Banco Santander Mexico SA Institucion de Banca Multiple Grupo Financiero Santand (BSMX) 2022 Q4 法說會逐字稿

Good day, everyone, and welcome to Banco Santander Mexico's Fourth Quarter 2022 Earnings Conference Call. Today's call is being recorded. Following the speakers' prepared remarks, there will be a question-and-answer session.

I would 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, sir.

Thank you, operator. Good day, and welcome to our fourth quarter 2022 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 today will be Felipe Garcia, our CEO; and Didier Mena, Vice President of Administration and Finance.

Before reviewing our fourth quarter results, we would like to remind you that as previously announced, our parent company, Grupo Santander intends to increase its ownership in our bank from 96.2% to 100%, and it is, therefore, our intention to delist the bank's shares from both the Mexican and the New York stock exchanges. Currently, we are awaiting the regulators' approval in order to proceed with the transaction, which is expected to conclude during the first quarter of 2023.

As always, we also 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. Felipe, please go ahead.

Thank you, Hector. Good morning, everyone, and good afternoon to those of you participating from Europe. We hope you have the opportunity to enjoy the holidays and our best wishes to you and your families for 2023.

We are very pleased to share with you that we closed a very successful year, reporting the highest net income in the history of our bank. The result was 46% higher than what we achieved in 2021 and 24% higher than the pre-pandemic level in 2019, demonstrating our tremendous capacity to adapt and grow in complex and challenging operating environment.

During the fourth quarter, we maintained solid performance levels in our core businesses while maintaining excellent asset quality throughout the loan portfolio. In fact, during 2022, we achieved the best risk metrics we have ever had with an NPL of 1.88% and the cost of risk of 1.56%. These record loan levels were due to the excellent work done by the risk area of our bank in coordination with all of our business units.

Total loans grew almost 8% year-on-year, with strong performance across our entire loan book. In individual loans, we had a solid increase compared to last year, mainly due to double-digit growth in credit cards, payroll and auto loans.

I would like to point out that November was our 32nd consecutive month of annual market share gains in individual loans after becoming the third largest player in the consumer loan market as of September. In terms of deposits, during last year, we continued executing our strategy to attract and retain individual clients, while letting go some expensive corporate deposits.

With this, total deposits were 6.9% higher than a year ago. Also, it is worth noting that at the end of 2022, we had achieved the greatest exposure to individual borrowers that we ever had at 41.4% of total deposits. However, we are still far from where we want to be, so we will continue to focus on it until we are able to achieve a similar mix to what relevant peers have in the Mexican market. We closed 2022 with an ROE of nearly 16%, 481 basis points higher than in 2021. This reflects our great exposure to individuals, both in terms of credit and deposits as well as the excellent risk management that I noted previously.

Further, if we adjust for the excess capital that we continue to have, our ROE for 2022 would be 174 basis points higher. Also, during the fourth quarter, we continue to maintain a strong balance sheet as reflected in our solid capital ratio and liquidity position. As of this year and following the appointment of Hector Grisi as a Head of Santander globally, CEO, I take full responsibility of the bank, which has enormous strength as well as exciting opportunities. I'm convinced that together with the entire Santander Mexico team and our ongoing collaboration with the group. We will become the best banking option in Mexico and the primary bank for our clients by ultimately offering the best user experience in the market, both in the advisory side and in retail banking.

The charts on Slide 4 show a still complex environment in Mexico with regards to the economy. While GDP expectations for the full year of 2022 have improved, the forecast for 2023 has been declining more recently as a perspective of the Mexican economy continues to be less and less optimistic. The shifting sentiment is due to a moderate outlook on private consumption and investment, along with a possible recession in the U.S. during the first half of 2023, the ongoing impact of COVID-19 as well as reduced fiscal stimulus and increased monetary tightening.

Regarding inflation, we expect it to gradually converge to its precrisis levels, reaching 5.3% by year-end and then decline toward a level of 4.2% at the end of 2024. Given the inflationary conditions, the reference rate reached its highest point of 10.50% in December. We expect it to reach 10.75% by year-end 2023 and then gradually declined to 9.75% by 2024.

According to the Mexican Institute of Social Security, more than 750,000 new jobs were created during 2022, bringing total jobs to 21,272,000 [ph] million of which 87% are permanent. However, as we mentioned in previous calls, most of these jobs are of relatively low quality. Other macro indicators have also shown improved economic performance. Private consumption is now 4% higher than before the pandemic, while industrial activity and investment remains practically at the same levels as 2019.

That said, while 2023 will be a year with substantial challenges on the macro front, it will also be a year with significant opportunities for the Mexican economy. The ongoing rearrangement of global supply chains, known as nearshoring ph provides Mexico with a unique opportunity for increased domestic and foreign investments, which could translate into higher growth rates for the economy in the future. The disciplined macroeconomic policies in place, including in the fiscal, monetary and the tech policy fronts with Mexico in a favorable position to capitalize on this opportunity.

The dynamism of manufacturing exports in the recovery from the pandemic and the recent strength of the exchange rate provides evidence of the potential benefits of the current juncture for the Mexican economy. In fact, the successful recent debt issuance made by the federal government and PEMEX reflect the confidence and optimism on Mexico and from foreign investors.

On Slide 5, you can see that system volumes, loan volumes in November maintained a solid growth trend, increasing low double digits year-over-year. This good performance was mainly driven by continued growth in consumer loans, which increased 17% as well as improved demand in commercial loans. System deposits continued a strong rebound, growing more than 10% year-over-year with demand deposits increasing by almost 8%.

Now I will ask Didier to continue from here with a deeper discussion of our fourth quarter results. Didier, please go ahead.

Thank you, Felipe, and thank you, everyone, for joining us today. Turning to Slide 6. Our total loans increased close to 8% year-on-year with differentiated dynamics between high-margin and low-margin segments.

Starting with high-margin segments. Credit cards stood out as November was the eighth consecutive months of gains in market share, reflecting the excellent performance of our light yield credit card among our customers. In fact, at the end of 2022, LikeU's portfolio balance already represented close to 15% of our total credit card portfolio. As a reminder, we only launched this innovative card in September 2021.

In the consumer segment, the performances of both auto and payroll products were also excellent. In fact, at the end of 2022, the auto portfolio was close to MXN 26 billion, resulting in a market share of 15.6%, consolidating ourselves in the third position of the market. At the same time, we continue to make this portfolio more profitable through new and key commercial alliances together with price adjustments.

On the commercial front, loan demand is also improving among mid-market companies and governments and financial entities, increasing by single digits year-on-year. It is also worth noting that corporate loan demand improved on a sequential basis, increasing by a low double-digit amount.

In mortgages, to protect the profitability of the product, we were the bank that raised its interest rate the most during last year, causing a deceleration in the growth of this portfolio from 12.1% in 2021 to 8.8% in 2022. Taken together, we continue seeing an upturn in our higher-yielding loan segments, which, coupled with higher interest rates, should continue helping drive our margin expansion while we maintain safe and sound asset quality.

On Slide 7, you can see that individual loans grew 14% year-on-year. It is worth noting that, as Felipe mentioned, we are outpacing the market in loan growth for 32 consecutive months. This has enabled us to achieve a 14.8% market share. Our mortgage portfolio continues expanded at a solid pace, increasing to 9% year-on-year and 11% organically despite the higher interest rates that we charge during the year, and thanks to the wide range of mortgage products that we offer.

Over the years, we have distinguished ourselves with an innovative and competitive offering in mortgages. We are the only bank recognized for offering a comprehensive set of banking products and services associated with our mortgages. Also, we have made substantial progress in the digitalization of our processes. Currently, more than 97% of our mortgages are being processed digitally, improving the customer experience and creating another point of differentiation in the market.

Regarding our consumer products, these were mainly driven by auto and payroll, which allow us to become the market's third largest player in consumer loans in September of 2022. In auto loans, we also continue expanding our business, gaining 411 basis points of market share during the last 12 months, with 15.6% of the market as of November 2022, we have consolidated our position as the #3 player in the market. We're very proud of this significant accomplishment and remain determined to move up in rank soon.

With the aim of expanding the business even further, we are now very active in the used car segment of the market. Currently, used car loans represent around 10% of our total loan portfolio, and we are targeting a 25% level in the medium term. Similarly, favorable loans delivered a solid performance during the quarter, increasing close to 21% year-on-year, while personal loans increased close to 8%.

At the same time, credit cards continued to accelerate with a solid 20.5% year-on-year increase or 6% sequentially. These excellent results were mostly driven by our flagship credit card LikeU since its launch, we have issued over 822,000 LikeU cards, exceeding our own expectations. In terms of demographics, more than 45% of our LikeU clients are young, less than 30 years old compared to 21% of the rest of our credit card products.

I would also like to point out that nearly 13% of total billing comes from these relatively new credit cards. Through our new payment and credit value offerings, we are confident that we will continue to acquire a significant number of new LikeU users with our customer base during this year, including customers participating in a recurring program, cashback baby, where all LikeU credit card users and almost 5 million payroll customers are automatically involved in and already enjoying the program's benefits.

Turning to Slide 8. The solid expansion of loyal and digital customers continue with year-on-year increases of 11% and close to 9%, respectively, with additional growth in loyal customers, they now represent 45% of active clients compared with 41% in the same quarter of last year. This growth reflects consistent improvements across a large number of our products and services as we aim to be the best option for our clients and continue working very actively until we achieve this role.

Also, we are very proud of our sustained improvements in core digital metrics with product sales via digital channels accounting for 62% of total sales, a significant increase compared to 56% a year ago. Digital monetized transactions also maintained an upward trend, reaching 49% of our total with mobile transactions accounting for 98% of total digital transactions. In addition, mobile clients grew nearly 10% over the past year to almost $5.8 million, thanks to promotional campaigns and the incentives we offer through digital channels.

During 2022, continuous improvement of our digital ecosystem remains a strategic priority as we focus on building on key pieces that in the aggregate, positively impact the end-to-end of digital experience of our customers when using each of our financial products, both mobile and web. Leveraging this experience, we continue working towards a bank's complete digital transformation.

As shown on Slide 9, commercial loans increased 3.4% year-on-year, driven by a high single-digit increase among mid-market businesses and a mid-single-digit increase in government and financial entities. Although corporate loans decreased 1.3% year-on-year, they increased 11.8% sequentially. We're seeing encouraging evidence of growing investment in certain states in Mexico, driven by nearshoring. The increased demand has mostly been in Northern and Central Mexico.

Conversely, SME loans are still being affected by weak economic conditions, resulting in low credit demand. This category of loans decreased 8.5% year-on-year and 2.8% on a sequential basis, similar to the prior quarter's sequential contraction.

Moving on to funding on Slide 10. Total deposits increased 7% year-on-year and 9% sequentially. Like the previous quarter, deposits were driven by term deposits, increasing a bit more than 30% year-on-year on the back of a higher interest rate environment. Demand deposits decreased 2% year-on-year, mainly to a 6% drop in corporate demand deposits as we continue forgoing certain expensive deposits to improve our funding costs. The bank deposits from individuals increased 4% year-on-year, supported by our promotional campaigns.

As a result, we have been able to show greater resilience to Central Bank rate hikes with our cost of deposits increasing 121 basis points year-on-year, mostly in line with the system, while the reference rate had increased 500 basis points year-on-year as of December.

Turning to Slide 11. We continue maintaining very strong capital and liquidity positions. At the end of the quarter, our liquidity coverage ratio stood at 181.2%, representing a substantial buffer and still far above the regulatory threshold. Our core equity Tier 1 and capitalization ratios as of December were 13.93% and 19.38%, respectively, significantly above the minimum requirement established for systemically important financial institutions like ours. At the end of the quarter, we also maintained a sound funding position with net loans to deposit ratio of 94.4%.

As you can see on Slide 12, net interest income had a solid double-digit increase of 24% year-on-year and almost 9% quarter-on-quarter, mainly driven by higher retail volumes and loans and deposits as well as the higher interest rate we've been discussing. During the quarter, Banco de Mexico increased the reference rate by 125 basis points to 10.50%. This impacted positively our NIM, which expanded 82 basis points year-on-year to 5.28% for the quarter.

Please turn to Slide 13. Net commissions and fees saw a strong increase of almost 8% year-on-year. This solid performance was mainly driven by a double-digit increase in insurance fees and cash management. In addition, purchased the sale of securities and money market transactions increased 20% year-on-year. Going forward, we expect to sustain good performance levels in credit card fees as our ambitions for the LikeU credit card are to continue increasing average monthly billings while achieving a better mix of fee income.

Turning to Slide 14. Gross operating income increased close to 18% year-on-year and 6% sequentially. This growth was driven by the solid performance in net interest income supported by our greater focus on individual loans and deposits. Higher fees were also a driver, mainly insurance fees and cash management, which more than offset lower markets related revenues.

Moving on to asset quality on Slide 15. Our NPL ratio improved 13 basis points sequentially to 1.88%, reflecting healthy trends across the loan portfolio and the adoption of the IFRS 9 methodology. Provisions in the quarter increased significantly on a sequential basis due to previous quarter's one-off items, the release of provisions related to some corporate clients and the recalibration of some of our risk models. At year-end, our cost of risk stood at 1.56%, a 134 basis point year-on-year decrease and a 2 basis point sequential increase.

As Felipe noted at the beginning of the call, these record low levels are due to the excellent and consistent work done by the risk area of our bank as well as by each of the business units. However, we wish to note that these excellent results are nonrecurring as we benefited from the recovery of some loans associated with the pandemic during 2022, thus, we expect both metrics to converge to more normalized levels.

Turning to costs on Slide 16. Administrative and promotional expenses decreased 3% year-on-year, but increased 6% when excluding the IPAB reclassification. On a sequential basis, expenses increased by 18%, mainly driven by administrative expenses and higher personnel expenses. Expenses also rose due to depreciation and amortization costs related to our investment plan. However, thanks to our solid revenue growth and strict cost control, we managed to improve our efficiency ratio by 799 basis points year-over-year to 48% at the end of the quarter. It is noteworthy that we accomplished this despite inflation pressures.

Turning to profitability on Slide 17. Net income increased 20% year-on-year to MXN 6.3 billion, mainly due to the solid increase in net interest income and fees, along with disciplined in cost control. Profit before taxes rose 52% year-on-year, reflecting the strong performance of our core business. Return on average equity was slightly above 15%, 222 basis points higher than the year ago level and close to 16% for the full year, reflecting our greater exposure to individuals, both in credit and deposits. The return was also due to the excellent risk management that we've highlighted.

Additionally, when adjusting for the excess capital that we continue to maintain, our ROE would be higher by 174 basis points as we also pointed out. On the other hand, our effective tax rate was 27%, a significant increase compared with last year's period due to a low comparative base and certain fiscal payments made during 2022.

Before we open the call for the Q&A session, let me conclude by saying that we are pleased to have met or exceeded our financial targets for the year. This was particularly gratifying given the challenging environment that we operated in during 2022. We're also very proud of the strong quality of our results and the robust core earnings expansion. Our growth in deposits was above our guidance range, even though we continue to prioritize retail over corporate deposits, a strategy that we will maintain during 2023.

In terms of expenses, despite persistently high inflation throughout the year, we effectively control costs, which grew below our target. Altogether, the healthy growth of our retail loans, coupled with a reduction in our cost of risk and effective cost control, generated solid net income growth, building on our buyers efforts to consistently deliver strong results.

In summary, we continue successfully working on and advancing our strategic priorities, enhancing our products, digital offerings, distribution network and most importantly, the overall customer experience. Although we have made good progress with our bank's operational transformation, continually simplifying processes and operations. We are then nevertheless mindful that we must step up the pace in working toward our goal of building a much stronger franchise and becoming the #1 bank for all our customers.

If the group's tender offer is approved by regulators and succeed, we are aware that this could be our last earnings call. We want to thank you for your support as a listed company. For all your questions, challenges for all the analysis that you have produced for all these more than 10 years, for all the investor trips you organized. You made us a better company and for sure, a better management team. We will remain available for you.

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

(Operator Instructions) Our first question is from Carlos Gomez with HSBC.

This is Carlos Gomez. Actually, I don't have a question. I just wanted to give you -- to thank you for all the time, as you said, all the trips, all the digital talks that we have had over the years, you have been a great listed company, and we wish you all the best, and we hope that you will be listed again in the not-distant future. Thank you very much.

Our next question is from Gilberto Garcia with Barclays.

I had a question on your commercial book sequential growth. There were a number of diverging trends. And I guess, also depending on the comparison being sequential or year-on-year, but we were a little surprised by the decrease in the middle market book. Just wanted to confirm, was that due to you increasing rates in that segment?

I think that the competitive dynamics, as you pointed out, is clients are being quite sensitive in rates. We've seen certain banks being quite aggressive. It's -- but also let me know that it's a marginal decrease sequentially. It's less than slightly more than MXN 10 billion, okay? So yes, one thing has to do with increased competition and also some amortization of some loans.

Okay, okay. And you mentioned in the press release that you are in the process of launching your digital bank. Just wanted to confirm, is that going to be a, let's say, fully separate bank? And if so, can you comment on what the strategy will be to, I guess, not cannibalize your legacy bank?

Yes. I'll take that one. It's going to be Openbank. Openbank already operates in Europe, in Argentina and a few other countries. It worked extremely well. It's a fully digital alternative for our clients. We want to become a digital bank with branches. That's the aim of the group in the medium to long run. And we want to serve clients whichever way they prefer. We have some clients that want to go to branches. We have some clients that want to be 100% digital. So Openbank will be an alternative, that will be 100% digital. It will be separate from the bank, it will be 100% digital. And we believe that it's going to cater to a different part of the pyramid that we are currently not serving probably as much as we would like to, given that the cost of serving digitally is much cheaper. We believe that we're going to be able to be a Openbank, broaden the client base.

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

And first of all, thank you for the partnership in all those years. I have a first question regarding -- I guess this has been maybe one of the most asked question in those years. So regarding our margins, what is the sensitivity you're seeing today? We saw a very good expansion this quarter. So for every 100 bps change on rates, how you are seeing, do you see more upside for your earnings in 2023?

And I have a second one regarding your charge-offs in the mortgage book. When we look through our NPL, you had some benefits from higher write-offs this quarter. And when we look by segment, we saw the write-offs coming from the mortgage book. So what happened there, is something specific is regarding to legacy portfolios like what is driving these higher losses on the mortgage book?

Regarding sensitivity to net interest -- increases in interest rates. I think that we remain positive, positive sensitive. I would say that 100 basis points increase on a parallel curve will give us close to MXN 600 million with the most recent estimates. Also, when you look at it on a NIM basis, given how the increases in the reference rate have happened over the last few months. We think that the NIM for 2023, I would say that there is a floor in a potential increase of at least 100 basis points relative to what we saw last year. And I would say that could be within 100 to 150 basis points, the potential increase associated with the interest rate environment. We're expecting interest rates in Mexico still to increase slightly above the current level. And if those -- and we also expect that those will be maintained for the rest of the year. So that's a very positive environment for our business. And Hector, if you could comment on the mortgage book.

Yes, on mortgages, you're absolutely right. There was a slightly higher level of write-downs, but there's nothing special about it. It's simply a decision managing the stock of NPLs. So it's business as usual.

Our next question is from Nicolas Riva with Bank of America.

I apologize I just, dialed into this call. So if you already said something on my questions, I apologize for that. So first question, on your 2028 Tier 2 bond, which is callable in October, it's really not par market is kind of assuming it's going to get called. Of course, in the past, you have called this Tier 2. So I remember when you called the '24 back in 2019. If you were to call and issue a new bond, the idea here would again be that the parent company, Santander Spain would buy most of the new issuance. So that's my first question. And any thoughts in general in terms of the call option in October.

Second question, on the nonbank financials, given that we have seen so many defaults and all of the companies trading at very distressed levels. Do you see any real value in this sector in the sense that perhaps you would be interested in acquiring any of these companies, given current valuations, either a leasing company, payroll lender, et cetera? And then finally, and again, maybe you have already mentioned this in this call, but once you complete the delisting of the stock in Mexico, are you going to continue having quarterly earnings calls such as this one going forward or not?

Hey Nicolas, we already answer all the 3 questions. So I suggest that you listen the replay. On your first question, we obviously acknowledge the market conditions to evaluate whether it makes sense or not to call our capital securities. We will do so again when time comes, as you rightly pointed out, this is due on – in October of this year. And also, we will be open for whether our parent company takes a significant part of the issuance or not. Those are decisions that I would say, depend on market conditions, I would say, okay? So we already started the process to get approval for either calling it or issuing a new one or just keeping it. We have to discuss that with the Central Bank per current regulation and we already started the process. So usually, it takes a few months to have those approvals. So we would remain open as to what's the best for the bank, okay? If our parent company ends up buying a significant part of the issuance, as we have done in the past, it has been at market conditions. So in terms of Santander Mexico as an issuer, I would say that it's relatively indifferent for us because we get the right price in the issuance, okay?

Then regarding nonbank financials. I would say that the businesses in which these companies are in, are not that attractive to us. We continue to remain open and analyze different opportunities to consolidate the market. We consider ourselves as the key candidate to consolidate the Mexican banking system for opportunities that, first of all, makes strategic sense for us. And secondly, that, that are accretive to our shareholders, okay? So of those companies that have had some stress over the last few quarters. I would say that we are not that interesting their business models. But we remain open to analyze any potential opportunity to consolidate the market.

And yes, in your final question, if our parent company succeeds well, first, if the regulators approve the transaction and the parent companies succeed in doing the tender offer, this would be our last earnings call.

After that, we are issuers in the Mexican market of debt and also in international markets, so we will continue releasing information. It's just that the quarterly call is the one we would no longer have.

As mentioned earlier, we would remain available for you if you have any question of the performance of the bank, okay?

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

Well, thank you, operator, and thanks, everyone, once again for joining Santander Mexico on this call. And as we have said, if you have additional questions, please don't hesitate to call us or email us directly. Thank you very much. Have a good day

Thank you.

Thank you.

This concludes today's call. You may disconnect your lines at this time, and thank you again for your participation