Q1 2022 Banco Santander Mexico SA Institucion de Banca Multiple Grupo Financiero Santander Mexico Earnings Call
Please and the presentation for today's call both of which were distributed yesterday after market close and can be found on our investor relations website presenting on our call today will be the manner our CFO .
But before we begin our formal remarks allow me to remind you that certain statements made during the course of the discussion may constitute forward looking statements, which were based on management's current expectations and beliefs and are subject to a number of risks and uncertainties, including the COVID-19 pandemic that could cause actual results to materially differ.
Including factors that could be beyond the company's control for an explanation of these risks please refer to our filings with the U S E T and the Mexican stock Exchange UBS. Please go ahead.
Thank you Victor good morning, everyone and good afternoon to those of you participating from Europe I'm pleased to share that we have encouraging results to start the year.
First quarter it both with very strong dynamics in our core business also we are now in a healthier operating environment contributing to sound asset quality, while helping us expand our loan portfolio at a strong pace.
That base reflects our higher risk appetite, coupled with improved economic performance underlying private consumption in the first quarter on the other hand business confidence remains subdued which is reflected in the soft growth of commercial loans.
Individual loans, we continue outpacing the market supported by sustained market share gains in mortgages and other loans in consumer experience and strong recovery, especially in credit cards. The renewed growth was due to the good performance of our like you credit card, which is experiencing excellent market acceptance.
Coupled with the promotional efforts, we have been making within our commercial network as well as other campaigns to keep positioning this unique product among our clients additions.
Additionally, in auto loans, we're very close to reaching the number three position in the market. Thanks to our attractive commercial offering and the various alliances we have with automakers.
We have achieved our natural market share of 13%, which was our goal. When we started this business a couple of years ago.
In terms of deposits, we continue growing at a solid pace, while carefully managing funding costs by improving our mix in favor of demand deposits over term deposits.
Also worth highlighting that the contribution of individuals has increased considerably in both categories of deposits currently the contribution of individuals in total deposits represent close to 38% compared with 24% in 2016. This is the best meet we have ever had.
As with previous years first quarters.
At the same time, our individual and corporate demand deposits continue expanding at high single digit rates each year underscoring the success of our loyalty and customer acquisition strategies as well as our continued focus on reducing deposit costs.
With regard to asset quality, our npls reflect the implementation of <unk> nine in Mexico, Despite our higher risk appetite in certain business lines, our portfolio remains healthy due to our prudent risk management further provisions should remain stable.
As we are not seeing any deterioration that could impact any of our loan portfolio segments.
As for profitability.
It shows the strong performance relative to first quarter of last year and benefits from the strategies, we have implemented to face volume mainly in the individual portfolio along with normalized provisions going forward, we expect profitability expansion.
Also during the quarter, we maintain a strong balance sheet as reflected in our solid capital ratios and liquidity position.
The charts on slide four short challenging outlook for the Mexican economy in terms of GDP growth in 2022.
So inflation nationally and globally has continued to rise although in Mexico inflation is lower than <unk>.
That of our countries other countries due to its fuel price policy.
Additionally, there has been an earlier tightening of monetary policy in response to higher inflation.
Given the current conditions, we expect additional rate hikes in 2022, reaching 825% by year end.
According to the Mexican Institute of Social security more than 385000, new jobs were registered in the first quarter of which 63% were permanent jobs.
Macro indicators have also shown better performance with most of the economies components exceeding pre pandemic levels, both industrial activity and private consumption have been recovering gradually by contrast investments have been lagging due to lower business confidence.
That said, we are well positioned to contribute to economic growth continuing to support both our individual customers, who slow demand has been solid despite the pandemic and our corporate clients with slowing demand is starting to strengthen.
On slide five you can achieve that system loan volumes in January continued to improve increasing roughly 5% year over year.
<unk> growth over the past five years. This growth was mainly driven by improvement in consumer loans, which also increased by nearly 5%, partially offset by corporates demand levels, which are still soft system deposits continue their strong rebound growing more than 7% year over year with Amanda.
It's increasing more than 9% year on year.
Please turn to slide six where I would like to give you an update on our growth strategy.
Our main strategic priorities to provide the best customer experience in Mexico financial services sector, leveraging the latest digital tools and improving processes to accelerate our technological transformation.
At the same time, we continue to position the bank as a market leader in value added products that attract and retain additional loyal planes with that in mind I would like to point out some milestones that we achieved during the first quarter of the year in auto loans, we continue to rapidly expand our business.
<unk> seven countries and 19 basis points during the last 12 months and reaching a market share of 13% in January . This means we have achieved we have achieved our initial goal which was to reach our natural market share of 13% to 13, 5%.
Although we're very proud of this accomplishment, we aim for more but maintaining this pace of growth we will move up to the surplus issue next quarter, becoming one of the top players in the market.
The results have been fueled by our alliances with leading automakers in Mexico and by our Super outdoor Santander platform, which integrates commercial and insurance offerings in a single place, allowing us to provide online preapproval in minutes during the quarter, we announced an exclusive financial alliance with guarantee.
Marketplace to offer guaranteed credit.
This is a new and unique financing scheme in Mexico for individuals who wish to buy or sell a pre owned car directly from one individual to another in a secure way. So currently is platform and with our own.
Bank financing.
Further guaranteed credit is available to both clients and non clients emphasizing that santander clients have preferential conditions.
Disney offer we're making our way into a market three times bigger than the new auto sales in Mexico, which is a market that continues in a moderate recovery trend.
The utilization of our products and services remains a priority, which is why we continue investing in technology. This includes collaborating with Fintech and other tech companies to introduce faster and more convenient digital tools and functionality once that enhance the customer experience increase customer engagement and drive more transactions furthering our pro.
Based on this front is very important for us with digital sales now representing 63% of total sales up from 49% a year ago. We also had $5 7 million digital clients as of March increasing 10% year on year.
In mortgages, our strong performance reflects the success of our products. It will take a pause and it will take a fleet as well as our potato online platform and the redesign of the customer's journey.
The redesign has eliminated significant pain points in the application and approval process.
These strong results support our position as one of the top mortgage originators in Mexico in <unk>.
As part of expanding our range of products. We're pleased to announce that we just launched a new mortgage product called a protection technology.
These new mortgage products will be the first to recognize the total income of families. Both fixed and variable you protect integral offers an interest rate of 11, 5% as well as property insurance, which covers the total value of the appropriate deal for our customers and unemployment insurance for up to nine months with the launch of these new.
An attractive offer we're confident that we will keep gaining market share in this segment in fact as of January we have diminished the gap by 90 basis points with a second player in the market. If we keep this pace, we will jump to the second place in the short term.
A couple of months ago, we launched the new and innovative credit card Blake you had mentioned at the beginning from my remarks discard was was born 100% digital and it is one of the most secure in the market.
Can be designed for any type of customer, allowing each to tailor the guard according to their individual preferences.
Our goal for 2022 is to double account acquisition, while focusing on the profitability and health of our portfolio also this year, we will tap into the open market with strategies that allow us to grow the portfolio with sound asset quality since its launch we have issued over 540.
Like you cards.
<unk> our own expectations.
Currently 89% of like you cardholders have activated their card and more than 75% registered at least one purchase.
We're satisfied with the results and the market strong acceptance of the credit card so far.
Another milestone we're proud to share with you is that Fintech Americas, a community focused on the digital modernization and financial services recognized for the fourth consecutive time, one of our product innovations on dislocation getting it received the platinum award for providing contactless payments on them.
Mexico City Metro booths.
Public transportation sector.
Cabinet by Santander has implemented infrastructure with a higher security that allow payments directly by credit card debit card smartphone or even smart watches users can also replenish their mobility card with the same technology. These initiatives developed jointly with visa and conduit.
Is unprecedented and has significant social impact.
Since it is the first transport system that accepts this type of payment, we're scaling efficient modern and secure payments, helping promote financial inclusion at the same time, we're very grateful for their work and the community recognition. It confirms that we're moving in the right direction with advancing innovation.
Innovation and customer focus are the pillars within net getting it strategy that have allow us to position ourselves in the market in Mexico, resulting in the second place among top players in terms of Pos.
Pos terminals and affiliations as well as the number of transactions, where we went from the number four to number two in just two years.
As part of our mission to promote financial inclusion through to you we offer financial products and services to low income sectors in Mexico.
The majority of our customers are women intrapreneur were not part of the formal economy and quite generally excluded by formal financial institutions.
To your customer support model currently comprises 84 branches, enabling us to directly support our more than 311000 low income customers. In addition, these customers have access to an online savings account that is open remotely by agents offering users both mobile and <unk>.
Online banking tools, we also launch new medical support services and I'm glad to share that 56% of our clients have been able to go to doctors they couldn't before helping contribute to the culture of prevention and facilitating customer access.
Specialist doctors dentists and laboratories also in reference to the positive social impact that to your efforts to improve our plants conditions I would like to point out that thanks to these loans, 80% of our clients have grown their business and 48% have increased the number of employees.
Our goal is firmly supported Mexican families, ensuring they have the information and tools they need to manage their resources properly and make them from decisions that help improve society and their economic wellbeing.
We will continue making process progress on the ESG front as we remain committed to further operationally integrating the criteria policies and internal processes, driving social and environmental performance as part of the formation.
For Santander, Mexico being sustainable means taking into account the communities, where we are present that people and companies that make them up in order to generate continuous and profitable such.
Social progress and economic environmental and ethical level.
Turning to slide seven total loans increased 8% year on year outpacing the system and posting a sequential increase of almost 3% highlighting our solid performance in consumer and credit card loans also it is worth to mention that we have been gaining market share in both individuals and.
<unk> loans for two consecutive months. This performance reflects our higher risk appetite in these segments along with our efforts to continue driving mortgage and auto loan growth.
On the commercial front low demand is also improving.
Markets, increasing by low double digits, together with loans to corporates and government and financial entities are growing low single digits year on year.
All in all we expect to continue seeing an upturn in higher yielding segments.
Which since the fourth quarter of 2018 did not grow faster than the low margin segments, which coupled with higher interest rates should support margin expansion, while maintaining sound and sustainable asset quality.
On slide eight you can see that individual loans are growing close to 10% year on year supporting the strong demand to an individual's mortgages and other loans continue growing at a solid rate while credit cards are starting to show an upturn with a strong annual and sequential growth.
Our mortgage portfolio continuous expanding at a solid pace of 11% year on year and 15% year on year organically.
During the quarter around 46% of originations came from our <unk> plus product, which also helps drive cross selling of other products as well as build customer loyalty. In addition throughput second line, we have been able to process, 96% of our mortgages completely digitally.
I want us to be faster and more efficient in terms of response times, all resulting in a much better customer experience.
At the same time, we're starting to see positive signs of growth in credit cards, expanding 1% quarter over quarter and 7% year on year.
This encouraging performance is driven by our latest credit card launch like you.
Thanks to this product will recover sales and productivity rhythms with a strong improvement in both acceptance in Prague.
Currently more than 11% of total being comes from our <unk> credit cards also it is worth mentioning that March was the best month during the quarter in terms of billing, increasing 19% month over month and 10% year on year.
Through these new payment and credit card value offering.
We are confident we will acquire a significant number of users within our customer base. In addition, we're expecting to launch this credit card in the open market by the second half of the year, allowing us to keep growing and steadily and organically in this business line and do so without compromising prudent.
Risk management.
In the same vein within customer products auto continues showing strong growth in just four years Santander has positioned itself almost on a par with our largest competitors and from building. This business from scratch today. It has a value of more than 20 billion pesos, but maintaining this strong performance, we expect to be a doctor.
Player next quarter as I said earlier.
<unk> also had a good performance, increasing 6% sequentially and 7% year on year converging gradually to pre pandemic growth rates.
Turning to slide nine solid expansion of loyal and digital customer continues achieving year on year growth of 9% and 10% respectively.
In this highly competitive environment, we have maintained our focus on digital conversion, while increasing detailed transactions on sales given the changes in trends in consumer behavior, and our agility to adapt.
To succeed in this new environment.
The ratio of our loyal customers also continues to grow with these clients now representing 42% of active clients compared with 39% in the same quarter of last year.
The evolution of this ratio has been positive throughout the past years in 2016 the ratio stood at around 21%. This clearly reflects our consistent improvement across the breadth of our products and services as we aim to be top of mind among our clients.
During the quarter product sales via digital channels accounted for 63% of total sales a substantial increase compared to 49% a year ago.
Little monetary transactions also maintained an upward trend, reaching 47% of our total.
With mobile transactions accounting for 97% of total data transactions up slightly from 96% a year ago.
In addition, mobile clients grew almost 12% over the past year to over five 4 million driven by our promotional campaigns and incentives we offer through digital channels.
As shown on slide 10, commercial loans increased five 4% year on year, driven by a double digit pickup in mid market loans, which grew by 13 413, 4% year on year. These types of companies are starting to be more active with loan demand.
During the quarter corporate loans increased one 7% year on year, although they had a decrease of 14, 6% sequentially.
Following the fourth quarter peak.
Loans to government and financial entities.
<unk>.
0.3% year on year increase, but three or four 4% on a sequential basis.
SME loans remain affected by current weak economic conditions remaining flat on a sequential basis.
Moving on to funding on slide 11, total deposits increased two 5% year on year and <unk>, 5% sequentially.
In previous quarters deposits were driven by the continuing good performance of demand deposits, increasing 7% year on year and representing 73% of total deposits. This is one of the best mixes we have ever had.
Conversely time deposits decreased seven 9% year on year, mainly due to a 16, 7% drop in corporate deposits as we continue forgoing certain expensive corporate deposits to lower the cost of our commercial deposits.
Demand deposits from individuals increased 6% year on year supported by our promotional campaigns. As a result, we have been able to reduce the cost of our demand deposits by 100 basis points year on year more than the market decrease we also continue working to further reduce our funding costs as we make additional.
So we're improving our deposit mix, one that prioritizes individual deposits.
Sort of the strategy our total deposits from individuals have increased considerably during the last five years, both demand and term deposits they stand at 35% and 45%, respectively and together make up 38% contribution of individuals in our total deposits.
Turning to slide 12, we have maintained very strong capital and liquidity positions, our liquidity coverage ratio stands at 187%, representing a substantial buffer and still far above the regulatory threshold.
Our core equity tier one and capitalization ratios as of March 31 are 14 point to 89% and 20, 21% respectively significantly above the minimum requirement established for systemic important financial institutions like ours in fact, we have.
We have been above 14% levels of <unk>.
C E T E. One ratio for six consecutive quarters and this is our third consecutive quarter above 20% in terms of total capitalization.
We maintain a sound funding position with.
Net loans to deposit ratio of 95% for the quarter.
Liquidity management is one of the main components or core activity at a retail bank.
Beyond our strong base of deposits, we aim to keep a diversified source of funds and a prudent maturity profile, we're constantly evaluating different alternatives and markets to match, our liquidity requirements secure financing and support our business growth in an efficient and profitable way during the past months wait into <unk>.
The domestic debt capital market to provide constructive and appropriate conditions for our niche issuer like Santander, Mexico started executed long term notes for an aggregate 10 billion pesos last November and follow with virus short term notes for approximately 15 billion pesos during this quarter.
So in late March we complemented with a couple of long term notes for nine 9 billion pesos. These issuances are testimony of the strong confidence or the banks wide investor base, we further strengthened our liquidity position to fulfill our business prospects.
As you can see on slide 13, our net interest income increased five 3% year on year, and two 3% quarter on quarter, mainly driven by both higher retail volumes and interest rates as a result, net interest margin expanded 17 basis points to 459% for the quarter.
We expect to continue seeing an improvement in net interest margin is higher margin segments begin an upturn together with interest rates.
<unk>.
Please turn to slide 14, net commissions and fees had a slight decrease of <unk>, 5% year on year and a sequential increase of two 4%.
Our solid performance in insurance fees after the renewal of financial mortgage policy combined with higher financial Advisory services were partially offset by the 15% year on year decrease in credit card fees due to extraordinary revenues that were registered in 2021, coupled with a higher.
Cost in the acquiring business and cost increases on different work programs.
Going forward, we expect a better performance in credit card fees as our ambitions for US like you credit card Act increased monthly average billings, while achieving a better composition in fee income.
Turning to slide 15, gross operating income increased 2% year on year, mainly due to the growth in net interest income driven by the performance of both our individual loans and deposits and interest rate increases.
On other hand trading income had a more normalized result, but was still above our historical 600 to 800 million pesos range contributing the recurrent 5% average to the gross operating income.
Moving on to asset quality on slide 16, the NPL ratio reflects the adoption of <unk> nine methodology, which had an impact of 82 basis points and makes the ratio non comparable with the ones reported previously.
It's sequential increase is due to this and not because of any deterioration in asset quality.
Provisions in the quarter declined 10% sequentially and 45% year on year, mainly driven by the additional provisions we booked in the first quarter of 2021 to face the pandemic and the better than expected performance in the retail portfolio. In addition to a couple of corporate payments and recoveries in February .
Going forward, we expect to keep provisions multimillion pre pandemic levels, even though we're increasing our risk levels and credit cards and consumer loans.
Loan portfolio continues to perform well with a cost of risk is standing at 241%, a 74 basis points year on year decrease and down 49 basis points sequentially. Looking ahead, we do not see any deterioration that would impact any of the loan portfolio segments. So our cost of.
She will remain below 3%.
Turning to costs on slide 17.
Administrative and promotional expenses decreased four 2% year on year. This was mainly driven by the reclassification of the past contributions due to the new <unk> nine implementation, which as of this year will be recorded in the other income line.
Excluding this change in accounting.
Our administrative and promotional expenses for the quarter increased five 8% year on year.
<unk> expenses decreased 25% after the fourth quarter 2021 peak related to the impact of the Btu and a new outsourcing law along with the E. Patrick Calcification that I noted.
Accordingly, the combination of this reclassification in the fourth quarter peak resulted in an improvement in our efficiency ratio of 872 basis points sequentially and an increase of 66 basis points year over year, which stood at 47% at the end of the quarter.
We feel confident about the dynamics of the business in a disciplined cost control. However, we see a potential upside risk and expenses throughout the year due to persistent inflationary pressures and to our ongoing efforts to strengthen our digital capabilities.
Turning to profitability on slide 18, net income increased 56% year on year to 451 billion pesos, mainly due to the solid increase in net interest income and lower provisions and expenses, partially offset by softer fees and lower market led income.
Before taxes was up 57% year on year for the quarter and 20% sequentially.
<unk> the strong performance of our core business.
Return on average equity was 12, 3% 408 basis points higher than the year ago level, we're still accumulating capital per the regulators recommendation to limit the payout of previous year's earnings. In addition, the effective tax rate returned to a more normalized level and stands at almost 25.
St.
56 basis points higher than a year ago.
We anticipate line between 23 and 24% by year end based on the steel kind of inflation rate expected for 2022.
Before going into the Q&A session, let me share with you. Some brief closing thoughts and a couple of adjustments in our perspectives as we expect asset quality to remain healthy despite our higher risk appetite in some business segments. We're adjusting the cost of risk from two seven to $2 90 range.
Two six to two eight levels, which is a positive sign.
On expenses, despite having mentioned growth of around 3% to 4% year on year in our guidance due to persistently high inflation, we now expect expenses growth to be between 5% to 7%.
For the tax rate, we are anticipating eight to lie between 23, and 24%, which is a bit better than the previous range, considering the higher inflation rate rate expected for 2022.
Lastly, we forecast net income to grow north of 15% as part of the aforementioned adjustments better operating environment and our continuous efforts to keep posting stronger results.
We will continue executing on our many growth initiatives and making new investments in the bank's transformation.
We will maintain our strategy that focuses on strengthening customer loyalty by increasing the utilization of our products and operations, mainly through innovation, our market, leading digital advancements that enable us to enhance the value of our products and digital offerings.
Our ambition to become the bank known for superior customer experience in Mexico remains.
This concludes our remarks.
Now ready to take your questions operator, please open the call for the Q&A session.
Yeah.
<unk> and answer session.
Yourself to one question and one follow up and jump back into the queue for any further questions that you may have.
Yeah.
Question. Please press star one on your telephone keypad.
Your line is in the question queue.
Right.
Thank you.
Yes.
It may be necessary for you to pick up your handset.
One moment.
A question.
Our first question comes from the line of Jason <unk> with Scotiabank. You May proceed with your question.
Hi, Thank you.
My first question is on your capitalization ratio in and you are showing that we are very strong.
Levels.
Can you give us an update on proposing dividend and what you expect and getting regulatory approval for that would be one and my second question is.
Related to mortgage loans and.
We show up we saw an 11% year on year increase mortgages now represent 26% of the total loan book.
You mentioned the success of your.
<unk> blocks and what type of free now.
Like you'll have close to 18% market share if you could talk about the dynamics and the mortgage segment.
Especially with rates rising quicker than than most expected are you changing terms.
Terms maturities pricing.
Maybe you could give some color on how important you think pricing for mortgage products is in the current market in.
And maybe you can get some other details on the average ticket and rates that you're charging.
Thank you.
Hi, Jason.
And regarding <unk>.
<unk>.
You might recall that the regulators recommendation was to limit payout.
The payout ratio for 2019, and 2020% to 25% of earnings.
Despite the fact that the regulators have.
Mentioned that they are ready to update that recommendation they haven't.
Made that public you know in several meetings that we have got with them.
They have mentioned that they feel comfortable.
We are increasing that restriction from 25% to 50%.
Uh huh.
And that's basically consistent with the historical payout ratio of the banking system. Okay.
With that in mind and without having the benefit of.
In all the banking Commission.
Releasing these publicly.
We think that the 50% payout ratio for last year's earnings is.
As prudent and is in my opinion achievable.
So we are going to propose that if there is any.
Chance to.
Pay out.
More than that.
Given the fact that we have a very strong capital ratio.
We will pursue that okay, but first of all we're waiting for the regulator to tool.
Confirm publicly their position and after they do that.
There is a chance to reduce excess capital we will do that you know I think.
It's in everybody's best interest.
Bank do not have projects that.
Require.
Capital you know for us to pay that out to our shareholders. Okay. So thats on dividend.
Regarding.
Mortgages you know.
Pricing, obviously is important but it's not the only factor that clients value.
I would say that.
The speed and service is critical and we have invested.
And in improving our you know the.
The customer journey associated with <unk>.
Mortgages and also doing need.
No end to end.
From a digital standpoint, so and that has contributed.
For us to continue gaining market share.
We also know this product is important to us.
Is key in our loyalty strategy.
We offer a competitive rate in the market as long as customers bring more business to us okay.
In the contract that we offer and it will take a close you know that.
That's completely build team.
If you don't comply with the conditions to have your payroll with us credit card insurance business with US then automatically the mortgage rate goes up okay.
So in that regard.
It's an important customer.
Customer acquisition.
The strategy for us so so obviously we.
We're mindful about the pricing, but it's not the only component you know we have a witness over the last few weeks I would say.
M a C.
Significant deterioration in inflation.
Not only in Mexico Board.
Globally, particularly in the U S.
That makes the probability of rate hikes are more aggressive in the short term you know more probable.
So chances have increased.
So clearly that makes us reconsider.
We consider our pricing policy we.
We meet on a.
Continuous basis in order to monitor that okay. So we will we will do that.
We.
We have a very disciplined approach in terms of profitability.
So in the case of mortgages not only the product, but in all the business that comes with a mortgage.
So.
I would say I would mention that if we can see either.
From a profitability standpoint, it's worth increasing rates, we will do so we have already done a small adjustment of 20.
25 basis points.
On average over the last.
A few weeks.
And we will.
We'll continue evaluating that Jayson.
Jason.
Thank you very much.
Our next question comes from the line.
J P. Morgan you May proceed with your question.
Hi, guys and thank you for asking the question I have a follow up on asset quality again, you did you already mention that presentation.
But for the other banks.
Nine blending thinks and helped the enduring cigarettes and in your case.
ADP worsening in our understanding here it was not for the credit cards, even more moving forward.
<unk> thousand 90 <unk> book.
This will help so my question is what happened with the <unk> implementation and why you you'll have.
A different trend than some peers and that's my God what to expect from the conversion rates correct, because I guess I know congratulations in output, but historically your corporate to other onto 130% and your message was very clear that we're not seeing any worsening that you might expect cost of risk to change materially.
My question is.
Should it should the coverage ratio remained at 100% level. Thank you.
Hi, Judy.
There is a.
You clearly point out you know Tau positive impact in terms of.
The <unk> nine implementation associated with the.
Consumer loans.
But there is.
<unk>.
There is in my opinion.
The objective criteria.
In classified stage three.
Portfolios.
That depends on the assessment of the credit analyst.
And.
You know whether you know the client.
Has the capacity to repay their obligations and given the fact that there is some subjectivity in it.
<unk> assessment.
No.
It may it may be the case that the same client.
If classified in different stages for different banks.
So in our case.
You know the classification in stage three.
Of the.
Large corporate segment within our loan portfolio was the one that created this this impact.
And it's less than a handful of clients associated with this okay. So that's it that's why it.
It had that impact in our case and clearly you know I cannot opine on how other banks are doing this okay.
In terms of the coverage ratio.
You know you will be able to say that this is an output.
I think that the.
I would be surprised if the coverage ratio is not within I would say 120% to 130%.
But it's an output.
And just to add.
Jody.
If you take a look at an NPL ratio of disclosure that we have on on slide 16, you actually credit card Npls did fall from three point, 56% in the fourth quarter to 334, that's the effect that you are mentioning and the biggest inc, and all of them.
<unk> decreased except commercial from 1.0122 <unk>, that's the effect that gilead is mentioning.
The effect the overall effect that we mentioned of a two basis point is on the total NPL ratio.
With that that lets say in stage III inclusion.
NPL would have been below 2%.
Okay, how does this correctly.
For the other conference calls are like.
Lots of them.
This objective <unk> depends on the comp growth.
Many variables not only up as dual but given the Mexico. We saw some other players using this criteria it called our attention and guys. If I may a second one very quickly.
And I don't know what our comment on this but what should we expect regarding capital allocation and there was already a question on the dividend with regarding potential delays and Panamax. Like this you can't provide any high level view on your thoughts on those two things because those are I guess point of interest for compliance. Thank you.
Yeah.
You know.
And I'm, probably going to be quite repetitive on this.
Because of this.
We maintain our position.
Since I joined the company and now six years ago.
We have a very disciplined approach in terms of inorganic growth opportunities.
Clearly panamax represents an attractive opportunity that we should analyze.
Deeply and.
Carefully.
Quite sure that the.
This transaction will change the competitive landscape in the Mexican banking sector, something that we haven't seen in the last two decades okay.
In our case.
Our strategy to not realizing in making acquisitions, we have a clear strategy that we have been executing for the last.
A few years, we have made progress.
We would love for the progress to come at a faster pace, but takes time.
So it's in my opinion, it's a matter of comparing alternatives. So clearly banamex represents an attractive opportunity.
What we need to ask ourselves if its the most efficient way to increase our exposure to the Mexican market.
Obviously comes at a price is it the best way to invest.
Certain amount of money in the Mexican market by making this acquisition.
We continue pursuing our organic growth.
Opportunities. So so we're going to do that.
Analyses.
We don't need to buy when the mix to continue being a sex successful in the Mexican market.
Okay.
Obviously needs to come.
At a price that.
That makes sense for our shareholders that will have the benefit of being accretive that takes into account the execution risks that are embedded in in this transaction. So so we'll have to do a complete analysis.
In my opinion.
And the fact that.
Despite the tender offer.
Having reached more than 96% of ownership are afraid of the Santander group.
I think that probably makes sense to leave open a potential opportunity to finance this transaction.
Raising capital locally and let me be very clear on this.
Both our global CEO and.
I don't know Athene.
Have been very clear in the sense that their preference would be not to issue.
Capital.
You know if there is an opportunity to buy dynamics, but I think that.
You know why kill that option now I think that the.
We have the obligation to analyze.
The opportunities and to look at the.
Potential financial.
Financing alternatives when Tang dynasty comp so I think that in my opinion is quite prudent true to.
Remain lease debt and have that as a potential opportunity to raise capital if it makes sense at the time.
And obviously, if we end up being.
The winner in this opportunity okay.
Okay, very clear and thank God for as well.
Very much guys.
Next question comes from the line of.
With Bank of America, you May proceed with your question.
Hi, good morning, <unk>, thanks for the opportunity.
My first question is also a follow up on Citi Banamex.
We have seen but then met with amyloid recently.
So just wanted to know if this topic was discussed this last meeting.
If you have already started to have conversations with banamex.
Also related to this can.
Can you remind us what is the level of your excess capital like the amount of the peso in dollars.
You also mentioned that maybe you can issue shares, but what other additional sources.
Are you thinking if youre interest of.
To finance the transaction.
Higher metal.
Yes in our opinion.
Yeah.
The Mexican President a few days ago.
Currently I was not invited to that meeting so I cannot.
Tell you confirm whether this topic was.
Well as mentioned are not.
I assume that it was but I was not there and I have been briefed havent been brief neither <unk>, nor <unk> on the topics that were covered in that.
Got it.
Now.
Regarding conversations with <unk>.
Panamax, we have stated that we are interested.
We.
We cannot comment on the specifics of the transaction okay given the.
The NDA that we have signed with with TD.
Regarding the excess capital that the.
We currently have.
The way that we look at it is having our core tier one ratio.
Of our approximately 11, 3%, we think that that's a and.
That's the level that we feel comfortable.
Uh huh.
To have.
And.
The excess capital that we have taken that into account is approximately 26 billion pesos.
Regarding potential.
Financing alternatives, you know I think that the.
<unk> are open and we are looking to every single opportunity.
And our sales what's the best.
Way too.
Put together our financing package you know if we end up.
In Panama, Okay, and obviously you know there are different alternatives that go from issuing.
Yeah.
Capital locally to issuing.
Issuing different capital Securities.
Or just plain that it all depends on.
The yes, the balance sheet strengths that we would like to keep.
On a pro forma basis.
And how markets are.
In the you know at that time.
It's good to have alternatives and I think that the.
The strength of both the Santander group and Santander Mexico.
It makes us quite confident that we will.
Get and Barry.
Good alternatives in terms of a potential acquisition of Panamax.
Perfect. Thank you very much and just stop it.
Related to this we have been hearing from investors that.
This transaction.
Look into the synergies now that there is some overlap.
In terms of branches in terms of personnel.
But if you really want to go for the senior years, you'll have to lay off people. So do you think this could be.
Creating some political noise or some of the action from the government that you cannot be laying off people maybe.
Two or three years.
You know I think that you touch a very important point and I think it's a sensitive one and is that something that clear.
Clearly.
You know anyone who is interested in buying banamex.
Take that into account.
The prescient to Mexican President has been very clear.
In last Monday made outside the banking commission as well he mentioned certain things that he would like to do.
To have as part of the sale transaction and he has mentioned about.
<unk>.
It gave about the employees.
Uh huh.
And I think that TD is also since June that from understanding how they proceed.
Jurisdictions.
So.
That's that's for sure something to bear in mind, I think that even.
So it would be very hard to execute those synergies.
So we have seen in prior occasions.
You should also.
Taking into account the <unk>.
Fact that there is a high turnover in banking employees.
So even without the firing employees.
There are some natural attrition.
While it takes more time.
Probably is not as.
Efficient.
Really good.
Napster redundancies.
But that's that's.
I would say.
Way we.
Or any buyer of Panamax could could consider this okay.
Perfect perfect and just a last question in terms of loan growth.
What do you think is the level of inflation and interest rate.
Or the loan portfolio growth.
Start to suffer.
And can you remind us your expectations on inflation and interest rates for this year next year. Thank you.
Yes in terms of loan growth I think that the.
Being close to.
10% is something that we should be able to maintain.
We had an inflationary environment.
Similar to the ones that we have okay.
The latest expectation is that inflation.
And I'll end up this year around 7%.
Our next year around four 3%.
Okay.
This is <unk>.
So as you probably are aware this is.
You know quite uncertain okay.
Inflation expectations have been increasing consistently EBIT for.
The four bank equal during the last probably nine meetings that they've had okay.
And the more deterioration inflation expectations happen are actually in the last meeting so it's not that it continues to deteriorate for DFAST.
<unk> done so in a in an increasing way okay.
Yeah.
As you probably know.
No.
You know there is a significant.
Under penetration in terms of banking in Mexico. So in my opinion, there is there's no it makes sense that <unk>.
Loan growth should be higher than inflation.
And the opportunity to increase loans to GDP.
On a secular basis.
But for example, what about the <unk>.
High level of interest rates affecting some of the banking products.
Okay.
I think that at these levels I don't see that the major impact.
Q3, it will start to see higher levels of inflation and interest rates in there.
So there is a point to be to take that into account.
In my opinion at these levels I don't think that there is you know there is a significant impact.
Impact.
And what do you see that impact that level of 9% 5%.
So let me see if I understand your question.
The interest rate it goes to 95, 5% and you can start to see.
More moderate loan growth.
You know very marginally and I don't think that you know I think that it's important no at least maybe I'm going to reveal my H with how I answer this but you know I joined the banking sector.
One month before the Tequila crisis. So so I have seen interest rates you know at a much much higher level than the ones that we have so so I think that these levels I'm not concerned at all.
<unk>.
<unk> rates get at double digit and probably mid teens, Dan I would be I will start to be concerned at these levels on im not that concerned.
Okay perfect perfect. Thank you very much.
Sure.
Our next question comes from the line of.
Okay.
Goldman Sachs. You May proceed with your question.
Hi, good morning, Thanks for the call and taking my question.
A couple I guess follow ups first on the loan growth.
Following up on those questions in terms of GDP growth expectations have come down right. Yet you've maintained your loan growth guidance. If you look at consumer loans, you are growing much faster than the system like 16%.
Seven also credit cards modest growth, but still growing faster than the system.
So just any concerns with sort of a slowdown in GDP growth, yet you're still kind of maintain the loan growth guidance and on consumer loans growing faster.
And then the system.
That's my first question and then I'll.
A second question after that.
Hi, Tito.
Sure.
I think that we are not that concerned that there is obviously a.
Slowdown.
<unk> and <unk>.
GDP growth expectations.
But you know.
I think that the way that we are positioning.
The products that are increasing I think that is quite a prudent.
From the loan growth that we have experienced within our customer base.
Okay. So so that's.
That's quite prudent okay.
We're aiming at the going to the open market and credit cards is it like you are.
Got it.
But.
Despite that generating that we'll do it on.
With very.
Talent the origination policies so.
We are not.
We have never been.
Aggressive in terms of gaining market share just for the sake of gaining market share.
Hey.
Think that the.
We are aiming at having more.
Increasing our customer base.
Having more loyal customers and clearly those customers demand.
Types of.
Of loans and Thats, what were trying to achieve that.
One of the things that the.
We're very pleased in the evolution is how loyal customers have increased relative to active customers able to almost double.
Slightly more than double.
Since we started with this.
Initiatives so.
As we are aiming that the key component of our growth is going to be within the customers that we already have we don't we're not that concerned okay.
We clearly recognize that relative to.
Other quarters, where we have a higher risk appetite, okay, but I think that we've been very very prudent.
Throughout.
The way we look at these opportunities.
And just to add a details on what the year was mentioning for example on the credit card like you were starting to those our own customers with very low limits and depending on their performance, we would be able to increase in time and given that it's 100 percentages of card also is very safe in terms of fraud, so even though it.
It's a new product, it's already made six months old.
The.
The trends are still pretty positive in terms of asset quality that we havent seen any signals there that would concern us and on mortgages, which is also fueling individual growth and our increase in market share those remember that our fixed rates and loan to value of that even the origination is below 70%.
No.
As Dan mentioned I mean, the even though consumer loans are the ones that are increasing we're doing that with very.
Strict origination criteria and we feel comfortable at this time with those risks.
Great. Thank you Didier.
No. That's helpful. And then my second question just following up on the dividend.
And capital position, you mentioned, you're still pursuing paying out dividends.
But would you pay anything out before any decision is made about a potential panamax acquisition just curious in terms of.
Would you want to use any of that capital for potential acquisition or you pay dividends, regardless and then figure out.
And how you would fund that acquisition after that.
We will pay dividends, regardless say Peter.
Okay very clear thank you.
Our next question comes from the line of Alonso Garcia with Credit Suisse. You May proceed with your question.
Yes.
Good morning, everyone and thank you for taking my question. My question is on guidance I mean looking at the trend lines that you are providing it seems that the increase in net income growth is coming from lower cost of risk a lower effective tax rate, which more than offset the higher opex growth, but just wanted to touch base on.
On your expectations for NIM and how.
Uh huh.
Big change if any compared to your original guidance.
<unk> only reported a 13 basis point increase quarter over quarter, just wanted to check on your expectations for the whole year.
How the higher loan yields on improvement improvement in mix.
Played out.
The higher funding costs.
Second question is just very quickly on other income and expenses.
So I mean pick up quarter over quarter.
Beyond the impact coming from the reclassification of all iPad costs. So I just wanted to.
To check if you're seeing this.
The new recurring level on their ISR and mine for this.
Thank you.
Hi, Alonso regarding.
NIM.
And that given.
Okay.
Expectations are for.
Higher rates.
I think that that will.
Benefit us.
More broadly we see a NIM expansion of close to 60 to 70 bps.
On a year on year basis, Okay.
The.
Obviously, it's gone up depends on how the the.
<unk> continue evolving both us as mentioned during our remarks.
They are high margin.
Loan segments are starting to grow faster than low yielding segments. So so I think that they do.
These NIM expansion.
Should be achievable.
Now regarding <unk>.
Other income.
The pathway.
It can amount to complement on that.
Okay.
Remember that in other income we have all sorts of lines.
Are there.
One of those the important one has to do with reserve for contingencies, so that probably that's the most important.
Changed recently have seen and thats in the.
Something that is recurrent and also Alonso remember that that we have and the expenses related to the recovery of the loan portfolio that also complements the amount of money in other income line.
Perfect. Thank you very much for the answers.
Okay.
Our next question comes from the line of Carlos Gomez with HSBC. You May proceed with your question.
Yes. Thank you very much first of all congratulations.
Fundamentally Boston.
And thanks once more for your presentation is very clear and easy.
So just wanted to go back shall we say that.
Second.
Can you give us an update about your plans to set up a separate digital bank is that this could go ahead with it.
States have you between the license winter.
When can we see something thank you for that.
And finally.
<unk>.
Because we're expanding into other financial services.
Area that sometimes I've met many years ago.
Thanks <unk>.
And I know it is difficult now because commissions nowhere, but definitely Anthony provides you with opportunities.
To acquire one or more of such please proceed.
That would be a way in which you could use that excess capital.
Good luck.
Hi, Carlos Thank you very much for for your comments.
Appreciate it.
Yeah.
Regarding on on our digital bank.
Bank.
We have submitted the.
<unk>.
Documentation for.
Another banking license too.
To have these digital banking okay.
Or just just a few comments on why it has taken us so long you know.
In the prior administration there was.
I would say.
A verbal agreement that we could do this under the our existing banking license.
And with.
With the change of administration.
Then there was another interpretation of it whether that was feasible or not so.
That that took us a lot of time to switch from that strategy to the new one okay. So having said that I think that we.
We probably are.
Our year to year and a half away from having.
You know fully operational the open bank in Mexico.
Now regarding our potential interest in other companies in the financial sector.
We're always.
Looking at the opportunities Okay and.
Even though you know pension funds have not been.
The core of our.
Hey.
Analysis of our interest.
Clearly were analyzed in the case of Panamax. It comes altogether. So that's something that we would consider it.
But I would say that.
In terms of inorganic growth.
It's not in our top of list pension funds will rather consolidate any operation or any other banking operation in Mexico.
Okay.
Okay.
The fact that.
It's taking so long for do you think a good day.
It'll banking license should we read anything into that in terms of how long it would take for the panamax transaction to be completed.
No.
Yeah.
You have a good point.
I think that the.
Every single case is different let me, let me say that first but clearly.
Regulators are taking.
You know for approvals, even for simple approve us and clearly you know.
With a banking license.
It requires you know.
Significant milestones and.
There are a lot of requirements. Okay. So that's one of the risks associated with the Panamax transaction because they they have expressed publicly.
Publicly their desire to keep.
Our banking operation more associated with.
Corporate clients that aspiration will require a banking license so so.
That's that.
Make cost.
The transaction to be you know.
Quite a lengthy approval and execution.
Okay.
Thank you very much.
Our next question comes from the line of.
<unk> with Citi. You May proceed with your question.
Thanks, Hi, everyone. Good morning, just two quick follow ups and a bonus.
This wasn't related because I got disconnected from the call a very quickly just wanted to understand in terms of your opex grow the revision on your guidance.
No.
Yes.
Does not include the public classification.
Just if you could clarify for me please.
The new range of 5% to 7%.
Would stay the same after considering the reclassifications or would go upwards or downwards that would be my first question.
And the second question just a quick follow up on fees.
We saw and you mentioned that some costs related to the merkle business.
And the reward.
<unk>.
Drove or pressure.
Fee.
These expenditures on the card credit cards debit cards.
So just wondering when do you think this high growth.
Expensive.
Could normalize going forward.
I can say.
Now regarding <unk>.
Your first question.
<unk> tried to capture the fact to isolate.
Any component on 25, sorry, 5% to 7% taking doubt taking that out okay. So if you compare apples to apples now regarding fees I think that the.
The Dean.
I'd say.
Extraordinary.
Revenues that we recognized in the first quarter of last year, where that extraordinary so we would expect that.
Starting in this quarter in the second quarter of this year.
The fee.
Performance should normalize relative to what we were seeing in prior quarters.
Perfect. Thank you.
Ladies and gentlemen.
Today's question and answer session. There are no further questions at this time I'd like to turn the floor back over to Mr Act of Chavez for closing comments.
Thank you.
Thank you operator.
Yeah.
Well that ends our call.
For this second first quarter of 2022 earnings conference call. Thank you very much for your participation.
As you remember we are always open to questions. If you have any more please feel free to reach us and have a good day. Thank you very much.
That concludes today's conference you may disconnect. Your lines at this time. Thank you for your participation and enjoy the rest of your day.
[music].