Industry Trends

The Mexican banking system continued to maintain high capitalization and liquidity levels in the second quarter of 2012. This enabled lending expansion and fund gathering activities. The three main categories in the lending portfolio (consumer finance, residential mortgages and SMEs) have continued to record high rates of year-on-year growth.

Fund gathering in demand and time deposits was up 9.3% in the same period, slightly down on the growth of the previous quarter. This is due to a slowdown in the growth of time deposits. In contrast, investment companies (SIDs) have increased their year-on-year growth rate. SIDs are non-banking savings instruments that compete with time deposits.

Regarding the regulatory environment it is worth noting the discussions to implement the Basel III capital rules in 2012 and to postpone the presentation of a future banking insolvency law until 2013.

The peso/euro exchange rate appreciated over the last quarter and the last 12 months.

Regarding the average exchange rate, it strengthened over the quarter but depreciated over the last 12 months. This has had a positive impact on the Group’s balance sheet and activity for the last 12 months and the quarter, and on the income statement for the quarter. However, the foreign-currency impact on the year-on-year earnings on the area is negative. Unless otherwise indicated, all comments below on percentage changes refer to constant exchange rates, with the aim of providing a better understanding of the performance of the business in Mexico.

Income statement

(Million euros)

					Units:
	Mexico				Banking Business				Pensions and Insurance
	1H12	Δ%	Δ% (1)	1H11	1H12	Δ%	Δ% (1)	1H11	1H12	Δ%	Δ% (1)	1H11
Net interest income	2,016	5.6	8.7	1,910	1,977	5.7	8.8	1,871	37	3.5	6.6	35
Net fees and commissions	612	2.0	5.1	600	574	1.9	4.9	563	30	(7.3)	(4.5)	33
Net trading income	111	(52.2)	(50.8)	233	71	(60.5)	(59.3)	179	40	(25.7)	(23.5)	54
Other income/expenses	138	41.6	45.8	97	(58)	(11.5)	(8.9)	(65)	228	17.0	20.5	194
Gross income	2,877	1.3	4.3	2,840	2,563	0.6	3.6	2,548	334	5.7	8.9	316
Operating costs	(1,092)	6.4	9.6	(1,026)	(1,028)	6.6	9.8	(965)	(83)	1.3	4.3	(82)
Personnel expenses	(468)	3.9	7.0	(450)	(428)	3.4	6.5	(414)	(40)	9.0	12.3	(37)
General and administrative expenses	(561)	7.1	10.3	(524)	(539)	7.6	10.8	(501)	(42)	(3.9)	(1.0)	(43)
Deprecation and amortization	(62)	21.2	24.8	(51)	(62)	23.1	26.8	(50)	(1)	(43.6)	(41.9)	(1)
Operating income	1,786	(1.6)	1.4	1,814	1,535	(3.1)	(0.2)	1,583	251	7.3	10.5	234
Impairment on financial assets (net)	(616)	0.7	3.7	(612)	(616)	0.7	3.7	(612)	-	-	-	-
Provisions (net) and other gains (losses)	(25)	(10.9)	(8.2)	(28)	(24)	(10.3)	(7.6)	(27)	(1)	(20.8)	(18.4)	(2)
Income before tax	1,144	(2.5)	0.4	1,173	895	(5.3)	(2.4)	945	250	7.5	10.7	233
Income tax	(278)	(8.2)	(5.4)	(302)	(203)	(13.2)	(10.6)	(234)	(74)	7.7	10.9	(69)
Net income	866	(0.5)	2.4	871	692	(2.7)	0.2	711	176	7.4	10.6	164
Non-controlling interests	(1)	8.3	11.6	(1)	(0)	(2.3)	0.7	(0)	(1)	7.6	10.9	(1)
Net attributable profit	865	(0.5)	2.4	870	691	(2.7)	0.2	710	175	7.4	10.6	163

(1) At constant exchange rate.

Balance sheet

(Million euros)

					Units:
	Mexico				Banking Business				Pensions and Insurance
	30-06-12	Δ%	Δ% (1)	30-06-11	30-06-12	Δ%	Δ% (1)	30-06-11	30-06-12	Δ%	Δ% (1)	30-06-11
Cash and balances with central banks	5,266	2.5	1.8	5,139	5,266	2.5	1.8	5,139	-	-	-	-
Financial assets	29,884	16.5	15.8	25,658	23,995	13.6	12.9	21,131	6,153	28.7	27.9	4,781
Loans and receivables	40,944	16.8	16.1	35,051	40,519	17.4	16.7	34,513	492	(16.9)	(17.4)	592
Loans and advances to customers	36,526	13.7	13.0	32,124	36,315	13.6	12.9	31,963	242	23.6	22.8	196
Loans and advances to credit institutions and other	4,418	50.9	50.0	2,927	4,205	64.9	63.9	2,550	250	(36.9)	(37.3)	396
Tangible assets	1,108	25.8	25.0	881	1,102	26.0	25.3	874	6	(10.5)	(11.0)	7
Other assets	2,475	27.9	27.1	1,935	2,906	6.2	5.5	2,737	154	57.4	56.4	98
Total assets/Liabilities and equity	79,677	16.0	15.3	68,665	73,788	14.6	13.9	64,394	6,806	24.2	23.5	5,478
Deposits from central banks and credit institutions	12,759	41.8	41.0	8,997	12,759	41.8	41.0	8,997	-	-	-	0
Deposits from customers	36,343	5.6	4.9	34,425	36,381	5.6	5.0	34,446	-	-	-	-
Debt certificates	4,219	7.9	7.2	3,911	4,219	7.9	7.2	3,911	-	-	-	-
Subordinated liabilities	2,623	12.4	11.8	2,333	3,189	(0.4)	(1.0)	3,202	-	-	-	-
Financial liabilities held for trading	6,787	54.9	54.0	4,381	6,787	54.9	54.0	4,381	-	-	-	-
Other liabilities	12,282	14.3	13.7	10,741	6,108	1.3	0.7	6,028	6,533	28.7	27.9	5,077
Economic capital allocated	4,663	20.3	19.5	3,878	4,345	26.7	25.9	3,429	272	(32.0)	(32.4)	401

(1) At constant exchange rate.

Significant ratios

(Percentage)

	Mexico
	30-06-12	31-03-12	30-06-11
Efficiency ratio	37.9	38.1	36.1
NPA ratio	4.0	3.8	3.6
NPA coverage ratio	111	116	134
Risk premium	3.40	3.52	3.58

Mexico. Operating income

(Million euros at constant exchange rate)

(1) At current exchange rate: –1.6%.

Mexico. Net attributable profit

(Million euros at constant exchange rate)

(1) At current exchange rate +0.5%