Banco Santander (Mexico) S.A., Institucion de Banca Multiple, Grupo Financiero Santander Mexico (ifrs-full:DisclosureOfLoansAndAdvancesToCustomersExplanatory)

12. Loans and advances to customers

a) Detail

The detail by classification of Loans and advances to customers in the consolidated balance sheets is as follows:


	12/31/2016	12/31/2017

Other financial assets at fair value through profit or loss	4,509	5,618
Loans and receivables	581,638	609,420
	586,147	615,038
Of which:
Before allowance for impairment losses	604,030	631,967
Allowance for impairment losses	(17,883)	(16,929)
	586,147	615,038

As of December 31, 2016 and 2017, 3,214 million pesos and 2,566 million pesos, respectively, of loans and advances to customers have been pledged in connection with derivatives traded in organized markets, and are classified as restricted assets within Loans and advances to customers (see Note 32).

Note 44.a. includes a breakdown of the remaining maturity of Loans and advances to customers. Additionally, Note 44.d. includes the fair value amounts of these assets classified as Loans and advances to customers – Loans and receivables.

b) Breakdown

The following is a breakdown by loan type, borrower sector, geographical area of residence and interest rate formula of the Loans and advances to customers. This breakdown reflects the Bank’s exposure to credit risk in its core business, disregarding the allowance for impairment losses:


	12/31/2016	12/31/2017

By loan type:
Commercial, financial and industrial loans	302,364	329,098
Public sector loans	57,022	49,294
Mortgage loans	125,636	126,835
Reverse repurchase agreements	4,509	5,618
Installment loans to individuals -
Revolving consumer credit card loans	49,585	52,037
Non-revolving consumer loans	47,319	50,953
Impaired loans	17,595	18,132
	604,030	631,967
By borrower sector:
Public sector	57,022	49,294
Individuals	233,293	241,951
Communications and transportation	21,889	31,339
Construction	34,817	29,386
Manufacturing	59,984	60,261
Services	166,344	189,846
Tourism	15,036	14,008
Other sectors	15,645	15,882
	604,030	631,967
By geographical area:
Mexico	604,030	631,967
	604,030	631,967
By interest rate:
Fixed rate	216,957	245,530
Floating rate	387,073	386,437
	604,030	631,967

As of December 31, 2016 and 2017, 4,511 million pesos and 5,618 million pesos, respectively, of debt securities have been received as collaterals in connection with the reverse repurchase agreement transactions within Loans and advances to customers – Other financial assets at fair value through profit or loss (see Note 31).

c) Allowance for impairment losses

The changes in the allowance for impairment losses on Loans and advances to customers were as follows:


	2015	2016	2017

Beginning balance	(15,198)	(18,749)	(17,883)

Impairment losses on financial assets – Loans and receivables (*)	(17,766)	(19,022)	(20,771)
Of which:
Individually assessed	(6,172)	(5,802)	(4,181)
Collectively assessed	(11,594)	(13,220)	(16,590)

Others	(209)	(157)	(8)

Write-off of impaired balances against recorded allowance for impairment losses	14,424	20,045	21,733
Balance at year-end	(18,749)	(17,883)	(16,929)

Of which:
By method of assessment:
Individually	(7,943)	(6,463)	(2,196)
Collectively	(10,806)	(11,420)	(14,733)
By geographical location of risk:
Mexico	(18,749)	(17,883)	(16,929)
By classification of assets:
Loans and advances to customers	(18,749)	(17,883)	(16,929)

(*)The amount of impairment losses on financial assets – Loans and receivables presented in the consolidated income statement is net of recoveries of loans previously charged-off and recovery expenses in the amount of 1,725 million pesos in 2015, 2,361 million pesos in 2016 and 1,951 million pesos in 2017.

d) Impaired loans

The breakdown of the changes in the balance of the financial assets classified as Loans and receivables – Loans and advances to customers that are considered to be impaired due to credit risk is as follows:



	2015	2016	2017

Beginning balance	18,430	19,742	17,595
Additions	30,006	30,431	34,180
Transfers to performing loans	(14,270)	(12,533)	(11,910)
Written-off assets	(14,424)	(20,045)	(21,733)
Balance at year-end	19,742	17,595	18,132

The breakdown of the balance of the financial assets classified as Loans and receivables – Loans and advances to customers between no past due and past due at December 31, 2016 is as follows:


		With Balances Past Due by
	With no Past
	Due Balances
	or Less than 3
	Months Past				More than 12
	Due	3 to 6 Months	6 to 9 Months	9 to 12 Months	Months	Total

By type of loan:
Commercial, financial and industrial loans	2,658	1,322	417	758	1,687	6,842
Mortgage loans	759	1,356	1,044	708	2,911	6,778
Installment loans to individuals
Of which:
Revolving consumer credit card loans	786	1,166	—	—	—	1,952
Non-revolving consumer loans	485	1,080	423	3	32	2,023
	4,688	4,924	1,884	1,469	4,630	17,595

The breakdown of the balance of the financial assets classified as Loans and receivables – Loans and advances to customers between no past due and past due at December 31, 2017 is as follows:


		With Balances Past Due by
	With no Past
	Due Balances
	or Less than 3
	Months Past				More than 12
	Due	3 to 6 Months	6 to 9 Months	9 to 12 Months	Months	Total

By type of loan:
Commercial, financial and industrial loans	2,509	2,472	664	127	235	6,007
Mortgage loans	1,086	1,624	1,186	815	2,650	7,361
Installment loans to individuals
Of which:
Revolving consumer credit card loans	868	1,467	—	—	—	2,335
Non-revolving consumer loans	647	1,287	472	4	19	2,429
	5,110	6,850	2,322	946	2,904	18,132

e) Renegotiated loans

Renegotiated loans include renegotiation of performing loans and impaired loans, as contractual terms of a loan may be modified not only due to concerns about the borrower’s ability to meet contractual payments, but also for customer retention purposes and other factors not related to current or potential credit deterioration of the customer. A breakdown of renegotiated loans during the years ended December 31, 2015, 2016 and 2017 is as follows:


	For the Year Ended 12/31/2015							For the Year Ended 12/31/2016							For the Year Ended 12/31/2017
	Performing loans							Performing loans							Performing loans
	Due to							Due to							Due to
	Concerns							Concerns							Concerns
	About							About							About
	Current or							Current or							Current or
	Potential		Due to					Potential		Due to					Potential		Due to
	Credit		Other	Impaired				Credit		Other	Impaired				Credit		Other	Impaired
	Deterioration		Factors	Loans		Total		Deterioration		Factors	Loans		Total		Deterioration		Factors	Loans		Total

Commercial, financial and industrial loans	3,219		—	1,591		4,810		3,576		—	1,606		5,182		879		—	1,028		1,907
Mortgage loans	—		—	—		—		—		—	—		—		22		—	1		23
Installment loans to individuals	96		—	294		390		1,073		—	158		1,231		1,086		—	186		1,272
	3,315		—	1,885		5,200		4,649		—	1,764		6,413		1,987		—	1,215		3,202
Percentage	64	%	—	36	%	100	%	72	%	—	28	%	100	%	62	%	—	38	%	100	%

Impaired loans that are renegotiated continue to be classified as impaired loans until the sustained payment criteria is reached as described in Note 2.g.

The types of terms that are typically renegotiated include: (a) modifications to the contractual terms of loans, such as payment terms, interest rates and currency, or (b) modifications to the guarantees that cover the loans.

The Bank has implemented renegotiation programs which include options for the borrowers to extend payment terms, reduction in scheduled installments of principal and interest repayments, consolidation of debt and other forms of loan modifications, among others.

See Note 47 (c) 4.7 Recovery management for additional information regarding restructured and refinanced loan portfolios.

f) Maximum exposure to credit risk and credit quality information

Maximum exposure to credit risk

The tables below represent the Bank’s maximum exposure to credit risk by class of financial instrument (except for hedging derivatives) and the respective collateral and other credit enhancements mitigating credit risk for these classes of financial instruments. The maximum exposure to credit risk includes the carrying amounts of financial instruments recognized on the consolidated balance sheet subject to credit risk and the nominal amounts for off-balance-sheet commitments.

Where available, collaterals are presented at fair value; for other collaterals, such as real estate and other assets, best estimates of fair value are used. Other credit enhancements such as guarantees are included at their nominal amounts.

Collateral or guarantees are credit enhancements in the form of an asset or third-party obligation that serve to mitigate the inherent risk of credit loss in an exposure, by either substituting the borrower default risk or improving recoveries in the event of a default. The Bank’s collaterals or guarantees are contractual and are typically classified as follows:

Financial and other collateral, which enables the Bank to recover all or part of the outstanding exposure by liquidating the collateral asset provided in cases where the borrower is unable or unwilling to fulfill its primary obligations. Cash collateral, securities (debt or equity securities), collection rights, inventory, equipment and real estate are included in this category:

Cash collateral received – Cash collateral requested from financial and corporate customers to secure the payments in OTC derivative transactions.

Collateralized by securities – Collateral to secure the payments in repurchase agreements and reverse repurchase agreements.

Collection rights – Highly liquid and realizable guarantees, which are mainly comprised of standby letters and pledges on funds and securities.

Real estate.

Guarantee collateral, which complements the borrower’s ability to fulfill its obligation under the legal contract and, as such, is provided by third parties in the form of individual guarantee by endorsement or cosigners, where individuals or companies act as guarantors of the loan transaction.

Collaterals and other credit enhancements related to the commercial portfolio are subject to at least an annual review. In the case of guarantees, the guarantor’s ability to perform under the guarantee contract is reviewed through an analysis of the financial position of the borrower and the guarantor. There are cases where the Bank has attempted to seek recovery through the execution of a third-party guarantee and has been denied such recovery. Please see Note 2.g. for an explanation of how the credit ratings of guarantors affect our allowance for impairment losses.

For the retail portfolio, a review of its collaterals and other credit enhancements is performed on a periodic basis depending on the history of the payment performance of the borrower.

For the real estate collaterals, appraisals are obtained as of the date of origination of the loans and when the loan is classified as impaired.

See Note 47 (c) 4.4 Transaction decision-making – Credit risk mitigation techniques for additional information regarding collaterals.

The breakdown is as follows:


		12/31/2016
		Maximum Exposure
	Maximum	to Credit Risk (1)		Collaterals		Other Credit Enhancements
	Exposure to			Cash Collateral	Collateralized by
	Credit Risk	Unsecured	Secured	Received	Securities	Collection Rights (3)	Real Estate (2)	Guarantees

Financial assets held for trading	340,760	333,360	8,400	3,182	5,218	—	—	—
Other financial assets at fair value through profit or loss	42,340	—	42,340	—	41,091	—	—	—
Available-for-sale financial assets	154,318	154,318	—	—	—	—	—	—
Loans and receivables:	693,381	307,270	386,111	—	—	122,050	204,806	68,112
Of which:
Loans and advances to credit institutions	82,388	82,388	—	—	—	—	—	—
Loans and advances to customers	599,521	213,410	386,111	—	—	122,050	204,806	68,112
Commercial, financial and industrial loans	309,206	82,616	226,590	—	—	96,926	76,511	65,096
Public sector loans	57,022	29,667	27,355	—	—	24,971	—	3,016
Mortgage loans	132,414	1,149	131,265	—	—	—	126,869	—
Installment loans to individuals:
Revolving consumer credit card loans	51,537	51,537	—	—	—	—	—	—
Non-revolving consumer loans	49,342	48,441	901	—	—	153	1,426	—
Debt instruments	11,472	11,472	—	—	—	—	—	—
Guarantees and loan commitments	62,065	62,065	—	—	—	—	—	—
Available lines of credit cards and non-revolving consumer loans	36,256	36,256	—	—	—	—	—	—
	1,329,120	893,269	436,851	3,182	46,309	122,050	204,806	68,112

(1)

Related to loans and receivables and available lines of credit cards and non-revolving consumer loans in the first column (Maximum Exposure to Credit Risk) that are secured by the collaterals and other credit enhancements disclosed in the table. As such, unsecured amounts are the amounts that are not covered by any collateral or other credit enhancement. The secured amounts may differ from the total collaterals and other credit enhancements as certain loans and receivables are secured by multiple credit enhancements.

(2)

Appraisals to support estimated fair value of the real estate collaterals are obtained at the moment of the loan origination and when the financial asset is classified as impaired.

(3)

Public sector loan rights are guaranteed by Mexican government entities.


		12/31/2017
		Maximum Exposure
	Maximum	to Credit Risk (1)		Collaterals		Other Credit Enhancements
	Exposure to			Cash Collateral	Collateralized by
	Credit Risk	Unsecured	Secured	Received	Securities	Collection Rights (3)	Real Estate (2)	Guarantees

Financial assets held for trading	313,008	264,201	48,807	45,024	3,783	—	—	—
Other financial assets at fair value through profit or loss	51,705	—	51,705	—	51,693	—	—	—
Available-for-sale financial assets	164,947	164,947	—	—	—	—	—	—
Loans and receivables:	696,229	308,252	387,977	—	—	165,696	196,146	76,030
Of which:
Loans and advances to credit institutions	59,122	59,122	—	—	—	—	—	—
Loans and advances to customers	626,349	238,372	387,977	—	—	165,696	196,146	76,030
Commercial, financial and industrial loans	335,104	107,980	227,124	—	—	141,806	66,619	76,028
Public sector loans	49,294	18,963	30,331	—	—	23,845	—	—
Mortgage loans	134,197	4,397	129,800	—	—	—	128,106	2
Installment loans to individuals:
Revolving consumer credit card loans	54,372	54,372	—	—	—	—	—	—
Non-revolving consumer loans	53,382	52,660	722	—	—	45	1,421	—
Debt instruments	10,758	10,758	—	—	—	—	—	—
Guarantees and loan commitments	78,812	78,812	—	—	—	—	—	—
Available lines of credit	38,291	38,291	—	—	—	—	—	—
	1,342,992	854,503	488,489	45,024	55,476	165,696	196,146	76,030

(1)

(2)

Appraisals to support estimated fair value of the real estate collaterals are obtained at the moment of the loan origination and when the financial asset is classified as impaired.

(3)

Public sector loan rights are guaranteed by Mexican government entities.

Credit quality information

For the commercial loans (except SMEs) and public sector loans, in order to achieve equivalent internal ratings in the different models available and to make them comparable with the external ratings of rating agencies, the Bank has developed a master rating scale. The equivalence is established through the PD associated with each rating. Internally calibrated PDs are compared against the default rates associated with the external ratings, which are published periodically by rating agencies. The internal rating scale and mapping with external ratings are as follows:


	Equivalence with
	Standard &
Internal Rating	Poor’s	Moody’s

9.3	AAA	Aaa
9.2	AA+	Aa1
9.0	AA	Aa2
8.6	AA-	Aa3
8.1	A+	A1
7.7	A	A2
7.3	A-	A3
6.7	BBB+	Baa1
6.1	BBB	Baa2
5.6	BBB-	Baa3
5.0	BB+	Ba1
4.4	BB	Ba2
3.9	BB-	Ba3
3.3	B+	B1
2.7	B	B2
2.2	B-	B3
1.6	CCC	Caa1
1.0	CC	Ca

For commercial loans (SMEs), mortgage loans and installment loans (revolving credit card consumer loans and non-revolving consumer loans), incurred losses are calculated using statistical methods without taking internal ratings into consideration. However, based on criteria set forth by the CNBV and a combination of internal scorecards, client financial information and qualitative criteria, ratings are assigned as follows:



Rating			Equivalence

A-1			Minimum Risk (Solid)
A-2			Low Risk (Outstanding)
B-1			Normal Risk (Good)
B-2			Normal Risk
B-3			Satisfactory
C-1			Normal Risk (Adequate)
C-2			Medium Risk (Weak)
D			High Risk (Poor)
E			Probable Loss

Credit quality information by rating category

The tables below represent the classification by rating category of the commercial loans and public sector loans and their related guarantees and loan commitments not recognized on the consolidated balance sheet:


	12/31/2016
																				Not
Rating Category	9.3	9.2	9.0	8.5	8.0	7.5	7.0	6.5	6.0	5.5	5.0	4.5	4.0	3.5	3.0	2.5	2.0	1.5	1.0	Rated	Total

Commercial loans (except SMEs)	—	—	—	—	15	4,006	17,082	6,699	54,717	61,648	57,457	10,978	3,497	1,753	1,373	116	1,949	—	204	19,817	241,311
Public sector loans	—	—	—	—	—	33,730	3,765	—	—	6,366	7,415	5,091	636	—	—	—	—	—	—	19	57,022
	—	—	—	—	15	37,736	20,847	6,699	54,717	68,014	64,872	16,069	4,133	1,753	1,373	116	1,949	—	204	19,836	298,333

Financial instruments not recognized on the consolidated balance sheet:
Guarantees	653	—	—	1,959	2,063	6,449	14,063	8,996	5,986	3,834	784	310	312	—	—	75	33	—	—	2,324	47,841
Loan commitments	—	—	—	31	582	124	726	210	2,922	4,560	3,978	639	9	20	—	—	—	—	—	111	13,912
	653	—	—	1,990	2,645	6,573	14,789	9,206	8,908	8,394	4,762	949	321	20	—	75	33	—	—	2,435	61,753
	653	—	—	1,990	2,660	44,309	35,636	15,905	63,625	76,408	69,634	17,018	4,454	1,773	1,373	191	1,982	—	204	22,271	360,086


	12/31/2017
																				Not
Rating Category	9.3	9.2	9.0	8.5	8.0	7.5	7.0	6.5	6.0	5.5	5.0	4.5	4.0	3.5	3.0	2.5	2.0	1.5	1.0	Rated	Total

Commercial loans (except SMEs)	—	—	—	—	3,380	496	9,116	28,807	48,849	74,722	63,662	13,901	2,898	1,396	413	112	1,870	564	—	12,639	262,825
Public sector loans	—	—	3,504	—	—	20,077	1	983	—	9,751	13,493	1,278	—	—	—	—	—	—	—	208	49,295
	—	—	3,504	—	3,380	20,573	9,117	29,790	48,849	84,473	77,155	15,179	2,898	1,396	413	112	1,870	564	—	12,847	312,120

Financial instruments not recognized on the consolidated balance sheet:
Guarantees	—	623	—	2,576	5,262	11,037	19,265	7,043	9,060	3,219	2,391	392	3	—	—	—	75	—	—	2,133	63,079
Loan commitments	—	—	—	7	491	501	597	253	2,137	5,728	4,210	862	86	25	—	—	78	—	—	196	15,171
	—	623	—	2,583	5,753	11,538	19,862	7,296	11,197	8,947	6,601	1,254	89	25	—	—	153	—	—	2,329	78,250
	—	623	3,504	2,583	9,133	32,111	28,979	37,086	60,046	93,420	83,756	16,433	2,987	1,421	413	112	2,023	564	—	15,176	390,370

The tables below represent the classification by rating category of the commercial loans, mortgage loans, revolving consumer credit card loans and non-revolving consumer loans and their related commitments not recognized on the consolidated balance sheet:


	12/31/2016
Rating Category	A-1	A-2	B-1	B-2	B-3	C-1	C-2	D	E	Not Rated	Total

Commercial loans (SMEs)	41,133	12,018	1,913	3,506	4,650	1,360	756	2,065	101	393	67,895
Mortgage loans	89,712	11,318	2,979	14,404	1,800	2,163	1,763	3,817	880	3,578	132,414
Revolving consumer credit card loans	2,855	11,997	12,304	5,835	3,329	4,804	4,617	4,499	1,297	—	51,537
Non-revolving consumer loans	2,426	5,226	7,181	16,057	5,365	2,950	4,830	1,957	2,536	814	49,342
	136,126	40,559	24,377	39,802	15,144	11,277	11,966	12,338	4,814	4,785	301,188

Financial instruments not recognized on the consolidated balance sheet:
Available lines of credit cards and non-revolving consumer loans	7,779	4,607	5,289	3,502	2,792	4,031	4,029	1,758	2,328	141	36,256
Guarantees	132	—	—	—	—	—	—	—	—	—	132
Loan commitments	180	—	—	—	—	—	—	—	—	—	180
	8,091	4,607	5,289	3,502	2,792	4,031	4,029	1,758	2,328	141	36,568
	144,217	45,166	29,666	43,304	17,936	15,308	15,995	14,096	7,142	4,926	337,756


	12/31/2017
Rating Category	A-1	A-2	B-1	B-2	B-3	C-1	C-2	D	E	Not Rated	Total

Commercial loans (SMEs)	47,231	11,515	1,899	1,946	4,656	1,683	874	1,968	507	—	72,279
Mortgage loans	98,015	2,999	1,174	1,634	846	17,535	3,919	3,153	1,218	3,704	134,197
Revolving consumer credit card loans	2,995	13,789	12,848	6,181	3,543	4,961	4,829	3,830	1,397	—	54,373
Non-revolving consumer loans	7,009	7,312	9,978	8,670	6,577	5,415	2,876	1,267	3,390	889	53,383
	155,250	35,615	25,899	18,431	15,622	29,594	12,498	10,218	6,512	4,593	314,232

Financial instruments not recognized on the consolidated balance sheet:
Available lines of credit cards and non-revolving consumer loans	7,118	5,500	5,943	3,902	3,149	4,373	4,268	1,696	2,343	—	38,292
Guarantees	282	—	—	—	—	—	—	—	—	—	282
Loan commitments	150	—	—	—	—	—	—	—	—	—	150
	7,550	5,500	5,943	3,902	3,149	4,373	4,268	1,696	2,343	—	38,724
	162,800	41,115	31,842	22,333	18,771	33,967	16,766	11,914	8,855	4,593	352,956

The following is a breakdown of the retail portfolios that are past due but not impaired at December 31, 2016 and 2017, classified by type of loan and by age of the oldest past due amount.

Portions of the retail portfolio that are past due but not impaired as of December 31, 2016 are as follows:


		Balances Past Due by
	Current	1 to 30 Days	31 to 60 Days	61 to 90 Days	Total
By type of loan:
Commercial loans (SMEs)	63,248	1,725	756	533	66,262
Mortgage loans	116,170	4,535	3,636	1,295	125,636
Installment loans to individuals
Of which:
Revolving consumer credit card loans	47,170	1,061	760	594	49,585
Non-revolving consumer loans	44,429	1,819	596	475	47,319
	271,017	9,140	5,748	2,897	288,802

Portions of the retail portfolio that are past due but not impaired as of December 31, 2017 are as follows:


		Balances Past Due by
	Current	1 to 30 Days	31 to 60 Days	61 to 90 Days	Total
By type of loan:
Commercial loans (SMEs)	68,157	1,590	771	733	71,251
Mortgage loans	116,293	4,545	4,205	1,792	126,835
Installment loans to individuals
Of which:
Revolving consumer credit card loans	49,253	1,145	851	788	52,037
Non-revolving consumer loans	48,129	1,520	687	616	50,952
	281,832	8,800	6,514	3,929	301,075

g) Securitization

Loans and advances to customers includes the securitized loans transferred to third parties on which the Bank has retained the risks and rewards, albeit partially, and which therefore, in accordance with the applicable IFRS, cannot be derecognized. Note 21 details the liabilities associated with these securitization transactions (mortgage-backed bonds). As of December 31, 2016 and 2017, the securitized loans retained on the consolidated balance sheet relate to securitized mortgage assets amount to 237 million pesos and 162 million pesos, respectively.

Securitization is used as a tool for diversifying the Bank’s liquidity sources. The Bank had not performed any securitization in 2015, 2016 and 2017 and prior years. This securitization corresponds to a transaction performed by the acquired entity Santander Vivienda in 2006.

The loans transferred through securitization are mortgage loans.

Banco Santander (Mexico) S.A., Institucion de Banca Multiple, Grupo Financiero Santander Mexico | CIK:0001698287 |

ifrs-full:DisclosureOfLoansAndAdvancesToCustomersExplanatory