Banco Santander Mexico, S.A.

Good morning, all, and welcome to the Santander Q1 2025 results call.

We entered the last year of our strategic cycle well ahead of our plan, focused on disciplining capital allocation, which is further improving our profitability to 15.8% post-81s and our C81 ratio to 12.9%, with 87% of RWA generating returns above our cost of equity. Given our solid progress building capital, our diversified earnings, and improving profitability, we reiterate our target to distribute up to $10 billion to our shareholders through share buybacks for 2025-2026, subject to regulatory approvals. Remember that we no longer set a maximum price for our buybacks, reflecting our confidence on the group's potential in terms of profitability and value creation. Q1 was another record quarter for Santander, demonstrating the strength of our strategy and the resilience of our business model. Profit reached a new record of 3.4 billion, 19% higher than Q124, with all of our businesses growing. On the back of our solid franchise of 175 million customers, that continues to grow as we improve our customer experience, leveraging our global platforms. We achieved this as we continue to invest for the future through one transformation and making excellent progress towards a simpler and more integrated model. This has helped us to improve our efficiency by around 1 point and increase our ROTE by almost 2 points to 15.8%. Our balance sheet remains solid with a strong CET1 capital ratio, which ended the quarter with another all-time high of 12.9% towards the top end of our 12 to 13 operating range. All this contributed to the strong shareholder value creation, with TINA plus dividend per share growing 14.5%, despite the depreciation of sub-currencies, Expenses grew below revenue and inflation, showcasing the positive effects from a transformation. We reiterate our target of lower costs in current euros in 2025. Third, we are once again demonstrating the sustainability of our results with 7% growth in net operating income. Fourth, our approach to risk is also evident in our robust credit quality trends with cost of risk that is consistently improving quarter after quarter. Fifth, finally, we have the impact from the different treatment of the Spanish banking tax that this year we're accruing quarterly through taxes. Even excluding this favorable impact, profit rose double digits year on year. All in all, as we have shown over time, our results are sustainable and less volatile than peers. This is because we are mainly a retail consumer bank with a business model that combines businesses and geographical diversification with a prudent approach to risk. We are ahead of our plan in executing our transformation, which continues to boost our operational leverage, structurally improving both revenue and cost performances. Simplifying and automating processes and our active spread management have already contributed 253 basis points of efficiencies since we started surpassing the levels which we expected to reach by the end of 2025. Our proprietary and global tech capabilities have generated 79 basis points in efficiencies so far. As we said last quarter, there is still more upside over the medium term for our strategy for both revenue and cost. Retail and consumers, which represent more than 70% of our revenue, have significant upside as we progress on the implementation of our common platforms. The rest of our revenue comes from wealth, CIB, and payments, which are more expertise to grow our U.S. franchise without changing the risk profile. Revenue grew 8% to another quarterly record supported by the good performance in the U.S. and client flows, demonstrating the benefits of our strategy. Wealth continues to grow strongly, improving in both efficiency and profitability, and in payments, we are seeing good activity trends as reflected in double-digit revenue growth both in PagoNext and Cards. The combination of our global businesses and our geographical diversification puts us in a unique position to face the challenges for 2025. Higher interest rates benefit some of our retail franchises, while other parts of our business, such as CIB consumer and some emerging markets, perform better with lower rates. Diversification that allows us to deliver recurrent strong results, consistent profitable growth, and value creation even under very different environments. Overall, the great start of the year, the execution of our strategy, and our diversification puts us on track to achieve our profitability targets for full year 25. In retail, which is at the heart of our banking business, we are progressing in our aim to become the number one bank for our customers. As we progress in the simplification, process automation, and customer experience, we gain their principality. Today, we have 3.5 million more active customers than a year ago. We have reduced the numbers of products by 40% in the last year and 51% since we started the process back in 23, with a special focus on the front book. As we deepen simplification, our digital sales and our cost to serve improves. Today, our digital sales are 23% higher than last year, and our cost to serve has dropped by 5%. The implementation of our global platform progresses at pace. We have completed the integration of Gravity in Chile, which improves the digital channel performance, reducing the best solutions, and increasing our cost competitive advantage across all of our footprint. First, we are verging towards global platforms. This quarter we launched Open Bank in Mexico with a full value proposition and we opened a branch in Germany. In the U.S., we have announced a multi-year partnership with Verizon offering their customers saving accounts. These initiatives are part of our focus on deposit gathering to lower funding costs, as reflected in our deposit increase of 12% year-on-year, while we continue to improve our customer experience. Second, we are working to grow and consolidate partnerships, offering global and best-in-class solutions integrated into our partners' processes. Xenia continued processing and progressing with strong partnerships. For example, we launched the Amazon co-branded cart in Austria. Finally, we are promoting the network effect, aligning the businesses with the group's operating model and becoming more agile through the simplification and automation of processes. Profit grew 6% in consumer on the back of NII growth and LLP improvements, mainly in the U.S. Growth grew in line with inflation, even after our efforts on transformation, which are supporting double-digit customer deposit growth. During the year, we expect NII to improve as interest rates continue to decline as we execute our strategy to lower funding costs and reinate at attractive profitability levels. In CIB, we are building a world-class business to better serve our corporate and institutional clients across our footprint while maintaining the same low risk profile. Number one, We're deepening our client relationships by expanding our advisory capabilities in the U.S., building on our areas of expertise to accelerate growth. CIB provides FX solutions to retail, product development, and structuring to wealth, and a full suite of products, including capital markets and advertising. advisory to commercial and auto. CIB had solid results, with revenue up 8% to a new record high, with fees growing at double digits. All of this while we maintained an efficiency ratio that is among the best in the sector and an ROT of around 22%, reflecting our focus on profitability and capital discipline. In wealth, we are building the best wealth and insurance manager in Europe and the Americas. First, in private banking, we remain focused on expanding our fee business by promoting value-added solutions, leveraging our best-in-class portfolio advisory capabilities. We have created a new global family office team, and we have expanded our ultra-high net worth business global team offering world-class specialized wealth management services. Second, in asset management, we progressed in the implementation of an advisory model for retail customers across countries, supported by a global investment platform that offers enhanced customer experience. Third, in insurance, we are developing new business lines, such as retirement, which we are offering an integrated value proposition while we span high growth verticals such as health and motor. Fourth, in collaboration with other businesses is of the essence in wealth and it is a major driver for growth. Collaboration fees increase by 10% year on year. In summary, all this supports growth and high profitability levels. Profit rose double digits on the back of strong activity and double-digit-free growth across all the three businesses. Efficiency ratio improved close to 1.5 points year-on-year, and ROTE stands at close to 70%. Finally, payments, where we have a unique position on both sides of the value chain. In merchant acquiring, we are one of the largest... In cards, where we are one of the largest issuers globally with 106 million active cards, we continue to deploy Plard, our global cloud cards platform. In Brazil, we currently... We managed more than 16 million debit cards through PLARD. In Chile, we started issuing debit cards for new customers, and in Mexico, we already authorized more than 160 million transactions per month. Payment delivered a strong quarter, with double-digit revenue growth year-on-year, both in cards and payments. AntCost is under control, which drove 30% profit growth. Finally, Pagonek's ABDA margin improved to around 29% backed by GetNet, with one of the best ratios among our competitors. We expect cost efficiency and capex optimization to continue to drive profitability in the coming quarters. Our strong operational and financial performance is improving profitability and driving double-digit value creation for the eighth consecutive quarter. ROTE post-81 was 15.8%, up close to two points year-on-year, reflecting the high levels of new business profitability. Earnings per share rose to above 21 cents, supported by a strong profit generation and a lower number of shares following the ongoing buyback programs. As a result, we continued to grow our value creation, which, in terms of TNAF plus cash DPS, increased 14.5%, reflecting our disciplined capital allocation and again the impact of our share buybacks. Buybacks remain one of the most effective ways to generate shareholder value. Since 2021, and including in full the share buyback that is currently underway, we will have bought back 14% of our outstanding shares, providing a return on investment.

We are yet again reporting record results, as our transformation continues to drive operational leverage. We had strong top-line performance with sound underlying trends, as revenue grew 5% and reached a new record high for the fourth quarter in a row, with good performance in cost towards our objective for 2025. As you can see, Argentina introduces some distortions between different lines of the P&L, which are fully compensated in total revenue. Local currency net interest income is affected by a sharp decrease in interest rates for around 600 million year on year. And in other income, there is a benefit from lower hyperinflation adjustment for a similar amount. Cost of risk. remained fairly stable in the quarter, supported by robust labor markets and prudent risk management. Last year, we charged the temporary levy on revenue earned in Spain in full in the the first quarter through other results. This year it is charged in the tax line on an accrual basis. This is the main reason that explains the significant jump in other results line. Even if we exclude this impact and calculate year-on-year growth on a like-for-like basis, profit grew to double digits, not only at the group level but also in almost all the global businesses. Finally, on the right-hand side of the slide, you can see the upward trend in profit, which grew 4% this quarter on the back of positive customer activity, lower cost, and better provisions. Please also remember that the last quarter we had the full positive impact from the FX account of the Argentine peso. This also produces some distortions quarter on quarter that I will comment on during the presentation only where relevant. Total revenue increased 5%, which puts us on track to meet the target for the year we provided last quarter. This was underpinned by growth in customer activity across businesses and reflects the benefits of our model. All of our global business interest income growth, mainly in the U.S., Groups net interest income increased 4% year-on-year, excluding Argentina, even in a less favorable interest rate environment. More than 80% of groups net interest income comes from retail and consumer businesses. And the positive evolution was supported by our active assets and liability pricing management in retail, most evident in the UK and Mexico, and consumer. both in Europe and in the U.S. It was also supported by continued profitable growth across most businesses and countries, mainly consumer, and finally also by our focus on adapting the sensitivity of our balance sheets to the new cycle of interest rates. A good example of this is retail NII, which increased across most countries and remained flat in Spain and Brazil in a context of unfavorable interest rates. Net interest income was resilient also quarter on quarter, flat when we exclude Argentina for similar reasons, which also explained the performance of net interest margin, which fell only seven basis points year-on-year without Argentina and was flat in the quarter. This performance is slightly better than our guidance of NIR going slightly up in 2025 in constant euros, excluding Argentina. slightly down in current euros. However, as forward rate curves remain very volatile in our jurisdictions, we reiterate our guidance for the year at this stage. We generated another record period of net fee income, reflecting our transformation efforts to promote connectivity across the group, deploy high-value added products and services, and provide the best customer experience. grew close to double digits on the back of strike activity in general, consumer growth, and in a change in mix with a higher share of more value-added services. Ritter showed good performance in his presentation. This year, consumer is affected by the impact of a new insurance regulation in Germany, which is being upset by strong free growth in DCB-US. As sector elaborated, one transformation is key to understanding why we can continue to get better in every single market leveraging our global businesses. As a result, we expect sustainable improvements in operational leverage as we further implement the structural changes to our model. These improvements are already very evident, as demonstrated by the trends in our efficiency ratio, which is consistently getting better quarter after quarter and remains one of the best in the sector, but more importantly, by the evolution of cost in absolute terms. and consumer are leading our transformation, which is delivering structural efficiency gains with revenue improving and costs flat. These two businesses represent 70% of our cost base, and we expect them to reflect further the benefits of one transformation going forward. CIB wealth and payments are more fee-driven. Cost grew 6%, showing positive operating with double-digit fee increase, as I have just explained. As a result, our efficiency ratio closed at 14.8% in the quarter, amongst the best we have reported in the past 15 years. As Hector said, we reiterate our guidance for lower absolute cost in current euros for 2025. The risk profile of our balance sheet remains low, with robust credit quality across our footprint, on the back of low employment and easing monetary policies in general. Loan loss provisions increased 7% year-on-year, mainly due to our efforts to reduce MPLs and some deterioration in Brazil in the context of higher rates and inflation. It improved year on year across all our main countries and was flat in the quarter, with significant improvement in Mexico, compensating the weaker performance in Brazil. In consumer, cost of risk was relatively stable both year on year and quarter on quarter, with notable improvements in the U.S., where we are seeing favorable payment rates, higher car prices, and an improved labor market year on year. As of today, we are not seeing any significant deterioration in employment rates and our credit quality remains stable. Moreover, it is in periods of high instability when diversification becomes more important. For instance, in the current context, we benefit from from the fact that tariffs do not equally affect all countries, and Brazil is a good example of it. Nevertheless, it is too early to make conclusions regarding the new geopolitical environment, but as long as labor markets are not significantly affected, we wouldn't expect material impacts to our cost-of-risk target. Moving on to capital, as you know, we have been working on improving our capital productivity and accelerating our capital generation for some time. This quarter, we delivered exceptional growth again, generating 10 basis points to 12.9% at the top end of the operating range we disclosed during last results. presentation and already very close to our 13% guidance for 2025. We generated 33 basis points of net organic capital after having absorbed 24 basis points of profitable risk weighted asset growth while we had a positive impact from securities portfolios and DTAs. This enabled us to compensate shareholder remuneration accrual, some regulatory charges, as well as to accumulate capital. As we have already mentioned in the past, there was no impact from Basel III implementation on day one.