Banco Santander Mexico SA Institucion de Banca Multiple Grupo Financiero Santand (BSMX) 2022 Q1 法說會逐字稿

Good day, everyone, and welcome to Banco Santander Mexico's First Quarter 2022 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 first 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 on our call today will be Didier Mena, our CFO. 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 were 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'm pleased to share that we have encouraging results to start the year. The first quarter evolved with very strong dynamics in our core business. Also, we are now in a healthier operating environment, contributing to sound asset quality while helping us expand our loan portfolio at a strong pace. That pace reflects our higher risk appetite coupled with improved economic performance, underlying private consumption in the first quarter.

On the other hand, business confidence remains subdued, which is reflected in the soft growth of commercial loans. In individual loans, we continue at pacing the market, supported by sustained market share gains in mortgages and other loans. In consumer, we experienced a strong recovery, especially in credit cards. The renewed growth was due to the good performance of our LikeU credit card, which is experiencing excellent market acceptance, coupled with the promotional efforts we have been making within our commercial network as well as other campaigns to keep positioning this unique product among our clients.

Additionally, in other loans, we are very close to reaching the #3 position in the market, thanks to our attractive commercial offering and the various alliances we have with automakers. In addition, we have achieved our natural market share of 13%, which was our goal when we started this business a couple of years ago. In terms of deposits, we continue growing at a solid pace while carefully managing funding costs by improving our mix in favor of demand deposits over term deposits.

It is also worth highlighting that the contribution of individuals has increased considerably in both categories of deposits. Currently, the contribution of individuals in total deposits represents close to 38% compared with 24% in 2016. This is the best needs we have ever had versus previous year's first quarter. At the same time, our individual and corporate demand deposits continue expanding at high single-digit rates each year, underscoring the success of our loyalty and customer acquisition strategies as well as our continued focus on reducing high deposit costs.

With regard to asset quality, our NPLs reflect the implementation of IFRS 9 in Mexico. Despite our higher risk appetite in certain business lines, our portfolio remains healthy due to our prudent risk management. Further, provisions should remain stable as we are not seeing any deterioration that could impact any or loan portfolio segments.

As for profitability, our ROE shows a strong performance relative to first quarter of last year and benefits from the strategies we have implemented to raise volumes, mainly in the individual portfolio, along with normalized provisions. Going forward, we expect profitability expansion.

Also, during the quarter, we maintained a strong balance sheet as reflected in our solid capital ratio and liquidity position. The charts on Slide 4 show a challenging outlook for the Mexican economy in terms of GDP growth in 2022. Also, inflation nationally and globally has continued to rise, although in Mexico inflation is lower than that of our countries -- other countries due to its fuel price policy. Additionally, there has been an earlier tightening of monetary policy in response to higher inflation.

Given the current conditions, we expect additional rate hikes in 2022, reaching 8.25% by year-end. According to the Mexican Institute of Social Security, more than 385,000 new jobs were registered in the first quarter, of which 63% were permanent jobs. Macro indicators have also shown better performance with most of the economy's components exceeding pre-pandemic levels. Both industrial activity and private consumption have been recovering gradually. By contrast, investments have been lagging due to lower business confidence.

That said, we're well positioned to contribute to economic growth, continuing to support both our individual customers whose loan demand has been solid despite the pandemic and our corporate clients, because loan demand is starting to strengthen.

On Slide 5, you can see that system loan volumes in January continued to improve, increasing roughly 5% year-over-year, the highest growth over the past 5 years. This growth was mainly driven by improvements in consumer loans, which also increased by nearly 5%, partially offset by corporate demand levels, which are still soft. System deposits continued their strong rebound, growing more than 7% year-over-year with demand deposits increasing more than 9% year-on-year.

Please turn to Slide 6, where I would like to give you an update on our growth strategy. Our main strategic priority is to provide the best customer experience in Mexico's financial services sector, leveraging the latest digital tools and improving processes to accelerate our technological transformation. At the same time, we continue positioning the bank as a market leader in value-added products that attract and retain additional loyal clients. With that in mind, I would like to point out some milestones that we achieved during the first quarter of the year.

In auto loans, we continue to rapidly expand our business, gaining 719 basis points during the last 12 months and reaching a market share of 13% in January. This means we have achieved our initial goal, which was to reach our natural market share of 13% to 13.5%. Although, we are very proud of this accomplishment, we aim for more. But maintaining this pace of growth, we will move up to the third position next quarter, becoming one of the top players in the market.

These results have been fueled by our alliances with leading automakers in Mexico and by our Super Auto Santander platform, which integrates commercial and insurance offerings in a single place, allowing us to provide online pre-approval in minutes. During the quarter, we announced an exclusive financial alliance with Caranty marketplace to offer Caranty Credit. This is a new and unique financing scheme in Mexico for individuals who wish to buy or sell a pre-owned car directly from one individual to another in a secure way through Caranty's platform and with our own bank financing.

Further, Caranty Credit is available to both clients and non-clients, emphasizing that Santander clients have preferential conditions. With this new offer, we are making our way into a market 3x bigger than the new auto sales in Mexico, which is a market that continues in a more recovery trend. Digitalization of our products and services remains a priority, which is why we continue investing in technology.

This includes collaborating with fintechs and other tech companies to introduce faster and more convenient digital tools and functionalities once that have enhanced the customer experience, increase customer engagement and drive more transactions. Furthering our progress on this front is very important for us with digital sales now representing 63% of total sales, up from 49% a year ago. We also had 5.7 million digital clients as of March, increasing 10% year-on-year.

In mortgages, our strong performance reflects the success of our products, Hipoteca Plus and Hipoteca Free as well as our Hipoteca online platform and the redesign of a customer's journey. The redesign has eliminated significant pinpoints in the application and approval process. These strong results support our position as one of the top mortgage originators in Mexico. In addition, as part of expanding our range of products, we are pleased to announce that we just launched a new mortgage product called Hipoteca Integral. This new mortgage product will be the first to recognize the total income families, both fixed and variable.

Hipoteca Integral offers an interest rate of 11.5% as well as property insurance, which covers the total value of the property of our customers and unemployment insurance for up to 9 months. With the launch of this new and attractive offer, we are confident that we will keep gaining market share in this segment. In fact, as of January, we have diminished the gap by 90 basis points with the second player in the market. If we keep this pace, we will jump to the second place in the short term.

A couple of months ago, we launched the new and innovative credit card LikeU that I mentioned at the beginning of my remarks. This card was born 100% digital, and it is one of the most secure in the market. It can be designed for any type of customer, allowing each to tailor the card according to their individual preferences.

Our goal for 2022 is to double account acquisition while focusing on the profitability and health of our portfolio. Also, this year, we will tap into the open market with strategies that allow us to grow the portfolio with sound asset quality. Since its launch, we have issued over 540,000 LikeU cards, exceeding our own expectations. Currently, 89% of LikeU card holders have activated their card and more than 75% registered at least 1 purchase. We're satisfied with the results and the market's strong acceptance of the credit card so far.

Another milestone we are proud to share with you is that Fintech Americas, a community focused on the digital modernization of financial services, recognized for the fourth consecutive time, one of our product innovations. On this occasion, GetNet received the Platinum Award for providing contactless payments on the Mexico City Metrobus, public transportation system. GetNet by Santander has implemented infrastructure with a high security that allow payments directly by credit card, debit card, smartphone or even smart watches. Users can also replenish their mobility card with the same technology. This initiative developed jointly with Visa and Conduent, is unprecedented and has significant social impact since it is the first transport system that accepts this type of payment.

We're scaling efficient, modern and secure payments, helping promote financial inclusion at the same time. We're very grateful for the work and the community's recognition. It confirms that we are moving in the right direction in advancing innovation. Innovation and customer focus are the pillars within GetNet strategy that have allowed us to position ourselves in the market in Mexico, resulting in the second place among some players in terms of POS terminals and affiliations as well as a number of transactions, where we went from the #4 to #2 in just 2 years.

As part of our mission to promote financial inclusion through Tuiio, we offer financial products and services to low-income sectors in Mexico. The majority of our customers are women entrepreneurs, who are not part of the formal economy and who are generally excluded by formal financial institutions. The Tuiio customer support model currently comprises 84 branches, enabling us to directly support are more than 311,000 low-income customers. In addition, these customers have access to an online savings account that is opened remotely by agents, offering users both mobile and online banking tools.

We also launched new medical support services, and I'm glad to share that 56% of our clients have been able to go to doctors they couldn't before, helping contribute to the culture of prevention and facilitating customer access to specialist doctors, dentists and laboratories. Also in reference to the positive social impact that Tuiio offers to improve our client conditions, I would like to point out that thanks to these loans, 80% of our clients have grown their business and 48% have increased the number of employees. Our goal lies firmly in supporting Mexican families, ensuring they have the information and tools they need to manage their resources properly and making firm decisions that help improve society and their economic well-being.

We will continue making progress on the ESG front as we remain committed to further operationally integrating the criteria, policies and internal processes, drive the social and environmental performance as part of our mission. For Santander Mexico being sustainable, means taking into account the communities where we are present, the people and companies that make them up in order to generate continuous and profitable social progress at an economic, environmental and ethical level.

Turning to Slide 7, total loans increased 8% year-on-year, outpacing the system and posting a sequential increase of almost 3%, highlighting our solid performance in consumer and credit card loans. Also, it is worth to mention that we have been gaining market share in both individuals and commercial loans for 2 consecutive months. This performance reflects our higher risk appetite in these segments, along with our efforts to continue driving mortgage and other loan growth.

On the commercial front, loan demand is also improving in mid-market, low single digits year-on-year. All in all, we expect to continue seeing an upturn in higher yielding segments, which since the fourth quarter of 2018 did not grow faster than the low margin segments, which coupled with higher interest rates should support margin expansion while maintaining sound and sustainable asset quality.

On Slide 8, you can see that individual loans are growing close to 10% year-on-year, supporting the strong demand on individuals. Mortgages and other loans continue growing at a solid rate, while credit cards are starting to show an upturn with strong annual and sequential growth. Our mortgage portfolio continues expanding at a solid pace of 11% year-on-year and 15% year-on-year organically. During the quarter, around 46% of originations came from our Hipoteca Plus product, which also helps drive cross-selling of other products as well as build customer loyalty.

In addition, through Hipoteca Online, we have been able to process 96% of our mortgages completely digitally, allowing us to be faster and more efficient in terms of response times all resulting in a much better customer experience. At the same time, we're starting to see positive signs of growth in credit cards, expanding 1% quarter-over-quarter and 7% year-on-year. This encouraging performance is driven by our latest credit card launch LikeU.

Thanks to this product, we recovered sales and productivity rhythms with strong improvements in both acceptance in front. Currently, more than 11% of total billing comes from our LikeU credit cards. Also, it is worth mentioning that March was the best month during the quarter in terms of billing, increasing 19% month-over-month and 10% year-on-year. Through this new payment and credit card value offering, we are confident we will acquire a significant number of users within our customer base. In addition, we're expecting to launch this credit card in the open market by the second half of the year, allowing us to keep growing steadily and organically in this business line and do so without compromising prudent risk management.

In the same vein, within customer products, auto continues showing strong growth. And just for years, Santander has positioned itself almost on a par with our largest competitors and from building this business from scratch. Today, it has a value of more than MXN 20 billion, but maintaining this strong performance, we expect to be a top 3 player next quarter, as I said earlier. Payrolls also had a good performance, increasing 6% sequentially and 7% year-on-year, converging gradually to pre-pandemic growth rates.

Turning to Slide 9, solid expansion of loyal and digital customer continues achieving year-on-year growth of 9% and 10%, respectively. In this highly competitive environment, we have maintained our focus on digital conversion while increasing digital transactions and sales, given the changes and trends in consumer behavior and our agility to adapt to and succeed in this new environment.

The ratio of our loyal customers also continues to grow with these clients now representing 42% of active clients compared with 39% in the same quarter of last year. The evolution of this ratio has been positive throughout the past years. In 2016, the ratio stood at around 21%. This clearly reflects our consistent improvement across the breadth of our products and services as we aim to be top of mind among our clients. During the quarter, product sales via digital channels accounted for 63% of total sales, a substantial increase compared to 49% a year ago. Digital monetary transactions also maintained an upward trend, reaching 47% of our total with mobile transactions accounting for 97% of total digital transactions, up slightly from 96% a year ago. In addition, mobile clients grew almost 12% over the past year to over 5.4 million driven by our promotional campaigns and the incentives we offer through digital channels.

As shown on Slide 10, commercial loans increased 5.4% year-on-year, driven by a double-digit pickup in mid-market loans, which grew by 13.4% year-on-year. These types of companies are starting to be more active with loan demand. During the quarter, corporate loans increased 1.7% year-on-year, although they had a decrease of 14.6% sequentially following the fourth quarter peak. Loans to government and financial entities had a soft 0.3% year-on-year increase, but grew 4.4% on a sequential basis. SME loans remain affected by current weak economic conditions remaining flat on a sequential basis.

Moving on to funding on Slide 11, total deposits increased 2.5% year-on-year and 0.5% sequentially, as in previous quarters, deposits were driven by the continuing good performance of demand deposits increasing 7% year-on-year and representing 73% of total deposits. This is one of the best mixes we have ever had. Conversely, time deposits decreased 7.9% year-on-year, mainly due to a 16.7% drop in corporate deposits as we continue for going certain expensive corporate deposits to lower the cost of our commercial deposits.

Demand deposits from individuals increased 6% year-on-year, supported by our promotional campaigns. As a result, we have been able to reduce the cost of our demand deposits by 100 basis points year-on-year, more than the market decrease. We also continue working to further reduce our funding costs as we make additional headway toward improving our deposit mix, one that prioritizes individual deposits. As a result of this strategy, our total deposits from individuals have increased considerably during the last 5 years, both demand and term deposits. They stand at 35% and 45%, respectively, and together make up 38% contribution of individuals in our total deposits.

Turning to Slide 12, we have maintained very strong capital and liquidity positions. Our liquidity coverage ratio stands at 187%, representing a substantial buffer and still far above the regulatory threshold. Our core equity Tier 1 and capitalization ratios as of March 31 are 14.89% and 20.21%, respectively, significantly above the minimum requirement established for systemically important financial institutions like ours. In fact, we have been above 14% levels of CET1 ratio for 6 consecutive quarters, and this is our third consecutive quarter above 20% in terms of total capitalization. We maintain a sound funding position with net loans to deposit ratio of 95% for the quarter.

Liquidity management is one of the main components of our core activity as a retail bank. Began our strong base of deposits, we aim to keep a diversified source of funds and a prudent maturity profile. We're constantly evaluating different alternatives and markets to match our liquidity requirements, secure financing and support our business growth in an efficient and profitable way. So in the past months, we identified the domestic debt capital market to provide constructive and appropriate conditions for an issuer like Santander Mexico.

We started and executed long-term notes for an aggregate MXN 10 billion last November and follow with various short-term notes for approximately MXN 15 billion during this quarter. Also in late March, we complemented with a couple of long-term notes for MXN 9.9 billion. These issuances are a testimony of the strong confidence for the bank's wide investor base. We further strengthened our liquidity position to fulfill our business prospects.

As you can see on Slide 13, our net interest income increased 5.3% year-on-year and 2.3% quarter-on-quarter, mainly driven by both higher retail volumes and interest rates. As a result, net interest margin expanded 17 basis points to 4.59% for the quarter. We expect to continue seeing an improvement in net interest margin as higher margin segments begin an upturn together with interest rate increases.

Please turn to Slide 14. Net commissions and fees had a slight decrease of 0.5% year-on-year and a sequential increase of 2.4%. Our solid performance in insurance fees after the renewal of an annual mortgage policy combined with higher financial advisory services were partially offset by the 15% year-on-year decrease in credit card fees due to extraordinary revenues that were registered in 2021, coupled with a higher cost in the acquiring business and cost increases on the reward programs. Going forward, we expect a better performance in credit card fees as our ambitions for our LikeU credit card are to increase monthly average billings while achieving the better composition in fee income.

Turning to Slide 15, gross operating income increased 2% year-on-year, mainly due to the growth in net interest income, driven by the performance of both our individual loans and deposits and interest rate increases. On the other hand, trading income had a more normalized result, but was still above our historical MXN 600 million to MXN 800 million range, contributing the recurrent 5% average to the gross operating income.

Moving on to asset quality on Slide 16, the NPL ratio reflects the adoption of IFRS 9 methodology, which had an impact of 82 basis points and makes the ratio non-comparable with the ones reported previously. Its sequential increase is due to this and not because of any deterioration in asset quality. Provisions in the quarter declined 10% sequentially and 45% year-on-year, mainly driven by the additional provisions we booked in the first quarter of 2021 to face the pandemic and a better-than-expected performance in the retail portfolio in addition to a couple of corporate payments and recoveries in February.

Going forward, we expect to keep provisions more similar to pre-pandemic levels, even though we're increasing our risk levels in credit cards and consumer loans. Our loan portfolio continues to perform well with a cost of risk standing at 2.41%, a 74 basis point year-on-year decrease and down 49 basis points sequentially. Looking ahead, we do not see any deterioration that would impact any of the loan portfolio segments, so our cost of risk should remain below 3%.

Turning to costs on Slide 17, administrative and promotional expenses decreased 4.2% year-on-year. This was mainly driven by the reclassification of the past contributions due to the new IFRS 9 implementation, which as of this year, will be recorded in the other income line, excluding this change in accounting. Our administrative and promotional expenses for the quarter increased 5.8% year-on-year. Sequentially, expenses decreased 25% after the fourth quarter 2021 peak related to the impact of the PTU and the new outsourcing law, along with the IPAB reclassification that I noted.

Accordingly, the combination of this reclassification and the fourth quarter peak resulted in an improvement in our efficiency ratio of 872 basis points sequentially and an increase of 66 basis points year-over-year, which stood at 47% at the end of the quarter. We feel confident about the dynamics of the business and our disciplined cost control. However, we see a potential upside risk in expenses throughout the year due to persistent inflationary pressures and to our ongoing efforts to strengthen our digital capabilities.

Turning to profitability on Slide 18, net income increased 56% year-on-year to MXN 5.1 billion, mainly due to the solid increase in net interest income and lower provisions and expenses, partially offset by softer fees and lower market-related income. Profit before taxes was up 57% year-on-year for the quarter and 20% sequentially, reflecting the strong performance of our core business.

Return on average equity was 12.3%, 408 basis points higher than the year ago level. We're still accumulating capital per the regulators recommendation to limit the payout of previous year's earnings. In addition, the effective tax rate returned to a more normalized level and stands at almost 25%, 56 basis points higher than a year ago. We anticipate line between 23% and 24% by year-end based on the still high inflation rate expected for 2022.

Before going into the Q&A session, let me share with you some brief closing thoughts and a couple of adjustments in our perspectives. As we expect asset quality to remain healthy despite our higher risk appetite in some business segments, we are adjusting the cost of risk from 2.7% to 2.9% range to 2.6% to 2.8% levels, which is a positive sign. On expenses, despite having mentioned growth of around 3% to 4% year-on-year in our guidance due to persistently high inflation, we now expect expense growth to be between 5% to 7%.

As for the tax rate, we are anticipating it to lie between 23% and 24%, which is a bit better than the previous range considering the high inflation rate expected for 2022. Lastly, we forecast net income to grow north of 15% as part of the aforementioned adjustments, better operating environment and our continuous efforts to keep posting stronger results. We will continue securing our many growth initiatives and making new investments in the bank's transformation. We will maintain our strategy that focuses on strengthening customer loyalty by increasing the digitalization of our products and operations, mainly through innovation, our market-leading digital advancements that enable us to enhance the value of our products and digital offerings. Our ambition to become the bank known for superior customer experience in Mexico remains.

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 the line of Jason Mollin with Scotiabank.

My first question is on your capitalization ratio. And you are showing that the very strong levels. Can you give us an update on proposing dividends and what you expect and getting regulatory approval for that would be one? And my second question is related to mortgage loans. And we show -- we saw an 11% year-on-year increase, mortgages now represent 26% of the total loan book. You mentioned the success of your Hipoteca Plus, Hipoteca Free now looking like you have close to 18% market share. If you can talk about the dynamics in the mortgage segment, especially with rates rising quicker than most expected. Are you changing terms, maturities, pricing? Maybe you could give some color on how important you think pricing for mortgage products is in the current market. And maybe give some other details on the average ticket and rates that you're charging?

Jason, regarding deal rate, you might recall that the regulators recommendation was to limit payout -- the payout ratio for 2019 and 2020 to 25% of earnings. Despite the fact that the regulators have mentioned that they are ready to update that recommendation, they haven't made that public, in several meetings that we have had with them, they have mentioned that they feel comfortable with increasing that restriction from 25% to 50%. And that's basically consistent with the historical payout ratio of the banking system, okay? So with that in mind and without having the benefit of the banking commission releasing this publicly, we think that a 50% payout ratio for last year's earnings is prudent and is -- in my opinion, achievable. So we're going to propose that if there's any chance to payout more than that, given the fact that we have a very strong capital ratio, we will pursue that, okay?

But first of all, we're waiting for the regulator to confirm publicly their position. And after they do that, if there's a chance to reduce excess capital, we will do that. I think it's in everybody's best interest, if a bank do not have projects that they require capital for us to pay that out to our shareholders, okay? So that's on dividends. Regarding mortgages, pricing, obviously, is important, but it's not the only factor that clients value. I would say that speed and service is critical. And we have invested in improving the customer journey associated with the mortgages and also doing it end-to-end from a digital standpoint.

So that has contributed for us to continue gaining market share. We also -- this product is important to us, is key in our loyalty strategy as we offer a competitive rate in the market as long as customers bring more business to us, okay? And in the contract that we offer in Hipoteca Plus, that's completely built-in. If you don't comply with the conditions to have your payroll with us, credit card, insurance business with us, then automatically the mortgage rate goes up, okay? So in that regard, it's an important customer acquisition strategy for us. So obviously, we were mindful about pricing, but it's not the only component.

We have witnessed over the last few weeks, I would say, a significant deterioration in inflation not only in Mexico but globally, particularly in the U.S. that makes the probability of rate hikes more aggressive in the short term, more probable. So chances have increased. So clearly, that makes us reconsider our pricing policy. We meet on a continuous basis in order to monitor that, okay? So we will do that.

We have a very disciplined approach in terms of profitability. So in the case of mortgages, it's not only the product but all the business that comes with the mortgage. So I would mention that if we consider that from a profitability standpoint, it's worth increasing rates, we will do so. We have already done a small adjustment of 25 basis points on average over the last few weeks. And we will continue evaluating that, Jason.

Our next question comes from the line of Yuri Fernandes with J.P. Morgan.

I have a follow-up on asset quality. I guess you, Didier, you already mentioned in the presentation. But for the other banks, IFRS 9 implementation helped the NPL ratios, right? And in your case, it drove 80 bps worsening. And our understanding here was that for the credit cards, given you were moving from 60 days past due to 90 days past due, this would help. So my question is what happened with the IFRS implementation and why you had a different trend than some peers?

And in that regard, what to expect from the coverage ratio, right? Because I guess you're -- I know coverage ratio is an output, but historically, your coverage was around 130%. And your message was very clear that you're not seeing any worsening that you don't expect cost of risk to change materially. So my question is should the coverage ratio remain at this 150% level?

Yuri, you clearly point out to a positive impact in terms of the IFRS 9 implementation associated with consumer loans. But there's, in my opinion, subjective criteria in classified Stage 3 portfolios. That depends on the assessment of the credit analyst and whether the client has the capacity to repay their obligations. And given the fact that there's subjectivity in this assessment, it may be the case that the same client is classified in different stages for different banks.

So in our case, declassification in Stage 3 of the large corporate segment within our loan portfolio was the one that created this impact. And it's less than a handful of clients associated with this, okay? So that's why it had that impact in our case. And clearly, I cannot opine on how other banks are doing this, okay? In terms of the coverage ratio, you clearly say that this is an output. And I think that I would be surprised if the coverage ratio is not within, I would say, 120% to 130%. But it's an output.

And just to add Yuri, if you take a look at the NPL ratio disclosure that we have on slide 16, actually credit card NPLs did fall from 3.56% in the fourth quarter to 3.34%. That's the effect that you were mentioning. And the biggest -- and all of them decreased, except commercial from 1.01% to 2.18%. That's the effect that Didier is mentioning. The effect -- the overall effect that we mentioned of 2 basis points is on the total NPL ratio. So with that, let's say, Stage 3 inclusion, the NPL would have been below 2%, okay?

So this is very clear. And for the other countries, you go over, like expected losses is, as I said, you are subject to things like it depends on economic growth, depends on many variables, not only a past due, but even in Mexico, we saw some other players using this criteria. It's called adaptation. And guys, if I may, a second one very quickly, and I don't know what you're commenting on this, but what should we expect regarding capital allocation, and there was already a question on dividends. But regarding potential delisting and dynamics, like if you can provide any high-level view on your thoughts on those 2 things because those are, I guess, point of interest from clients.

Yes. Probably I'm going to be quite repetitive on this, Yuri, because this -- we've maintained a position probably since I joined the company now 6 years ago. We have a very disciplined approach in terms of inorganic growth opportunities. Clearly, Banamex represents an attractive opportunity that we should analyze deeply and carefully. I'm quite sure that this transaction will change the competitive landscape in the Mexican banking sector, something that we haven't seen during the last 2 decades, okay?

In our case, our strategy to not realizing in making acquisitions. We have a clear strategy that we have been executing for the last few years. We've made progress. We would love for the progress to come at a faster pace, but it takes time. So it's -- in my opinion, it's a matter of comparing alternatives. So clearly, Banamex represents an attractive opportunity. But we need to ask ourselves if it's the most efficient way to increase our exposure to the Mexican market. It obviously comes at a price.

Is it the best way to invest a certain amount of money in the Mexican market by making this acquisition or we continue pursuing organic growth opportunities? So we're going to do that analysis. We don't need to buy Banamex to continue being successful in the Mexican market, okay? It obviously needs to come at a price that makes sense for our shareholders that will have the benefit of being accretive, that takes into account the execution risks that are embedded in this transaction. So we have to do a complete analysis.

In my opinion, the fact that despite the tender offer having reached more than 96% of ownership of the Santander Group, I think that probably makes sense to leave open a potential opportunity to finance this transaction, raising capital locally. And let me be very clear on this. Both our Global CEO and (inaudible) have been very clear in the sense that their preference would be not to issue capital if there is an opportunity to buy Banamex.

But I think that why kill that option now. I think that we have the obligation to analyze the opportunities and to look at the potential financial -- financing alternatives when times come. So I think that, in my opinion, it's quite prudent to remain listed and have that as a potential opportunity to raise capital if it makes sense at the time and obviously, if we end up being the winner in this opportunity, okay?

Our next question comes from the line of Ernesto Gabilondo with Bank of America.

My first question is also a follow-up on CitiBanamex. We have seen Botin met with AMLO recently. So just wanted to know if this topic was discussed in this last meeting and if you have already started to have conversations with Banamex? Also related to this, can you remind us what is the level of your excess capital, like the amount in pesos or in dollars? You also mentioned that maybe you can issue shares. But what other additional sources are you thinking if you are interested to finance the transaction?

Ernesto, yes, Ana Botin met the Mexican President a few days ago. Unfortunately, I was not invited to that meeting. So I cannot tell you, confirm whether this topic was mentioned or not. I assume that it was, but I was not there. And I haven't been briefed neither by Ana Botin nor by Hector Grisi on the topics that were covered in that meeting. Now regarding conversations with Banamex, we have stated that we are interested, and we cannot comment on specifics of the transaction, okay, given the NDA that we have signed with Citi.

Regarding the excess capital that we currently have -- the way that we look at it is having a core Tier 1 ratio of approximately 11.3%. We think that that's a level that we feel comfortable to have. And the excess capital that we have taken that into account is approximately MXN26 billion. Regarding potential financing alternatives, I think that all alternatives are open and we would look into every single opportunity and assess what's the best way to put together a financing package if we end up acquiring Banamex, okay?

And obviously, there are different alternatives that go from issuing capital locally to issuing different capital securities or just plain debt. It all depends on the balance sheet strength that we would like to keep on a pro forma basis and how markets are in -- at that time. But it's good to have alternatives. And I think that the strength of both the Santander Group and Santander Mexico makes us quite confident that we will get very good alternatives in terms of a potential acquisition of Banamex.

Perfect. And also related to this, we have been hearing from investors that this transaction -- if you look into the synergies now that there's an overlap in terms of branches and in terms of personnel. But if you really want to go for the synergies, you have to lay off people. So do you think this could be creating some political noise or some of the action from the government that you cannot not be laying off people maybe in 2 or 3 years?

I think that you touch a very important point, and I think it's a sensitive one. And that's something that clearly, anyone who is interested in buying Banamex should take that into account. The President, the Mexican President has been very clear in (inaudible) and in the banking commission as well, he mentioned certain things that he would like to have as part of this transaction. And he has mentioned about -- sensitive about employees. And I think that Citi is also sensitive on that from understanding how they proceed in other jurisdictions.

So that's, for sure, something to bear in mind. I think that even it would be very hard to execute those synergies as we have seen in prior occasions. You should also take into account the fact that there's a high turnover in banking employees. So even without firing employees, there's a natural attrition, probably takes more time. And probably it's not as efficient as really going after redundancies. But that's, I would say, way we -- or any buyer of Banamex could consider this, okay?

Perfect. Perfect. And just a last question in terms of loan growth. What do you think is the level of inflation and interest rate or the loan portfolio growth could start to suffer. And can you remind us your expectations on inflation and interest rates for this year, next year?

Yes. In terms of loan growth, I think that being close to 10% is something that we should be able to maintain with an inflationary environment similar to the one that we have, okay? The latest expectation is that inflation could end up this year around 7% and next year around 4.3%, okay? But this is -- as you probably are aware, this is quite uncertain, okay? Inflation expectations have been increasing consistently even for the -- for Banxico during the last probably 9 meetings that they've had, okay?

And the more deterioration in inflation expectations happened actually in the last meeting. So it's not that it continues to deteriorate, but it has done so in an increasing way, okay? As you probably know, Ernesto, there's a significant under-penetration in terms of banking in Mexico. So in my opinion, there's -- it makes sense that loan growth should be higher than inflation and with an opportunity to increase loans to GDP on a secular basis.

But for example, what about the high level of interest rates affecting some of the banking products?

I think that at these levels, I don't see that a major impact, Ernesto. If we start to see higher levels of inflation on interest rates, then there is a point to be -- to take that into account. In my opinion, at these levels, I don't think that there is a significant impact.

And where do you see that impact at levels of 9%, 9.5%?

So let me see if I understand right, your question.

The interest rate, if it goes to 9.5% then you can start to see more moderate loan growth?

Very marginally. I don't think that -- I think that it's important -- at least, maybe I'm going to reveal my age with how I answer this. But I joined the banking sector one month before the Tequila Crisis. So I have seen interest rates at a much, much higher level than the ones that we have. So I think that these levels, I'm not concerned at all. Probably if Banxico rates get a double-digit and probably mid-teens, then I would be -- I will start to be concerned. At these levels, I'm not that concerned.

Our next question comes from the line of Tito Labarta with Goldman Sachs.

Couple of, I guess, follow-ups. First on the loan growth, following up on Ernesto's question. In terms of GDP growth expectations have come down, right, you've maintained your loan growth guidance. If you look at consumer loans, you're growing much faster than the system, like 16% versus 7%; also credit cards, modest growth, but still growing faster than the system. So just any concerns with sort of the slowdown in GDP growth you still kind of maintain the loan growth guidance and on consumer loans growing faster than the system? That's my first question and then I'll ask the second question after that.

Tito, I think that we are not that concerned. There's obviously a slowdown in GDP growth expectations. But I think that the way that we are positioning the key products that are increasing, I think that it's quite prudent from -- the loan growth that we have experienced is within our customer base, okay? So that's quite prudent, okay? We're aiming at going to the open market in credit cards with LikeU card. But despite that, I think that we'll do it on -- with very sound origination policies.

So we are not -- we have never been aggressive in terms of gaining market share just for the sake of gaining market share, okay? I think that we are aiming at having more -- increasing our customer base, having more loyal customers. And clearly, those customers demand different types of loans. And that's what we're trying to achieve. One of the things that we're very pleased in the evolution is how loyal customers have increased relative to active customers.

They almost double or slightly more than double since we started with these initiatives. So as we are aiming that the key component of our growth is going to be within the customers that we already have. We don't -- we are not that concerned, okay? We clearly recognize that relative to other quarters where we have a higher risk appetite, okay? But I think that we've been very, very prudent throughout the way we look at these opportunities.

Just to add details on what Didier mentioning, for example, in the credit card, LikeU, we are starting to those -- our own customers with very low limits. And depending on the performance, we would be able to increase in time. And given that it's 100 percentage of card also is very safe in terms of fraud. So even though it's a new product, it's already mainly 6 months -- the trends are still pretty positive in terms of asset quality.

So we haven't seen any signals there that would concern us. And on mortgages, which is also fueling individual growth and our increasing market share, those members are fixed rates. And loan-to-value of that even the origination is below 70%. So as Didier mentioned, I mean, even though consumer loans are the ones that are increasing, we're doing that with very strict origination criteria, and we feel comfortable at this time with those risks.

And then my second question, just following up also on the dividend and capital position, you mentioned you're still pursuing paying out dividends. But would you pay anything out before any decision is made about a potential Banamex acquisition? Just curious in terms of -- would you want to use any of that capital for a potential acquisition or you pay dividends regardless and then figure out how you would fund an acquisition after that?

We'll pay dividends regardless, Tito.

Our next question comes from the line of Alonso Garcia with Credit Suisse.

My question is on guidance. I mean looking at the different lines that you are providing it seems that the increase in net income growth is coming from lower cost of risk, lower effective tax rate, which more than offset the higher OpEx growth. Would you mind to touch base on your expectations for NIM and how have they changed, if any, compared to your original guidance? I mean you already reported a 13 basis point increase quarter-over-quarter.

I just wanted to check on your expectations for the whole year and check how the higher loan yields and improvement in mix will play out vis-a-vis the higher funding cost. And my second question is just very quickly on other income and expenses. We saw a big pickup quarter-over-quarter beyond the impact coming from the reclassification of IPAB costs. So I just wanted to check if you think this is the new recurring level on their IFRS 9 for this line?

Alonso, regarding NIM, I think that given expectations of higher rates, I think that, that will benefit us. Probably, we see a NIM expansion of close to 60 bps to 70 bps on a year-on-year basis, okay? Obviously, it's going to depend on how the mix continues evolving. But as mentioned during our remarks, the high-margin loan segments are starting to grow faster than low-yielding segment. So I think that this NIM expansion should be achievable. Now regarding other income, I'll have Hector or Fernando complement on that.

Remember that in other income, we have all sorts of lines that are there. One of those -- the important ones have to do with reserves for contingencies. So that's probably -- that's the most important change that we recently have seen, and that shouldn't just be something that is recurrent.

And also Alonso, remember that after we have the expenses related to the recoveries of the loan portfolio that also complements the amount of money in other income line.

Our next question comes from the line of Carlos Gomez with HSBC.

First of all, congratulations on the results, especially on the funding and the deposit. And thanks once more for your presentation, it's very clear and it's very easy to follow. So I just wanted to make sure we say that. Second, can you give us an update about your plans to separate digital bank? Is that still going ahead with the stage as you get in the license? When can we see something tangible on that?

And finally, because we're expanding into other financial services one area that Santander left many years ago is the pension business, the (inaudible) business. And I know it is difficult now because commissions have been lower, but that may actually provide you with opportunities to acquire one or more of such businesses. Would that be a way in which you could use your excess capital?

Carlos, thank you very much for your comments. We appreciate -- regarding on our digital bank, open bank, we have submitted the documentation for another banking license to have this digital banking, okay? Just a few comments on why it has taken us so long. In the prior administration, there was, I would say, a verbal agreement that we could do this under our existing banking license. And with the change of administration, then there was another interpretation of whether that was feasible or not. So that took us a lot of time to switch from that strategy to the new one, okay?

So having said that, I think that we're probably a year to 1.5 years away from having fully operational, the open bank in Mexico. Now regarding our potential interest in other companies in the financial sector, we're always looking at the opportunities, okay? And even though pension funds have not been the core of our analysis or interest, we clearly will analyze. In the case of Banamex, it comes all together. So that's something that we would consider. But I would say that in terms of inorganic growth, it's not in our top of list pension funds. We'll rather consolidate any operation or any other banking operation in Mexico.

Okay. So that would -- that would not be a priority. And the fact that it's taking so long for you to get the digital banking license, should we read anything into that in terms of how long it will take for the Banamex transaction to be completed?

You have a good point. I think that every single case is different. Let me say that first. But clearly, regulators are taking time for approvals even for simple approvals. And clearly, approving a banking license requires significant milestones, and there are a lot of requirements, okay? So that's one of the risks associated with the Banamex transaction because they have expressed publicly their desire to keep a banking operation more associated with corporate clients that, that operation will require banking license So that may cost the transaction to be quite a lengthy approval and execution.

Our next question comes from the line of [Jose Quinca] with Citi.

Just 2 quick follow-ups, and apologies if this was already discussed, I got disconnected from the call. But very quickly, I just wanted to understand in terms of your OpEx growth revision on your guidance, there is a footnote that says that it does not include the reclassification. So just if you could clarify for me, please, if that new range of 5% to 7% would stay the same after considering the reclassifications or would go upwards or downwards? That would be my first question.

And the second question, just a quick follow-up on fees. We saw and you mentioned that some costs related to the merchant business and the rewards, I think, drove or pressured fees -- expenses on the credit cards and debit cards. So just wondering when do you think this high growth in fee expenses could normalize going forward?

Jose, regarding your first question, the footnote tries to capture the fact to isolate any component on [IPAB]. So it's 5% to 7%, taking that out, okay? So if you compare apples-to-apples. Now regarding fees, I think that the -- let's say, extraordinary revenues that we recognized in the first quarter of last year were that extraordinary. So we would expect that starting in this quarter, in the second quarter of this year, the fee performance should normalize relative to what we were seeing in prior quarters.

Ladies and gentlemen, we have reached the end of today's question-and-answer session. There are no further questions at this time. I'd like to turn the floor back over to Mr. Hector Chavez for closing comments.

Thank you, operator. Well, that ends our call for the first quarter 2022 earnings conference call. Thank you very much for your participation. As you remember, we are always open to questions. If you have any more, please feel free to reach us and have a good day. Thank you very much.

That concludes today's conference. You may disconnect your lines at this time. Thank you for your participation, and enjoy the rest of your day.