Material U.S. Federal Income Tax Consequences

In the opinion of Davis Polk & Wardwell LLP, special U.S. tax counsel to SanMex (“U.S. Tax Counsel”), the following are the material U.S. federal income tax consequences of the Merger and the ownership and disposition of SanMex shares and ADSs following the Merger to the U.S. holders of GFSM shares and ADSs described below.

The following discussion is based upon the Internal Revenue Code of 1986, as amended (the “Code”), final, temporary and proposed U.S. Treasury regulations, judicial authorities, published positions of the IRS, the income tax treaty between United States and Mexico (the “Treaty”) and other applicable authorities, all as of the date of this prospectus and all of which are subject to change or differing interpretations (possibly with retroactive effect). This discussion is also based in part on representations by the Depositary and assumes that each obligation under the Deposit Agreement and any related agreement will be performed in accordance with its terms. This discussion is limited to U.S. holders that hold their GFSM shares or ADSs (and who will hold their SanMex shares or ADSs after the Merger) as capital assets for U.S. federal income tax purposes (generally, assets held for investment). This discussion does not address all of the tax consequences that may be relevant to a particular U.S. holder such as alternative minimum tax consequences or the Medicare tax on net investment income or to U.S. holders that are subject to special treatment under U.S. federal income tax laws, such as:

In addition, this discussion does not address other U.S. federal taxes (such as gift or estate taxes), the tax consequences of the Merger under state, local or non-U.S. tax laws.

For purposes of this discussion, the term “U.S. holder” means a beneficial owner of GFSM shares or ADSs that is (i) a citizen or resident of the United States, (ii) a corporation (or other entity treated as a corporation for U.S. federal income tax purposes) created or organized under the laws of the United States, any state thereof or the District of Columbia or (iii) an estate or trust, the income of which is subject to U.S. federal income tax regardless of its source.

If a partnership (or other entity treated as a partnership for U.S. federal income tax purposes) owns GFSM shares or ADSs, the U.S. federal income tax treatment of a partner in the partnership will generally depend upon the status of the partner and the activities of the partnership. Partnerships owning GFSM shares or ADSs and their partners should consult their tax advisors with respect to the tax consequences of the Merger in their particular circumstances.

In general, a U.S. holder who owns GFSM ADSs or SanMex ADSs will be treated as the owner of the underlying GFSM shares or SanMex shares, respectively, represented by such ADSs for U.S. federal income tax purposes.

The U.S. Treasury has expressed concern that parties to whom American depositary shares are prereleased, or intermediaries in the chain of ownership between holders and the issuer of the security underlying the American depositary shares, may be taking actions that are inconsistent with the claiming of foreign tax credits by holders of American depositary shares. These actions would also be inconsistent with the claiming of the reduced rates of tax, described below, applicable to dividends received by certain non-corporate holders. Accordingly, the creditability of Mexican taxes, and the availability of the reduced tax rates for dividends received by certain non-corporate U.S. holders, each described below, could be affected by actions taken by such parties or intermediaries.

Shareholders are urged to consult their tax advisors as to the particular U.S. federal income tax consequences of the Merger to them, as well as any tax consequences arising under any state, local and non-U.S. tax laws or any other U.S. federal tax laws.

The Merger

Based on certain representations, covenants and assumptions described below, all of which must continue to be true and accurate in all material respects as of the effective time of the Merger, it is the opinion of U.S. Tax Counsel that the Merger will be treated for U.S. federal income tax purposes as a reorganization within the meaning of Section 368(a) of the Code, which opinion is referred to in this prospectus as the reorganization opinion.

In rendering the reorganization opinion, U.S. Tax Counsel has relied on (i) customary representations and covenants made by GFSM and SanMex, including those contained in certificates of officers of GFSM and SanMex, and (ii) specified assumptions, including an assumption regarding the completion of the Merger in the manner contemplated by the merger agreement. In addition, U.S. Tax Counsel has assumed in rendering the reorganization opinion the absence of changes in existing facts or in law between the date of filing of this prospectus and the closing date of the Merger. If any of those representations, covenants or assumptions is inaccurate, the tax consequences of the Merger could differ from those described below. An opinion of U.S. Tax Counsel neither binds the IRS, nor precludes the IRS or the courts from adopting a contrary position. Neither GFSM nor SanMex intends to obtain a ruling from the IRS on the tax consequences of the Merger.

Subject to the discussions below and under “—Passive Foreign Investment Company Rules”, the material U.S. federal income tax consequences of the exchange by a U.S. holder of GFSM shares or ADSs for SanMex shares or ADSs will be as follows:

The treatment of the cash dividend of approximately Ps.1,816 million to be declared by GFSM in connection with the Merger is not entirely clear. The dividend may be treated as any other ordinary dividend distribution by GFSM and be subject to tax in the manner described in “Item 10. Additional Information—E. Taxation—Material U.S. Federal Income Tax Consequences—Taxation of Distributions” of GFSM’s annual report on Form 20—F.

Alternatively, the dividend may be treated as additional consideration received in exchange for GFSM shares or ADSs by the U.S. holder. If the dividend is so treated, the U.S. holder will not recognize loss on the exchange, but will recognize gain (if any) equal to the lesser of: (1) the amount of the cash received, and (2) the excess of the sum of the amount of cash received and the fair market value on the closing date of the Merger of the SanMex shares or ADSs received over the U.S. holder’s basis for the GFSM shares or ADSs surrendered in the exchange. A U.S. holder is likely to be required to be required to treat such gain as a dividend unless the U.S. holder’s percentage ownership in SanMex (including shares that the U.S. holder is deemed to own under certain attribution rules) after the Merger is meaningfully reduced from what the U.S. holder’s percentage ownership would have been if the U.S. holder had received solely SanMex shares or ADSs rather than a combination of cash and SanMex shares or ADSs in the Merger. If, however, a U.S. holder’s percentage ownership were treated as meaningfully reduced, the gain recognized would generally be treated as capital gain, and generally would be long term capital gain if the GFSM shares or ADSs have been held for more than one year on the effective time of the Merger.

If the dividend is treated as additional consideration in the Merger, the U.S. holder’s aggregate adjusted basis of the SanMex shares or ADSs received in the Merger will be equal to the U.S. holder’s aggregate tax basis in its GFSM shares or ADSs exchanged in the Merger increased by the amount of gain, if any, recognized, including any portion of the gain that is treated as a dividend, and decreased by the amount of cash received.

U.S. holders should consult their tax advisors as to whether the dividend will be treated as an ordinary dividend distribution or additional consideration received in the exchange and if it is treated as additional consideration whether the gain (if any) on the exchange will be treated as capital gain or dividend income under the Code.

Certain U.S. holders who are “significant holders” will be required to file a statement with their U.S. federal income tax returns in accordance with U.S. Treasury regulations section 1.368-3 setting forth information regarding the parties to the Merger, the date of the Merger, such U.S. holder’s basis in GFSM shares or ADSs surrendered and the fair market value of SanMex shares or ADSs received in the Merger.  U.S. holders are generally required to retain certain records pertaining to the Merger.  U.S. holders should consult their own tax advisors regarding any records retention and reporting requirements that may apply to them.  Additional, special rules will apply to a U.S. holder that is a 5% Transferee Shareholder following the Merger. A 5% Transferee Shareholder will need to enter into a gain recognition agreement and comply with certain reporting requirements in accordance with applicable U.S. Treasury regulations. U.S. holders that may be 5% Transferee Shareholders following the Merger should consult their own tax advisors regarding their need to enter into a gain recognition agreement and any reporting requirements that may apply to them.

Consequences of Owning and Disposing of SanMex Shares and ADSs

Taxation of Distributions . Subject to the discussion under “— Passive Foreign Investment Company Rules” below, distributions paid on SanMex shares or ADSs, other than certain pro rata distributions of SanMex shares, will generally be treated as dividends to the extent paid out of our current or accumulated earnings and profits (as determined under U.S. federal income tax principles). Because SanMex does not maintain calculations of its earnings and profits under U.S. federal income tax principles, it is expected that distributions will generally be reported to U.S. Holders as dividends. Subject to the discussion above regarding concerns expressed by the U.S. Treasury, dividends paid by qualified foreign corporations to certain non-corporate U.S. holders (including individuals) may be eligible for taxation as “qualified dividend income” and therefore may be taxable at rates applicable to long-term capital gains. A foreign corporation is treated as a qualified foreign corporation with respect to dividends paid on stock that is readily tradable on a securities market in the United States, such as the NYSE, where SanMex ADSs are expected to be traded. Non-corporate U.S. holders should consult their tax advisers to determine whether the favorable rates will apply to dividends they receive and whether they are subject to any special rules that limit their ability to be taxed at these favorable rates.

The amount of a dividend will include any amounts withheld in respect of Mexican taxes. The amount of the dividend will be treated as foreign-source dividend income to U.S. holders and will not be eligible for the dividends-received deduction generally available to U.S. corporations under the Code. Dividends will be included in a U.S. holder’s income on the date of the U.S. holder’s (or in the case of SanMex ADSs, the Depositary’s) receipt of the dividend. The amount of any dividend income paid in pesos will be the U.S. dollar amount calculated by reference to the exchange rate in effect on the date of receipt regardless of whether the payment is in fact converted into U.S. dollars. If the dividend is converted into U.S. dollars on the date of receipt, U.S. holders should not be required to recognize foreign currency gain or loss in respect of the dividend income. A U.S. holder may have foreign currency gain or loss if the dividend is converted into U.S. dollars after the date of receipt.

Subject to applicable limitations, some of which vary depending upon the U.S. holder’s circumstances, and subject to the discussion above regarding concerns expressed by the U.S. Treasury, any Mexican income taxes withheld from dividends on SanMex shares or ADSs at a rate not exceeding the rate provided by the Treaty generally will be creditable against the U.S. holder’s U.S. federal income tax liability. Instead of claiming a credit, the U.S. holder may elect to deduct such Mexican income taxes in computing the U.S. holder’s taxable income, subject to generally applicable limitations under U.S. law. An election to deduct foreign taxes instead of claiming foreign tax credits applies to all taxes paid or accrued in the taxable year to foreign countries and possessions of the United States. The rules governing foreign tax credits are complex, and U.S. holders should consult their tax advisers regarding the creditability of foreign taxes in their particular circumstances.

Sale or Other Taxable Disposition of SanMex Shares or ADSs . Subject to the discussion under “—Passive Foreign Investment Company Rules” below, gain or loss realized on the sale or other taxable disposition of SanMex shares or ADSs will be capital gain or loss, and will be long-term capital gain or loss if the U.S. holder held the SanMex shares or ADSs for more than one year. Long-term capital gain of a non-corporate U.S. holder is generally taxed at preferential rates. The deductibility of capital losses is subject to limitations. The amount of the gain or loss will equal the difference between the U.S. holder’s adjusted tax basis in the SanMex shares or ADSs disposed of and the amount realized on the disposition, in each case as determined in U.S. dollars. If a Mexican tax is withheld on the sale or disposition of SanMex shares or ADSs, a U.S. holder’s amount realized will include the gross amount of the proceeds of the sale or disposition before deduction of the Mexican tax. See “Item. 10 Additional Information—E. Taxation—Mexican Taxation—Taxation on Capital Gains” of GFSM’s Annual Report on Form 20-F for a description of when a disposition may be subject to taxation by Mexico. This gain or loss will generally be U.S.-source gain or loss for foreign tax credit purposes.

Information Reporting and Backup Withholding . Payments of dividends and sales proceeds that are made within the United States or through certain U.S.-related financial intermediaries generally are subject to information reporting and may be subject to backup withholding unless (i) the U.S. holder is a corporation or other exempt recipient or (ii) in the case of backup withholding, the U.S. holder provides a correct taxpayer identification number and certifies that it is not subject to backup withholding. The amount of any backup withholding from a payment to a U.S. holder will be allowed as a credit against the holder’s U.S. federal income tax liability and may entitle it to a refund, provided that the required information is timely furnished to the Internal Revenue Service.

Certain U.S. holders who are individuals (and certain U.S. entities closely-held by individuals) may be required to report information relating to the SanMex shares or ADSs, unless the shares or ADSs are held in accounts at financial institutions (in which case the accounts may be reportable if maintained by non-U.S. financial institutions). U.S. holders should consult their tax advisors regarding their reporting obligations with respect to their ownership and disposition of the SanMex shares or ADSs.

Passive Foreign Investment Company Rules

Special, generally unfavorable, U.S. federal income tax rules may apply to U.S. holders that have held GFSM shares or ADSs or will hold SanMex shares or ADSs if GFSM or SanMex has been or is a PFIC at any time during which the U.S. holder has held or holds GFSM or SanMex shares or ADSs, and may change the treatment of distributions on and dispositions of SanMex shares or ADSs described above and the treatment of the exchange of GFSM shares or ADSs for SanMex shares or ADSs pursuant to the Merger.

Based on proposed U.S. Treasury regulations, which are proposed to be effective for taxable years beginning after December 31, 1994, GFSM believes that it was not a “passive foreign investment company” (a “PFIC”) for U.S. federal income tax purposes for the taxable years ending December 31, 2012 or any subsequent completed taxable year and it does not expect to be a PFIC for its current taxable year, and SanMex does not expect to be a PFIC for its current taxable year. However, because the application of the proposed regulations is not entirely clear, because the proposed U.S. Treasury regulations may not be finalized in their current form, and because the composition of SanMex income and assets will vary over time, there can be no assurance that GFSM was not and SanMex will not be a PFIC for any taxable year. The determination of whether a company is a PFIC is made annually and is based upon the composition of its income and assets (including, among others, entities in which the company holds at least a 25% interest), and the nature of its activities.

If GFSM has been a PFIC at any time during the holding period of a U.S. holder, assuming that SanMex is not a PFIC in the taxable year of the Merger, such a U.S. holder would, under proposed regulations which are proposed to be effective from April 11, 1992, recognize gain (but not loss) upon the exchange of its GFSM shares or ADSs for SanMex shares or ADSs. The gain would be equal to the difference between the fair market value of the SanMex shares or ADSs received on the date of the exchange and the U.S. holder’s tax basis in GFSM shares or ADSs exchanged and would be subject to taxation in the manner described below with respect to gain on disposition of SanMex shares or ADSs.

If SanMex were a PFIC for any taxable year during which a U.S. holder held SanMex shares or ADSs, gain recognized by a U.S. holder on a sale or other taxable disposition (including certain pledges) of the SanMex shares or ADSs would generally be allocated ratably over the U.S. holder’s holding period for the SanMex shares or ADSs. The amounts allocated to the taxable year of the sale or other taxable disposition and to any year before SanMex became a PFIC would be taxed as ordinary income. The amount allocated to each other taxable year would be subject to tax at the highest rate in effect for individuals or corporations for that year, as appropriate, and an interest charge would be imposed. Further, to the extent that any distribution received by a U.S. holder on its SanMex shares or ADSs exceeds 125 percent of the average of the annual distributions on the SanMex shares or ADSs received during the preceding three years or the U.S. holder’s holding period, whichever is shorter, that distribution would be subject to taxation in the same manner as gain, as described immediately above. Certain elections may be available that would result in alternative treatments (such as mark-to-market treatment) of the SanMex shares or ADSs. U.S. holders should consult their tax advisers to determine whether any of these elections would be available and, if so, what the consequences of the alternative treatments would be in their particular circumstances. Furthermore, if SanMex were a PFIC or, for the taxable year in which SanMex paid a dividend or for the prior taxable year, the preferential dividend rates discussed above with respect to dividends paid to certain non-corporate U.S. holders would not apply.

If a U.S. holder owns SanMex shares or ADSs during any year in which SanMex is a PFIC, the U.S. holder generally must file annual reports containing such information as the U.S. Treasury may require on IRS Form 8621 (or any successor form) with respect to us, generally with the U.S. holder’s federal income tax return for that year.

BANCO SANTANDER M É XICO

History and Development of the Bank

Banco Santander México was incorporated on November 16, 1932, under the name Banco Mexicano. In 1955, Sociedad Mexicana de Crédito Industrial (subsequently Banco Somex), which was incorporated in 1941, purchased a controlling portion of the shares of Banco Mexicano. In 1958, Banco Mexicano merged with Banco Español, with Banco Mexicano as the surviving entity.

In 1970, Banco de Londres y México merged with Compañía General de Aceptaciones (formerly a shareholder of Banco de Londres), with Banco de Londres y México under its new name, Banca Serfin, as the surviving entity.

In 1979, Banco Mexicano changed its corporate name to Banco Mexicano Somex, S.A., operating as a multiple-purpose banking institution.

In 1982, Mexican commercial banks were nationalized by the Mexican government.

In 1990, the Mexican Constitution was amended to permit the total reprivatization of Mexican commercial banks, and the Mexican government enacted the Mexican Banking Law, which led to the reprivatization of such banks starting in 1991. As part of this banking privatization process, in 1992, Grupo InverMéxico acquired Banco Mexicano Somex, which then took the corporate name of Banco Mexicano, S.A., Institución de Banca Múltiple, Grupo Financiero InverMéxico.

In 1992, Grupo Financiero Serfin was incorporated following the acquisition of Banca Serfin by Operadora de Bolsa.

In 1997, Banco Santander Parent acquired Grupo InverMéxico, which became Grupo Financiero Santander Mexicano. Banco Mexicano later became Banco Santander Mexicano. In May 2000, Banco Santander Parent acquired Grupo Financiero Serfin, which was merged into Grupo Financiero Santander Mexicano and changed its corporate name to Grupo Financiero Santander Serfin. In 2001, Banco Santander Mexicano adopted the corporate name of Banco Santander Mexicano, S.A., Institución de Banca Múltiple, Grupo Financiero Santander Serfin.

Banco Santander Mexicano and Banca Serfin initially operated independently. In 2004, Banca Serfin was merged into Banco Santander Mexicano, with the surviving entity being Banco Santander Serfin, S.A., Institución de Banca Múltiple, Grupo Financiero Santander Serfin. Subsequently, in 2006, the Bank was renamed Banco Santander, S.A., Institución de Banca Múltiple, Grupo Financiero Santander.

On February 21, 2008, the corporate name of the Bank was changed to Banco Santander (México), S.A., Institución de Banca Múltiple, Grupo Financiero Santander. GFSM currently owns 99.99% of the Bank’s capital stock.

On December 23, 2010, Banco Santander Mexico entered into a stock and assets purchase agreement to acquire the residential mortgage business of General Electric Capital Corporation and its subsidiaries, or GE Capital, in Mexico, or the GE Capital mortgage business. The purchase price for the acquisition was Ps.2,042 million (U.S.$118 million) and, in addition, we repaid at closing to GE Capital the Ps.21,009 million (U.S.$1,218 million) intercompany debt at that date relating to the GE Capital mortgage business, which GE Capital historically had financed through intercompany debt. The total volume of assets at the time of closing was Ps.23,904 million (U.S.$1,386 million), including a total loan portfolio of Ps.21,926 million (U.S.$1,271 million), while the total volume of liabilities was Ps.21,494 million (U.S.$1,246 million). The transaction closed on April 29, 2011. The acquisition made us the second-largest provider of residential mortgages in Mexico in terms of residential mortgages outstanding in 2011, as determined in accordance with Mexican Banking GAAP, according to information published by the CNBV.

Banco Santander Mexico obtained shareholder approval on September 12, 2012 to change its name to Banco Santander (México), S.A., Institución de Banca Múltiple, Grupo Financiero Santander México, and such name change was subsequently authorized by the CNBV.

In November 2012, Banco Santander Mexico completed a debt offering of U.S.$1.0 billion in senior notes in the domestic and international markets. In November 2012, Banco Santander Mexico issued senior notes in an aggregate principal amount of U.S.$1.0 billion, in accordance with the Rule 144A of the Securities Act, under an indenture dated as of November 9, 2012. The notes mature on November 9, 2022, and bear interest at a rate per annum equal to 4.125%. Interest is paid semi-annually in arrears on May 9 and November 9 of each year.

In November 2013, Banco Santander Mexico completed the acquisition of the equity stock of ING Hipotecaria, S.A. de C.V., Sociedad Financiera de Objeto Múltiple, Entidad No Regulada, or ING Hipotecaria, a subsidiary of ING Group. Prior to the acquisition, ING Hipotecaria provided mortgage-related products and services to more than 28,000 clients and operated 20 branches throughout Mexico. The net assets acquired amounted to Ps.395 million which includes a loan portfolio with an unpaid principal balance of Ps.11,237 million, and an estimated fair value of Ps.10,772 million. A loan portfolio of approximately Ps.363 million was expected to be uncollectible at the time of the acquisition. As part of the transaction, we made a cash payment of Ps.541.4 million (approximately U.S.$31.4 million) for ING Hipotecaria’s equity. This acquisition solidified Banco Santander Mexico’s position as the second-largest banking mortgage provider in Mexico with an estimated market share of 17.7% as of December 31, 2013, 18.9% as of December 31, 2014, 19.3% as of December 31, 2015, and 18.7% as of December 31, 2016. Since the acquisition, all of the branches operated by ING Hipotecaria have been closed, in an effort to consolidate the distribution network and increase operational efficiency.

On December 13, 2013, ING Hipotecaria obtained shareholder approval to change its name to Santander Vivienda, S.A. de C.V., Sociedad Financiera de Objeto Múltiple Entidad Regulada, or Santander Vivienda. In February 2014, Santander Vivienda obtained the permits required to change its legal name.

In December 2013, Banco Santander Mexico completed a debt offering of U.S.$1.3 billion aggregate principal amount of Basel III compliant Tier 2 Subordinated Capital Notes in the domestic and international capital markets.

During 2014, we reached an agreement with Banco Santander Parent for the purchase of the custodial business to FINESP Holdings II B.V., affiliate of Warburg Pincus and Temasek.

On June 19, 2014, Banco Santander Parent announced having reached a definitive agreement with an affiliate of Warburg Pincus and Temasek to acquire 50% of the custodial businesses of Santander in Spain, Mexico and Brazil through a new entity. The closing was scheduled for the fourth quarter of 2014.

On July 24, 2015, Banco Santander Parent made us an offer to purchase our custodial business, which we accepted. The agreed sale price was Ps.1,191 million. The transfer of the custodial business was subject to the following conditions: (i) the offer was valid until June 30, 2016; (ii) the offer was subject to the same conditions established in the global agreement signed by Banco Santander Parent in connection with the sale of the custodial businesses in Spain, Mexico and Brazil; (iii) authorizations must have been obtained from the Mexican authorities to establish a special purpose entity whose purpose was the operation of the custodial business in Mexico; (iv) the offer was dependent on the global transaction, which if was terminated, would also lead to the termination of the transaction in Mexico; and (v) the transaction should be formalized through the signing of the respective contracts.

Banco Santander Parent received, in August 2016, the authorization of the Mexican authorities for the incorporation and operation of Banco S3 México, S.A., Institución de Banca Múltiple, whose activities shall be focused to the specialized business of deposit, custody and management of securities and cash in Mexico. It is expected that Banco S3 México, S. A., Institución de Banca Múltiple, will initiate operations as an independent subsidiary by the end of 2017.

On November 26, 2014, we entered into an agreement to acquire a non-revolving consumer loans portfolio from Scotiabank Inverlat. The acquisition was completed in April 2015 after obtaining the applicable regulatory approvals. The acquired portfolio consists of 39,252 loans with a face value of Ps.3,179 million and a fair value of Ps.3,002 million.

On December 21, 2016, by means of note UBVA/093/2016, the SHCP approved the merger of two of our subsidiaries Santander Hipotecario, S.A. de C.V., Sociedad Financiera de Objeto Múltiple, Entidad Regulada, Grupo Financiero Santander México, as the merged entity, and Santander Vivienda, S.A. de C.V., Sociedad Financiera de Objeto Múltiple, Entidad Regulada, Grupo Financiero Santander México as merging company. The merger was effective January 1, 2017.

On December 29, 2016, the Bank issued perpetual subordinated non-preferred contingent convertible additional Tier 1 capital notes (the “Tier 1 notes”) in an aggregate principal amount of U.S.$ 500,000,000, under an indenture dated as of December 27, 2016, as supplemented by a first supplemental indenture dated as of December 27, 2016, with the same terms as the perpetual subordinated non-preferred contingent convertible additional Tier 1 capital notes issued by GFSM on the same date. GFSM purchased 100% of the aggregate principal amount of the Tier 1 notes. See “Item 5. Operating and Financial Review and Prospects—B. Liquidity and Capital Resources—Debt Securities Outstanding—The Additional Tier 1 Capital Notes” of GFSM’s Annual Report on Form 20-F for more information on the terms the Tier 1 notes.

On October 5, 2017, the SHCP authorized the inclusion of Santander Inclusión Financiera, S.A. de C.V., Sociedad Financiera de Objeto Múltiple, Entidad Regulada, Grupo Financiero Santander México (“Inclusión Financiera”) as a part of the Group. As a result of the purchase, SanMex will hold 99.99% of the capital stock of Inclusión Financiera.

Capital Expenditures and Divestitures

In 2015, our capital expenditures were Ps.2,911 million (U.S.$168.8 million), 71.4% (Ps.2,078 million) of which was for technology and the remainder of which was for furniture, fixtures and equipment (Ps.833 million). In 2016, our capital expenditures were Ps.2,946 million (U.S.$142.9 million), 77.4% (Ps.2,280 million) of which was spent on information technology and the remainder Ps.666 million which was spent on furniture, fixtures and equipment. In the six months ended June 2017, our capital expenditures were Ps.919 million, 60.5% (Ps.556 million) of which was spent on information technology and the remainder Ps.363 million which was spent on furniture, fixtures and equipment.

At the end of 2015, we proudly finished our plan to add 200 new branches to our distribution network. The expansion cost approximately Ps.1.03 billion and it was funded using our working capital.

For 2017, we have a capital expenditures budget of Ps.6,043 million (U.S.$293 million), 70.4% of which (Ps.4,254 million) will be spent on information technology and the rest of which will be spent on furniture, fixtures and equipment (Ps.1,789 million). Our management expects that cash flows from operations will be sufficient to meet our liquidity requirements over the next 12 months, including our expected 2017 capital expenditures.

Business Overview

Overview

We are the second-largest bank in Mexico based on total assets, third in terms of total loans and deposits and fourth in terms of net income as of December 31, 2016, in each case as determined in accordance with Mexican Banking GAAP, according to information published by the CNBV. As a bank and through our subsidiaries, we provide a wide range of financial and related services, principally in Mexico, including retail and commercial banking and securities underwriting. As of June 30, 2017, we had total loans, net of allowance for impairment losses, of Ps.580,323 million (U.S.$32,128 million), total assets of Ps.1,275,454 million (U.S.$70,614 million), total deposits of Ps.853,082 million (U.S.$47,229 million), total equity of Ps.111,077 million (U.S.$6,150 million) and 1,374 offices located throughout Mexico, and for the six months ended June 30, 2017, we had net income of Ps.9,315 million (U.S.$517 million), which represented a return-on-average equity, or ROAE, of 17.38% for that period. As of December 31, 2016, we had total assets of Ps.1,350,937 million (U.S.$65,518 million) total deposits of Ps.795,852 million (U.S.$38,597) and total equity of Ps.105,227 million (U.S.$5,103 million) and 1,364 offices located throughout Mexico, and for the year ended December 31, 2016, we had net income of Ps.16,536 million (U.S.$801 million), which represented a return-on-average equity, or ROAE, of 14.89% for that period.

We offer a differentiated financial services platform in Mexico focused on the client segments that we believe are most profitable, such as high- and mid-income individuals, SMEs and medium and large companies in Mexico, while also providing integrated financial services to low-income individuals. We developed our client segmentation strategy in 2008 with clearly defined client segments: high- and mid-income individuals, SMEs and middle-market corporations. Since then, we have focused our efforts on further refining our client segmentation, developing our product offerings, information technology systems and our internal practices, as well as enhancing our distribution channels in order to maximize service in our key client segments.

The following chart sets forth the Retail Banking and Global Corporate Banking operating segments of the Bank and their main focus.

In addition, we have a Corporate Activities operating segment comprised of all other operational and administrative activities that are not assigned to a specific segment or product listed above. These activities include the centralized management of our financial investments, the financial management of our structural interest rate risk and foreign exchange position and the management of our liquidity and equity through securities offerings and the management of assets and liabilities.

Our insurance activities are included in the Retail Banking segment.

The following table sets forth the breakdown of our net interest income and operating profit before tax by operating segment.

The following table shows certain of our financial and operational data.

Prior to 2015, bullet maturity loans (i.e. loans with payment of principal at maturity) were classified as non-performing once more than 30 days past due and revolving loans were classified as past-due when more than 60 days past due.

See Note 2.g.i of our audited financial statements for more details on the classification of impaired loans.

See Note 2.h of our audited financial statements for more details on our change in accounting estimates regarding our refinements to impairment models.

After the Merger, we will operate as an independent subsidiary within the Santander Group and our principal shareholder, Banco Santander Parent, will have no liability for our banking operations, except for the amount of its respective holding of our capital stock. Banco Santander Parent, currently the controlling shareholder of GFSM, currently beneficially owns, directly and indirectly, 74.97% of GFSM’s common stock (including Series B and Series F shares), which in turns owns 99.99% of our common stock. We believe that our relationship with Banco Santander Parent and the Santander Group as a whole offers us significant competitive advantages over other banks in Mexico. As of June 30, 2017, the Santander Group had total assets of U.S.$1,445 billion (U.S.$1,648 billion), equity of U.S.$100,955 million (U.S.$115,134 million) and a market capitalization of U.S.$84,461 million (U.S.$96,324 million). It also generated an attributable profit of U.S.$1,749 million (U.S.$1,995 million) in the six months ended June 30, 2017 and had 13,825 branches and 201,596 employees as of June 30, 2017. We represented approximately 7% of the Santander Group’s attributable profit in the six months ended June 30, 2017, making us the fifth largest contributor of attributable profits to the Santander Group. We also represented approximately 4% of the Santander Group’s assets in the six months ended June 30, 2017, according to the quarterly financial report of the Santander Group for the six months ended June 30, 2017.

Our Competitive Strengths

Leading market position in select categories

We rank second in terms of total assets and net income and third in terms of total loans and deposits among private-sector banks in Mexico, with market shares of 15.8%, 14.7%, 13.6% and 14.4%, respectively, as of December 31, 2016, in each case as determined in accordance with Mexican Banking GAAP, according to information published by the CNBV. Among the seven largest private-sector banks in Mexico, we believe we hold leading market positions in most of our key product lines, such as mortgages and commercial loans (including loans to SMEs and middle-market corporations).

The following table shows the rankings and market share of Banco Santander Mexico as of December 31, 2016, according to information published by the CNBV. All statements in this prospectus regarding our relative market position and financial performance vis-à-vis the financial services sector in Mexico are based, out of necessity, on information obtained from CNBV reports, and accordingly are presented in accordance with Mexican Banking GAAP. For a more detailed description of our performance relative to the Mexican banking industry, see “—Competition.”

Source: CNBV.

We believe that our scale and market leadership provide us with exceptional competitive opportunities, including the ability to gather market intelligence to support decision-making in determining business opportunities and in meeting our customers’ needs.

Focus on well-defined profitable client segments resulting in superior track record

We believe our market share in our key client segments (high- and mid-income individuals and SMEs) will continue to contribute to our profitability. We have posted ROAE levels of 13.2% and 14.4% in 2015 and 2016, respectively, as determined in accordance with Mexican Banking GAAP, making us the third most profitable bank among the seven largest private-sector banks in Mexico under that metric in 2016, as determined in accordance with Mexican Banking GAAP, according to information published by the CNBV.

We developed our client segmentation strategy in 2008 with clearly defined client segments: high- and mid-income individuals, SMEs and middle-market corporations. Since then, we have focused our efforts on further refining our client segmentation, developing our product offerings, developing our information technology systems and our internal practices, as well as enhancing our distribution channels in order to better service our key client segments.

We believe our targeted efforts have helped us organically increase our market share in key business lines such as retail services to middle-market corporations and SMEs. From December 31, 2011 to December 31, 2016, our commercial loans market share (which includes loans to middle-market corporations, institutions, corporate clients and SMEs) increased 40 basis points, from 14.4% to 14.8%, as determined in accordance with Mexican Banking GAAP, according to CNBV data. We are the second-largest provider of residential mortgages in Mexico in terms of residential mortgages outstanding in 2016, as determined in accordance with Mexican Banking GAAP, according to information published by the CNBV. See “—Our Core Products—Retail Lending—Mortgages.”

Efficient and business-oriented operational platform

Our operational platform efficiently combines our modern business-oriented information technology systems with our multichannel distribution strategy, resulting in innovative ways to serve our clients. Our multichannel distribution strategy consists of using both traditional and alternative distribution channels such as branches, Internet banking, mobile banking and contact centers tailored to each of our client segments and designed to reach a broad spectrum of customers in a cost-efficient manner. We have well-developed customer relationship management, or CRM, tools that allow us to monitor our clients’ behavior and provide them with targeted product offerings through diverse channels. As a consequence, we are able to efficiently leverage alternative distribution channels, such as ATMs, Internet banking and our contact centers, which are complementary to our traditional proprietary branch network, which enables us to deliver better service to our clients and increases our sales ratios. As of December 31, 2016, we had approximately 1.84 million customers with pre-authorized credit offers. We believe our efficient operations allow us to realize synergies and more profitable growth. As of December 31, 2016, we were the second most efficient bank among the seven largest private-sector banks in Mexico, as calculated in accordance with Mexican Banking GAAP, according to information published by the CNBV. For this purpose, we calculate the efficiency ratio as administrative expenses divided by total income, using information published by the CNBV. We believe this is a result of many factors, including our focus on cost-control and best practices that we can leverage from Banco Santander Parent, among others. We believe our efficiency ratio provides us with operating flexibility and enables us to be competitive in pricing versus our peers.

Synergies from our affiliation with the Santander Group

We believe that being an affiliate of the Santander Group offers us significant competitive advantages. The Santander Group is one of the largest banking groups in Latin America in terms of assets, the largest financial group in Spain and a significant financial system participant in various European countries, including the United Kingdom, through its Santander UK subsidiary, Poland and Portugal, among others. Through Santander Consumer, Santander Group also operates a leading consumer finance franchise in the United States as well as in Germany, Italy, Spain and several other European countries. Our relationship with the Santander Group allows us, among other things, to:

Although we benefit from our affiliation with the Santander Group, our executive officers are responsible for the management of our business independent from Banco Santander Parent.

Strong and sustainable funding and capitalization profile

Our principal source of funding is customer deposits, including repurchase agreements, which represented Ps.656 billion, or 52.7%, of our total liabilities as of December 31, 2016. As of December 31, 2016, customer deposits represented 82.4% of our total deposits. Since we are primarily a transactional bank, customer deposits, a comparatively less expensive source of funding, constitute the main source of liquidity in our financing structure. This has allowed us to manage our reliance on and exposure to riskier sources of funding and manage our liquidity requirements. We believe we have attractive capitalization levels based on our Tier 1 capital ratio, which has been near the median of the seven largest banks in Mexico over the past five years. As of December 31, 2016, our total capitalization ratio was 15.7%, comprised of Tier 1 capital ratio of 11.8% and Tier 2 capital ratio of 4.0%, in each case as calculated in accordance with Mexican Banking GAAP.

Experienced management team and skilled workforce

We benefit from a highly-experienced management team. Our senior management has an average of 21 years of experience in the financial industry and 11 years in the Santander Group. Our management team has guided us through economic cycles and, by anticipating recent macroeconomic developments, our net income has increased at a compound annual growth rate, or CAGR, of 9.24% since 2008, as determined in accordance with Mexican Banking GAAP, compared to 8.11% CAGR increase in the Mexican banking system as a whole over the same period, as determined in accordance with Mexican Banking GAAP, according to data from the CNBV. Our management has concentrated its efforts on establishing a successful working environment and employee culture, and has invested in rigorous personnel selection processes, training programs and evaluation processes to maintain a strong talent base and foster retention. We have promoted the development and strengthening of abilities and skills in managing people and teams. The experience and commitment of our senior management team has been a critical component in the growth of our franchise, as well as in the continuing enhancement of our operations and financial performance.

Our Strategy

During 2016, we enhanced our commercial strategy focusing towards two main objectives: (i) becoming our clients’ primary bank and (ii) being leaders in profitable growth.

Based on our strong profitability and growth in key business lines, we will continue targeting retail banking for Mexico’s upper class, emerging middle class, SMEs and middle-market corporations, the most dynamic and profitable segments of the Mexican economy. We will strengthen our focus on client attraction, client loyalty, deposit growth, the transformation of our distribution and operational model and enhancing our leading banking franchise in Mexico while attaining sustained profitable growth.

We intend to achieve these objectives through the following strategies:

Establish a client centric model that places the customer at the core of our business while we continue to expand and develop our customer base and further enhance customer loyalty

Customers are our main focus and our priority with respect to all of our commercial efforts. We seek to differentiate the Group by providing exceptional service and attractive value, allowing us to increase customer loyalty. We believe this model will allow us to strengthen our position in the retail segment by attracting new high-potential customers, retaining existing customers through transactional products and become their primary bank. We intend to continue to use our extensive distribution network to proactively pursue and strengthen our relationships with high- and mid-income customers through the offering of key products and business solutions for SMEs and middle-market corporations. An important part of our strategy is the segmentation of our customer base. We classify our individual customers in four main categories: “select,” “premier,” “preferred” and “classic” customers. We believe that our clear customer classification allows us to offer our customers a portfolio of targeted products that fit their specific needs.

On May 23, 2016, we launched “Santander Plus” an innovative and comprehensive program focused on client attraction, transactionality, loyalty and digitalization. To join the program, customers have to transfer their payroll account to the Bank and become a digital customer by using internet or mobile banking services. Benefits include cash backs in direct debits and in a select suite of entertainment venues, as well as preferential rates in saving accounts. Furthermore, following our goal to adapt to our customers’ needs and lifestyle, in September 2016, we added additional benefits to our Santander Plus program, such as “Consumer Credit” pursuant to which we give our customers cash back for the opening commission when contracting payroll, cash or express line credits and “Santander Event Protection” which awards our clients who have at least two insured assets with us (home, auto, health and life) , with a certificate to celebrate the occurrence of certain important events in their lives. We believe this initiative will become one of our principal engines to attract high potential clients and a valuable tool to foster its loyalty and become their primary bank. As of December 2016, over 1.5 million customers have signed up for this program, of which 52% are new customers.

Furthermore, to take advantage of the new payroll portability regulations, we are seeking to leverage our unique position in the corporate, middle-market and SMEs segments to attract new payroll customers and grow our individual demand deposit base.

In addition, on October 16, 2017, we announced the launch of Tuiio, a financial inclusion program for low income individuals. Tuiio, which will have its own operating model, infrastructure and brand, is a robust financial inclusion program that will leverage technology to support the needs of Mexico’s low-income segment. It aims to generate measurable social impact through productive micro-lending, a digital savings account, its own branch network, staff, ATMs, point-of-sale terminals and electronic banking. The initiative will also include a financial education program for clients, with the purpose of maximizing their skills and developing their employment potential.

Upgrade and enhance our technological platforms and infrastructure and expand our product offering in order to offer our customers innovative & quality services that satisfy their dynamic demands

We are upgrading and enhancing our technological platforms and infrastructure in order to meet our clients’ dynamic needs by providing them with high-quality and innovative products and services. In order to be able to achieve this goal, our strategy requires the digitalization of our businesses.

In order to secure our offerings with a client centric vision, we will continue to improve our CRM tool to drive strategies based on market intelligence; we plan to offer new products and services to existing customers based on our customer segmentation and the development of value-added offerings. Our goal in managing customer relationships is to position our customers at the heart of our business strategy. By improving our information technology systems and our processes, we believe we will be able to produce business intelligence by acquiring detailed information about current and future needs and the behavior of our customers. We believe that this business intelligence will enable us to define our customer segments in greater detail according to the life cycle and income levels, as well as improving the way we serve our customers through various distribution channels.

We will also continue to invest in creating and maintaining strong business support and commercial processes to make our products and services more accessible and improve our relationships with our clients. For example, we have developed a fully integrated commercial network, which manages customer product offerings through an internally designed CRM tool that makes it easier for branch executives to know their portfolios and to approach customers with specific and tailored product offerings, in addition we also defined differentiated on boarding service model optimizing the accounts opening and the digital contracting of loans for our clients and non-clients.

We seek to increase our market share in retail banking by offering innovative banking products and intend to focus on profitable products such as insurance, mortgages, credit cards, personal loans, SMEs and middle-market corporations loans where we believe there is an opportunity to increase our market share. For our non-retail clients, we will continue to offer through our Global Corporate Banking segment an array of comprehensive products and services relating to finance, guarantees, mergers and acquisitions, equity and fixed income, structured finance, international trade finance, cash management services, collection services and e-banking, including structured loans, syndicated loans, acquisition financing and financing of investment plans, among others. We intend to improve the ways we serve our clients by expanding the multichannel distribution strategy related to each of our client segments, and we will continue to seek to maximize the synergies and leverage the cross-selling opportunities between our corporate and retail businesses. In addition, we have established a division that is focused on enhancing the quality of our products and processes.

During 2016, we continued to strengthen our mortgage business through the implementation of competitive commercial actions. On November 16, 2016, we launched “Santander Personal Mortgage” which offers the only mortgage loans in Mexico at a personalized interest rate, adjusted to each of our customers’ risk profile and needs such as loan-to-value and term. Furthermore, clients who benefit from Santander Personal Mortgage are also entitled to enjoy the benefits of Santander Plus, provided certain conditions are met.

Another initiative to attract and retain customers is the co-branded Santander-Aeroméxico credit card launched in February 2016, as a result of a 10-year exclusive alliance with Mexico’s leading airline. So far, more than 430,000 cards have been issued, 30% of which were for new customers.

Leverage our leading market position to benefit from the significant growth potential of the Mexican banking sector

We seek to continue increasing our market penetration, focusing on our well-defined client segments and targeted products (such as mortgages, consumer lending, SMEs lending and middle-market corporations). At the same time, we intend to continue developing our profitable and client-centered global corporate banking. To achieve these objectives, we will continue to leverage our strong brand name, distribution network and products with customer centricity, as well as seek to capture the benefits of growth in the banking sector as the Mexican economy grows and the level of penetration of financial services in Mexico approaches those of other countries in Latin America. Furthermore, we will continue to focus our marketing efforts to grow our customer base and promote loyalty through the transactional use of our electronic channels, as well as the cross-selling of products and tailored services to increase the number of products used by each of our clients. We intend to achieve this objective through ongoing technological innovation, development of lasting relationships with our customers and by cross-selling credit products, such as mortgage loans, credit card loans, payroll loans, personal loans and insurance products, such as life, automobile, home, health, accident, fraud and unemployment insurance, to our clients. We aim to improve our competitiveness by further strengthening our brand awareness, particularly through the marketing of our products and the use of our multichannel distribution platform and by continuing to focus on the development of innovative products aimed at satisfying the needs of each of our different client segments.

Capitalize on our risk management practices, cost-efficient culture and efficient capital allocation to promote profitable and sustainable growth

As we pursue our growth and profitability objectives, we will sharpen our focus on profitability and efficiency, by seeking to be a more balanced bank with a higher share of consumer loans and lower cost deposits. We aim to underpin this strategy through efficient capital allocation, strong risk management, an efficient overhead structure and productive investments. We will continue applying risk policies aimed at generating an appropriate return of our risk-weighted assets. We intend to continue to carefully monitor the credit quality of our asset portfolio and adapt our risk policies accordingly, particularly any assets in high growth segments such as individuals and SMEs, while diversifying our balance sheet. We plan to maintain a balanced growth profile with a strong emphasis on liquidity, a stable, low-cost funding base and strong capital ratios.

We plan to make efficient use of technology and digitalization through alternative channels, such as mobile banking, internet banking, full-function ATMs and our telephone contact centers, in order to control the expenses associated with the continued expansion of our multichannel distribution strategy. As of December 31, 2016, we were the second most efficient bank among the seven largest private banks in terms of assets in the Mexican banking system, as determined in accordance with Mexican Banking GAAP, according to data from the CNBV. For this purpose, we calculate the efficiency ratio as administrative expenses divided by total income, using information published by the CNBV. We will continue to monitor our administrative and promotional expenses in order to seek to maintain a low efficiency ratio.

Operations Through Subsidiaries

As of December 31, 2016, the subsidiaries of the Bank, are as follows:

On December 21, 2016, the SHCP authorized the merger of our subsidiary Santander Vivienda, S.A. de C.V., Sociedad Financiera de Objeto Múltiple, Entidad Regulada, Grupo Financiero Santander México as merging entity with two of our other subsidiaries, Santander Hipotecario, S.A. de C.V., Sociedad Financiera de Objeto Múltiple, Entidad Regulada, Grupo Financiero Santander México and Santander Holding Vivienda, S.A. de C.V. both as merged entities. The merger was effective on January 1, 2017.

On October 5, 2017, the SHCP authorized the inclusion of Santander Inclusión Financiera, S.A. de C.V., Sociedad Financiera de Objeto Múltiple, Entidad Regulada, Grupo Financiero Santander México (“Inclusión Financiera”) as a part of the Group. As a result of the purchase, SanMex will own 99.99% of the capital stock of Inclusión Financiera.

The following table shows total assets, net income and total equity of each of our principal subsidiaries as of and for the year ended December 31, 2016.

Our principal sources of funding are customer deposits. Customer deposits typically represent a substantial portion of our funding base because of our ability to attract deposits from customers through its extensive retail, wholesale and corporate network. Since we are primarily a commercial bank, customer deposits constitute the main source of liquidity in our financing structure. These deposits currently cover most of our liquidity requirements. Our control and management functions involve planning its funding requirements, structuring the sources of financing to achieve optimal diversification in terms of maturities, instruments and markets and setting forth contingency plans. In order to increase liquidity, we rely in part on local peso-denominated issuances. We also have access to international funding through U.S. dollar-denominated issuances with longer maturities. For a further discussion of our funding, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources.”

Operating Segments

We have two operating segments: Retail Banking and Global Corporate Banking. These operating segments are identical to those of GFSM. For further detail on our Retail Banking and Global Corporate Banking Segments, please see “Item 4. Information on the Company—B. Business Overview—Retail Banking” and “Item 4. Information on the Company—B. Business Overview—Global Corporate Banking Segment” of GFSM’s annual report on Form 20-F.

Our Core Products

Deposit-Taking and Repurchase Agreements Transactions

We offer our Retail Banking customers a variety of deposit products, such as:

In addition, we accept deposits from financial institutions as part of our treasury operations, which are represented by certificates of interbank deposit, or CDIs, and which earn the interbank deposit rate. Besides representing a significant source of stable funding for us, we regard each account holder as a potential customer for the full range of products and services we offer.

We also enter into repurchase agreements transactions. Repurchase agreements are Mexican-law governed sale and repurchase agreements ( reportos ), also known as repos, pursuant to which a party agrees to a temporary purchase or sale of securities in exchange for (i) a specified premium to be paid or received and (ii) the obligation to resell or repurchase the underlying security. Under a circular issued by the Mexican Central Bank, Mexican banks may enter into repurchase transactions with Mexican and foreign counterparties. Repurchase transactions may be entered into in respect of bank securities, Mexican government securities, debt securities registered with the CNBV and certain foreign securities. Repurchase transactions must be entered into under master agreements, such as the master agreements of the International Securities Market Association and the Public Securities Association. Collateral may be provided in connection with repurchase transactions.

Repurchase agreements totaled Ps.124,525 million at December 31, 2016, a 36.17% decrease compared to the amount at December 31, 2015. We expect to continue using this funding source in the future due to its broad availability and low cost.

The table below presents a breakdown of our total deposits by product type including repurchase agreements at the dates indicated.

Retail Lending

General

We offer retail lending products to customers through our extensive branch network and on-site service units. See “—Distribution Network.” We divide our customers into separate categories based principally on their monthly income (for individuals) and annual gross revenues (for businesses). We tailor our products and services to the needs of each customer classification. Our loans are generally originated and serviced internally. We believe our underwriting system has the capability to process large application volumes (greater than the expected volume for the upcoming years), maintaining the tight controls and information requirements to improve the decision models.

We make credit available to our customers through the various loan products listed in the table below. The table sets forth the composition of our individual and SME customer total loan portfolio at the dates indicated.

The Santander Hipotecario residential mortgage portfolio amounted to Ps.30,928 million and Ps.26,262 million as of December 31, 2015 and December 31, 2016, respectively.

The following table shows the annual interest rate applicable to the main categories of retail lending products at December 31, 2016.

Payroll Loans

Payroll loans are a typical consumer lending product with a differentiated method of payment. We grant loans (after conducting a risk assessment) to clients that receive their salaries through a current account at the Bank. The loan payments are made through automatic charges to the current account and are scheduled according to the payroll frequency of each employee (weekly, biweekly, monthly).

Our clients include employees from the public and private sectors. At December 31, 2016, payroll loans amounted to Ps.27,315 million (U.S.$1,325 million), representing approximately 4.6% of our total loans and advances to customers (excluding reverse repurchase agreements). We held approximately 12.0% of the market share in Mexico in payroll loans at December 31, 2016, as determined in accordance with Mexican Banking GAAP, according to information published by the CNBV.

Personal Loans

Personal loans are loans granted to individuals with maturities of up to 48 months and the monthly installments to be paid by the customer may not exceed 30% of such customer’s net monthly salary. Personal loans are not secured by collateral. At December 31, 2016, personal loans amounted to Ps.21,990 million (U.S.$1,066 million), representing approximately 3.7% of our total loans and advances to customers (excluding reverse repurchase agreements), which include the non-revolving consumer loans portfolio acquired from Scotiabank Inverlat on November 26, 2014 consisting of 39,252 loans with a face value of Ps.3,179 million and a fair value of Ps.3,002 million.

Credit Cards

We are the third-largest issuer of credit card loans in the Mexican market according to information published by the CNBV, and we had 3.2 million outstanding credit cards across 3.0 million accounts as of December 31, 2016. As of the same date, we held a 14.5% market share, with a Ps.51,537 million (U.S.$2,499 million) loan portfolio and a delinquency rate of 4.2%, below the average in the Mexican market, in each case as determined in accordance with Mexican Banking GAAP, according to information published by the CNBV. As of December 31, 2016, our total credit card loans outstanding represents approximately 8.6% of our total loans and advances to customers (excluding reverse repurchase agreements).

We issue 21 different MasterCard, Visa and, beginning this year, American Express credit cards designed for our different business segments. We mainly issue credit cards to our existing customers, such as deposit account holders and non-deposit account holders. Our income from credit cards includes interchange merchant fees, interest on credit card balances, annual cardholder fees and fees charged for cash advances. We market our credit cards through our branch network and offer preselected credit cards to our customer base across all socioeconomic customer segments. Our growth strategy is based on gaining market share while growing profits, by focusing on product innovation and aggressive customer acquisition efforts through commercial campaigns and managing risk according to different segments and channels. Since 2001, we have launched credit card products designed to serve customer preferences and financial needs and aimed at encouraging demand for our products. The main customer preferences and needs that have been addressed are low rates, no commissions, total protection and miles/rewards programs.

We offer many benefits for our credit card customers, including: (i) the Fiesta Rewards program, in which points are awarded for each dollar of consumption in any establishment and participating hotels, plus a bonus is awarded for the first purchase within the first 100 days of the card’s authorization, and can be redeemed for hotel nights, airline tickets, car rentals, rewards catalog products and gifts; a concierge service and access to over 600 VIP lounges at major airports in over 100 countries are also available; (ii) the Delta Platinum program, which offers welcome bonus, priority boarding on certain flights, concierge services, SkyMiles program (one mile for every dollar spent at any establishment and two miles for every dollar spent on Delta), and concierge and parking benefits in the Mexico City International Airport for up to 15 days paying 50% of the fare; (iii) the Ferrari card, which provides access to major Formula 1 races, the opportunity to take a course in sports driving and access to the Scuderia Ferrari community; and (iv) the American Express card which awards points, special shopping offers in department stores, supermarkets and other shops, extra bonus with triple points, and purchases without interest for the first six months.

In February 2016, we launched a new travel credit card “TDC Santander-Aeromexico”, in conjunction with the most important airline in Mexico, with exclusive benefits for 10 years. This card offers differentiated benefits to different client segments: Santander Aeroméxico Infinite and Santander Aeroméxico Platinum for high income clients and Santander Aeroméxico Blanca for mid income and massive clients. Benefits to our TDC Santander-Aeromexico credit card customers include “premier points” per trips and for each U.S.$1.00 spent, benefits when traveling including preferential boarding, airport transportation and access to airport and premium lounges, free use of Santander ATMs abroad, replacement and cash advance with emergency card abroad, shopping protection and international emergency medical services, among others.

In 2016, TDC Santander-Aeromexico became a priority commercial focus for us, issuing more than 350,000 cards to consumers since the launch of the product in February.

As of December 31, 2016, our credit card portfolio has the second-best performance in terms of asset quality (defined as total non-performing loans as a percentage of total loans) among the seven largest private banks in Mexico, as determined in accordance with Mexican Banking GAAP, according to information published by the CNBV.

The following table shows the non-performing loans in our credit card portfolio as a percentage of the total loans in our credit card portfolio for the periods indicated.

A special risk management unit for the credit card business continuously monitors portfolio performance. New application scores, behavior scores and capacity score models were implemented to manage new growth strategies. In addition, the credit card portfolio is segmented for risk according to behavior models. Depending on risk stratification, different offers are designed to increase, maintain or reduce exposure and profitability.

Our credit card business follows the Santander Group’s corporate model, which provides the following benefits:

We have invested in simplifying support and commercial processes. Due to our new issuing process, customers can leave the branch with their credit card in less than fifteen minutes. Our contact centers provide segmented customer service and retention activities, utilizing analytical tools as well as predictive retention models.

In addition to issuing credit and debit cards, we also manage ATMs and point-of-sale terminals. The point-of-sale terminals business is a joint venture with Elavon Merchant Services México, or Elavon, which is a subsidiary of U.S. Bancorp, a company that provides end-to-end payment processing services to more than one million merchants in the United States, Europe, Canada and Puerto Rico and other countries. The main contributions of Elavon are its know-how, its portfolio of products and services, its multinational customers with operations in Mexico and its access to the investments that this business requires. Our alliance with Elavon has resulted in what we believe is a more diligent management of our credit card business, focusing on providing new payment solutions and innovative business services for merchants.

Mortgages

We offer loans to our customers for the purchase of real estate secured by mortgages with a maturity of up to 20 years. We have a leading position in this business among non-government-owned banks and, at December 31, 2016, held a 18.7% market share in Mexico in terms of amounts of loans outstanding, as determined in accordance with Mexican Banking GAAP, according to information published by the CNBV. As of December 31, 2016, we had a total mortgage portfolio of Ps.132,414 million (U.S.$6,422 million), representing approximately 22.09% of our total lending portfolio.

On December 23, 2010, we entered into a stock and assets purchase agreement to acquire the U.S.$2 billion residential mortgage business of General Electric Capital Corporation and its subsidiaries, or GE Capital, in Mexico, or the GE Capital mortgage business. The transaction closed on April 29, 2011. In addition, we repaid at closing to GE Capital the Ps.21,009 million (U.S.$1,218 million) intercompany debt at that date relating to the GE Capital mortgage business, which GE Capital historically had financed through intercompany debt. We did not purchase any loans to developers as part of the GE Capital acquisition or otherwise. The total volume of assets at the time of closing was Ps.23,904 million (U.S.$1,386 million), including a total loan portfolio of Ps.21,926 million (U.S.$1,271 million), while the total volume of liabilities was Ps.21,494 million (U.S.$1,246 million).

On November 29, 2013, we completed the acquisition of the equity stock of ING Hipotecaria, S.A. de C.V., Sociedad Financiera de Objeto Múltiple, Entidad No Regulada, or ING Hipotecaria, a subsidiary of ING Group. In February 2014, ING Hipotecaria was renamed Santander Vivienda. Santander Vivienda provides mortgage-related products and services to more than 28,000 clients and operates two branches throughout Mexico. The net assets acquired amounted to Ps.395 million, which included a loan portfolio with an unpaid principal balance of Ps.11,237 million and an estimated fair value of Ps.10,772 million. As part of the transaction, we made a cash payment of Ps.541.4 million (approximately U.S.$31.4 million) for ING Hipotecaria’s equity. Since the acquisition, all of the branches operated by ING Hipotecaria have been closed, in an effort to consolidate the distribution network and increase operational efficiency.

As a result of our acquisitions of the GE Capital residential mortgage business and ING Hipotecaria, during 2014 and 2015, we currently have the second-largest mortgage loans portfolio of the financial system, as determined in accordance with Mexican Banking GAAP, according to information published by the CNBV. The mortgage portfolio of the GE Capital mortgage business represented approximately 26% and 20% of our mortgage portfolio as of December 31, 2015 and 2016, respectively, as determined in accordance with Mexican Banking GAAP. The mortgage portfolio of Santander Vivienda (formerly known as ING Hipotecaria) represented approximately 8% and 6% of our mortgage portfolio as of December 31, 2015 and 2016, respectively, as determined in accordance with Mexican Banking GAAP. We have also engaged in transactions involving the loan p ortability via mortgage replacement, a process in which the Bank cancels an outstanding client mortgage with another institution and generates a new debt for such client with the Bank. During 2016, Banco Santander Mexico was the market leader in the segment, with a placement of Ps. 4,956 million, representing a market share of approximately 40 % .

On average, the loan-to-value ratio of our mortgage loans was 53% as of December 31, 2016. We generally do not make any loans for more than 80% of the value of the property to be purchased (if the property value is greater than Ps.5 million) or up to 90% (if the property value is less than or equal to Ps.5 million). Borrowers must meet certain minimum monthly income levels as evidenced by recent payroll information and tax returns. Borrowers must provide satisfactory documentary evidence to confirm their employment or other types of revenue and to otherwise evaluate their ability to pay.

On November 16, 2016, we launched Santander Personal Mortgage which offers the only mortgage loans in Mexico at a personalized interest rate, adjusted to each of our customer’s needs. Further, clients who benefit from Santander Personal Mortgage are also entitled to enjoy the benefits of Santander Plus, provided certain conditions are met.

According to the SHF, there was a deficit of approximately 8.8 million homes in Mexico in 2016, as compared to the approximately 12.8 million home deficit in 2015. This deficit is expected to increase to an estimated 14.2 million homes in 2020, according to the SHF, based on the expected demographic growth of 600,000 families per year in Mexico, according to the SHF. We expect that this systemic housing deficit in Mexico will continue to drive demand for our residential mortgages and related products in the near term.

Insurance Brokerage

We currently distribute insurance products from Zurich Santander Insurance America, S.L. as well as third-party providers. The products we sell, which are underwritten by the joint venture with Zurich Financial Services Group, together with sales of products of its predecessor, Seguros Santander, represented approximately 29.1% and 29.7% of the commissions we earned in 2015 and 2016, respectively.

Total outstanding insurance premiums distributed by us increased 3.4%, or Ps.358.1 million in 2016, as compared to 2015, and total insurance commissions collected by us increased 4.1% in 2016 as compared to 2015. This result was supported by strengthening of our offering with a client-segmented approach and a significant mass media campaign for “Autocompara”, focusing on the improvement of sales force productivity and their incentive scheme.

The products we distribute as part of our insurance brokerage services include life, automobile, home, health, accident, fraud, unemployment and life-savings insurance. We focus on simple standardized banking product-related insurance mainly intended for the retail business. We cross-sell these insurance products with our banking products. The products are sold through our distribution network and we receive a service fee from the insurance providers based on our sales.

We do not bear any underwriting risk in connection with our insurance brokerage services. All underwriting risk is assumed by, and all premiums are payable to, the relevant third-party insurance underwriters.

In 2011, we launched our Autocompara program, which allows potential clients to compare automobile insurance quotes from the seven largest insurance companies in Mexico. Clients may access this program at our branches, on the Internet or by telephone. This program has been advertised through a national publicity campaign, which has allowed us to position ourselves among the top companies in the automobile insurance sector. As of December 31, 2016, automobile insurance products generated commissions of Ps.917.1 million (U.S.$44.5 million) based on a portfolio of approximately 1,366,811 outstanding automobile insurance policies.

In 2016, we launched “Santander Event Protection” program as an additional benefit of Santander Plus for our clients, which awards our clients who have at least two insured assets with us (home, auto, health and life) , with a certificate to celebrate the occurrence of certain important events in their lives . This program encourages the integral protection of our customers, increasing the profitability and strengthening our client portfolio though the rewards scheme.

Corporate Lending

We offer a wide range of credit products to our corporate customers, including general corporate and working capital financing and foreign trade financing complemented by deposit-taking and cash management services. As of December 31, 2016, we had approximately 367,311 SME customers, 10,814 middle-market corporation customers and 2,207 government institutional customers. Our middle-market corporation customers include companies across all industry sectors. Our SME and middle-market corporation clients’ coverage is handled by our officers who are appointed according to the customer’s geographic location in the case of middle-market clients, and according to the location of our corporate headquarters in Monterrey and Mexico City in the case of our large domestic companies customers.

Distribution Network

We refer to our strategy of using multiple distribution channels, such as branches, Internet banking, mobile banking, contact centers and third-party branches, tailored to each of our client segments and designed to reach a broad spectrum of customers in a cost-efficient manner as our multichannel distribution strategy. Our multichannel distribution strategy is identical to that of GFSM. For information on our distribution network, please see “Item 4. Information on the Company—B. Business Overview—Distribution Network” of GFSM’s annual report on Form 20-F.

Funding

Our principal source of funding is customer deposits, including repurchase agreements, which represented Ps.655.9 billion (U.S.$31.8 billion), or 52.7%, of our total liabilities as of December 31, 2016. Customer deposits typically represent a large portion of our funding base because of our ability to attract deposits from customers through our extensive retail, wholesale and corporate network. Since we are primarily a commercial bank, customer deposits constitute the main source of liquidity in our financing structure. These deposits currently cover most of our liquidity requirements. Our control and management functions involve planning our funding requirements, structuring the sources of financing to achieve optimal diversification in terms of maturities, instruments and markets and setting forth contingency plans. In order to increase liquidity, we rely in part on local peso-denominated issuances. We also have access to international funding through U.S. dollar-denominated issuances with longer maturities. For a further discussion of our funding, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources.”

The following table sets forth Banco Santander Mexico’s funding and market share with respect to funding for the periods indicated.