Banco Santander México, S.A., Institución de Banca Múltiple, Grupo Financiero Santander México (BSMX)
Q2 2022 Earnings Conference Call
July 29, 2022, 10:00 AM ET
Company Participants
Hector Chavez - Managing Director and Head of IR
Felipe García Ascencio - CEO
Didier Mena - VP of Administration and Finance
Conference Call Participants
Jason Mollin - Scotiabank
Ernesto Gabilondo - Bank of America
Jorge Chirino - Morgan Stanley
Tito Labarta - Goldman Sachs
Alonso Garcia - Credit Suisse
Olavo Arthuzo - UBS
Yuri Fernandes - JPMorgan
Presentation
Operator
Good day, everyone, and welcome to Banco Santander Mexico's Second Quarter 2022 Earnings Conference Call. Today's call is being recorded. Following the speakers' prepared remarks, there will be a question-and-answer session.
I'd now like to turn the conference over to Mr. Hector Chavez, Managing Director and Head of Investor Relations, who will make some opening remarks and introduce today's other speakers. Please go ahead.
Hector Chavez
Thank you, operator. Good day and welcome to our second quarter 2022 earnings conference call. We appreciate everyone's participation today. By now, you should have access to our earnings press release and the presentation for today's call, both of which were distributed yesterday after the market closed and can be found on our Investor Relations website.
Presenting on our call today will be Felipe García Ascencio, our recently appointed CEO of Banco Santander Mexico; and Didier Mena, Vice President of Administration and Finance.
Before we begin our formal remarks, I would like you to mention that last week the Board of Directors approved the name Felipe García Ascencio as our new CEO of Banco Santander Mexico starting January 2023. Felipe brings more than 25 years of banking experience having held leadership positions in Credit Suisse and Goldman Sachs. Felipe served as Head of SCIB here at the Bank.
And allow me to also remind you that certain statements made during the course of this discussion may constitute forward-looking statements, which are based on management's current expectations and beliefs and are subject to a number of risks and uncertainties, including the COVID-19 pandemic that could cause actual results to materially differ, including factors that could be beyond the company's control.
For an explanation of these risks, please refer to our filings with the SEC and the Mexican Stock Exchange. Felipe, please go ahead.
Felipe García Ascencio
Thanks a lot Hector. Good morning, everyone. It is an honor to have the opportunity to talk with you all. First of all, I want to thank Hector Grisi, Jose Antonio Alvarez and our team and the Board in Mexico for this amazing opportunity. I'm honored and committed to continue with the outstanding job the Director and the team have made during the past few years. Today Santander Mexico is a much stronger bank than the one that it was before we started our transformation plan back in 2016.
We have increased by almost 50% the number of our total customers, while active customers have grown more than 25%. The utilization has been key during these years, digital customers have grown more than four times while penetration of digital to active customers more than tripled. We have been able to grow organically our loan portfolio at solid and healthy rates. In fact during this quarter, we had the lowest cost of risk in the history of the bank.
We have improved our exposure to individuals in both loans and deposits, closing the gap versus our main peers. We started two businesses that did not exists a couple of years ago. Those are our out loan businesses and our financial inclusion program. All these efforts have allowed us to have an ROE above 20% when adjusted for capital excess. This ROE is the highest since 2015. In terms of cultural transformation, we have improved gender diversity within the organization, but mainly among our Board members.
It is going to be my responsibility to continue with this excellent result to position Santander Mexico at the forefront in customer proximity, innovation in our products, solidity and of course in very important aspects such as sustainable banking, and our accredited task as responsible banking. It is going to be a pleasure to share with you the progress made every quarter.
Now I will turn the presentation over to Didier, who will go over the results of this quarter. Didier, please go ahead.
Didier Mena
Thank you, Felipe. Good morning, everyone and good afternoon to those of you participating from Europe. In the second quarter we maintained very strong momentum in our core businesses gaining market share in both individual and commercial loans together with strong origination rates. Further, we're now in a healthier operating environment, as reflected in our solid growth in consumer products, helping us expand our loan portfolio without compromising asset quality.
Corporate loans grew 10.3% year-on-year with strong performance across our entire portfolio. In individual loans, we continue our pace in the market, supported by sustained market share gains in mortgages, auto loans, and credit cards. The renewed growth in credit cards was due to the continued market acceptance and solid performance of our latest credit card LikeU.
The growth of these unique products speaks for itself with what's also due to the promotional efforts we have been making within our commercial network, as well as other campaigns to keep positioning effectively among our clients. Additionally in auto loans, we are now the number three player in the market, reaching 14.2% converting to our market share in loans to individuals of 14.9% as of May 2022.
Our strength in this business is thanks to our attractive commercial offerings and the various alliances we have with leading automakers. Taking together June was our eighth consecutive month, gaining market share across our portfolio the sixth consecutive month, increasing market share in both individual and commercial loans, and the 26th consecutive month gaining market share in loans to individuals.
In deposits, we continue growing them at a solid pace while carefully managing funding costs by improving our deposit mix. It's also worth noting that the contribution of individuals has increased considerably in both categories of deposits. Putting things in perspective in the first quarter of 2016 deposits from individuals contributed only 24% of total deposits while they currently contributed 37%.
As a result, we have reduced the gap in the cost of funding versus our main competitors. Also in today's high rate environment, term deposits continuing increasing among both individuals and commercial clients up 4.5% and 10.2% year-on-year, respectively. Regarding asset quality, our portfolio remains healthy despite our increased risk appetite in certain business lines. This is due to our outstanding risk management, resulting in improvements in both the cost of risk, down 69 basis points year-on-year and our NPL ratio down 23% - sorry 23 basis points year-on-year.
In fact, the 2.06% cost of risk of this quarter is the lowest level in the history of the bank. In terms of profitability, our ROE shows a strong performance being the highest ROE of the past 12 quarters, benefiting from the strategies we have implemented to raise loan volumes, mainly in the individual portfolio and from normalized provisions and more normalized capital levels. Going forward, we expect profitability to continue expanding. Also, during the quarter, we maintained a strong balance sheet as reflected in our solid capital ratio and liquidity position.
The charts on Slide 4 show a still challenging outlook for Mexico's economy. GDP remains below its pre-pandemic level with a slow recovery on the rate this year. Regarding inflation, the market expected to remain temporarily high above Banco de Mexico's target range. However, a gradual decrease is forecasted towards the end of the year, reaching 7.6% by year-end. Consequently, there has been a tightening of monetary policy in response to rising inflation. Under these conditions, the market expects additional rate hikes in 2022, reaching 9.5% by year-end.
According to the Mexican Institute of Social Security, more than 448,000 new jobs were registered during the first semester of the year, of which 80% were permanent jobs. Macro indicators have also shown better performance. In fact, private consumption is now higher than before the pandemic. By contrast, investments and industrial activity have been lagging due to lower confidence levels within the business sector.
Although the operating environment is still marked by complexity and uncertainty, we're well positioned to continue contributing to our Mexico's economic growth, supporting both our individual customers whose loan demand has been solid, and our corporate clients whose loan demand is strengthening.
On Slide 5, you can see that system loan volumes in May continued to improve, increasing more than 9% year-over-year, the highest growth rate since March 2020. This growth was mainly driven by improvements in consumer loans, which increased low double-digits, partially offset by corporate demand levels, which are still fast. System deposits continued their strong rebound, growing more than 10% year-over-year with demand deposits increasing close to 11%.
Please turn to Slide 6, where I would like to give you an update on our strategic and growth initiatives. Our strategic priority is to provide the best customer experience in Mexico's financial services sector with the aim of becoming a more customer-centric bank. To accomplish this, we continue leveraging the latest digital tools and accelerating our technological transformation to simplify processes and operations in order to transform our service model.
At the same time, we continue positioning the bank as a market leader in value-added products that attract and retain clients to improve our balance sheet. With that in mind, I would like to point out some important milestones we achieved during the first half of this year. In our loans, we continue to rapidly expand our business, gaining 562 basis points during the last 12 months and achieving the 14.2% market share that I highlighted earlier.
This means we're close to achieve our goal to reach the market share that we have in loans to individuals, which stands at 14.9%. Again, this has moved us into the number three position in the market. And while we are proud of this significant accomplishment, we will be looking to keep moving up soon. In addition to our alliances with leading automakers in Mexico, our growth and market share gains were driven by our Super Auto Santander platform, which integrate commercial and insurance offerings in a single place.
Digitalization of our products and services remains a top priority, which is why we continue investing in technology. Even though we have made significant progress in transforming the banks since 2016 were still far from where we want to be. We want to know our clients better, creating profile-based on their behaviors and relying on that data analytics to offer tailored solutions and maintain the best service model.
Our digital evolution includes collaborating with Fintechs and other tech companies to introduce faster and more convenient digital tools and functionalities. Advancing on this front is very important for us with digital sales now representing 61% of total sales, up from 50% a year ago. We also have 5.7 million digital clients as of June, increasing 12% year-on-year. And our loyal customers are now over $4.1 million, an increase of more than 10% year-on-year.
In mortgages, our strong performance reflects the success of our Hipoteca Plus and Hipoteca Free products as well as our Hipoteca Online platform, a complete redesign of the customer's journey. The redesign has eliminated significant pain points in the application and approval process. These strong results support our position as one of the top mortgage originators in Mexico.
In addition, as we expand the range of products with our latest mortgage product called Hipoteca Integral, we're now reaching a segment of the population that was underserved. This new mortgage product recognizes the total income of family, both fixed and variable. Hipoteca Integral offers an interest rate of 11.5% as well as property insurance, which covers the total value of the property of our customers and unemployment insurance for up to nine months.
With the launch of this new and attractive offer, we're confident that we will keep gaining market share in this segment. In fact as of May, we closed the gap with the second player in the market from 159 basis points a year ago to 55 basis points. Ten months ago, we launched LikeU. Since its launch, we have issued over 635,000 LikeU cards, exceeding our own expectations. Currently 95% of LikeU card holders have activated their card.
So far, we're pleased with the results and the market's strong acceptance of our innovative credit card. Given the product's success in late September, we will launch an aggressive campaign to tap into the open market with the aim of maintaining the solid growth in this business segment and to offer our LikeU credit card to every Mexican. So stay tuned.
In addition, to help support inclusive growth through financial empowerment and education that increased financial inclusion, we offer financial products and services to more than 343,000 low-income customers through Tuiio. We have grown our clients by 52% year-on-year. In addition, these customers have access to an online savings account opened remotely by agents, offering users both mobile and online banking tools.
We also offer medical support services, and I'm glad to share that 21% of our clients went to our genocologist for the first time ever, helping contribute to a culture of prevention and facilitating customer access to especially doctors, dentists and laboratories. As another reference to the positive social impact that Tuiio has, I would like to point out that thanks to these loans, 87% of these clients experienced improvements in their lives in personal and economic terms.
Of note, 55% have increased the number of employees in their businesses and 76% of our clients that are women now make spending decisions at home since they have a credit with Tuiio and power intent. Santander is a leader in microfinance in Latin America, we helped more than 1 million entrepreneurs each year to establish or grow their businesses through the Tuiio and Prospera programs. This is why Euromoney named Santander, the best bank in the world for financial inclusion for the second consecutive year.
Turning to Slide 7, our total loans increased more than 10% year-on-year, outpacing the system and posting a sequential increase of almost 2%, highlighting our solid performance in individual loans. On the commercial front, loan demand is also improving in mid-market companies, increasing by low double-digits together with loans to corporates, government and financial entities with this segment growing in the high single-digits year-on-year.
All in all, we expect to continue seeing an upturn in higher yielding segment, which - I'm sorry, I got disconnected. Can you hear me now?
Operator
Are we joining.
Didier Mena
I'm sorry, I got disconnected. Can you hear me now?
Hector Chavez
Yes, we can. Go ahead Didier.
Didier Mena
Sorry. So all in all, we expect to continue seeing an upturn in higher yielding segment, which, coupled with higher interest rates should support margin expansion while also maintaining sound and sustainable asset quality.
On Slide 8, you can see that individual loans are growing close to 13% year-on-year, the highest growth level since February 2016. Our mortgage portfolio continues expanding at a solid pace of 11% year-on-year and 15% year-on-year organically. During the quarter, more than 50% of our detentions came from our Hipoteca Plus product, which also helps drive cross-selling of other products and build customer loyalty as well.
In addition, through Hipoteca Online, we have been able to process 96% of our mortgages completely digitally, resulting in a much better customer experience, reducing response times and simplifying processes, as I noted before. At the same time, credit cards are expanding a solid 13% year-on-year and 6% quarter-over-quarter. This encouraging performance is driven by our latest credit card launch LikeU.
Currently, 12% of total billing comes from our LikeU credit cards. It is also worth pointing out that May was our best month during the quarter in terms of billing, thanks to the hot sale in Mexico, increasing 18% month-over-month and 15% year-on-year. Through our new payment and credit card value offering, we are confident we will acquire a significant number of new LikeU users within our customer base.
Launching this credit card in the open market by the second half of the year will enable us to keep growing steadily and organically in the business line and do so without compromising proven risk management. In the same time, within consumer products, auto loans continue showing strong growth. Since March, we positioned ourselves as the top three competitor in the market, starting from scratch just four years ago.
Today, the balance of our auto business is MXN 21.5 billion. Also, with the aim of increasing our market position in the auto market and expanding the business further, we are now very active in the used car segment, given the recovery of domestic sales of new cars is estimated until 2024. For this reason in recent years, banks have accelerated financing in the used cars segment.
As of today, the used cars portfolio represents 5% of our total order portfolio, and we're targeting a 20% level in the medium to long-term. Payroll loans also delivered solid performance, increasing close to 12% year-on-year and 5% sequentially, offsetting the 4% year-on-year contraction in personal loans. That said, personal loans are starting to show positive performance, increasing 5% quarter-over-quarter.
Turning to Slide 9, solid expansion of loyal and digital customers continues, achieving double-digit growth year-on-year of 10% and 12%, respectively. In this highly competitive environment, we continue advancing our digital transformation. We are reinforcing digital communication through campaigns and tutorials with the goal of further expanding digital customers and promoting our digital channels.
The ratio of loyal customers also continues to grow with these clients now representing 43% of active clients compared with 40% in the same quarter of last year. The evolution of this ratio has been positive throughout the last five-plus years. In 2016, the ratio stood at around 24%. This clearly reflects consistent improvement across our products and services as we aim to be top of mind among our clients.
During the quarter, product sales via the digital channels accounted for 61% of total sales, a substantial increase compared to 50% a year ago. Digital monetary transactions also maintained an upward trend, reaching 47% of our total with mobile transactions accounting for 97% of total digital transactions, up slightly from 96% a year ago. In addition, mobile clients grew 13% over the past year to over $5.5 million, driven by our promotional campaigns and the incentives we offer through digital channels.
As we show on Slide 10, commercial loans increased 8.5% year-on-year, driven by a double-digit pickup in mid-market loans, which grew 12.6% year-on-year and a high single-digit growth in corporates, which increased 9.1% year-on-year. Note that these types of businesses are being more active with loan demand versus last year, but that slowing their pace versus the first quarter of the year, given the complex economic environment we're facing.
Loans to government and financial entities had a 6.8% year-on-year increase or is up [ph] a contraction of 0.5% on a sequential basis. SMEs remain affected by current weak economic conditions and low credit demand decreasing 4% year-on-year and 3% on a sequential basis. However, it is worth mentioning that this is its lowest contraction of the past nine quarters.
Moving on to funding on Slide 11, total deposits increased [indiscernible] unlike previous quarters, deposits were driven by term deposits, increasing 7.9% year-on-year due to the higher interest rate environment. In the same way, demand deposits are starting to slow their pace, increasing 1.4% year-on-year, mainly due to a 2.2% drop in corporate deposits as we continue foregoing certain expensive corporate deposits in order to lower the cost of our deposits.
Demand deposits from individuals increased 8.6% year-on-year, supported by our promotional campaigns. As a result, we have been able to show greater resilience to the rate hikes, increasing our cost of deposits by only five basis points year-over-year, while the market increased 12 basis points. We also continue working to reduce our funding costs further as we make additional headway toward improving our deposit mix, one that prioritizes individual deposits.
As a result of this strategy, our total deposits from individuals have increased considerably during the last five years, low demand and term deposits. They stand at 36% and 40%, respectively, together make up 37% of the contribution made by individuals to our total deposit rates.
Turning to Slide 12, we still maintain very strong capital and liquidity positions. Our liquidity coverage ratio stands at 181.7% representing a substantial buffer and still far above the regulatory threshold. Our core equity Tier 1 ratio and capitalization ratio as of June are 13.84% and 19.28% respectively, significantly above the minimum requirement established for systemically important financial institutions like ours.
In addition, it is worth to mention that on June 28, we made a dividend payment of MXN 9 billion. And yesterday, we also made a second dividend payment of MXN 8.8 billion. With this, we have exhausted the capacity to keep paying dividends given the new restriction defined by the regulator for this year. We also maintained a sound funding position with a net loan to deposit ratio of 96.2% for the quarter.
Liquidity management is one of the core components of our operations as a retail bank on top of our strong base of deposits we aim to keep a diversified source of funds and a prudent maturity profile. We're constantly evaluating different alternatives and markets to match our liquidity requirements, secure financing and support the growth of our business growth in an efficient and profitable way.
On July 14, we issued a four-years floating senior unsecured bond for MXN 5 billion in the domestic capital market. This represented our third issuance of the year, and our first time using the - a new reference rate benchmark for coupon calculation. We are one of the principal issues in the domestic market, reaching a broad base of investors that have set their confidence in our management and business prospects.
As you can see on Slide 13, our net interest income had a solid increase of 9.6% year-on-year and 5.2% quarter-on-quarter, mainly driven by both higher retail volumes and loans and deposits as well as higher interest rates. As a result, our net interest margin expanded 18 basis points year-on-year to 4.70% for the quarter.
Please turn to Slide 14. Net commissions and fees had a strong increase of 8.3% on both a year-on-year and sequential basis. Our solid performance was mainly driven by credit cards, which increased 17.2% year-on-year due to the hot sale in May and the excellent performance of our LikeU like credit card. Growth was also driven by a 14% increase in insurance fees.
Going forward, we expect a good performance in credit card fees to be sustained as our ambitions for the LikeU credit card are to continue increasing average only billings while achieving a better composition of fee income.
Turning to Slide 15, gross operating income increased 10.1% year-on-year due to growth in net interest income. This growth was driven by the performance of both, our individual loans and deposits, interest rate increases, the good fee performance in credit cards and insurance and a solid trading income result that was above our historical average.
Moving on to asset quality on Slide 16, our NPL ratio improved 31 basis points year-on-year and 23 basis points sequentially, driven mainly by a good performance in our commercial portfolio, especially in SMEs as well as in our mortgage book. Provisions in the quarter declined 26.3% sequentially and 43.6% year-on-year, mainly driven by the additional provisions that we booked in the second quarter of 2021 to address market and credit conditions related to the pandemic.
The decrease in provisions was also due to better-than-expected performance in our retail portfolio. Going forward, we expect to maintain provisions that are more similar to pre-pandemic levels, even though we're increasing our risk levels in credit cards and consumer loans.
Our loan portfolios continues to perform well in terms of cost of risk, which stood at 2.06%, a 59 basis point year-on-year decrease and down 35 basis points sequentially. Looking ahead, we do not see any deterioration in risk levels that would impact any of our loan portfolio segments. So cost of risk should remain around 2%.
Turning to costs on Slide 17, administrative and promotional expenses increased 1.7% year-on-year and 12.4% when excluding the IPAB reclassification. On a sequential basis, expenses increased 7%, mainly driven by administrative expenses and higher inflation increased our supply costs. Our expenses also rose due to publicity related to our sponsorship of Formula 1 and to the assumption of employee travel.
Given our solid revenue growth and strict cost control, we managed to improve our efficiency ratio by 63 basis points year-over-year to 46.7% at the end of the quarter, and we accomplished this despite inflationary pressures. We feel confident about the dynamics of the business and our disciplined cost control. However, we expect cost to increase around 7% by year-end, slightly below inflation as we continue investing in strengthening our digital capabilities with inflation pressure persisting.
Turning to profitability on Slide 18, net income increased 26.4% year-on-year to MXN 6.9 billion, mainly due to the solid increase in net interest income and fees, along with the lower provisions. Profit before taxes was up 50.4% year-on-year for the quarter and 31.6% sequentially, reflecting the strong performance of our core business. Return on average equity was 16.9%, 510 basis points higher than the year ago level and the highest in the last 12 quarters.
Also adjusting for the excess capital, we would reach an ROE slightly above 20%, and this is the highest since Hector Grisi became CEO of Santander Mexico. On the other hand, the effective tax rate stands at 22.8%, 212 basis points higher than a year ago. We anticipate lying between 23% and 24% by the year-end based on the still high inflation rate expected for 2022.
Before going into the Q&A session, let me share with you some brief closing thoughts and a couple of new adjustments to our full year performance outlook. Given that expectations for economic growth have deteriorated significantly and with the goal of maintaining healthy asset qualities through prudent originations, we're adjusting our growth for the loan portfolio to a range of 7% to 9%.
In terms of asset quality, considering the excellent results we have achieved to-date, we're adjusting the cost of risk from 2.6% to 2.8% range to below 2.4%, which is a very positive sign concerning the challenging environment we have been operating during this year. On expenses, due to persistently high inflation, we now expect expenses to increase between 6% and 8%. As for the tax rate, we're expecting it to lie between 23% and 24%, which is a bit better than the previous range, considering the high inflation rate expected for 2022, as I noted before.
Lastly, we now forecast net income to grow north of 30% given these adjustments and consistent with our ongoing efforts to keep delivering strong results. In summary, we continue successfully advancing our strategic priorities, strengthening our position in value-added products while developing and implementing new growth initiatives. We are currently developing a more robust product offering and servicing model for mass market clients.
Further, we have made additional progress to our goal of being a customer-focused bank as we continue to work on simplifying processes and operations in order to transform and enhance our service model. Our ambition to become the bank known for superior customer experience in Mexico remains.
This concludes our remarks. We are now ready to take your questions. Operator, please open the call for the Q&A session.
Question-and-Answer Session
Operator
Thank you [Operator Instructions] Our first question comes from the line of Jason Mollin with Scotiabank.
Jason Mollin
Hello, thanks for the opportunity to ask questions. My first question is on the announcement that Santander is no longer going to participate in the sale of the Citibanamex franchise. If you can provide some color on what drove that decision? And the second question would just be on the competitive environment?
How relevant do you consider the impact of new entrants, fintechs and what your incumbent competitors are doing? Maybe some color on the credit card business would be helpful. And then lastly, if you can provide an update on Santander's plan to bring the digital bank, open bank to Mexico? Thank you.
Didier Mena
Hey Jason, regarding the announcement made by the current company a few days ago. We understand that the parent company submitted an unbinding offer - and Citi Group decided not to give Santander opportunity to continue participating in the process. So that - it was disclosed as we have mentioned several times, and you might probably recall this, our strategy is not dependent on making acquisitions.
We are very disciplined in terms of all the strategic and financial impact of any inorganic growth opportunity, and this continues to be the case, okay. So I think that - and as our global CEO made reference to in the conference call with investors yesterday there might be an opportunity to gain market share, while another competitor completes the acquisition of Citibanamex, okay. So that's on your first question.
On your second question, we have continuously provided an update on how we see fintechs competing in the Mexican market. So we still don't see a significant impact. We mentioned the last quarter's call that we saw last year an impressive capital raising activity by fintechs in Mexico last year close to $2.8 billion, equivalent to the shareholders' equity of 27 smallest banks in the system so that's quite material.
But as you - as you probably noticed, the market has been quite severely impacted in terms of additional capital raisings in these types of businesses. So significant capital raising has decreased. So we think that this will provide an opportunity for us to consolidate the market or to partner up with those businesses that might be in a weak position in terms of continuing financing growth.
You asked specifically for credit cards. And we have seen some competitors, fintech entering this market quite aggressive in some cases. And I think that we will wait and see to check the results that they have in terms of asset quality. That would be my main concern so far. I think it's obviously noting that they have made significant progress in reducing certain pain points that our customers have.
I think it's quite easy to originate loans. It's not very easy to collect loans, okay. And we have seen several examples over the last two to three decades in Mexico. And none of those prior attempts have been successful with scale and with strong asset quality, okay. So we will remain expectant to see how this e-commerce perform, those that have gained certain scale. And obviously, the market environment is complicated. So we'll wait and see.
Regarding Openbank, we continue to work on those plans. And as the previously noted, we think that we're going to be ready next year for launching the Openbank services for the Mexican market.
Jason Mollin
Thank you Didier congratulations on the good quarter and particularly on the improved guidance for net income.
Didier Mena
Thank you, Jason.
Operator
Next question Ernesto Gabilondo, Bank of America.
Ernesto Gabilondo
Hi, good morning, Didier and Hector - congrats on your quarter results. I have a couple of questions from my side. The first one is another follow-up on Citibanamex. What do you think were the aspects or the challenges that makes Santander not to go further I don't know was there something related to the MX [ph] technology or the government announcing that massive tires will not be allowed. Anything on that would be helpful?
And then my second question is on potential the listing of Santander. Considering that the flow is less than 4% and again, you are no longer in the biding process for Banamex. Wouldn't be the natural step request for a mandatory offering -- and what do you think are the advantages or the disadvantages to maintain lease to the company with a float of less than 4%?
Didier Mena
Thank you, Ernesto regarding your first question, as mentioned earlier, it was a Citigroup the one that decided not for us to continue the process. So I have nothing more to add on that regard. Regarding the listing, I think that the group hasn't made a decision whether to complete the listing. Probably it's something that makes sense given the interest that the group has manifested in two prior tender offers. But I think that there hasn't been made a final decision on that. If there's any update on that, we'll definitely share it with the market, okay.
Ernesto Gabilondo
Thanks Didier just to make me and we have another question related to [indiscernible]. We want to hear your expectations considering the higher rates and now the tolerability of having an economic recession in Mexico next year. How should we think about the number? We have seen this quarter less of double-digits so considering next year, should we think and should be normalizing to a single-digit growth? Would like to hear like your first impressions and also related to this, can you remind us what is your direct and direct exposure to the U.S. economy?
Didier Mena
Sorry, Ernesto I can't hear your last question, what our exposure to what sorry?
Ernesto Gabilondo
To the U.S. economy to directly and indirectly.
Didier Mena
Okay well, regarding the impact that the current environment could have and potential economic recession, I think that what we have analyzed so far is a slower growth rather than a recession, but it's probably worth noting that over the last few months, there's, been consistently revisions on downward revisions of economic growth. We are monitoring closely what's happening in the U.S. And obviously, there's a very close link between Mexican GDP growth and the U.S. GDP growth.
So if the U.S. end ups in a recession, I think that the likelihood that Mexico will follow is high. But so far, we are not seeing - we're not expecting that, but that could be a possibility. I don't Know Hector Chavez, you do have the numbers with you in terms of exposure that we have in terms of our corporate loan book associated with businesses that have direct exposure to the U.S. economy?
Hector Chavez
Hi Didier no, I don't have them available, but I just wanted to remind Ernesto, that all, of our loan book is focused on Mexico as a region, we don't have cross-border in our books. And the Mexican economy is 35% of GDP are experts [ph]. So there is a close link to exploring these companies. And it's not easy to calculate the in direct effect. You have to do it by certain sectors. So we can discuss that, but the numbers are not that easy to pinpoint.
Felipe García Ascencio
And just to complement Ernesto just a rough number of exposure because as Hector mentioning, it's not that easy to see record [ph] an exposure. I would say that the exposure that we have right now is around 5%, which is below the market system that is around 6.5%. But again, it's not an exactly direct exposure.
Ernesto Gabilondo
Okay no, understood, thank you very much. And just last question we saw in the media that Santander Mexico has exposure to Credito Real. I don't know, anything that you can give us some color on that?
Didier Mena
The exposure that we have to Credito Real is not material, less than 10 basis points of our total loan portfolio and we have made provisions for that loan that it's getting close to 80% of provisions for the exposure that we have. So it's absolutely not material, okay.
Ernesto Gabilondo
Okay, perfect thank you very much and again, congrats on your results and your new guidance.
Didier Mena
Thank you, Ernesto.
Operator
Next question Jorge Chirino with Morgan Stanley.
Jorge Chirino
Hi good morning everyone. Just wanted to start by congratulating Hector Grisi [ph] for his appointment in Spain, all the best of Hector and congratulating also Felipe and Hector and Didier, sorry, for their new roles in Mexico also wish you the best of luck. Most of my questions have been answered. I just wanted to add something?
I wanted to ask you something a bit technical, which is when you put in your bid for Banamex, was the information that you were not going to be allowed to fire people according to the commentary that Amlo made recently in the press, was that already known at the time of the bid. And to what extent the bid included the ability to fire people and how -- and was there an opportunity for you to change your bid after that information came out? Thank you.
Didier Mena
Hi Jorge it's great talking to you long time no speak. Thank you very much – I'll past your message to Hector. I think that since the beginning of the process, the government and the President particularly has been sending certain messages about his desire about what the buyer of Citibanamex could look like, okay.
Obviously, those things are important to consider, but I wouldn't say that those were hard stop restrictions in terms of how we put or the group put together an offer, okay. So - and I think that the President has also stated that this is a transaction that is between private parties and that he's just expressing his willingness. So clearly, he has manifested that he would like the new owner not to fire individuals.
But I think that, that's up for the management to decide whether it makes sense or not to run some efficiencies so all in all, I would say that the comments made by the President and the government, we heard them. I don't think that they were critical in how the group put together a proposal for Citibanamex I know Biden okay.
Jorge Chirino
Great Didier, thanks for the color and again, congrats to everyone on their new roles.
Didier Mena
Thank you very much, Jorge. Good to hear from you.
Operator
Next question, Tito Labarta with Goldman Sachs.
Tito Labarta
Hi good morning thank you for the call and taking my questions. Two questions first on your dividend, Didier, you mentioned that you paid another $8.8 billion I think, yesterday. In the past, you've mentioned that you would pay up to I think it was 11% core Tier 1. So if I estimate correctly, you still have $12 billion, $13 billion in excess capital. I think you said you also exhausted your dividend for this year?
So should we expect that roughly $13 billion in excess capital to be paid out next year any color you can provide - in the cost of risk, as you mentioned, the guidance to be below 2.4% I know you should normalize the pre-pandemic levels. But do you expect to normalize next quarter? I mean, that would imply a big increase in provisions or can you give some color on how long that normalization would take given that asset quality seems to be holding up fairly well and any color on when NPLs can begin to increase? Thank you.
Didier Mena
Hi Tito, regarding your first question on dividends, you may recall that the new guidelines that the CNBV provided for this year, taking into account the sensitivities that each bank provided at the beginning of the year in terms of the impact that has in your capital ratios, certain stress scenarios, okay. So it's not sensitivity just for one year, but takes into account how the bank might look like during the following years and also how each bank would need to comply with TLAC okay.
So your dividend payment shouldn't compromise obviously, your regulatory capital requirements, but also the fact that for those systemic banks that have TLAC requirements that you comply with the phase-in as provided by regulation. So - in our case, what we submitted at the beginning of the year was basically MXN 17.9 billion so that what we could pay this year and not compromise under a stress case scenario.
Our capacity to be above minimum regulatory capital ratios and to have certain buffer and also not compromising our TLAC compliance, okay, what we are starting to consider is by the beginning of next year, we have to provide this new version of these sensitivities for stress cases. And we will discuss that with the regulator during the following months purely in advance to the deadline that is on January of next year.
So that we have a better understanding in terms of whether that will continue to be the restriction that they will impose or if they will just move for a more simplistic way of looking at it in terms of excess capital as with the capital ratios that we currently have, okay. But you are right in the sense that we continue to have excess capital, taking into account the capital - the dividend paid yesterday, it's more close to MXN 10.5 billion, okay.
The excess capital relative to our Core Tier I ratio that give us, I would say, the quite the good comfort in - for us in Mexico, okay? So that's on dividends. I would say that probably during the next quarterly call we might provide you an update if we have already met with the CNBV and discussed the plans that we have for the following years so, to give you a better understanding as to timing and magnitude of dividend payments, okay.
And regarding asset quality, as noted during our remarks, we have been positively surprised by the performance of our, I would say, the retail portfolio, as we have seen the - our loan growth has been quite robust over the last quarters. And the credit card's performance also, mortgages and asset quality has been quite strong.
And you're right in the sense of -- we don't expect the cost of risk to jump to pre-pandemic levels the next quarter, but still remain fairly close to what we are standing right now, but trending up given the change in the loan portfolio that we are witnessing with higher growth in loans to individuals, okay.
Tito Labarta
Great thank you Didier that's helpful. If I can ask just one follow-up on the dividend. So just - so is there a core Tier 1 ratio that we should consider as your minimum? I think in the past, you had mentioned 11%, but given some of the changes, I'm not sure if that's still the right one. And just to confirm, there will be no more dividends this year. That's correct, right?
Didier Mena
Yes, there will be no more dividends this year. The recommendation made by the CNBV, the one the restriction is what you or what each bank consider in this sensitivity exercises, and we have exhausted that, okay? And the Core Tier 1 ratio that we have related to in the past is 11.3%. That's where we think we would feel comfortable.
Tito Labarta
Okay thank you Didier and also congratulations to you and Felipe and in Europe.
Didier Mena
Thank you. Tito.
Operator
Next question Alonso Garcia with Credit Suisse.
Alonso Garcia
Good morning for taking my question. My first question is on loan growth. I mean the revision to loan growth guidance was just a slight reduction to a 7% to 9% range. But still, it sort of implies a slightly softer second half of the year. So I just wanted to check the rationale for that reduction if it's mainly given that you see a cool down in demand in second half? Or if it's more of a -- if it's coming more from the supply side, if you are getting a bit more restrictive or conservative given the challenging macro outlook ahead?
And my second question is on the NII. I mean, you had a nice performing this quarter, up 5% sequentially. I still wanted to check on the outlook for NII growth in the coming quarters and how much you are being able and willing to pass through to clients the higher reference rates? Thank you.
Didier Mena
Hello Alonso, I think that both questions are related, as I will elaborate. We are passing -- we're starting to pass certain increases in interest rates to our customers and particularly in mortgages. We probably have been one of the banks that has increased the most interest rates during the year, okay.
And we will continuously monitor interest rates and the market appetite to price that product the best -- in the best way to reflect the current environment and also to reflect where we think interest rates will end up in the near term, okay? So that mortgages, if you look at year-on-year growth has contributed close to 27% of our total loan growth. And we think that with interest rates that we have increased and we have passed to our customers there might be the case that there could be a slowdown in mortgages.
And if you add to that certain reduction in loan demand because of the current market environment, I think that, that's what led us to reduce our loan growth guidance for the year. I would say that those are the 2 key contributors. And in terms of net interest income, we continue to see quite good momentum during the second half, and we expect NII to grow double digit for this year, okay?
Alonso Garcia
Thank you very clear and congratulations again to you and Felipe on your appointments.
Operator
Next question Olavo Arthuzo with UBS.
Olavo Arthuzo
Yes good morning Didier and thank you for taking my questions. Actually, I have two and the first one it's related to the credit mix of the bank. So I just wanted to hear what could we expect for the rest of the year related to the credit mix of the bank in regards to the consumer loans, the mortgage and the commercial portfolio. And also, if you could please remind us the sensitivity for the news of the bank for a 100 bps hike in the monetary policy. I would appreciate. And then I'll go to my second question.
Felipe García Ascencio
Hi regarding loan mix, we have been growing quite steadily in terms of our loans to individuals. You can look at it probably in a couple of ways when we look at it in high-margin segments relative to low-margin segments. So in this quarter, we reached one of the highest contributions of high-margin segments over the last few quarters, turns up to 52.5% of our total loans. And if you look at the breakdown within those high-margin segments and you have market companies and credit cards, we expect those 2 to continue growing at a quite strong pace.
In the low-margin segments, you have their mortgages. And as mentioned, we think that there could be a slight slowdown in that regard. So we think that high-margin segments could continue growing its contribution, probably north of 53%. And if you look at loans to individuals, it's slightly above 42%, 43%. That has continued increasing.
And we would expect that to either remain stable or gain slightly because of the combination of a potential slowdown in mortgage loan growth. But we -- that might be compensated by the strong performance that we're having in credit cards, okay? But when you look at it, over the last few years loans to individuals have continued to increase their share in our total loan portfolio. Having said that, we think that there is still potential to have more exposure to individuals.
That's one of the core strategies that we are pursuing. And we think there is a potential to have, I would say, probably a contribution of loans to individuals north of 45% of our loan portfolio. We're currently at 43%, okay? At some point, we were below 40% over the last few years, okay.
Olavo Arthuzo
Okay, so still talking about this topic. I just wondered if you could please just share the sensitivity of your needs to reach 100 bps hike on the monetary policy rate?
Felipe García Ascencio
Yes sorry. Yes it's - as it is right now, it's close to MXN 500 million, the impact of a parallel increase over a year of the monetary policy rate, okay?
Olavo Arthuzo
Okay thank you very much for this. And if I may pose my second question regarding to the long-term assumptions of the bank I just wanted to understand what is the view of the bank for the sustainable ROE of the bank? And if you could add or what is the assumption that you guys are using for the cost of equity for the bank today? I would appreciate.
Felipe García Ascencio
In terms of ROE, I think that we're aiming at having a bank with an ROE of 20% in the medium to long-term, okay? This quarter, we reached that if you take into account the excess capital, okay? We think that with the higher exposure to individuals we think that there might be an opportunity for us to deliver ROEs at 20% or higher on a sustainable basis. But let me be very clear on that. We are not there yet, okay.
I think that we have benefited from a strong NII and a strong asset quality this quarter. And I think that for having a 20% ROE on a sustainable basis, we need to continue making progress both on our gaining exposure to individuals and also the continuing making progress on our digitalization efforts, okay.
Olavo Arthuzo
Okay thank you very much Felipe.
Operator
Next question Yuri Fernandes with JPMorgan.
Yuri Fernandes
Thank you Didier, Hector and congrats on the quarter I have the first one on the liability side on your deposits. We are seeing deposits growing slightly less than loans and you have a very good liquidity. You show the ratios. LDR remains below 100%. But if you can provide some color here on your deposit funding strategy I remember in the past, you have some like plus and you have been trying to attract more retail funding?
So what is the plan here? Again, I don't think it's an issue. You are calling for loan growth to decelerate a little bit, but just to understand a little bit on the funding side of things. And I have a second question regarding LikeU, it has been great. 12% of billings is a lot. But we are seeing acceleration on new adds, right? I guess, in the beginning, in the first quarter, when you launched this in September, you added about 400,000 customers in about 3, 4 months?
And now you are seeing 100,000 or 150,000 net adds per quarter. So my question is, what is your view here do you have any number like opening this to the open market? How this can help you? Will you still target like lower-income clients. What is the target here? It's like the unbanked population in the open market, is these customers from other banks? Just some color on like your strategy because it's getting bigger and would be great.
And if I may, a third and last one, just want to follow up on the delisting on the potential delisting. I understood you have not made a decision. Santander Spain has not made a decision yet. But can you tell us the process, like if they decided to delist the company? How long is this may take? What are the process do they need to call a shareholders assembly thing they offer, like just a quick summary and what would be the steps there? Thank you very much.
Didier Mena
Hi Yuri, regarding our deposit strategy, we continue to make emphasis, I would say, in two things, try to gather as much individuals. And I think that the contribution that the individuals have provided in terms of deposits has been quite strong over the last five years. The evolution is there. Probably, if you look at it on a more recent basis, probably BBVA has done a great job in terms of attracting a significant number of individuals.
I think that their strategy in terms of utilization, making processes simpler for their clients is paying off quite well. So we've seen a relative slowdown in our capacity to attract individuals recently and with a strong performance from BBVA. We are working, as we have stated, on simplifying things for our clients on updating our app. And we think that with those two things, we're going to have the capacity to compete relative to BBVA and have the opportunity to convince clients that we are the best bank for them to make their deposits.
The second thing that I would like to stress is the fact that we have been pursuing a strategy to let go those deposits are more expensive. So when you look at the market share of the deposit growth that we have with the corporate deposits, that reflects that, okay. We continue to have a much larger market share in terms of deposits from corporates relative to deposits from individuals, okay? And that's why we have a higher cost of funds than our peers.
And the only way to make this a consistent and sustainable strategy is to be relevant, to have a relevant value proposition for individuals. And I think that we have made some progress on that. And given how competitive is the Mexican market, I think that we need to continue making a significant effort for us to provide the best possible value offering for our clients, okay. So that's on deposits.
On LikeU, credit cards, one of the things that is quite interesting is when you break it down by age. So 45% of the LikeU credit cards are within 18 to 30 years old. That's where our clients are, okay? If you compare that to the credit card portfolio, excluding LikeU, that's 21%. So clearly, the LikeU credit cards have been extremely well received by the young population in Mexico.
And Mexico has a quite young population. So you could frame this as on bank yet or not that bank. So we feel encouraged with the growth that we have experienced within our customer base. So we think that it's about time to tap into the open market and see the reaction there. We think that there's a significant potential there, okay?
So that's basically the strategy that we're following the LikeU card and -- where is the target population we're aiming at regarding….
Yuri Fernandes
On the LikeU, on the open market, what is the target there? Like clients from other banks like unbanked people, what would be - I understood like the younger people focus, but these are unbanked or banked kind of plan?
Didier Mena
It's the combination of both, Yuri. I think that we will have the capacity to offer for clients that would be their first credit card all clients that have already credit cards with other banks, okay? That's on LikeU. Now on the potential delisting process, as mentioned before, group has not made a decision yet as to when or if this is something that they will pursue in the short term. It needs to follow a process that has to -- prospectus needs to be put in place.
There needs to be a mandatory delisting offer. We - obviously, the Shareholders Assembly needs to meet. The CNBV needs to prove the documents for the transaction. And in terms of pricing, it has to be at the highest of book value for the last pay for size [ph] 20 business that is the weighted average of the pricing of the stock. So I think that all in all, will probably take, in my opinion, close to 120 to 150 days to execute a transaction at the listing transaction once it is announced, okay?
Yuri Fernandes
This is super, super helpful. I appreciate and again, congrats, it's a very good quarter for company trading at a very discounted valuation. It seems that liquidity is a matter here. But congrats guys, you are doing a good job. Thank you.
Felipe García Ascencio
Thank you, Yuri.
Operator
Thank you. If there are no further questions, I would like to turn the floor back to Mr. Hector Chavez for any closing comments.
Hector Chavez
Thank you, Operator, and thanks, everyone, once again for joining Santander Mexico on this call. As always, we wish to maintain an open dialogue with all of you in the financial community. So if you have any additional questions, please don't hesitate to call or e-mail us directly. Until next meeting, please stay safe. Thank you.
Operator
This concludes today's conference call. You may disconnect your lines at this time. Thank you again for your participation.
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Banco Santander México, S.A., Institución de Banca Múltiple, Grupo Financiero Santander México (BSMX) Q2 2022 Results - Earnings Call Transcript