Banco Santander México, S.A., Institución de Banca Múltiple, Grupo Financiero Santander México
Q2 2021 Earnings Call Transcript

Published: 1 Aug 2021

[Operator:]

Good day, everyone, and welcome to Banco Santander Mexico’s Second Quarter 2021 Earnings Conference Call. Today’s call is being recorded. Following the speakers’ remarks, there will be a question-and-answer session. I’d now like to turn 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. Good day and welcome to our second quarter 2021 earnings conference call. We appreciate everyone’s participation today. By now you should have access to our earnings press release and the presentation for today’s call, both of which were distributed yesterday after the close of the market close and can be found on our Investor Relations website.

[Didier Mena:]

Thank you, Hector. Good morning, everyone, and good afternoon to those of you participating from Europe. I hope you and your families are managing to stay healthy and safe. While the pandemic continues to weigh on our results, and there is a third wave starting to impact in Mexico our results this quarter improved significantly both year-over-year and sequentially as provisions have started to normalize. Further, we continue to make progress on our strategic priority, while maintaining a strong balance sheet and liquidity position. Loan volumes still reflect difficult year-on-year comps, mainly in commercial loans, in line with market trends and soft demand conditions. However, mortgages and other loans continued to perform extremely well, along with government loans, as we continue to grow our top market and gain market share while maintaining conservative origination standards. Although consumer and SME loans remain soft, we have started seeing a gradual sequential pickup in credit cards and mid-market loan demand. In line with improving macroeconomic conditions, our prudent risk appetite has grown in profitable segments, such as credit cards and SMEs, but the approach remains prudent. We’re confident that loan demand can continue to grow gradually during the second half of the year, supported by the economy’s recovery. Deposits also reflect difficult year-on-year comps, mainly in corporates as their liquidity needs have normalized compared with year account levels. In addition, high liquidity has allowed us to focus on improving our deposit mix by favoring demand deposit over term deposits. Both our individual and corporate demand deposits continue expanding at high single digits year-on-year, underscoring the success of our loyalty and customer acquisition strategies and our focus on lowering our cost of funds. In terms of asset quality, NPLs continue falling from their fourth quarter of last year peak, a result of improving economic conditions in the country. With regards to provisions, we are approaching a normalized level. In May, one of the corporates on the restructuring that we mentioned last quarter paid down its complete exposure with us, while the other corporates were successfully restructured. With this, our cost of risk has declined to the lowest level in the last 12 months, and we expect it to continue converging gradually to its pre pandemic levels.

[Operator:]

Thank you. Our first question comes from Jason Mollin with Scotiabank. Please go ahead.

[Jason Mollin:]

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

[Didier Mena:]

Hi, Jason, good to hear you. Regarding the dynamics that we see in our loyal client base, as you rightly point out, we have been growing steadily and consistently. You might recall that we launched our loyalty program in May of 20 16, five years ago, and it continues to get traction. Also, as you rightly point out there was a contractual inactive clients that they – it was mainly a due to the payroll accounts that we lost as a consequence of job losses due to dependent. So it’s not that – we’re losing these clients to other banks, but the fact that at least in the payroll business, there was a contraction due to the pandemic. We continue to enhance our loyalty programs, as I made reference to earlier the Hipoteca Plus program is critical to attracting and retaining the loyal clients. The Hipoteca Plus has build team and scheme, which if the client starts or stops using different products and services, then the interest rate of the mortgage goes up automatically. So it’s a fully considered, the behavior of the client. So, clients have received quite well. I would say enhance the product offering and the benefits that it brings to them. We will continue to leverage not only Hipoteca Plus, but also in other loans there’s recent focus in cross-selling, in accelerating the delivery or the offering of different products and services that the bank has more than just auto loans. I think that you touched a very critical issue in regards to the Mexican banking sector that it’s about expanding the pie, and I think that if we do an honest reflection, I think that banks have focused more on those clients that already have banking needs that probably more on the medium-to-high end of the income segment rather than looking closely at the needs and how to solve the needs of low-income individuals in Mexico. But if you look at the demographics in Mexico, the vast majority of Mexicans are low-income individuals So, if we want to be or continue being a successful bank in Mexico, we need to deliver a better product offering and services to low-income individuals. Over the last few weeks, we have appointed Norma Castro that is – she is responsible for our financial inclusion initiative TUIIO to look at the low-income individuals, product offering so that we can understand better those needs and think creatively in solving those needs. I think that there is – one of the few benefits of the pandemic is the fact that there is some higher digital adoption. So I think that even low-income individuals, as we are seeing in TUIIO are adapting to these circumstances and being more comfortable reducing digital channels. So, I think that this is – this should be different to what we have done in the past as a system. Some of the alternatives that we are looking at, if you follow Santander Chile they launched a program into low-income individuals call Santander Life. That is working quite well, growing very nicely. And it’s tailor-made for this segment. They’re relying heavily on digital channels rather than using the branch network. So we need to look at those types of solutions. And this is – this has been relatively – we launched this relatively soon. So it’s still in I would say pre working space. But this is something that we will focus over the next years, as this is critical to the success of Santander Mexico in the medium to long-term. Now about the outlook for the sector. We are, as reinforced in my remarks earlier, were slightly more positive than what we were in the last few quarters. If you recall at the beginning of the year, we were looking at loan growth in the base case close to flat or be slightly marginal increase or decrease, okay? Now if the trend that we are seeing of the first two quarters continues, we expect that loan growth could be around 4% to 5%. There is obviously very different dynamics within individuals and within commercial loans. We have a very strong growth in mortgages and auto loans and consumer loans, at double-digit rates, okay? And we expect that to continue. So probably individuals will grow at high single digits. And commercial loans, we’re seeing some progress in mid-market companies on a sequential basis. SMEs we think that we reached the bottom. We are in probably in deflection point. And I think that the corporate have normalized more their demand. So I think that with this, commercial loans could be growing at low single digits, and therefore, the total loan portfolio, around 4% to 5%, okay. We think that we – with this trends, we should continue grow in market share in individual loans. And it’s not – to me, it’s not that clear if we would be flat or slightly lose some market share in commercial loans. Okay. We are not that concerned on that regard. In terms of deposits, I think that I would expect a more normalized growth, we probably one of the big differences and how the banking sector has performed in this crisis relative to the prior ones, is that in the prior ones, there was always a contraction in deposits and most likely at the beginning of the crisis. And we haven’t seen this – this been a very different crisis. And the households and individuals have built up their savings as a consequence of the restrictions that we have all faced. So – and I think that sometime this – this will change as we are already seeing that the – at some point, we had double-digit growth in deposits. Now the combination of more normalized activity, along with the decrease in interest rates that we saw or we have seen over the last 12 months that is contributing to the decline in term deposits. I think that will make deposits to have, in my opinion, slight contraction, with a positive change in the deposit mix. As you can see in our results, demand deposits are growing their contribution to total deposits. And I think that, they continued over the next few quarters. So those will be my answers to Jason.

[Jason Mollin:]

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

[Didier Mena:]

I think that it has been, we mentioned that it was three to four times more profitable, and now it’s closer to three times because of the following dynamic. Given the fact that we have attracted the, payroll accounts and, I would say its transactionality, those types of products are less profitable. It is critical for us, to incentivize those clients, to use credit cards, to use – to have other loans and, to use mainly our credit related province, which are the ones that command higher profitability. So that when you look at the entire loyal customer base, what we see relative to what we had in 2016 is a lower usage of credit-related products. That has created a no work; let’s say profitability for a loyal customer, but in my opinion, that’s temporary. Because once we have a loyal customer, once which is satisfied with, how we are servicing them. Then we have the possibility of offering more, more products and services, and we consider, we’re confident that the profitability will follow.

[Jason Mollin:]

Fantastic. It looks like these strategies you implemented years ago really are, are paying off. Thanks for the answers and comments.

[Operator:]

The next question comes from Alonso Garcia with Credit Suisse. Please go ahead.

[Alonso Garcia:]

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

[Didier Mena:]

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

[Alonso Garcia:]

Thank you. And sorry, I think you mentioned the COVID. Could you please repeat your guidance for focus of risk for the coming quarters?

[Didier Mena:]

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

[Alonso Garcia:]

Okay. Thank you very much.

[Operator:]

The next question comes from Yuri Fernandes with JPMorgan. Please go ahead.

[Yuri Fernandes:]

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

[Didier Mena:]

Hi, Yuri, first, I think that we have a challenge in terms of looking at the ROEs in the pandemic era. Okay. And then let me expand that a little bit, as how we see it in terms of relative performance to our peers. So I think that when you look at the, in 2019 and you look at, let’s say our net income market share, it was pretty much in line to our natural market share, close to 13.8%. Now last year, main peers had a very different approach to provisions. That is the – in my opinion the most relevant factor that explains the different performance that we have had relative to our peers. Just to give you some data about how different these provisioning performance has been for at least the four largest banks in the system. So we did an analysis in which we take the average monthly provisions for 2019, for 2020 and for 2021. We did the average for that. We estimated the standard deviation and we divided the standard deviation over the average, just to see – pay to normalize. Let’s say the analysis. With data, with this data, our numbers are the ones that probably the less, okay? That’s this variation efficiency is that 39% BBVA is at 62%, Citibanamex at 66% and Banorte at 79%. So this tells you that, we have been more consistent in terms of how we provision. Last year we – our peers, over provisioning, some of you were concerned that we were under provisioning. And I think that, time is showing that the, we provision to according to what our best estimates were and that those have been relatively accurate, okay? So with the fact that, our main peers over provisioned last year and they impacted, obviously their net income numbers. Our market share in net income last year was almost 20% and that was the highest that we’ve seen ever. Okay. Now it’s close to 10%, this year, but that has, that’s also impacted because the other provisioning that our peers made has helped them in creating less provisions this year, or freeing up certain provisions. If you take, let’s say accumulated net income for 2020 and 2021, our net income market share is close to 16%. Okay. So just to give you some numbers in terms of how difficult is to compare, a net income ROEs in this pandemic era, okay? But I think that probably your question has to do more with our medium to long-term objective. And definitely, one of the critical reasons for us presenting to our largest shareholder and to our Board of Directors, an investment, and strategic plan back in 2016 was to increase our profitability. We used to have an average profitability, very, very similar to what the system has. And our goal is to be above the market and close the gap to the leading peers in profitability. I think that with a normalized economy. With interest rates slightly higher than the ones that we currently have. Our goal should be to have ROEs close to 17%, 18%, okay? In prior years, we mentioned that we were aiming at ROE is close to 20%. I think that if interest rates are slightly higher than the ones that we currently have, that could be achievable. Now, if we are successful in developing a strong value proposition for low income individuals in Mexico. I think that profitability around 20% should be our goal, but this is not something that will happen over the next two to three years. I think that’s more a long-term objective. Okay.

[Yuri Fernandes:]

No. Super clear, I guess the point was like in 2018, 2019, you had 16 ROEs, but rates were much higher, but the bank was still in this transition, right? And you’re still investing – doing the best investment mode, the number of loyal clients were smaller. So maybe now with rates moving up, we could start to see, the, I’ll not say the ROE, because the leverage also matters, right? Like the limitation of dividends, but your ROE, maybe at least going back to the levels we used to see in 2018, 2019, right.

[Didier Mena:]

Absolutely

[Yuri Fernandes:]

Okay. Thank you very much.

[Didier Mena:]

You’re welcome, Yuri.

[Operator:]

The question comes from Carlos Gomez with HSBC. Please go ahead.

[Carlos Gomez:]

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

[Didier Mena:]

Yes. Hi, Carlos and in terms of investing in securities portfolio, I think that the likely before the pandemic when, interest rates start coming down, we increased our portfolio precisely to protect our net interest income. So the percentage of, let’s say the contribution of investment in securities to yielding assets, was reached close to 35%, 36% over the last few quarters. And now it’s at 32%, when we have seen it close to 27%, 28%. I think that with the potential increase in interest rates, certain securities that mature, will almost likely will not – will do something different. Okay. So I think that we should go back to, below 30% of contribution of investment in securities to total yielding assets. Okay. Now regarding the tax rate, you’re totally right it’s purely driven by the spike in inflation. At the beginning of the year, we’re expecting inflation to be close to 3%. And now, roughly speaking is close to 6%, the average of the most. So it’s basically because of that and we think that, tax rates should be, I would say probably around 20% to 23% for this year, okay? Now regarding COVID, let me share with you some numbers, you obviously have access to the country’s data. But I think that, the numbers that we’re seeing in Santander Mexico are quite revealing, I would say in terms of the trend of increases in the, inactive cases. First, let me, we share some data with the leading peers and I’m proud to say that, we have been able to manage the pandemic, more effectively than some of our peers; we have, probably around 20%, less cases than the average of our peers So it’s been quite effective. So numbers that I’m going to give was probably scare you a little bit for giving you these contexts. I think it’s important; it was about let’s say eight weeks ago. The number of active cases in our employees was close to 16 but it was 16 actually. And now is close to 109, okay. In eight weeks. So it’s almost 12 times, what we used to have. Okay. Now but we’re seeing, not only in the case of our employees, but also in the government data is that this increase in cases has not translated into an increase or a one-to-one increases in hospitalizations and also in the number of beds. So vaccines are working what we’re seeing is young people getting infected that are still not vaccinated most of them. But the committee is less severe for young individuals than for elderly people. We’re seeing in some of our employees, that they, they get the virus even having one or two doses of the vaccine. The vaccine has been effective in, the virus not being that severe, in those cases. Now the attitude that the – we’re obviously being very cautious, the looking at the data just to see whether it makes sense or not to continue, these, strategy of bringing all employees back to, to corporate, as you can imagine, branches have operated continuously throughout the pandemic. Currently, we are like close to 15% of the employees that work at the corporate’s that are working at the office. We were planning on having, let’s say a second phase that would increase that to 30%, but given these data, we made a pause and we will be looking at it, what is reassuring at least in how we’re handling the pandemic is that contagions or not happening at the office are happening, in our employees that are working from home that clearly, make the case that they, they are having, they are going to, social gatherings and that’s, how they are getting infected. Okay. So we don’t expect the information as of today, because these purely could change. We don’t expect significant restrictions being imposed if it continues. I think that the government has been very clear. They are even aiming at bringing kids back to school in a month. So, I don’t think that the economic activity should be that impacted, if this third wave continues as it is. Okay?

[Carlos Gomez:]

Very clear. Thank you so much.

[Operator:]

Thank you. There are no further questions. I’d like to turn the floor back to Mr. Héctor Chávez for any closing comments.

[Héctor Chávez:]

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

[Operator:]

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