portfolio and in fact considering the rest of products -- our credit portfolio is growing 7%; expanded, 11% -- we are looking at 2014 that the credit portfolio, it should be growing about 10%, between 10% and 11%. This is something that we [divulge] in our outlook.

On the credit (inaudible) system, the outlook that our research department has, it's something between 13.5% and 13.6%. Once again -- this is my personal view -- I think that we are going to have differences in terms of [pace] between products.

We've seen that mortgages are going to still be the main product. We are forecasting that next year it will be in the neighborhood of 25%. And this year, it's more about 30%. Maybe it's going to decelerate somehow. But in any case, it's going to be the main driver in terms of growth.

And maybe more of the same in terms of [collateralized loans], growing slightly better than [uncollateralized loans].

But the most important thing is that we think that the private banks and Santander -- at least this is the hypothesis -- that we are going to look for 2014 that we are going to grow slightly higher than we have seen up until now in 2013.

So, maybe a follow-up to that question.

I wanted to --.

Sure. Go ahead, Oscar. Sorry.

In terms of the appetite, we still believe that there is opportunity to grow in Brazil and we are in a growing mood in Brazil. What we have realized, as Carlos was saying, is that that growth cannot come at the cost of a credit policies too aggressive. So, we are going to maintain the quality in line, also with working a lot in the optimization of the risk return of each one of the portfolios.

And we clearly have an ambition to maintain our share in the individuals and the consumer finance, and clearly have an appetite to grow and to gain market share in products like mortgages, even like payroll, BNDES and (inaudible) of BNDES, and all the infrastructure financing, SMEs related to the business of (inaudible).

So, we want to maintain a growing appetite with quality, and therefore searching for opportunities to gain market share in programs that we believe that are important, not only because of the risk profile we have but also because they will allow us to strengthen the relationships that we have with our customers. And we all know that mortgages and infrastructure BNDES financings help you have a closer relationship with our customer base.

OK. Thank you. So, maybe just a follow-up question to that. At what level do you believe you can expand your loans and still maintain the very successful trajectory, or performance, on the vintages such as you have demonstrated over the last few quarters? Is it something that you can step it up to maybe the 12% to 14% level that you're expecting for the system? Or, anything above 10%, 11%, you could start seeing delinquencies again?

That's a difficult question, because it also depends on what happens at the macro level and also in the competitive environment that we are going to see.

What we can say is that we still see room for improve our growth, improving our operational processes for some of the products, like mortgages, like payroll, like in the BNDES. So, in those products, we believe that we have room for growing faster without having to adjust the credit policy, just by improving our processes to approve and to close those type of products. And therefore, there is room for growing faster in those products.

In the other ones, we believe that we are comfortable right now with the credit models, and it's going to be much more a matter of working out the combination of risk-return. As I was saying, we believe that the market environment is going to change in terms of competition, as we're already seeing, and therefore it will leave us some space to improvement.

As an example of that, I would say that it's our [auto finance] portfolio, where we've been able in a difficult market environment, we've been able to gain market share and to outgrow our competitors while maintaining the credit quality very much under control.

So, there is a space to grow. Our reference continues to be the private banks, but we see a space to grow and to grow faster. But we're also watching very carefully how the market and the competitive and the macro environment evolves.

OK. Thank you, Oscar.

Philip Finch, UBS.

Hi. This is Philip Finch. Thank you very much for the presentation, Carlos. I've got two questions, please. First of all, can you explain why your effective tax rate increased in the third quarter? And going forward, what is the level of effective tax rate we should assume?

And secondly, can you just talk a little bit, give us an update on the special dividend, timing of that, when that could take place?

Thank you.

Thank you, Philip. Well, regarding the corporate tax level, yes, this quarter it was a little bit higher than previous one, but nothing [trivial]. As we mentioned in the second Q, we expect on a yearly basis to maintain a range of between 6% and 8% as a projected level for 2013.

Bear in mind that in this quarter we [gave an additional] increase on capital. So, we are going to be in the third Q. So, for the entire year, something between 6% and 8% is a result to think.

Regarding the second question, the special dividend. Well, as you know, this is something that it will be [execute] in January. We are in the process with all legal procedures. We are waiting for the shareholder meeting, which will be held in the 1st of November. And after that, there are all the legal milestones that we have to compile. And that's why we think that the execution of both, the capital distribution and the issuance of the new notes, will be in the third, maybe the third or fourth week of January.

We don't have any other further reporting information. Everything's on track. And we are [now] working with authorities in order to have the formal profiles, or the formal structure of the notes. This is something that is going to be work doing in November, and we think that by the end of December we can announce the structure of the notes and the volumes that we are going to issue as [201 versus 202].

That's very helpful. Thank you very much, indeed.

[Regina Sanchez], Itau BBA.

Hi, everybody. (inaudible) My first one is about private recoveries. I know you already mentioned the significant increase in this quarter, 87% quarter over quarter, was also related to better collection policies improving this part of the business. But when we divide credit recoveries by the last 12 months charge-offs, we can see the expansion wasn't so big as it was quarter over quarter. As well, I would like to know what can we expect in next quarters? And also if this particular quarter it was related also to renegotiations that we saw that went up 7.6% in the quarter? If these renegotiations end up also helping the recoveries because it was also related to clients that were delinquent and came to renegotiate and they start to pay again and also help to improve the NPL ratio?

And then, I have my second question. Thank you.

Regina, could you please repeat, because I think I understood in the first part of the question that you said that the ratio of collections over --.

The recoveries, when we take the last 12 months of the recoveries divided by the level of charge-offs, it did not bump up that much. Of course, actually by doing this calculation, I was just noting actually the impact in the last 12 months. So, it was [clear] that this quarter they went up, and you explained that they improved the collection process. I was just wondering if the renegotiations in this quarter also helped in increasing the recoveries?

OK. I [understand that now]. Well, every time when you take a one-year horizon, the changes in terms of level of any of the indicators, it tends to be smoothed out. So, yes, if you look at the last 12 months and you add up all the charge-offs and the collections, you're going to see that the change in the rate is not going to be as strong as it seems in the quarter.

We do believe that we have reached in this quarter a differentiated level of collections, and that it is very much, as I explained in the Portuguese conference call, very much because of the model implemented working within our branch network and also in our partnership with the collection agencies that we work with.

Your second point of the impact in terms of the renegotiations, one of the key elements of the collections process is the renegotiation, especially when you are talking about charge-offs. But you have to consider that when we do a renegotiation for a charge-off transaction, we maintain 100% the level of provision. And you will only impact the P&L of the Bank when we actually see cash flow into the Bank, that the cash comes into the Bank as a payment of the customers.

Therefore, it is something that it always will help us improve in the quarter, but we are confident that the policy that we have set to approve these renegotiations for the transactions that are already charged [of] the balance sheet will mean that we have a space to be positively impacted in the future quarters.

That's perfect. Thanks a lot, Oscar. And then, my second question is if you could comment on GetNet, the acquiring businesses, the credit card business? I know that you also provided more details even in the previous call that it has been very successful, especially in the small companies with annual revenues even below R$1 million. If you could comment on that, because we have been hearing recently that GetNet has been aggressive in pricing lower (technical difficulty)? If that is the case or not for SMEs? If it's more for large corporates? And how do you see this business going forward?

Thank you.

Well, Regina, I don't know if I understood fully your question about GetNet. The transaction, it's on track. We are dealing with the due diligence, and it's something that has to be done in the next weeks. And later, we are going to expect for the (inaudible). You know that (inaudible) has to be approved by the central bank. And we expect to finish the deal with GetNet at the end of this year, or maybe in the first month of the first quarter of 2014.

Everything is on track, as I was mentioning, and the idea it's to invite the partners and the owners of GetNet as part of the new size of the (inaudible). And the idea, it's to accelerate all the IT development that we have to do and to improve in all the new company and the new (inaudible) entity, all the different initiatives that we have been doing related to the new alternative channel, which is for instance (inaudible).

[It'd be nice to] include everything in the same company and to gain some flexibility and trying to accelerate in the process. More specifically, because now we are in a new stage where basically we think that we finished the first cycle more or less focused on to provide the product to our SME companies. And now, we are in second cycle, but we are more focused on big retailers. And for that, the IT development is being planned in order to provide more a tailor-made solution, and that's why it's part of the [agreement] that we made with GetNet.

We are convinced that this is a business that is going to grow in a very important manner in the near future, and that's why we would like to be a protagonist in this process. And that's why we have been doing that.

We will be giving you more information once that we make the formal deal with the stakeholders of GetNet. And once it is formalized, we will be discussing the different financial structure that we are going to do and how we are going to focus in terms of a strategic [plan] and the acquired business, and all the different things that we have been done.

(inaudible) anticipated that the deal will be part in cash and part in [the stake] participation, and this is something that, once again, we will be sharing with us once that everything is done.

Well, thanks a lot, and I appreciate the color on how the deal is evolving. But my question was really more on the current business together with Santander in terms of how aggressive --. And I think you touched a little bit of that by saying that the focus has been more on the small companies, and now with the IT development you're also growing on larger customers.

Just as a follow-up, if you could say that you believe how GetNet is being aggressive or not in terms of pricing, because we have been hearing that it has become more aggressive in reducing [MGRs and PIS rental] fees in order to gain market share. Do you think that that is the case? Or, is it only in a few cases, particular cases?

Thank you.

Regina, this is Felipe. You know that up to two, three quarters ago, basically the Bank in acquired businesses was dealing with SMEs and, as you know, in SMEs it's not about a price competition and the Bank maintaining the price over the course of the period.

Now, the growth that you saw more recently is thought to have more importance with big retailers. Some agreements were closed recently. And then, of course, there is a lot from customer to customer, what sort of strategy you use in order to enter that customer.

So, basically, I think perhaps some of the noise that you are hearing about is related to the fact that Santander more recently is more active with big retailers. So, perhaps this is why perhaps you saw something about it. That's it.

OK, Felipe. Thanks a lot.

Carlos Firetti, Bradesco.

Good afternoon. I would like to go back to Regina's questions on renegotiated loans. Basically, you'd say that most of these renegotiated loans are related to the recoveries of credits that were previously out of your balances already written off? Or, they are mostly credits that were [a red] in your, [I assume], balance sheet and consequently in your NPLs? And also, if you could say how much this renegotiation impacted your NPL ratio this quarter?

Thank you.

Carlos, I might explain --. Clearly, I was not clear about that, because I didn't say that most of the [refinanciations] were charge-offs. What I said is that part of their recoveries, it's through refinanciations or agreements with --. In the recovery, we negotiate with the customers a down payment, and then some installments to liquidate the debt that they have and that we already took out of the balance.

So, it's not that most of the [receipt] comes from that. It's the other way around. It's most of the -- not, most of it -- but a part of the recoveries comes from refinanciations. In the refinanciations, it also includes all the transactions that we do with customers that have more than 60 days of non-performing, and we do not disclose what is part from one and from the other.

OK. Thank you. That helps. Another thing you have been saying since last quarter is the impact of revolving credit lines in your margin. You talked about you have seen a decrease in these volumes. You would say this impact of this reduction is a [definite] movement? Or, you expect some recovery on that? And eventually, what are you doing in terms of recovering this revolving line? Thank you.

Well, what we expect is [ideally this both]. We expect that they are going to grow at a slower pace than other products, but we don't expect the same trend looking at near quarters. We think that more or less once that the bottom has, we assess and create all the standards. And we think that now we are in a (inaudible) trend.

So, having said that, we don't expect, for instance, for next year that they are going to grow at the same pace of the rest of the [controlled price product]. We insist that we think that the controlled price products are going up. Our update on controlled price products are evolving, even though we don't expect a negative performance. We think that they are going to grow maybe in one single digit, low single digit, versus what I'm saying double digit that we expect for the portfolio as a whole.

OK. Thank you.

Eduardo Nishio, Brasil Plural.

Hi. Thank you for taking my question. I have one more question regarding your network branch expansion. At the beginning of the year, you had a plan to open 25 branches this year, and that was already a big downward revision from your original plan after the IPO. Now, if you notice, you had actually a contraction of 35 branches this year to date. And I want to know what has changed? What are plans now? Are you still planning to enter in regions where you're not so strong, like in the northeast, in the north, the middle east, the middle west, or west regions? Overall, what's your geographic plans going forward? Thank you.

Thank you, Eduardo. Well, I would tell you two ideas regarding the network expansion. As I think I mentioned in previous calls, the Bank changed the priority regarding the footprint as a part of the productivity plan and improvement in efficiency. Therefore, it prioritized to make all the investments that we made in the previous years more profitable. As a matter of fact, you know that we expanded more than 350 branches in the last three years. And now what we are more focusing in to accelerate the breakeven and the payback of all this investment.

That's why we decelerate all the branch expansions, and basically now the branch expansion is more focused on the select brand. As you know, we announced that we were going to open 60 new select branches. We are on track of that. If I'm not mistaken, we have opened 40, and we are going to open another 20 branches in the fourth quarter. Most of them, they are branch conversions, to the standard branches that we have, but part of them are new branches that we are opening.

The second idea is that we are going to be more selective in terms of the new branch expansion and in the regions and the market that we are going to open. The Bank as a part of the productivity plan, it's revising where it makes sense, not to close but to converge, or to merge, two branches, because the transactionality and the profile of clients. And this is something that, it's under revision. In any case, we are not talking about a big number of branches so far. We know this is a work which is under development and the idea is, once again, to gain some profitability and gain some productivity in our footprint.

Bear in mind that something that we have to improve, as a third idea, is that in terms of infrastructure, we have 12% market share, while in terms of commercial activity we have below 10%. So, we have plenty of space, and we have to leverage this infrastructure, and this is what we are doing as a part of the productivity plan for the near future, for the next quarter. And that's why we are more focused on to leverage this investment that we made and, yes, in terms of big branch expansion to (inaudible) and to execute the opening branches for the select brand.

OK. Do you still think it's possible to get into new states, for instance in the northeast region, with the actual plan? Or, it's something that will be postponed for a few years?

Eduardo, part of our expansion in relative terms was more concentrated in the northeast. Why? Because the footprint that we had it was smaller. And this is part of the analysis and the assessment that we have been making. Maybe we are going to --. In the 350 branches, as I mentioned before, most of them, a majority of them were located in the northeast of Brazil, while in terms of number of branches most of them, [the big ones], in the south and east.

But once again, we think that we have been implementing a regionalized assessment for the footprint that we have, and maybe we are going to see some movements in terms of [murps] or in terms of [restarting]. But we don't consider nothing material, even in the northeast nor in the southeast. It will be on a basis-by-basis point, what our movement that we are going to do in terms of the branch network.

OK. Thank you so much.

Thank you. This media session is over, and I wish to hand over to Mr. Carlos Galan for any concluding remarks.

Once again, thank you for attending this conference, and we are open -- or, don't hesitate to contact us if you have further questions or you need further information.

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.