Q4 2021 Banco Santander Mexico SA Institucion de Banca Multiple Grupo Financiero Santander Mexico Earnings Call
Good day everyone.
And welcome to Banco Santander, Mexico's fourth 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 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.
Good day and welcome to our fourth 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 market close and can be found on our Investor Relations website.
On our call today will be Didier Mena our CFO .
But before we begin our formal remarks allow me to remind you that certain statements made during the course of discussion may constitute forward looking statements, which are based on management's current expectations and beliefs and are subject to a number of risks and uncertainties, including the COVID-19 pandemic.
That could cause actual results to materially differ including factors that could be beyond the company's control for an explanation of these risks please refer to our filings with the SEC and the Mexican stock Exchange UBS. Please go ahead.
Victor Good morning, everyone and good afternoon to those of you participating from Europe .
Hope you've had the opportunity to enjoy the holidays and my best wishes for you and your families in 2022.
Our results for the end of the year showed that second half was much healthier for an environment, where we were able to boost business dynamics by designing and launching innovative products and services as part of our strategic priorities. This is in line with our mission of contributing meaningfully to the progress of people and businesses.
Our country during.
During the fourth quarter, we continued with a strong balance sheet and liquidity position. We also started to see positive performance in total loan volumes, mostly boosted by commercial loans with corporates and government loans, increasing close to 18%.
And 14% year on year, respectively.
Individual loans, we continue outpacing the market supported by sustained market share gains in mortgages and auto loans in consumer we are now seeing signs of a sequential recovery, especially in credit cards as economic activity starts to gather speed coupled with the effort. We have made within our commercial network as well.
Really campaigns, we have lunch and throughout the year.
In terms of deposits, we continue growing at a solid base improving our funding mix by favoring demand deposits over term deposits in fact, our current deposit mix with 72% demand and 28% term. It's one of the best plants. We have ever had also this worth to highlight that the contribution of individuals.
Cash increased considerably in both demand and term deposits currently the contribution of individuals in total deposits represents close to 39% compared to 24% in 2016.
On the other hand, our individual and corporate demand deposits continue to expanding our high single digit rates year on year underscoring the success of our loyalty and customer acquisition strategies as well as our focus on lowering our funding costs.
In terms of asset quality Npls continue their downward trend, reflecting our prudent risk management, which resulted in a healthy loan portfolio along with an improvement in the country's economic activity further we're pointing to a more normalized level of provisions and cost of risk at all.
Operating environment becomes healthier.
As for profitability our arrow. He was shocked by an environment of limited growth in volumes, along with still low interest rates and how your provisions as a result of that each of our reserves that we had to build throughout the year.
On the bright side, we're optimistic because we are expecting to see a turnover from this point for work on the back for better operating environment stronger loan demand and higher interest rates, coupled with our efforts to maximize profitability along 2022.
Also during the quarter, our parent company Grupo Santander increased its ownership in our bank to slightly more than 96%, which leased three 8% of ownership with minority shareholders.
The charts on slide four shows that GDP is expected to continue recovering 2022.
Slower pace than in 2021, as the fiscal and monetary stimulus in the U S is likely to be gradually withdrawn, but while domestic demand continues to improve.
According to the Mexican Institute of Social Security 2021 rig registered the highest just increased ever with more than 846000 jobs created as for now we have recovered pre pandemic formal employment levels.
Macro indicators have also shown better performance with most of the economies components Niglet, you mean pre pandemic levels industrial activity in private consumption have been recovering gradually.
Contrast investments have been lagging due to reduced business confidence.
Additionally, with inflation remaining high and above the bank when it makes your cost target range, we forecast inflation of four 3% for 2022 and three 8% for 2023 were expecting how you referenced rate of 675% for 2022.
725.
For 2023.
That said, we are more optimistic about the outlook for 2022, while remaining well positioned to contribute to the economies turnaround supporting our customers with slowing demand is starting to strengthen.
Okay.
Similar volumes in December continued to improve increasing roughly 5% year over year. After four consecutive quarters of negative annual growth the year on year growth was mainly driven by the improvement in consumer loans, which started to show a sequential recovery hand in hand, with economic rebound and partially.
Set by corporate demand levels are still soft.
Positive signs.
System deposits continue their strong rebound growing close to 6% year on year with demand deposits, increasing 9% year on year.
Please turn to slide six where we would like to give you an update in our growth strategy.
Our strategic priority remains the same provide the best customer experience in Mexico financial services sector, leveraging the latest digital tools and improving processes to accelerate our technological transformation, while we continue positioning the bank as a market leader in value added products.
And retained additional loyal clients.
With that in mind, I would like to point out some milestones that we achieved throughout 2021.
In other loans, we continue to dramatically expand our business gaining close to seven percentage points.
Reaching a market share of over 12% as of December .
The results are fueled by our alliances with leading automakers in the country together with our Super OTO Santander platform, which integrates the commercial and insurance offerings in one place, allowing us to provide online preapproval in less than 10 minutes.
All in all we are the fourth largest player in the market and if we maintain this pace of growth. We will soon move up the rankings and be among the top three players.
Reminder, our goal is to achieve a natural market share of 13% to 13, 5% at present and we aim to accomplish this in the coming months.
In mortgages, our strong performance reflects the success of our products in particular, plus any free as well as already particularly <unk> platform and the redesign of the customer's journey, whereby we eliminated significant pain points in the application and approval process.
Strong results support our position as the second largest mortgage originator in the market, allowing us to gain market share.
Digitalization of our products and services remains a priority and we continue investing in technology.
This includes collaborating with Fintech and other tech companies to introduce faster and more convenient digital tools and functionality that.
Enhance the customer experience increased customer engagement and drive more transactions.
Furthering our progress on this front, it's very important for us with digital face representing 56% of total sales up from 41% a year ago. We.
We also had $5 5 million digital clients as of December increasing 10% year on year.
In addition in early September we launch our new innovative credit card like you.
This card is 100% digital one of the safest in the market and is designed for any type of customer, allowing each client to tailor the card according to their individual preferences.
It is worth mentioning that like you is the first got in Mexico based on the concept of what financial demand, which means that the customer only pays for the benefits they need.
Our goal for 2022 is to almost double account acquisition, focusing on the profitability and health of our portfolio.
Also this year, we will attack the open market with strategies that allow us to grow the portfolio with sound asset quality.
Since its launch we have issued over 354000 like you cards exceeding our own expectations.
<unk>, 93% of like New cardholders remained fully digital while 70% have also requested the plastic version.
Illustrating the higher adoption level of digital product.
We are quite happy with the results in market or market acceptance of the credit card so far.
Another milestone we're proud to share with you. Thanks to the progress implementing the bank's ESG practices Santander, Mexico was the only bank in the country included in the S&P sustainable sustainability Yearbook 2021.
Additionally, we were granted the industry mover and blame for surpassing the score we obtained in 2020 and representing the strongest improvement in the financial sector.
Also it is worth mentioning that we were once again included four consecutive year in the sustainability yearbook 2022, Besides the international Finance magazine recognized us as the best financial inclusion bank and the most socially responsible bank in Mexico.
In addition, we are glad to mention that we were selected as a member of the Dow Jones sustainability.
Pacific Alliance Index for the second consecutive year for Santander real 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 and an economic environmental and ethical level.
All of these recognitions are proof of our strong commitment to sustainability and responsible banking agenda not to mention our experience and good practices that are based on ESG benchmarks.
Part of our mission and promoting financial inclusion through to you we offer financial products and services to low income sectors in Mexico.
A majority of our customers are women interpreters, who are not part of the formal economy and who are generally excluded from formal financial institutions.
To your customer support model currently compromised comprises.
84 branches, enabling us to directly support our customers.
Where we have served.
To more than 279000 clients. In addition, our customers have access to an online savings account that has opened remotely by consultants offering users mobile and online banking tools.
We also launched new medical support services, helping contribute to the culture of prevention and facilitating access for our customers to a specialist doctors dentists and laboratories.
Our goal now is firmly support Mexican families ensuring they have the information and tools they need to manage their resources appropriately and taking firm decisions in order to improve their economic wellbeing.
We will continue making progress on this front as we remain committed to further operationally integrating the criteria policies and internal processes that drive the social and environmental performance as part of our mission.
Turning to slide seven total loans has increased six 9% year on year outpacing the system and posting a four 9% increase sequentially underscoring our solid performance in consumer and credit card loans going forward, we expect to start seeing a better trend in key segments as a risk.
Appetite increases along with our ongoing efforts to drive mortgage and auto loan growth.
In addition, commercial loans are anticipated to strengthen.
Due to the expected improvement in economic environment. All in all we expect to start seeing an upturn in higher yielding segments.
Would support margin expansion, while maintaining sound and sustainably sustainable asset quality, reflecting a portfolio that exhibits good behavior.
On slide eight you can see that individual loans are growing close to 10% year on year on the back of mortgages and auto loans, while credit cards are starting to reverse a negative trend, reflecting a strong sequential growth our mortgage portfolio continues to expand at a solid pace.
16% year on year organically, almost doubling the market growth rate during.
During the fourth quarter around 56% of originations came from a potato plus product.
Which helps drive cross selling of other products as well as build customer loyalty.
In addition to protect online, which is our digital onboarding platform for mortgages.
Have been able to process, 95% of our mortgages completely virtually.
I want us to be more efficient in terms of response times and eliminating the need for our customers to visit the branch all resulting in a much better customer experience.
At the same time Curry cuts are recovering growth expanding almost 6% quarter over quarter.
This encouraging performance is driven by our latest credit card launch like you.
Thanks to the launch will recover sales and card activity reasons with strong improvements in broad acceptance and trough currently almost 11% of total billing comes from Lake you credit cards also it is worth mentioning that November was the best month in terms of billing increasing 37% month over.
Month, we can see that our campaigns and the benefits offered.
When using the like your credit card during <unk>.
A positive impact seeking greater usage of the new car.
So these new payment and created value offering we're confident we will acquire a significant number of users with our customer base, allowing us to grow steadily and organically in this market segment and do so without compromising prudent risk management.
Likewise within consumer products autos has been showing strong growth in just four years Santander has positioned itself almost on par with our largest competitors. It is worth to mention that the last quarter.
Water the gap that we had with the number three player was 456 basis points and now has been reduced to 172 basis points. We continued with its strong pace, we will be the top three player during this year.
By contrast, personal and payroll loans are still affected by weak demand conditions, while also reflecting our cautious approach.
Turning to slide nine solid expansion in loyal and digital customers continues achieving year on year growth of 7% and 10% respectively.
In this highly competitive environment, we have maintained our focus on digital conversion, while increasing digital transactions and sales further the ratio of loyal customers continues to grow with loyal clients now representing 41% of ASP declines versus 39% in the fourth quarter of 2020.
The evolution of this ratio has been positive throughout the last years as in 2019 was expanding at 33%. This clearly reflects our consistent improvement within our breadth of products and services aiming to be the number one bank of our clients.
On the other hand, I'm proud to share with you that our new Santander mobile App is being tested with friends and family and we're expecting to do the official launch very soon with this new App, we will be offering a variety of options from everyday checking to more specific needs. All in all ways to have one of the best apps in the market.
<unk>, providing the best customer experience.
During the fourth quarter of last year product sales via digital channels accounted for 56% of total sales a significant increase compared to 41% a year ago.
Digital monetary transactions also maintained an upward trend, reaching 43% of our total with mobile transactions accounting for 97% of total digital transactions.
<unk> was 94% a year ago.
In addition, mobile clients grew almost 10% over the past 12 months to over $5 2 million.
Driven by our promotional campaigns and incentives through digital channels.
As shown on slide 10.
<unk> loans increased 5% year on year, driven by a pickup.
In corporate and government loan growth as we have discussed in prior calls during 2020 companies drew on their committed lines of credit in the face of uncertainty caused by the pandemic.
Since the second quarter of 2020, we have seen normalized demand.
<unk> of credit and recently a pickup in demand.
During the year corporate loans increased.
At a double digit rate year on year and sequentially by 18% and 24% respectively.
Loans to government and financial entities also increased at a double digit pace, 14% year on year and 10% on a sequential basis.
The other hand mid.
Mid market companies posted a soft three 5% year on year increase and remained flat on a sequential basis signaling company simply cautious approach to investments.
SME loans remain affected by current circumstances. However, they are beginning to perform better and we're putting more focus on alliances and campaigns to support the recovery.
SME loan demand, we expect to see portfolio expansion going forward, reflecting our growing risk appetite in this segment.
Moving on to funding on slide 11, total deposits increased two 4% year on year and 2% sequentially as in previous quarters. There continues to be a shift between demand and time deposits totaled.
Due to the decreasing interest rate environment experienced in 2021.
Nevertheless, we started seeing a sequential increase in time deposits driven by the recent hikes in the reference rate over the last couple of months.
Demand deposits from individuals increased 8% year on year supported by our ongoing efforts to attract these type of deposits.
As a result, we have been able to reduce the cost of our demand deposits by 51 basis points.
Year on year, beating the market decrease in funding costs.
Although we are satisfied with this result, we continue working to further reduce our funding costs as we make additional headway. So we're improving our deposit mix, while lowering the cost of our commercial deposits is well aligned with our strategy of focusing on prioritizing individual loans and forgoing certain expensive corporate deposits.
As a result of this strategy our total demand deposits from individuals have increased considerably during the last five years in both demand and term deposits.
Pending at 37% and 43%, respectively, resulting in a 39% contribution of individuals to total deposits.
Turning to slide 12, we have maintained very strong capital and liquidity positions, our liquidity coverage ratio stands at 228%, representing a substantial buffer and far above the regulatory threshold.
Our core equity tier one and capitalization ratios so as of December 31, or 14 points to 84% and 21, 56% respectively.
<unk> above the minimum requirement established for systemic systematic systemic.
Important financial institutions.
On September 15th the bank issued $700 million in subordinated notes, which gave us the opportunity to capitalized.
Market conditions on December eight the bank announced its intention to pay in full.
The <unk> million dollars in 81 notes issued back in 2016, which we're actually paid on January 20 of this year.
Decision was made as we remain committed to manage efficiently our capital base.
Impact of executing the call.
These instruments is around 130 basis points in our total capital ratio.
Also during this quarter anticipated rate hikes, the bank issued too.
<unk> one for $6 5 billion pesos at a fixed rate of 8% for seven years and another one for $3 5 billion pesos have variable rate of five 3% for four years.
Both transactions were priced at a spread at the best spreads we have issued.
Our net loans to deposit ratio was 93% for the quarter.
Also reflecting our strong structural liquidity.
As you can see on slide 13, our net interest income decreased one 4% year on year, reflecting a combination of lower interest income from its investment in securities and higher interest expenses for demand deposits, partially compensated by lower interest expense for time deposits.
Net interest.
Margin decreased four basis points year on year to $4, 46%, we expect to start seeing an improvement in NIM.
As higher margin segments begin an upturn coupled with higher interest rates.
Please turn to slide 14, net commissions and fees rose, one 1% year on year, and 7% quarter on quarter, mostly driven by a solid performance in financial Advisory services combined with higher investment funds commissions as well as growth in insurance fees.
On the other hand credit card fees decreased 10% year on year due to bonuses and rewards that were paid to our customers in the quarter.
Going forward, we expect a better performance in credit card fees as our ambitions for the like your credit card or to increase monthly average billing, while achieving a better composition of income.
Turning to slide 15, gross operating income increased 2% year on year, mainly due to fee growth and to the solid performance in market related income as our marketing team was able to capitalize on rising interest rates, coupled with exchange rate volatility.
On a community basis gross operating income decreased three 3% year over year, reflecting higher base of market related income and lower net interest income.
Moving on to asset quality on slide 16, you can see that our NPL ratio showed a significant decrease of 90 basis points year over year to 218% a level, we have not seen since early 2020 with relevant improvements across our loan book. In addition, given the expected improvement in the economic environment.
We expect to see portfolio exhibits healthy behavior during 2022.
Provisions in the quarter declined two 2% sequentially as to corporates prepaid exposure they had with us.
However, provisions increased 36% year on year, reflecting the low base in the fourth quarter of 2020 going forward, we expect to keep provisions at more normalized levels, despite increasing our risk appetite and credit card and SME.
Our loan portfolio continues to perform well with our cost of risk is standing at 2.9% remaining practically flat when compared with.
A year ago.
Looking ahead, we do not see any deterioration that could impact any of the loan portfolio segment.
So the cost of risk should remain below 3%.
Turning to costs on slide 17 at.
Administrative and promotional expenses increased almost 14% year on year. It was mainly driven by the impact of the recently enacted a resourcing law and changes in the Mexican legislation regarding the profit sharing benefits paid to employees locally known as Btu.
We have been reserving just one month's wage and now due to the regulatory change we shall pay.
A limit of three Molly wages.
The impact of these changes at two 959 million pesos, excluding this impact our administrative and promotional expenses for the quarter would have increased five 2% year on year, which is less than half the actual growth and three 3% for the full year.
It is important to highlight our commitment to our it transformation.
Prior to the execution of our investment plan <unk> expenses represented 9% of total expenses and now they represent 14%.
The combination of our software gross operating income and a significant increase in administrative and promotional expenses, resulting in a deterioration of actually of our efficiency ratio, which now stands at 56%. It is worth mentioning that the impact on expenses related to <unk> and the outsourcing law only.
The fourth quarter of last year.
We feel confident about the dynamics of the business and our disciplined cost control and therefore, we expect to maintain cost growth below inflation along the year.
Turning to profitability on slide 18, net income decreased 4% year on year to five 2 billion pesos, mainly due to lower fees and higher expenses, partially offset by solid growth in market related income and lower provisions.
So net income increase.
8% quarter on quarter supported by solid net interest income lower.
Loan loss reserves, and a lower effective tax rate.
Return on average equity was 12, 9% 181 basis points below the year ago level we.
We are accumulating capital for the regulators recommendation to limit the payout of 2019 and 2020 earnings.
In fact, if we didn't have the current excess capital our ROE would be 130 basis points higher standing at two.
40% versus 11 point, 13%.
November 5th we paid the remaining dividend amount associated with the restriction imposed by the banking regulator in Mexico.
This represented in 28 cents per share a total of one 9 billion pesos.
Turning to guidance for this year on our next slide.
Expecting an annual loan growth between 8% to 10% with stronger performance in the retail segment as we have reviewed over the presentation.
But also with a gradual uptick in the commercial business.
Total deposits in turn are expected to increase between six to six and 8%.
We continue with our focus of improving our funding cost by bringing to the bank more deposits from individuals while trimming the cost of our corporate deposits.
We expect asset quality to remain healthy despite our higher risk appetite in some business segments with cost of risk between two seven and two 9%.
In terms of costs, we are looking for an expansion between three and 4% as we continue invest in strengthening our digital capabilities.
As for the tax rate, we are anticipating it to lie between 24% and 25% considering the still high inflation rate expected for 2022.
Taking all into account, we forecast net income to grow between 10 and 12%.
Before going into Q&A, let me share with you some brief closing thoughts and perspectives.
Our strategy will continue to focus on strengthening client loyalty and increasing the utilization for probes on operations keeping intact, our ambition to become the bank, providing the best customer experience in Mexico, who.
We will continue working on our many growth initiatives, making new investments in the bank's transformation, mainly in AT&T utilization, while seeking efficiencies in other business lines.
We have made progress inspirational transformation of our bank again this year. We're nevertheless, mindful that we must be cup to pace.
This concludes our remarks, we're now ready to take your questions. Operator, Please open the call for the Q&A session.
Thank you and ladies and gentlemen at this time, we will be conducting a question and answer session. If you would like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate that your line is in the question queue.
You May press the Star key followed by the number two if you would like to remove your question from the queue for participants using speaker equipment. It may be necessary to pick up your handset before pressing the star keys.
Once again to ask a question press star one on your telephone keypad.
Our first question comes from Tito <unk> with Goldman Sachs. Please state your question.
Hi, good morning, Thanks for the call a couple of questions. I guess first any can you give any guidance in terms of your expectations for margins and remind us your sensitivity to higher rates.
So fees.
Any color you can give on that in terms of guidance for the year and then second question I guess in terms of capital.
And then also potential banner.
Banamex, So acquisition, which is for sale any update on dividend payouts and what you can expect there and then if could you use any of that excess capital to potentially.
Ah by Banamex bandwidth acquisition come more from Spain, as opposed to Mexico any color you can provide.
On that in terms of.
How you guys would consider potentially looking at Panamax now thank you.
Hey, Hi, Tito.
Regarding margins we are assuming.
You know NIM expansion around 5%.
But let me.
Let me share with you that the.
In my opinion, we're being.
Either extremely cautious or conservative in that assumption.
I think that if.
High margin segments and the.
<unk> performed well during this year I think that there is some potential upside there.
And just just just to give you.
So very basic sensitivities.
10 basis points.
Or for NIM represents an additional 1 billion pesos of net income.
<unk>.
So so I think that you all can make the numbers, whether we we can have.
Have a higher NIM than 5%.
And that could provide a potential upside relative to the guidance that we're providing okay.
In terms of the sensitivity to two an increase of 100 basis points.
And that's around 500 to 600 million pesos.
Hey, Josh.
Remember that.
That.
That assumption.
Yeah.
Implies.
That there is a parallel shift in interest rates and that.
We do not think these just you know.
How the balance is in a position right now.
I think that.
We depending on how.
The fast interest rates increase we can follow several strategies to get more exposure to floating rates relative to two fixed rates. Okay. So whatever.
Now without doing anything the sensitivity is.
As I mentioned, okay, now moving on to two two capital and dividends.
We are in ongoing discussions with.
With the CFPB.
And.
The latest conversation that we had was was probably.
Two weeks ago.
Yes.
As a banking association proposed to withdraw the restriction that the imposed on just paying out or having a payout of 25% of 2019 and 2020 earnings.
Our recommendation is based on all the strong levels of capital ratios that the banking system pass is standing at 19, 4%.
There was some concern.
Regulators that the if the banks pay out higher.
Higher dividends.
That we would compromise.
Supporting loan growth and we provided evidence that that's not the case we could.
<unk> very very strong growth you know.
15% to say a number.
Pay out 100% of earnings of last year with the current profitability of the banking system has.
The impact all in all would be close to 70 basis points in the total capital ratio. Okay. So its in my opinion is is not that material.
I would say I would.
Actually told them that he would represent a very good signal to the market if they are.
We draw these these.
This restriction.
I think that.
And this is this is completely informal and.
No band by by this I mean that.
They can change their views because they haven't.
The published it once they are final.
Recommendation, but my.
My impression.
Is that they would come up with still a restriction that is higher than 25%.
Dave mentioned during the call that they were thinking of it.
Looking at the.
Pre pandemic levels.
They actually pointed out to to what the banks paid during 2014 to 2019.
If my numbers are right.
Our payout close to 50%.
But you know they they mentioned something that I'm not sure if they do.
They are going up.
Provide this.
Facility.
Is that.
They they would recommend these for the entire banking system. However.
Recall that every single year.
Banks have to provide.
Sensitivities to certain scenarios in our solvency, it's called the <unk>.
Capital Sufficiency exercises.
And in that in that exercise.
Banking regulator provides a couple of scenarios of base case or in a stress case and also hey, Manny.
Management provides two scenarios base case also and I'll stress case, so and there is.
The projections in these scenarios so what the regulator tries to do with these exercises is to look at.
The.
Your solvency of the bank say solvency.
Time with these different scenarios.
And they ask you to provide.
Certain guidance, our assumptions in terms of it.
Dividend. So every single bank has to provide what's their dividend assumption.
For 2022.
That would make them compliant with.
The capital regulations in Mexico, not only for this year, but consistent through time okay.
So.
Prime latest mentioned that.
Some banks can actually some systemic banks.
We're proposing.
Higher payout ratio than what they were having in mind for the entire system.
But there are a significant part of the banks.
Around 90%.
We're below the recommendation of the level that they were thinking of.
So with all these I would say that.
They will they actually mentioned that if a bank.
He is proposing a higher payout ratio and that they what they recommend they would be open to.
To the.
The two.
To hear what the bank has to say in terms of the reasons of supporting.
Higher payout ratio.
Okay. So if all this.
The turns out to be what they end up doing.
You know our our action.
Actions would be to provide evidence that we can have.
Payout ratio of 100%.
Of last year's earnings.
Without really compromising solvency in not only for this year for.
For the year that I consider in these scenarios.
So that's that's the latest on on dividends.
Regarding.
Banamex.
As you probably assume.
We are interested we will be patiently waiting for the process to start.
We have always said that the.
As you know we are open to look at any potential opportunity to consolidate the Mexican market, we consider ourselves.
You know one of the best candidate to consolidate the Mexican banking system, we have said this.
For four years, and we have looked at different.
Opportunities not of the size and relevance of panamax spot or our approach regarding M&A.
In my opinion has been consistent.
We are not basing our strategy.
On M&A, our strategy has been defined and we're executing it and I think that we are making progress on it but definitely we have the fiduciary duty to look at these opportunities that could change.
The banking landscape in Mexico.
Regarding.
How to finance it in case that we acquired.
Inc. That there are different alternatives and I think that it's too early to to to make analysis as to what's the best alternative.
To make this acquisition.
All I can say is that we will look into all different potential alternatives and we will propose in the case that we end up participating and.
And in this transaction, we will propose what's best for our shareholders.
Got it.
Those decisions are made we the information that happens at that time. So so I think that it's in my opinion, its not worth elaborating more than that because market conditions could be different now from what they are when when this potential transaction.
Close to that I think that's going to take some time by the way.
Great. Thank you Didier.
For color, maybe just to follow up on that.
There's also some comments in the news.
But I guess that the government may be preferred.
Mexican bank to acquire Banamex.
Have you heard bandwidth that rule out something there in any way and I think also on our team and we're seeing that they would not issue shares to acquire it.
And their same level, maybe you could still do it at that.
Mexico level.
As you said, it's early so I. Appreciate you may know the answer to that but just any color you can provide I would appreciate it. Thank you.
Yes, you know obviously you know.
I have read you know that government for ferrous.
A Mexican bank.
Our Mexican shareholders too.
To buy Panamax.
My opinion is is that the.
You know nationality of.
Capital is less relevant.
Then they who manages the bank.
I think that we have we can point out to different case.
Cases.
In the Mexican banking history.
We're not necessarily the best management teams.
Our management teams will experience.
We're actually given the opportunity to acquire banks.
I think that the.
In <unk> case, that's even more important than just the.
Looking at whether its its Mexican or is.
Yes.
Foreign origin capital.
That's it.
That's my view.
I don't think.
They would rollout.
Any potential bidder for these just just for the sake of.
Nationality, helping directs and divest interest or failure.
The banking system.
The economy.
Even the process you know I think that is.
Yes.
<unk> rules out foreign players they will end up with very very limited.
The.
Potential interested.
Parties and I'm not sure that they would go at.
That way.
Think that the regulator of the Mexican government.
It should be more focused on other things.
I mentioned.
Management and also if there is any potential concentration in certain products and segments.
There is an antitrust commission and that.
Commission should be very clear in terms of.
What are the implications of it.
Higher concentration in the market and also let me let me emphasize that I am not sure whether you know the government officials that have mentioned.
Concentration is an issue.
They have in mind that the <unk>.
This is not something that happens in in Mexico, We're not unique in that regard if you look at the.
Banking sectors across the world not only Latin America.
Do you get to see that the top.
Top three five players concentrate a significant part of the market I think that you.
That tells you that the banking sector benefits from economies of scale.
Probably one of the outliers.
Big economies the U S.
For for historical reasons of Harbin.
<unk>.
Regulation that promoted banks in every state rather than natural national charters, but.
You know look at Canada look at France, and Spain.
The U K.
<unk>, Colombia, Chile, Argentina, Brazil.
It's Oliver so I don't think that Thats a.
That's a fundamental reason to poaching.
One of the largest players such as ourselves by now.
<unk> been candidates to consolidate.
The market now regarding how to finance this as mentioned.
It's way too early.
We are Interstate we don't know if you fear.
If the conditions.
That you would expect for the transaction would be.
Returnable.
We are still waiting to see what exactly what they are they're up for sale.
We have a very basic understanding across according to what they disclosed but.
We need to do the homework and once we do the homework then.
The next step would be to look at different alternatives of how to finance. This.
And I think that in our team.
She mentioned was that there's a strong preference of not issuing a group's shares.
I think that she has a point, but I think in my opinion.
We have to wait on deal.
Process advances and if we end up becoming the winner of this process I think that we will definitely look at every single alternative and.
Proposed whats what specs there.
For for our shareholders.
Great. That's very helpful. Thank you Daphne and good luck with the process.
Thank you.
Our next question comes from George Friedman with Citibank. Please state your question.
Thank you very much can you hear me well.
Yes.
We can hear you well Hello.
Perfect. Thank you.
Good morning, and thank you for taking my question my questions are related.
Mostly due to the guidance.
On the tax rate.
I confess that I got a bit surprised with.
I know, you're very high effective tax rate.
In light of.
Of the skew high.
Nation rate expected for this year.
I am seeing here and your analysis that you are expecting inflation, that's harp on 3% in your revised upwards I just was.
Curious if you are reflecting this four 3% already in the tax rate guidance, because when I look into the historical levels for the taxation.
You get you know.
Uh huh.
Lower rates for tax rates historically.
Even.
With low levels of inflation. So this is my first question and then I can come back to the next.
Yes.
<unk>.
The very basic rule of thumb that we.
We have.
As shared with you in the past.
Is that for every.
100 basis points of.
Inflation.
There is a 100 basis points benefit in terms of.
Reducing the effective tax rate so if inflation.
Up.
Being close to 4%.
Then assuming a tax rate of 24% to 25%.
Sure.
That could be reasonable.
And that's the that's what we have in mind.
Okay. Okay.
That's perfect.
Go into expenses and sorry, if I'm not super familiar right.
With the Mexican legislation regarding the Btu payment just wondering if this is recurring.
Because of course this was unimportant impact.
During the year of 2021.
But taking into consideration the carryover of inflation.
And the investments overall that you have been doing and how are you.
In fact, if you have been alright in terms of cost cutting on administrative expenses.
Just wondering how you think you can achieve three.
3% to 4%.
Opex grill.
Our growth this year.
If.
Personnel might be.
Under pressure or not and you still have more space to cut administrative expenses.
Yeah.
First on on the profit sharing.
Non recurrent so basically what we do.
Well reflected in the fourth quarter of last year is that that's a one off that's almost 1 billion pesos. Okay.
That has to do with.
In the outsourcing law.
And cares or associated with the change in the outsourcing law.
There are still some provision in terms of cap.
Now companies have to provide for.
For sharing.
Profits with employees.
That increased from one to three months.
What I'll say salary, okay. So thats that.
That's basically you're going to the origin of.
Of that expense, okay, and its non recurrent.
<unk>.
You mentioned the <unk>.
The initiatives and efforts that we've been doing over the last few.
Two years in order to.
I would say have.
More robust infrastructure.
Just just to the to make a point there.
In the last quarter.
Last year.
Our <unk> expenses were slightly above 2 billion pesos.
In 2016.
All year.
Okay.
Total expenses were.
We're two 5 billion pesos.
So we are now spending.
On a quarter almost what we were spending a year.
Hey.
Uh huh.
If you look at the compounded annual growth rate in expenses over the last five years, that's close to 20%.
While our total expenses, including <unk> have grown 9%.
So yes.
I think that we have shared with you in the past that there.
And we were lagging in terms of.
Capabilities infrastructure.
In all.
Certain issue say associated with cyber security and I think that.
We're getting to a point, where we'll start.
<unk> seen the benefits of all those investments.
As mentioned in our remarks.
We are already testing our new app.
And just just to have it.
It used to be in that position in place that you have to invest heavily in different types of.
Systems.
Sure.
And capabilities, Okay. So it will continue.
To be a priority for us.
Even with.
Higher adoption in in terms of.
Digital transactions because of the pandemic that's.
That's the path that we will continue.
Walking okay.
Do you know what as well.
We have a very straight then we're very disciplined in terms of cost control.
Yeah.
I recognize that there might be some pressure in terms of.
Employee compensation. However, you know we made a salary increase in September of last year. So so I think that the.
We are well positioned.
We think that the way that we have manage the pandemic with our employees has also.
<unk> positioned ourselves in a very good standing and I think that our employees recognize.
The flexibility.
You know we have acted promptly in terms of protecting its counsel for not only are embraced by our clients as well. So I think that we have goodwill.
Goodwill in that regard so hum.
I'm not that concerned in regarding a potential impact.
<unk>.
Employee compensation.
I would say that we are seeing K. We think we are confident in achieving a 3% to 4%.
Increasing expenses.
We we should start seeing as well.
Eliminating some.
For legacy systems.
That.
Sure.
Have been replaced with the investments that we've made.
During the last five years, so that would be at.
As far as of.
Cost reduction going forward.
No that's perfect very clear. Thank you very much and my last point here DDA easier.
With respect to how to reconcile.
Your dynamics of loan growth with asset quality I mean, you had been great in terms of asset quality. This quarter was a very good then you are back at you.
The pre pandemic levels off Nepl's.
At the same time.
You have shown.
Very strong apathy.
Appetite for higher risk loans, such as auto and which we have been growing a lot in getting a lot of market share, but more recently also credit cards. So how should we think.
Loan growth.
In different segments this year and how should we expect NPL to evolve not cost of rates, but NPL. Thank you.
In that.
Europe , probably two trains that are.
Have opposite effects charge.
On one hand.
We.
We still have.
Saum.
The pandemic impact in our asset quality metric.
Metrics, Okay and.
Until we get to two let's say clean that up to get to more normalized levels. We will continue seeing.
<unk> some benefit in that regard okay.
Now.
That's let's say that's the positive trend than the negative trend is as you rightly pointed out you know our appetite to be more exposed to.
Higher risk segments.
Implies.
Hi, Europe .
Npls.
So we think that for this year those trends offset each other.
So we are expecting.
Npls to be relatively at the levels that we're seeing right now.
Perfect. Thank you very much sort of like when you are winning.
Good morning.
So our research and the C bench.
Whether we.
Accelerate our pace.
In growth or we.
We are more cautious.
That we.
We are continuously monitoring.
Asset quality on a proactive basis.
Okay.
Oh, that's perfect. Thank you and good luck this year.
Thank you George.
Thank you and in order to get through the questions. Please limit yourself to one question and one follow up question per each time you queue. Thank you.
Our next question comes from Alonso Garcia with Credit Suisse. Please state your question.
Hi, Good morning, everyone. Thank you for taking my question.
Wanted to ask about how youre seeing is the recurring level towards the other operating income line I mean, how recurring or not.
Around 800 million pixels gain recorded in the fourth quarter, which was related to the sale of their client contracts.
You are going to grow so just wanted to know how.
Of this line.
Going forward because of this.
Buying contracts. Thank you.
Yeah.
Hi, Alonso.
I'll pass it onto actor requirement to comment.
Yeah. It is.
Hi, Alonso.
This is a one off certainly in not only the recurrent quarterly other income it's negative in the order of $400 million to $500 million per quarter.
Understood. Thank you.
If I may follow up.
On your loan growth of 8% to 10% I mean, you mentioned you expect retailers to continue or even grow.
You could provide more specifics on the retirement products I mean, how should we expect auto loans to perform on one hand you have.
Continuing to gain market share, but there is there are some issues on the auto industry worldwide. So we just wanted to see how.
That should impact in your numbers and also credit card.
Four quarters.
This year. So if you could provide some color on a product by product basis that would be useful. Thank you.
Yeah.
I think that the.
Our individual loans should continue outpacing them.
Loans to.
Corporate.
No based.
On to two things.
Three things I would take the islands.
First the most relevant product and individual loans is mortgages.
And we.
We have had very strong performance over the last eight years.
And given how we chase.
<unk> the entire customer journey.
How do we digitize the process and we offer a tailor made products for customers as well.
And we expect that to continue.
The.
There are some products that are in.
In our pipeline in terms of the <unk>.
<unk> other alternatives for customers would probably talked to talk on this during the next few quarters.
But to say that the mortgages will continue to be.
Barry.
Strong growth.
I mean its support for.
Loan growth.
To individuals, we expect more than 10% loan growth to.
To continue.
And then on other loans, if we look at it on a percentage basis still looks very very high.
<unk>.
What I can say is that in.
No.
Different tool to the mortgage market.
Auto loans in the system are contracting.
<unk>.
The growth that we're having is at expense of the you know the.
Largest players contracting.
The way this market.
It works alone so is.
I would tell you that.
The banking market associated with our loans.
Is that your partner up.
We have.
Good manufacturers.
Any change in the let's say the preferred financing option for manufacturers then.
It has as a consequence of change in market share and we have been quite active in.
Pursuing alliances with manufacturers to to be the preferred option for for their clients. So that's what.
You are seeing there we're growing significantly significantly despite that the market is contracting and despite despite that auto sales are contracting as well, but that's it.
That's why we are seeing those numbers you know.
I would say that.
Auto loans in terms of percentage could be growing.
Probably around.
40% to 50%.
Pam.
Okay.
Then.
Credit cards, I think that the.
Sure.
We're probably at the inflection point.
We expect.
Certain recovery in that regard.
One thing that has impacted us in terms of loan balances as as we have mentioned as well in prior calls is the fact that.
Yes.
The percentage of clients that are paying their balance in full has increased significantly over the last.
Four or five quarters.
That continues to be the case.
So despite that there is.
Higher usage of our credit cards, we are not seeing that reflected in our loan portfolio. Okay.
We think that this year.
Probably you know loan growth.
Above a six 7% should be should be achievable.
But it will all depend on weather.
You know.
The percentage of clients that paid a balancing.
Go back toward normalized levels, you know I think that the excess liquidity that house households, certain households had during the pandemic might be come to a more normalized level.
With that I would say that probably the level of leverage will will become higher and use their credit cards as a financing mean, okay.
Uh huh.
And I think that the Smes.
And we will see a slight recovery.
No.
Our appetite is is quite strong in this sector, we still see very very light segment. Okay.
And I would tell you that the one on the remaining segments.
We are optimistic in what we're seeing over the last.
A few months in terms of.
Loan demand from corporates.
So we would expect.
Loan growth pretty much in line with the overall guidance that we provided.
Thank you. Thank you very much.
Our next question comes from Yuri Fernandes with Jpmorgan. Please state your question.
Thank you, yes, thanks Paul.
I had a question regarding competition.
In the last cycle and the less heightening cycle next call resolving warranty events most of our malls not fully repricing.
Due to competitive dynamics. So my question is do you expect.
Hiking cycle.
They have more pricing power and less competitive outlook.
Increase rates on Mark reason, especially margins in consumer because I guess for government law.
Is there on that.
Sure.
Thanks to the rates.
I don't know what to expect for all of those other products.
Yes.
On expenses guidance.
So for growth seems very good before we assume solicit close to five years.
And Brian .
Okay.
Okay.
Okay.
Can you hear me.
Okay.
Okay can you understand me now.
Hello.
Yeah.
We clearly you know about competition and rates, but the other question that you were trying to make we couldnt hear.
Oh, sorry, let me try again.
Yes.
Where is that where the cost.
This will come from because Arsenal.
About 40% of total expenses.
And I guess G&A and Nike there are additional.
Depreciation and.
Additional plenty five right. So how do you deliver below inflation G&A for 2020 chip. Thank you.
Regarding.
Competition Juno.
I will say it all depends on where interest rates end up you know I E.
I would expect.
Rational behavior from the competitors.
You know, we all have to.
Have a profitable products and obviously you can.
Stan.
The priority.
Below.
Let's say certain threshold profitability in certain products, but you cannot do that on.
On a sustainable basis.
So.
If interest rates.
We are expecting.
That they will go up by 125 basis points during the year, citing that the that that increase.
Should translate in a repricing in our key products.
You know.
That's something that.
It's already been discussed.
I think that we are waiting.
To see how the.
The the new governor of the Central Bank.
As we have.
Our board.
Meeting next week, so depending on on how they do.
The act in terms of the level the magnitude of ing of interest rate increases okay.
Now regarding.
Cost efficiencies I would say that.
It's there is.
Not a single line item that will will make the magic. Okay. So basically the discipline that we have in every single front you know.
It.
We've been like that at all.
All the time and we'll be looking at every single item and expenses I was I was mentioning you know these.
The.
Turning off certain legacies I would say that that would.
Provide certain benefits.
In in IP.
Expense.
Line items okay.
But julio.
There is not.
There is not a single thing that the.
That would make him.
Yeah.
You know a significant contribution it's just.
Disciplined.
Okay perfect. Thank you very much.
Our next question comes from Carlos Lopez with HSBC. Please state your question.
Thank you for taking the question.
First one I know you have said this already the 1 billion.
Expenses.
The outsourcing law, that's a one off but we should expect.
Extra expenses every quarter I can you repeat that.
Second question give us an update on the digital side.
Thanks Dennis.
One should be working for this company.
Thanks, gentlemen.
I think James is there.
Are you are you launching that.
In Mexico and pencil.
And finally on the dynamics.
One of the elements.
We consider it depends also on the accordion.
On the no circumstances consider owning that asset at all or is that something that is on the next day.
Yeah.
Yeah.
Hey, Carlos regarding.
The one off associated with profit sharing.
That's a one off.
Okay.
<unk>.
Dan.
The.
On our digital fronts.
We have discussed in the past are.
Work on open bank.
And thats it.
Open banking is let's say the digital bank that the Santander group passing several.
Geographies.
In Europe , particularly in Spain.
<unk> has recently been launched in Argentina.
And then we are doing here.
Here the homework in terms of what's the best.
Structure to launch it.
I think that the.
It is not something that will happen. This year I think that it's more a 'twenty 'twenty three.
The project to be implemented okay.
We're still.
Considering what's the best alternative there and watching that it provides a significant <unk>.
Benefits for certain types of clients.
And it obviously has to do.
Time to market, you know I think that the.
Open Bank has shown is that.
We are different.
The core systems.
Leveraging on the latest technology.
<unk> can provide.
You know a more simple.
Better customer experience.
In a more.
In a reduced.
And at time, so I think that that's it.
That's quite a compelling okay. So.
We will adjust.
Consider that considering whether that that's the best route or continuing with the significant transformation that were undertaken in the bank, but I think it's good to have those alternatives you know I would tell you that but don't expect that to happen.
This year.
Carlos now regarding a better mix.
Recall that the.
Santander used to own pension funds in Latin America.
<unk>.
The group decided to divest them.
Many many years ago.
No.
I don't know.
We'll do our homework and.
I think that there.
As in every single transaction there are some processing costs associated with having or not a pension fund in Mexico.
I think that on the regulatory front, probably most of the risks that we.
We were looking in this industry, probably they have already materialized.
Uh huh.
We probably I just don't expect that.
A significant reduction in fees.
More than what we have seen.
So far.
So so I don't think that.
<unk>.
And actually the reform.
That was implemented.
Last year.
In terms of a higher contribution.
By employees and companies.
That will provide.
Significant growth in assets under management, So that's definitely a positive.
But.
And I think it's it's quite early for us to talk to.
To have a strong view Carlos weather.
We will be interested in owning the pension fund or not but we will definitely.
Look at it very very closely.
Thank you so much.
Yeah.
Thank you.
And our next question comes from Carlos <unk> with GBM. Please state your question.
Hi, Thank you for taking the question.
First of all on deposit dynamics, I mean, I think its very understandable that you are favoring demand deposits for term deposits, but how are you managing to materialize. This particularly in an interest rate environment, where rates are going up.
Okay.
Well.
<unk>.
No.
That's a great question.
Carlos.
You have to.
To understand.
The contribution of.
Individuals to both.
Month of time deposits.
Because.
We are coming actually from a very low base.
Yeah.
Five five.
Five years ago.
And the <unk>.
Deposits from Corpus are obviously more expensive and more sensitive to.
To movements in interest rates.
So.
On one hand.
It's benefiting us that we are having a higher contribution of individuals to demand deposits. Okay. So that's quite positive.
And gay.
No matter you know.
How low or high interest rates.
Demand deposits from individuals in order to yield a very low base.
The yield okay.
Now.
Demand deposits from corporates.
Another that's another animal okay.
And actually what we saw in the last quarter of last year is that some large corporate.
Deposit.
In Santander.
You know a significant part of their excess liquidity.
And that actually had.
Negative effect in <unk> when you look at the cost of funds.
All right.
The rate that we're paying in demand deposits that's actually.
The reason why it went up.
Relatively fast because of low dose.
Those corporates, making dose those deposits I think that.
We have to provide.
Tim.
Alternatives and provide a good experience have not.
Not only the digital channels, but also the branch network.
And the ATM network working appropriately so that we can have a higher percentage.
The costs from individuals okay.
We were happy with.
Okay.
With housing cargo in unit dose just to point out in demand deposits. When we started these.
Our strategic plan.
The investment plan.
Demand deposits from individuals where 25% of total demand deposits and now it's almost 37%.
Quite good but when you look at our peers. They are more in the 45% to 50% area. Okay. So so we will continue.
With these initiatives to strengthen our capabilities to attract and retain retail customers. So that's the way to two.
To have a better funding mix, regardless of the interest rate environment, and we're obviously sensitive given our higher higher exposure to corporate deposits in terms of what happens to interest rates.
So I would say that that's a second order impact that we have for the most.
Relevant in terms of providing a sustainable.
Quite cost effective.
Deposits is having a more balanced mix.
Individuals relative to corporate.
That's very helpful. Thank you and for the follow up.
You mentioned in the press release and investments of $11 billion, that's for infrastructure and the utilization.
And you mentioned that that is an all time high investments I guess.
I was wondering how does that compare to the 2021 figure and if you could provide us some idea of where this.
Money would we invest there that if this is basically it's still a catch up against your peers or that would set you up ahead of them.
I wouldn't say that we would be ahead of our peers you know I think that we have great competitors.
I think that it does.
Joseph <unk> component off of catch up.
Most of these investments are going into our <unk>.
And it'll initiatives. It includes not only opex, but also capex okay.
It's very important tool to have in mind and I don't know Eric if you could provide additional color on that sure and it is the highest we've had it's around between 3% to 5% higher than.
The investment we made in 2021.
It.
It's what do we call.
The actual.
[noise] outflow of expenses that we didn't do as David was mentioning.
Some of it is equally.
Actually personnel expenses, that's oh.
Opex than we have hardware and software which is.
Capex that's around five 4 billion of the of the 11.
General expenses on it is around $6 billion and $1 billion of personnel expenses related to development. So again, it's a it's a mix between capex and Opex.
That's very helpful. Thank you so much for that breakdown.
Thank you.
If there are no further questions at this time I would like to turn the floor back to Mr. Hector Chavez for any closing comments.
Thank you operator, and thanks, everyone. Once again for joining Santander, Mexico on this call as always we wish to maintain an open dialogue with you all.
All of the financial community.
If you have additional questions. Please don't hesitate to call or E mail or directly until our next earnings call. Please stay safe and have a great day.
Thank you. This concludes today's conference call you may disconnect. Your lines at this time. Thank you again for your participation.