Q4 2022 Banco Santander Mexico SA Institucion de Banca Multiple Grupo Financiero Santander Mexico Earnings Call
100%.
Speaker 1: 6.2% to 100% and it is therefore our intention to delist the bank's shares from both the mark the Mexican and the New York Stock Exchange's. Currently we are awaiting the regulators approval in order to proceed with the transaction which is expected to conclude during the first quarter of 2023.
Speaker 2: I fall weight. We also remind you that certain statements made during the course of the discussion may constitute forward-looking statements which are based on management, current expectations and beliefs. And I subject to a number of risks and uncertainties.
Speaker 3: including the COVID-19 pandemic that could cause actual results to materially differ, including factors that could be beyond the company's control.
Speaker 4: For an explanation of these risks, please refer to our filings with the SEC.
Speaker 5: And the Mexican subject changes. Anything? Please go ahead.
Speaker 6: Thank you, Hector. Good morning, everyone, and good afternoon to those of you participating from Europe . We hope you have the opportunity to enjoy the holidays and our best wishes to you and your families for 2023. We are very pleased to share with you that we closed a very successful year, reporting the highest net income in the history of our bank. The result was 46% higher than what we achieved in 2021.
Speaker 7: and 24 higher than the pre-pandemic level in 2019, demonstrating our tremendous capacity to adapt and grow in complex and challenging operating environments.
Speaker 8: During the fourth quarter, we maintained solid performance levels in our core businesses while maintaining excellent asset quality throughout the loan portfolio. In fact, during 2022, we achieved the best risk metrics we have ever had with an NPL of 1.88% and the cost of risk of 1.56%.
Speaker 9: These record low levels were due to the excellent work done by the risk area of our bank in coordination with all of our business units.
Speaker 10: Total loans grew almost 8% year on year with strong performance across our entire loan.
Speaker 11: In individual loans, we had a solid increase compared to last year, mainly due to double-digit growth in credit cards, payroll, and auto loans. I would like to point out that November was our 32nd consecutive month of annual market share gains in individual loans.
Speaker 12: after becoming the third largest player in the consumer loan market as of September .
Speaker 13: In terms of deposits, during last year we continued executing our strategy to attract and retain individual clients while letting go of some expensive corporate deposits.
Speaker 14: With these total deposits were 6.9% higher than a year ago.
Speaker 15: Also, it is worth noting that at the end of 2022, we had achieved the greatest exposure to individual virus that we ever had at 41.4% of total deposits.
Speaker 16: However, we are still far from where we want to be, so we will continue to focus on it until we are able to achieve a similar mix to what relevant peers have in the Mexican market.
Speaker 17: We closed 2022 with an ROE of nearly 16%, 481 basis points higher than in 2021. These effects are great exposure to individuals, both in terms of credit and deposits, as well as the excellent risk management that I noted previously.
Speaker 18: Further, if we adjust for the fifth capital that we continue to have, our ROE for 2022 would be 174 basis points higher.
Speaker 19: Also, during the fourth quarter, we continue to maintain its strong balance sheet, as we're reflecting our soil capital ratio and liquidity position.
Speaker 20: As of this year, I'm following the appointment of Hector Guicci as a
Speaker 21: I take full responsibility of the bank, which has an audience strength as well as exciting opportunities. I am convinced that together with the entire continent of Mexico team and our goal collaboration with the group.
Speaker 22: We will become the best banking option in Mexico and the primary bank for our clients. By ultimately offering the best user experience in the market, both in the advisory side and in the retail banking.
Speaker 23: The charts on slide 4 show a still complex environment in Mexico without the economy. While GDP expectations for the failure of 2022 have improved, the forecast for 2023 has been declining more recently, as a perspective on the Mexican economy and continues to be less and less optimistic. The city's shifting sentiment is due to a moderate outlook on the product and the
Speaker 24: by year end and then be climbing to a level of 4.2 at the end of 2024.
Speaker 25: Given the inflationary conditions, the reference rate reached its highest point of 10.50 in December . We expected to reach 10.75 by year end 2022 degree and then gradually decline to 9.75 by 2024.
Speaker 26: According to the Mexican Institute of Social Security, more than 750,000 new jobs were created during 2022, bringing total jobs to 21,372,000, of which 87% are permanent. However, as we mentioned in previous calls, the number of jobs that were created during 2022 was not as high as it was in 2019.
Speaker 27: Most of these jobs are relatively low quality. Other macro indicators have also shown improved economic performance. Private consumption is now focused on higher than before the pandemic, while industrial activity and investment remains practically at the same level as 2019.
Speaker 28: That said, while 2023 will be a year with substantial challenges on the micro-front, it will also be a year with significant opportunities for the Mexican economy.
Speaker 29: The ongoing rearrangement of global supply chains known as reassuring provides Mexico with a unique opportunity for increased domestic and foreign investment, which could turn into higher growth rates for the economy in the future.
Speaker 30: The discipline microeconomic policies in place, including in the fiscal, monetary, and state policy fronts, put Mexico in a favorable position to capitalize on this opportunity.
Speaker 31: The optimism of manufacturing exports in the recovery from the pandemic and the recent strength of the exchange rate provide evidence of the potential benefits of the current juncture for the Mexican economy.
Speaker 32: In fact, the successful recent debt insurance made by the federal government and PEMEX reflect the confidence and optimism of Mexico and foreign investors.
It was like five, you can see that system volumes, loan volumes in November maintain their solid growth trend.
increasing low double digits year over year.
This good performance was made with using by Fultinic both in Tensuma Lones which increased 17% as well as improved demand in commercial loans.
System deposits continue to strong rebound growing more than 10% year over year with demand deposits increasing by almost 8%.
Now, I will ask Guilherme to continue from here with a deeper discussion of our fourth-quarter results. Guilherme, please go ahead. Thank you, Felipe, and thank you, everyone, for joining us today. Turning to slide 6, our total loans increased close to 8 percent year-on-year. We differentiated dynamics between high-margin and low-margin segments.
Starting with high margin segments, credit cards stood out as November while the eighth consecutive months of gains in market share reflect in the excellent performance of our like-you credit card among our customers. In fact, at the end of 2022, like use portfolio balance already represented close to 15%.
2022 the auto portfolio was close to 26 billion pesos resulting in a market share of 15.6% consolidating ourselves in the third position of the market.
At the same time, we continue to make this portfolio more profitable through new and key commercial alliances together with price adjustments.
On the commercial front, loan demand is also improving among mid-market companies and governments and financial entities, increasing by single digits year on year. It's also worth noting that corporate loan demand improved on a sequential basis, increasing by a low double digit amount.
In mortgages, to protect the profitability of the product, we were the bank that raised its interest rate the most during last year, causing a deceleration in the growth of this portfolio from 12.1% in 2021 to 8.8% in 2022.
Taking together, we continue seeing an upturn in our higher yielding loan segments, which, coupled with higher interest rates, should continue helping drive our margin expansion while we maintain safe and sound asset quality.
On slide seven, you can see that individual loans grew 14 percent year on year. It is worth noting that, as Felipe mentioned, we are outpacing the market in loan growth for 32 consecutive months. This has enabled us to achieve a 14.8 percent market share.
Our mortgage portfolio continues expanded at a solid pace, increasing to 9% year-on-year and 11% organically, despite the higher interest rates that we charge during the year and thanks to the wide range of mortgage-project products that we offer.
Over the years, we have distinguished ourselves with an innovative and competitive offering in mortgages. We are the only bank recognized for offering a comprehensive set of banking products and services associated with our mortgages. Also, we have made substantial progress in the digitalization of our processes.
Currently, more than 97% of our mortgages are being processed digitally, improving the customer experience and creating another point of differentiation in the market.
Regarding our consumer products, these were mainly driven by auto and payroll, which allow us to become the market's third largest player in consumer loans in September of 2022. In order loans, we also continue expanding our business, gaining 411 basis points of market trend during the last 12 months.
With 15.6% of the market as of November 2022, we have consolidated our position as the number three player in the market. We are very proud of this significant accomplishment and remain determined to move up in rank soon.
With the aim of expanding the business even further, we're now very active in the used car segment of the market. Currently, used car loans represent around 10 percent of our total loan portfolio, and we are targeting a 25 percent level in the medium term.
Similarly, payroll loans deliver a solid performance during the quarter, increasing close to 21% year-on-year, while personal loans increase close to 8%.
At the same time, credit cards continue to accelerate, with a solid 20.5% year-on-year increase or 6% sequentially. These excellent results were mostly driven by our flagship digit credit card like you, since its launch. We have issued over 822,000...
like U-cards exceeding our own expectations. In terms of demographics, more than 45% of our like-upelines are a junk. Less than 30 years old compared to 21% of the rest of our credit card products.
I would also like to point out that nearly 13% of total billing comes from this relatively new credit card.
Through our new payment and credit value offerings, we are confident that we will continue to acquire a significant number of new, like you, users who are customer-based through this year, including customers participating in a recurring program, Cashback Baby, where all like you, credit card users, and all of 5 million favorite customers.
are automatically involved in and already enjoying the program's benefits.
Turning to slide 8, the solid expansion of low-end and digital customers continue.
with year-on-year increases of 11% and close to 9% respectively.
With additional growth in loyal customers, they now represent 45% of active clients compared with 41% in the same quarter of last year. These growth reflects consistent improvements across a large number of our products and services as we aim to be the best option for our clients.
and continue working very actively on to re-achieve this role. Also, we are very proud of our sustained improvements in Portugal metrics.
With product sales, we had the channel's accounting for 62% of total sales. A significant increase compared to 56% a year ago. The retail monetary transactions also maintain an upward trend, reaching 49% of our total.
with mobile transactions accounting for 98% of total digital transactions. In addition, mobile clients grew nearly 10% over the past year to almost $5.8 million thanks to promotional campaigns and the incentives we offer through digital channels.
During 2022, continuous improvement of our digital ecosystem remains a strategic priority as we focus on building on key pieces that in the aggregate positively impact the end-to-end of digital experience of our customers when using each of our financial products, both on the income and tone change.
Leveraging this experience, we continue working towards banks' complete digital transformation.
As shown on slide 9, commercial loans increase 3.4 percent year on year, driven by a high single-digit increase among mid-market businesses and a mid-single-digit increase in government and financial entities. For more information, visit www.fema.gov
Although corporate loans decrease 1.3 percent year on year, they increase 11.8 percent sequentially. We're seeing encouraging evidence of growing investment in certain states in Mexico driven by near showing. The increased demand has mostly been in northern and central Mexico.
Conversely, S&E loans are still being affected by weak economic conditions, resulting in low credit demand. This category of loans decreased 8.5 percent year on year and 2.8 percent on a sequential basis, similar to the prior quarter's sequential contraction.
Moving on to funding on slide 10, total deposits increase 7% year on year and 9% sequentially. Like the previous quarter, deposits were driven by term deposits, increasing a bit more than 30% year on year on the back of a higher interest rate environment. Demand deposits decreased 2% year on year, mainly to55122.
to a 6% drop in corporate demand deposits as we continue forgoing certain expensive deposits to improve our funding costs. The banned deposits from individuals increased 4% year on year, supported by our promotional campaigns. As a result, we have been able to show greater resilience to centralQ
The cost of deposits increasing 121 basis points year on year, mostly in line with the system, while the reference rate had increased 500 basis points year on year as of December .
Turning to slide 11.
We continue maintaining very strong capital and liquidity positions.
At the end of the quarter, our liquidity coverage ratios stood at 181.2%, representing a substantial buffer and still far above the regulatory threshold. Our core equity tier one and capitalization ratios as of December were 13.93% and 19.38% respectively. For more information, visit www.fema.gov
Significantly above the minimum requirements established for systemically important financial institutions like ours.
At the end of the quarter, we will also maintain a soundfond in position with a net loss to the positive ratio of 94.4%.
As you can see on slide 12, Native interest incomes had a solid double digit increase of 24 percent year on year and almost 9 percent quarter on quarter, mainly driven by higher retail volumes in loans and deposits as well as the higher interest rate we've been discussing.
During the quarter, Banco de Mexico increased the reference rate by 125 basis points to 10.50 percent. This impacted positively our NIM, which expanded 82 basis points year on year to 5.28 percent for the quarter. For more information, visit www.nim.gov
Please turn to slide 13. Net commissions and fees are strong increase of almost 8% year-on-year. This solid performance was mainly driven by a double-piggy increase in insurance fees and cash management. In addition, purchase the sale of securities and money market transactions.
increased 20% year on year. Going forward, we expect to sustain good performance levels in credit card fees as our ambitions for the like-you credit cards are to continue increasing average monthly buildings while achieving a better mix of fee income.
Turning to slide 14, gross prior income increased close to 18 percent year on year and 6 percent sequentially. This growth was driven by the solid performance in net interest income supported by our greater focus on individual loans and deposits. Near feet were also a driver.
Main insurance fees and cash management, which more than I said, lower market related revenue.
Moving on to our equality on its life 15, our NPL ratio improved 13 basis points sequentially to 1.88% reflecting healthy trends across the long portfolio and the adoption of the IFRS 9 methodology.
Provisions in the quarter increase significantly on a sequential basis due to previous quarters one-off items, the release of provisions related to some corporate crimes, and the recalibration of some of our risk models. At year end, our cost of risk is 2.1.56%.
A 134 basis point year-on-year decrease and a 2 basis point sequential increase.
As Felipe noted at the beginning of the call, these record low levels are due to the excellent and consistent work done by the risk area for banks as well as by each of the business unit.
However, we wish to note that these excellent results are non-recurring, as we benefited from the recovery of some loans associated with the pandemic during 2022, thus we expect both metrics to converge to more normalized levels.
So it costs on a slight 16. Administrative and promotional expenses decrease 3% year-on-year, but increase 6% when excluding the past reclassification. And at the financial basis, expenses increased by 18%, mainly driven by administrative expenses and higher personal expenses.
Expenses also rose due to depreciation and amortization costs related to our investment plan.
However, thanks to our solid revenue growth and strict cost control, we managed to improve our efficiency ratio by 799 basis points year over year to 48% at the end of the quarter. It is noteworthy that we accomplished this despite inflation pressures.
Turning to profitability on slide 17, net income increased 20 percent year on year to 6.3 billion pesos, mainly due to the solid increase in net interest income and fees, along with disciplined in cost control.
profit before taxes rose 52% year on year, reflecting the strong performance of our core business.
Return on average equity was slightly above 15 percent, 222 basis points higher than the year-ago level, and close to 16 percent for the full year, reflecting our greater exposure to individuals, voting credit and deposits.
The return was also due to the excellent risk management that we've highlighted.
Additionally, we're adjusting for the excess capital that we continue to maintain. Our ROE would be higher by 174 basis points.
as we also pointed out.
On the other hand, our effective tax rate was 27%, a significant increase compared with last year's period due to a low comparative base and certain fiscal payments made during 2022. On the other hand, our effective tax rate was 27%, a significant increase compared with
Before we open the call for the Q&A session, let me conclude by saying that we're pleased to have met or exceeded our financial targets for the year.
This was particularly gratifying given the challenging environment that we operated in during 2022. We're also very proud of the strong quality of our results and the robust core earnings expansion. Our growth in the deposits was a Bob or guidance range, even though we continue to prioritize retail over corporate deposits.
a strategy that we will maintain during 2023. In terms of expenses, despite persistently high inflation throughout the year, we effectively control costs, which grew below our target.
Altogether, the healthy growth of our retail loans, coupled with a reduction in our cost of risk and effective cost control, generated solid net income growth, building on our various efforts to consistently deliver strong results.
In summary, we continue successfully working on and advancing our strategic priorities, enhancing our products, digital offerings, distribution networks, and most importantly, the overall customer experience.
Although we have made good progress with our banks' operational transformation, continually simplifying processes and operations, we are nevertheless mindful that we must step up the pace in working toward our goal of building a much stronger franchise and becoming the number one bank for all our customers.
If the group's tender offer is approved by regulators and succeeds, we are aware that this could be our last earnings call.
We want to thank you for your support as a listed company, for all your questions, challenges, for all the analysis that you have produced for all these more than 10 years, for all the investor streets you organized.
You made us a better company and for sure a better management team. We will remain available for you.
These concludes our prepared remarks. We're now ready to take your questions. Operator, please open the call for questions.
Thank you. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the queue. You may press star 2 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. Our first question is from Carlos Nomes with HSBC. Please proceed.
Hi, this is Carlos Gomez. Actually, I don't have a question. I just wanted to give you, to thank you for all the time and as you say all the treats, all the visits, all the talks that we have had over the years. You have been a great listed company and we wish you all the best and we hope that you will be.
Good morning and thank you for the call. I had a question on your commercial book, Sequential Growth. There were a number of diverging trends and I guess also depending on the comparison being sequential or year on year, but we were a little surprised by the decrease in the middle market.
you know, quite sensitive in rates. We've seen certain banks being quite aggressive. You know, it's, but also let me know that it's marching out to increase sequentially, you know. It's less than, than slightly more than 10 billion pesos.
So yes, one thing has to do with increased competition and also some amortization of some loans. So, you know, that's one thing that has to do with increased competition and also some
Okay, okay, thank you. And you mentioned in the press release that you are in the process of launching your digital bank. Is that going to be a fully separate process?
bank and if so, can you comment on what the strategy will be to not cannibalize your legacy bank?
Yeah, I can, okay, if that one, it's going to be open bank, open bank already operates in Europe , in Argentina and a few other countries. And it works extremely well. It's a fully digital alternative for our clients. We want to become a digital bank with branches. That's the aim of the group in the middle.
100% digital and we believe that it's going to cater to a different part of the pyramid that we are currently not serving probably as much as we would like to. Given that the cost of serving digitally is much cheaper, we believe that we're going to be able to...
via Open Bank broadened the client base.
Okay, thank you very much.
As a reminder to star 1 on your telephone keypad if you would like to ask a question. Our next question is from Yuri Fernandez with JP Morgan. Please proceed.
Thank you all and first of all thank you for the partnership in all those years. I have a first question regarding I guess this has been maybe one of the most asked questions in those years. So regarding our margins, what is the sensitivity you are seeing today? We saw a very good expansion this quarter so for every 100 bits change of rate how you are...
coming from the mortgage book. So what happened there is something specific regarding to legacy portfolios like what is driving these higher losses on the mortgage book. Thank you.
Hi, Yuri. Good to talk to you. Regarding in-hole sensitivity to net interest rates, I think that we remain positive, positive-sensitive.
I would say that the 100 basis points increase on a parallel curve would give us close to 600 million pesos, you know, with the most recent estimates. So when you look at it on a mean basis, you know, given
how the increases in the reference rates have happened over the last few months. You know, we think that the name for 2023...
I would say that there is a floor in a potential increase of at least 100 basis points relative to what we saw last year. I would say that it could be within 100 to 150 basis points, the potential increase associated with the interest rate environment. We're expecting...
interest rates in Mexico still to increase slightly above the current level. And if those, and we also expect that those will be maintained for the rest of the year, so that's a very positive environment for our business. And Hector, if you guys comment on the mortgage book, hi, hi, hi, Julie.
Yes, on mortgages you are absolutely right. There was a slightly higher level of write-downs, but there is nothing special about it. It's simply a decision managing the stock of NPLs.
So Mogic says you are absolutely right, there was a slightly higher level of write downs, but there's nothing special about it. It's simply a decision managing the stock of NPLs. So it's business as usual.
No, no, thank you, did you hear? Thank you, actor. And again, thank you for the partnership. Thank you.
Thank you.
Our next question is from Nicholas.
Riva with Bank of America, please proceed. Thanks very much for taking my questions, and I apologize, I just dialed into this call. So if you already said something on my questions, I apologize for that. So first question, on your 2028 Tier 2 bond, which is callable in October ... you've said such a simple question!
It's trading at par. Marking is kind of assuming it's going to get cold. Of course, in the past, you have called this tier two. So remember when you called the 24th back in 2019. If you were to call an issue a new bond, the idea here would again be that the parent companies and Tandera Spain would buy most of the new issuance. So that's my first.
value in this sector in the sense that perhaps you would be interested in acquiring any of these companies given current valuations either leasing company, payroll lender, etc. And then finally and again maybe you have already mentioned this in this call but
Once you complete the listing of the stock in Mexico, are you going to continue having quarterly earnings calls such as this one going forward or not? Thanks very much.
We already answered all of the three questions, so I suggest that you listen to the replay. No, no. Don't your first question. We obviously acknowledge the market conditions.
to evaluate whether makes sense or not, the ball, our capital security, we will do so again when time comes, as you rightly pointed out, this is due in October of this year.
And also, we will be open for whether a parent company takes significant part of the insurance or not. Those are decisions that I would say depend on market conditions, I would say.
So we already started the process to get approval for either calling it or issuing a new one or just keeping it. We have to discuss that with the central bank per current regulation. And we already started the process. So usually they say.
a few months to have those approvals. So we would remain open as to what's the best for the bank. If our parent company ends up buying the significant part of the insurance, as we have done in the past.
It has been at market conditions, so in terms of the Central Mexico as an issuer, I would say that it's relatively indifferent for us because we get the right pricing in the issuance. Okay, then regarding non-bank financials.
I would say that the businesses in which these companies are in
are not that attractive to us. You know, we continue to remain open and analyze different opportunities to consolidate the market. We consider ourselves as the key candidate to consolidate the Mexican banking system for opportunities that, first of all,
make strategic sense for us and secondly that they are accretive to our shareholders. So, for those
companies that have had some stress over the last few quarters. I would say that we are not that interested in their business models, but we remain open to analyze any potential opportunity to consolidate the market.
And yes, you know, your final question, if the our parent company succeeds, you know, well, first, if the regulators approve the transaction and the parent company succeeds in doing the tender offer, this would be our last earnings call.
Okay, thanks very much for that. Here we are, issuers in the Mexican market.
of debt and also in international markets, so we will continue releasing information. It's just that the quarterly call is the one we would no longer have.
Thank you very much. Thank you very much. Thanks for the earlier. You know, it would be, it would remain available for you if you have any, any, any question in all of the performance on the back, okay?
Thanks very much again.
If there are no more further questions, I would like to turn the floor back over to Mr. Hector Chavez for any closing comments.
Well, thank you, operator, and thanks everyone once again for joining Center under Mexico on this call. And as we have said, if you have additional questions, please don't hesitate to call us or email us directly.
And thanks everyone once again for joining Santa Andor, Mexico on this call. And as we have said, if you have additional questions, please don't hesitate to call us or email us directly. Thank you very much. Thank you very much.
Thank you. Thank you. Thank you. This concludes today's call. You may disconnect your lines at this time. And thank you again for your participation.