Banco Santander Mexico, S.A.

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

Thank you, operator. Good day and welcome to our fourth quarter 2020 earnings conference call. We appreciate everyone's participation today. By now, everyone should have access to our earnings press release and the presentation for today's call, both of which were distributed yesterday after the close of the market and can be found on our investor relations website. In response to your kind feedback, this quarter we have reduced our prepared remarks in order to allow for more time for Q&A. And also, we have included in the appendix of this earnings presentation a slide with information on our responsible banking standards for your reference. Presenting on our call today will be Hector Grissi, Executive President and CEO, Didier Mena, our CFO, and Rodrigo Brand, Executive General Director of Public Affairs. Before we begin our formal remarks, allow me to remind you that certain statements made during the course of this discussion may constitute forward-looking statements which are based on management's current expectations and beliefs and are subject to a number of risks and uncertainties, including COVID-19, that could cause actual results to materially differ, including factors that could be beyond the company's control. For an explanation of these risks, please refer to our filings with the SEC and the Mexican Stock Exchange. Hector, please go ahead.

Thank you, Hector. Good morning to everyone, and good afternoon to those of you participating from Europe. I hope that you and your families are managing to stay healthy and safe in this particular situation that we're going through. Following a very difficult year during which our markets and our operations were disrupted by the pandemic, our top priority remains safeguarding employees and customers. A product approach to safety in our balance sheet have enabled us to withstand the aftershocks of the pandemic to date. This quarter, we delivered some financial operating results in still a very weak operating environment. Despite a small year-over-year contraction on our loan book, we maintained solid performance levels in loans to individuals, particularly mortgage and auto loans, while commercial loans remained weak in line with market trends and soft demand conditions. By contrast, deposits have proven very resilient. In fact, individual demand deposits increased more than 20% thanks to our loyalty and customer acquisition strategy, while corporate demand deposits also grew double-digit, with companies favoring liquidity. Importantly, our prudence balance sheet strategy has allowed us to maintain ample levels of liquidity and capital, while our ROE for the years surpassed that of the system for the first time in the past five years, a result in which we are very well-satisfied. In terms of asset quality, we are pleased to report that 75% of the loan portfolio under the payment holiday program in support of retail and SME customers remains current. Only 9% have missed payments, and of that, 16% has been restructured already. Given this better-than-expected performance, we estimate that the preemptive loan provisions for 2.9 billion pesos that we made in the second quarter of last year are sufficient at this time. We will discuss our business environment shortly, but first, let me emphasize our conviction that Santander, Mexico remains very well positioned against the still adverse economic effects of the pandemic. Slide number four, please. The chart on slide four shows the full year impact of the pandemic on economic activity and employment. While it seems the worst is behind us, this year recovery is likely to be very gradual, and business activity is expected to remain well below pandemic pre-pandemic levels for some time. Although there has been a gradual turnaround in formal job creation, the annual trend remains negative. January normally shows a seasonal rebound in job creation, but the recent spike in COVID cases has resulted in renewed restrictions on economic activities that have reduced population mobility following a national recovery in prior months. These restrictions will likely impact the pace of their recovery in the first quarter of 21. It is important to note that most job losses have been concentrated among individuals who earn less than two minimum salaries, while approximately 86% of our customers earn more than two minimum salaries, meaning that the rise in unemployment has a limited impact on asset quality within our consumer loan portfolio thus far. Given current economic conditions, Inflation should remain within Bank of Mexico target range. We forecast inflation of 3.5 for 21, giving the central bank room for two more interest rate cuts of about 25 basis points each. We estimate that the reference rate could fall to 3.75% by year-end. The combination of modest economic growth, lower employment, and low interest rates present a challenging outlook for Mexico commercial and consumer environments, and therefore our business in 2021. On slide five, you can see that system loan volume contracted nearly 2% year over year. The weakest performance is 2002. The decline was mainly driven by consumer loans, which had not contracted this much since the 2009 crisis. We coincided with the gradual reduction in corporate loan demand, following high volumes in the first quarter of last year. By contrast, System deposit remains strong, expanding 11% year over year. We demand deposits up 17% year on year, likely reflecting a greater need for liquidity among households and companies, as well as lower rate environment. Moving to slide six, a brief update on our strategy. Our strategic priorities remain focused on building a stronger bank for the future. As we shift the business mix toward higher share of retail loans and deposits, thus attracting more retail customers and increasing loyalty remain the cornerstones of our strategy. Digitalization also remains a priority, and we continue investing in technology. This part of our strategy includes collaborating with fintechs and other tech companies to introduce faster and more convenient digital tools and functionalities that increase customer engagement and drive more transactions. For example, This year we plan to release a new integrated app that is simple, intuitive, and offers enhanced functionality. We expect the app to become a market benchmark and will be exported to other markets where Santander operates. Cloud technologies embedded in our everyday operations, as well as reinforced cybersecurity, are key to our delivering higher value to our customers, as well as increased operating efficiencies. Continually improving our customer journeys and service excellence excellence are also our aim. Being a top three player in terms of NPS is one of our strategic targets, and this indicator is already a relevant KPI in the variable compensation for all employees at the bank. Digital conversion is crucial to our goal of serving customers anytime, anywhere, and anyhow. Progress on this front includes expanding the number of digital customers by 20% to 5 million by year end. A critical part of our strategy has been driving digital adoption levels, as well as expanding our base of loyal customers, who now account for almost 40% of the total active customers. Helping drive digital adoption is our network of smart and agile branches, as well as new functionalities that we're introducing across our digital banking platforms, in addition to new digital products and services. It's our new digital onboarding platforms that are boosting our auto and mortgage loans, which represents 62% of our retail loan portfolio and continue performing extremely well even under these conditions. Importantly, we are growing our auto loan business organically and rapidly, achieving a 5.4 market share as of December. Our alliances with Mazda, Tesla, Suzuki, and Peugeot helped us gain nearly 400 basis points in market share during the last 12 months. We plan to at least double our market share over the next couple of years, with the goal of reaching our natural market share of 13.5% in the medium term. Our mortgage business broke our own production record against this product in December, as well as the banking system, originating 5.6 billion pesos of home loans, driving growth for our innovative Hipoteca Plus and Hipoteca Free products, boosted by our newest digital product, Hipoteca Online, the only mortgage platform in Mexico that connects to all end-to-end processes. Our customer acquisition and loyalty initiatives have been paying off over the past two years, with our mix of retail deposits improving 373 points to 35% of total demand deposits, which will contribute to lowering our cost of funding over time. Attracting retail customers and their low-cost deposits is core to our strategy. Our goal is to reach the average mix of 42% retail and 58% commercial demand deposits over time. Turning to slide seven, total loans contracted 1.5% year-on-year and 4.4% sequentially. in line with the market trends and mainly due to lower balances of corporate and consumer loans. Given the constraints of the current economic environment and with an eye on maintaining asset quality, we continue focusing on more defensive segments, such as mortgages, payroll, and auto loans, where we have been gaining a lot of market share and we have been a leader in the market. On slide 8, you can see that individual loans are growing above 7% year-on-year on the back of mortgages and auto loans, while credit cards and personal loans remained weak. Mortgages have proven defensive, despite current conditions. In fact, we grew mortgage loans over 18% year-on-year, again, organically. Also, by focusing on the middle and upper income segments, we have been able to increase our average ticket, which is 35% higher than the market, compared with 5% only four years ago. This approach has also allowed us to attract more high-quality customers that we then convert into loyal customers with a Hipoteca Plus offer that has been a huge success. In December, when we set our mortgage origination records, around 70% of originations came from our Hipoteca Plus, which helps drive cross-selling in other products as well as build customer loyalty. Our digital onboarding platform for mortgages, Hipoteca Online, has been critical during the pandemic and also helped drive originations around 2020. 70% of mortgages were processed through this digital process. Like mortgages, our auto loan origination reached a historically high level in December, nearly doubling auto loan production sequentially in the fourth quarter. Turning to slide nine, Growth in loyal and digital customers continues demonstrating solid progress in this key area of our strategy, with year-on-year increases of 14% and 20% respectively. As you can see on the slide, loyalty penetration continues to increase significantly. We have also focused on digital conversion while increasing digital transactions and sales. This quarter, product sales via digital channels accounted for almost 50% of total sales. a significant increase from a year-ago level. Digital monetary transactions also spiked, reaching almost one-third of our total, with mobile transactions accounting for 94% of total digital transactions versus 87% in 2019. Mobile customers also kept growing at a solid 23% annual rate, reaching 4.7 million at the end of the quarter. As shown on slide 10, Commercial loans decreased approximately 7% year-on-year and 9% respectively, and some corporates and the middle market firms continued to prepay some lines they tapped in the first quarter of 2020. Loans to government and financial entities also contracted, mostly driven by prepayments from PEMEX and CFE. Middle market companies continued showing a year-on-year expansion, although the segment declined sequentially. SME loans registered a six-sequential quarterly contraction, as this segment was weakening even before the pandemic. Putting this in perspective, our standing loans to SMEs is similar to our third quarter in 2016. The downward trend in this and other segments is also related to a reduced risk appetite in the current economic environment, particularly on SMEs, which are higher risk when the economies are weak. Comps will be difficult in the first quarter of 21, given the precautionary lines of credit that companies drew at the start of the pandemic. Moving on to total deposits on slide 11, this increased 10% year-on-year, while we saw a slight contraction sequentially. As in previous quarter, there was a shift between demand and time deposits due to lower interest rates that favored the former. Deposit growth for individuals stands out at 24% year-on-year, supported by our promotion campaigns to attract these types of deposits. Although this effort, we have been able to reduce the cost of our demand deposits by 110 basis points year-on-year, better than the market has decreased. Although we are satisfied with this result, we continue working to reduce our cost level further as we make additional headway improving our deposit mix while lowering the cost of our commercial deposits. With term deposits, there is also some room to improve our funding costs under the same strategy. I would like to conclude by highlighting that we finished the year better than we have expected due to our swift response to the negative market conditions, and although many challenges remain, we are well positioned with very strong capital and liquidity levels. Now let me pass the call over to Didier, who will review the quarter's most important trends and metrics. Thank you.