Banco Santander México, S.A., Institución de Banca Múltiple, Grupo Financiero Santander México
Q1 2019 Earnings Call Transcript
Published:
- Operator:
- Good day, everyone, and welcome to Banco Santander Mexico's First Quarter 2019 Earnings Conference Call. Today's call is being recorded, and after the speakers' remarks, there will be a question-and-answer session. I'd now like to hand the conference over to Mr. Hector Chavez, Managing Director, Head of Investor Relations, who will make some opening remarks and introduce today's other speakers. Please go ahead.
- Héctor Chávez:
- Thank you. Good morning, and welcome to our first quarter 2019 earnings conference call. We appreciate everyone's participation today. By now, everyone should have access to our earnings press release and the presentation for today's call, both of which were distributed before the market opened today. Presenting on our call today will be Héctor Checa, Executive President and CEO; Didier Mena, our CFO; and Rodrigo Brand, Executive Director of Public Affairs. Following the review of this quarter results, we will be all able to answer your questions during the Q&A session. But before we begin our formal remarks, allow me to remind you that certain statements made during the course of this discussion may constitute forward-looking statements, which are based on management's current expectations and beliefs and are subject to a number of risks and uncertainties that could cause actual results to materially differ, including factors that may 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. Hector, please go ahead.
- Héctor Grisi Checa:
- Good morning, everyone, good afternoon to most of you in Europe, and people joining our earnings call - our earnings call this morning here in Mexico. We started year on a strong note, generating solid core earnings growth with a robust loan growth, particularly, in midmarket. Growing mortgages while maintaining a strong asset quality across all our portfolio. As we entered the third and final year of operational and indeed, transformation of our bank, we continue to improve our performance across all business areas. During the first quarter, we made additional progress regarding sustained high-quality growth - loan expansion and solid fee growth while generating our ninth consecutive quarter of double-digit growth in retail deposits. In executing our strategy, we remain focused on pursuing profitable growth. Our discipline allow us to deliver a 12% year-on-year increase in net income and to continued expanding ROE, which reached 16.4% in the quarter. Importantly, we achieved this range while continue to embed in our strategic initiatives and in spite of lower than average starting gains. On this last point, we're talking a more conservative - taking a more conservative approach to trading even core market conditions, which lack a lot of liquidity. Before disclosing the performance of the Mexican investment banking system and our own performance during the quarter, please note that our parent company recently announced that it consents to launch a voluntary tender offer for 25% of outstanding shares that is currently owned in Santander Mexico. Our parent company also noted that it does not intend to release Banco Santander Mexico even from the Mexican Stock Exchange or the New York Stock Exchange. For information about this standing offer, please refer to Banco Santander press release that was issued on April 12. Looking now at the key trends in Mexico's banking system, Santander's Slide 4. Overall, industry loan growth maintained momentum during the quarter with loans rising just over 10% year-on-year. As in the prior quarters, loan growth in Mexico was mainly driven by commercial loans with increase in energy, 50% was in the first quarter of 2018. By contrast, take the consumer loans posted a small growth for the 11th consecutive quarter due to persistently high interest rates. Total deposits continue expanding at a steady pace, which rose nearly 8% year-on-year. Demand deposit posted slight tick-up in the quarter, rising nearly 4%. However, because of the highest rate environment, multi-dynamics still reflect a preference for 10 deposits, which expanded almost 18% year-on-year. Although the growth activity remains to be seen for the start of the year, we foresee a complex environment of regular uncertainty, both in domestic and international markets. Therefore, we anticipate a slower than expected GDP growth for the year. We are now forecasting another GDP growth of around 1%, down from 1% - 1.5% for the year, and annual inflation decreasing from 2 - 3.9 from 4.8 last year. Moving on to Santander Mexico performance on Slide 5. We believe it year-on-year long growth close to 10%, tracking slightly above of our full year guidance range of 7% to 9%. Growth was well balanced across our loan segments, supporting solid performance in net interest income. High margin segments accounted for 54% of our loans and continue to contribute with almost 70% of NNI. Please turn to Slide 6 for a closer look of our retail loan performance. First, I would like to point out that we are maintaining our strategy of taking a conservative approach to retail lending, particularly even called market uncertainty related to slowdown in economic growth I noted earlier in the quarter. In consumer loans, for example, which have been straining down in personal loans while our strategy of leveraging our strong commercial franchise to attract payroll accounts continues to drive our robust growth in the second. Our payable loans increased by 13% year-on-year, well above the 8% in the system growth. Our position in the commercial market has allowed us to capture almost 70 basis points of market share in the last 12 months. Payable loans, now worth a cent close to 61% of our total consumer loans, up from 56% in the first quarter of 2018. Growth included car loans accelerated in the quarter almost up 5% year-on-year, while credit card usage increased a strong 11%, allowing us to catch up with the market. This good performance is another example of our ability to cross [indiscernible] into our payable and Hipoteca Plus customers. I would like to emphasize, though, that we still maintain our cautious approach to credit card growth by only targeting our own customers. This approach has continued to sustain Santander's quality and higher profitability for these loans segment. Finally, in mortgages despite the sale of MXN 1 billion nonperforming, loan portfolio, we still expanded our loan book by 8% year-over-year. Our running mortgage remuneration remains strong, up slightly over 12% year-on-year compared with a 10% growth from the industry. The third consecutive quarter will be system growth in the segment. This growth is mainly due to a continuous success of our Hipoteca Plus product which accounted for 70% of total mortgage remuneration during the quarter. This product is helping us to attract new and quality clients, which we were developing strong relationships and pursuing many of our other financial products and services, capturing a greater share of wallet. We consider - we were among of the 2 top mortgage remakers during the quarter, that mainly due to Hipoteca Plus. Please turn to Slide 7. Following the second year of implementing our credit client-centric initiatives, we saw further increase in value customers, up 23% year-over-year as we expanded the number of branches, with digital updates - upgrades, sorry, added functionality store-ups and increased our network of full-functioning ATMs. We continue to attract more digital customers, up45% alone. As a percentage of total transactions, we have transactions standed 390 basis points up to nearly 16%. On growth enhancements through our mobile app help increase mobile customers by 69%. With mobile transactions accounting for 80% of the digital monetary transactions, up from 62% in the year-ago quarter. Also note that loyal to active customers reach 30% in the quarter, expanding over 200 basis points year-on-year. These results further demonstrate the progress that we continue making across the various strategic initiatives which have been implementing to improve our customers' experience. We continue to work hard at transforming our distribution network and infrastructure, boosting customer acquisition while selling our products and building customer loyalty. All while launching new businesses. Recent examples of this [indiscernible] includes the following; number 1, the transformation of another 50 branches during the quarter, our new menus for multiuse of digital and self-service channels, new management tools and individual P&L. To date, we have modernized a total of 264 branches. We also added 50 new full-function ATMs during the quarter, bringing our total to over 850 ATMs. We remain on track to reach our goal of over 1,000 full-function ATMs across the country. Now yearend, which will take us to our not while market share in terms of the type - this type of infrastructure. Among other initiatives, we continuously constant upgrades to our mobile app, adding new functionalities as part of our growing exports to improve the customer experience in customer areas. We also continue to see good traction in TUIIO, our financial inclusion program. To date, we have opened 41 branches in 10 states, serving over 25,000 customers and representing a total loan book of MXN 90 million per branch. Turning to Slide 8. Our commercial loans increased slightly over 11% mainly driven by middle market and government loans, as we will remain profit and profitable lending in this area of our businesses as well. Lending to us in mid- and middle market business expanded approximately 7% and 12%, respectively. As we continue selectively pursuing corporate involvement in business to acquire payroll accounts among our other objectives, our loans in this segment also expanded. Corporate loans increased just over 5%, while government loans grew 24%. On a sequential basis, these loans were relatively flat. It is important to note here that because of greater investor appetite for deviations, corporate entities have been more prone to obtain financing through bank loans. As we have mentioned in the past calls, the segment along with the government has been volatile and sensitive to changing market conditions. Also, note that while we delivered the strong year-on-year growth in corporate and government loans, this is the third consecutive quarter we'll reactively the stable loan books in these 2 segments. Please turn to Slide 9. Our strategy to attract and retain retail clients, including the acquisition of payroll accounts, continues to perform well. Total in renewal and municipal deposits are growing at a steady pace, up nearly 14% and 10%, respectively. Importantly, individual deposits have been growing at a double-digit rate for over the past two years. Similar to what we explained last year, behind this rate environment continue to make term deposits more attractive, more than doubling growth in our individual and corporate demand deposits. Individual include the contribution to total demand deposits by 150 basis points year-on-year and by 220 basis points for total term deposits. As you can see, we continue to successfully capitalize on our leadership in commercial banking to capture more share of Mexico in banking market. As we keep growing in both the corporate enrollment segments, we are generating additional opportunities to attract payroll accounts and cross sell retail products. Let me hand the call over to Didier Mena, who'll review our capital position P&L and performance guidance. Afterwards, we'll be happy to answer any of your questions. Thank you very much.
- Didier Mena:
- Thank you, Hector. Good morning everybody. Moving on to Slide 10, we maintain a solid funding position with net loans to deposits at just over 95% and liquidity coverage of 166%, well above the regulatory threshold of 100%. Our debt profile also remain sound with no major maturity to enter 2022 and only 38% of our debt maturity to 2021. Despite volatile market conditions during the quarter, we successfully tapped the pharma-co market issuing two local notes or [Foreign Language] reaching a total of MXN 6.9 billion. This includes our three year MXN 2.3 billion bullet note due 2022 and paying fee plus 10 basis points and a 7 year MXN 4.6 billion bullet note due 2026 at a fixed rate of 8.95%. I'd like to point out that we were one of the few Mexican companies that issued long-term debt during the third quarter. Our capital allocation ratio increased 99 basis points sequentially to 16.9% while our core Q1 capital increased 115 basis points to 12.2% and Tier 1 stood at 13.5%. As you can see on slide 11, net interest income increased close to 13% versus the same quarter last year supported by our focus on profitability across the balance sheet and to a lesser extent by the high interest rate environment. Interest income from the loan portfolio increased over 14% year-on-year and we generated an almost 7% increase in interest income through our investments in securities. Our net interest margin increased slightly during the quarter expanding 6 basis points to 5.58%. Moving down to the P&L on Slide 12, we continued to generate solid growth in net free, up nearly 9% year-on-year and almost 5% sequentially. Credit cards were the main contributor to fee growth, driven by sustained, higher usage levels, followed by the insurance segment. Investment banking fees also performed well, despite continued overall soft yield flow in the market. Strong cross-selling opportunities to our mortgage and payroll customers as discussed previously and the good performance of our car insurance digital platform, Auto [indiscernible], drove the growth with 40% year-on-year growth in insurance fee. By contrast, cash management fee posted a decline in the quarter, mainly reflecting lower fees earned in a broker year. Turning to Slide 13. Gross per income was up nearly 12% year-on-year and almost 5% sequentially. Core earnings continue to perform well, up nearly 12%. Note, however, that our market related income increased 15% year-on-year, within trading gains of MXN 330 million in the quarter, below our historical average rage of MXN 600 million to MXN 800 million. Given uncertain market environment, we're maintaining a cautious approach as Héctor also noted earlier. As you can see on the Slide 14, we achieved asset quality improvements across the board. Loan officers for the quarter increased over 4% year-on-year and declined close to 11% sequentially. As a reminder, due to new accounting effective since the beginning of this year, banks are required to record recoveries in the provision accounts. Previously, recoveries were booked in other income. Please note that during the quarter we reversed a provision of approximately MXN 140 million in connection with credit finance loan. We took this provision in year 2018. The release of this provision contributed to the improvement in loan loss reserves in the first quarter. Excluding these one-time item, our loan loss reserves have still shown good performance. During the quarter, we also sold MXN 1 billion of nonperforming mortgages noted earlier, which we had already provision in the fourth quarter. The sale of these portfolio contributed to lower NPLs, with improvement of 69 basis points in mortgage NPLs. Our focus on asset quality also resulted in lower NPLs across our loan portfolio. With exception of our energy portfolio, our nonperforming loans ticked up slightly on a year-over-year and sequential basis, reflecting write-off in first quarter of '18. Combined, total NPLs improved to 2.15% by the end of the quarter, reaching system levels. Our cost of risk for the quarter fell 36 basis points year-on-year to 2.69% and was [indiscernible] stable sequentially, tracking below the low end of our for guidance range of 2.8% to 3.0% for 2019. Please turn to Slide 15. As we entered the third and final year of our operational transformation program, [indiscernible] on promotional expenses increased almost 13% year-on-year. Specifically, we recorded higher amortization cost for our administrative expenses related to our investment program. Although slightly above our annual guidance, we expect these expenses to normalize as the year progresses, ending the year within our guidance range of 10% to 12%. Efficiency was relatively stable year-on-year and improved 182 basis points sequentially to 44.8% in the quarter supported by strong earnings quality. Moving on to profitability on Slide 16, net income increased nearly 12% year-on-year and slightly above 15% sequentially. This was achieved despite a significant increase in our effective tax rate which rose 400 basis points year-on-year and almost 550 basis points sequentially to 25.3% in the quarter. Importantly, as Héctor noted, return on equity expanded 54 basis points year-on-year and over 120 basis points sequentially to 16.4% in the quarter. We're particularly pleased with these results considering the cost of the C&L with investment plan and we continue implementing and the relatively low market related income of the quarter. Turning to guidance on Slide 17. The strong results that we delivered in the first quarter support our expectations for the full year. Although income growth in the first quarter exceed our 5% to 7% target range for the year, we're maintaining our guidance for income growth. Despite this achievement, the economic activity that followed with performance to the fourth quarter of 2018, we expect the economy to decelerate due to heightened uncertainty that we see at both local and global levels. Monetize and fiscal policy are not expected to contribute to faster growth in the near term as we see no growth estimated in expansion in our central bank policies. However, even volatile market conditions, corporates are most likely to continue relying on bank to bank financing in Mexico. In this context, we will maintain a cautious approach to growth in both our consumer and corporate segment prioritizing asset quality and profitability. The same will be true with respect to our training activities. The operational transformation of our banks will serve us well in the core challenging environment, in addition to making our offering more competitive with our peers. We continue to make excellent progress towards the comer of client's primary bank as the most recent quarter results further demonstrate. Customer loyalty continues to grow along the number of the retail customers and higher retail deposits. Although we have room for improvement during the remainder of the year, we remain confident that our strategy is the right one. That concludes our remarks. We're now ready to take your questions. Operator, please go ahead.
- Operator:
- [Operator Instructions]. Our first question is from Jason Mollin from Scotiabank.
- Jason Mollin:
- In your presentation, you highlighted that in tandem with the tender offer that Santander Mexico's parent does not intend to delist Mexican subsidiary shares, in Mexico nor New York Stock Exchange. Can you clarify the details of the minimum float necessary for a public company to trade in the Mexican exchange? And is there a risk that lower float could lead to a delisting?
- Héctor Grisi Checa:
- According to the securities markets, the low [indiscernible] - sorry, high value. The minimum requirement is to have 12% free float. However, there are several companies, less than a handful, that fall below that 12% and continue to be listed. So it's not clear to us that these provisions in the law will be enforced there. So I think that, if the tender offer reaches a single level to what happens in Brazil in which the free float is close to 10%, then I don't think that there will be any pressure from authorities to enforce delisting. Also, according to several calculations that Rich made, even with, let's say, less than a 10% free float, we could continue to be part of the IPC index and the Mexican Stock Exchange, which will provide, in our view, sufficient liquidity in our stock for investors not to be concerned on this matter.
- Jason Mollin:
- That's helpful. Maybe just an operational question, just Santander Mexico is in the third and final year of the previously announced investment program. You mentioned in your presentation success in payroll loans, the mortgage product, it will take a plus among other metrics. It would be great if you could just give us a general sense of tangible results that you've seen so far from this investment plan, perhaps in terms - you mentioned some data with clients, but new clients, reduction in clients turnover and growth in low cost retail deposits, how's that going?
- Héctor Grisi Checa:
- It's going quite well. And obviously, we'll like these to be quicker, Jason, but I think that, moving these - a bank of this scale is not that easy. In my opinion, if you were to look at the strategic positioning of Santander in Mexico, we would like more on corporate deposits than retail deposits, okay? And the contribution of deposits from individuals has increased consistently over the last 3 years. Also, very important, if you look at the contribution of loyal customers to active customers, in the first quarter of last year that number was around 26%. And as Héctor noted earlier, now it's closer to 30%. So that's a significant increase. And as we have this cost previously, it takes some time for loyal customers to impact our P&L, according to our analysis, it takes 3 to 4 years to get the full benefit of these new loyal customers. Also important in the investment plan is the fact that we have continued to attract a significant number of customers through our loyalty program. And then that loss goes north of 5.4 million customers already enrolled in the program. Also, the growth in the client, where the - all the investment that we're making on the app and retail channels are growing quite nicely, close to 45%. So I would say that those are the most tangible results of the investment plan. And it's very important to highlight that there's a lag effect to get those benefits within. I would say, we're positively surprised for having expanded ROE through this investment plan over the last two years. So I think that, we feel confident about the performance, execution that we have achieved so far. But I would say that it's - we're in the beginning or the earlier stage of receiving the benefits of this investment.
- Operator:
- Our next question is from Yuri Fernandes from JPMorgan.
- Yuri Fernandes:
- Just a follow-up also on the tender offer. Can you provide some color on the timing? What are the next step, like what should we expect going on?
- Héctor Grisi Checa:
- Sure, Yuri. Our parent company is working on the necessary conditions to present the authorizations to New York Stock Exchange at the Mexican banking commission, sorry, the HEC and the banking commission. And it is expected that they would also need this authorizations in mid-May. And according to a timeline that they're managing, they think that it could take all the way to mid-August to late August to get the authorizations, the approval. Then they - it will be formally launched, the tender offer. According to the securities market law in Mexico, you need to have at least 20 working days period to make the offer. So that will probably take us to the end of September, if everything is right on track, okay? So that's basically the key milestones in the process. I think with the information that we need to provide or that the - our parent company needs to provide, they'll be using or we will using first quarter numbers that can be used all the way to end of October. So I think that, without causing a major delay, we can execute tender offer before end of September - end of October, sorry.
- Operator:
- Our next question is from Ernesto Gabilondo from Bank of America Merrill Lynch.
- Ernesto Gabilondo:
- My question is also on the global Santander offer. Have you heard anything related to - if the offer could be changed at some point? I mean, if it can be improved. And if yes, when is the deadline to do this? And then, do you know how NASDAQ ETS shareholders will vote? Do you know if this will be through a proxy? And do you know how many of your shareholders are related to the NASDAQ?
- Héctor Grisi Checa:
- Okay. Hello, good morning. Look, I mean, right now, at this point, I mean, what Santander has strategy is that they do not plan to do any change to the offer of the SED. I mean, they basically believe that the premium that they offered is the right amount. And as we told you, it is not the idea to release the banking anyway. I mean, it's an option for the stockholders basically to tender those shares if they like or not. I mean, they have the option to do it and, I mean, they could take a look at the performance of the bank and make the decision themselves, no? In terms of the timing, Didier already gone through. I don't know, again, if you would like to point out, I mean, it was basically what Didier was. This would be basically September, October. And you will have 20 working days in order to make the final decision.
- Didier Mena:
- But just to clarify that you asked about NASDAQ?
- Héctor Grisi Checa:
- No, the NASDAQ.
- Ernesto Gabilondo:
- NASDAQ, the [indiscernible]
- Héctor Grisi Checa:
- Actually, I mean, I don't know, Didier, if you know. I actually don't know exactly what's going to happen to there. We can basically find out and give you a call back. I'll tell you exactly what happens in that particular situation.
- Ernesto Gabilondo:
- Okay. But do you know if they need an instruction to vote?
- Héctor Grisi Checa:
- I really don't know. I will have to get back to you on that.
- Ernesto Gabilondo:
- Okay. Okay. And then just a follow-up, I just wanted to know your point of view. If Santander Mexico decides to pursue an acquisition in Mexico at some point, do you think that in the future, it could still be financed through a follow-on on Santander Mexico? Or do you think it will be likely done through Global Santander?
- Héctor Grisi Checa:
- I mean, it will all - going to depend on the capital position of the group. I mean, given the current situation and everything, I believe that if we pursue an acquisition, ideally, what would happen, we will be paying - I mean, our shares are basically very low and that's why Santander decided basically to do the tender offer. At this point, I think it would be much better for Santander to issue themself the shares and then through a capital infusion into Mexico. But that will all depend at the moment we write the acquisition and at the price that we have in the shares at that time.
- Operator:
- [Operator Instructions]. Our next question is from Rodrigo Ortega from BBVA.
- Rodrigo Ortega:
- On the investment plan, do you have analyzed the need for increasing investments further from your three year target of MXN 6 billion? You have shared [indiscernible] only as you expect [indiscernible].
- Héctor Grisi Checa:
- Sorry, you're breaking up. The connection is real bad. We cannot listen to you.
- Rodrigo Ortega:
- I was wondering if there's any updates? Are you listening better now?
- Héctor Grisi Checa:
- We can barely hear you, Rodrigo.
- Rodrigo Ortega:
- [Indiscernible] later.
- Héctor Grisi Checa:
- Sorry about that, Rodrigo. We couldn't hear you.
- Operator:
- Throw another question here from Carlos Gomez from HSBC.
- Carlos Gomez:
- I was wondering, since you are accumulating capital a bit faster than you were expecting, if you might modify your traditional 50% payout ratio. Also do you have to offer a formal recommendation for a tender offer if and when it becomes - it gets approved?
- Héctor Grisi Checa:
- Carlos, we reaching our dividend policy so that we pay at what is in excess of 11% [indiscernible] ratio. With the level of growth that we're experiencing right now, it's almost the same. You get basically to same numbers of 50% payout ratio paying wise in excess of 11% [indiscernible] ratio. So with the expectations that we had, we would say that the dividend policy should result in very similar amount to the historically - to what we have paid historically, okay? Then on your question regarding the tender offer, yes, by Mexican law, the board has to make a recommendation. The board has decided to hire an investment bank to provide a - furnish opinion. We have also hired a Mexican legal counsel in that regard. So once the tender offer is launched, let's say, with the timeline that we discussed previously, let's say, beginning of September, then the board has 10 business days to meet and make a formal recommendation. Obviously, all the necessary analysis and work that needs to be done for the board to get to a conclusion and recommendation will be done prior to that date. The board is ready to make the recommendation.
- Carlos Gomez:
- Okay. And I understand and apology, but I understand this is a very, very delicate subject. There is no requirement in the law that the representatives of the pardoned abstain from the decision as per Mexican law. Is that correct?
- Héctor Grisi Checa:
- The board members that have conflict of interest, let's say, will not be boarded, let's say, or will not be making formally the recommendation. So it's literally the board members, the ones that will be making the recommendation.
- Operator:
- [Operator Instructions]. If there are no further questions, I'd like to turn the floor back to Mr. Héctor Chavez for any closing comments.
- Héctor Grisi Checa:
- Thank you again for joining Santander Mexico on this call. As always, I wish to maintain an open dialogue with me and the invitation to visit us remains open. So if you have further questions, please don't hesitate to call us or e-mail us directly. Have a great day.
- Operator:
- This concludes today's teleconference. You may disconnect your lines at this time. Thank you again for your participation.
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