Banco Santander Mexico SA Institucion de Banca Multiple Grupo Financiero Santand (BSMX) 2021 Q3 法說會逐字稿

Good day, everyone, and welcome to Banco Santander Mexico's Third Quarter 2021 Earnings Conference Call. Today's call is being recorded. Following the speaker's remarks, there will be a question-and-answer session. I'd now like to turn the conference over to Mr. Hector Chavez, Managing Director and Head of Investor Relations, who will make some opening remarks and introduce today's other speakers. Please go ahead.

Thank you, operator. Good day, and welcome to our third quarter 2021 earnings conference call. We appreciate everyone's participation today.

By now, you should have access to our earnings press release and the presentation for today's call, both of which were distributed yesterday after the market closed and can be found on our Investor Relations website.

Presenting on our call today will be Didier Mena, our CFO. But before we begin our formal remarks, allow me to remind you that certain statements made during the course of this discussion may constitute forward-looking statements, which are based on management's current expectations and beliefs and are subject to a number of risks and uncertainties, including the COVID-19 pandemic, that could cause actual results to materially differ, including factors that could be beyond the company's control. For an explanation of these risks, please refer to our filings with the SEC and the Mexican stock Exchange. Didier, Please go ahead.

Thank you, Hector. Good morning, everyone, and good afternoon to those of you participating from Europe. I hope you and your families are managing to stay healthy and safe.

During this quarter, we continue advancing on our strategic priorities while maintaining a strong balance sheet and liquidity position. Loan volumes continue lagging, mostly affected by commercial loans, in line with market trends and still soft demand conditions. However, we are optimistic as we have started to see a slight sequential upturn in certain segments. In individual loans, we continue outpacing the market, supported by sustained market share gains in mortgages and other loans. In consumer and SMEs, we are now seeing signs of a gradual sequential recovery as economic activity starts to gather speed, coupled with our higher risk appetite in these segments.

For third consecutive quarter, deposits remained relatively stable sequentially. The high liquidity has allowed us to focus on improving our deposit mix by favoring demand deposits over term deposits. In fact, our current deposit mix with 74% demand and 26% term is the best mix we have ever had. Both our individual and corporate demand deposits continue expanding at low double-digit rates year-on-year, underscoring the success of our loyalty and customer acquisition strategies as well as our focus on lowering our cost of funds.

In terms of asset quality, NPLs continue falling, supported by improving economic conditions in the country, along with our sound portfolio, which reflects our proven risk management. We're also approaching a normalized level of provisions as we continue moving to our healthier operating environment. Besides our cost of risk has declined to the lowest level in the last 5 quarters, and we expect it to continue converging gradually to pre pandemic levels.

Before moving on to review our performance for the quarter, please note that today, in the early morning, our pine company launched a voluntary tender offer for cash to acquire all the Series B shares and ADRs of Santander, Mexico, not already held by Banco Santander, which represents approximately 8.27% of Santander Mexico's share capital. The offering price is MXN 26.50 per share and the U.S. dollar equivalent of MXN 132.50 per ADR. For more details about the offer, please refer to Banco Santander's press release that was issued today.

The charts on Slide 4 show the continuous improvement in GDP expectations, which are based on prospects for continued solid economic performance in the U.S., coupled with a gradual recovery in domestic demand. September was the best month in terms of annual growth in job creations since March 2017. As of now, 98% of the jobs lost during the pandemic have been recovered.

Aggregate demand has also shown better performance with most of its components nearly achieving prepended levels. Exports exceeded pre-crisis levels with a slight fall in August, while private consumption has been recurring gradually. By contrast, investment has been lagging due to low visibility. Therefore, the combination of a rebound in economic growth and a gradual recovery in employment seem to indicate that the worst is behind us.

Additionally, with inflation remaining high and above Banco de Mexico's target range, we forecast inflation of 6.4% for 2021 and 3.7% for 2022. We're expecting a reference rate of 5% for 2021 and 5.25% for 2022. We are more optimistic about the outlook for the remainder of 2021. And for the coming year, while remaining well positioned to contribute to the turnaround of the economy, supporting our customers, whose loan demand is anticipated to strengthen going forward.

On Slide 5, you can see that system loan volumes remain stagnant at a level similar to the past 3 quarters and contracting 3% year-on-year, although system loan demand remains sluggish as slight require is beginning to occur as contractions are becoming less dramatic. The year-on-year decline continues to be driven by commercial loans, particularly corporates that are still posting soft demand. On the bright side, consumer loans have started to show a marginal sequential recovery hand-in-hand with economic rebound. System deposits continued showing a tepid rebound, growing 2% year-over-year with demand deposit growth at 9% year-on-year.

Please turn to Slide 6, where we would like to give you an update on our growth strategy. Our strategic priority remains the same, provide the best customer experience in the financial services sector in Mexico, leveraging the latest digital tools and improving processes to accelerate our technological transformation, while we continue positioning the bank as a market leader in value-added products that attract and retain additional loyal clients.

As we continue working on the transformation of the bank's payments assets through PagoNxt, this quarter, we acquired 70% of our strategic technology partner, MIT, (foreign language). This acquisition will allow Getnet to establish itself as a payment platform with the largest functionality in Mexico, adding more value to corporates and SMEs by offering improved technological solutions tailored to their collection needs. It is a technology payments company with over 35,000 customers and 125,000 points of sale in Mexico, which allows it to process 31 million payments a month. Its share of the Mexican merchant payments market is 10%, and its products and services includes POS, e-commerce, smartphone payments, call center and direct debit. As technology and merchant payment services providers, MIT and Getnet Mexico's value proposition in Mexico is both competitive and innovative.

In addition, in early September, we launched our new and innovative credit card like you. This card is 100% digital, one of the safest in the market and designed for any time of customer, allowing each client to tailor the cards according to their preferences. In fact, like you, its first car in Mexico with a concept on financial demand, which means that the customer only pays for what the benefits they need. Our goal is to place 1 million of these cards in the next 12 months among our customer base. We're quite happy with the results so far. Since its launch, one point 5 months ago, we have issued over 177,000 like u cards, breaking our own expectations.

Digital conversion is crucial to our goal of seamlessly serving customers anytime and anywhere and becoming a more customer-focused bank. Progress on this front is very important for us, with digital sales representing 53% of total sales, up from 39% a year ago. We also had more than 5 million digital clients as of September, increasing 10% year-on-year. Our focus on secured lending, particularly in mortgages and other loans, is delivering excellent results. These products are strategic for us due to the potential to attract and retain loyal customers. In other loans, we continue expanding our business both organically and rapidly, achieving a market share of 10% as of August, decreasing the portfolio 3x compared to a year ago. These results are fueled by our alliances with leading automakers in the country. We're the fourth largest player in the market, originating a monthly average of around MXN 1.8 billion. If this trend continues, we expect to move up the ranking and be among the top 3 players within the next 12 months.

Our medium-term goal remains reaching our natural market share of around 13% to 13.5%. In mortgages, our strong performance reflects the success of our products, Hipoteca Plus and Hipoteca Free as well as our Pro Tech online platform and the redesign of the customer's journey, whereby we eliminated significant pain points in the application and approval processes. These strong results support our position as one of the top mortgage originations originators in the market, achieving the highest absolute last 12-month growth in the market for 2 consecutive quarters.

Our solid performance in auto and mortgage loans has allowed us to increase our individual loans market share by 7 basis points compared to a year ago. In terms of deposits, the mix of our individual deposits to total demand deposits increased by 245 basis points over the last 2 years to 33.3%, consistent with our strategy of attracting more retail customers.

This brings us closer to our medium-term goal of achieving a more balanced deposit mix, in line with the best-in-class peers. This better mix is contributing to lower funding costs over time. In addition, our discipline and profitability focus when pricing corporate demand deposit has allowed us to be one of the banks that has lowered its cost of deposits the most compared to the system and to main peers.

Turning to Slide 7. Total loans contracted 3% year-on-year, in line with the system and posting a slight increase sequentially, reflecting the sustained performance shown in the retail portfolio and offset by the still difficult comparison base of the commercial book. Going forward, we expect to start seeing a better trend as we're increasing our risk appetite, particularly in credit cards and SME loans and our ongoing efforts in mortgage and auto loans.

In addition, commercial loans are anticipated to strengthen, driven by the expected improvement in the economic environment and supported by initial basis of comparison. All in all, we expect to start seeing an upturn in higher-margin segments while keeping an eye on maintaining sound and sustainable asset quality, reflecting a portfolio that exhibits good behavior.

On Slide 8, you can see that individual loans are growing close to 10% year-on-year on the back of mortgages and other consumer products, especially auto loans, while credit cards and payroll loans remain weak. Mortgages not only have proven defensive during the last quarter, but have also shown unceasing growth. Our mortgage portfolio expanded 19% year-on-year organically, double the market growth.

During the third quarter, around 57% of originations came from our Hipoteca Plus product, which helps drive cross-selling of other products as well as building customer loyalty. Our digital onboarding platform for mortgages, Hipoteca line has been a game changer as it helps streamline processes and eliminate the need to visit a branch. During this quarter, 96% of our mortgages were processed through this digital platform. By contrast, credit cards, personal and payroll loans are still affected by weak demand conditions but also reflect our cautious approach.

However, as I mentioned before, we expect better conditions from now on as it seems we have left the negative impact of the pandemic behind us. In September, credit card usage grew 20% year-on-year. With this encouraging performance and the launch of Light you or new credit card, we anticipate seeing the start of a sequential growth in credit card balances going forward. In fact, just in the last 7 weeks after being launched, we already have issued more than 177,000 like due cards and reached a balance of MXN 813 million.

Our target is to issue 1 million cards in 12 months. This innovative product includes enhanced security features, making it one of the safest in the market with a digital and integrated experience, zero annual fee and the possibility of accessing temporary benefits and insurance coverage and 100% customized for each customer. This credit card is the first in Mexico based on the own financial demand concept. In terms of digital experience, Light U issued 100% digitally with a dynamic digital security code to protect our clients, while the physical card is infoless to help prevent exposing the customers' personal data. Besides, it takes a maximum of 5 minutes for our customer to be able to start using their digital card. And if the customer decides to ask for the physical card, in a matter of 5 days, it will receive it at a branch or at their home.

Currently, 90% of like UCAR holders remain 100% digital, while 54% have also requested the plastic pressure, illustrating the higher adoption level of a digital product. Through this new payment and credit value offering, we're confident we will acquire a significant number of users with our customer base, allowing us to grow steadily and organically in this market segment and without compromising prudent risk management.

Turning to Slide 9. Solid expansions in loyal and digital customers continues, achieving year-on-year growth of 10% in both cases. We have maintained our focus on digital conversion, while increasing digital transactions and sales. During the third quarter of this year, product sales via digital channels accounted for 53% of total sales, a significant increase compared to 39% a year ago. Digital monetary transactions also had a sharp increase reaching 42% of our total, with mobile transactions accounting for 96% of total digital transactions. In addition, mobile clients grew 13% over the past 12 months to over $5 million, driven by our promotional campaigns and incentives through digital channels.

As shown on Slide 10, commercial loans decreased 10% year-on-year, still affected by lower corporate and mid-market loans. As is well known, last year, companies drew under committed lines of credit in the face of uncertainty caused by the pandemic. Therefore, we won't see a full recovery in corporate loans until investment levels get back to what they were in 2019.

Loans to government and financial entities decreased 6.2% year-on-year and 6.7% on a sequential basis. Mid-market companies, and in particular, large corporates registered notably year-on-year contractions, although bold posted an uptick of 1.2% and 4.2% on a sequential basis, signaling a turning point that we expect can be fueled further by a stronger economy in coming quarters.

SME loans registered their first sequential increase after 8 consecutive quarterly contractions. We expect to see better performance going forward, reflecting our greater risk appetite in this segment as we are more confident about a healthy recovery in SME loan demand as economic conditions continue to improve.

Moving on to funding on Slide 11. Total deposits decreased 1% year-on-year. As in previous quarters, there continues to be a shift between time deposits due to the still low interest rate environment that favors the former, coupled with our efforts to improve our funding mix. In fact, the 74% demand deposit weight in total deposits is our highest ever. Demand deposit growth from individuals increased 10% year-on-year, supported by ongoing efforts to attract these types of deposits. As a result, we have been able to reduce the cost of our demand deposits by 77 basis points year-on-year, beating the market cost decrease.

Although we are satisfied with this result, we continue working to further reduce our funding costs as we make additional headway toward improving our deposit mix, while lowering the cost of our commercial deposits as well, supported by our strategy of focusing on prioritizing individual deposits and forgoing certain expensive corporate deposits.

Turning to Slide 12. We have maintained very strong capital and liquidity positions. Our liquidity coverage ratio stands at 330%, representing a substantial buffer and well above the regulatory threshold. On September 15, the bank issued $700 million of subordinated notes, which were offered entirely to Banco Santander, our parent company, through a private placement. These notes follow Basel III guidelines and comply with local regulations to be considered as part of our Tier 1 capital. The execution gave us the opportunity to capitalize on favorable market conditions and we widen the alternatives to manage our capital base and funding going forward.

Following the issuance, our core Tier 1 and capitalization ratios as of September 30 are 14.86% and 21.46%, respectively. In addition to this new $700 million notes, the bank also has $500 million of AT1 notes issued back in 2016. The first call date of our 2016 notes will take place on January 2022. As in the past, the decision to exercise or not the option to call such instruments will be driven completely by both economic factors and regulatory capital requirements at the moment. Our net loans to deposits ratio was about 90%, reflecting our strong structural liquidity position. We also remain very comfortable with our debt profile, given how manageable our debt maturities are.

As you can see on Slide 13, our net interest income decreased 250 basis points year-on-year, reflecting a combination of lower rates and a contraction of high-margin loans, partially compensated by lower deposit costs. In contrast, net interest margin expanded 14 basis points year-on-year on the back of lower average balance of investment in securities.

Please turn to Slide 14. Net commissions and fees decreased 5.2% year-on-year, particularly affected by lower net credit card fees as we recognized in 2020, extraordinary income from the renewal of a contract with one of our partners. Insurance fees were also lower as we faced a fee adjustment as part of our annual review with our insurance partner as well as lower renewals of certain large group policies. Let me highlight that charge fees are up 16% year-on-year due to an increase in transactionality. This increase was mainly driven by debit cards, ATMs and installment purchases.

Turning to Slide 15. Gross operating income declined 2% year-on-year, mainly due to the fee adjustments mentioned previously and to the soft net interest income. This was partially offset by solid performance in market-related income as our markets team was able to capitalize on rising interest rate coupled with exchange rate volatility. On a cumulative basis, gross operating income decreased 5% year-over-year, reflecting a higher base of market-related income and lower net interest income.

Moving on to asset quality on Slide 16. You can see that our NPL ratio decreased 2 basis points sequentially to 2.85%. Year-on-year, the NPL ratio increased 76 basis points, reflecting the artificially low base in 2020 that was related to the customer release program. Going forward, we expect NPLs will remain stable as we start to grow the loan portfolio. Provisions in the quarter declined 14% sequentially and almost 5% year-on-year as we continue moving toward a more normal operating environment.

Moving forward, we expect to keep provisions at a more normalized level despite having a greater risk appetite in credit cards and SMES. Our loan portfolio continues to perform well, with our cost of risk standing at 2.75%, a 38 basis points year-on-year decrease and starting to converge to pre-pandemic levels that were in the neighborhood of 2.6% to 2.7%. Looking ahead, we anticipate cost of risk to remain stable with a gradual downward trend in the coming quarters.

Turning to costs on Slide 17. Administrative and promotional expenses increased 3% year-on-year, well below inflation. This was mainly driven by higher personnel and IT-related expenses. Higher amortization costs related to our investment program also contributed to the increase as we remain focused on digitizing more of our services and reinforcing our cybersecurity assets among other ongoing technology investments.

Increase in personnel expenses was the main factor of our 8% increase quarter-over-quarter caused by the hiring of employees that were previously outsourced and by a general salary increase we made in September, in line with inflation. These increases were partially offset by lower administrative expenses as our sourcing providers were canceled, together with lower EPAP related costs. The combination of a contraction in gross providing income and an increase in administrative and promotional expenses, resulting a deterioration of our efficiency ratio, which now stands at 50.97%. We're optimistic about the dynamics of the business that we expect that will result in improvements in the ratio going forward.

Turning to profitability on Slide '19. Net income decreased 3.7% year-on-year to MXN 4.8 billion, mainly due to the lower fees and higher expenses, partially offset by solid growth in market-related income and lower provisions. Return on average equity was 12%, 191 basis points below the year ago level. We are accumulating capital per the regulator's recommendation to limit the payout of 2019 and 2020 earnings. In this regard, on November 5th, we will pay the remaining dividend amount associated with this restriction imposed by the CMBB. This represents $0.28 per share for a total of approximately MXN 1.9 billion.

Before going into the Q&A session, let me share with you some closing thoughts and perspectives. Although domestic normal economic conditions are improving, they will likely remain uneven and challenging. Nevertheless, our strategy will continue to focus on strengthening client loyalty and increasing digitalization, keeping intact our ambition to become the bank provided the best customer experience in Mexico.

We continue working on growth initiatives by leveraging new digital tools and methodologies and by further enhancing our internal operating processes. Accordingly, we will continue making new investments in bank's transformation, mainly in IT and digitalization, while seeking efficiencies in other business lines and maintaining tight cost controls. Both of which also support our bottom line.

This concludes our remarks. We're now ready to take your questions. Operator, please open the call for the Q&A session.

We will now be conducting a question-and-answer session. (Operator Instructions). One moment, please while we poll for questions. Our first question is from Jason Mollin with Scotiabank.

My first question is on the competitive environment in the Mexican financial system. We've seen lots of announcements of new entrants, numbers that they have provided, not necessarily that we see in the banking commission numbers. But can you talk about the -- especially in the credit card market. We've seen lots of new players? Are they going after your clients? Are you seeing them as meaningful competitors at this point in time?

And the second question would be in the context of the economic outlook for Mexico, what are you looking for, for loan growth in the medium term? And how quickly can that accelerate? And is it really an increase in the penetration of the unbanked that can drive this? Or is it those that increasing the balances of those that are in the system already?

Jason, I think that you raise a great question about the competitive environment. And before talking about some specifics, let me share with you 3 trends that I see with certain concerns that are evolving, not only in Mexico, but in certain key markets, key banking markets. The first 2 trends have to do with somehow incumbents, we're losing certain competitive advantages. And the first one is associated with raising capital, not only in a certain amount, but also in terms and conditions. Historically, incumbents had the benefit of accessing capital and accessing it in better terms than new entrants. And what we're seeing these days is that there is enough capital that is being provided for new entrants. A valuation that is more compelling for new entrants than for incumbents and just to put a particular example, Nubank. In the latest capital that they raised, their implied evaluation is $30 billion. At that valuation, the price-to-book value is 110x book. As you know, we're trading at 1x book, okay?

So for the same project, you know that they're already operating in Mexico. If they're going after a specific project here in the Mexican market, and we both want to invest, and we want to raise capital for that. They are in a much greater position than we are. And that's totally new. We, as incumbent, we always had the competitive advantage of raising capital and raising it in better terms and conditions. So that's no longer the case.

The second trend that I see that it's concerning. Incumbents also had the benefits of economies of scale. And this was mainly related to when we retain certain inputs, okay? The most critical input that we have these days, in other than talent is technology. And nowadays, you don't have upfront costs. If you want to build a data center. You no longer need a multimillion-dollar investment in hard assets. You only need to hire a provider for that. And those providers offer exactly the same conditions to incumbents and to new entrants. So we no longer have that, okay?

And the third trend is about higher customer expectations in terms of user experience. So I think that the pandemic has strengthened this point that we -- all that consumers are expecting things to go flawless to be very simple. We expect companies to yield the information that they have on us to offer better solutions, more targeted products. And I think that incumbents are at a certain disadvantage to new entrants because of the focus and because they leverage on existing technology, and they don't have to carry the costs of -- and probably culture about legacy assets, okay?

So all these 3 things -- or 3 trends, in my opinion, will create significant pressure for incumbents. It's up to us what to do in order to obviously, recognize these trends and act on them, okay? Now you ask about new entrants and particularly on the credit card market. I would say that with the information that we have, they are gaining traction. Of probably the 2 largest players in this space have slightly less than 800,000 credit cards. Around the same credit cards one of them about the same credit cards that we were able to issue in 7 weeks.

So just to put things in perspective. I don't think that they represent a meaningful competition right now. But I think that if investors that are supporting these business models. Continue being patient and providing enough capital and supporting, I would say, good management teams, I think it would be a matter of time that they become real players in the market. Now in the benefit of incumbents, there's enough room for everybody, okay? And we are in one of the most underpenetrated banking systems in the world.

And probably moving on to your second question. I think that loan growth would be supported not only by current clients that are already banked, but also from UMB bank. And I think that we're still, as a banking system, have not done enough to fulfill the needs of bank population. And I think one of the initiatives that we have is to develop or customized value proposition for low-income individuals. The vast majority of Mexicans our low-income individuals. And if we want to make a significant contribution in terms of financial inclusion and also in terms of providing more services to the vast majority of the population in Mexico.

We need to come up with a different value proposition for this segment. I think that we still will face some headwinds in the short-term associated with the pandemic and also associated with the lack of visibility in terms of business environment in Mexico. There are several examples that, I would say, reduced business confidence. So my expectation in the short-term is that loan growth should be around 5% to 10% growth. And as long as there's more visibility in terms of more full of law and clearer rules in the country, I would expect loan growth to go back to the levels that we were seeing in prior years, close to 10% to 15% loan growth.

Our next question is from Carlos Gomez with HSBC.

Thank you for the presentation. I have 2 specific questions. One is about the need to issue AT1 paper, the subordinated debt that you had with the patent? I mean you obviously have abundant capital. So it's not clear, and you have no loan demand. So what is the questionable to issue or reissue an instrument like that? And second, you are building your retail franchise quite successfully, as you explained to us in mortgages and individuals. On the other hand, you have always had a fairly large SME franchise. But even this patent, you have reduced the loan portfolio quite significantly. Do you think that has affected your stance with your clients? And do you think that you will be able to rebuild back to the market share that you had before?

Carlos, regarding the AT1 issuance that we made, we issued back in 2016, a $500 million subordinated notes, okay? So we are somehow anticipating the call that we have at the beginning of next year, okay? We did it for a larger amount as we have more room for these instruments to compute in our capital. And as mentioned in our remarks, we will make the decision to exercise the call in January, taking into account market conditions and obviously, looking at the position of our capital position. So that was the rationale behind. It's basically extending the maturity of the capital notes that we already have, okay?

Then on your question on SMEs, this -- the -- our cautious approach is not only associated with the pandemic, okay? Goes back 5.0 to 5 years ago when Trump want the U.S. elections. We started monitoring very closely the critical risks that we are facing with our corporate clients. And we started visiting both large corporates, mid-market companies and SMEs to understand the exposure, not only in terms of interest rates, but also in terms of FX. And that created a good understanding of where we were positioned, okay? Then when the change in administration came here in there's always some friction associated with the change in government that -- for SMEs that work with the federal government.

So we were somehow cautious in that respect, okay? And then finally, when the pandemic came, we also understanding that typically are the segments that suffer the most in a downturn, we were somehow cautious as well. We think that we are in a position to recover the tens that we have. And let me share with you the following data that it's quite encouraging. If we look at the average monthly origination that we're making in SMEs. During the first 5 months of this year, it was MXN 1.7 billion, okay? Now if we take the average of the -- from June to September, that's roughly MXN 3 billion. Okay, if we do it on a quarterly basis, the average monthly origination in SMEs in the first quarter was almost MXN 1.5 billion. In the second quarter, MXN 1.8 billion. And in the third quarter, MXN 3 billion.

So when we compare these volumes, the third quarter relative to the first quarter is twice as large, okay? So yes, we're confident that we're well positioned that we will continue supporting this segment and that the inflation point is happening. With this dynamic, we think that the loan growth in this segment is coming in the next quarters.

Our next question is from Ernesto Gabilondo with Bank of America.

(foreign language) Thanks for your presentation and theory. I have a couple of questions. My first question is on the voluntary tender offer. Can you provide us some color on what is the current floating? And if you know what is the minimum flow required to remain listed? And for my second question is on GetNet. It was interesting to see that Getnet in Brazil was listed, and I believe Getnet in Mexico has a similar market share. So I don't know if you have plans in the future to least Getnet Mexico, and I understand the relations are low in Mexico, but I don't know if it could be a possibility to be listed in the U.S?

Ernesto, regarding the voluntary tender offer, it was announced early this morning. It represents close to 14% premium to the market close yesterday, including the dividend that will be paid on November 5th. In terms of how concentrated is the float, I would say that top 10 investors represent close to 62% of the entire float. So it's highly concentrated, okay? What's the minimum requirement to remain listed according to the securities market law, it's 12%. So we're already below that, okay? And this is a voluntary tender offer, okay? It's not that dilating tender offer, okay.

Now on GetNet, I think that what we're seeing is that the market and investors have different valuation metrics when you look at companies that are associated with payments. And I think that the group is fully aware of that. And I think that what they did in Brazil is somehow a way to capitalize on that. I think that, that's clearly an alternative for what we can do in Mexico. And definitely, we will explore that alternative going forward. It's not something that there's a plan for that, but definitely could be an alternative, okay.

(Operator Instructions) Our next question is from Yuri Fernandes with JPMorgan.

I have a question regarding ROEs. And basically to see if those low tiers at kind of the bottom for 2022, like basically to see how do you think about ROEs for the next years, right? I guess, we are in a depressed level of rates, rates are moving up. As you said, like the low mix are still a little bit depressed with credit cards down, but hopefully improving. So basically to understand, like how do you see your ROE gap versus tiers evolving? Like and if you can provide any numbers would be great.

And I have a second question regarding funding. You did a good job increasing them in deposits versus time deposits. But as you accelerate again, loan growth, my question is, how do you see funding, right? Because you are growing your number of loyal customers, but inflation adjusted, like in real terms, the average balance per loyal customer in demand deposits are decreasing. And your time deposits materially shrink, and I totally understand the year like your rationale to defend margins. But my take is, do you think funding is a problem for growth or it's easy for you to adjust and increase deposits if needed?

Yuri, regarding ROE, the first thing that we need to take into account is that per CNBV's recommendation, we're accumulating capital. This limit to only pay no more than 25% of earnings of 2019 and 2020. Hassles and the system in very, very strong capital positions. We were fairly advanced with the now former President of the CNBV in terms of providing arguments for them to feel comfortable about moving that restriction away. But now we have, as of yesterday, a new President of the CNBV.

So we have to probably start from scratch then. But the concern is the following. They think that if banks pay out dividends, we will not support loan growth and economic growth in the country. And even though it's a valid concern, as you look at the systems data with the current profitability that system has that is around 12% ROE. The system could grow at a level of 12% and still keep the same capital ratio as we currently have. So there's, in my opinion, has significant room to make dividend payments and continue having a very strong capital ratio. In our case, if you compare our ROE. And if you adjusted to the capital ratio that we had in the third quarter of 2019, 2 years ago, our ROE would expand 190 basis points. So literally, what you -- we reported 12%. So it's basically 14% adjusted for normalized capital levels, okay?

Now if our base is 14%, I think that there's upside on that number for several reasons. First, our high-margin loans have been contracting, basically SMEs and credit cards, and we were seeing a turning point in those 2 products and segments. So we think that, that will contribute to higher profitability. Also, the discipline that we have in terms of our cost of funds will continue paying out. And this strategy about attracting and retaining retail clients. I think that is working and is impacting through a lower cost of funds. So I think that there is upside for our ROE. I would see it once the regulators allow us to go back to the capital ratios that we had pre pandemic.

ROE is probably in the short term, going from 15% to 16%. And ever since we announced the investment plan 5 years ago, we mentioned that we were aiming at ROEs in the neighborhood of 20%. And I still think that those are achievable with the different initiatives that we have been executing. As you probably are aware, this takes time. And we are in a competitive environment that is quite fierce. I think that competitors are doing a great job. So it has not been easy, but I think that we have laid very strong foundations for profitability to be stronger and more defensive. Now in terms of your question, as I said, with funding, we don't see any issue at all. Not only through our, let's say, funding through our customers, that's the structural position that we have.

If for any reason, loan demand would be to accelerate at a level that outpaces what deposit growth, there are several things that we can do. And just to give you an example. And that's probably the -- one of the last alternatives that we have. But we were the first issuer in the pandemic in Latin America to issue an international bond. There -- and it was stressful conditions in the market with low visibility. And we were able to raise $1.7 billion for that. The capital markets remain wide open here in Mexico, in the international markets. And if we wanted to raise more deposits through pricing, we can definitely do that. And it's quite easy.

We have a very strong relationship with corporates in Mexico, and corporates are very sensitive to price. So we have those relationships. It's just literally a matter of signaling to our corporate clients that we're willing to pay a higher rate for their deposits. And actually, that's what also we did back when the pandemic started, and we had a significant loan growth associated with the committed lines of credit and half. It was quite remarkable the way that we were able to tap into deposits from our corporate so we don't see any issue at all associated with funding, Yuri.

If there are no further questions, I'd like to turn the floor back to Mr. Hector Chavez for any closing comments.

Thank you, operator, and thanks, everyone, once again for joining Santander Mexico on this call. As always, we wish to maintain an open dialogue with all of you in the financial community. So if you have any additional questions, please don't hesitate to call or e-mail us directly. Until next earnings call, please stay safe. Have a great day.

This concludes today's conference call. You may disconnect your lines at this time. Thank you again for your participation.