Banco Santander Mexico, S.A.

Good morning, everyone, and welcome to the nine-month 2020 earnings presentation of Banco Santander. As every quarter, we have as speakers our group CEO, Mr. Alvarez, and our group chief financial officer, Mr. García Cantera. Our CEO will address the group performance for the nine months of 2020, and then our CFO will follow up with a business area review in more detail. before jumping to the key takeaways of the quarter by our CEO, and obviously happy to answer your questions during the Q&A session afterward. So, Jose Antonio, please, the mic is yours.

Okay, thank you, Sergio, and good morning to everyone. First of all, I hope that you and your families, friends, and relatives are doing well. Let me go straight to the third quarter results. I will qualify these results. This quarter, a very positive quarter within the environment arising from the COVID crisis. We have improved significantly the quarterly trends in business activity and results. On activity, if the second quarter was pretty strong on the corporate side, the third quarter will recover significantly the activity coming more for individuals. And this reflects in the underwriting of both mortgages and consumer lending as long as the growth in deposits. The profit in the quarter was 1.75 billion, 14% increase in underlying terms compared with the previous quarter, 18% higher in constant euros. All the regions are performing better than in the previous quarter. In the first nine months, we maintain a solid top-line performance. The pre-provision profit under this scenario, and I want to stress you this, in constant euros grew 3%, driven by resilient customer revenue and our cost reduction plan. In credit quality, I will elaborate later on in more detail. 76 billion out of the 115 or 14 billion that we had in moratorium payment holidays already expired, and the behavior has been pretty good. Only 2% went into stage 3. Well, the future continues to be highly uncertain, but for this year, we expect a lower cost of return than the one we got due. We got due in the first queue, though it was 1.4, 1.5. Now probably going to be more around the 1.3% for 2020. On the capital side, we continue to build capital with a strong capital generation, 40 basis points in the quarter after the dividend accrual of 13 basis points. This morning in the AGM, we present to the shareholders and they approve the script dividend of 10 cents per share on a cash dividend for next year to be paid in cash next year, provided that the regulators allow us to do so. So if we go to the P&L, straight to the P&L, what we see is first, I should mention the exchange rates. The impact was significant in the quarter. You see both in revenues between six and nine points in the different lines of the account. This has been particularly strong in the real in Brazil, the impact, and you see the difference in those two figures. Excluding the impact of looking at the business in constant euros, the income remained stable as the decrease in activity and lower interest rates were offset by higher volumes, some management of market volatility, and lower cost of deposits. We accelerate our cost reduction, and we have good news, good perspectives for the coming quarters. As a result of our underlying profits, show significant resilience and net operating income rose 3% year-on-year in constant euros. Finally, higher loan loss provisions due to COVID-19-related provisions, although this quarter came more in line with the second than with the first quarter where we did the overlay that you already know. In the charts of the right, you can see how earnings peaked strongly in the quarter with the following detail. By lines, the revenue grew 7% quarter-on-quarter, while growth in net interest income, highest NII in the last seven quarters, mainly driven by Spain, UK, US, and Brazil, so pretty well spread across the board. turn in net fee income as a result of higher activity, and this happens all across our 10 markets. We recorded lower gains in financial transactions in the second quarter. CAB did a very good quarter that we couldn't repeat in the third quarter. Costs were up 3%, and this partly reflects adjustments that we did in the second quarter due to the expectation of lower personal costs in the year related with the expected performance. As a result, net operating income was up 11% quarter-on-quarter and higher than the Q3 2019 that I will say, as I said at the beginning, is remarkable. Loan loss provisions fell 14% due to the high level of provisions related to COVID-19 in the second quarter. The main trends of the last quarter are supported by all the regions. You see all the regions growing revenues, all the regions having a good cost control, and very positive pre-provision profit performance increasing in all the regions with highly resilient NII and efficiency improvement. Going to capital in the quarter. We finished the previous quarter in 1184. We continue to unite capital in a strong generation, 40 basis points organic generation in the quarter. We accrued 13 in order to be able to pay dividend next year, equal to so. Additionally, we had several positive impacts from corporate transactions of 10 basis points, mainly related with the share buyback of SCUSA and negative impact from regulation market and exchange rates. In Q4, we could have a potential positive impact from the software of around 20 basis points, so slightly higher, and a negative change around 10 basis points from other regulatory impacts. So that's the reason why we expect to finish at the end of the year around 12%. That is at the top of our target range. In relation with profitability ratios, remarkable that our efficiency ratio improved a little bit compared with 2019. This is again remarkable. The underlying return on tangible equity recovers from the first half of the year, still far away from what the one we had in 2019, and the tangible net asset value stayed basically flat, but is suffering from the continuous depreciation of the currencies, particularly those currencies in Latin America and mainly Europe. You go to the business activity on the group. Normally we don't go in that much detail with the activity, but let me to guide, given the current situation in which we are living, let me to guide you where is the activity. The average new lending is coming back to a more normalized levels. In the previous quarter, we have a strong government support that underpinned the growth. In the quarter now, you see that we are lending 1.1 billion a day in constant euros. That was pretty much the same figure that we had back in February. So some kind of normalization in the volume of lending compared with the previous quarter. If we go into more specific details, you have the new mortgage lending by regions, and this is a significant recovery from the previous quarter, and the consumer lending happens pretty much the same. It happens all across the regions, and we saw a substantial recovery in the third quarter compared with the second quarter. Well, in relation with SMEs and corporate lendings, you will see that we came back after the spike In the second quarter, when we were pretty active providing loans guaranteed by different governments, particularly to SMEs and corporates, it's coming back to a more normalized level where the government-supported program is non-material at the end of the quarter in September. In CIB, large corporates, after the spike that happened mainly in March, the situation is back to normal and is fairly stable at this point. It may not surprise you, everybody expects digital sales booming as a result of the pandemic and the digital adoption of more and more customers by the day. You have the figures in the screen, the digital customers, digital sales are growing rapidly. And the mobile is the preferred channel that the customers are using more and more. And this, in my view, will come here to stay in the future. If we analyze a little bit the details of the P&L, well, NII was around $24 billion, no material change year on year. Net income was strongly impacted, mainly in the second quarter, by lower transaction volumes and regulatory changes in several units. From the global business point of view, both wealth management and insurance AV increased fee income and represented 46% of the total group fee income. This quarter, we can again perceive a gradual recovery of net fee income associated with normalization of activity. When it comes to costs, I will say good developments here. Costs, nominal costs are falling in Europe around 6 percent, North America 2.3 percent, and South America are growing 1.9 percent. Overall, the group nominal costs are falling 2.1 percent, and we continue to expect positive developments in this front. In relation with Europe, we expect to achieve the one billion target we established last year in April. We expect to achieve at the end of this year, since April 2019 until December 2020, probably we're going to be there. In relation with credit quality, at this stage, you see like two fronts. On one front, we are providing much more based on the models and the scenarios. The scenarios we are using are not far away, are not mimetic, but they are not far away from the ones the AMF is using. And as a result of this, our provisions, loan loss provisions, are going up 58% year-on-year. And this is still the extra provisions basically remaining in the balance sheet based on the models and the scenarios we are using. On the other side, on the credit equality side, we are not seeing a significant deterioration on the credit quality. So the cost of credit went up as a result of the provisions based on the scenarios and models. NPLs Traditional definition still performing very well. And loan loss reserves in the book, in the balance sheet, stood at around 24 billion euros, which represents 2.6% of the total loan book. On top of that, and this is the first line of defense in this situation, our pre-provision profit is around 25 billion euros and is fairly stable the last couple of years. So finally, let me elaborate a little bit on the moratorias, the payment holidays. You have the figures that probably you are familiar with. The total group moratoria was $114 billion. You have by products and by regions. The main amount was in mortgages. The two-thirds of the moratoria, more than two-thirds, is already expired. And, well, if you see the behavior of those customers you have, where are those customers? 82% are in stage 1, 16% in stage 2, and 2%, as I already mentioned before, in stage 3. If you see by regions, you have pretty much, with some variations, the same picture. What remains, and this is a behavior that, well, probably is better than the one we were expecting a couple of months ago, and this is Well, you may say that the government programs protecting incomes is helping a lot in this regard. The amount of loans still in moratoria is close to $40 billion. You have the split there. Out of this $39 billion, $24 billion are mortgages, $3 billion consumer loans, and $12 billion SMEs and corporates. You see where this payment holiday is moratoria by countries. You have two countries that are relatively small in terms of the loan book, Portugal and Chile, where the government stands moratoria for a longer period of time, usually one year. So you're going to see this moratoria stay there. And the other two is UK and Spain, that you see the figures compared with the loan book, both in UK and Spain are relatively small. in the region of 3% to 4% or 5% of the total loan book. So, and this is, we don't expect a behavior materially different than the ones that Spain, mainly taking into account that you have the figures in light blue, that around 89% in Spain and 93% in UK are secure loans to individuals. So... I hand it now to Jose Garcia-Cantera, our CFO, to elaborate about the trends in the regions and the countries, and I come back at the end to sum up and to give you our vision for 2021. Thank you.

Thank you, Jose Antonio. Good morning, everyone. Despite the global nature of the pandemic, our geographical and business diversification continues to work. The very strong results that we had in the first quarter are predicated upon our diversification between the three regions and the businesses that Jose Antonio has commented. We had positive year-on-year volume performance across all geographic regions and global businesses. The decrease in the quarter is explained by the sale of Puerto Rico, the sale of a non-performing loan mortgage portfolio in Spain. I will refer to these two in a minute, and also lower volumes in CIB. We had increase in pre-provision profit in North America, South America, and our global businesses, and the only decreases that were recorded were in Europe. Excellent underlying profit of our global units, with CIB growing 30% year-on-year, and wealth management and private banking with stable year-on-year profits, but activity clearly picking up in recent months. Now, if we turn to Spain... We have reached already 13 million customers, and we continue to support families and businesses through many initiatives for the recovery of the economy. For example, we have granted 180,000 payment holidays in mortgages and consumer loans, and we had a market share in the government support program for SMEs and corporates of 27%. All the while, we remain prudent, ensuring no deterioration in the portfolio's risk profile. We reached more than 5 million digital customers with more than 300 million accesses in the quarter, leading in customer experience rankings. In terms of commercial activity, loans fell 2% in the quarter due to the sale of this non-performing loan mortgage portfolio that I mentioned that amounted to $1.5 billion. But obviously, we had an increase year-on-year boosted by SMEs and corporate loans. If we move to the income statement, profit was 53% higher in the quarter due to the positive performance of customer revenue. In turn, due to the sharp increases in net interest income, up 11%, fee income up 5% quarter on quarter. We recorded a decline in total income, which was obviously the result of low interest income, smaller ALCO portfolio, the fall in net fee income due to reduced transaction volumes, and also lower income from our real estate subsidiaries. We had a positive cost performance, dropping cost down 10% year-on-year, and the non-performing oil ratio that dropped by 125 basis points in recent months, mainly due to the sale of this non-performing loan mortgage portfolio. Looking ahead, we remain positive about the top-line performance, net interest income and net fee income, and more positive towards credit quality in individuals, although somewhat less so for SMEs given the current environment and the uncertainties. If we move to Santander consumer finance, we continue to see a strong signs of recovery in most of the countries where Santander consumer finance operates, while with new businesses actually outperforming the market. In the third quarter, underlying profits increased 10 percent, thanks to an almost 30 percent jump in net fee income, which is linked to volumes returning to pre-crisis levels. In the quarter, new business volumes were up 37 percent. Looking at nine months, underlying profits continue to be heavily impacted by provisions. However, net interest income increased 1% and costs were down 3% thanks to our efficiency programs and COVID-19 actions implemented in the second quarter. Cost of credit remains low for this type of business. Looking forward, we would expect the new business in the coming quarters at similar levels to those recorded in the third quarter. with costs and loan loss provisions under control. In the UK, we had a strong quarterly uptick in underlying attributable profit driven by a continued increase in volumes. We are actually seeing a very, very strong new demand for mortgages. Mortgage applications in recent weeks has been very strong, and this should be reflected in the net interest income in coming quarters. Also driven by bounce-back loans. We reduced the cost of the 1-2-3 account in May and in August, and this can be seen in the reduced cost of funding. Increased fee income, mainly due to CIB activity, and costs that remain under control, while loan loss provisions were significantly lower in the quarter, down 19%, with a cost of credit below 30 basis points. In terms of nine-month results, continue to be impacted by COVID, in addition to regulatory changes affecting overdrafts, although somewhat compensated by lower costs. Looking forward, we expect to see similar trends to those that we've seen this quarter, improving net interest income and continued efficiency savings with no significant changes in loan loss provisions. This, of course, is conditioned by the Brexit negotiations. If we move to Brazil, it has once again recorded an excellent quarter, both in terms of results and volumes, while we remain focused on capturing growth opportunities. Positive performance in mortgages – reaching record high in new mortgage lending in the last month, in the month of September. In cards, just in September, for instance, we sold 450,000 cards, and in wholesale banking, very positive evolution also in GetNet and the auto finance subsidiary. Underlying attributable profit rose 21%, quarter and quarter, driven by consumer revenues. Costs were 3% higher. Half of the growth in costs is explained by the collective labor agreement. Provisions decline in the quarter. We don't foresee a worsening in the cost of credit in the coming quarters. We expect it to remain stable or even improve slightly given the current economic forecasts. Brazil economic outlook continues to improve. The IMF forecast regarding GDP growth in 2020 improved from minus 9% in June to minus 5.8% recently. Analyst consensus actually is even better than this, expecting a drop in GDP this year between 3% and 4%, and the current account deficit is 1%. With all of this, we would expect the Brazilian real to show a better performance in the coming quarters. In short, Brazil has again proved its balance sheet and results strength despite the current environment, and we remain optimistic about the future, both in terms of profits and absolute amount of profits, and also in terms of profitability. In the United States, during the quarter, Shusha increased its ownership stake in the consumer finance entity to 80.25%, and we completed the sale of the retail and commercial bank in Puerto Rico. The sale amounts to $2.2 billion in loans and $3.5 billion in deposits, which obviously explains why volumes show this performance. However, we had a strong year-on-year growth, excluding these in loans and consumer loans and consumer funds, boosted by corporate demand and incentive programs. In the quarter, profits were 79% higher, mainly due to low provisions. Lower cost of debt, better performance in leasing and control costs. Underlying attributable profit decreased 24% year-on-year, primarily due, obviously, to COVID provisions. Net operating income was flat, and the reduction of costs, down 5%, offset total income decrease. In Mexico, most branches, the bank continued to operate normally. We reduced staff, and we also saw digital activity picking up substantially. Loan growth year-on-year was driven by the corporate side, while credit cards continued to be affected by lower activity arising from lockdown measures. Compared to the previous quarter, profit increased slightly as lower loan loss provisions and higher customer revenue were upset by the fall in gains on financial transactions, which were exceptionally high in the second quarter, and the rising costs driven by several projects and higher IT expense. On the other hand, we had good performance year-on-year due to better revenue performance and improved efficiencies. Profit was weighed down by higher loan loss provisions. Cost of credit stood around 3%, and we expect a stable or even decreasing ratio in the coming quarters. These results show a very positive trend in customer revenue, reflecting the improvement in our franchise and high profitability, with a return on tangible equity of 15%. Lastly, in the corporate center, we can see results improved 11% compared to 2019. On the one hand, we had positive impacts coming from gains on financial transactions amounting to 440 million euros, basically foreign currency hedging, and the positive trend in operating expenses continued, improving 12% compared to last year. On the other hand, we had a negative impact on NII of the larger liquidity buffer, and other results and provisions increased due to one-off provisions for certain stakes whose values were affected by the crisis. And now let me hand it back to our CEO for his closing remarks.