Banco Santander Mexico, S.A.

Good day, everyone, and welcome to Banco Santander Mexico's second quarter 2020 earnings conference call. Today's call is being recorded. Following the speaker's remarks, there will be a question and answer session. And I'd like to turn the conference over to Mr. Hector Chavez, Managing Director and Head of Investor Relations, to make some opening remarks and introduce today's other speakers. Please go ahead.

Thank you. Good morning and welcome to our second quarter 2020 earnings conference call. We appreciate everyone's participation today. And by now, everyone should have access to our earnings press release and the presentation for today's call, both of which were distributed before the market opened today and can be found in our investor relations website. Presenting on our call today will be Hector Grissi, Executive President and CEO, Vivian Mena, our CFO, and Rodrigo Brand, Executive General Director of Public Affairs. We will review our second quarter results as well as provide an update on how we are operating under the health and safety protocols that are designed to help mitigate the risks related to the COVID-19 pandemic. Then we will be happy to answer your questions during the Q&A session. Before we begin our formal remarks, allow me to remind you that certain statements made during the course of this discussion constitute forward-looking statements which are based on management's current expectations and beliefs and are subject to a number of risks, uncertainties, including COVID-19, that could cause actual results to materially differ, including factors that could be beyond the company control. For an explanation of these risks, please refer to our filings with the SEC and the Mexican Stock Exchange. Hector, please go ahead.

Thank you, Hector. Good morning, everyone, and good afternoon to those in Europe. Thank you for joining our earnings call today. I hope you and your families are healthy and safe. As we discussed last quarter, mitigating the effects of the pandemic on the health and the well-being of our employees and customers has remained our utmost priority. Before giving you an update on the measures that were implemented in this regard, let me begin our review by providing context. This past quarter has been a quite challenging as we started seeing the impact of the pandemic on the Mexican economy, on our own business, and of course, on our results. Despite the impact, let me assure you that our bank remains strong and focused. First, our capital and liquidity levels are solid and well above the minimum regulatory levels. Second, we have a clear strategy, which we are executing to support our customers and minimize the impact on the pandemic on the finances, and third, we expect to emerge from this difficult environment as a stronger institution. Business volumes closed the second quarter with high single-digit year-on-year growth, while we experienced an adverse shift in our portfolio mixed towards lower yielding segments. Consumer and SME loans started to contract, in line with market trends, while the commercial and mortgage loans were resilient and continued to register expansions. The timely measures implemented by Banco de Mexico and the CNBB have allowed us to maintain ample levels of liquidity and capital, enabling us to offer our customers support mechanisms to temporarily alleviate their cash flow and the financial stress caused by the economic fallout of the pandemic. Although asset quality deteriorated slightly in the quarter, we made preemptive loan loss provisions of 3.9 billion pesos in addition to the normal quarterly provisions. in preparation for our future losses. We would revise this amount in the future as more information becomes available on the performance of our loan portfolio during the coming quarters. As we normally do, we will provide an overview of our business environment, but let me emphasize again our conviction that Santander, Mexico is very well positioned against the current and still growing economy impact of the COVID-19 pandemic. In slide four, we present select economic indicators that show the magnitude of the impact the pandemic is having on economic activity and employment. As you might recall, 2020 GDP growth expectations for the Mexican economy were modest prior to the pandemic, mainly due to weak private investment prospects. With April and May indicators showing a contraction of more than 20% year-on-year in economic activity and 37% on year-on-year and drop in fixed investment, market consensus expectations have been revised down to around 9% annual decrease in GDP during 2020. For additional context, this would be an economic contraction not seen in many decades. This significant fall in economic activity resulted in the loss of more than 1 million formal jobs during the second quarter. to Social Security data, but as many as 20 million jobs lost, taking into account informal employment. Following the past two severe economic crises, back in 1995 and 2009, it took seven quarters for the Mexican economy to recover its previous level of economic activity. However, in the current one, we consider it is unlikely that the economy could recover within a similar period of time, given the depth and magnitude of the global economic shock and the absence of any meaningful fiscal problem to address the severe contraction in its employment. With external demand grounding only gradually and without any mechanism to alleviate households' income loss, an open economy like Mexico faces a slow path to recover to previous activity levels. With 2021 growth prospects being forecasted at only plus 3%, it could take three to four years to recover 2019 levels of activity. Under these conditions, inflation pressures should remain low. We expect 3.6 for 2020, allowing Banco de Mexico to cut interest rates a little further. We expect another 100 basis points of cuts throughout the year, which would take the reference rate to around 4% by year-end. In summary, this is a scenario of low growth and low interest rates represents a challenging outlook for Mexico's commercial and consumer environments and for our business. If you turn to slide five, you will notice that despite the severe shock to economic activity and employment, the system's loans and deposit volumes still show a significant year-over-year expansion of 8% and 14% respectively. This is mainly explained by large and medium-sized companies and government entities that have drawn on the credit lines to maintain the liquidity of their balance sheets in order to continue operating during the months of which the stay-at-home guidelines have been in effect. On the other hand, consumer loans showed a relevant contraction reflecting the initial impact of the pandemic on consumer behavior and of product origination practices being maintained by financial institutions. It is worth noting that system-wide demand deposits remain strong, up 18% year-on-year, likely reflecting heightened needs for liquidity among households and companies while still at-home guidelines remain in effect. Please turn to slide 6, where we would like to give you an update on the bank operations during the past few months. Our health and business continuity protocols remain in place. such as suspending non-essential travel, limiting the number of people at gatherings and group events, and enhanced sanitization measures at branches, corporate offices, ATMs, and contact centers. As of today, most corporate employees continue working from home, while only essential personnel are working on-site. Approximately 80% of the bank branches are open, and 92% of our ATM locations are functioning normally. The bank's digital channels and contact centers have also been operating normally. Our digital monetary transactions increased 64% year-on-year, while our digital sales represented 44% of total sales, plus as much as they did last year as we continue promoting customers' use of digital channels, which continues to drive adoption levels. Further, more IT resources have been channeled into implementing additional remote operating tools, with cybersecurity being a priority. During this critical time, we have been supporting our customers through a debt relief program, offering deferred payments for individuals and SMEs, and case-by-case debt restructurings to our corporate customers. I will elaborate on this program in a moment. As part of our commitment to our communities, we have made numerous donations and support initiatives that aid the medical community and vulnerable populations. We also donated an app to the Mexico City government, which allows the population to self-diagnose based on symptoms, locate medical facilities with little capacity near them, and obtain information on the pandemic. On slide seven, you will find a snapshot of our debt support program that I mentioned before. Currently, 19% of our total loan portfolio is under the Payment Holiday Program for Individual and SMEs, with more than 600,000 customers benefiting from it. Through this program, we are helping customers who have encountered liquidity problems by permitting them to escape loan payment, both interest and principal, for four months without any penalty or cost. Because of this feature, Under the program, it is difficult to assess at this time the extent of the pandemic's impact on our asset quality. However, we have been proactive in addressing asset quality over the past few months by contacting our customers to better understand their financial situation and by analyzing their ability to pay. More than 55% of our branch network personnel is focused on recoveries, calling customers directly. Likewise, the collections and commercial and risk departments segmented the portfolio by level of concern, identifying risk and exposure according to customer quality. Through this more granular process, we are thus marketing each type of client within 36 different clusters. We have also been analyzing our customer behavior patterns using our CRM capabilities. I know that more of 95% of our payroll customers continue to receive their salaries. For those payroll customers who are not longer receiving their salary, we are collecting for unemployment insurance. With current information, we estimate that close to 40% of our customers should be able to continue honoring fully the condition of their loans. Since it is still unclear if the rest will be able to remain current, we are offering upfront loan restructurings to many of them in order to speed up the recovery process. It will not be until the third and fourth quarters of this year that we will have sufficient hard data on the behavior of the portfolio. With regard to our commercial book, we are taking a case-by-case approach to manage our exposure. As we did during the past critical periods, we have remained very close to our customers and are helping them navigate this current challenging environment. For those companies that face difficulties, we have been offering multiple alternatives to support them. Our current portfolio of commercial restructured loans is close to $50 billion and accounts for 16% of our loan portfolio with medium and large-sized corporates. In addition to actively managing our portfolio, know that 76% of our payment holiday portfolio is associated with mortgages and SMEs, which both have guarantees. Within our total SME book, 67% of the portfolio is backed up by warranties issued by Nafinza, one of Mexico's development banks, which allows us to share the risk with them. Specifically, for those SMEs that are in the deferral program, 75% of them have warranties. Furthermore, payrolls and auto loans, 9% of the deferred portfolio, are semi-secured given the collateral represented by each customer's salary and car. Please turn to slide eight, where I would like to share with you some of the key characteristics of our mortgage portfolio, which is giving us relative comfort due to its defensive nature. Our organic mortgage portfolio accounts for 86% of all our mortgages. The existing portfolio has a loan-to-value ratio of 44%, while origination has an LTV of 70%, very good warranty coverage. The MPL ratio of this portfolio is 3.6% and has been quite stable for some time. For the past two years, our Hypotheca Plus Mortgage has allowed us to attract higher income customers, which are more defensive in the current environment. To expand on this point, our average ticket has been increasing since we launched the product and is currently not only the highest among our peers, but 37% higher than the average ticket of our peers. In addition, Hypotheca Plus customers are loyal as they also have their payroll and their credit cards with us. Having a low loan-to-value ratios, as well as being the main bank of our customer, lowers the probability of non-payment, as this type of customer tends to prioritize the home mortgages in economic downturns. All in all, considering the level of warranties we have, the structure of our portfolio, and the proactive measures we are taking, we consider we are on the right path to mitigate the negative impact of the pandemic on the quality of the loan portfolio. On slide nine, let me comment on origination dynamics and the mix we have seen during the past few months. Commercial loans continue to support total loan growth. Therefore, their contribution We've seen local loan origination increase from 78% in the second quarter of 2019 to 82% in the second quarter in 2020. In line with this, commercial loans now represent 64% of our total loans. This changing mix has had an impact on our NII, as we will explain later in the call. In terms of origination dynamics, we have seen encouraging trends during the quarter that are worth noting here. In the mortgage and commercial segments, June's loan origination registered relevant sequential improvements compared to May, surpassing January's 2020 level. In consumer loans, June loan origination remains 25% below the first quarter in 2020 monthly average. However, it expanded 33% above the 2020 minimum reached last April. As you can see on slide 10, our capital and liquidity positions are very strong. At the end of June, our Common Equity Tier 1 ratio stood at 11.6%, 58 basis points above March, and was significantly in excess of the 8.2% minimum requirement established for the bank's RSI. The decision taken during April's shareholders' meeting to postpone the dividend payment for 2019 has allowed us to further strengthen our capital position. In terms of liquidity, our second quarter in 2020 liquidity coverage ratio reached 211%, well above the Bank of Mexico regulatory requirement and supported by the senior notes we issued back in April. Before turning the call over to Lydia, I would like to finish my remarks by by reiterating that we have been active swiftly and decisively to further strengthen our bank in order to mitigate the impact of the current crisis on our operations, in addition to implementing proper protocols and measures to protect our employees and customers. We have continued serving clients with high standards of customer service through our branches and digital channels. Again, we are confident that our bank is well positioned to support our customers as they recover from this unprecedented crisis. Now, let me pass the call over to Divier, who will review the quarter's most important trends and metrics. Thank you.

Thank you, Hector. Good day, everybody. Please turn to slide 11 for an overview of our recent loan performance. Total loans expanded 7% year-on-year, but contracted 3% sequentially, giving a strong corporate loan demand at the end of the first quarter. Low-margin segments are growing twice as fast as high-margin segments, where SMEs and credit cards contracted 9% and 6% year-on-year, respectively, due to the economy's weak performance. By contrast, mortgage loans increased a solid 9% year-on-year and expanded 13% when excluding the runoff effect of GE and ING portfolios, which was well above market growth. High-margin segments have reduced their contribution to net interest income by almost 100 basis points. Individual loans on slide 12 show a slowdown, growing 4% on a year-on-year basis, mainly supported by mortgages. As mentioned previously, mortgages have proved to be a defensive segment within the Mexican market during the past periods of economic instability. With this in mind, we decided to lower even more the rate of our Hypotheca Plus product to 7.75%, targeting loyal customers. As of June, close to 60% of our mortgage origination was coming from Hypotheca Plus, which allows us to increase cross-selling of other products. In July, we launched a new product, a new mortgage product called Hipoteca Free, which is the first commission-free mortgage product in Mexico. Unique characteristics of this product are the customers do not have to pay an application fee, monthly commission, or a home appraisal, nor are life and unemployment insurance required, leaving only notary fees to be paid by the customer when acquiring this product. As you can see, even during these challenging times, we haven't stopped innovating. There continues to be a downward trend in credit card loans as we take a more conservative approach toward this segment. In addition to managing customers' credit limits, credit card usage declined 30% year-over-year during the quarter, as many clients stayed at home. This drop had a negative impact on balances, of course. After usage, Rates reached a very low level in April. They recovered in May and June, although remaining slightly below first quarter levels. Growth in our consumer loans has been concentrated in payroll loans, growing 2.5% year-on-year and still above the market per CNBB data as of the end of May. Personal loans continue to contract, consistent with our strategy to focus on more defensive segments of the market, as Hector noted. Finally, our auto loan production in June more than doubled compared to previous quarter's average boosted by our new commercial alliance with Mazda. Turning to slide 13, growth in our base of loyal and digital customers continues demonstrating important progress, with year-on-year increases of almost 17% and 31% respectively, despite the challenging business environment. Loyalty penetration that is loyal to active customers stands at 35%, 400 points higher than a year ago. We have seen continuous growth in the use for digital channels as customers have stayed home during the pandemic. This quarter, product sales via digital channels accounted for 44% of the total, almost doubling year-ago levels. Digital monetary transactions also spiked, reaching almost one-third of the total, while mobile transactions represented 93% of total digital transactions versus 84% in 2019. Mobile customers also kept growing at a solid 38% year-on-year rate, reaching 4.3 million at the end of the quarter. As you can see on slide 14, commercial loans grew 9% year-on-year, but decreased sequentially as some corporates started prepaying some lines withdrawn in the first quarter of this year. Government and middle market segments continued to register double-digit year-on-year expansion, although their sequential evolution showed lower and stable volumes, respectively. SME loans registered a fourth sequential quarterly contraction as this segment showed a weakening trend even before the pandemic. Outstanding loans are similar to the ones we had in the fourth quarter of 2017, 10 quarters ago. The downward trend is also related to our lower risk appetite for lending in the SME segment. Given that more than 50% of our SME loan book joined the payment holiday deferral program and those customers cannot use their credit lines while in the program. Loan origination in this segment will remain low until we have more visibility on the performance of the economy. Moving on to total deposits on slide 15, this increased 10% year-on-year, while quarter-on-quarter we saw a 3% contraction. During the quarter, there was a shift between demand and time deposits favored by lower interest rates. As of the second quarter of this year, demand deposits represented 64% of total deposits and were up 11% year-on-year. Deposit growth from individuals stands out at 23% year-on-year, supported by our promotion campaign to attract these types of deposits. After an atypical first quarter of this year, deposits from individuals continue to grow faster than corporate deposits, in line with our strategy to further increase our exposure to retail deposits. Retail deposits now represent 33% of total deposits almost 400 basis points higher than its contribution in the first quarter of 2018. Turning to slide 16, we have a very strong capital and liquidity positions, as Hector had highlighted. We maintain a sound funding position with a net loans to deposits ratio of 91.8%, one of the strongest levels since becoming a listed company. Our liquidity coverage ratio increased 89 percentage points relative to the first quarter of this year, and now stands at 211%, well above the regulatory threshold of 100%. We also remain very comfortable with our debt profile with manageable debt maturities. Regarding capitalization, our ratio increased 46 basis points sequentially to 16.7%, reflecting the postponement of the dividend payments as recommended by the Banking Commission, while our core Tier 1 ratio was up 58 basis points to 11.6%, and our tier one ratio stood at 13.03%. As you can see on slide 17, net interest income decreased 4% year-on-year and 6% quarter-on-quarter. As a result, net interest margin contracted 128 basis points to 4.5% for the quarter. Our margin decline was a result of lower interest rates and lower balances within the high yielding segments coupled with higher average assets as a consequence of a significant increase in our securities portfolio. Without this last effect, our NIM would have contracted only 54 basis points. As Hector explained earlier, we're expecting net interest income to continue contracting during the remainder of the year due to anticipated decreases in interest rates combined with a change in our portfolio mix, where growth will likely come from low-yielding segments and with a likely contraction in high-yielding segments. However, this downward pressure will be partially mitigated by our expanded investment in securities portfolio. Please move on to slide 18. Net commissions and fees decreased 2.1% year-on-year, affected by the double-digit decline in credit card transactions. Credit card usage decreased 42% in April, 34% in May, and 14% in June on a year-on-year basis. Insurance fees register only a slight contraction given renewals of several groups' insurance policies, which partially compensated for software insurance demand. Insurance represents almost 30% of our total fees and has proven to be a defensive segment, even considering the pandemic, with health and life insurance growing while retail insurance is slightly decreasing. Our investment banking team has been very active, mainly in financial advisory services, which translated into strong fee growth of 31% in this line of our business, which partially compensated for weaker results in other areas, mainly credit card fees. Turning to slide 19, gross operating income grew 9% year-on-year, driven by a solid performance in market-related income, which was significantly above our historical average levels of between 600 to 800 million pesos per quarter. Declining interest rates, the FX market volatility, especially during April and May, supported market-making income. In addition, we sold investment in securities in order to further strengthen our liquidity position, generating non-recurring gains that boosted this quarter's result. All this contributed for market-related income that accounted for 13.8% of gross operating revenues 3.5 times higher than the historical average of 4%. Moving on to provisions on slide 20. In light of the deterioration of Mexico's economic environment and in anticipation of a possible deterioration of our loan portfolio, both due to the pandemic, in June we registered a special charge of low loans provisions on top of those normally required. The 3.9 billion pesos charge raised total provisions to 8.35 billion pesos in the quarter, up 88% year-on-year and 62% sequentially. We have made this estimate of preemptive provisions with the information currently at hand. However, this amount could be revised in the future as more information becomes available. Cost of risk for the quarter stood at 3.1%, a 44 basis point year-on-year increase, and 49 basis points sequentially. Our total MPL ratio showed a slight 28 basis points year-over-year increase to 2.5%, mainly due to the SME segment, together with our mortgage and credit card portfolios. As explained earlier, these ratios only reflect the performance of 81% of our total portfolio that does not fall under the payment holiday program. We consider this ratio encouraging as its evolution is quite benign, when considering the significant deterioration in economic activity and employment. However, it will not be until the third and fourth quarter of this year that the debtors program will end. It will be at that time when MPL ratios will reflect the real magnitude of the economic impact of the pandemic. Now please turn to slide 21. Administrative and promotional expenses increased 1.2% year-on-year, reflecting the effort to control personal costs, mainly reserves for viable compensation, and amortization expenses related to the strategic and IT investments that we made over the past three years. As we will continue investing in the digitalization of the bank and in technology upgrades, we're targeting greater operating efficiencies in the common quarters, such as the ability to reduce the number of business trips, variable compensation, as well as limiting base salary increases, among other improvements. Less business travel and salary caps already led to a sequential 1.9% decrease in our total expenses during the second quarter of this year. Such expense controls, combined with strong operating income and the conclusion of our three-year investment plan, contributed to a 358 basis point improvement in our efficiency ratio, which decreased to 40.7%. On a six-month basis, the ratio improved 227 basis points year-on-year to 42.3%. Turning to profitability on slide 22, you will note that our earnings were mainly impacted by special low-nose provisions that we discussed earlier. Profit before taxes was down 24% year-on-year for the quarter and 11% for the first half of the year. Net income decreased 25% year-on-year to 4.2 billion pesos, While our effective tax rate increased 38 basis points year-on-year to 25.3%. This resulted in an 11.5% decrease in net income for the first six months of 2020, which was 9.6 billion pesos. Return on equity was 11.9%, 543 basis points below the year-ago level, and down 362 basis points sequentially. Year-to-date, ROE contracted 328 basis points to 13.5%. Let me now turn the call back to Hector Grissi for some final remarks. Hector, please go ahead.

Thank you, Didier. Please turn to slide 23. Let me share with you some final thoughts on what lies ahead. Given the unprecedented nature of this health crisis and the uncertainty surrounding its duration at magnitude, we anticipate only a very gradual recovery of the economy, which has obvious implications with regard to our operating environment. We expect our loan portfolio will likely be driven by commercial loans, mainly medium and large corporates, government loans, as well as mortgages. The consumer will recover very gradually, and this will depend on the speed of the eventual turnaround in employment, economic activity as well as business and consumer confidence. Although visibility on asset quality is limited, due to the payment holiday program, we have been talking and taking rapid and decisive action in order to mitigate the impact of the pandemic on the loan book. Our recoveries plan, which includes a very detailed and in-depth analysis of each customer's situation, is allowing us to preemptively and swiftly prepare the bank for complicated quarters ahead. In particular, we have allocated a large number of current employees and branches involved in carrying out recovery strategy. We will continue focusing on enhancing customer loyalty and on cross-selling non-credit products to support non-interest income. We also remain committed to making additional investments in the bank transformation, mainly in IT and digitalization, but we will continue to look for efficiencies in other lines with strict cost control in order to support the bottom line. And finally, rest assured that our bank is operating from a position of strength with robust capital and high liquidity levels that will allow us to overcome this complicated, but what we believe are temporary circumstances. We are now ready to take your questions. Please, operator, let's go ahead.

Thank you. If you would like to ask a question, please signal by pressing star 1 on your telephone keypad. If you're using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Again, press star 1 to ask a question. Please ask one question and a follow-up. If you have further questions, please re-enter the queue. We'll pause for just a moment to allow everyone an opportunity to signal for questions. Thank you. Our first question is from the line of Hassan Moline from Scotiabank. Please go ahead.

Hi. Thank you very much. My question is on the operating outlook. The disclosure is excellent, as always, and I like the way you presented it. On slide 19, we can look at the main drivers for the operating income, and clearly it's used. We talked about market-related revenue was very strong, well above historical levels, about 14% of the total operating income compared to, let's say, 3% or 4% in the past. These are different times, but how should we think about efficiency going forward? You talked about cost control. We saw that. If you can just give us a general sense. You mentioned there are certain costs you can control and you are controlling. Can you talk a little bit about the physical infrastructure? Is there an opportunity to rationalize the physical branch network after the investments you made? What should we be looking for in terms of efficiency going forward? The dynamic is quite skewed from all of these moving parts, the very high trading and the low revenues given what's going on. Thank you.

Thank you. Look, I mean, As you have said, I mean, and if you take a look at our numbers, basically, we have decreased the operation cost of the bank quite significantly. I mean, first of all, I mean, not traveling and not doing many things basically have reduced naturally the cost, but we have also been very strict in new projects and new situations. I mean, we are basically focusing all our expenses in IT to support the backbone and to be ready for what's coming. So in that sense, that's going to be our priority. Secondly, we are taking a look and we're doing a deep dive in terms of all our infrastructure. And we're not going to take, I mean, rough decisions in terms of closing down a big number of branches or anything like that. I think we're going to be rationally looking at each of the micro markets that we have divided the country into and we will decide with the evolution of the economy what should happen there. But we're going to be very strict. If you have seen the growth of the past four or five years in terms of branches, we actually have decreased the number of total branches. We have been very intelligent in the way we have managed that. What we have done is upgraded the current and the most important branches, which we are going to basically be... taking a little bit more time than the time that we were thinking of upgrading all the branches that are not up to the standard. So this is actually what we're doing. We're going to basically rationalize all expending and do it on where the most important thing is, that is basically the IT platform and the digitalization of the bank. So in that sense, we're going to be very concentrated on that We also believe that given that we have been able to operate the bank under these circumstances, we have a huge amount of people basically working from home. You basically get to understand exactly how much people do you need, what can you rationalize, etc. What you're going to see from us is that we're going to be very responsible in the way we manage that and concentrate on those points. We're working currently on that plan. We are working on our three-year plan and we're basically including all these in order to do so.

Maybe as a follow-up, just some comments on what you've seen throughout your peers in the Santander group in the region or elsewhere. Are there other things you think that could be applied to Mexico that could help, perhaps on the side of the banking system, perhaps in terms operationally or IT or any factors at all.

Thank you. What we're doing basically is, for example, I mean, in terms of developing digital platforms, et cetera, what we're doing is we're doing it now instead of each country basically developing the platforms, we are doing it together. So that basically is going to help out quite a lot. So it's not Mexico. For example, right now in Mexico, we're developing the new super app, and the new super app is going to be used in Mexico. or the other countries. For example, the onboarding for SMEs, we're using the one that is being developed in Europe. So all those type of things are going to help us out, basically, in reducing our cost for the digital infrastructure that we're developing. And we're working together much more within the group in order to do that. So you're going to see that the cost of basically developing things and it's gonna come down to the fact that we're doing it together with the rest of our 10 sister ranks.

So those are the things that we're implementing at this point. Thank you, I appreciate it. Well, thank you.

The next question comes from the line of Jorge Cury from Morgan Stanley. Please go ahead.

Hi, good morning everyone. I wanted to ask about net interest margin. You pointed out that you expect further complications in the next couple of quarters given falling rates and weak loan demand and mixed deterioration. As you look at 2021 in the context of what you said on not a strong economic recovery next year, And with average rates next year being much lower than 2020, if indeed rates end up at 4%, what is the expectation for net interest margin next year and for NII? Is it possible that we're likely to see another year of NII compression? And to what extent that could be offset elsewhere in the P&L? And my second question is on the coverage ratio. And I know that banks normally don't target a coverage ratio. I get it. But evidently, the size of your reserves have a relationship to the size of your loan book, the size of your NPLs, and the size of the amount of loans that are under restructuring. And so when I look at your coverage ratio at $1,000, 138%. It looks low relative to where Banorca ended up at 201% and Banco del Bajio at 185%. So I wonder why not just take a much bigger charge on provisions this quarter? Evidently there's a lot of uncertainty ahead and the more the better. And so is this piecemeal just going to, you know, potentially put more pressure on your earnings going forward rather than just, you know, take a really big one soup and, you know, raise your coverage to north of 200%. And is that likely maybe something you'll do in the third quarter? Thank you.

Look, Jorge, I will ask this sector. I will answer the first part, and then I will ask BDR to complete on the basic numbers of LII, okay? Okay. I mean, first of all, I mean, if you saw the presentation, we are basically changing the mix of the credit loan portfolio, okay? First of all, I mean, if you have seen, I mean, we have decreased quite a lot our exposure, unfortunately, to SMEs, given the lack of warranties from the government, from NAFINSA, okay? So the portfolio has dropped almost 10%. So in that sense, that basically is a high-yield portfolio, which... It's going to continue to shrink unless we see some guarantees from the government. And if you see our portfolio, which is quite important, we have like 62% of it already guaranteed by Nafisa. Okay, the current portfolio. This basically goes to answer your second part of the question in terms of the amount of reserves that we have done. Then you'll see that also we see that, for example, consumer credit and consumer loans are going to decrease as well. So the mix is completely changing. We're going basically back to where we were five years ago when we had much more exposure to corporates and to medium-sized companies than to consumer loans. Remember that we have that different mix, okay? So that's why NII is shrinking. On the other side, what we've also been doing is we're pricing and we are very strict on pricing risk, okay? So we've been increasing the margin on the corporate loans quite significantly due to that fact that we are basically looking at the risk that we are taking and we are looking very closely at the ratings of those companies and we are pricing risk accordingly. This is not a situation in which we want to expand the portfolio for the great portfolio just to expand it. We are basically doing it just to the companies that we believe that have a future And they will be there in the next few years. And both were pricing the risk accordingly. So in that sense, you're going to see us going towards that. Also, the other concentration is mortgages, which we believe, I mean, there is a sector still of growth. I mean, as you know, there is a lack of or a big deficit in terms of homes in Mexico. So we believe there is still a part of the population that can afford a mortgage. Mortgage penetration in Mexico is quite low versus the rest. and also loan penetration is quite low. So we believe there is a chance to continue to penetrate that sector. And maybe on payrolls, on some situations, we will basically be also lending in that part. And auto loans also, we have seen some interesting developments there with very cautious approach to it. So in that sense, the mix of the portfolio is going to change, and probably they can let you know exactly how we see NII evolving. In terms of what you were asking, in terms of the reserves, we've actually been doing reserves accordingly to what we believe we are doing in terms of how the portfolio is behaving at this point. What I can tell you is that the portfolio, not on payment holidays, is behaving much, much better than we believed that it was going to turn. I'm quite surprised about it. Hopefully, it continues that way. But in that sense, we are basically being, in my opinion, being very responsible in the amount of research that we are making at this point. Also, we have done a tremendous job with the data hubs that we have in reviewing the portfolio on holidays. And that portfolio is being divided, as we said, in 36 clusters. These clusters have been divided upon the amount of risk that we have on each particular situation. And in some of these portfolios, even before the payment holiday ends, we are already talking to clients and discussing the way that we could get paid on those particular situations because we believe is that whoever gets paid first is the one that is going to get paid. So we are basically being very aggressive on that sense to talk to our clients and basically trying to get that to recover that portfolio. As you have seen, 55% of our branches have been turned into collecting branches. I mean, basically, we're dedicating our executives to collect. We have divided them up on them in the sectors that we believe are the ones that are going to be much more important or that are going to be hit the most in the economy. So in that sense, I really were very well prepared. Although, I mean, or nevertheless, it's always, I mean, a lot of uncertainty what's happening, and we didn't want to go overboard. We believe it's the right approach is the one that we have made. But we will continue to see over the next few months evolution, but I can tell you that we're going to be very conservative in the way we manage that. Okay. Didier, I don't know if you want to complete.

Absolutely. Absolutely. I would like to compliment on what you mentioned. Great talking to you, Jorge. Long time no speak. In terms of names, you know, definitely, you know, as we laid out in the presentation, we see significant pressures. And let me just give you some background information that I think it's quite relevant. The speed at which interest rates have come down in Mexico is significant. Just in this quarter, the average of the reference rate came down 123 basis points. That's the fastest decline that we've seen in the recent history. we didn't saw an increase of that magnitude when interest rates were coming up. So that's one thing to have in mind, that the impact in NIM that you see in this quarter, I think, is probably the most severe that we're going to see in a relative basis, relative to the first quarter of this year and relative to the second quarter of last year. Also, bear in mind that when interest rates were close to 4%, as we probably agree with you that that's where we're headed, you know, our NIM was close to 5%, you know, and this was, you know, in the second and third quarter of 2016. I think that, you know, the number that we reported, the 448% in this quarter, you know, it has to do with what I was referring to, you know, the speed at which interest rates... came down. Also, on top of that, you have the change in mix on our loan side and also the fact that in order to protect net interest income from interest rates coming down, we increased our investment in securities portfolio significantly you know and those are you know lower margin assets relative to the loan portfolio just to you know share with you we've bought you know and this taking into account you know both divestments and maturities the overall growth in our investment securities portfolio is is 96 billion pesos over the last 12 months. So what we expect coming down the road for the rest of 2020 and next year, I think that having said that there's still a lot of uncertainty, I think that probably the most severe numbers in terms of NIMH are the ones that we saw this quarter. There's probably 10 to 15 basis points, probably further adjustment or slight improvement for the rest of the year. And next year, I think that we'll probably get to see NIMS similar or slightly above to the ones that we were seeing in this quarter. Now, regarding the coverage ratio, You're totally right in the sense that we don't target that coverage ratio. That's a resultant number. And also, you know, when you make reference to, you know, our number, 138%, looks low relative to Banorte. You know, Banorte in the first quarter of this year, they had 140%. In the second quarter, they did, as we did also, you know, increase the provisions. But different to us, they did a significant charge-off, 4.6 billion pesos. So that's why their coverage ratio increased to 200%. I'm probably just elaborating more on what Hector mentioned. The level of provisions that we have are in line with the expected losses that we estimate. you know, you might have a, you know, or you might question, you know, whether we, you know, this is enough or not, you know, and let me share with you that, you know, under current circumstances, we have definitely done different types of sensitivity analysis or scenario analysis, okay? So if there is a B-type recovery in the Mexican economy, you know, we have with these quarters provisions, we are, you know, more than covered for the rest of the year. Now, do we think that there's going to be a V-type recovery in the Mexican economy? I don't think so. It's very low probability. Now, we have assessed our level of provisions according to other type of scenarios, more a U-type or an adverse scenario having a GDP contraction of 12.5%. And under those circumstances, These quadros provisions are not enough for the entire year. There could be close to 60% to 75% depending on the magnitude of the GDP contraction that you assume. So there should be a direct correlation between expected losses and provisions. And the provisions that we are putting forward, we think that with information that we have are quite strong to cover expected losses. If the economy ends up contracting more than we are expecting right now, definitely we will need to provide additional provisions. Something that I encourage you to look at if you haven't done so yet, The central bank, Banxico, released in the financial stability report published a few weeks ago an analysis regarding MPLs for the entire system. And what they did is look at information from the entire banking system for the last 20 years. And they, using an econometric model, They estimated, you know, what are the critical variables that determine MPLs, and they break down the loan portfolio in consumer loans, in mortgage loans, and corporates. So once they determine, you know, this econometric model, then they provided, you know, a shock with the variables that we're seeing lately, and they estimated, you how much MPL ratios would deteriorate for the entire banking system. For consumer loans, that would imply a 32% increase. For mortgages, 19%, and for corporates, also 32%. So when you do that math and you break it down by the type of loans, by type of bank, You get to see, you know, this is obviously a ballpark estimate because obviously every single bank has different practices in, you know, origination practices and recoveries and so on. But you can get a sense of the magnitude in terms of, you know, using this model, you know, how much you would expect that each bank would provision, okay?

Thank you. Thanks, Hector Adelier, for the detailed responses.

We will take the next question. It comes from the line of Ernesto Gavilondo from Bank of America. Please go ahead.

Hi, good morning, Hector and Vivier. Thanks for the opportunity. My first question is a follow-up on the preventive provisions of 3.9 billion pesos. So you think this level of provisions will be enough for the rest of the year, or are you going to evaluate to create more depending on the behavior of payments after the relief program? And then my second question is a difficult one because we would like to know if you have exposure to Aeromexico under Chapter 11 or to Alsea that has restructured loans with the banks for about a year. But I understand if you cannot disclose your exposure. So maybe if you can remind us how much of your loan book is exposed to airlines and how much to food and beverage. And if there is a sector that is concerning you. And finally, my last question is on competition in mortgage loans. We have seen different banks reducing the interest rates of mortgages in light of the lower rates. So how has been your strategy to attract more mortgage clients and how competitive is your interest rate? Thank you.

Thank you, Ernesto. Let me start and then Didier will complement. First of all, on the follow-up on provisions, I haven't spoken many times to my CRO, and he basically tells me that when I ask you and ask him the same question that you're asking me at this point, and he basically says, look, I don't have my crystal ball so clear, and it's quite impossible. I mean, not impossible, but it's going to be difficult to assess what we're doing. I mean, what I can tell you is that we're doing our best job in basically reviewing the portfolio. We do that every single day. We review the behavior of it, and we're basically trying to be as conservative as we can in order to manage it. And if we see that the portfolio continues to deteriorate and is much more complicated, we're going to find out. I mean, the payment shock comes in the first week of August. We're preparing for next week, actually, when the first loans that went into the payment holiday start coming. to mature, and we will see how the performance of the portfolio is, and then we'll take, I mean, you're going to see our numbers right as, I mean, we're going to take the provisions as soon as they come, if needed, okay? And our second point in Aeromexico, yes, and I will say, yes, we do have exposure to them, nothing that we cannot control or nothing too big for the size of the bank, I mean, our total exposure to airlines is not big. I mean, compared to the total size of the portfolio, I would say probably Guillermo's percentage much better, but it's not big. I mean, it's not very significant versus the size of the bank. And we have done some provisions already on some of the exposure we have to Mexico. Okay, so we can tell you that... in the provisions that we made. Some of them are made for the other Mexico exposure, which is not relevant. In terms of ALSEA, yes, we do have exposure to them, also not significant, and we are basically in the restructuring process as of now, and we see that the company can recover I mean, I don't see that I'd say it's going to be a particular situation. Food and beverage, I don't know if DDR has the data. Unfortunately, I don't have it in front of me, and we can get back to you on that data next time. In terms of the competition on mortgage loans, it's quite important what we do. We have an important differentiation in terms of how we do mortgages versus our competition. If you take a look at what Hypotheca Plus is, It's a completely different product that nobody has replicated in the Mexican market. I mean, some of the other banks basically have tried to do a little bit of what we do in Hipoteca Plus. Hipoteca Plus is the best rate available in the market. But in order to get the rate best available in the market, which is 7.75% for a 15-year mortgage, you have to basically turn us into into your most important bank, to your number one bank. In order to be able to get that rate, you basically have to have different products with us. Basically, you have to have your payroll, you have to direct debit, your utilities with us, you have to have your insurance. There is something that you have to do in order to be able to access the rate. In that regard, what happens is even if the loan is at $7.75 and we're also very cautious in the loan-to-value that we do in that loan, that's why precisely I was explaining in the presentation that that's why our ticket per mortgage is 37% larger than the rest. So we go directly to the wealthy people, to the people that are in the best situation right now. So we believe that our portfolio is more resilient in these particular situations and also that we get the best client because those are the ones that basically can achieve this rate and have these characteristics to access this type of product. So that's why the portfolio we believe is going to behave well and is going to be managed or is going to behave in a nice way due to that fact. Okay, and we have seen the way the portfolio has performed, and we see that the performance is according to our expectations given the very complicated circumstances. Okay, so in that regard, I mean, there is competition. I mean, there are some banks. I mean, a couple of banks have tried to come in and basically compete with us head-to-head in these type of situations, but they have not been able to have the same type of product that we sell to the market. Then we came out with another product, the Hypotheca Free. The Hypotheca Free basically has a particularity that has everything included in the rate. You don't have any fees, any commissions. You don't have to pay for any ancillary cost or anything like that. So that particular thing is for people that, I mean, that they believe that we have a lot of things under the table and they were not completely clear. This is completely transparent to the client. And that Hypotheca is above 9%. That's the rate, and that's for a different type of client. So we have a Chinese menu for every type of different client that would like to access what we do. And for example, the Hypotheca Free goes to a different sector that is new to us, that is basically clients with a lower ticket. But there are some of these clients that are very good, and they have very good credit quality, and that's why we decided to compete in that sector. I don't know if this answers your question, Ernesto, and please be a compliment.

Sure, Hector. Regarding your first question, Ernesto, as I previously mentioned, I think that it depends on how severe is GDP contraction this year and how that impacts the capacity for clients to pay back their loans. We think that, as mentioned, if there's like a U-type recovery and GDP contracting somewhere around 10% to 12%, then we have made, with the provisions of this quarter, more than half of what we require. And that could be 60% to 75% of what we require with the information that we have right now. So, but it's going to be dependent on how this evolves, you know, and obviously we're closely monitoring, you know, how our clients are behaving, okay? Now, on your second question regarding the exposure that we have to Iron Mexico and Alsea, you know, obviously for confidentiality reasons, we cannot disclose those, but we can reassure you that these two exposures that we have are not within our top 10 exposures. As Hector mentioned, we have already provisioned partially the exposure that we have with Idaho-Mexico, and that's close to 45% of the exposure that we have that is not that material. And I don't have with me the breakdown in terms of food and beverage. The breakdown that we have, that I have right now, it's more the one that CNBB uses more for regulatory purposes and do not have that detail. But for sure, we can follow up with that, Ernesto.

Now, this is super helpful, Hector and Javier.

Thank you very much.

We'll take the next question. It comes from Brian Flores from Citibank. Please go ahead.

Hi, good morning. Thank you for the opportunity to ask questions. Before my question, we wanted to make a quick follow-up. You mentioned that based on your CRM capabilities, you saw a certain percentage of customers continue paying.

What was that percentage? Sorry. Sorry, Brian. I think that's 40%. Right.

Okay.

40%. Thank you. And now for my question. You know, we've seen some deterioration in asset quality across the board, and as you mentioned, your S&P portfolio has a large degree of guarantee. My question is in credit cards. Could you elaborate on the collateral there and the not-given default for this segment? What are you expecting in terms of NPL for this segment?

Thank you. If you like, I can take that, Hector.

Credit cards do not have collateral. So loss given defaults in credit cards is close to 100%. You basically do not recover that much in terms of credit cards. And we think that that's that's going to be one of the products most impacted. When you look at the different types of loans that clients have, we think that mortgages are the ones that you continue paying. If there's just one loan that you continue paying, that's mortgages. And probably credit cards are you know, at the bottom of your priorities, you know, when you have trouble, you know. The MPLs that we see in credit cards, you know, have been increasing slightly, but I think is, you know, relatively stable when you compare it, you know, historically, you know. So we don't expect, you know, a significant deterioration, you know, Cost of risk with the provisions that we're taking is close to 11%. So I don't know, Hector, if you would like to further complement on this.

This is the operator. Mr. Chavez's line has gone idle. I will try to reconnect him at this time. Would we like to take the next question?

Sure. The next question comes from Tito Labarta from Goldman Sachs.

Hi, good morning. Thank you for the call and taking the questions. One question on the market-related income. I know you talked about the big spike in the quarter, but do you think that goes back to normal already in the third quarter, or do you think that can remain elevated for some period of time? I know it's hard to predict, but if you could give some more color on how you think about market-related income going forward. And then if I can ask just one follow-up on the provisions I understand given the scenario you see, you kind of feel comfortable with where you are, but if you look at the cost of risk before this quarter, it had been around 2.6, 2.7. Barring any changes in the scenario that you see right now, is that 2.6, 2.7 what we should expect sort of going forward as well? Again, barring any significant changes in the current scenario?

Thanks. Thank you. I mean,

What I can tell you is, yes, we have had a good run in terms of market-related income. I think the bank is well positioned to do so. The important point is volatility, and if volatility continues to be the way it is, then you can expect that we can basically have good numbers there. I don't think we're going to have in the third quarter numbers as good as they were in this quarter. But, I mean, it also depends what happens in the next few days, in the next few months. In terms of the provisions and the cost of risk, Didier, you want to comment on that?

Absolutely, Raikito. You know, I think that once you take out the extraordinary provisions that we did this quarter, I think that cost of risk should be slightly higher than the numbers that we were having over the last five quarters, but not to the levels that we reported this quarter. So somewhere, you know, below the 300 basis points. That would be my take. And obviously, as you mentioned, you know, with the information that we currently have, okay?

Okay, that's helpful. Thank you.

We'll take the next question. It comes from the line of Carlos Gomez from HSBC. Please go ahead.

Hello and good morning. I have a question about credit risk, but not to your corporates, but to the rest of the financial system. We already saw one company that has been liquidated or has been put into liquidation by the National Banking Commission. This is becoming a very long crisis, with some segments of the economy being unable to operate, so eventually one would imagine that some institutions might get into trouble. Are you taking special precautions in regard to any sectors of the financial system, and do you think you'll encounter much trouble, or most of them will be able to go through this okay?

Thank you. Thank you, Carlos. I mean... In all these particular situations, and depending how long the crisis is going to take, I mean, it's probably going to take down some financial payers. In that sense, yes, we are being very cautious and reviewing and having conversations with them about what their position is and their situation. And we're going to basically continue to monitor that as the crisis continues to evolve. So in that sense, we are very close to a particular sector. We don't have, I mean, we are not a big lender to the sector. I mean, I can tell you that they're not in the, as Miguel was saying, under 10 most important clients. They are not financial players. So in that sense, we are not worried about the exposure that we have out to them. But we are very concerned, taking a look and monitoring them all the time, okay? Hopefully the crisis is shorter and nobody else goes down, but I mean, let's see what happens.

Any particular sub-segments that you think merit special monitoring? You know, market-related or consumer-related or payrolls?

I think microfinance is a sector that we need to be very close monitoring. We don't have to We don't have to allow big exposures to them, but that's a sector that would be complicated as always in these type of situations. The people that suffer the most are the ones that are on the base of the pyramid. So unfortunately, that's the case, and we are monitoring that quite closely.

Thank you so much.

We'll take the next question. It comes from Alonso Garcia from Credit Suisse.

Please go ahead.

Good morning. Thank you for taking my question. My question is regarding liquidity. I mean, your liquidity coverage ratio improved nicely in the quarter. In part, it was owed to the $1.8 billion debt issuance in April, but also given a very strong increase in funding with banks this quarter. So could you please provide some color as to the nature of this funding source and what would be your strategy for liquidity in the coming quarters? Thank you very much.

Hi, Alonso. You know, there are several factors regarding liquidity. You know, I think that the most relevant is how we fund the, you know, let's say the loan-to-deposit ratio. That, as mentioned, was one of the strongest factors numbers that we have reported since we became a listed company, close to 92%. So that's, in my opinion, that's the most robust and fundamental way of looking at it. Then, as you rightly mentioned, the debt issuance is, you know, contributed significantly to the increase of our liquidity coverage ratio. And we are, monitoring any potential use of the committed lines of credit that we have with our clients. If you look at it, it's probably the one, let's say, risk that could materialize in the short term. We have ample of liquidity to honor every single committed line of credit that we have, but that's the one risk and the most relevant driver in terms of consumption of liquidity. The other types of, you know, events that could impact our liquidity, you know, are more gradual, you know, and those could be, you know, contraction in deposits that we're not seeing that. And I think that the bank has managed quite proactively liquidity to be prepared for any potential really worst case scenario further down the road.

Thank you. Regarding the line of in your balance sheet, the line of banks and other loans which increased 81% quarter over quarter, do you think this line will remain close to those levels or do you think you could substitute this source of funding with probably other deductions in coming quarters. What's your study there?

We monitor constantly the different type of funding sources, and depending on the specific tenure cost, we end up withdrawing or taking advantage of the different funding sources. So I would say that not only that particular line item, but every single line item is reviewed. And under current market circumstances, it's our obligation to look at better ways of not only funding the bank, but keeping the structures in place so that the bank can continue supporting loan growth. So that's something that we continue to monitor, Alonso. So yes, it could be that we keep it at those levels or that we reduce it if there's an opportunity to find a more effective funding source.

Thank you very much.

We'll take the next question.

It comes from Yuri Fernandez from JP Morgan. Please go ahead.

Thank you, Axel. I have a question regarding the increase on NPL ratio. It was up 35 bits quarter over quarter, and I understood that some players, they had higher charge-offs, and that may explain a little bit the difference. But even other players where the charge-off was not as high, we kind of saw a more flattish NPL behavior. because of the special accounting, because of the program release. So what drove the deterioration in this quarter for you? And my second question is regarding the special accounting criteria. When we look to those numbers, the balance of NPLs, they are much higher than the ones, the old accounting versus the current special accounting. And I would like to understand the difference here. A very negative outlook would be to see those numbers materializing as losses. So if you can explain for me the differences on the special accounting versus the old accounting, and if the balance of NPLs there may become losses, I would appreciate it.

Thank you.

Hi, Yuri. In terms of the NPL ratio, this quarter, what drove the slight deterioration was basically credit cards that went up from 4.14% to 4.82%, and SMEs basically going from 2.61% to 3.37%. As we discussed during the call, the vast majority of our loan portfolio did not enroll in the support programs. So what we're seeing, this slight deterioration has to do more with what's happening with the portfolio, the clients that did not enroll in the program. And it's not a significant deterioration in our view given what's going on in the economy. It's just a slight deterioration. Now, on your second question, Could you elaborate on that? You know, I don't know exactly what you're comparing, you know, the special accounting criteria to the other accounting criteria.

So the previous accounting before the CNBD regulation for COVID, you have like a table on your release comparing the special accounting criteria versus the former, I think like B6 accounting criteria. And when we look to the balance of non-performing loans, I believe the balance you have today is something around like 18 billion pesos, 19 billion pesos. That implies the 2.5% NPL ratio. But if you look to the old accounting criteria, the B6 accounting, I think the balance of NPLs, they are closer to 40, 44 billion pesos. So the NPL ratio, they would be much higher. I understand that maybe a lot of loans that will not really become NPLs, they are there. But my concern is that as soon as this accounting criteria goes back to normal, if we could see, you know, like a higher need of provisions, worsening on NPLs. So that's why I ask the difference and if it makes sense, you know, to expect some worsening on that.

No, I think that it's fairly dependent on the level of or the type of assumptions that we make because the existing accounting criteria is very stringent in terms of, let's say, past dues and percentage of how much the client has paid back. So I think that it's, in my opinion, it's somehow extreme comparison, okay? So it has to do with, you know, with the special accounting criteria. You basically allow clients not to pay, you know, every client that's not paying their interest in capital stays current. You know, and under the old or the prevailing accounting criteria, you know, you have to take into account just the, you know, when your 90 days pass through and depending on if you are, you know, let's say a corporate client, you know, depending on how much you have already paid back, whether you're 20% or more or how, you know, the time that has elapsed. you know, it's very, I would say, the critical, I would say that the assumptions are critical, and I think that probably what is important is to understand that in the following two quarters, we'll get to know the hard data. You know, we, you know, rather than comparing those numbers with big assumptions, I think that as soon as clients start paying back or not, we'll get to know the magnitude of the impact, rather than just making some assumptions that could materialize or not. As mentioned during the call, I think that we have made a good assessment in terms of the risk that each client has, the relationship that we have with them, and we have also asked them how they're doing and whether they have the capacity to pay back. So taking all that into account, that's how we've come up with these provisions associated with expected losses that we assume. So I would encourage you, Yuri, just to wait a couple of quarters, and with the hard data, Just analyze, you know, if we, you know, on one hand, the benefit of these temporary measures that the banking commission provided, and on the other hand, you know, the true impact that it has had in our asset quality.

No, no, super clear. Thank you very much.

We will take the next question.

It comes from Nicola Viva from Bank of America.

Yeah, thanks very much for taking my question. I have only one question. I apologize if you already mentioned it. So you mentioned that 19% of the loan portfolio has been subject to some kind of debt relief measures, payment holidays, giving grace periods. Have these measures ended already for any clients? And if so, if you can tell us... what's the percentage of these clients that have resumed payments already since it's been already about four months since the full outbreak of the pandemic? And if this has not been the case, if the payment holiday hasn't ended for any significant amount of clients, if you can tell us, when you make this provision charge of the 3.9 billion pesos in this quarter, Did you incorporate any assumption in terms of what would be the percentage of these 19% of these clients under the debt relief program that will pay you back once the payment holiday ends? Thank you.

First, the payment holiday period ends tomorrow. So we'll start seeing whether clients pay back or not starting next week. So we don't have that information yet. Now, regarding how we made provisions for this quarter, and as mentioned throughout the call, we classified the clients depending on the risk that they have, the exposure that they have with us, the relationship that they have with us, So we classified the retail clients in 25 clusters and SMEs in 11 clusters. So depending on the level of cluster that each client falls in, there's either a high risk or high exposure category for clients, and we assume certain probability of those clusters either paying back their loans or not, okay? So that's how we came up with the provision that we made this water. So yes, there is, but it depends. There are 36 responses in terms of whether we expect a high number or low number of clients to pay back their loans. It's because of these analyses that we've done that we feel relatively confident that with the information that we have, what we have provided is is a good provision for asset quality deterioration for the rest of the year.

Okay. Thank you very much.

The next question comes from Olavo Artuso from UBS.

Please go ahead.

Okay. Thank you very much for taking my question. It is just one. I just wanted to understand the dynamic of the credit relief program held by the bank. and the hike on NPLs to 2.5%. According to my calculation, deferred loans reach at almost 15% of total loans, if I'm not wrong. Roughly a similar level to the other banks, but different from other players, and even considering the Brazilian and the Chilean subsidiaries, they have also fostered their credit relief program, NPLs decreased in the second Q. You mentioned that this deterioration is from the SME and the credit card segment. So I just wanted to understand if this hike in NPLs behaved worse than expected by the bank, considering the amount of loans that were postponed. And what does the bank see for this semester in terms of fostering the credit relief program in case of regulators extend the schedule and change the rules for it? So thank you very much.

No, I think that, you know, first of all, you know, the MPLs that they increase that we see in the second quarter are associated with those clients that do not enter into the program. Relief program. Okay, so it has to do with that 81% of clients that decided not to enter into into the program and obviously those clients are also exposed to the deterioration of the economic activity, you know Hector mentioned, you know the the losses that you know the employee losses that we've seen and So it has to do more with that, let's say with the clients that do not enroll in the program. Whether we were expecting that type of deterioration, I think that if someone tells you that they were envisioning this type of economic deterioration, I think that they're lying. I think that we were not expecting this type of deterioration. contraction, you know, the magnitude that we're seeing. You know, if you look at how every single analyst updates its forecast for the Mexican economy, every week you get to see downward adjustments. So I think that it do not surprise us. You know, we mentioned that given this deterioration of economic activity, we think is just a slight deterioration. But as mentioned, we will get to see the final impact or the final numbers probably in the next two to three quarters. It's not only what happens the rest of the year. I think that the impact of the pandemic, at least for Mexico, has the possibility of going further than just 2020. So we'll get to see that. I think it's quite early to have a definitive view on a complete impact on asset quality.

Okay, okay. Thank you very much.

The last question comes from because of Bush from BTG Pactual. Please go ahead.

Hi everyone, my questions were already answered. Thank you very much.

There are no further questions in the queue and I'd like to turn the floor back over to Mr. Hector Chavez for any closing remarks.

Thank you, Operator. And thanks, everyone, once again, for joining Santander, Mexico on this call. As always, we wish to maintain an open dialogue with all of you in the financial community. So if you have additional questions, please don't hesitate to call or email us directly. Until our next call, please stay safe. Good afternoon.

This concludes today's teleconference. You may disconnect your lines at this time. Thank you again for your participation.