2023-04-29 04:00:06 ET
Banco Santander México, S.A., Institución de Banca Múltiple, Grupo Financiero Santander México (BSMX)
Q1 2023 Earnings Conference Call
April 27, 2023 12:00 PM ET
Company Participants
Hector Chavez - Managing Director and Head of Investor Relations
Didier Mena - Vice President of Administration and Finance
Conference Call Participants
Nicolas Riva - Bank of America Merrill Lynch
Presentation
Operator
Good day, everyone, and welcome to the Banco Santander Mexico's First Quarter 2023 Earnings Conference Call. Today's call is being recorded. Following the speakers' prepared remarks, there will be a question-and-answer session.
I would 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. Good day, and welcome to our first quarter 2023 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 in our Investor Relations website. Presenting on our call today will be Didier Mena, Vice President of Administration and Finance.
As always, we 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 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.
Didier, please go ahead.
Didier Mena
Thank you, Hector. Good morning, everyone, and good afternoon to those of you participating from Europe. Before reviewing our first quarter results, I would like to inform you that the tender offer being executed by Santander Group had a very high level of participation. The Santander Group was able to repurchase 96% of the total shares that were still outstanding, thereby increasing Banco Santander's stake in Santander Mexico from 96.2% to 99.84%.
Further, in the listing process is evolving this plan, we expect that the last day of trading of our ADRs on the New York Stock Exchange would be on May 4, while the delisting from the Mexican Stock Exchange should occur in the subsequent weeks as we await authorization from the Mexican regulator. Moving on to our first quarter performance. I'm pleased to share with you that we started the year with very strong results, with net income of MXN 7.6 billion, growing slightly more than 49% year-over-year and demonstrating the earnings power of our strategy.
Total loans grew more than 5% year-on-year, with strong performance across our entire loan book. In individual loans, we had a solid increase compared to last year, mainly due to double-digit growth in credit cards, payroll and other loans. In fact, February was our 10th consecutive month of double digit growth in payroll loans and in credit cards. We also reached a market share of 16.2% in auto loans, keeping us firmly in third position in the auto segment.
On the other hand, we started to see a gradual and expected slowdown in mortgages due to higher interest rates. With regard to deposits, we achieved solid growth of 14.6% compared to the first quarter of last year. That was mainly due to good performance of term deposits, which grew close to 52% year-on-year, thanks to our strategy focused on increasing retail deposits for new customers as well as higher interest rates that have practically doubled in this period.
Our main opportunity continues to be increasing our market share in individual demand deposits, which stood at 9.8% in February, a 20 basis point decrease compared to last year. It is also worth noting that although we have increased the contribution of deposits from individuals to total deposits from 24% in 2016 to 40%, the contribution share of demand deposits to total deposits fell to 64% in the first quarter of this year from 73% in the first quarter of last year. This is due to strong growth in term deposits.
During the first quarter, asset quality remains at excellent levels despite the solid growth of our consumer loans. The NPL ratio stood at 1.96%, improving 83 basis points compared to the first quarter of last year, while our cost of risk improved 79 basis points to 1.62%. This results underscore our prudent risk management strategy that has been consistently executed by a risk team in coordination with all business units.
In terms of profitability, our first quarter of this year performance reflects solid growth in individuals, both in terms of credit and deposits as well as the excellent risk management that I just noted. Accordingly, we achieved a return on equity of nearly 18%, 560 basis points higher than a year-ago. Thanks to our solid revenue growth and strict cost controls, we also managed to improve our efficiency ratio by 644 basis points year-on-year, which stood at 40.8% at the end of the first quarter. It's noteworthy that we accomplish still in a high inflation environment.
Moreover, we continue to maintain a strong balance sheet as reflected in our solid capital ratio and liquidity position well above regulatory requirements for a systemic bank of our size. At the end of the first quarter, our total capital ratio was 22.1%, while our liquidity coverage ratio was 212%.
Before we open the call for the Q&A session, I would like to briefly summarize the quarter. The healthy growth we achieved in retail loans, coupled with a reduction in our cost of risk and the effective cost controls we have maintained, generated solid net income growth, building on various initiatives to consistently deliver strong results. We will continue executing our many growth initiatives and advancing our bank's transformation hand-in-hand with our strategy focused on further strengthening customer loyalty by increasing the digitalization of our products and operations. Innovation and market-leading digital advancements will enable us to continually enhance the value of our products and digital offerings. All-in-all, our goal of building a much stronger franchise and becoming the best bank in customer experience for all of our customers remains our top priority. This concludes our prepared remarks.
We're now ready to take your questions. Operator, please open the call for questions.
Question-and-Answer Session
Operator
We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from Nicolas Riva with Bank of America. Please go ahead.
Nicolas Riva
Thanks very much Didier, Felipe for the chance to ask questions. I have a few questions. The first one, if you can comment – give us an update on the 2028 bonds. I remember last earnings call, you mentioned that you had asked for approval from the Bank regulator, I believe, to call this bond in October. If you can confirm what's the plan for the – regarding the call option in October of that bond? And if you plan to issue a new Tier 2 bond, which would be majorities ascribed by the parent company than in the past. So that's my first question on the 2028.
Second question, if you can explain a bit more the driver for that big jump in the CET1 ratio this quarter to 17.7% I think up from I believe 13.9% or so last quarter. And also – so that's the second question. Third question, of course, the parent company carried the tender offer on the shares. I think the ownership has increased to 99.8%. If you can give us an update in terms of when you expect the delisting from the stock exchange to be completed? And also if the delisting would mean that you wouldn't be able to issue in the future AT1s, which are convertible into shares stand in the past? Or if you could still do that because the AT1s in the past have been fully bought by the parent company instead of going to the market. Thanks very much.
Didier Mena
Hi, Nicolas. Good to hear from you. Regarding your first question, I think that we have defined our responsibility to do what we [indiscernible] for our shareholders. So we have started the approval process for doing what would be best for our shareholders. So it could be calling the bonds, it could be issuing new ones. So the approval process before the Central Bank takes some time. So we are prudent that we already started that. We will make a decision as to what is best for the company, okay. So we will remain with all our options open, okay.
Nicolas Riva
And one thing, if I can just – sorry, just ask a follow-up question there. If you were – at least, can you say if you were to call that these bonds in October, in that case, would you replace them with a new Tier 2 bond with the same structure 10-year non-callable 5? Can you say anything about that or not?
Didier Mena
What I can tell you is that we will analyze all the options available at that time, and we'll make the best decision as we will do.
Nicolas Riva
Okay. Understood. Thank you.
Didier Mena
Okay. Then regarding your second question, the CET jump, we used to have a finance company as a subsidiary of the bank. We merged that. So in the past, as it was a subsidiary, you had to deduct the capital invested in that finance company from core Tier 1. So by merging it, you will increase actually CET1. So that's obviously retained earnings also contributed for the increase in CET1, and we haven't paid dividends. So we are still accumulating capital. So that's on your second question.
Nicolas Riva
Sorry to interrupt one second, just to clarify. So then there was a merger between Banco Santander Mexico and the consumer finance subsidiaries and tender consumers, so I believe it was the name – and because the bank no longer needs to deduct that investment in subsidiary, then because of that, you had an increase in the CET1.
Didier Mena
Absolutely. That's totally right, okay.
Nicolas Riva
Okay. Thanks.
Didier Mena
Then regarding your third question, as mentioned, we expect that we will be delisted from the New York stock exchange on May 4. We're still in the process of getting regulatory approval by the Mexican banking commission to the list in Mexico. So we expect that to happen soon because all conditions to the list have been met. So that will happen, I would guess during the following weeks. Now being or not being listed to not prevent us to issue for issuing AT1s. That used to be a restriction that in a law, in a regulation that I think was changed back in 2019, if I recall right.
In the past, BBVA was not able to issue these instruments in the Central Bank when they put in place these conditions to create an incentive for banks in Mexico to list their shares, they prevented them from issuing capital securities, okay. But sometimes they change their mind and they allow – they actually, in my opinion, they made the right call because this is something that the market should consider. If they need to maybe convert into shares and the bank is not listed, well, that's an issue that investors should take into consideration, that's a risk. And obviously, there are several ways that you can value a bank, using alternative methods and not only by being a listed company, okay. So we have been one of the banks most active in capital securities, and we will continue to do so going forward.
Nicolas Riva
Okay. So the conclusion is you believe that in the future, you would be able to continue issuing AT1 that are convertible into shares despite not being listed?
Didier Mena
Yes. And if I recall right, the current regulation has the option of not only comparing but also writing down the AT1. So yes, that's something that you actually negotiate with the investors – depending on the conditions that you put forward in a prospectus and you get a pricing for that, okay.
Nicolas Riva
Okay. Okay. So basically, you could continue to issue AT1, so maybe instead of being converted into shares with that write-down feature. Okay. And last question. I already asked this in the last earnings call. Assuming the stock delisting goes through early May, this would be your last earnings call, right?
Didier Mena
Yes. Actually, last time, I gave some words, thanking you and everybody has been very helpful to us throughout this process. We continue to be listed. There was an extension in the tender offer time line. So that's why we still are listed. So we have an obligation before you that we are honoring. But yes, if during the following weeks, we are formally delisted, then yes, this would be our last earnings call. We will continue providing the information as required by regulation. And obviously, if there's anything that you need from us, you know where to reach us.
Nicolas Riva
Awesome. Well, thanks very much Didier, Hector, Felipe for the help. Thanks a lot.
Didier Mena
Thank you.
Operator
Thank you. If there are no further questions, I'd 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, if you have additional questions, please don't hesitate to call or email us directly. Have a great day.
Operator
This concludes today's conference call. You may disconnect your lines at this time. Thank you again for your participation.
For further details see:
Banco Santander México, S.A., Institución de Banca Múltiple, Grupo Financiero Santander México (BSMX) Q1 2023 Earnings Call Transcript