Banco Santander México, S.A., Institución de Banca Múltiple, Grupo Financiero Santander México
Q1 2021 Earnings Call Transcript

Published: 2 May 2021

[Operator:]

Good day, everyone, and welcome to Banco Santander México's First Quarter 2021 Earnings Conference Call. Today's call is being recorded. . I'd now like to turn the conference over to Mr. Héctor Chávez, Managing Director and Head of Investor Relations, who will make some opening remarks and introduce today's other speakers. Please go ahead.

[Héctor Chávez:]

Thank you, Operator. Good day, and welcome to our first 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 close of the market and can be found in our Investor Relations website.

[Didier Mena:]

Thank you, Héctor. 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, this quarter, we continue to make progress on our strategic initiatives while maintaining a strong balance sheet and ample liquidity. Loan volumes reflect difficult year-on-year comps, mainly in corporates, in line with market trends and soft demand conditions. Mortgages and other loans continue to perform extremely well as we continue to grow above market and gain market share with prominent originations. We have fully absorbed the negative impact of the pandemic, maiden consumer loans, credit cards and SMEs and are well positioned to support our customers in the recovery pass ahead. While loan volumes in these segments show year-on-year contractions, we expect a gradual turnaround from here. Deposits also reflect difficult base effects, many in corporates as companies liquidity needs have normalized compared with year ago levels. By contrast, individual demand deposits continue expanding above 20%, underscoring the success of our loyalty and customer acquisition strategy. In terms of asset quality, NPLs have started to decline, benefiting from improving conditions for our customers, together with write-offs taken mainly in the segments, mostly impacted by the pandemic such as consumer, credit cards and SME loans. Although provisions increased this quarter due to specific corporate exposures, we estimate that cost of risk has peaked and should start declining from here. Before moving on to review our business environment and performance for the quarter, please note that reporting company recently announced that it intends to launch a tender offer for 88.3% of outstanding shares that it doesn't currently own in Santander México. Our parent company also stated that it intends to list Banco Santander México from the Mexican Stock Exchange and the New York Stock Exchange as well. For information about this pending offer, please refer to Banco Santander's press release that was issued on March 26.

[Operator:]

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

[Ernesto Gabilondo:]

My question is on the creation of provisions for specific corporate. With information circulating in the media, we have seen Santander has exposure to México, Alsea, and Cinepolis. So just wondering if those are the corporates increase you created higher provisions or is there another corporate in which I know that you cannot disclose the name, but maybe the type of sector or industry? And then very quickly on my second question, what will be the next steps for the cash tender offer? You mentioned that it could happen between second quarter, third quarter of this year. But when we use as a reference, the timing of the tender offer that happened 2 years ago? And just to double check, you will not pay dividends after the transaction is done, right?

[Didier Mena:]

Ernesto, thank you for your questions. Regarding provisions, you're right in the sense of also not having the possibility to disclose individual names, but definitely are in the entertainment industry and in the retail industry all the one-offs that we reported this quarter. If we add up all these one-offs, it's slightly above MXN 2.2 billion, okay? It's north of 30 -- almost 32% of the entire provisions that we made this year. And this has to do with our internal rating models. So this is not just a gut feeling, its due to certain deterioration in these names in their financials. Still, as I mentioned in our remarks, they are not nonperforming, but these clients with public information, they are undergoing restructuring processes. And according to our methodology, that requires making these provisions. Now moving on to your question on the tender offer process. A few days ago, we received some comments from the CNBV, regarding the documentation that needs to be approved in order to -- for the CNBV approve the tender offer. It's not the only comments that we're expecting, but we are very pleased that we got these comments a few days ago. We're in the process of making those changes, and we continue to expect that the transaction can be closed either at the end of this quarter or most likely during the third quarter of this year. Now regarding dividends, as you probably are aware, a few weeks ago, the banking commission made an updated recommendation in terms of dividend payments. And there's still some uncertainty associated both with timing and with the amount of business that we can pay out in the short term. And let me elaborate on that. The recommendation made by the CNBV states that you can pay out or banks can pay out up to 25% of the combined net income of 2019 and 2020. That, for us, is slightly above MXN 10 billion, okay? However, in CNBV's communication, they reflect that if you already made some payments associated with this -- well, mainly with 2019, and if you make these payments during 2020, then you need to take that out. However, as is written, it's not clear if the dividend payment that we made on December 2019, according to our practices of paying dividends twice a year, the dividend payment that we made in December of 2019 was associated with the earnings of the first half of 2019. We paid out roughly MXN 5.5 billion, back then, okay? So given that the CNBV's communication, it states explicitly the restriction or taking out what you paid in 2020, and we made this payment in 2019. We have asked that question to CNBV to clarify, going to the spirit or what we interpret the spirit of CNBV's communication. We think that the restriction applies regardless of when the payment was made. That's our assumption. So we are asking the question just to make sure that we are not misreading the communication that was sent by CNBV. So summarizing, if restriction applies in a spirit, we will have the capacity to pay close to MXN 5 billion in dividends. If the communication, we should treat it explicitly, we could be paying or have the capacity to pay slightly above MXN 10 billion in dividends. Now timing is uncertain because for locally systemic banks, the CNBV also included in this communication that we need to be compliant with TLAC. You are proposing to that the Mexican banking system adapts TLAC in a relatively short period of time, starting in the first quarter of next year and with a gradual implementation during the 6 quarters. So given the fact that they are suggesting or recommending banks to pay out dividends, only if they are compliant with this trajectory of further requirements associated with TLAC with a regulation that's still not in place, that brings some uncertainty. So we are currently in discussions with CNBV just to figure out exact whether we can make payments right now and if what the restriction in terms of amount, whether we -- it's MXN 5 billion or MXN 10 billion. So we're exactly in that process. Now stated in Grupo Santander press release on March 26, if there's a dividend payment before the tender offer is executed, then that dividend payment or the price that they are offering, what they have offered, should be adjusted by any dividend that is paid out in this -- before the offer is concluded. So that's in a nutshell, Ernesto, where we stand.

[Operator:]

. Our question comes from the line of with Scotiabank.

[Unidentified Analyst:]

My question is related to loan growth expectation and how that relates to the change in economic growth expectation. So at the end of the fourth quarter, when you were discussing the results, you were expecting GDP growth of 3.2% for 2021. And now I think that the expectation that you showed is of 4.5%. So given that change, what is your expectation in terms of loan growth for 2021? And what segments do you think will be driving -- will still be more or has that changed?

[Didier Mena:]

Sure. As noted in my remarks, we think that we feel encouraged with certain trends. Obviously, this -- the higher expected GDP growth that's associated with how the U.S. economy is performing. That's definitely great news. If you look at -- and in order to answer your question, we definitely need to break it down, break our loan portfolio in individuals and commercial. In individuals, we continue to expect a solid performance in mortgages and in other loans. And in credit cards, as also mentioned in our remarks, we think that there's a positive trend associated with what we saw in last months, the more than 20% increase in transactionality. So the levels that we have in our credit card portfolio slightly above MXN 50 billion. Most likely, that's close to the bottom that we're expecting to see. There is one thing that might bring an additional contraction, we're seeing in our loan portfolio, in our credit card loan portfolio, those clients that pay their balances in full have increased through time. If we compare to, let's say, first quarter of last year, clients that paid their balance in full was 26%. Now, that's 31%. Okay. That's a significant increase. So -- and part of it has to do with the -- how cautious households have been so rather than leveraging under credit cards, having excess liquidity, and we can see that through how deposits have been growing over the last 12 months, then they're using less their credit card to finance their need, okay? So that's something very important to have in mind. And this number, if you look at the last 4 years, is by far the largest percentage that we have in trends that are paying their balances in full, okay? So we see loan to individuals continue growing, and we reported a 7.2% year-on-year growth. We think it's likely that it's going to be at those levels or slightly above that for the rest of the year, okay? Now what is still uncertain is what happens on the commercial side. Also as noted in our remarks, even though we have year-on-year significant decreases in corporates, in SMEs, when you look at sequential performance, mid-market and corporate companies are relatively flat. The only significant contraction associated with write-offs is SMEs. The absolute contraction in SMEs is the largest that we have ever had. And the SME loan portfolio similar to the levels we had at the end of 2015. So that's the size of the impact that pandemic is having in this segment. So we think that if during the next or during this quarter, the second quarter of this year, we see a loan demand picking up mainly in mid market companies and corporate then there's some likelihood that we will end up with a positive growth rate during the rest of the year. But as said, I think that it is still unclear how our customers will demand loans for the rest of the year. But I think that we are more optimistic than we were one quarter ago, mainly associated with the improved expectations in terms of GDP growth and how the loan portfolio has performed during the first quarter of the year.

[Operator:]

. There are no further questions left in the queue. I'd now like to turn the call over to Mr. Héctor Chávez, for any closing remarks.

[Héctor Chávez:]

Thank you, Operator. And thanks to everyone again for joining Santander México on this call. As always, we wish to attain an open dialogue with you. So if you have any additional questions, please don't hesitate to call or e-mail us directly. Please stay safe. Have a great day.

[Operator:]

This concludes today's teleconference. You may now disconnect your lines at this time. Thank you for your participation, and have a wonderful day.