Banco del Bajio SA Institucion de Banca Multiple

BMV:BBAJIOO

Earnings Call Transcript 2019-Q1

[Operator]

Good morning, everyone, and welcome to BanBajío's First Quarter 2019 Earnings Conference Call.

My name is Leo, and I will be your conference operator today.

Yesterday, BanBajío issued its quarterly report. If you did not receive a copy via email, please do not hesitate to contact us in New York City at [phone].

Before we begin the call today, I would like to remind you that forward-looking statements made during today's conference call do not account for future economic circumstances, industry conditions, company performance and financial results. These statements are subject to a number of risks and uncertainties.

Joining us today from BanBajío in León, is Mr. Carlos de la Cerda, Chief Executive Officer; Mr. Joaquín Domínguez, Chief Financial Officer; and Mr. Alberto Guajardo, investor relations officer.

And now I will turn the call over to Mr. Guajardo. Sir, you may begin.

[Alberto Meléndez, executive]

Good morning, everybody, and thank you all for the opportunity to discuss our results for the first quarter.

Before I begin with my presentation, I would like to briefly comment on the relevant event we issued yesterday regarding the changes in our top management. As it was disclosed, Mr. Carlos de la Cerda, current CEO of BanBajío, has been named Executive Vice Chairman of the Board of Directors, effective July 1. And on that same date, Mr. Edgardo del Rincón will assume the CEO position. Mr. del Rincón has over 30 years of experience in the banking sector, where he achieved outstanding results in his prior financial institution in areas such as technology, consumer and digital banking as well as branch network.

Let me now start with a brief summary of our results for the quarter before going more into detail.

Our net income for the quarter reached MXN 1.4 billion, representing a 22% increase when compared to the MXN 1.2 billion registered during the first quarter of 2018. Total revenues and financial margin grew 18.1% during the quarter, while our ROAE reached 19.3%. NIM was 5.7%, up from 5.5% recorded during the first quarter of last year.

We continued to improve our efficiency ratio, which now stands at a level of 42.8% at the close of the quarter, down from 44.7% recorded in the same year ago period.

The total loan portfolio rose 20.5% to MXN 175.8 billion at the end of the quarter. Company loans, which represented close to 83% of our total loan book, increased 19.3%, reaching MXN 145.2 billion. Total deposits reached MXN 139 billion, 18.2% higher than the MXN 117.6 billion registered a year ago. Our NPL ratio was 0.92% at the close of the quarter. And finally, the coverage ratio was 173.2%.

Before getting into the details of the quarter. Yesterday, we hosted our Annual Shareholders' Meeting, during which among other things a cash dividend was declared equivalent to 40% of 2018 net income, of which 20% is ordinary dividend and 20% extraordinary. The total amount to be distributed equals to MXN 2 billion, which is 2.64x the dividend paid last year and on a per share basis equals to MXN 1.71 compared to the MXN 0.65 paid last year. This represents a dividend yield of approximately 4.5%. And payment will take place during May.

Moving on to Slide 4. During the quarter, total revenues grew 18.1% to MXN 3.6 billion. This increase is the result of an 18.1% increase in the financial margin line, which in turn was positively impacted by higher volumes and interest rates as well as an 18.2% increase in non-interest income.

Moving on to Slide 6. As a result of our continuous growth in earnings, we achieved a 78% increase in EPS since our IPO and 27% on a year-on-year basis, reaching MXN 4.48 in the first quarter.

As shown in Slide 7, our net interest margin reached 5.68%, an improvement of 16 basis points when compared to the 5.52% recorded in the same period of 2018, mainly explained by the increases in the reference rate during last year.

On Slide 8, you will see the performance of our efficiency ratio. It came in at 42.8% versus 44.7% in the first quarter of last year; and below the 51.8% average that our peers reported during the fourth quarter of 2018, which is the most recent publicly available information.

Slide 9 shows our total portfolio loan growth in the period, which increased 20.5%, reaching MXN 175 billion at the end of March. As we've done in the past, we continued to outperform the banking system growth. During the quarter, corporate loans reached MXN 95.3 billion, increasing 20%, while SMEs amounted to MXN 49.9 billion, increasing 18%.

On Slide 10, you will see that our NPL ratio stood at 0.92% in the quarter versus 0.93% recorded in the first quarter of last year and also compares positively to the 2.11% recorded for the system as of February 2019. On the other hand, our NPL ratio adjusted for write-offs was 1.57% in the quarter compared to 1.35% recorded in the same period of last year and also positively compares to the 4.54% recorded for the system as of February 2019.

Our coverage ratio was 173.2%, down from 209.5% from the first quarter of 2018. This ratio also positively compares to the 152.1% recorded for the banking system at the close of February 2019. Furthermore, the cost of risk at the close of the quarter declined to 0.41%, a level that is similar to the first quarter for the last 2 years.

On Slide 11, you will see that we have been consistently creating additional reserves to those that are required by the regulation. The main reason for this is to build an anti-cyclical cushion to protect the bank from any additional risk of a potential shift in the economy.

Moving on to Slide 12. Total deposits grew 18.2%, while for the system the growth was 7.1% as of February 2019. As you can see, our cost of total funding for the quarter was 5.3%, similar to that of the system.

Moving on to Slide 13, we see that our capitalization ratio on a preliminary basis at the end of March 2019 was 16.45%, up from the 16.37% at the close of the first quarter of 2018. It is worth noting that 99.2% is Tier 1.

With this, I conclude my presentation. Thank you very much for your attention, and we are now ready to take your questions.

Please, operator?

[Operator]

[Operator Instructions] We'll take a question from Gabriel Nóbrega of Citibank.

[Gabriel da Nóbrega, analyst]

I actually have a question on the recent CEO change. This question is actually relating. What is the strategy that the bank is going to pursue given that Edgardo is actually coming from the retail banking background? And maybe, are you going to begin focusing more on then retail clients and also in digital platform? And I'll make the second question afterwards.

[Carlos De la Cerda Serrano, executive]

Gabriel, this is Carlos de la Cerda. I think your question is very important because we need to -- we would like to tell you all that the Banco del Bajío is not changing its basic business model. What happens is -- just to make an analogy: We see ourselves like an athlete that has a very strong leg, very powerful leg; and that is company loans and services side of the business. And we have a much weaker leg that has -- that is the retail part of the business. And we already have a 306-branch network that in our opinion is underutilized, under what it should be, is suboptimal. So the first challenge that Edgardo will have will be to help us bring that leg to the same level of the other one, but we are not getting weaker on our strong leg on the company business. Besides that, Edgardo is a person that has a lot of experience in the technology transformation toward the digital banking because he already did it in his past job. And we are convinced that the main challenge that the banking system as a whole has in whole -- in all the world is a technological challenge. So Edgardo has a lot of experience in that regard and he is bringing his talent to work with us in achieving the main objectives of the bank, but we are not changing our basic model. We will keep trying to be stronger and stronger in the company loans and services side of the business.

[Gabriel da Nóbrega, analyst]

Yes. That was very clear. And if you may allow me just another question here. I'm looking at your loan growth. It has been very strong around 20%, I mean, year-over-year. This is well above what you have guided. So here I just want to maybe understand, where are you seeing this loan demand actually coming from, being that we are seeing a slower economic growth in Mexico? And also, could this maybe signify any upwards revisions to your guidance?

[Carlos De la Cerda Serrano, executive]

We have -- during the last quarter, we had good opportunities that we took to make important loans to AAA companies. And we took those -- that opportunity and we saw a very important growth in that we -- actually we didn't expect. If you remember, the last first quarter, the first Q of '18, we had a decrease in the total loan portfolio of the bank because, since we are very strong in the agricultural part of the business. And during the first quarter, we get paid for the loans that we did, that we make for the -- of the winter part of the production or autumn/winter cycle of the agricultural production. And we had the same phenomenon this first quarter. We got paid-out loans as soon as the agricultural people harvest their -- the things, but we have this opportunity that I'm mentioning. So in -- right in this moment, we are not changing our guidance, but we will probably do it in the second quarter of this year because -- as we have seen that, probably the demand for loans will not be as low as we expect it. So in the next quarter -- we will evaluate this second quarter, if we change the guidance. And we probably will.

[Gabriel da Nóbrega, analyst]

Carlos, just a follow-up here. You're saying that you took important opportunities for these AAA companies, but could maybe these companies continue to grow more, being that we are beginning to see companies shying away from capital markets given uncertainty and also volatility and also -- and thus going on to banks rather than tapping capital markets?

[Carlos De la Cerda Serrano, executive]

Yes, it is possible. Also, traditionally, in Mexico the suppliers do a lot of funding for their clients. And we are seeing that some of those suppliers are tightening their conditions, and some clients are coming to the banks to ask for loans. So even though the economy is slowing down notoriously, some opportunities are showing up. And we intend to take them, especially with very AAA clients, with very low-risk clients.

[Gabriel da Nóbrega, analyst]

All right. That's very clear, Carlos. And good luck with your new role as well.

[Carlos De la Cerda Serrano, executive]

Thank you very much, Gabriel.

[Operator]

[Operator Instructions] We'll move next to Adriana De Lozada of Scotiabank.

[Adriana De Lozada, analyst]

Congratulations on your results. You alluded to a change in guidance because of the high level of loan growth that you're seeing. How about cost of risk? It's seemed that it's been particularly low this quarter. And I also have a follow-up question but maybe that one first.

[Carlos De la Cerda Serrano, executive]

Thank you, Adriana. The cost of risk in the quarter reflects the high quality of our asset portfolio. We didn't save on provisions to have a better profit in the quarter. I -- during the quarter, the -- as you can see, the NPL ratio stayed the same, but the coverage diminished, the coverage ratio. What happened is that, during the quarter, a yellow flag customer that we were monitoring very closely went into concurso mercantil; or the equivalent of that, to Chapter 11. And it wasn't in the nonperforming loans since it had a [ stance deal ] with all of its banks. It was a performing loan. So when it went to concurso mercantil, we had to choose to send it to nonperforming loan or write it off, and we decided to write it off. That's the reason why you see a decrease in the coverage ratio and also a slight increase in the nonperforming loan adjusted with the write-offs. That went from 1.35 to 1.57, which is still pretty good in the system, but that is the reason why the coverage ratio diminished. We wrote off a case. We will continue the legal procedures to recover our loan, but since it will take years, we didn't want to have it in the balance sheet as a nonperforming loan. So we decided to write it off. The 0.41% cost of risk reflects what we needed by regulation to charge to the profits to accommodate the growth in the loan portfolio. That is a very high quality in terms of risk.

[Adriana De Lozada, analyst]

That's very clear. And maybe a follow-up question. You mentioned a suboptimal, like, branch network. I think the word you used was "suboptimal." Is this something you're planning to invest on in the future?

[Carlos De la Cerda Serrano, executive]

We don't want to build more branches. I mean we will but at the same pace that we have been opening up branches in the last few years. But we do want to sell more products in the branch network. We are known for having a splendid level of good service in the -- in our branches, but our people is not used to have aggressive objectives in terms of selling products to our clients. And Mr. Edgardo del Rincón is an expert in that area. We -- what we want to do is just to take more or bring more business to our branch network and make it optimal. I don't know the optimal word is the right one, but that's what we want to do. One of Mr. Edgardo del Rincón's challenge is to make even more profitable the branch network.

[Operator]

[Operator Instructions] We'll move next to Ernesto Gabilondo of Bank of America Merrill Lynch.

[Ernesto María Gabilondo Márquez, analyst]

Congrats in your results. Sorry. I entered late to the call. But your net income growth was particularly high this quarter, so do you think there could be upside risk to your net income guidance? And then my second question is if you can remind us your sensitivity to a potential reduction of 100 basis points in interest rate but not in terms of basis points but the amount in pesos.

[Carlos De la Cerda Serrano, executive]

Thank you, Ernesto. I will answer your first question, and then Joaquín will answer the second question about sensitivity. As I was mentioning, our growth in the volume of business, both deposits and loans, has been higher than expected due to certain opportunities that we have seen in this quarter. We are not completely sure that this dynamic will be the same for the rest of the year, but we will be evaluating during the second quarter if we change our guidance. At this moment, I think we will. I think our results both in terms of growth and in net profits will be higher than expected, but as soon as we are sure, we will let you know about our new guidance. Yes...

[Joaquín Domínguez Cuenca, executive]

Ernesto, this is Joaquín Domínguez. Yes, the sensitivity we have price related now is that for each 100 basis points of increase in the interest rate, the net income will reduce for MXN 100 million. It means 7% of the net income. Right now we are expecting, as the consensus at the market, that probably at the third quarter of this year we will start a reduction on the interest rates, but we don't see more than a 1/4 of -- more than 25 basis points. So we are not expecting a relevant impact in this year.

[Ernesto María Gabilondo Márquez, analyst]

Perfect. And then just in terms of how to protect the NIM in the future, are you evaluating to grow more in noncredit-related revenues such as leasing, insurance? Or are you [ evaluating ] to hedge something to protect NIM at some point?

[Joaquín Domínguez Cuenca, executive]

Yes. In fact, we already started with our hedge funding. Since the end of the last year, we have very important goals in the sales force in terms to increase the fee income. And of course, we have really developed a strategy to hedge, but we see that this is not time to implement this hedging yet. So it's a very important timing [strategy], and it's not [strategy] for the long and mid term. So the -- basically, the most important action is related with the fee income and also working very hard on reducing the cost of funding.

[Carlos De la Cerda Serrano, executive]

And also part of the strategy to improve our retail business portfolio is to increase our NIM and generate more fee income. And yes, we are selling more insurance from our partners in the insurance business. So we are doing several things to prepare the bank for a diminishing [ TF ] scenario. And that is increasing our fee income, those that are not under surveillance by the congress, by the way; increase our retail portfolio at the sales of other products like insurance; and increase our NIM through the new -- I mean, through the retail launch that we intend to grow.

[Operator]

We'll take our next question from Neha Agarwala of HSBC.

[Neha Agarwala, analyst]

Congratulations on the strong numbers. I have 2 questions. First, on the effective tax rate, if I compared your effective tax rate over the last 3, 4 years versus your closest peer Banregio, your number is almost 1.5 percentage points lower. Could you explain, where does this tax advantage come from? And what can we expect in the coming years? The second question is on regulation. Do you see any potential regulatory changes that could impact your operation in your niche segment?

[Joaquín Domínguez Cuenca, executive]

Neha, yes, that's right, what you say about the taxes. The point is that we are very sensitive to the inflation. As we have mentioned in other conference and as we show in our guidance, as we expect a lower inflation, the effective tax rates increase. So it is perfectly in line with the behavior of the inflation. For the rest of the year, there is no very clear signals about the behavior of the inflation. Probably [indiscernible], so we will increase a little bit. If that happen, our effective tax rate will reduce, but right now it's in line with our guidance and in line with what we were expecting in terms of inflation.

[Carlos De la Cerda Serrano, executive]

Neha, this is Carlos de la Cerda. In terms of your second question, we don't expect a strong regulation or important changes in the regulation for us. In the Convención Bancaria in Acapulco, the President and the finance ministry, the -- all the major political persons that were there told us very clearly that they will not make any important change in the regulation towards the banks in terms of limiting the tax rates or fees or things like that. That's what they said. Now, on the other hand, they opened up the possibility to make differentiated regulation for the different banks and the different sizes in the banks. And that could benefit us, the middle-size banks, if they remove some of the requirements that we -- that today we have to fulfill. That probably could mean lower regulation costs for us, but that's just speculation. I mean that's just speculative. They said they would consider it. They are seeing it, and that will be positive. But to answer your question: I don't expect any important change in regulations that could affect us in the near future.

[Operator]

[Operator Instructions] We'll move next to Enrique Mendoza of Actinver.

[Enrique Mendoza Farías, analyst]

[Three questions, if I may]. [ And the first one, the line ] deposits grew at a very strong [ 6% ] quarter-over-quarter. Did you see any improvement in deposit growth or cost of funds for next quarters [ during the ] -- or as proportion to the average [indiscernible]?

[Alberto Meléndez, executive]

Enrique, this is Alberto. Sorry to interrupt, but we are not hearing anything -- your questions. Can you get closer to your handset, please?

[Enrique Mendoza Farías, analyst]

Yes, yes. Sorry. The [indiscernible] [ the line ] deposits grew at a very strong [ 6% ] quarter-over-quarter. Do you see any improvement in deposit growth or cost of funds for the next quarters with these trends?

[Carlos De la Cerda Serrano, executive]

So...

[Alberto Meléndez, executive]

[indiscernible].

[Carlos De la Cerda Serrano, executive]

[indiscernible]. We believe that -- I don't know if you want us to answer -- Enrique, this is Carlos. I don't know if you want us to answer your questions one by one. Or would you like to make all your questions at the same time?

[Enrique Mendoza Farías, analyst]

As you [ assumably ] consider it appropriate, it will be the same for me, of course.

[Carlos De la Cerda Serrano, executive]

Thank you. We will answer your first question. In regards to the deposit growth for the rest of the year and for this next quarter, we don't expect an acceleration in the rate of deposit generation in the system. We basically believe that the rate of growth both of deposits and loans will keep on going down, the rate of growth, but having said that, we believe that we can outperform the system in both areas in loans and in deposits. We believe that the deposit rate of growth will go down, but still we will have a 2-digit growth in deposits and loans.

[Enrique Mendoza Farías, analyst]

Okay, okay. That's very helpful. And if I may, the second question, could we expect now any change in the branch strategy, for example, intensifying the branch network either through the number of them or to invest and go enhancing them with these recent changes?

[Carlos De la Cerda Serrano, executive]

What we do expect is that the branch network will accelerate the rate of business generation. And since the -- since Mr. Edgardo del Rincón is an expert in that area, we believe that we will see an improvement in the business generation and profits from the bank -- from the branch network. We believe that we will grow more if -- it's going to take years. Since the retail business is very slow to -- is very small in our portfolio, it will take years before it has a substantial impact on our results, but what is important is that we change toward that goal. And what we will see -- what the other part and the reason why Mr. Edgardo del Rincón is joining us is because of his expertise in terms of technology transformation. As I have said before, the banking business is not a brick-and-people business anymore. It's a technology business. And we are investing heavily in technology, and we wanted to bring an expert in leading that transformation process.

[Enrique Mendoza Farías, analyst]

Okay. [indiscernible] I understand. Perfect. And the last one is, if I may, a follow-up of -- regarding in regulation and government credits and change in that. Do you consider -- or can you -- any news regarding the requirements from government credits or any important change in government project finance that you can share with us?

[Carlos De la Cerda Serrano, executive]

In the national banking convention in Acapulco a month ago, the authority, the President itself and the Secretario de Hacienda, were very firm in telling us that there won't be any major change in regulation for the banking system in the short term. And we don't -- we really don't expect -- I mean I believe that part of the speech. We don't think there will be a major change in regulation. Now in terms of opportunities in the infrastructure business, it is [that] we don't see an [exploration] in that area since the government -- it kind of feels that they are trying to understand how to finance and what projects do we -- the country needs. And it is not clear for them. We have an area that is specialized in infrastructure finance. And basically they're doing other kinds of loans since there are not, as of today, opportunities in that area. And probably in the near future, the government will get to understand that they need to invest more in the infrastructure. And they don't have the money, so they will have to create or ask for loans or create new associations with the private sector and get some finance but not in the short term.

[Enrique Mendoza Farías, analyst]

Okay, okay. I understand. And we're very happy to, let's say, turn over to you.

[Carlos De la Cerda Serrano, executive]

Thank you, Enrique.

[Operator]

[Operator Instructions] And it appears that we have no further questions at this time. I would be happy to return the call to management for any concluding comments.

[Alberto Meléndez, executive]

Hi. Thank you, Leo. Thank you all for your interest in the company, and we look forward to speaking with you in the -- in our next conference call.

Everybody have a good day. Goodbye.

[Operator]

Thank you. This does conclude BanBajío's First Quarter Earnings Conference Call. You may now disconnect your lines, and everyone have a great day.