Banco Santander Mexico, S.A.

Good morning everybody and welcome to Banco Santander's conference call to discuss our financial results for the third quarter of 2022. Just as a reminder, both the results report and presentation we will be following today are available to you on our website. I'm joined here today by our CEO, Mr. José Antonio Álvarez, and our CFO, Mr. José García Cantera. Following their presentations, we will open the floor for any and all questions you may have in the Q&A session. With this, I will hand over to Mr. Alvarez. José Antonio, the floor is yours.

Thank you, Begoña, and good morning to everyone. Thank you for attending to this conference. So I should say, to start this presentation, that while we've been developing our activity now, highly uncertain macro environment. In this environment, we've been able to keep growing our customer base and translating this into volumes growth and revenue growth. So the most remarkable change in the quarter probably has been the acceleration, starting the acceleration of NII. with a growth of 5% quarter on quarter. Probably this is the main event on the back of activity levels and starting, just starting to raise interest rates, particularly in the Eurozone where our exposure So our high rate is high. Our profitability improved significantly. Our return on tangible equities stays in 13.6%. EPS is growing at 31% on the back of the profits we got in the quarter, 2.4%. Billion after absorbing 181 million charge net of tax and minorities in Poland. The gross number was north of 300 million related to the new payments holiday regulation. Excluding it, profit grew 11% in the quarter, 10% in constant years. In the nine-month attributable profit, we got €7.3 billion, increasing 25% with the positive impact of the currencies being plus 14% in constant euros. The credit quality on our balance sheet shows no signs of deterioration so far in the quarter. Overall, the cost of risk remains below 1% and we continue to generate capital at good pace. Finally, as you already know, we continue to pay value to our shareholders, both in terms of shareholder remuneration with the cash dividend we announced the board approved last month, and the growth in tangible net asset value per share that provides a combined TNAP plus cash dividend per share of 11%. Going into more detail into the regions, you see the growth is well spread across the board, both in loan and deposits. It's fairly balanced growth. We cannot say that we are growing just in one part of the business. We are growing well across regions. The board in constant euro loans increased 2% quarter on quarter, 17 billion, which increases in almost all countries. Deposits were up 2% also in the quarter, with some shift towards time deposits given the current interest rate environment. In the actual month, loans and deposits grew 7% and 6% in constant years. Regarding our loan portfolio, naturally this doesn't change quarter to quarter. Yes, you have to remind that our portfolio is fairly balanced at 1.30%. Individual mortgages, mainly UK and Spain by this order, being UK by far the largest, more than 50% of the total portfolio. The other, less than a third, but close to 30%, is consumer lending. The majority is auto lending in Europe and in the U.S. And finally, we have an exposure north of $400 billion, close to 40%. of our loan book, the majority in SMEs and corporates and in CIV. You see that all the main portfolios are growing, so 7% individual mortgages, 7% consumers, 6% corporates. So, as I said, balanced growth across the board. Looking at the income statement, we provide you growth rates both in euros and constant euros for you to analyze in the best way you can analyze. As you can see, there was a positive impact from change rates of around 5-7 percentage points, partially offset by the FX hedge in the corporate center that is including gains on financial transactions. In constant euros, revenue grew at a faster pace than in Q1 and Q2, and costs faced inflationary pressures but continued to grow below inflation. Thanks to this performance, net operating income reached 21 billion, a record for the first nine months of a year. In long-lost provisions, that is one of the current topics in this particular environment, there were two opposition forces impacted significantly. the year-on-year performance. On the other hand, in 2021, there were COVID-19-related long-loss provisions released in Q2 and Q4 of 2021 due to better-than-expected credit performance. On the other hand, in 2022, long-loss provisions including... include an additional $1 billion, circa $1 billion in provisions related to update macro assumptions, mainly in the U.S., Spain, and U.K. So the macro provision, roughly speaking, was $1.1 billion. Spain represents $200 million, U.K. $300 million, and U.S. $500 million, and other countries $100 million, of which $500 million are expenses against P&L, and the other $600 million is reassigned funds, mainly coming from COVID. provisions that were in the balance sheet. So, we are seeing, this is an important development in the quarter, some normalization in the U.S., as we anticipate to you, and in Brazil, some stabilization of the cost of risk. We elaborate on this Jose will elaborate in this further. Additionally, this year we record higher charges related to fund contributions and new resolution schemes, plus lower minorities and tax borrowing. The net results, as you can see, is 7.3 billion. Elaborating a little bit on the P&L trends, let me to say, well, positive trends in customer revenue, especially NII the last quarter, which we expect to continue as the positive impact of interest rate hikes and activity growth are fully reflected in the different regions. The positive impact is just starting in Europe and somehow more advanced in other countries like the UK and US, and more so in Poland and in Mexico. The opposite happens, the negative impact has happened in Brazil and Chile, as you know, that they are getting lower rates. Secondly, our costs grew below inflation in all regions in most countries. Our efficiency improved slightly to 45.5% compared with full year 21, but this is being eroded by inflationary pressures in some regions by the lack between the almost immediate impact on costs and the revenue benefit from higher rates coming later. Thirdly, in general, we did not see any deterioration in the cost of risk or in the credit quality variables such as arrears. We have very good cost of risk in Europe and the ECB, and also in North America, where both the U.S. in process of normalization and Mexico are performing better than expected. In South America, the cost of risk in general was stable. You know that Brazil went up this year. For now, for two quarters in a row, it has been stable. and we believe that we already reached the peak and some indicators are more constructive on this going forward. All in all, we are confident for the whole group to achieve our cost of risk target.

In relation with the