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Grupo Financiero Santander México
4Q. 2016
GRUPO FINANCIERO SANTANDER MÉXICO, S.A.B. DE C.V.
TRANSCRIPT FOURTH QUARTER 2016 EARNINGS CONFERENCE CALL
FRIDAY, JANUARY 27, 2017
11:00 AM US ET, 10:00 AM MEXICO CITY TIME
Operator:
Good day everyone and welcome to Grupo Financiero Santander México’s Fourth Quarter 2016 Earnings
Conference Call. Today’s call is being recorded, and after the speaker’s remarks there will be a questionand-answer session. For opening remarks and introductions, I’d like to turn the call over to Mr. Héctor
Chávez, Managing Director, Head of Investor Relations. Please go ahead, sir.
Héctor Chávez:
Thank you. Good morning and welcome to our fourth quarter 2016 earnings conference call. We
appreciate everyone’s participation. By now, everyone should have access to our earnings release and
Company presentation which were released this morning before the market opened. Speaking during
today’s call will be Héctor Grisi, Executive President and CEO. Also joining us are Pedro Moreno, Deputy
President of Administration and Finance, Didier Mena, Chief Financial Officer; and Rodrigo Brand, Deputy
General Director of Public Affairs and Communications, all of whom will be available to answer questions
during the Q&A session.
Before we begin our formal remarks, allow me to remind you that certain statements made during the
course of this discussion today 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
that could cause actual results to differ materially, including factors that may 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.
Let me now turn the call to Héctor Grisi. Héctor, please go ahead.
Héctor Grisi:
Thank you, Héctor. Good morning everyone. We are pleased to report 4Q and full year results which
demonstrate our ability to drive profitable sustainable growth, even as the macro backdrop remains
uncertain. Our focus on becoming a client-centric bank is reaping rewards. We continue to leverage
operating efficiencies, while prioritizing investment projects and innovation to become a more productive
organization.
We maintained our focus on profitability despite increased competition, which has seen a moderation of
loan volumes, and are confident that our strategy will underpin Santander’s sustained profitability going
forward. We also closed the year with strong asset quality across all metrics.
We are particularly pleased with our capital optimization strategy executed at the end of the year which
boosted our ROE. We are proud of the progress we have made with our strategic initiatives to date, and
confident in our ability to continue delivering on our sustainable growth promise.
The next slide, despite the uncertainty that is impacting the economy, we are optimistic on the attractive
long-term opportunities in our market. Reflecting our confidence in Mexico’s financial system and our
business model, we are investing 15 billion pesos between 2017 and 2019, additional to our recurring
investments and initiatives. This is to support our goal of becoming our client’s primary bank and Mexico’s
market leader in profitability and sustainable growth.
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Investments will be targeted to three key groups of initiatives. More than 50% will be allocated to the
transformation of our distribution network as we reorganize our business to drive innovation and invest in
infrastructure, including next generation technology. We recognize the need to enhance our processes
and digitize operations. We are investing to provide higher quality service at a lower cost by redirecting
transactionality to lower cost channels.
Close to one third is expected to be invested in initiatives to strengthen customer acquisition
transactionality and loyalty. This includes Santander Plus and Aeromexico projects launched early in 2016.
The remaining 14% will be invested in new businesses that are a complement to our value proposition,
such as auto financing, distribution of third-party insurance products and our mid-market clients, and
operating leasing in response to customer demand. Also, in line with our commitment to support
communities where we operate, we expect to launch a financial inclusion offering which includes a
financial education program.
Now, to update you on the progress we have made around Santander’s key initiatives. First of all,
Santander Plus continues to perform well with customers up 72% in the quarter, boasting over 1.1 million
clients, 51% of which are new to the bank.
Our Aeromexico co-branded card is also proving very successful with over 430,000 clients at the year-end,
31% of which are new. We are achieving strong cross-selling levels among these clients across our
mortgages, funds and deposit portfolios.
Our strategy to drive demand deposits has posted 17% year-on-year growth and is showing a consistent
increase in individual demand deposits.
In payrolls, we expanded our net client acquisition flow, reaching 324,000 new payroll customers in 2016,
41% more than the previous year.
On customer acquisition, loyalty and digitalization, I would like to highlight the following points. Our focus
on attracting new customers, together with a significant reduction in our attrition rate has resulted in
645,000 net new customers in 2016, almost 90% more than the previous year. In turn, loyal customers
increased by 20%, reaching 1.7 million by year 2016. Digital customers have expanded consistently every
quarter, increasing 60% in the year and surpassing the 1.3 million mark.
Moving on to the dynamics of Mexico’s banking system. Total system loans as of November, the most
recently available public data published by CNBV, expanded by 14.6%. Consumer loan growth remained
stable at 13% while system deposits grew 15% year-on-year. We believe that these figures do not yet
reflect the recently changed environment in Mexico which has impacted business and consumer
confidence. Latest November and December data show that uncertainty around the U.S. macro scenario
had limited impact, with households, SMEs and corporates showing robust performance. Remittances rose
almost 25% year-on-year in November; retail sales grew at high single digits - Walmart same store sales
around 7.5% in December, and car sales expanded by almost 20% in December. Still, we have revised
our GDP expectations for 2017 due to macro uncertainty and expectations of a more challenging scenario.
Briefly, we expect consumer demand to soften compared to 2016. Private spending should remain well
supported by employment growth but could suffer from higher inflation affecting real wages. In turn,
companies may be more cautious on their capex plans which, with higher interest rates, could impact loan
demand. I will discuss this in more detail when we move to guidance.
Please turn to Slide 8. Regarding loan growth, we expanded our loan portfolio by 8% year-on-year. In
total, loan performance, however, was below our guidance range for this year for 10 to 12% growth. This
reflects a contraction in corporate and government loan growth as we pursued our strategy of keeping a
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4Q. 2016
strong focus on profitability. Individual loans in December were also soft, reflecting the combination of
stiffer competition and a more prudent risk-pricing approach given the economic environment.
Looking at our loan book in more detail, individual loans expanded 8% year-on-year as we maintain our
strategic focus on driving payroll and credit cards, and while we see resilient consumer demand, we are
also experiencing strong competition in these markets.
Consumer loans were up 10% year-on-year and are stable quarter-on-quarter. Payroll loans posted a
strong performance, up 18% year-on-year as the Santander Plus program continues to gain traction.
Credit card growth decelerated to 8% year-on-year.
Mortgage loans were up 7% year-on-year as we continue to see aggressive customer acquisition
strategies from rivals, while market mortgage rates have not yet repriced in this higher-interest rate
environment. Overall, mortgage activity remained soft as high-end real estate transactions typically
quoted in US dollars were impacted by high FX volatility and the hike in interest rates.
Finally, commercial loan growth decelerated to 8% year-on-year from 16% in the previous quarter. We
saw a sharp slowdown in corporate loans this quarter—up 2% year-on-year—as we had some large
payments of short-term loans. We maintain our focus on returns and are not willing to sacrifice
profitability despite increased competition.
Sequentially, corporate loans fell 19% following a 39% increase in the previous period that had been
driven by a few large short-term transactions in connection with working capital needs as discussed last
quarter. Similarly, government loans were flat year-on-year as we prioritized profitability.
I would like to highlight the strong performance in SMEs and middle market. Middle market posted strong
growth, up 15% from 10% in the previous quarter. SMEs were up 11% as our strategy to target mid-to
large sized SMEs and maintain a risk-return focus continues to gain momentum. Overall, return dynamics
continue to improve in this segment.
Looking ahead, we maintain a cautiously optimistic view for the year. Commercial customers remain
prudent, following the rate hikes last year, expectations of additional rises, and economic uncertainty after
the US elections. We also expect intensified competition.
Moving on to funding, deposit performance exceeded our expectations, rising 15%, ahead of our 10% to
12% forecasts. Demand deposits were up 17%, driven by strong the growth from individuals and SMEs as
we remain focused on improving our funding costs.
In this volatile market, we also saw higher demand for low-risk term instruments, which contributed to
the 11% increase in term deposits.
Summing up, we demonstrated the ability to keep achieving sustained profitable growth even as the
macro-backdrop remains uncertain, and I am confident that for the period ahead, our value proposition,
exceptional customer service and execution discipline will continue to reap returns for our stakeholders.
Now, let me turn the call over to Pedro who will go over our capital position and P&L. I will then discuss
guidance and afterwards we will be happy to respond to questions. Thank you very much.
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4Q. 2016
Pedro Moreno:
Thank you Héctor. Good morning everybody. We maintain a solid balance sheet in a challenging
environment. The net loans to deposit ratio improved to 96.3% this quarter from 106.7% in the previous
quarter, giving us a very comfortable funding position to leverage future growth opportunities.
Given the rising interest rate environment, our funding strategy focused on increasing the duration of our
debt, re-building our yield curve and diversifying our funding sources. Accordingly, during the year we
issued notes—2, 5 and 10 years—totaling 10 billion pesos which allowed us to double the average
maturity of our local debt from 2.3 to 4.3 years.
Our liquidity coverage ratio stood at 153%, well above the regulatory requirement.
Moving to the income statement on Slide 13, net interest income remained strong, up 13% year-on-year
and 4% sequentially.
Results for the quarter show the full benefit from the three interest rate increases that took place until
June ’16, and to a lesser extent the one in September, and also our profitable loan mix. This is still
pending to reflect the 100 basis point increase occurred in the last four quarters.
Most significantly, NII growth was driven by the loan portfolio which contributed with a 24% year-on-year
increase in interest income, up from 19% in the previous quarter. Our securities portfolio had an increase
of almost 4% in interest income, which was impacted by market volatility. We are pleased to report a
significant 11 basis points sequential improvement in NIMs, reaching 5.12% this quarter.
Net commissions and fee growth remained soft, impacted mainly by weaker performance in credit cards
and insurance products. However, we saw a sequential improvement with fees resuming growth of almost
5% sequentially following the 6% contraction in the previous quarter.
Our Santander Plus program continues to drive higher transactionality, supporting the 17% year-on-year
increase in cash management fees. Investment fund fees also increased 26%, reflecting a better priced
mix.
Financial advisory also performed well this quarter, up 26% as we closed some transactions in our
pipeline. While we are present across all capital markets and financial advisory opportunities, we remain
cautious given overall uncertainty.
Credit card fees fell 24% year-on-year, reflecting difficult comps, higher reward and issuance costs from
our Aeroméxico co-branded card and also the peso depreciation, as some of our credit card fees paid are
dollarized. Note however, that earned fees rose 16%, reflecting higher credit card usage.
Insurance fees fell 2% as soft SME demand and individual credit-related insurance offset the good
performance in our online platform for car insurance – Auto Compara.
Summing up, we achieved a 15.6% increase in gross operating income, driven by strong NII growth and
significant trading gains which were above our estimated quarterly average of around 600 to 800 million
this period and represented 6% of total gross operating income.
We closed the year with strong asset quality across all metrics. Loan loss reserves fell 2.5% sequentially,
and were in line with loan growth year-on-year. We also continued to improve our non-performing loan
ratio across all segments, with the total ratio down 85 basis points year-on-year to 2.48% below market
levels. Cost of risk for the quarter improved 14 basis points to 3.35%, and reaching 3.31% on an
accumulated basis at the low end of our guidance range of 3.3% to 3.5% for the year.
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4Q. 2016
Looking at expenses on Slide 17, we achieved an 80 basis point year-on-year improvement in our
efficiency ratio, reaching 40.4% in the quarter. This was the lowest level this year as we continue to focus
on efficiency and profitability to mitigate the 13% increase in expenses in the quarter due to our strategic
initiatives.
Operating costs, excluding IPAB, rose 9.4% for the full year, above our expectation of a 6% to 8%
increase in costs in 2016, mainly driven by the amortization charges of our investment plan and the effect
of a weaker exchange rate on some of our dollarized costs.
As Héctor mentioned at the beginning of our call, looking ahead we will continue investing to strengthen
our business and drive innovation to better serve present day clients, which is expected to reap higher
income as we keep a sharp focus on profitability and efficiency.
In summary, we reported an 11% year-on-year increase in net income for the full year. This is after
absorbing a 130 basis point increase in the effective tax rate. Importantly, pre-tax earnings growth of
13% exceeded our 8% to 12% guidance range for the year. Note that effective tax strategy management
enabled a 24% effective tax rate in the year, slightly below our expectation of 25% to 26%.
Now, let me cover our capital optimization strategy before turning the call to Héctor. Last December we
implemented a series of initiatives to further optimize our capital structure, which included the following.
First of all, a 13.6 billion ordinary and extraordinary cash dividend from retained earnings. We also issued
US$500 million of perpetual subordinated non-preferred contingent convertible additional Tier 1 capital in
Basel III compliant Notes. This is an innovative structure that was the first of its kind in Mexico. Our
parent company, Banco Santander acquired 88% of the AT1 notes, maintaining its commitment to
Mexico.
In addition to optimizing our capital structure, these initiatives have allowed us to improve profitability
metrics and maintain capitalization levels well above regulatory requirements to take advantage of future
growth opportunities. As a result, return on average equity for the year improved by 120 basis points to
14.1%, while without this transaction it would have been 13.5%. Our more efficient capital structure is
expected to boost return on average equity going forward as well.
In addition, our capitalization ratio dropped 30 basis points in the quarter to 15.7%, mainly reflecting our
dividend payment of the first half of 2016. Our Tier 1 capital stood at 11.8% and Core Tier 1 at 10.3%.
Finally, these initiatives also allowed us to increase total shareholder return, posting a yield of 8.5% at the
end of December, the highest in the Mexican Stock Exchange and exceeding four times the yield of the
IPC index.
To recap, we are pleased to have delivered on our goal of driving profitable growth. Our strong bottom
line performance underscores the resilience of Santander Mexico’s business against a more volatile global
backdrop as we execute our strategic initiatives and focus on risk-weighted asset returns and efficiency.
Now, before opening the floor for Q&A, let me turn the call to Héctor Grisi who will discuss guidance for
2017.
Héctor Grisi:
Thank you Pedro. Moving to our guidance, we expect softer loan growth for this year ranging between
7% to 9%. In the current environment, we recently revised down our GDP growth estimates for 2017 to
1.8% from 2.3% and announced a forecast of 1.5% for 2018. We also expect the peso to remain weak
with the foreign exchange rate estimated to be at 21.7 pesos per dollar by year-end. Inflation is
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4Q. 2016
anticipated to reach 4.8% by December, triggering another 100 basis point increase in interest rates
during the year.
These factors, together with a more complex global environment and our focus on profitable growth amid
stiff competition are expected to result in soft loan growth for both commercial and individual loans.
Deposits are expected to grow between 9% to 10% during the year as we continue to target individuals
and SMEs.
In terms of asset quality, we are keeping a more prudent risk appetite with cost of risk ranging between
3.3% and 3.5% for the year. While we expect NPLs to improve, cost of risk is anticipated to remain
stable, reflecting more conservative regulatory provision requirements and a different mix.
Operating expenses are expected to increase between 10% to 12%, reflecting high amortization from the
continued investments as we are undertaking in technology and processes, and the impact from higher
inflation. As usual, this does not include the deposit insurance fee, or IPAB, and the reversal from the
employee profit sharing EPS future payments.
Our effective tax rate is forecast to range between 24% to 25% in the year ahead as we continue to
approach a normalized effective tax rate of 27% to 28% in the future.
Finally, we anticipate net earnings to increase between 8% and 11% as we remain focused on driving
income growth despite a challenging economic backdrop.
In short, while we are maintaining a cautious approach in terms of loan volume growth, we expect to
continue to deliver improved profitability this year. We are committed to building our reputation as an
innovative, customer-centric organization and confident of sustained growth as the economy recovers.
We are now ready to take questions. Operator, please go ahead.
Operator:
Thank you. Ladies and gentlemen, we will now conduct a question-and-answer session. If you would like
to ask a question, please press star, one on your telephone keypad and a confirmation tone will indicate
that your line has entered the queue. You may press star, two if you would like to remove your question
from the queue, and as a reminder for anyone using speaker equipment, it may be necessary you pick up
your handset before pressing the star keys.
Our first question comes from the line of Tito LaBarta with Deutsche Bank. Please go ahead.
Tito LaBarta:
Hi. Good morning and thanks for the call. A couple of questions. First, in terms of your net interest
margin, we saw net interest margin rose about 10 basis points in 2016 despite over 200 basis point
increase in rates in the year, so I just want to get a sense what do you expect for 2017 in terms of net
interest margin? Could you maybe realize some of the benefits of the higher rates more in 2017? Or,
would the slower growth, will that impact margins? I just want to get a better sense of your outlook for
margins.
Also, fee income was a bit weak. I know your financial advisory fees were somewhat weak for the year,
dragging that down, but we also saw a big increase in commission expenses, particularly on debit and
credit cards. I just want to get a better understanding of what do you expect for fee income for this year.
Thank you.
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4Q. 2016
Pedro Moreno:
Net interest margin for 2017, as I said before, is still pending to reflect the deposit side the last 100 basis
point increases. We have a sensitivity, positive sensitivity with assets, so for every 100 basis points you
can expect 1 billion additional net interest gross margin in a good year. We are still uncertain how much
can be the interest rate prices this year, 2017. But yes, we can expect something between 25 to 30 basis
points improvement in NIM.
In terms of fees, we expect to continue growing the earned fees, probably double-digit growth, doubledigit growth in the earned fees, but we have still expense bills coming from the credit cards issuances, so
at the end you can expect single digit growth for earned fees and paid fees for 2017.
Tito LaBarta:
Thank you, Pedro. Just so I make sure I understood correctly, did you say about 25 to 30 basis points
increase in margin?
Pedro Moreno:
That’s right.
Tito LaBarta:
Okay. So, you think you’ll realize more the benefits this year from the higher rates.
Pedro Moreno:
Yes.
Tito LaBarta:
Okay, perfect. Thank you.
Operator:
Our next question comes from the line Carlos Rivera with Citi. Please go ahead.
Carlos Rivera:
Hi. Good morning. Thanks a lot for the presentation. My first question is regarding the outlook for loan
growth. I wonder if you could share a little bit more color. What are the segments that you expect to
grow more this year? Particularly given the more challenging macroeconomic environment in Mexico, are
there any particular segments that you are cautious about or you don’t want to outpace the market there?
My second question probably related is regarding the cost of risk. You have a range of 3.3 to 3.5, so
basically flattish to slightly up from 2016. Basically you are implying a little bit of deterioration there but
not significant. There also if you could share with us a little bit of your thoughts around these. Why in a
more tough environment in Mexico the cost of risk should not increase more than what you have in the
range? What makes you believe there? Thank you.
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Héctor Grisi:
Thank you, Carlos. Let me tell you what we think. I mean, if you take a look a little bit at what we were
doing in the last year, and mostly towards the end of the year is that we have been managing the
portfolio in a very dynamic way. What I’m basically telling you is that first of all we are taking at look at
our pricing and at our different strategies every 15 days to really be up to date on what’s happening in
the Mexican economy at this point. So, if you take a look, I mean we have taken a mixed approach in
terms of the different products in the portfolio. For example, we maintained a little bit the rates in
mortgages, we increased the rates in the individual loans and also we increased the rates on the loans for
the corporate sector, due to the fact that I mean margins are coming up and (inaudible) competition and
we are extremely focused on profitability, and that’s why you see our portfolio, basically, dropping on the
third quarter due to that fact. I mean, we got paid almost 10 million pesos in the corporate sector due to
that fact, because we decided basically to increase our margins there and to really, I mean, have a really
good operation in terms of rates and returns.
So, what we expect for next year is we will be concentrated in the same strategy. I mean, we will
continue to be growing in SME and middle market because that’s where the profitable market is. On the
corporate side, we will continue to be much more taking opportunity—being opportunistic in a sense. I
mean, if we see value we’ll come in and if we don’t see the value then we will not do anything.
On the individual side we will continue to grow our growth in credit cards and basically payroll loans which
are, in our opinion premium, given the market conditions, probably the best to be in, and with the best
margins, profitability and also cost of credit.
In the terms of the cost of risk, what I would like to tell you is that, I mean, we are maintaining our
expectations that even with this market disruption that we have had due to the fact that first of all we are
looking very closely at our portfolios and we have concluded that at this point we don’t see any
deterioration of them, so we will continue to be reviewing them every single week to see how are they
doing, and depending on that—and also what we have been doing very actively is in the corporate sector
in SMEs and middle market and also in the big corporates, we are taking a look, evaluating different
situations in the different sectors and attacking the different scenarios that basically increase our cost of
risk.
So, we believe that at this point, even with the current economic situation that we don’t see any troubles
and we are confident that we will maintain the cost or risk in these levels.
Carlos Rivera:
All right, thank you very much for the color.
Operator:
Our next question comes from the line of Mario Pierry with Bank of America Merrill Lynch. Please go
ahead.
Mario Pierry:
Yes, okay. Let me ask you two questions then. Good morning. The first one, as you mentioned on your
operating expense growth, you expect an acceleration because of your investments that you are going to
continue to make. I also wanted to understand what part of this growth is due to the weaker peso?
Basically, what percentage of your expenses are in dollars?
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Second question has to do with your outlook for trading gains. You had an extremely positive year in
terms of trading. Should we expect—I think your previous guidance used to be between I think about 600
to 800 million pesos per quarter. Just wanted to get an update on that. Thank you.
Pedro Moreno:
Regarding the first question, the portion of our costs in US dollars is around 7% of the total overhead.
Yes, it will imply at least 1.5% of the total increase from that. If you add the related to the credit card
business many of expenses are in dollars and also part of our IT investments.
The second question is around the market related income.
Héctor Grisi:
You have seen—we have done some changes, basically in our team in that side. I mean, we have
basically changed a little bit the structure of our trading desks in a way to make them a little bit more
profitable, more oriented to client flow which basically has resulted in the numbers that you have seen.
Also, we were in a very good position for the situation for the US elections. We were actually very neutral
in our approach to them so that was the right call in that point. We are basically benefiting a lot in the
huge increase in client flows, which we are basically taking advantage of. I would basically continue to
see the trend in positive trading to continue to be around the number that you were saying, probably a
little more since our position is following in a good (inaudible).
Mario Pierry:
Okay, so that would imply lower revenues from market income in 2017.
Héctor Grisi:
No, no, no. It’s actually much better than what we were having before because around these numbers
we’re talking about are maybe, I mean, at least 800 million to a billion pesos per quarter.
Mario Pierry:
Okay. Okay. No, I thought you meant that we will go back to the 600 to 800 number.
Héctor Grisi:
No, no, no, no, no. I mean, I think we’re going to be able to be, I mean, around 800 million to a billion
per quarter.
Mario Pierry:
Perfect. Thank you.
Operator:
Now, our next question comes from the line of Carlos Macedo with Goldman Sachs. Please go ahead.
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Carlos Macedo:
Good morning. Thank you, gentlemen. I have a couple of questions. First question is related to asset
quality on your consumer book. It weakened a little bit in the fourth quarter, not meaningfully. What
would it take in terms of theHéctor Chávez:
Sorry, Carlos. We cannot hear you. Can you speak up please?
Carlos Macedo:
Yes, sure. A question regarding asset quality, sorry. It weakened a little bit in the fourth quarter, not
materially but a little bit. Just trying to get an idea if this is a sign of things to come, and what would it
take for the yellow lights or maybe even the red light to go on in terms of signs from the economy? Is it
unemployment, GDP growth, inflation? What are you looking for that would lead you to become a lot
more conservative in underwriting loans to consumers?
Pedro Moreno:
If I understood well you mentioned the decrease in the last quarter in the non-performing loans, this was
mainly due to additional charge-offs we made in the latest part of the homebuilders. This is what explains
the improvement in the commercial loans.
Individual performance has been mixed. We are observing fair performance in the payroll loans not so
much in effective loans. Credit cards are quite stable. So, it’s uncertain to say, we don’t expect a
deterioration. The quality of the latest businesses serving individuals are performing well. So, we are—
we’ve seen quite a stable behavior. Also, we will keep our standards in terms of risk appetite. That’s why
our guidance, as you see for loan growth is a bit more conservative than it used to be.
In commercial loans, that behavior of SMEs remains very, very, very stable. Middle market is an
improving. The big corporates we don’t foresee any surprise as we have in the past concerning the
homebuilders or the Pemex suppliers.
So, we are quite confident on the quality of our all loan portfolio and we don’t expect to change our risk
appetite, so that’s why we are quite confident on stable non-performing loans.
Héctor Grisi:
I mean, if you take a look, we’ve been very dynamic in the way we have managed the grade of our
portfolio because we have been a little bit more risk averse. In the last quarter, we were much tighter
basically in that, and also our risk-based pricing approach has proven to help us in that regard as well. So,
if you see—I mean, the mix of our portfolio of loans and how we have behaved in the last quarter is
basically individual loans we didn’t grow as much. We grew much better in the middle market when we
see—sorry, more profitable and the cost of risk wasn’t that much. So, we’ve been very active in terms of
how do we manage the portfolio, and we will very much concentrating in basically getting deposits,
demand deposits mainly from our clients, mainly the individuals and SMEs which have turned out to be
very profitable for us given the rate increase.
Carlos Macedo:
Okay. Thank you.
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Operator:
Our next question comes from the line of Jorge Kuri with Morgan Stanley. Please go ahead.
Jorge Kuri:
Hi. Good morning everyone. I wanted to get a bit of clarity on your NIM expansion. You did say to a
previous question that you’re expecting 25 to 30 basis points of NIM expansion. That’s right?
Pedro Moreno:
Yes. We see—sorry, Jorge. I precise here (inaudible) the uncertainty on how can increase the interest
rates in 2017.
Jorge Kuri:
Yes. Yes. All right, because I’m just having a hard time reconciling your net income guidance. If I use the
midpoint of your guidance range for loan growth, cost of risk, expenses, tax rate and I assume 20 basis
point expansion in NIMs, not 30 but 20, I end up with a midpoint net income growth of 14%. Your
midpoint in net income growth is 9, and so I’m just wondering what part of that net income 8 to 11 has
more negative assumptions vis a vis what’s published here. For fees, if you assume 5% growth, I don’t
know. You would have to assume a more negative outlook on some of the lines that you’re not publishing
in order to get to midpoint 9%. You know, it’s not that difficult, right? I mean, it’s just price times volume
and cost and expenses and you end up with 13%, 14% midpoint.
Pedro Moreno:
Well, Jorge, you’re right. I mean we—the guidance is a bit conservative in the bottom line. We don’t want
to compromise or commit in such an uncertain environment, no? As Héctor said, we are doing well in
market-related income. We have not diversonal positions that can compromise or put in risk our profit but
it’s very uncertain to predict this line.
On the other hand, as you have seen, expenses, we’re investing a lot. Our expenses are growing a lot,
and the big question mark here is how much the interest rates will increase. So, if you take a positive,
optimistic approach, yes, you are right. The income, the net income growth can grow 12%, 14%, but with
the actual circumstances (inaudible), but we cannot permit a most optimistic scenario.
Jorge Kuri:
All right. Thanks, Pedro. Sorry, go ahead. I’m sorry.
Héctor Grisi:
What I wanted to tell you basically is that, I mean, you’re right in your approach in terms of the numbers,
but I can tell you is that we have, as you have seen, a very aggressive investment program and we have
to execute in a really surgical mode in order to really get our numbers correct and really deliver on the
numbers that we’re trying to achieve. I mean this year has been a really nice experience in terms of
managing the portfolio, being more dynamic about how we manage the bank in many ways. I think it’s
important that we as the Management maintain a conservative approach in terms of what we’re trying to
achieve, due to the fact that, as you understand, I mean we cannot—if we deviate just a little from
whatever we do in revenues, I mean we are basically in a complicated situation due to the amount of
investment that we are doing. So, we really need to do a really good execution on that and that’s what
we’re focused on.
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Hopefully, if the economy basically goes in a nice way and not so complicated as we have seen at this
time in the year, then I believe that we can basically be more—less conservative, but at this point we
don’t feel that the best thing that we should basically be more aggressive on that.
Jorge Kuri:
Thanks. Thanks. Let me—thanks, Héctor. Let me ask a second question. You mentioned in your initial
remarks that competition is increasing, so wanted to get more details around that. If I just take a very
simplistic view, and I’m obviously sitting in New York and detached from some of these issues, but if I’m
sitting here, I do see some of your competitors in disarray still, thinking whether or not they’re going to
sell, thinking how they’re going to manage the business now that it’s not a geographical unit but more
attached to the parent company, if some of them with existential problems, and it doesn’t seem like
because of that you would expect a very competitive environment. Can you just give us a bit more color
exactly on what you are seeing?
Héctor Grisi:
Jorge, if you take a look at what happened in the last quarter to our loan portfolio, then you can get a
really good idea of what’s happening in the market. First of all, if you basically look at our big corporate
loan portfolio, it decreased actually, due to the fact that we maintained a really strong discipline in
margins and the competition basically decided to take a ride and basically tried to get market share,
which we are basically not in the game of doing. Basically, it happened and we lost around 10 million
pesos in the portfolio just in December alone just because the rest of the market is basically getting
market share with pricing which we believe is not the right path to take.
We are not managing the bank—we are managing the portfolio for the long term, not for the short term,
and we believe that the right approach is to basically be responsible on the margins and the objectives we
need to do and we need to focus on profitability. I mean, capital is a scarce resource and I believe we
need to be really disciplined around how we manage it.
Also take a look at what happened in individuals and—not on SMEs as much, but in individuals. I mean,
the competition has been really hard and some of our competitors have decided to maintain their rates
even with what’s been happening in the market, which we don’t believe is the right way to do it. Also,
we’ve been very also focused on risk in terms of a little bit tighter now, tightening a little bit, I mean, the
portfolio in that sense, and some situations have resulted in declines paying us back and taking money
from other institutions. So, in that regard we are going to continue with that approach and continue
maintaining our profitability in that sense. I mean, there are some decisions that we have made in order
not to lose market share, but we’ll be maintaining our position to be very disciplined about it, but we don’t
hear competitors basically doing the same. I mean, there are a couple of I’d say three or four competitors
that their goal is to win market share and they have continued to do so, even at the expense of lower
margins.
Jorge Kuri:
Thank you. Thanks for the detailed responses. Thanks.
Operator:
Our next question comes from the line of Marcelo Telles from Credit Suisse. Please go ahead.
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4Q. 2016
Marcelo Telles:
Hi. Hello everyone. Thanks for your time. My question is regarding the guidance. Just want to make sure I
understand correctly, particularly your cost of risk guidance up like 3.3% to 3.5%. Are you considering
any impact from the change in regulation in terms of the additional provision requirements on the nonrevolving credit lines? Thank you.
Héctor Grisi:
You’re basically talking about the B6, Marcelo?
Marcelo Telles:
Pardon.
Héctor Grisi:
You’re talking about the B6 regulation.
Marcelo Telles:
Yes.
Héctor Grisi:
Look, let me tell you, I mean we took into account everything and if you have seen basically our cost of
risk is getting to be much more predictable. Actually, more towards the end of the year we have been
able to really lock up some prices that we can’t have in the past and we are really taking a deep look at
what’s happening there now.
In terms of on the regulation, we don’t foresee that due to the fact that we have a really strong control of
what’s happening. I mean, let me give you an example. We reviewed all the cases from the SMEs that
we’re having. We found out that we have 120 SMEs that we thought that they were going to get in
trouble and we decided to go and visit them one by one. We actually ended up with schemes that helped
them out and didn’t basically jeopardize our position with the B6.
Also, I mean in the situation that was more complicated, that was basically with payment contractors and
their situation around payment,—we got an exception from the CNBV in order to help that particular
clients in that sector and we took that approach and helped some of them. What I can tell you is that the
majority of the portfolio we have not had a situation we have had to really take the (inaudible) for a
longer pace. I think—I mean the portfolio, to my surprise is behaving very well.
Marcelo Telles:
Excellent. One question, this one related to your opex expense growth in 2017. It seems that you take
advantage, right, after the better margins to invest more in IT. If you could just elaborate a little bit more
what your investment plan is and what are the areas that you are seeking to improve with that increased
expense? Thank you.
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Héctor Grisi:
Sure. I mean, first of all—I mean, what we said a year ago when I came into the Bank is that we were
going to turn ourselves in a more client-centric approach, okay? When our only driver in the past was
credit, I mean loans, then it was actually quite easy to do that.
The problem is when you get—you turn the Bank to be the number one bank for your clients, they start
transacting with you a lot more, and that’s exactly what’s happening. When you use products like
Santander Plus that basically helps the client and enables the client to transact a lot more with you and
you have the digital clients increasing so much, our transactionality has grown quite a lot in all our—I
mean deeper in the channels, mainly in our branches and our call center, and in the digital platform as
well. So, we have to increase capacity in all of those and basically to start taking our new approach of
basically sending business not through the branch but the different channels, okay? So, we need to
invest, basically, in around 200 to 250 branches that are this point are completely collapsed with the
amount of clients coming in, okay? So that’s a major thing that we need to do and we’re started already
to do it towards the end of the year. That’s very important.
Second of all, we did the pilot program of Santander Go (phon) that is basically our first digital account
that basically enables the client to open the account in the bank, a level two account completely in a
digital base and that is going very well. We’re basically coming out toward the end of the month and are
really—I mean to a nationwide basis, so that is helping us a lot. We also have a huge investment on
transformation because we are coming out with also onboarding for SMEs. We are basically want to give
some credit to SMEs with the digital platform. We are basically working on the customer journey with the
intent that we are (inaudible). So, we are working in a whole bunch of different initiatives that will help a
lot to our clients, will basically help us in getting more transactions out of our clients.
What we can tell you is that our experience has been, once we have really mature clients working with
us. It’s four times more profitable than clients that we give our loans out to, or something like that.
If you have seen the amount of deposits that we have grown, it’s because of that. Our clients are
basically using us as a main bank and they’re using us to transact, and that’s exactly where the
investments are going.
Marcelo Telles:
Excellent. Thanks for your answers, and congratulations on the quarter. Thank you.
Héctor Grisi:
Thank you, Marcelo.
Operator:
Our next question comes from the line of Jason Mollin with Scotiabank. Please proceed with your
question.
Jason Mollin:
Hi. Thank you for the opportunity to ask a question. I’m interested in understanding a bit of these
statements that…
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4Q. 2016
Héctor Chávez:
Jason, we aren’t hearing you, sorry.
Jason Mollin:
Can you hear me? Is that better?
Héctor Chávez:
That’s much better. Yes, thank you.
Jason Mollin:
So, if I look—I’m trying to understand the strategic comments that you want a price lending—you want to
maintain prices and maintain margins to sustain your profitability, not go for market share. I was doing
some analysis of the risk-adjusted yields by segment for Santander Mexico. It’s interesting that the
government segment, when we take the yield of, I don’t know, 5%—this is from November, last 12
months—and risk adjust it to 4.8, and we compare that to companies at 3.6 as a risk adjusted loan yield,
is there any desire—is it about diversifying risk and the size of the government? But, it looks like that
would be a segment that could provide good risk return dynamics; clearly, consumer and mortgage are
higher. I’m not sure how you’d put expenses into that calculation. If you could give us some comments on
the exposure which has been relatively stable for you to government, if that would be interesting.
My second question is on the consumer segment. I mean, your customer acquisitions have been very
strong with your new products and Santander Plus. In fact, I think over a million clients now and half—1.1
million, excuse me, and over half new, I mean, how expensive has it been to acquire these clients and
how long will it take to make them profitable or are they profitable from Day 1?
Héctor Grisi:
Okay. Thank you, Jason. Let me tell you, on the government strategy, look, I mean we will continue as
we have been. It’s a very opportunistic market, okay? First of all, let me tell you, I mean. What we’re
doing in government is basically try to maintain our market share in some of the different transaction or
win the business that we have with some of the government entities, okay? That’s exactly what we do. I
mean, we really give loans out too, to the ones that we have is in the payrolls so we have the payment
accounts or whatever they do to transact with us. So, this is profitable when you combine it with
transactionality.
To giving out loans to government, because have (phon) that relation, it’s not our business and we won’t
do it. It’s not profitable. So, in government loans we will continue but we will do it if it’s on an
opportunistic basis and we see a good margin, then we will do it, okay? But, it’s not a market that we are
particularly very focused on, only in the situations as I’m telling you, to defend the business that we do on
that transactional basis which is profitable.
Jason Mollin:
Okay.
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4Q. 2016
Héctor Grisi:
On the other side, going back to what you were saying, is that Santander Plus has proven to be a really
good—to be much better than we expected in the sense that it is not as expensive as we thought it was
going to be because we have had a lot of cannibalization on our client rates, and this is a problem that we
have been very much concentrated on getting new payrolls with our clients, and you’re going to see that I
mean we’re doing very well. You saw that—I mean, we had a problem with attrition and it has diminished
quite a lot. So, that basically has enabled us to help us in profitability. First of all, because we have a lot
less cost in the amount of attritions that we have had, that’s number one, and that was something that
was really important for us to tackle.
Number two, what has happened is that once we get a client on Santander Plus, the client starts to
transact with us and due to the fact that they basically have the direct debit to their checking account and
everything, they maintain a lot better surplus with us in the account, so they maintain their money, which
is very profitable, and given these new rates, it’s much more profitable.
So, I think the strategy is proving—has been proven that works and we will continue to focus on that and
continue to running the program in that sense because this is the right path to take.
If you take a look a little bit of our mixture of the year-end in terms of last year we closed at around 101
to 100 in terms of loans to deposits. Now we are at 95% for the first time in a long time. I mean, I
haven’t been around, maybe several months, but this is the first time that we have a surplus in deposits
versus loans, which is very profitable in a market like this one.
That basically gives you an idea that even the acquisition costs is a little more than with the competition
have already, it’s proven to be much more profitable than we expected, and the increase in rates that
helps of course.
Jason Mollin:
Do you think that you’ve reached kind of—I mean, I remember you had some pretty aggressive targets in
terms of new clients and such, but looking for 2017, do you expect the same kind of trends?
Héctor Grisi:
Yes, we think so. I mean, we have a very good—so far a very good trend and we believe it’s going to
continue like that. I mean, we are doing very well, and we have our —bank focused on that and our
different areas are really working.
Let me tell you why. Because we are working really together. We are having for example, I mean the
investment banking area basically working really hard for us to get those corporates that we loan to, to
change their payrolls to us and you’re going to see that. I mean, you have seen it in this year and you’re
going to see it on the first quarter. We have a really good trend on that. So, we are working as one and
also we have—I mean as you know, we have the second largest franchise of middle market companies in
the market and we are taking advantage of that, so that basically it’s enabled us to get a lot more market
share than our competitors in that sense. Even though we are number four in payrolls and we are
working really hard on that, I mean, we are growing much faster, much faster on the competition.
Jason Mollin:
Thank you very much.
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4Q. 2016
Héctor Grisi:
Thank you.
Operator:
Our next question comes from the line of Carlos Gomez with HSBC New York. Please proceed.
Carlos Gomez:
Hi. I’m calling late so you may have answered this question already. Can you let us know if you used the
exemption that the authorities allowed to reclassify any of your securities? Again, you may have already
talked about this.
Second, you also mentioned it in the call that you also have an allowance to treat some of the Pemex
suppliers. Could you quantify how much of the portfolio that will be affected and how long that exemption
might take place?
Finally, on the capital side, you have done this successful AT1 transaction. You have successfully replaced
capital that (inaudible) your ROE. On the other hand, you are starting the year with a CET1 capital of
around 10% lower than the competitors in an environment which is not particularly friendly. Are you
comfortable with that 10% or do you expect it to change over the year? Thank you.
Pedro Moreno:
Okay. Well, I suppose if you—we have a very comfortable position in our ALCO and we reviewed the
duration of the securities and we finally decided not to reclassify any of our securities to cause maturity
because (inaudible).
Second question, the answer is no. We have a few restructured loans with Pemex suppliers, but they are
currently performing, so we don’t have any cushion or need to provide any additional reserves with our
portfolios.
The third one, look, our Q1 capital is 11.8. Don’t forget that the security—the notes we have issued is
Basel III compliant, Additional Tier 1, so its absolutely the same quality of capital as Tier 1. So, it’s not
10.3, it’s 11.8. We feel very comfortable with this level of capital. The total capital including the Tier 2 is
15.7. It’s even above the average of the market in Mexico, really well above the regulatory need, and we
feel comfortable with the level of growth for the coming years.
Carlos Gomez:
That’s really useful. Thank you. If I may ask on the AT1, the interest that you pay on these notes, is it
considered part of interest income or does it go through the minorities line? Thank you.
Pedro Moreno:
It’s treated as capital instrument so the interest paid are not reflected in the P&L but in the equity.
Carlos Gomez:
Sorry, so it doesn’t go through the P&L at all? So, the interest on the AT1—if I understand correctly, the
interest on the AT1 note is charged directly to equity.
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Pedro Moreno:
That’s right. As it’s an equity instrument.
Carlos Gomez:
Thank you very much.
Operator:
Thank you. We’ve reached the end of our question-and-answer session. I’d like to turn the call back over
to Mr. Chávez for any further remarks.
Héctor Chávez:
Thank you very much for joining Santander Mexico on this call. I would like to invite you to download our
new Investor Relations app so you can have easy access to our financial information on your mobile. If
you have any further questions, please don't hesitate to call or e-mail us. Thanks again and have a great
day.
Operator:
Thank you. Ladies and gentlemen, this does conclude our conference for today. We thank you for your
time and participation and you may disconnect your lines at this time. Have a wonderful rest of the day.
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