Banco Santander Mexico, S.A.

Good day, everyone, and welcome to Banco Santander Mexico's second quarter 2020 earnings conference call. Today's call is being recorded. Following the speaker's remarks, there will be a question and answer session. And I'd like to turn the conference over to Mr. Hector Chavez, Managing Director and Head of Investor Relations, to make some opening remarks and introduce today's other speakers. Please go ahead.

Thank you. Good morning and welcome to our second quarter 2020 earnings conference call. We appreciate everyone's participation today. And by now, everyone should have access to our earnings press release and the presentation for today's call, both of which were distributed before the market opened today and can be found in our investor relations website. Presenting on our call today will be Hector Grissi, Executive President and CEO, Vivian Mena, our CFO, and Rodrigo Brand, Executive General Director of Public Affairs. We will review our second quarter results as well as provide an update on how we are operating under the health and safety protocols that are designed to help mitigate the risks related to the COVID-19 pandemic. Then we will be happy to answer your questions during the Q&A session. Before we begin our formal remarks, allow me to remind you that certain statements made during the course of this discussion constitute forward-looking statements which are based on management's current expectations and beliefs and are subject to a number of risks, uncertainties, including COVID-19, that could cause actual results to materially differ, including factors that could be beyond the company control. For an explanation of these risks, please refer to our filings with the SEC and the Mexican Stock Exchange. Hector, please go ahead.

Thank you, Hector. Good morning, everyone, and good afternoon to those in Europe. Thank you for joining our earnings call today. I hope you and your families are healthy and safe. As we discussed last quarter, mitigating the effects of the pandemic on the health and the well-being of our employees and customers has remained our utmost priority. Before giving you an update on the measures that were implemented in this regard, let me begin our review by providing context. This past quarter has been a quite challenging as we started seeing the impact of the pandemic on the Mexican economy, on our own business, and of course, on our results. Despite the impact, let me assure you that our bank remains strong and focused. First, our capital and liquidity levels are solid and well above the minimum regulatory levels. Second, we have a clear strategy, which we are executing to support our customers and minimize the impact on the pandemic on the finances, and third, we expect to emerge from this difficult environment as a stronger institution. Business volumes closed the second quarter with high single-digit year-on-year growth, while we experienced an adverse shift in our portfolio mixed towards lower yielding segments. Consumer and SME loans started to contract, in line with market trends, while the commercial and mortgage loans were resilient and continued to register expansions. The timely measures implemented by Banco de Mexico and the CNBB have allowed us to maintain ample levels of liquidity and capital, enabling us to offer our customers support mechanisms to temporarily alleviate their cash flow and the financial stress caused by the economic fallout of the pandemic. Although asset quality deteriorated slightly in the quarter, we made preemptive loan loss provisions of 3.9 billion pesos in addition to the normal quarterly provisions. in preparation for our future losses. We would revise this amount in the future as more information becomes available on the performance of our loan portfolio during the coming quarters. As we normally do, we will provide an overview of our business environment, but let me emphasize again our conviction that Santander, Mexico is very well positioned against the current and still growing economy impact of the COVID-19 pandemic. In slide four, we present select economic indicators that show the magnitude of the impact the pandemic is having on economic activity and employment. As you might recall, 2020 GDP growth expectations for the Mexican economy were modest prior to the pandemic, mainly due to weak private investment prospects. With April and May indicators showing a contraction of more than 20% year-on-year in economic activity and 37% on year-on-year and drop in fixed investment, market consensus expectations have been revised down to around 9% annual decrease in GDP during 2020. For additional context, this would be an economic contraction not seen in many decades. This significant fall in economic activity resulted in the loss of more than 1 million formal jobs during the second quarter. to Social Security data, but as many as 20 million jobs lost, taking into account informal employment. Following the past two severe economic crises, back in 1995 and 2009, it took seven quarters for the Mexican economy to recover its previous level of economic activity. However, in the current one, we consider it is unlikely that the economy could recover within a similar period of time, given the depth and magnitude of the global economic shock and the absence of any meaningful fiscal problem to address the severe contraction in its employment. With external demand grounding only gradually and without any mechanism to alleviate households' income loss, an open economy like Mexico faces a slow path to recover to previous activity levels. With 2021 growth prospects being forecasted at only plus 3%, it could take three to four years to recover 2019 levels of activity. Under these conditions, inflation pressures should remain low. We expect 3.6 for 2020, allowing Banco de Mexico to cut interest rates a little further. We expect another 100 basis points of cuts throughout the year, which would take the reference rate to around 4% by year-end. In summary, this is a scenario of low growth and low interest rates represents a challenging outlook for Mexico's commercial and consumer environments and for our business. If you turn to slide five, you will notice that despite the severe shock to economic activity and employment, the system's loans and deposit volumes still show a significant year-over-year expansion of 8% and 14% respectively. This is mainly explained by large and medium-sized companies and government entities that have drawn on the credit lines to maintain the liquidity of their balance sheets in order to continue operating during the months of which the stay-at-home guidelines have been in effect. On the other hand, consumer loans showed a relevant contraction reflecting the initial impact of the pandemic on consumer behavior and of product origination practices being maintained by financial institutions. It is worth noting that system-wide demand deposits remain strong, up 18% year-on-year, likely reflecting heightened needs for liquidity among households and companies while still at-home guidelines remain in effect. Please turn to slide 6, where we would like to give you an update on the bank operations during the past few months. Our health and business continuity protocols remain in place. such as suspending non-essential travel, limiting the number of people at gatherings and group events, and enhanced sanitization measures at branches, corporate offices, ATMs, and contact centers. As of today, most corporate employees continue working from home, while only essential personnel are working on-site. Approximately 80% of the bank branches are open, and 92% of our ATM locations are functioning normally. The bank's digital channels and contact centers have also been operating normally. Our digital monetary transactions increased 64% year-on-year, while our digital sales represented 44% of total sales, plus as much as they did last year as we continue promoting customers' use of digital channels, which continues to drive adoption levels. Further, more IT resources have been channeled into implementing additional remote operating tools, with cybersecurity being a priority. During this critical time, we have been supporting our customers through a debt relief program, offering deferred payments for individuals and SMEs, and case-by-case debt restructurings to our corporate customers. I will elaborate on this program in a moment. As part of our commitment to our communities, we have made numerous donations and support initiatives that aid the medical community and vulnerable populations. We also donated an app to the Mexico City government, which allows the population to self-diagnose based on symptoms, locate medical facilities with little capacity near them, and obtain information on the pandemic. On slide seven, you will find a snapshot of our debt support program that I mentioned before. Currently, 19% of our total loan portfolio is under the Payment Holiday Program for Individual and SMEs, with more than 600,000 customers benefiting from it. Through this program, we are helping customers who have encountered liquidity problems by permitting them to escape loan payment, both interest and principal, for four months without any penalty or cost. Because of this feature, Under the program, it is difficult to assess at this time the extent of the pandemic's impact on our asset quality. However, we have been proactive in addressing asset quality over the past few months by contacting our customers to better understand their financial situation and by analyzing their ability to pay. More than 55% of our branch network personnel is focused on recoveries, calling customers directly. Likewise, the collections and commercial and risk departments segmented the portfolio by level of concern, identifying risk and exposure according to customer quality. Through this more granular process, we are thus marketing each type of client within 36 different clusters. We have also been analyzing our customer behavior patterns using our CRM capabilities. I know that more of 95% of our payroll customers continue to receive their salaries. For those payroll customers who are not longer receiving their salary, we are collecting for unemployment insurance. With current information, we estimate that close to 40% of our customers should be able to continue honoring fully the condition of their loans. Since it is still unclear if the rest will be able to remain current, we are offering upfront loan restructurings to many of them in order to speed up the recovery process. It will not be until the third and fourth quarters of this year that we will have sufficient hard data on the behavior of the portfolio. With regard to our commercial book, we are taking a case-by-case approach to manage our exposure. As we did during the past critical periods, we have remained very close to our customers and are helping them navigate this current challenging environment. For those companies that face difficulties, we have been offering multiple alternatives to support them. Our current portfolio of commercial restructured loans is close to $50 billion and accounts for 16% of our loan portfolio with medium and large-sized corporates. In addition to actively managing our portfolio, know that 76% of our payment holiday portfolio is associated with mortgages and SMEs, which both have guarantees. Within our total SME book, 67% of the portfolio is backed up by warranties issued by Nafinza, one of Mexico's development banks, which allows us to share the risk with them. Specifically, for those SMEs that are in the deferral program, 75% of them have warranties. Furthermore, payrolls and auto loans, 9% of the deferred portfolio, are semi-secured given the collateral represented by each customer's salary and car. Please turn to slide eight, where I would like to share with you some of the key characteristics of our mortgage portfolio, which is giving us relative comfort due to its defensive nature. Our organic mortgage portfolio accounts for 86% of all our mortgages. The existing portfolio has a loan-to-value ratio of 44%, while origination has an LTV of 70%, very good warranty coverage. The MPL ratio of this portfolio is 3.6% and has been quite stable for some time. For the past two years, our Hypotheca Plus Mortgage has allowed us to attract higher income customers, which are more defensive in the current environment. To expand on this point, our average ticket has been increasing since we launched the product and is currently not only the highest among our peers, but 37% higher than the average ticket of our peers. In addition, Hypotheca Plus customers are loyal as they also have their payroll and their credit cards with us. Having a low loan-to-value ratios, as well as being the main bank of our customer, lowers the probability of non-payment, as this type of customer tends to prioritize the home mortgages in economic downturns. All in all, considering the level of warranties we have, the structure of our portfolio, and the proactive measures we are taking, we consider we are on the right path to mitigate the negative impact of the pandemic on the quality of the loan portfolio. On slide nine, let me comment on origination dynamics and the mix we have seen during the past few months. Commercial loans continue to support total loan growth. Therefore, their contribution We've seen local loan origination increase from 78% in the second quarter of 2019 to 82% in the second quarter in 2020. In line with this, commercial loans now represent 64% of our total loans. This changing mix has had an impact on our NII, as we will explain later in the call. In terms of origination dynamics, we have seen encouraging trends during the quarter that are worth noting here. In the mortgage and commercial segments, June's loan origination registered relevant sequential improvements compared to May, surpassing January's 2020 level. In consumer loans, June loan origination remains 25% below the first quarter in 2020 monthly average. However, it expanded 33% above the 2020 minimum reached last April. As you can see on slide 10, our capital and liquidity positions are very strong. At the end of June, our Common Equity Tier 1 ratio stood at 11.6%, 58 basis points above March, and was significantly in excess of the 8.2% minimum requirement established for the bank's RSI. The decision taken during April's shareholders' meeting to postpone the dividend payment for 2019 has allowed us to further strengthen our capital position. In terms of liquidity, our second quarter in 2020 liquidity coverage ratio reached 211%, well above the Bank of Mexico regulatory requirement and supported by the senior notes we issued back in April. Before turning the call over to Lydia, I would like to finish my remarks by by reiterating that we have been active swiftly and decisively to further strengthen our bank in order to mitigate the impact of the current crisis on our operations, in addition to implementing proper protocols and measures to protect our employees and customers. We have continued serving clients with high standards of customer service through our branches and digital channels. Again, we are confident that our bank is well positioned to support our customers as they recover from this unprecedented crisis. Now, let me pass the call over to Divier, who will review the quarter's most important trends and metrics. Thank you.