Banco Santander Brasil SA (BSBR) 2013 Q4 法說會逐字稿

Good day, and thank you for waiting. Welcome to the conference call to discuss Banco Santander (Brasil) S.A.'s results of the fourth quarter of 2013. Present here are Mr. Carlos Galan, Vice President, Executive Officer, CFO; Mr. Oscar Rodrigues, Vice President, Executive Officer, CRO; and Mr. Luiz Felipe Taunay, Head of Investor Relations.

The live webcast of this call is available at Banco Santander's investor relations site, www.santander.com.br/ri, where the presentation is available for download. (Operator Instructions)

We would like to inform you 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 on information currently available. Such forward-looking statements are not a guarantee of performance. They involve risks, uncertainties, and assumptions as they refer to future events and, hence, depend on circumstances that may or may not occur.

Investors must be aware that general economic conditions, industry conditions, and other operational factors may affect the future performance of Banco Santander and may cause actual results to substantially differ from those in the forward-looking statements.

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

Thank you. Good afternoon, and thank you for attending Santander's Brasil 2013 results conference call.

The table of contents summarizes the topics that will be covered -- a quick review about the macroeconomic scenario, the highlights regarding 2013, the evolution of 2013 performance and commercial activity, a good finish with a final remarks.

But before I start, I would like to mention two points. First, in the 4Q 2013, we had R$1.5 billion of additional net revenues, mainly originated by the conclusion of the sale of Santander Brasil asset management and complemented with the issuing of (inaudible) tax amnesty. These items were offset by non-recurring expenses of the same amount.

So, there was not an impact on the bottom line. For more details, see page 30 of the earnings results. It's worth noting that in order to ensure a better understanding of the period results, all the figures in this presentation show the managerial results excluding these events.

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

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

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

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

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

On page 6, going through the highlights of 2013, I'd like to share six points. First, net profit amounted to R$5.7 billion in the year, 10% lower than 2012 and flat in the quarter, at R$1.4 billion.

Secondly, expanded credit portfolio grew 3% in the quarter and 9% year over year.

Third, revenues -- NII plus fees -- decreased 1% quarter over quarter and 4% year over year. However, [overall] revenues net of allowance for loan losses continued to present a positive outcome. They grew 2% in the quarter, while they remained flat on a yearly basis.

The fourth point, operating expenses excluding depreciation and amortization increased 5% in the quarter and 3% over 2012, below half of the annual inflation.

Fifth, NPLs over 90 days improved 180 basis points in the year, with improvements in individuals and corporates. Allowance for loan losses decreased both on a quarterly and a yearly basis.

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

On page 8, the 4Q 2013 results amounted to R$1,409 billion (sic - see slide 8, "million"), flat against the previous quarter and 12% lower than the same quarter last year.

Regarding the full year, we had a net profit, including 100% of goodwill amortization, of R$5,744 million, a 9.7% decrease, or R$618 million, in 12 months.

This implies a profit per unit of R$1.51 in 2013.

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

The encouraging point of this quarter is that for the first time in a prolonged period, credit-related NII increased and credit-related NII after provisions maintained its improvement trend for the third consecutive quarter. This is in line with the expectation that we shared with you previously.

In relation to the latter, it increased about R$290 million, or 10.2%, in the quarter; as a result, approximately R$250 million reduction in loan loss provisions in the quarter together with the increase of R$40 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 stages of this transition process.

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

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

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

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

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

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

Credit-related NII [grows] approximately R$40 million in the quarter. This is good news, an increase after five quarters of consecutive decreases. As we shared with you previously, this signal suggests the beginning of a stabilization process. The trend change in the quarter is explained by factors -- first, better or higher evolution in average credit growth in the period and, secondly, the lower reduction of the average loan portfolio spread.

This quarter, the spread declined approximately 10 basis points, while in the average of the five previous quarters, it declined 50 basis points per quarter. This movement is related to origination price management refinements and deceleration in the pace of the mix change of the loan portfolio.

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

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

On page 11, looking at the loan portfolio, the expanded portfolio reached R$279.8 billion, an increase of 2.6% in the quarter and 9% in 12 months. It has been growing in line with private banks.

We have a good diversification in our credit portfolio between the segments -- half with individuals and half with corporates. By segments, we have loans to individuals, up 2% quarter over quarter and 6% year over year, with mortgages and credit cards due to seasonality as the main growth drivers in this quarter, with 9% and 10%, respectively. And in annual terms, mortgages grew 33% and revolving credits decreased by 4%.

Consumer finance totaled R$38 billion, up 3% in three and 12 months.

SMEs decreased 2% quarter over quarter and 8% in 12 months. I do like to reinforce that SMEs remains a strategic focus for us. However, the evolution of this segment reflects the more moderate pace of economic activity throughout the year, as well as our efforts to prioritize the profitability of this business.

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

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

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

Regarding the NPL over 90 days, this reached 3.7% of the total credit portfolio, down 80 basis points in the quarter and down 180 basis points in 12 months. Evolution in this quarter is slightly better than we had anticipated. For individuals, delinquency improved 90 basis points in the quarter, reaching 5.1%. And for corporates, delinquency improved 70 basis points, to a 2.4% level.

Moreover, the NPL formation metrics which adjust the 90-day NPL change for charge-offs and renegotiated loan evolution improved 20 basis points in the quarter.

The NPL positive evolution both in individuals and corporates is due to a combination of elements -- better quality in origination, better evolution of the credit portfolio, and a mix change in the products and recovery process performance.

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

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

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

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

In the next page, we can see how fees have evolved. Total fees and commission income in 2013 reached R$10.7 billion, an increase of 10% over 2012 and 9% in the quarter, mainly due to more business and transactions. The highlights in the quarter were [card] fees grew 20% in 12 months and 11% in the quarter, [strictly] due to the increase in credit card transactions, reflecting the (inaudible) seasonality and the growth of acquiring services revenues.

Income from collection services grew 12% in 12 months and 7% in the quarter, the latter upturn being primarily due to the increase in the volume of settled collections in the period, which is partially explained by seasonality and also by the increased penetration of this product in our client base.

Others, which included a diversity of items and products, was positively impacted by the increase in the appraisal services related to mortgage and car finance.

Finally, the insurance fees presented a 25% growth year on year and 38% in three months, being impacted by the new regulation issued by SUSEP, the insurance sector regulator, which changed the rule for recognizing policies renewals. They used to be highly concentrated at the beginning of the year and, as a result, were now recognized in December 2013. If we exclude this effect, the insurance fees would have grown by 16% in 12 months and 4% in the quarter, while total [fees] would have moved up by 9% and 4%, respectively.

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

As we discussed in previous quarters, the productivity and efficiency improvements are multi-year goals. We have been working in a special program which comprises various initiatives such as commercial processes review at the point of sale; number of headquarters building optimization; improvement of branch commercial distribution; call centers integration; and general processes optimization.

We have created a special fund in order to avoid non-recurring impacts derived from these plans and to assure that our cost baseline grows well below inflation in the years to come.

Regarding performance ratios, efficiency ratio reached 49.5% (sic - see slide 16, "47.5%") in 2013, an increase of 320 basis points over 2012. This is basically explained by the top line pressure we previously presented.

Recurrence ratio reached 65.5% in 2013, an improvement of 440 basis points in 12 months.

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

And finally, our return on equity reached 11% in 2013, a reduction of 190 basis points against 2012.

On page 17, assets totaled R$479 billion (sic - see slide 17, "R$476 billion"), an increase of 5% in the quarter and 9% over December 2012.

Equity excluding goodwill amounted to R$53 billion, flat in the quarter and an increase of 6% in 12 months. Considering the goodwill, equity totaled R$63 billion.

On the next page, coverage ratio over 90 days improved almost 29 percentage points in the quarter, to 179%, and continues to be at a comfortable level. As we have indicated, the Bank does not have a target for coverage ratio.

The quarterly and annual increase of the coverage ratio was chiefly due to a bigger reduction in the balance of non-performing loans over 90 days, given the improvement in the quality of the portfolio and the improvement in the renegotiation practice, with a prudent stance with regards to provisions recoveries that I referred before.

BIS ratio reached 11.2% (sic - see slide 18, "19.2%"), the highest among large Brazilian banks, 150 basis points lower than the previous quarter, and it's basically composed of Tier 1 capital. The reduction of the BIS in the quarter is due to 100 basis points affected by the implementation of the new rules of Basel III since October 2013. More or less, we are talking about [DTAs] and risk-weighted asset consumption in the large corporates. And the other 50 basis points were impacted by credit growth and dividends distribution.

On page 19, you can observe a vigorous growth on the deposit activities, which reflects our strong focus on our clients and on the linkage with them. Total funding from clients amounted to R$222 billion, an increase of R$23 billion in 12 months, which is higher than the increase in the total credit portfolio of R$16 billion in the same period, improving the loan-to-deposit ratio about 400 basis points in the last 12 months, reaching 102%.

We would like to highlight the good performance in our core deposits, demand and savings deposits, which have increased 8% in the quarter and 22% in annual basis.

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

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

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

Further, the Bank is undertaking several initiatives and measures aiming at boosting customers' linkage and enhancing the relationship with them, with a special focus in services and deposits-related activities; reduction of NPLs ratios and allowance for loan losses with a more resilient business mix; increased productivity and efficiency. And the results of all above will improve our profitability.

It's going to be a long journey, but we are confident that we are in the right direction. I would like to highlight five items in our 4Q results that suggest that we are in the right direction and that we are started to bear fruits.

In the quarter, credit-related NII rose after five consecutive decreases in the previous quarters. This is related to the lower spread compression seen in the quarter related to a more normalized speed of asset mix change in the quarter. What happened in the quarter is aligned with our view that the pace of change in mix would abate, and we expect a more normalized change in mix pace going forward.

Credit-related NII after loan loss provisions increased for the third consecutive quarter, and we believe it will continue increasing in the coming quarters.

NPLs improved both for individuals and corporates. It is the third consecutive quarter we observed a reduction in allowance for loan losses.

Our operating expenses grew close to half of inflation in the last 12 months, reflecting our efforts to improve efficiency and productivity.

The robust growth in deposit-related activities is a reflection of the renewed focus in increasing the linkage with our clients.

Looking forward, it's paramount to continue improving the loan portfolio quality and to pursue relentlessly productivity efficiency gains and to continue the efforts to increase customer loyalty, the transactionality with them, and to ensure the right offer of products and services for each customer cluster. These are key targets to adopt the Bank to the new banking environment.

Thank you.

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

Marcelo Telles, Credit Suisse.

Good afternoon, gentlemen. Thanks for the opportunity.

I have actually two questions, the first one on asset quality. You clearly have had a very strong improvement in delinquency indicators in the quarter. And I was wondering at what stage you think you are in terms of that improvement? Do you think that you can improve delinquency rates further? And this will probably lead to additional --? You think this can lead to additional reduction in provisioning expenses going forward?

And the second question is regarding the OpEx performance. Can you remind us a little bit what you think your target is for OpEx in the years to come? I think you mentioned you want to grow below inflation. Do you think this is still, let's say, possible this year in, let's say, a rising inflation scenario? Do you think that you can --? And also the efforts to get new clients and improve the image further, the image of the Bank? Do you think this could eventually due to be a little bit higher, or closer to inflation, on the OpEx front?

Thank you.

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

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

Thank you.

Marcelo, regarding the other question, as we discussed, the improvement in productivity and efficiency is a multi-year task. The Bank has launched a plan for the next three years, including 2013, and in order to basically maintain the same pace that you have seen in 2013, not just for 2014, but for the years to come.

This is a very tough task, given the environment and the exchange rate environment and the inflation environment that we have. But that's why the Bank launched several initiatives, some of them that I shared with you in the presentation, in order to assure that we are going to achieve these goals, not just for 2014, but for the next two years as well.

Basically, the [fund] that we made is basically aiming at achieving these goals and to make sure that all the initiatives, they have enough funds, enough source of funding, in order to deploy all the measures that they are going to help us in order to delivery these trends for the next two years.

So basically, yes, more of the same; well below inflation is the target for 2014 and 2015.

Thanks so much, Galan. Appreciate your time.

Saul Martinez, J.P. Morgan.

Hi. Good afternoon, Carlos and everybody. I have a couple of questions as well. One of them is more of a high-level theoretical question, more of a theoretical question. One is a more very specific question.

The first question is how management thinks about returns on equity and cost of equity. Obviously, with the higher rate environment in Brazil -- I think its reference rate is at 10.5%, the swap rate even higher than that -- you can argue that the cost of capital, cost of equity for companies, is pretty high.

Your ROEs clearly aren't necessarily where you want them to be -- 10%, 11% the way you measure it. The capital reduction, the dividend will obviously improve that.

But how does management think about the process of getting to an ROE that meets its cost of capital? Over what time period do you think that occurs? And I'd just like to know how management thinks about ROEs, cost of capital, and how you plan on getting to a stage where you start to create value?

Secondly, the more specific question on asset quality. Obviously, very impressive in terms of NPL evolution provisioning. Fifteen- to 90-day NPL ratios, however, kind of flat. It did go up a little bit for corporate. They haven't really improved much, and typically fourth quarter sees improvements in early-stage delinquencies.

Anything there that worries you? Should we read much into that? I guess, why haven't you seen a more notable improvement in early-stage delinquencies?

Thank you, Saul. Regarding your first question, clearly the management is not happy with the profitability that we have been delivering.

Secondly, we saw your report on the cost of equity adjustment that you made, because the interest rate environment, et cetera. In that case, I would tell you that the way that we see, it's in a longer horizon. It's not in a short or in a yearly basis. So, basically, the cost of credit is more stabilized in order to delivery profitability above this cost of equity defined internally.

And thirdly, I would tell you that clearly part of the challenge and the task that the senior management that we have here is to improve and to make a catch-up versus our competitors in terms of profitability.

As I said in the presentation, it's going to be a long journey. It's fair to say that we still have after the equity optimization process, we still have an excess of capital. But putting aside this excess of capital, the profitability has to be improved.

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

So, having said that, the gap that we have with our converges, some of them is explained by the excess of capital. But some of them is clearly explained by the lower profitability that we have, more specifically when we are talking about our spreads after provisions that clearly are well below our competitors. And this is one of the key factors that we should improve in the coming quarters and that should improve and should help in order to delivery a higher bottom line.

Regarding the second one, Oscar is going to answer you.

Saul, thank you very much for your question. On regards to the 15 to 90 days, the evolution, the trend that you can see in the number, it is very much the results of the credit policies that we implemented in 2011 and 2012. And if you see that 15 to 90 days, it already show an improvement, a significant improvement, in 2012.

Since then, we've been pretty much maintaining our credit policies, the vintages still. So, some improvement, but in not as strong as it was in the last quarter. And that 15 to 90 days ratio, it is very much impacted by the vintages. So, in that, improvement.

Therefore, the stability that you see, it shows that level of vintages as being something that we're going to continue to maintain and very much care about the quality of the origination that we have.

It is also impacted in 2013 by the increased weight that the renegotiations have in the 15 to 90 days, which is normal after the increase that that portfolio saw in 2013, and it is within the quality standards that we plan on our collections program.

OK. That's helpful.

I think I answered your question.

That was very helpful. Thank you, Oscar. Just a follow-up. Would you be willing to share what you do think your cost of equity is, Carlos, if you think the rate curve isn't necessarily reflective of an adequate perception of how to think about cost of capital?

It's in the range between 16% and 16.5%.

OK.

But basically this is more or less the cost of equity that we manage internally.

OK. Great. That's very helpful. Thank you very much.

Regina Sanchez, Itau.

Hi, everybody. I have two questions. The first one I think is also for Mr. Oscar. I'd like to have a rough idea, say, how much of the renegotiated [loans] were (inaudible) in the non-performing loans, or out of the R$14 billion, the increase in around R$1 billion that is in the fourth quarter of renegotiated loans, as a percentage? How much was previous in NPLs, because that might have helped the decline in NPL ratios in this quarter?

And then, my second question is more regarding the strategy of the Bank in the loan portfolio going forward. I think we saw [bigger] lending and also SMEs portfolio shrinking in the fourth quarter and during the entire year of 2013. If you could share if there are strategic movements to maybe start to post increases in these portfolios, especially for when that you see an increase in competition in the marketplace? But it's still a very good product considering it's a [phased] portfolio and it's still with good returns.

So, I appreciate both answers. Thank you.

With regards to your first question, I would like to point that most of the improvement in NPLs is being generated by the improvement in the quality of the origination. So, out of the 80 basis points that we see improve, around 50 basis points it's explained by the better quality of origination, and 30 basis points is explained by the effort in the collections process and the renegotiation of the portfolio.

You can also consider that even when we look at the NPL formation, including charge-offs and renegotiations, it still shows an improvement of 20 basis points in the quarter, stressing the improvement in the overall quality of the credit.

Regina, regarding your other question, I would tell you three or four points. The first one is that it's true when you are looking at the credit portfolio that this year has shrunk versus the previous one. But bear in mind that part of the credit activity with SMEs is on the acquiring business, and acquiring business is not included in the credit portfolio.

So, basically, when you include the acquiring business in SMEs, for instance in the 4Q, the performance was slightly positive, as I mentioned, something around 1% to 1.5%.

Having said that, as a second point, as I mentioned, we're more focused on the linkage with the SMEs. So, the deposits and fees grew much, much higher than the credit [portfolio] including the acquiring business. And this is the priority with SMEs, to create a much more stronger customer base with them, with more relationship with them.

And the third point is that in this cycle, yes, the Bank tightened the [renegotiations], prioritized more the linkage and the profitability with these clients. And bear in mind that basically we are in a new stage of this cycle. We expected that to recover the same pace of growth that we have seen in the credit portfolio for SMEs previous to 2013.

So, basically, what you could expect for 2014 it's more of the same, the growth that we had in previous years and after once that we normalize the cycle with them, and that clearly it's a segment that we strongly believe the Bank has a gap versus our competitors and that we should increase our SMEs customer base.

Perfect, Galan. Thank you, Oscar, as well. Really appreciate the answers.

(Operator Instructions) Jorge Kuri, Morgan Stanley.

Hi. Good morning, everyone. I have two questions. The first one is on your merchant acquiring business. I notice that a year ago in your 4Q12 presentation you mention that your market share was 4.5% and that the target for year-end 2013 was 10%. In your current presentation, you now have a 5.8% market share -- so, roughly a little bit over one percentage point gain over the last 12 months -- and you no longer have a target specified there.

So, can you just walk us through why you didn't get to the 10%? Why you only won one percentage point? Is it going to take you another five, ten years to make the 10 percentage points? Is that no longer the case? I just want to understand what the dynamics in that business are, which clearly you haven't delivered as, I guess, the market expected?

That's the first question.

The second question -- and, again, I'm sorry; I know this is something that a lot of people have asked -- but exactly a year ago you said the industry was going to grow around 15%, which was the right forecast. We saw yesterday from the numbers reported by the central bank that total loans in the industry grew 15%.

But you did say last year that you were going to grow faster than the peers, faster than the industry, and you actually grew half of that. You grew 7%. Now, the message is the same. Now, you're saying -- The industry is going to grow probably around 15%, and we are ready to grow faster.

So, I just -- if we can get a little bit better level of confidence on why this time around that will be the case, what has really changed for you in order to be able to do that, I think that will be great.

Thank you.

Thank you, Jorge, for your two questions. Regarding the first one, it's true what you have said. And I mentioned before, we decelerated somehow the pace of increasing our market share in this product in 2013. Nevertheless, we have to bear in mind that we start from scratch in two years, three years ago and that we prioritize all the acquiring business firstly with our SMEs segment.

And with the SMEs segment, we are quite happy. We basically -- in a proxy, because they are not official figures -- but we think that we have reached the 10%, or close to the 10%.

And clearly, in order to achieve the 10% in the total portfolio, clearly we have to accelerate the pace with the big retailers that maybe they are not as profitable as the SME, which was the focus at the beginning of this process, but they give you more volume. In order to achieve the 10%, the big retailers are a key segment in order to attain and to work with.

For that reason that we would like to accelerate, and the 10% it is still a target for the Bank, we have been trying to make an agreement with the GetNet in order to accelerate the pace forward, because for the big retailers the proposal is a little bit different versus the small and medium companies. We have to adequate the offer in terms of IT solution. And for that reason, one of the decision takings is to be more flexible in the time to market process with GetNet.

We think that in a couple of weeks we will be announcing the final agreement with them. And one of the purposes it's to accelerate the pace servicing the big corporates and delivering the IT solutions with prompted or with more accurate opportunity.

Regarding the second point, yes, it's true, but there are two important facts, events that happened in 2013 were different than we were foreseeing at that state.

The first one is that when we discussed the 15%, we were discussing some convergence in terms of private banks and public banks. It didn't happen. As a matter of fact, it happened the opposite. We [weathered] the pace between publics and privates.

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

The other important event is that clearly we in 2012, or at the end of 2012, entered in a delinquency cycle, and the Bank prioritized the improvement in the asset quality and the improvement in all the delinquency ratios more than to grow the volume and more than to gain some market share. We discussed that in the middle of this year.

And once that the Bank thinks that all the asset quality it's in comfortable levels, that said, now we should enter in a new cycle where basically the Bank is not going to gain market share in all segments in all products in all activities. No.

The Bank first is going to prioritize to maintain and to remain the levels of delinquency at the minimum, the 4Q ratios that we have shown, and to be somehow aggressive in several fields and several products where the Bank is comfortable or we think that we have a differential approach, such as, first, acquiring. Even though we reduced the pace, we have still gaining some market share. This is the idea for 2014 and for the coming years. More specifically, it should be even strengthened by the GetNet agreement.

Secondly, we think that the Bank is not happy with several [earmarkets] such as (inaudible) products. So, the Bank is trying to improve the performance in these two markets, basically because we have a lot of market share and we should aspire to improve or to increase our presence, [closer] to our natural market share.

And the third, it's clearly the payrolls, the payrolls where the Bank didn't perform in line with peers for several reasons. I explained some of them, that the other challenge outside the [network] branches were not very good managed. We were not successful in how to manage and deploy profitability with the other intermediary channels.

And the Bank is trying to improve, first, all these products. We are convinced that payrolls should be in 2014 an important product in terms of growth. We expect that core (inaudible) products such as mortgages, payrolls, they are going to grow faster than other products, and that's why the Bank has to make the turnaround and to improve the profitability, first in the internal channel and later, complementary, with other initiatives that maybe we are going to add some added value and some other volumes in these products.

So, what I am going to say you is that, first, the priority is to maintain the asset quality as a first vector. And the second one, our aspiration is to gain some market share in several products where either the Bank has a low market share or we have or we think have a different approach proposal that they are going to give us some opportunities.

And this is in a context where for the private banks we think that 2014 will be an environment more positive in terms of credit evolution.

All right. Thanks for the detailed explanation.

(Operator Instructions) Thank you. The Q&A session is over, and I wish to hand over to Mr. Carlos Galan for his concluding remarks.

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

Thank you very much.

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