Banco Santander Mexico, S.A.

Good day, everyone, and welcome to Banco Santander Mexico's second quarter 2022 earnings conference call. Today's call is being recorded. Following the speaker's prepared remarks, there will be a question and answer session. I now would like to turn the conference over to Mr. Hector Chavez, Managing Director and Head of Investor Relations, who will make some opening remarks and introduce today's other speakers. Please go ahead.

Thank you, Operator. Good day and welcome to our second quarter 2022 earnings conference call. We appreciate everyone's participation today. By now, you should have access to our earnings press release and the presentation for today's call, both of which were distributed yesterday after the markets closed and can be found on our investor relations website. Presenting on today's call will be Felipe Garcia, our recently appointed CEO of Banco Santander Mexico, and Didier Mena, Vice President of Administration and Demands. Before we begin our formal remarks, I would like you to mention that last week, the Board of Directors approved to name Felipe Garcia Asensio as our new CEO of Bank Santander Mexico, starting January 2023. Felipe brings more than 25 years of banking experience, having held leadership positions in Credit Suisse and Goldman Sachs. Felipe serves as head of SEIB here at the bank. And allow me to also 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 the COVID-19 pandemic, that could cause actual results to materially differ, including factors that could be beyond the company's control. For an explanation of these risks, please refer to our filings with the SEC and the Mexican Stock Exchange. Felipe, please go ahead.

Thanks a lot, Hector. Good morning, everyone. It is an honor to have the opportunity to talk with you all. First of all, I want to thank Hector Grissi, José Antonio Álvarez, Ana Botín, and the Board in Mexico for this amazing opportunity. I'm honored and committed to continue with the outstanding job that Hector and the team have made during the past few years. Today, Santander, Mexico is a much stronger bank than the one that it was before we started our transformation plan back in 2016. We have increased by almost 50% the number of our total customers, while active customers have grown more than 25%. Digitalization has been key during these years. Digital customers have grown more than four times, while penetration of digital to active customers more than tripled. We have been able to grow organically our loan portfolio at solid and healthy rates. In fact, during this quarter, we had the lowest cost of risk in the history of the bank. We have improved our exposure to individuals in both loans and deposits, closing the gap versus our main peers. We started two businesses that did not exist a couple of years ago. Those are our out-of-loan businesses and our financial inclusion program. All these efforts have allowed us to have an ROE above 20% when adjusting for capital excess. This ROE is the highest since 2015. In terms of cultural transformation, we have improved gender diversity within the organization but mainly among our board members. It is going to be my responsibility to continue with this excellent result, to position Santander Mexico at the forefront in customer proximity, innovation in our product, solidity, and of course, in very important aspects such as sustainable banking and our accredited task as responsible banking. It is going to be a pleasure to share with you the progress made every quarter. Now, I will turn the presentation on to Didier, who will go over the results of this quarter. Javier, please go ahead.

Thank you, Felipe. Good morning, everyone, and good afternoon to those of you participating from Europe. In the second quarter, we maintained very strong momentum in our core businesses, gaining market share in both individual and commercial loans, together with strong origination rates. Further, we are now in a healthier operating environment, as reflected in our solid growth in consumer products, helping us expand our loan portfolio without compromising asset quality. Total loans grew 10.3% year-on-year, with strong performance across our entire portfolio. In individual loans, we continue outpacing the market, supported by sustained market share, gains in mortgages, auto loans, and credit cards. The renewed growth in credit cards was due to the continued market acceptance and solid performance of our latest credit cards like you. The growth of these unique products speaks for itself as well as also due to the promotional efforts we have been making within our commercial network, as well as other campaigns to keep positioning it effectively among our clients. Additionally, in our loans, we are now the number three player in the market, reaching 14.2%, converting to our market share in loans to individuals of 14.9% as of May 2022. Our strengths include in this business is thanks to our attractive commercial offering and the various alliances we have with leading automakers. Taking together, June was our eighth consecutive month gaining market share across our portfolio, the sixth consecutive month increasing market share in both individual and commercial loans, and the 26th consecutive month gaining market share in loans to individuals. In deposits, we continue growing them at a solid pace while carefully managing funding costs by improving our deposit mix. It is also worth noting that the contribution of individuals has increased considerably in both categories of deposits. Putting things in perspective, in the first quarter of 2016, deposits from individuals contributed only 24% of total deposits, while they currently contribute 37%. As a result, we have reduced the gap in the cost of funding versus our main competitors. Also, in today's high rate environment, term deposits continue increasing among both individuals and commercial clients, up 4.5% and 10.2% year on year, respectively. Regarding asset quality, our portfolio remains healthy despite our increased risk appetite in certain business lines. This is due to our outstanding risk management resulting in improvements in both the cost of risk down 69 basis points year-on-year and our NPL ratio down 23 basis points year-on-year. In fact, the 2.06% cost of risk of this quarter is the lowest level in the history of the bank. In terms of profitability, our ROE shows strong performance, being the highest ROE of the past 12 quarters, benefiting from the strategies we have implemented to raise loan volumes, mainly in the individual portfolio, and from normalized provisions and more normalized capital levels. Going forward, we expect profitability to continue expanding. Also, during the quarter, we maintain a strong balance sheet as reflected in our solid capital ratio and liquidity position. The charts on slide four show a still challenging outlook for Mexico's economy. GDP remains below its pre-pandemic level with a slow recovery on the way this year. Regarding inflation, the market expects it to remain temporarily high above Bank of Mexico's target range. However, a gradual decrease is forecasted toward the end of the year, reaching 7.6% by year end. Consequently, there has been a tightening of monetary policy in response to rising inflation. Under these conditions, the market expects additional rate hikes in 2022, reaching 9.5% by year end. According to the Mexican Institute of Social Security, more than 448,000 new jobs were registered during the first semester of the year, of which 80% were permanent jobs. Macro indicators have also shown better performance. In fact, private consumption is now higher than before the pandemic. By contrast, investments and industrial activity have been lagging due to lower confidence levels within the business sector. Although the operating environment is still marked by complexity and uncertainty, we're well positioned to continue contributing toward Mexico's economic growth, supporting both our individual customers, whose loan demand has been solid, and our corporate clients, whose loan demand is strengthening. On slide five, you can see that system loan volumes in May continue to improve, increasing more than 9% year-over-year, the highest growth rate since March 2020. This growth was mainly driven by improvements in consumer loans, which increased low double digits, partially offset by corporate demand levels, which are still soft. System deposits continue their strong rebound, growing more than 10% year-over-year, with demand deposits increasing close to 11%. Please turn to slide six, where I would like to give you an update on our strategic and growth initiatives. Our strategic priority is to provide the best customer experience in Mexico's financial services sector with the aim of becoming a more customer-centric bank. To accomplish this, we continue leveraging the latest digital tools and accelerating our technological transformation to simplify processes and operations in order to transform our service model. At the same time, we continue positioning the bank as a market leader in value-added products that attract and retain clients to improve our balance sheet. With that in mind, I would like to point out some important milestones we achieved during the first half of this year. In our loans, we continue to rapidly expand our business, gaining 562 basis points during the last 12 months and achieving the 14.2% market share that I highlighted earlier. This means we're close to achieve our goal to reach the market share that we have in loans to individuals, which stands at 14.9%. Again, this has moved us into the number three position in the market. And while we're proud of this significant accomplishment, we'll be looking to keep moving up soon. In addition to our alliances with leading automakers in Mexico, our growth and market share gains were driven by our SuperAuto Santander platform, which integrates commercial and insurance offerings in a single place. Digitalization of our products and services remains a top priority, which is why we continue investing in technology, Even though we have made significant progress in transforming the banks since 2016, we're still far from where we want to be. We want to know our clients better, creating profiles based on their behaviors and relying on that data analytics to offer tailored solutions and maintain the best service model. Our digital evolution includes collaborating with fintechs and other tech companies to introduce faster and more convenient digital tools and functionalities. Advancing on this front is very important for us, with digital sales now representing 61% of total sales, up from 50% a year ago. We also had 5.7 million digital clients as of June, increasing 12% year on year. And our loyal customers are now over $4.1 million, an increase of more than 10% year-on-year. In mortgages, our strong performance reflects the success of our Hypotheca Plus and Hypotheca Free products, as well as our Hypotheca online platform, a complete 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 addition, as we expand the range of products with our latest mortgage product called Hipoteca Integral, we're now reaching a segment of the population that was underserved. This new mortgage product recognizes the total income of families, both fixed and variable. Hipoteca Integral offers an interest rate of 11.5%, as well as property insurance, which covers the total value of the property of our customers, and unemployment insurance for up to nine months. With the launch of this new and attractive offer, we're confident that we will keep gaining market share in this sector. In fact, as of May, we closed the gap with the second player in the market from 159 basis points a year ago to 55 basis points. Ten months ago, we launched Like You. Since its launch, we have issued over 635,000 Like You cards, exceeding our own expectations. Currently, 95% of Like You cardholders have activated their card. So far, we're pleased with the results and the market's strong acceptance of our innovative credit card. Given the product's success, in late September, we will launch an aggressive campaign to tap into the open market with the aim of maintaining the solid growth in this business segment and to offer our Like You credit card to every Mexican. So stay tuned. In addition, to help support inclusive growth through financial empowerment and education that increase financial inclusion, we offer financial products and services to more than 343,000 low-income customers through Tuyo. We have grown our clients by 52% year on year. In addition, these customers have access to an online savings account opened remotely by agents, offering users both mobile and online banking tools. We also offer medical support services, and I'm glad to share that 21% of our clients went to a gynecologist for the first time ever, helping contribute to a culture of prevention and facilitating customer access to specialist doctors, dentists, and laboratories. As another reference to the positive social impact that TUI has, I would like to point out that thanks to these loans, 87% of these clients experience improvement in their lives in personal and economic terms. Of note, 55% have increased the number of employees in their businesses, and 76% of our clients that are women now make spending decisions at home since they have a credit with Tuyo, empowering them. Santander is a leader in microfinance in Latin America. We help more than a million entrepreneurs each year to establish or grow their businesses through the Tuyo and Prospera programs. This is why Euromoney named Santander the best bank in the world for financial inclusion for the second consecutive year. Turning to slide seven, our total loans increased more than 10% year-on-year, outpacing the system and posting a sequential increase of almost 2%, highlighting our solid performance in individual loans. On the commercial front, loan demand is also improving in mid-market companies, increasing by low double digits, together with loans to corporate, government, and financial entities, with this segment growing in the high single digits year-on-year. All in all, respect to continue seeing an upturn in higher-yielding segments.

Thank you.

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Go ahead. Sorry. So, all in all, we expect to continue seeing an upturn in higher yielding segments, which coupled with higher interest rates should support margin expansion, but also maintaining sound and sustainable asset quality. On slide eight, you can see that individual loans are growing close to 13% year-on-year, the highest growth level since February 2016. Our mortgage portfolio continues expanding at a solid pace of 11% year-on-year and 15% year-on-year organically. During the quarter, more than 50% of originations came from our Hypotheca Plus product, which also helps drive cross-selling of other products and build customer loyalty as well. In addition, through Hipoteca Online, we have been able to process 96% of our mortgages completely digitally, resulting in a much better customer experience, reducing response times, and simplifying processes as I noted before. At the same time, credit cards are expanding a solid 13% year-on-year and 6% quarter-over-quarter. This encouraging performance is driven by our latest credit card launch, Like You. Currently, 12% of total billing comes from our Like You credit cards. It is also worth pointing out that May was our best month during the quarter in terms of billing, thanks to the hot sale in Mexico increasing 18% month over month and 15% year on year. For our new payment and credit card value offering, we are confident we will acquire a significant number of new Like You users within our customer base. Launching this credit card in the open market by the second half of the year will enable us to keep growing steadily and organically in the business line and do so without compromising proven risk management. In the same vein, within consumer products, auto loans continue showing strong growth. Since March, we positioned ourselves as the top three competitor in the market, starting from scratch just four years ago. Today, the balance of our auto business is 21.5 billion pesos. Also, with the aim of increasing our market position in the auto market and expanding the business further, we are now very active in the used car segment, given the recovery of domestic sales of new cars is estimated until 2024. For this reason, in recent years, banks have accelerated financing in the used cars segment. As of today, the used cars portfolio represents 5% of our total auto portfolio, and we're targeting a 20% level in the medium to long term. Payroll loans also delivered solid performance, increasing close to 12% year-on-year and 5% sequentially, offsetting the 4% year-on-year contraction in personal loans. That said, personal loans are starting to show positive performance, increasing 5% quarter-over-quarter. Turning to slide 9, solid expansion of loyal and digital customers continued, achieving double-digit growth year-on-year of 10% and 12%, respectively. In this highly competitive environment, we continue advancing our digital transformation. We are reinforcing digital communication through campaigns and tutorials with the goal of further expanding digital customers and promoting our digital channels. The ratio of loyal customers also continues to grow. with these clients now representing 43% of active clients compared with 40% in the same quarter of last year. Evolution of this ratio has been positive throughout the last five plus years. In 2016, the ratio stood at around 24%. This clearly reflects consistent improvement across our products and services as willing to be top of mind among our clients. During the quarter, product sales via digital channels accounted for 61% of total sales, a substantial increase compared to 50% a year ago. Digital monetary transactions also maintain an upward trend, reaching 47% of our total, with mobile transactions accounting for 97% of total digital transactions, up slightly from 96% a year ago. In addition, mobile clients grew 13% over the past year to over 5.5 million, driven by our promotional campaigns and the incentives we offer through digital channels. As we show on slide 10, commercial loans increased 8.5% year-on-year, driven by a double-digit pickup in mid-market loans, which grew 12.6% year-on-year, and a high single-digit growth in corporates, which increased 9.1% year-on-year. Note that these types of businesses are being more active with low-in-demand versus last year, but that's slowing their pace versus the first quarter of the year. given the complex economic environment we're facing. Loans to government and financial entities had a 6.8% year-on-year increase, but a soft contraction of 0.5% on a sequential basis. SME loans remain affected by current weak economic conditions and low credit demand, decreasing 4% year-on-year and 3% on a sequential basis. However, it is worth mentioning that this is the slowest contraction of the past nine quarters. Moving on to funding on slide 11, total deposits increased 3. Unlike previous quarters, deposits were driven by term deposits increasing 7.9% year-on-year due to the higher interest rate environment. In the same way, demand deposits are starting to slow their pace, increasing 1.4% year-on-year mainly due to a 2.2% drop in corporate deposits as we continue foregoing certain expensive corporate deposits in order to lower the cost of our deposits. Demand deposits from individuals increased 8.6% year-on-year, supported by our promotional campaigns. As a result, we have been able to show greater resilience to the rate hikes, increasing our cost of deposits by only five basis points year-over-year, while the market increased our basis points. We also continue working to reduce our funding costs further we make additional headway toward improving our deposit mix, one that prioritizes individual deposits. As a result of this strategy, our total deposits from individuals have increased considerably during the last five years, both demand and term deposits. They stand at 36% and 40% respectively, together make up 37% of the contribution made by individuals to our total deposit rate. Turning to slide 12. We still maintain very strong capital and liquidity positions. Our liquidity coverage ratio stands at 181.7%, representing a substantial buffer and still far above the regulatory threshold. Our core equity tier one ratio and capitalization ratio as of June are 13.84% and 19.28% respectively. significantly above the minimum requirement established for systemically important financial institutions like ours. In addition, it is worth to mention that on June 28th, we made a dividend payment of 9 billion pesos, and yesterday we also made a second dividend payment of 8.8 billion pesos. With this, we have exhausted the capacity to keep paying dividends given the new restriction defined by the regulator for this year. We also maintain a sound funding position with a net loss to deposit ratio of 96.2% for the quarter. Liquidity management is one of the core components of our operations as a retail bank. On top of 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 the growth of our business growth in an efficient and profitable way. On July 14th, we issued a four-year floating senior-owned secure bond for 5 billion pesos in the domestic capital market. This represented our third issuance of the year and our first using a new reference rate benchmark for coupon calculation. We are one of the principal issuers in the domestic market, reaching a broad base of investors that have set their confidence in our management and business prospects. As you can see on slide 13, our net interest income had a solid increase of 9.6% year-on-year and 5.2% quarter-on-quarter, mainly driven by both higher return volumes in loans and deposits, as well as higher interest rates. As a result, our net interest margin expanded 18 basis points year-on-year to 4.70% for the quarter. Please turn to slide 14. Net commissions and fees had a strong increase of 8.3% on both a year-on-year and sequential basis. Our solid performance was mainly driven by credit cards, which increased 17.2% year-on-year due to the hot sale in May and the excellent performance of our Like You credit card. Growth was also driven by a 14% increase in insurance fees. Going forward, we expect the good performance in credit card fees to be sustained, as our ambitions for the Like You credit card are to continue increasing average monthly billings while achieving a better composition of fees. Turning to slide 15, gross operating income increased 10.1% year-on-year due to growth in net interest income. This growth was driven by the performance of both our individual loans and deposits, interest rate increases, the good fee performance in credit cards and insurance, and a solid trading income result that was above our historical average. Moving on to asset quality on slide 16, our MPL ratio improved 31 basis points year-on-year and 23 basis points sequentially, driven mainly by a good performance in our commercial portfolio, especially in SMEs, as well as in our mortgage book. Provisions in the quarter declined 26.3% sequentially and 43.6% year-on-year, mainly driven by the additional provisions that we booked in the second quarter of 2021 to address market and credit conditions related to the pandemic. The decrease in provisions was also due to better than expected performance in our retail portfolio. Going forward, we expect to maintain provisions that are more similar to pre-pandemic levels, even though we're increasing our risk levels in credit cards and consumer loans. Our loan portfolios continues to perform well in terms of cost of risk, which stood at 2.06%, a 69 basis point year-on-year decrease and down 35 basis points sequentially. Looking ahead, we do not see any deterioration in risk levels that would impact any of our loan portfolio segments, so cost of risk should remain around 2%. Turning to costs on slide 17, administrative and promotional expenses increased 1.7% year-on-year and 12.4% when excluding the EPAP reclassification. On a sequential basis, expenses increased 7%, mainly driven by administrative expenses, as higher inflation increased our supply costs. Our expenses also rose due to publicity related to our sponsorship of Formula One and to the resumption of employee travel. Given our solid revenue growth and strict cost controls, we managed to improve our efficiency ratio by 63 basis points year over year, to 46.7% at the end of the quarter, and we accomplished this despite inflationary pressures. We feel confident about the dynamics of the business and our disciplined cost control. However, we expect costs to increase around 7% by year-end, slightly below inflation, as we continue investing in strengthening our digital capabilities with inflation pressure persisting. Turning to profitability on slide 18, Net income increased 46.4% year-on-year to 6.9 billion pesos, mainly due to the solid increase in net interest income and fees, along with the lower provisions. Profit before taxes was up 50.4% year-on-year for the quarter and 31.6% sequentially, reflecting the strong performance of our core business. Return on average equity was 16.9%, 510 basis points higher than the year-ago level, and the highest in the last 12 quarters. Also adjusting for the excess capital, we would reach an ROE slightly above 20%, and this is the highest since Hector Ruiz became CEO of Santander, Mexico. On the other hand, the effective tax rate stands at 22.8%, 212 basis points higher than a year ago. We anticipate lying between 23 and 24 percent by the year end, based on the still high 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 new adjustments to our full-year performance outlook. Given that expectations for economic growth have deteriorated significantly, and with the goal of maintaining healthy asset qualities through prudent originations, We're adjusting our growth for the loan portfolio to a range of 7 to 9 percent. In terms of asset quality, considering the excellent results we have achieved to date, we're adjusting the cost of risk from a 2.6 to 2.8 range to below 2.4 percent, which is a very positive sign considering the challenging environment we have been operating during this year. On expenses, due to persistently high inflation, We now expect expenses to increase between 6% and 8%. As for the tax rate, we're expecting it to lie between 23% and 24%, which is a bit better than the previous range, considering the high inflation rate expected for 2022, as I noted before. Lastly, we now forecast net income to grow north of 30%, given these adjustments and consistent with our ongoing efforts to keep delivering strong results. In summary, We continue successfully advancing our strategic priorities, strengthening our position in value-added products while developing and implementing new growth initiatives. We're currently developing a more robust product offering and servicing model for mass market clients. Further, we have made additional progress to our goal of being a customer-focused bank as we continue to work on simplifying processes and operations in order to transform and enhance our service models. Our ambition to become the bank known for superior customer experience in Mexico remains. This concludes our remarks. We're now ready to take your questions. Operator, please open the call for the Q&A session.

Thank you. We will now be conducting a question and answer session. 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 question queue. You may press star 2 if you would like to remove your question from the queue. You may ask two questions and may re-queue for a follow-up. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star key. Our first question comes from the line of Jason Mullins with Scotiabank.

Hello. Thanks for the opportunity to ask questions. My first question is on the announcement that Santander is no longer going to participate in the sale of the Citibat Amex franchise, if you can provide some color on what drove that decision. And the second question would just be on the competitive environment. How relevant do you consider the impact of new entrants, fintechs and what your incumbent competitors are doing? Maybe some color on the credit card business would be helpful. And then lastly, if you can provide an update on Santander's plan to bring the digital bank, open bank, to Mexico. Thank you.

Hey, Jason. Regarding the announcement made by the parent company a few days ago, we understand that the parent company submitted a non-banking offer, and the a city group decided not to give Santander the opportunity to continue participating in the process. So that was disclosed. As we have mentioned several times, and you might probably recall this, our strategy is not dependent on making acquisitions. We are very disciplined in terms of both strategic and financial impact of any inorganic growth opportunity and this continues to be the case. So I think that as our global CEO made reference to in the conference call with investors yesterday, there might be an opportunity to gain market share while another competitor completes the acquisition Okay, so that's on your first question. On your second question, you know, we have continuously provided an update on how we see fintechs competing in the Mexican market. So far, we still don't see a significant impact. You know, we mentioned last quarter's call that we saw last year an impressive capital raising activity by fintechs in Mexico last year, close to $2.8 billion, equivalent to the shareholders' equity of the 27 small businesses. banks in the system. So that's quite material. But as you probably noticed, the market has been quite severely impacted in terms of additional capital raisings in these types of businesses. So significant capital raisings have decreased. So we think that this will provide an opportunity for us to consolidate the market or to partner up with those businesses that might be in a weak position in terms of continuing financing growth. You asked specifically for credit cards, and we have seen some competitors fintechs entering this market quite aggressive in some cases. And I think that we will wait and see to check the results that they have in terms of asset quality. That would be my main concern so far. I think it's obviously noting that they have made significant progress in reducing certain pain points that our customers have. I think it's quite easy to originate loans. It's not that easy to collect loans, okay? And we have seen several examples over the last two to three decades in Mexico, and none of those prior attempts have been successful with scale and with... strong asset quality. Okay. So we will remain expectant to see, you know, how these new commerce perform, you know, those that have gained certain scale and obviously the, the market environment is, is complicated. So we'll wait and see, uh, regarding, uh, open bank, we continue to work on, on those plans. And, uh, the previously, uh, noted, We think that we're going to be ready next year for launching the open bank services for the Mexican market.

Thank you, Didier. Congratulations on the good quarter and particularly on the improved guidance for net income.

Next question, Ernesto Gavriloni, Bank of America.

Hi, good morning, Viviel and Hector. Congrats on your quality results. I have a couple of questions on my side. The first one is another follow-up on Citi Dynamics. What do you think were the aspects or the challenges that make something there not to go further? I don't know whether it's something related to Dynamics technology or the government's announcing that massive fires will not be allowed. Anything on that would be helpful. And then on my second question is on a potential delisting of Santander. Considering that the flow is less than 4%, and again, you are no longer in the binding process for Banamex, wouldn't be the natural step to request for a mandatory offering? And what do you think are the advantages or the disadvantages to maintain leads to the company with a float of less than 4%. Thank you.

Thank you, Ernesto. Regarding your first question, as mentioned earlier, it was Citigroup the one that decided not for us to continue the process. So, you know, I have nothing more to add on that regard. Regarding the, you know, the listing, I think that the group hasn't made a decision whether to complete the listing. Probably it's something that makes sense given the interest that the group has manifested in two prior tender offers. But I think that there hasn't been made a final decision on that. If there's any update on that, we'll definitely share it with the market, okay?

Okay, thank you. Let me have another question related to Longwood. We want to hear your expectations considering the higher rates and now the probability of having an economic recession in Mexico next year. How should we think about the long road? We have seen this quarter, lots of double digits. So considering next year, should we think and should we normalize into a single digit growth? We'd like to hear your first impressions. And also related to this, can you remind us what is your direct and indirect exposure to the U.S. economy?

Sorry, I couldn't hear your last question. What's our exposure to what, sorry?

To the U.S. economy, directly and indirectly.

Okay, well, regarding the impact that the current environment could have and potential economic recession, I think that what we have analyzed so far is is a slower growth rather than a recession. But, you know, it's probably worth noting that, you know, over the last few months, there's been consistently revisions, downward revisions of economic growth. We're monitoring closely what's happening in the U.S., and obviously there's a very close link between Mexican GDP growth and the U.S. GDP growth. So if the U.S. end up in a recession, I think that the likelihood that Mexico will follow is high. But so far, we are not seeing, we're not expecting that, but that could be a possibility. I don't know, Hector Chavez, if you have the numbers with you in terms of exposure that we have in terms of our corporate loan book associated with businesses that have direct exposure to the U.S. economy?

No, I don't have them available, but I just wanted to remind Ernesto that all of our loan book is focused on Mexico as a region. We don't have cross-border in our books. And the Mexican economy is 35% of GDP are exports. So there is a close link to export interest companies. And it's not easy to calculate the indirect effect. You have to do it by certain sectors. So we can discuss that, but the numbers are not that easy to pinpoint.

And just to complement Ernesto, just a rough number of the exposure, because as Hector mentioned, it's not that easy to see a direct exposure. I would say that the exposure that we have right now is around 5%, which is below the market system. That is around 6.5%. But again, it's not an exactly direct exposure.

Okay, no, understood. Thank you very much. Just a last question. We saw in the media that San Antonio, Mexico has exposure to Crédito Real. So I don't know anything that you can give us some color on that.

The exposure that we have to Crédito Real is non-material. It's less than 10 basis points of our total loan portfolio. And we have made the provisions for that that it's getting close to 80% of provisions for the exposure that we have. So it's actually not material, okay?

Okay, perfect. Thank you very much, and again, congrats on your results and your new guidance.

Thank you, Ernesto.

Next question, Jorge Curie with Morgan Stanley.

Hi. Good morning, everyone. Just wanted to start by congratulating Hector Grissi for his appointment in Spain. All the best of luck, Hector. And congratulating also Felipe and Hector and Didier, sorry, for their new roles in Mexico. Also wish you the best of luck. Most of my questions have been answered. I just wanted to add something. I wanted to ask you something a bit technical, which is when you put in your bid for, was the information that you were not going to be allowed to fire people, according to the commentary that AMLO made recently in the press, was that already known at the time of the bid? And to what extent the bid included the ability to fire people, and was there an opportunity for you to change your bid after that information came out? Thank you.

Hi, Jorge. It's great talking to you. Long time no speak. Thank you very much. You know, pass your message to Hector. You know, I think that since the beginning of the process, the government and the president particularly has been, you know, sending certain messages about his desire about, you know, what the value of Silicon America's could look like, okay? Obviously, those things are important to consider, but I wouldn't say that those were a hard stop restrictions in terms of how we put or the group put together an offer, okay? So, and I think that the president has also stated that this is a transaction that is between you know private parties and that he's just expressing his willingness so clearly you know he has manifested that he would like you know the new owner not to fire individuals but I think that that's up for the buyer to decide whether it makes sense or not to run some efficiencies you know So, all in all, I would say that the comments made by the president and the government, you know, we heard them. I don't think that they were critical in how the group put together a proposal for CIDI Banamex. Okay?

Great, Didier. Thanks for the color. And again, congrats to everyone on their new roles.

Thank you very much, Jorge.

Good to hear from you.

Next question, Tito Labarta with Goldman Sachs.

Hi, good morning. Thank you for the call and taking my questions. Two questions. First on your dividend, Didier, you mentioned that you paid another $8.8 billion, I think, yesterday. In the past, you've mentioned that you would pay up to, I think it was 11% court tier one. So if I estimate correctly, you still have, you know, 12, 13 billion in excess capital. I think you said you also exhausted your dividends for this year. So should we expect that, you know, roughly 13 billion in excess capital to be paid out next year? Any color you can provide? Yeah. and the cost of risk, as you mentioned, the guidance to be below 2.4%, and that you should normalize the pre-pandemic levels. But do you expect to normalize next quarter? I mean, that would imply a big increase in provisions, or can you give some color on how long that normalization would take, given that asset quality seems to be holding up fairly well, and any color on when MPLs can begin to increase? Thank you.

Okay. Hi, Tito. Regarding your first question on dividends, you may recall that the new guidelines that the CNBB provided for this year take into account the sensitivities that each bank provided at the beginning of the year in terms of the impact that has in your capital ratios certain stress scenarios, okay? So it's not a sensitivity just for one year, but takes into account how the bank might look like during the following years, and also how each bank would need to comply with ILAC, okay? So your dividend payment shouldn't compromise, obviously, your regulatory capital requirements, but also the fact that for those systemic banks that have T-LAC requirements, that you comply with the phase-in as provided by regulation. So in our case, what we submitted at the beginning of the year was basically 17.9 billion pesos. That's what we could pay this year and not compromise under a stress case scenario, our capacity to be above minimum regulatory capital ratios and to have certain buffer, and also not compromising our DLAC compliance, okay? What we are starting to consider is you know, by the beginning of next year, we'll have to provide this new version of these sensitivities for stress cases. And we will discuss that with the regulator during the following months, you know, fairly in advance to the deadline that is due on January of next year, so that we have a better understanding in terms of whether that will continue to be the restriction that they will impose or if they will just move for a more simplistic way of looking at it in terms of excess capital with the capital ratios that we currently have. But you're right in the sense that we continue to have excess capital you know, taking into account the capital the dividend paid yesterday, it's more close to 10.5 billion pesos, okay? The excess capital relative to a core-to-income ratio that give us, I would say, you know, quite a good comfort in, you know, for us in Mexico, okay? So that's on dividends. I would say that probably during the next quarterly call, we might provide you an update if we have already met with the CMDB and discussed the plans that we have for the following years. So to give you a better understanding of the timing and magnitude of dividend payments, okay? And regarding as a quality, you know, as noted during our remarks. You know, we have been positively surprised by the performance of our, I would say, the pre-care portfolio, you know, as we have seen. you know, our loan growth has been quite robust over the last quarters. And, you know, credit card performance, also mortgages as a quality has been, you know, quite strong. And, you know, you're right in the sense of, you know, we don't expect the cost of risk to jump to pre-pandemic levels the next quarter, but still, remain fairly close to what we are standing right now, but trending up given the change in the loan portfolio that we're witnessing with higher growth in loans to individuals, okay?

Great. Thank you, Didier. That's helpful. If I can just one follow-up on the dividend. Is there a quarter one ratio that we should consider as your minimum? I think in the past you had mentioned 11, but given some of the changes, I'm not sure if that's still the right one. And just to confirm, there will be no more dividends this year. That's correct, right?

Yes, you know, there will be no more dividends this year. You know, the recommendation made by the CMDB, you know, the one, the restriction is, is what you or what each bank consider in these sensitivity exercises, and we have exhausted that, okay? And the core tier one ratio that we have related to in the past is 11.3%. That's where we think we would feel very comfortable.

Okay, perfect. Thank you, Didier, and also congratulations to you and Felipe on your new role.

Thank you, Tito.

Next question, Alonso Garcia with Credit Suisse.

Good morning, everyone. Thank you for taking my question. My first question is on long-growth. I mean, the revision to long-growth guidance was just a slight reduction to a 7% to 9% range, but still it sort of implies a slightly softer second half of the year. So I just wanted to check the rationale for that reduction if it's mainly given that you see a cool-down in demand in the second half, or if it's coming more from the supply side, if you are getting a bit more restrictive or conservative, given the challenging macro outlook ahead. My second question is on the NII. You had a nice performance this quarter, up 5%. I just wanted to check on the outlook for NAI growth in the coming quarters and how much you are being able and willing to pass through to clients the higher reference rates. Thank you.

Hi, Alonso. I think that both questions are related, as I will elaborate. We are starting to pass certain increases in interest rates to our customers, and particularly in mortgages. We probably have been one of the banks that has increased the most interest rates during the year. And we will continuously monitor interest rates and the market appetite to price that product in the best way, to reflect the current environment and also to reflect where we think interest rates will end up in the near term. Mortgages, if you look at year-on-year growth, has contributed close to 27% of our total loan growth. And we think that with interest rates that we have increased and we have passed to our customers, there might be the case that there could be a slowdown in mortgages. And if you add to that certain reduction in loan demand because of the current market environment, I think that that's what led us to reduce our loan growth guidance for the year. I would say that those are the two key contributors. In terms of net interest income, we continue to see quite good momentum during the second half and we expect to grow, you know, a double digit for this year, okay?

Thank you. Very clear, and congratulations again to you, Juan Felipe, on your appointment.

Gracias.

Next question, Olivia Ortuzo with UBS.

Yes. Hi. Good morning, everybody. Thank you for taking my question. Actually, I have two. And the first one, it's related to the credit mix of the bank. So I just wanted to hear what could we expect for the rest of the year related to the credit mix of the bank in regards to the consumer loan, the mortgage, and the commercial portfolios. And also, if you could please remind us the sensitivity for the needs of the bank for each 100 bps hike in the monetary policy rates, I would appreciate. And then I'll go to my second question.

Hi. Regarding loan mix, You know, we have been growing quite steadily in terms of our loans to individuals. You know, you can look at it probably in a couple of ways. You know, one way is look at it in high margin segments relative to low margin segments. So in this quarter, we reached one of the highest levels contributions of high-margin segments over the last few quarters. It stands at 52.5% of our total loans. And if you look at the breakdown within those high-margin segments, and you have mid-market companies and credit cards, we expect those two to continue growing at a quite strong pace. In the low-margin segments, you have their mortgages. And as mentioned, we think that there could be a slight slowdown in that regard. So we think that high margin segments could continue growing contribution, probably north of 53%. And if you look at loans to individuals, it's slightly above 42%, 43%. That has continued increasing and we would expect that to either remain stable or gain slightly because of the combination of potential slowdown in mortgage loan growth. But we, you know, that might be compensated by strong performance that we're having in credit cards, okay? But, you know, when you look at it, Over the last few years, loans to individuals have continued to increase their share in our total loan portfolio. Having said that, we think that there's still potential to have more exposure to individuals. That's one of the core strategies that we are pursuing. And we think there's a potential to have, I would say, probably a contribution of loans to individuals north of 45% of our loan portfolio. We're currently at 42%, okay? At some point, we were below 40% over the last few years, okay? Okay.

Still talking about this topic, I just wondered if you could please just share the sensitivity of your needs to reach a 100-billion hike in the monetary policy rate.

Yes, sorry. It's, as it is right now, it's close to 500 million pesos, you know, the impact of a parallel increase over a year of the monetary policy rate, okay? Okay.

Okay, thank you very much for this. And if I may pose my second question regarding to the long-term assumptions of the banks, I just wanted to understand what is the view of the bank for the sustainable ROE of the banks? And if you could add what is the assumption that you guys are using for the cost of equity for the bank today, I would appreciate it.

In terms of ROE, I think that we're aiming at having a bank with an ROE of 20% in the medium to long term. This quarter, we reached that if you take into account excess capital. We think that with the with a higher exposure to individuals, we think that there might be an opportunity for either ROEs at 20% or higher on a sustainable basis. But let me be very clear on that. We are not there yet, okay? I think that we have benefited from strong NII and strong asset quality. this quarter, and I think that for having a 20% ROE on a sustainable basis, we need to continue making progress both on our gaining exposure to individuals and also continuing making progress on our digitalization efforts, okay?

Okay, thank you very much for this.

Next question, Yuri Fernandez with J.P. Morgan.

Thank you, Director Herman. Congrats on the quarter. I had the first one on the liability side on your deposits. We are seeing deposits growing slightly less than long, and you have a very good liquid if you show the ratios. LDR remains below 100%. But if you can provide some color here on your deposit funding strategy, I remember in the past you had something there plus and you have been trying to attract more retail funding. So what is the plan here? Again, I don't think it's an issue. You are calling for loan growth to decelerate a little bit, but just to understand a little bit the funding side of things. And I have a second question regarding like you. It has been great. 12% of dealings, it's a lot. But we are seeing a deceleration on new ads, right? I guess in the beginning, in the first quarter, when we launched this in September, you added about 400,000 customers in about three, four months. And now we are seeing 100,000, 150,000 net ads per quarter. So my question is, what is your view here? Do you have any number, like opening this to the open market, how this can help you Will you still target like lower income clients? What is the target here? It's like the unbanked population in the open market. Is this customers from other banks? Just some color, no unlike you, strategy because it's getting bigger and would be great. And if I may, a third and last one, just want to follow up on the listing, on the potential of the listing. I understood you have not made a decision. Santander Spain has not made a decision yet. But can you tell us the process, like if they decide to delist the company, how long does it take? What are the processes? Do they need to call the shareholders assembly, take their offer? Just a quick summary and what would be the steps there. Thank you very much.

Hi, Yuri. Regarding our deposit strategy, We continue to make emphasis, I would say, in two things, try to gather as much individuals. And I think that the contribution that the individuals have provided in terms of deposits has been quite strong over the last five years. the evolution is there. You know, probably if you look at it on a more recent basis, you know, probably BBVA has done a great job in terms of attracting a significant number of individuals. I think that their strategy in terms of utilization, making processes simpler for their clients, is paying off quite well. So we've seen a relative slowdown in our capacity to attract individuals recently and with a strong performance from BBVA. We are working, as we have stated, on simplifying things for our clients, on updating our app, and we think that with those two things, we're going to have the capacity to compete relative to BBVA and have the opportunity to convince clients that we are the best bank for them to make their deposits. The second thing that I would like to stress is the fact that we have been pursuing a strategy to let go, those deposits are more expensive. So when you look at the market share of the deposit growth that we have with the corporate deposits, that reflects that, okay? We continue to have a much larger market share in terms of deposits from corporates relative to deposits from individuals, okay? And that's why we have a higher cost of funds than our peers. And the only way to make this a consistent and sustainable strategy is to have a relevant value proposition for individuals. And I think that we have made some progress on that. And given how competitive is the Mexican market, I think that we need to continue making a significant effort for us to provide the best possible value offering for our clients. So that's on deposits. Like you, credit cards, one of the things that is quite interesting is when you break it down by age. 45% of the Like You credit cards are within 18 to 30 years old. That's where our clients are. If you compare that to the credit card portfolio excluding Like You, that's 21%. So clearly, the Like You credit card has been extremely well received by the general population in Mexico. and Mexico has a quite young population. So you could frame this as unbanked yet or not that banked. So we feel encouraged with the growth that we have experienced within our customer base. So we think that it's about time to tap into the open market and see the reaction there. We think that there's a significant potential there. So that's basically the strategy that we're following like UCAR and where the target population we're aiming at.

Regarding the potential. On the open market, what is the target there? Is it clients from other banks? Is it unbanked people? I understand the younger people focus, but is it unbanked or unbanked kind of clients? Thank you.

It's a combination of both, Judy. I think that... we will have the capacity to offer for, you know, clients that will be their first credit card or clients that have already credit cards with other banks, okay? So that's on like you. Now, on the potential, the listing process, you know, as mentioned before, group A has not made a decision yet as to when. or if this is something that they will pursue in the short term. It needs to follow a process that has to, you know, prospect needs to be put in place. There needs to be mandatory, the listing offer with, you know, obviously the insureholders assembly needs to meet. the CNBB needs to approve the documents for the transaction. And in terms of pricing, it has to be at the highest of book value for the last 5, 20 business days, the weighted average of the pricing of the stock. I think that all in all, it would probably take, in my opinion, close to 120 to 150 days to execute a transaction at the listing transaction once it is announced. Okay?

No, this is super, super helpful. I appreciate it. And again, congrats. A very good quarter for a company trading at a very discounted valuation. It seems that liquidity is the matter here, but congrats, guys. You are doing a good job. Thank you. Thank you, Yuri.

Thank you. If there are no further questions, I would like to turn the floor back to Mr. Hector Chavez for any closing comments.

Thank you, operator, and thanks, everyone, once again, for joining Santander Mexico on this call. As always, we wish to maintain an open dialogue with all of you in the financial community. So if you have any additional questions, please don't hesitate to call or email us directly. Until next meeting, please stay safe. Thank you.

This concludes today's conference call. You may disconnect your lines at this time. Thank you again for your participation.