Banco Santander Mexico SA Institucion de Banca Multiple Grupo Financiero Santand (BSMX) 2021 Q2 法說會逐字稿

Good day, everyone, and welcome to Banco Santander Mexico's Second Quarter 2021 Earnings Conference Call. Today's call is being recorded. (Operator Instructions) 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. Good day, and welcome to our second 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 with Didier Mena, our CFO; as well as Rodrigo Brand, Executive General Director of Public Affairs.

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 expectation 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. While the pandemic continues to weigh on our results, and there is a third wave starting to impact in Mexico, our results this quarter improved significantly both year-over-year and sequentially as provisions have started to normalize. Further, we continue to make progress on our strategic priority, while maintaining a strong balance sheet and liquidity position. Loan volumes still reflect difficult year-on-year comps, mainly in commercial loans, in line with market trends and soft demand conditions. However, mortgages and other loans continued to perform extremely well, along with government loans, as we continue to grow our top market and gain market share while maintaining conservative origination standards.

Although consumer and SME loans remain soft, we have started seeing a gradual sequential pickup in credit cards and mid-market loan demand. In line with improving macroeconomic conditions, our prudent risk appetite has grown in profitable segments, such as credit cards and SMEs, but the approach remains prudent. We're confident that loan demand can continue to grow gradually during the second half of the year, supported by the economy's recovery. Deposits also reflect difficult year-on-year comps, mainly in corporates as their liquidity needs have normalized compared with year account levels. In addition, high liquidity has allowed us to focus on improving our deposit mix by favoring demand deposit over term deposits.

Both our individual and corporate demand deposits continue expanding at high single digits year-on-year, underscoring the success of our loyalty and customer acquisition strategies and our focus on lowering our cost of funds. In terms of asset quality, NPLs continue falling from their fourth quarter of last year peak, a result of improving economic conditions in the country. With regards to provisions, we are approaching a normalized level. In May, one of the corporates on the restructuring that we mentioned last quarter paid down its complete exposure with us, while the other corporates were successfully restructured. With this, our cost of risk has declined to the lowest level in the last 12 months, and we expect it to continue converging gradually to its pre pandemic levels.

Before moving on to the review more of our performance in the quarter, please note that on June 8, our parent company announced a change in the conditions of the tender offer to acquire the 8.3% of outstanding shares that it doesn't currently own in Santander Mexico. Santander group, after receiving regulatory approvals will proceed with a voluntary tender offer. Given the timing of approval is uncertain, there is no formal date to launch the tender offer. For information about the pending offer, please refer to Banco Santander's press release that was issued on June 8.

Moving on to Slide 4. The charts show the continuous improvement in GDP expectations, which are based on prospects for solid economic performance in the U.S., coupled with a gradual recovery in domestic demand. In terms of job creation, June was the sixth consecutive month with employment increases. However, progress has not been enough to date to recover jobs lost during the pandemic. 4 out of 10 jobs lost have yet to be recovered. Population mobility has also been increasing consistently after falling in January due to the spike in COVID cases reaching its mobility highest point in June. Although the vaccination program is evolving favorably contributing to a recovery of economic activity, the recent spike in contagious post a risk of a slowdown in the near term.

Given current economic conditions, inflation could temporarily remain high and above Banco de Mexico's target range with forecast inflation of 5% for 2021, with the Central Bank increasing the reference rates by 75 basis points to 5% by year-end. The combination of a rebound in economic growth along a gradual recovery in employment seems to indicate that the worst is behind us. We're cautiously optimistic about the outlook for the second half of the year, and we are well positioned to contribute to the turnaround of the economy, supporting our customers as low demand strengthens going forward.

On Slide 5, you can see that the system loan volumes remain stagnant at a level similar to the past 2 quarters and contracting 7% year-over-year. The decline was mainly driven by commercial loans, mainly corporates, which had not showed recovery signs and still have difficult comps year-over-year. On the positive side, consumer loans have started to show a marginal recovery on a sequential basis, hand-in-hand with economies rebound. System deposits weakened growing only 0.6% year-over-year with demand deposit growth slowing to 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, become the best bank for customer experience 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 loyal clients. In line with Santander Group's strategy, we're working on the transformation of the bank's payments assets through PagoNxt. As part of this initiative, we relaunched our merchant business through Getnet Mexico, bringing best-in-class service to our customers and access to new payment solutions developed globally with the aim of providing the best payment solutions in the country.

Currently, Getnet Mexico is the second largest merchant in POS and affiliations, but we're still served in a number of transactions processed through our acquired businesses. Accordingly, we are developing new solutions to increase acceptance of the nonpresent car channel adapting to the new normality and expecting to become the second most relevant player by year-end. As an issuer of credit cards, we will launch a new product shortly, about which I will give more details in a moment.

In addition, we recently announced a new alliance with Samsung to offer a unique financial digital ecosystem through an electronic wallet that Samsung users can access through their phones. This means that from now on, our Santander wallet will be precharged -- a precharged wallet in old Samsung mobile. With this partnership, the 40 million current Samsung users can have access to this product, which will help promote the adoption of technology, reduce the use of cash and achieve higher level of financial inclusion in the country. In addition, we will be offering via this digital wallet, all Santander banking services, such as insurance, financing, payments, among others. It is worth mentioning that Samsung is the biggest seller of mobile phones in Mexico with more than 30% market share.

Digital conversion is crucial to our goal of seamlessly serving customers anytime and anywhere and becoming a more customer-focused bank. Currently, Santander has been the bank with the highest growth in digital customers to date among comparable peers, reaching more than 5 million digital clients as of June, expanding by 11% year-over-year. Progress on this front is very important for us, with digital sales representing 50% of total sales, up from 36% a year ago. Our focus on secure lending, particularly in mortgages and other loans, showing excellent results. These products are strategic for us to turn potential to attract and retain loyal customers.

In other loans, we're expanding our business, both organically and rapidly, achieving close to 9% market share as of May and growing the portfolio 3x compared to a year ago. These results are fueled by our alliances with leading automakers, the most recent addition being Honda, which is producing excellent results together with the alliances that we already had with Nasdaq, Suzuki, Peugeot and Tesla, among others. We're now the fourth player in the market, moving up from 6 place in the last 12 months, 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 is to reach our natural market share of 13% to 13.5%.

In mortgages, we're also very proud of our performance as our originations grew by 126% year-over-year. This result reflects the success of our products in Hipoteca Plus and Hipoteca Free, our Hipoteca online platform and the redesign of the customer's journey that has eliminated significant pain points in the process. These strong results support our position as one of the top mortgage originators in the market, having achieved the highest absolute growth in the market during the last 12 months. The increase in the individual loans market share of 76 basis points year-over-year was supported mainly by our excellent performance on mortgage and other loans, which help us expand our retail exposure.

In terms of deposits, the share of our individual deposits to total demand deposits increased by 350 basis points over the last 2 years to 33.8%, in line 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 cost over time. In addition, our discipline and profitability focus on pricing corporate demand deposits has allowed us to be one of the banks that has lowered its cost of deposits the most compared to the system and main peers.

Turning to Slide 7. Total loans contracted 5% year-over-year, in line with the system and remaining almost flat sequentially, reflecting the solid performance shown in the retail portfolio and offset by still difficult comparison base of the commercial book. As I mentioned before, we expect to see an improving trend from now on as these difficult comparisons will start to weigh less in our loan portfolio and commercial loan demand strengthens, in line with expected macroeconomic activity during the second half of the year. Also, driven by the expected improvement in the economic environment, which would start to see a gradual pickup in higher-margin segments, such as credit cards, consumer and SME loans, all while keeping an eye on maintaining sound asset quality.

On Slide 8, you can see that individual loans are growing close to 10% year-on-year on the back of mortgages and other loans, while credit cards and personal loans remain weak. As I mentioned earlier, mortgages not only have proven defensive during the pandemic. Our mortgage loans grew over 19% year-on-year organically. During the second quarter, around 57% of originations came from our Hipoteca Plus product, which helps drive cross-selling for the products as well as build customer loyalty. Our digital onboarding platform for mortgages Hipoteca Online has been key during the pandemic as it helps to streamline processes and eliminate the need to visit any branch.

During the second quarter, 96% of our mortgages were processed through this digital platform. In contrast, credit cards, personal and payroll loans posted negative performance affected by weak demand conditions. However, we expect a gradual recovery in the coming quarters as it seems we have left a negative impact of the pandemic behind us due to an improvement in the macroeconomic conditions. In June, credit card usage grew 35% year-on-year. With this encouraging performance and the launch of a new credit card offer, we anticipate seeing the start of a sequential growth in credit card balances going forward.

Let me elaborate on this new card, for which we have high expectations. In the next few weeks, we will launch a unique credit card in Mexico designed by listening to our customers. This innovative product includes enhanced security features, a digital and integrated experience, 0 annual fees and the possibility of accessing benefits and insurance coverage that is temporary and customized for each customer who only pays for the benefits they choose. In terms of security and a digital experience, our new card would be issued 100% digital with a dynamic digital security code to protect our clients, while the physical card will not have numbers nor a security code to help prevent exposing the customers' personal data. With these and other security features, it will be the safest card in the market.

With regard to personalization, the customer will be able to choose benefits, services, insurance and assistance that are completely tailored to their personal needs. And innovative features that I like the most is that customers will be able to personalize their card, which is linked to a social responsibility aid organization so that every time they use it, they will be supporting an specific cost. So these new payments and credit value offer, we're confident we will acquire a significant number of new customers, allowing us to grow steadily and organically in this market segment and without forgoing our prudent risk management.

Turning to Slide 9. Growth in loyal and digital customers continue demonstrating solid progress in this key area for our strategy, achieving year-on-year increases of 13% and 11%, respectively. We have maintained our focus on digital conversion, while increasing digital transactions and sales. This quarter, product sales via digital channels accounted for 50% of total sales, a significant increase compared to 36% in June of last year. 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 14% over the past 12 months to over 4.8 million, driven by our campaigns and incentives through digital channels.

As shown on the Slide 10, commercial loans decreased 14% year-on-year, still reflecting the exceptionally high comps of last year when corporate and mid-market loans increased significantly in the first 2 quarters of 2020. Last year, company drew under committed lines of credit in the face of uncertainty caused by the pandemic. Loans to government and financial entities increased 4.4% year-on-year but decreased 6.5% on a sequential basis. Large corporates and mid-market companies registered notable year-on-year contractions, although mid-market companies grew 2% sequentially, signaling a turning point that we expect can be maintained, supported by a stronger economy.

Worth mentioning that the contribution of corporates to the commercial portfolio decline was close to 60%. SME loans registered the eighth consecutive quarter contraction as this segment has been the most affected by the pandemic. Nevertheless, we expect to see better performance in the second half of this year as we are gradually becoming more confident about a healthy recovery in this segment as economic conditions improve. In fact, June and July have started to show some signs of improvement as balances have increased slightly.

Moving on to funding on Slide 11. Total deposits decreased 3% year-on-year, reflecting initially high comps in the second part of last year, where corporates continue drawing their credit lines and left that liquidity on the bank's balance sheet. As in previous quarters, there was a shift between demand and time deposits due to lower interest rates that favor the former and our efforts to improve our funding mix. Demand deposit growth from individuals reached 9% year-over-year, supported by our ongoing efforts to attract this type of deposits.

As a result of these efforts, we have been able to reduce the cost of our demand deposits by 56 basis points year-on-year beating the markets decrease. Although we're satisfied with this result, we continue working to further reduce our cost level as we make additional headway toward improving our deposit mix, while lowering the cost of our commercial deposits as well, supported by the bank's strategy focused on prioritizing individual deposits and foregoing certain expensive corporate deposits.

Turning to Slide 12. We have maintained very strong capital and liquidity positions. Our liquidity coverage ratio stands at 316%, representing a substantial buffer and well above the regulatory threshold. Our net loans to deposits ratio was below 90% for the third consecutive quarter, reflecting our strong structural liquidity position. We also remain very comfortable with our debt profile, given manageable debt maturities. Our capitalization ratio increased to 18.91%, while our core equity Tier 1 ratio increased 261 basis points to 14.25%. As you can see on the Slide 13, our NIM increased 4 basis points to 4.5% for the quarter, reflecting a combination of lower contribution of loans to yielding assets and lower deposit costs.

Please turn to Slide 14. Net commissions and fees increased 6% year-on-year, supported by a solid performance in credit cards, which expanded by 15% year-on-year as the economy reopened, combined with solid performance in insurance and cash management fees, which grew above 7% on a yearly basis. Turning to Slide 15. Gross operating income declined almost 10% year-on-year due to a more normalized result in market-related income, which declined 75%, reflecting the extraordinary gains in the second quarter of last year, partially offset by a solid increase in net commissions and fees. Taking a closer look into the components, net interest income proceeds is slightly higher this quarter, both year-on-year and sequentially, showing how resilient the business has been during the pandemic.

Moving on to asset quality on Slide 16, you can see that our NPL ratio decreased 4 basis points sequentially to 2.87%. Year-on-year, the NPL ratio rose 36 basis points, still reflecting the impact of the pandemic but remains below its fourth quarter of last year peak. Going forward, we expect that NPLs should remain stable or even slightly lower than current levels as we start to grow the loan portfolio. Provisions in the quarter declined 28% sequentially and 39% year-on-year, reflecting easier comps as we had higher charge-offs last quarter, owing to some corporates which have difficulties making their payments and to the additional provisions we made in the second quarter of last year to face the pandemic.

As mentioned earlier, the restructuring of these loans evolved positively, taking our cost of risk to 2.75%, a 39 basis points year-on-year decrease and started to converge to pre pandemic levels that were in the neighborhood of 2.6% to 2.7%. Looking forward, we anticipate cost of risk to remain stable with a gradual downward trend in coming quarters.

Turning to costs on Slide 17. Administrative and promotional expenses rose 4% year-on-year below inflation. This was mainly driven by higher personnel expenses as well as those related to IT as we remain focused on digitalization of services and reinforcing our cybersecurity tools among other ongoing technology investments. Increase in personnel expenses is explained by the reinforcement of certain critical business units such as auto, IT and cybersecurity, and it was partially compensated by lower expenses in supplies, maintenance and stationery due to the new working environment that we are all facing. This was partially offset by lower administrative expenses and impact related costs, the combination of a contraction in gross operating income and an increase in administrative and promotional expenses, results in a deterioration of efficiency ratio that stands now at 47.6%.

We're optimistic on the dynamics of the business that will result in a slight improvement in the ratio going forward.

Turning to profitability on Slide 18. Net income increased 11% year-on-year to MXN 4.7 billion, mainly due to lower provisions, stable NII, solid growth in fees and straight cost discipline. Return on average equity was 11.8%, 3 basis points below the year ago level. If we had the same capital ratio as of last year, ROE would have been 101 basis points higher. We're accumulating capital to regulators recommendation to limit the payout of 2019 and 2020 earnings.

Before going into Q&A session, let me share with you some closing remarks. In a still challenging but now improving economic environment, we continue executing our strategy with focus and discipline, keeping our ambitions intact in becoming the best bank for customer experience in Mexico. We continue winning and securing clients through true innovation and market-leading digitalization that allow us to significantly enhance the breadth and value of our products and digital offerings, while better leveraging our distribution network and attracting lower cost individual deposits at a solid pace.

At the same time, we remain focused on strengthening loyalty among active customers with a multi-tranche that consists of cross-selling, ever-improving service quality and rising satisfaction levels. We do this by leveraging our new digital tools and methodologies and by enhancing our internal operating processes. In the aggregate, consistent execution of these strategic measures is building a stronger franchise to effectively address the challenges and sees the growing opportunities ahead of us.

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

(Operator Instructions) Our first question comes from Jason Mollin with Scotiabank.

My first question is really on the client strategy and you gave some details and showed that your loyal client base has increased about 13% year-on-year, and that these loyal clients represent about 40% of total clients, and that's up from last year's 35%, pretty good improvement. We did see when we make that calculation that total customers were down a couple of percent year-on-year. So can you just provide us a little even more color on how the strategy has been working over the last years? I mean, it seems in terms of loyal clients, are you letting clients go? Are these clients from other banks in the typical segments? And maybe as a second part of the question, if you can talk about expanding the pie in Mexico and going down market into those who are under-banked or less banked. And my second question is just on the outlook for the second half of the year. If you can provide any kind of guidance if the trends that we've been seeing -- clearly, there is a lot of uncertainty, but what you're expecting going forward?

Jason, good to hear you. Regarding the dynamics that we see in our loyal client base, as you rightly point out, it has been growing steadily and consistently. You might recall that we launched our loyalty program in May of 2016, 5 years ago, and it continues to get traction. Also, as you rightly point out, there was a contraction in active plans that it was mainly due to the payroll accounts that we lost as a consequence of job losses due to the pandemic. So it's not that we're losing these clients to other banks. But the fact that, at least in the payroll business, there was a contraction to the pandemic.

We continue to enhance our loyalty programs. As I made reference to earlier, the Hipoteca Plus program is critical to attracting and retaining the loyal clients. The Hipoteca Plus is -- has built in an scheme with which if the client starts or stops using different products and services, then the interest rate of the mortgage goes up automatically. So it's fully considered the behavior of the clients. And clients have received quite well. This, I would say, enhanced the product offering and the benefits that it brings to them. We will continue to leverage not only on the Hipoteca Plus, but also in other loans, there's a recent focus in cross-selling, in accelerating the delivery or the offering of different products and services that the bank has more than just auto loans.

I think that you touched a very critical issue regarding Mexican banking sector that is about expanding the pie. And I think that if we do an honest reflection, I think that banks have focused more on those clients that already have banking needs that are probably more on the medium to high-end of the income segment rather than looking closely at the needs and how to solve the needs of low-income individuals in Mexico. But if you look at the demographics in Mexico, the vast majority of Mexicans are low-income individuals. So if we want to be or continue being a successful bank in Mexico, we need to deliver a better product offering and services to low-income individuals.

Over the last few weeks, we have appointed Norma Castro that is -- she is responsible for our financial inclusion initiative TUIIO to look at the low-income individuals, product offering so that we can understand better those needs and think creatively in solving those needs. I think that there is -- one of the few benefits of the pandemic is the fact that there is some higher digital adoption. So I think that even low-income individuals, as we are seeing in TUIIO are adapting to these circumstances and being more comfortable reducing digital channels. So I think that this is -- this should be different to what we have done in the past as a system.

Some of the alternatives that we are looking at, if you follow Santander Chile, they launched a program aimed to low-income individuals call Santander Life. That is working quite well, growing very nicely. And it's tailor-made for this segment. They're relying heavily on digital channels rather than using the branch network. So we need to look at those type of solutions. And this is -- this has been relatively -- we launched this relatively soon. So it's still in I would say, pre working phase. But this is something that we will focus over the next years, as this is critical to the success of Santander Mexico in the medium to long term.

Now about the outlook for the sector. We are, as reinforced in my remarks earlier, were slightly more positive than what we were in the last few quarters. If you recall at the beginning of the year, we were looking at loan growth in the base case close to flat or be slightly marginal increase or decrease, okay? Now if the trend that we are seeing of the first 2 quarters continues, we expect that loan growth could be around 4% to 5%. There is obviously very different dynamics within individuals and within commercial loans. We have a very strong growth in mortgages and auto loans and consumer loans at double-digit rates, okay? And we expect that to continue. So probably individuals will grow at high single digits. And commercial loans, we're seeing some progress in mid-market companies on a sequential basis.

SMEs, we think that we reached the bottom. We are in probably in deflection point. And I think that the corporates have normalized more their demand. So I think that with this, commercial loans could be growing at low single digits, and therefore, the total loan portfolio, around 4% to 5%, okay? We think that we -- with this trends, we should continue grow in market share in individual loans. And it's not -- to me, it's not that clear if we would be flat or slightly lose some market share in commercial loans, okay? We are not that concerned on that regard.

In terms of deposits, I think that I would expect a more normalized growth. We probably one of the big differences in how the banking sector has performed in this crisis relative to the prior ones, is that in the prior ones, there was always a contraction in deposits and most likely at the beginning of the crisis. And we haven't seen this -- this has been a very different crisis. And the households and individuals have built up their savings as a consequence of the restrictions that we have all faced. So -- and I think that sometime this -- this will change as we are already seeing that the -- at some point, we had double-digit growth in deposits.

Now the combination of more normalized activity, along with the decrease in interest rates that we saw or we have seen over the last 12 months, that is contributing to the decline in term deposits. I think that that will make deposits to have, in my opinion, slight contraction, with a positive change in the deposit mix. As you can see in our results, demand deposits are growing their contribution to total deposits. And I think that, that they should continue over the next few quarters. So those will be my answers, Jason.

Very helpful. I mean, I think definitely, we've seen that the strategy on lowering funding costs paying off here. Maybe just a question on the loyal customers, and you do give us the definition that its clients with a non 0 balance and depending on the segment between 2 and 4 products and between 3 and 10 transactions in the last 90 days. Are those clients still -- I mean, that's something you talked about back in 2016 as you referenced that loyal clients are 4x or about 4x more profitable than non-loyal clients. So is that still the same -- is that still kind of the same metric do you still think of it that way?

I think that it has been -- it's -- we mentioned that it was 3 to 4x more profitable. And now it's closer to 3x because of the following dynamic. Given the fact that we have attracted payroll accounts and, I would say, transactionality, those type of products are less profitable. It is critical for us to incentivize those clients to use credit cards, to use -- to have other loans and to use mainly our credit-related products, which are the ones that command higher profitability. So that when you look at the entire loyal customer base, what we see relative to what we had in 2016 is a lower usage of credit-related products. That has created a lower, let's say, profitability per loyal customer. But in my opinion, that's temporary because once we have a loyal customer, once that he is satisfied with how we are servicing, then we have the possibility of offering more products and services. And we consider, we're confident that the profitability will follow.

The next question comes from Alonso Garcia with Credit Suisse.

I actually have 2 questions on asset quality. First, if you could comment on the dynamics in the commercial segment. I mean, we observed some deterioration -- sorry, some improvement in consumer and mortgages, but some deterioration is there in commercial. So I mean, I want to know if this is something company-specific? Or is it something broader and related to a certain industry? And in that sense, how do you think asset quality in this segment will evolve in the coming quarters? And my second question is on the NPL coverage. It is right now at 118%, which is below the pre pandemic levels of around 130%. I understand this is not something you actively manage and instead is an output. But do you have any views on this? Do you think this implies limited room for cost of risk to improve further? And instead maybe increase from here?

Alonso, in terms of asset quality, I think that is company or client specific. And we see a positive trend with some of the clients that had some problems as a consequence of the pandemic that we're -- to structure, some clients actually paid their exposure in food over the last few months. So we were positive about the dynamics in the commercial loan portfolio. Obviously, when you compare year-on-year, you had clearly some deterioration, okay? Now regarding NPLs, I think that when you look at charge-offs and you compare charge-offs of this year relative to last year's, it's been close to 35% increase in the charge-offs that we do on a quarterly basis, okay? So that, in my opinion, will make that our coverage ratio will slightly improve over the next few quarters. [You'll see] as this -- the impact of the pandemic flows through time.

And -- sorry, I think you mentioned in the call, but could you please repeat your guidance for cost of risk for the coming quarters?

I think that it should be pretty much in line to what we have right now or slightly below that.

(Operator Instructions) The next question comes from Yuri Fernandes with JPMorgan.

So you mentioned a lot of good things right on loyal clients, like mix towards consumer, auto loans. I have just a question regarding the profitability, right? Like I remember when you had your investment plan back in 2017, 2018, one of the main reasons was to focus more in retail, make the bank more fee-based and improve the ROEs, right? I remember, you have a goal to kind of close a little bit the profitability gap versus peers. And we had COVID, right? So I guess, we are seeing the operating trends there on the mix. We are seeing that on the loyal clients, but we are still not seeing the ROEs improving, moving closer to the peers. So my question is, when should we start to see on all like this profitability of the bank improving? And what is the level of ROE you are seeing for the bank? Because I'm [enumerating] the fact you were -- you're talking about like high teens ROEs, but rates were much higher, right? And with this new outlook for rates, what should be like this new best guess for your mid-term ROE?

Yuri, first, I think that we have a challenge in terms of looking at ROEs in the pandemic era, okay? And let me expand a little bit as how we see it in terms of relative performance to our peers. I think that when you look at in 2019 and you look at, let's say, our net income market share, it was pretty much in line to our natural market share, close to 13.8%. Now last year, main peers had a very different approach to provisions. That is the -- in my opinion, the most relevant factor that explains the different performance that we have had relative to our peers. Just to give you some data about how different this provisioning performance has been for at least the 4 largest banks in the system. We did an analysis in which we take the average monthly provisions for 2019, for 2020 and for 2021. We did the average for that. We estimated the standard deviation, and we divided the standard deviation over the average just to see -- to normalize, let's say, the analysis.

With data, with this data, our numbers are the ones that probably is less, okay? That's this variation efficiency is at 39%. BBVA is at 62%. Citibanamex at 66% and Banorte at 79%. So this tells you that we have been more consistent in terms of how we provision. Last year, we -- our peers, our provisioning, some of you were concerned that we were under provisioning. And I think that the time is showing that we provision according to what our best estimates were and that those have been relatively accurate, okay? So with the fact that our main peers over provisioned last year, and they impacted, obviously, their net income numbers. Our market share in net income last year was almost 20%, and that was the highest that we've seen ever, okay? Now is -- it's close to 10% this year. But that has -- that's also impacted because the over provisioning that our peers made has helped them in creating less provisions this year or freeing up certain provisions.

If you take, let's say, accumulated net income for 2020 and 2021, our net income market share is close to 16%. Okay? So just to give you some numbers in terms of how difficult is to compare net income ROEs in this pandemic era, okay? But I think that probably your question has to do more with our medium- to long-term objective. And definitely, one of the critical reasons for us presenting to our largest shareholder and to our Board of Directors, an investment and strategic plan back in 2016 was to increase our profitability, we used to have an average profitability very similar to what the system has. And our goal is to be above the market and close the gap to the leading peers in profitability. I think that with a normalized economy, with interest rates slightly higher than the ones that we currently have, our goal should be to have ROEs close to 17%, 18%, okay?

In prior years, we mentioned that we were aiming at ROEs close to 20%. I think that if interest rates are slightly higher than the ones that we currently have, that could be achievable. Now if we are successful in developing a strong value proposition for low-income individuals in Mexico, I think that profitability around 20% should be our goal. But this is not something that will happen over the next 2 to 3 years. I think that's more a long-term objective, okay?

No, no. Super clear. I guess the point was like in '18, '19, you had 16 ROEs, but rates were much higher, but the bank was still in this transition, right? And you're still investing -- doing the investment mode. The number of loyal clients were smaller. So maybe now with rates moving up, we could start to see the -- I'll not say the ROE because the leverage also matters, right, like the limitation of dividends, but your ROE may be at least going back to the levels we used to see in '18, '19, right?

Absolutely.

Next question comes from Carlos Gomez with HSBC.

I have 3 very brief questions. The first one is if you could comment on your holdings of securities? We have seen them go down. I think they're now at MXN 700 million. That shows -- I mean, that is perhaps the natural contraction after the crisis. But where do you see that going forward? Second, if you could comment on your low tax rate. I mean, however it was managed that very well, in the past it was rebound. Or is it because of inflation right now? And what should we expect for this year? What tax rate is reasonable to expect for 2021? And finally, we have seen the numbers for COVID go up, fortunately, on the infections, not so much debt so far. But do you have the expectation that at some point that might affect economic activity and perhaps even your results?

Carlos, in terms of our investment in securities portfolio, I think that slightly before the pandemic, when interest rates start coming down, we increased our portfolio precisely to protect our net interest income. So the percentage of, let's say, the contribution of investment in securities to building assets was reached close to 35%, 36% over the last few quarters. And now it's at 33%. When we have seen it close to 27%, 28%, I think that with the potential increase in interest rates, certain securities that mature, most likely, will not -- will do something different, okay? So I think that we should go back to below 30% of contribution of investment in security to total yielding assets, okay?

Now regarding the tax rate, you're totally right. It's purely driven by the spike in inflation. At the beginning of the year, we were expecting inflation to be close to 3%. And now roughly speaking, it's close to the 6%, the average of the most analysts. So it's basically because of that. And we think that tax rate should be, I would say, probably around 22%, 23% for this year, okay?

Now regarding COVID, let me share with you some numbers. You obviously have access to the country's data. But I think that the numbers that we're seeing in Santander Mexico are quite revealing, I would say, in terms of the trend of increases in inactive cases. First, let me -- we shared some data with the leading peers. And I'm proud to say that we have been able to manage the pandemic more effectively than some of our peers. We have probably around 20% less cases than the average of our peers. So it's been quite effective. So the numbers that I'm going to give you probably scare you a little bit for giving you this context, I think it's important.

It was about, let's say, 8 weeks ago, the number of active cases in our employees was close to 16, (inaudible) 16 actually. And now it's close to 190, okay, in 8 weeks. So it's almost 12x what we used to have, okay? Now but we're seeing not only in the case of our employees, but also in the government data is that this increase in cases has not translated into an increase or a one to one increase in hospitalizations and also in the number of beds. So vaccines are working. What we're seeing is young people getting infected. That are still not vaccinated, most of them. But the committee is less severe for young individuals than for elderly people. We're seeing in some of our employees that they get the virus, even having one or 2 doses of the vaccine. The vaccine has been effective in the virus not being that severe in those cases.

Now the attitude that -- we're obviously being very cautious at looking at the data just to see whether it makes sense or not to continue this strategy of bringing all employees back to corporates. As you can imagine, branches have operated continuously throughout the pandemic. Currently, we are like close to 15% of the employees that work at the corporates that are working at the office. We were planning on having, let's say, a second phase that will increase that to 30%. But given this data, we made a pause, and we will be looking at it. What is reassuring, at least in how we're handling the pandemic is that contagions are not happening at the office, are happening in our employees that are working from home that clearly makes the case that they are having -- that are going to social gatherings, and that's how they are getting infected, okay?

So we don't expect good information as of today, because this purely could change. We don't expect significant restrictions being imposed if it continues. I think that the government has been very clear. They are even aiming at bringing bids back to school in a month. So I don't think that the economic activity should be that impacted if this third wave continues as it is. Okay?

Thank you. There are no further questions. I'd like to turn the floor back to Mr. Hector Chavez for any closing comments.

Yes, sorry. Yes, thank you, operator. Thanks, everyone, for once again for joining Santander Mexico on this call. As always, we wish to maintain an open dialogue with you in the financial community. So if you have any additional questions, please don't hesitate to call or e-mail out directly. Until our next earnings call, please stay safe.

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