Banco Santander Mexico, S.A.

Good morning, everybody, and welcome to Banco Santander's conference call to discuss our financial results for the first half of 2024. Just as a reminder, both the results report and presentation we will be following today are available to you on our website. I am joined here today by our CEO, Mr. Hector Grisi, and our CEO, Mr. José García Cantera. Following their presentations, we will open the floor for all and any questions you may have in the Q&A session. If you would like to ask a question, please press star five on your phone. And with this, I will hand over to Mr. Greasy. Hector, the floor is yours.

Thank you, Begoña. Good morning, everyone, and thank you for joining us. Today's presentation will follow the usual structure. First, I will talk about our H1 results in the context of our strategy. Then, Jose will then review our financial performance in greater detail. And then I will conclude with some final messages. As Virginia said, we will then open the floor for your questions. The main highlights of our results in the The first half of 2024 are the following. Q2 was another record quarter for Santander, which shows the strength of our strategy and the resilience of our business model. Profit reached 3.2 billion, that's 20% above Q2-23, even after the impact of 450 million euros of one-time charges, net of taxes and minorities. Excluding them, recurring profit was €3.7 billion in Q2. Profit in the first half reached €6.1 billion, also a record high of 16%, supported by the strong cost-on-revenue growth in all regions and global businesses. We continue to accelerate one transformation to become simpler, more automated, and more integrated. As a result, our efficiency ratio improved by 261 basis points to 41.6%, the best in 15 years. And our return on tangible equity rose 137 basis points to 15.9%, or 16.3% if we analyze the impact of the temporary levy in Spain. Finally, our solid balance sheet with a sound capital ratio, solid credit quality, and a strict capital discipline helped us reach strong profitable growth and shareholder value creation with enough plus dividend per share increasing 12%. Let us stop for a moment in our income statement. As always, we present growth rates in both current and constant euros. This quarter, there were no material differences between them. Since last quarter, we have reported variation in constant euros in all countries except Argentina, which is shown in current euros to mitigate the distortions from hyperinflation. In Q2, we have taken a prudent approach again and used an inflation-adjusted exchange rate for the Argentine peso, given the significant divergence between inflation and the official effects. Although it has little impact when compared in half years, distortions are more significant when we compare with Q1. These were 210 additional Swiss dollars Mortgage provision in Poland reaching coverage of 100%. 240 million from the write-down of our mentioned platform in Germany and Superdigital in Latin America that I will explain in more detail later on. Additionally, we have positive and negative one-offs impacts in Brazil which do not affect profit and have been netted in the underlying P&L. This, as you can see, is a strong first half of the year with solid commercial and business dynamics that already puts us ahead of our plan for 2024. As a result, we have upgraded some of our targets for the year. We have increased our revenue growth target to high single digit with better NII and fee income. We have improved our efficiency ratio target to around 42% as accelerating one transformation leads to higher operational leverage. And we have raised our ROTA target to about 16% versus the previous 16%. We are also confirming the rest of our targets for the year. Cost of risk is expected to remain stable at around 1.2% on active risk management and strong labor markets. As a reference, year-to-date cost of risk was 1.17%, even with additional provisions that I just described in Poland. In capital, our CET1 ratio ended June at 12.5%, with a strong organic capital generation in line with our target to be above 12%, even after the Basel III implementation. One transformation and the operational leverage it brings are behind-the-record performance, structurally improving both revenue and cost performances. Simplifying and automating processes, plus our active spread management, have already contributed 266 basis points of efficiencies since we started. Our global businesses continue to push a group's profitability and have delivered 87 basis points in efficiency gains. Finally, our proprietary and global tech capabilities have generated 71 basis points in efficiencies so far. As we have often said, we are going back to basics, which supports value creation based on profitable growth. How? By focusing on offering customers the best products and user experience, and by obtaining the operational leverage from our global platforms and common tech. This is reflected in the performance of our global businesses. Our retail and consumer businesses efficiency ratio improved by 480 basis points and 270 basis points, respectively. In CIB, we are building a world-class business. leveraging our expertise to grow in the U.S., maintaining our risk profile. Revenue grew 6%, another record, supported by the strong performance and inclined flows in the U.S. Wealth continued its strong growth, improving efficiency and profitability, and in payments, where we managed over 100 million cards in the group, we have significantly improved profitability. As a reminder, in Q1 of last year, we had a one-time fee from a commercial agreement in Brazil. Excluding this impact, payments revenue would be 6% up and efficiency would have improved by 113 basis points, even after investing in the global platforms. In the coming five slides, I will review the advances on each of our global businesses. Let's start with retail, where we are working to become the number one bank for our customers. It is a great example of the benefits from one transformation. Innovation helps to offer the best customer experience. In Mexico, for example, our new digital processes helped onboarding time and led to a record 90,000 digital account openings just last month. A common operating model across our banks, automation and digitalization frees up time of our people to focus on commercial activities. Dedication of resources to non-commercial activities has dropped 8% versus last year. Deployment of our global platform has continued. In the U.S., it has been successfully completed. Within the group, Gravity is already operational in Spain, the U.K., Mexico, Brazil, and Chile, and it is processing a number of transactions that is around 20% higher year on year. Financially, we are extracting the potential from today's favorable conditions in our footprint as we benefit from our diversification. We carefully manage margins in the higher-for-longer rate environment in Europe and keep capturing the benefits from our negative sensitivity to rates in South America, and while we achieve strong operational leverage across the group. As a result, our profit grew 35% year-on-year, ROTE up 4%. 430 basis points to 18.1 on the back of revenue up double digit on good performance of NII and fees with all regions growing, especially Europe and South America. Cost is well under control, down 4% in real terms, reflecting the structural benefits from our transformation and provision and cost of risk fairly stable at comfortable levels. In consumer, we strive to be the partner of choice for our customers. Our best-in-class global solutions are integrated into our partners' processes. For example, last year we launched a new digital onboarding to pure direct auto players, which allows them to offer their customers the completion of their auto finance online end-to-end in very little time. We are progressing well in deposit gathering to increase NII stability and autonomous funding across the interest rate cycle. Deposits were up 14% year-on-year, supported by our digital solutions. We expect positive trends to continue, helped by the launch of our deposit gathering platforms. Deploying global platforms is key to scaling our business, reducing cost to serve, and improving profitability. In checkout lending, we recently launched installment loans with Apple in Germany through Xenia, which we are looking to spend to other European countries. had a great quarter on its operational leverage, which resulted in double-digit growth in net operating income and a 4% profit increase in H1, with number one, strong revenue, driven by positive commercial dynamics with higher volumes, mainly in Europe and Brazil, good NAI performance, and 27% fee growth from insurance. Number two, cost falling 3% in real terms on the execution of our strategy and efficiency plans executed last year. And third, higher provisions, mainly Swiss franc mortgages, and expected cost of risk normalization in Europe and the U.S. Volumes and good profitability levels of the need to pay off with several firsts. For example, we made our first corporate share buyback for a U.S. company. and we were appointed global coordinator for a US-listed IPO for the first time ever. In Mexico, we are creating a significant partnership within the Mexico-US corridor, leveraging our global markets and US-span-built-out initiatives. And these are just a few examples from a long list. As a result, Revenue in CIB in the U.S. rose 33% year-on-year. This strong growth reflects the benefits of our U.S. banking build-out initiative, which will become even more evident in the coming quarters. We continue to expand and strengthen our centers of expertise, including key industry groups such as chemicals, technology, and paper and packaging. Our CIB business is capitalized, very much linked to customers, and with fees growing at a good pace year-on-year. Our active capital management continues to support graded origination and high profitability levels. In essence, CIB has had great results, increasing revenue in H1 6% year-on-year, even after a record first half in 23, making H1 the best ever. with fees growing at double digits and the vast majority of our growth coming from customer flows. Moving on to wealth management and insurance, we continue to build the best private bank and insurance manager in Europe and the Americas. How? Number one, by improving customer relationships through the best service and right solutions, resulting in double-digit growth in private banking customers. Second, collaboration with other businesses, especially retail and CIB, which is a major driver for growth and allows us to capture network benefits. Collaboration fees increase by 12% year-on-year. Third, developing global platforms across all three businesses and digitalized distribution and advisory capabilities to improve customer experience and promote growth. A good example of this is AutoCompara, our auto insurance comparison engine that operates in six countries and which we are expanding to new segments and businesses. In summary, we're accelerating growth and maintaining high profitability. Attributable profit rose double-digit on strong private banking activity in a favorable interest rate environment, with total fees from all three businesses growing at double-digit, and costs topped slightly in real terms. Finally, efficiency improved 230 basis points year-on-year, and ROTE rose to 350 basis points to over 80%. Finally, payments, where we have unique positions on both sides of the value chain, one issuing where we manage more than 100 million cards group-wide, and second in merchant acquiring. In merchant, we are the second largest acquirer in Latin America and a market leader in Spain and Portugal, with a right balance between growth and profitability. We are gaining market share in most markets as we strengthened GetNet's customer value proposition with new global solution. An example is dynamic currency conversion in Mexico, which has helped GetNet to become second in Mexico with a 20% market share and a 47% EBITDA margin in Q2. We continue to migrate significant volumes of payments to Pagonex's global platform to leverage the group's scale. The transactions managed globally through Pagonex's payments surpassed $1 billion per year during the first half of this year, with 30% growth quarter-on-quarter. The rollout of Plard, our global cards platform, is on track. We continue to increase the number of debit cards managed in Plard at a good pace, and we're starting the migration of the debit portfolio. We plan to manage around 15 million cards through PLARD in Brazil by year-end. As I mentioned earlier, we recorded one of the charges in Pagonext from the write-down of investments. One is a discontinuation of our merchant platform in Germany we announced in June, as we are focusing on our current acquiring value proposition in our core markets, where we have a very competitive business. The other one is our decision to write down Superdigital, a natural step to promote the use of common platforms across a group and maximize operational leverage. These decisions will enable a more stable and profitable business, reducing fixed cost going forward. Excluding these impacts, underlying performance was very positive. Profit in payments was up 30% year-on-year on good revenue performance, cost falling in real terms while we invest in our common platforms, and sound credit quality in cards. Pagonex's EBITDA margin improved to 20%, one of the best among competitors. We expect the consistent execution of our strategy, efficiency, and capex optimization will continue to drive profitability in the coming quarters. Today's results show that our strategy has enabled us to deliver outstanding profitability growth in H1, with double the shareholder value creation for the fifth consecutive quarter. Rote was 16.3%, up 134 basis points year-on-year, reflecting the high levels of profitability at which we are originating new business. EPS rose to nearly 37 cents, that's around 20% year-on-year, and we delivered 12% growth in shareholder value creation. supported all by strong profit generation, a strict discipline in capital allocation, and share buybacks. We have repurchased around 11% of our outstanding shares in the last three years, returning around $6.5 billion through buybacks and providing a return on investment of 19% to our shareholders. I'll leave you now with Jose to go into our financial performance in more detail. Please, Jose.

Thank you, Hector, and good morning, everyone. Like always, I will go into a bit more momentum both in Europe and in Latin America at the same time. Revenue grew 9% with the highest NII and fee income in our history, and costs were down slightly in real terms. As a result, operating income was up 14%. Provisions increased even after including the 200 million increase in Swiss franc provisions that we took in the quarter. On the right-hand side, you can see the upward trend in profit quarter-on-quarter at 12%, which was driven by top-line growth with lower costs and provisions fairly flat, as I just mentioned. Let me now spend a couple of minutes on the reasons why we're starting to use a new inflation-adjusted exchange rate in Argentina rather than the official one. We have observed a significant divergence between the official exchange rate and inflation, and we have decided to follow a prudent accounting approach. The new exchange rate is the result of adjusting the official exchange rate with the differential between the inflation in Argentina and in the U.S. This is a... very conservative approach and a much more conservative way of recognizing the actual value in euros of our results and our investment in Argentina. And this should mitigate the volatility that the currency might experience in the future as you all remember was the case in 2023. Following these accounting rules, we have recorded the full Q1 and Q2 impacts from this adjustment in Q2, which does not significantly affect the year-on-year figures, but it has a significant impact and causes some distortions when we look at quarterly. quarter, and I will try to show these differences in the coming slides. For instance, NII is dropping, is down 4% in the quarter, but if we exclude Argentina, the group's NII would have gone up 2%. Something similar happens with fees. Instead of decreasing in the quarter or increasing 1%, they would have increased 3%, and costs would have been fairly flat. If this exchange rate does not materialize, we would revert this adjustment and account for the results that we are not recognizing today. But it looks to us that this is a prudent, more conservative way of recognizing our investment and results in Argentina. There was a strong total revenue growth driven by customer revenue again this quarter, which made up more than 95% of total revenue. This strong growth was primarily supported by retail. Retail accounts, as you know, for more than 50% of our businesses. And it's growing at double digits with very good performance in NII across regions. Some fees also growing, especially in the Americas, and also consumer growth. which is reaching good profitability levels in new businesses and a strong long growth in Europe and Latin. Corporate investment banking also had a good quarter, as revenue reached an all-time high, both in the quarter and in the first half of the year, particularly in Spain, in the U.S., and in Mexico. Also double-digit growth in wealth, as Hector mentioned, driven by solid commercial activity in private banking and in asset management. Payments also performing very well. Particularly, we exclude the one-time positive impact recorded in Brazil in the first quarter of 23 years. You remember, which we explained, and Hector just mentioned, where we had a one-off from an agreement with MasterCard. And finally, the corporate center's higher liquidity buffer remuneration was upset by higher TILA chemtrail issuances and the negative impact from FX hedging. Most of our revenue growth came from NII, which continued to increase in the quarter if we exclude Argentina, particularly driven by retail, consumer, and CIV, which represented 95% of groups NII. On the slide, you can see that we are in this small box in red, putting the figure that we would have recorded if we had used the official Argentina exchange rate. So this is important. Keep this in mind. and to show again that what we have decided to do is a prudent accounting of our profits coming from Argentina. NII rose 11% year-on-year, supported by all businesses and regions, on the back of very active price management in retail Europe, especially in deposits, also higher volumes, and the benefits of negative sensitivity to interest rates in South America, in consumer South America, in retail South America in consumer, sorry, which is now very evident in Brazil, especially in Brazil and Chile. and very good levels of activity in corporate investment banking. In terms of profitability, we have improved net interest margin year on year, explained by higher yield on assets as we continue repricing our books, but also very good management of deposit costs, which more than anything, basically outweighed the pressures that we are seeing. It's true that the margin is expanding. As you can see, if we exclude Argentina or if we had used the official exchange rate, so overall the margin management, pricing management on both the asset side and liability side is really strong. We see a slight deterioration, though, if we use our official exchange rate or our adjusted exchange rate, although it's not very significant in the quarter. Going forward, we would expect some marginal margin pressure in Europe that will be more than compensated by positive contribution from the Americas and our consumer business. In the context of low fee growth in general across the sector as a result of subdued loan demand, we generated another record quarter in fee income at 6.5 billion euros with solid growth all across the five businesses. Retail increased 3%, basically driven by Brazil, North America and Poland. Outstanding performance in consumer. on the back of very strong insurance businesses. Corporate investment banking also grew from already very high levels in the first quarter, in the first half of last year, especially in the U.S. Wealth supported by very strong private banking activity and payments that, as we mentioned, was affected by the one-time fee recorded in Brazil last year. Structural efficiency gains from our transformation program are very evident quarter after quarter. Cost income was 41.6%. The best level that we have reported for the last 15 years and one of the best in the sector is already better than the levels that we guided for 2024. Cost declined quarter on quarter. We're very flattish if we exclude Argentina after having been stable for the last three quarters, with revenue growing steadily quarter after quarter, improving and increasing operational leverage. that we obviously expect to continue to have in the second half of the year and into 2025. Average inflation continued its gradual decline, down from 12% a year ago to below 4% this quarter. In this context, cost fell 1% in real terms year on year, despite that, as you all know, we have some lagged effects from higher inflation on salaries and other costs, and our investments in transformation. By businesses, costs remain well under control in retail, consumer, and payments, which represent 80% of our cost base. And 80% of the increase, as you can see on the bottom of the chart, came from CIB, reflecting our strategy to reinforce our corporate investment banking franchise. In fact, if we exclude this investment, costs in the rest of the group would have decreased 3% in real terms. Credit quality remained very much under control, obviously supported by a stable economic environment and our active risk management all across the group. Cost of risk was 1.21%. Remember that we look at the last 12 months. If we look at the first quarter, we generated 52 basis points organically, supported by our asset rotation initiatives to compensate organic risk-weighted asset growth. We recorded 25 basis points charged for shareholder remuneration in line with our 50% payout. And finally, there was a seven basis point negative impact, mainly related to intangibles, the valuation of available for sale portfolios and others. There were not significant regulatory impacts in the quota. We continue to deploy capital to the most profitable growth opportunities and expand our asset mobilization capabilities to maximize capital productivity. Our disciplined capital allocation has resulted in a new book return on risk-weighted assets of 2.9% in the quarter, which is equivalent to a return on tangible equity of 23%, well above that of our back book at 16%. Our centralized asset management desk, which aims at optimizing capital deployment, is achieving outstanding results. In the first half, we disposed of an amount of capital equivalent of 30 billion in risk-weighted assets at a cost of capital of half of that of the new originations. In addition, the one-third of our balance sheet that matures every year is being substituted by the more profitable new businesses at this return on tangible equity of 23%. The combination of these actions explain the expanding profitability and the increasing capital ratio. Let me turn it now back to Hector for his conclusions.