Bolsa Mexicana de Valores SAB de CV

BMV:BOLSAA

Earnings Call Transcript 2022-Q2

[Operator]

Greetings, ladies and gentlemen, and welcome to the Bolsa Mexicana de Valores Second Quarter 2022 Earnings Conference Call.[Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Mr. Ramón Güémez, Chief Financial Officer. Thank you. Please go ahead.

[Ramón Sarre, executive]

Thank you. Good morning, and welcome to the Bolsa Mexicana de Valores Second Quarter 2022 Earnings Conference Call. Before proceeding, I'd like to provide a brief safe harbor statement.

This presentation contains forward-looking statements and information related to Bolsa that are based on the analysis and expectations of its management as well as assumptions made and information currently available at Bolsa. Such statements reflect the views of Bolsa related to future events and are subject to risks, uncertainties and assumptions. Many factors could cause the current results, performance or achievements of Bolsa to be somewhat different from any future results, performance or achievements that may be expressed or implied by such forward-looking statements. Including, among others, changes in the general economic, political, governmental and business conditions, both in a global scale and in the individual countries in which Bolsa does business such as changes in monetary policies, inflation rates, in prices, in business strategy and various other factors.

Should one or more of these risks or uncertainties materialize or should underlying assumptions prove incorrect, actual results may vary considerably from those described herein as anticipated, believed, estimated, expected or targeted. Bolsa does not intend and does not achieve any obligation to update these forward-looking statements.

I would like to remind participants that today's call is being recorded, and a replay of this call will be available online on July 22 at Bolsa's corporate website, www.bmv.com.mx.

During this call, all figures are in Mexican pesos and compared to the second quarter of 2021, unless stated otherwise. This call is intended for the financial community only, and the floor will be open at the end to address any questions you may have.

Joining us for today's call are José-Oriol Bosch, CEO; José Manuel Allende, Chief Capital Information Markets and Information Services Officer; Claudio Gutierrez, Chief Information Officer; Alfredo Guillén, Managing Director of Equity Markets, Jose Miguel de Dios Gomez, Managing Director of Derivatives Market; Rosa Crespo, Managing Director of Human Resources; Luis Rene Ramon, Director of Investor Relations; and myself, Ramón Güémez, CFO.

I would now like to turn the call over to José-Oriol Bosch.

[José-Oriol Par, executive]

Thank you, Ramon, and good morning, everyone, and thank you for joining us for the second quarter 2022 earnings conference call. In terms of today's format, I will go over the financial and operational results of each business line, then talk about our progress in BMV's project plan and finally open up the line for Q&A.

As a reminder, if you want to ask a question, you need to dial in the number that was provided in the press release yesterday. With that, please turn to Slide #3. On the financial highlights for the second quarter we have achieved good results this quarter with revenue growth and cost control. Revenue was MXN 997 million, up MXN 32 million or 3% compared to the second quarter of 2021, driven by a stronger performance in transactional businesses, equity derivatives and OTC trading as well as information services. Expenses were MXN 447 million, up MXN 8 million or 2%, well below inflation and under control mainly explained by higher personnel and building maintenance costs. Operating revenue and EBITDA increased by 5% and 4%, respectively and net income reached MXN 404 million for the quarter, showing a 15% growth compared to the second quarter of 2021.

Please turn to Slide 4 to review half year results. Regarding the key financial highlights for the first half of the year 2022. BMV Group's diversified business portfolio continues to make solid financial and operational progress. Revenue is up MXN 199 million or 10%, MXN 66 million recurring operations and MXN 133 million from extraordinary concept in the balance [indiscernible]. Expenses are flat for the first 6 months of the year at MXN 896 million. EBITDA is up 17% to MXN 1.4 billion, and EBITDA margin was recorded at 63%.

Earnings per share were MXN 1.51, up 22% from MXN 1.24 per share. All in all, BMV Group has delivered a solid half year result with good underlying performance across most divisions.

On Slide #5 on the revenue by business line in the first 6 months of 2022, First, on transactional businesses, which consist of equity trading and clearing, derivatives trading and screening and OTC trading were up 8%, 9% and 18%, respectively. Once you exclude nonrecurring tax refunds, OTC trading was up 7%. On information services, which is made up of data analytics, indices, valuation and financial risk management services is up 14%, driven by better understanding of customer needs and development of new products and services.

The central securities depository is up 11% year-on-year. However, it is down 5% after excluding extraordinary items in the first quarter. Capital formation is flattish, down 1% due to fewer lifting last year. BMV Group total revenue is up 10% in the first 6 months. We are well diversified across the value chain with high recurring revenue in nature.

On next Slide #6, on equity trading and trading. Cash equities trading revenue was 6% higher than the second quarter of 2022. The average daily traded value, the ADTV for the second quarter of 2022 was MXN 19.2 billion, up 10%. Investors in Mexico have the option of investing in over 140 local securities and over 3,000 foreign securities. The local market ADTV increased 21% and represented 51% of the total ADTV, where BMV has a 97% market share. Global Market Day ADTV was flat and amounted to 49% of the total. BMV had an 87% market share. Both market shares have been consistent over time, proving our experience and reflecting the value customers place on the breadth and depth of BMV's liquidity.

As for CCV, creating revenues increased MXN 3 million or 6% because of higher equity trading in the quarter. On Slide #7, on derivatives, trading and clearing. The revenue in MexDer and Asigna was up 33% and 3%, respectively, due to higher trading of polar future and longer tenor traded of TIIE Swaps.

The average margin deposits were MXN 33 billion in the second quarter, down 5% because of the new risk management methodology which allows collateral and capital optimization, partially offset by higher trading in future. Average margin deposits for the first 6 months of the year are down 14% to MXN 31.5 billion, in line with our expectations.

We continue working in finding new ways to grow the derivatives market. MexDer is in the authorization process to leave options and futures of shadow listed foreign securities in Mexico, given the success of the global market platform or SIC. On the OTC trading, SIF ICAP revenues, that's on Slide #8. SIF ICAP was up MXN 24 million or 16% compared to the second quarter of 2021. SIF ICAP Mexico was down MXN 2 million due to lower trading of interest rate swaps. On the other hand, SIF ICAP Chile was up MXN 27 million, MXN 23 million due to robust trading activity and volatility because of political events and increments in the interest rates in an attempt to slow down inflation and MXN 4 million due to nonrecurring tax refunds.

On Slide 9, regarding the capital formation business, listing revenue reached MXN 11 million, flat versus the second quarter of 2021. Regarding the debt market, 250 short-term debt issues were placed for an amount of MXN 37 billion, 6% lower versus the second quarter of 2021 and 25 long-term issues for an amount of MXN 53 billion, 54% higher than the second quarter of 2021. 3 clients listed ESG debt through BMV, on sustainable bonds from BBVA Mexico for MXN 10 billion, one social bond from FEFA for MXN 3.3 billion and 2 linked bonds from Grupo Herdez for MXN 3 billion.

I am pleased to share with you that BMV has assisted companies in issuing over MXN 100 billion through ESG debt securities since 2016, an important milestone.

In fact, today, 26% of all long-term debt issued in BMV had an ESG goal. Maintenance fees were down MXN 4 million due to lower listings in 2021. We expect annual revenue in this business line to be slightly below last year's figures as debt listings slowly recovered, we will see growth in maintenance revenue in the following years.

On Slide #10 on our central security suppository, Indeval revenue was MXN 296 million, down MXN 29 million or 9%. Assets under custody increased 4% and 2% in the local and global market, respectively. However, cross-border transactions for the global market were down impacting revenue. It is important to mention that the Indeval allows the electronic issuance of corporate debt securities in February 2022 for the benefit of all participants in the Mexican financial market by reducing time, digitizing processes and carrying out a faster settlement. This initiative allows us to start analyzing other processes that could be optimized with digital technology.

On next slide, #11, on Information Services. Information Services reported revenues of MXN 168 million in the second quarter of 2022, up MXN 20 million or 14% mainly driven by the new business growth and high customer retention. Market data revenue increased 11% due to sales with the new international clients, growth in the number of terminals for retail investors, new services and reference data products and fee increments. Valmer was up MXN 9 million with valuation services and database subscription. Continued acceleration in the revenue reflects our investment in broadening and deepening our information services offering and innovation in our delivery of this data and analytics.

Let me now turn to operating expenses in Slide 12. Operating expenses for the first 6 months of 2022 were well under control, down 2% in the quarter and flat versus half year 2021. Personnel expenses were down MXN 7 million due to the corporate restructuring to optimize operations in June 2021 and job vacancies. Technology was down MXN 1 million due to the return leased hardware whose regional contracts have been extended to maximize the useful life of the equipment. Depreciation was flat, but we expect it to increase MXN 10 million in the last quarter of the year as we have started registering hardware leases to execute the segregation of Post-Trade infrastructure project.

Rent maintenance were up MXN 3 million because of higher maintenance costs as personnel return to BMV's building. Consulting fees were up MXN 6 million because of the information security services for the Security Operations Center, SOC, and the segregation of Post-Trade's infrastructure. Both items are ongoing costs incurred from regulation and security in our business operations. CNBV increase are linked to inflation. And we continue executing with cost discipline towards increased operational leverage while investing for growth.

Please turn to Slide #13 to review the status of our project plan. Direct cost CCP for bonds and accepting securities as margin deposits continues pending regulatory approval. In the first one, we want to provide access to the local CSD infrastructure. In the second one, we will provide clearing services for all on-the-run M Bonds. And in the last one, we have proposed a model to accept securities as margin deposits in addition to cash. This initiative will increase liquidating the formal derivatives market and increased margin deposits in Asigna.

We continue breaking and following up with local regulators as well as showing the benefits that these initiatives will bring to the Mexican financial markets in order to accelerate its approval. Post-Trade segregation is on track to separate the technology infrastructure for Indeval, Asigna and CCV. This initiative is part of our efforts to continue enhancing our resiliency for all market infrastructures. We will start registering hardcore leases or depreciation in fourth quarter as we are reviewing open source licenses and performing the right sizing to minimize our debt cost.

Regarding historical market data, we are a bit behind the schedule, but we should start operations in September 2022. We are working with a global third-party provider to deliver agile and high precision data to perform in-depth analysis. Back testing of very large amounts of data with the goal of attracting quants and algo trading. As for the minimum viable product for securities lending, the new platform will allow our clients to negotiate transactions and keep records in an easier and user-friendly manner. The expected release date is the fourth quarter of 2022.

On next slide, #14, on the summary. The Mexican stock exchange at the center of Mexican financial markets is a vital institution that serves as an engine in the Mexican economy transition towards sustainable development. This year, Bolsa was included in local and regional ESG indices due to our efforts to run a sustainable company and promote environmental, social and governance practices across the market. As part of the BMV Group's ESG strategy, we published a carbon-neutral guide. The main goal is to provide a practical path to help listed and nonlisted companies to design a strategy towards net 0 carbon emission. Furthermore, it is the first year that BMV Group has released a TCFD report task force on climate-related financial disclosure showing the company's climate risk and opportunities. This report can be consulted in our website, www.bmv.com.mx.

Furthermore, we have doubled down in our efforts to promote financial awareness in Mexico by relating a mobile app targeted for the local retail investors, which you may download under the name of Bolsa App. This initiative is a joint effort and is being carried out with companies listed in the BMV, [indiscernible] as houses and fund managers. Regarding financial results, we have delivered a good set of numbers in the second quarter and half year of 2022 and we are well positioned across the financial markets value chain to continue delivering high-quality recurring revenues and strong results for all the stakeholders.

I am convinced that further technological integration will enhance our product offerings and simplify our operations. Our capital expenditures are being invested to run, grow and transform the company as we implement efficient, scalable and seamless platform.

With that, I thank you for your time. And together with my colleagues, we will gladly answer any questions you may have. Thank you very much. And on the last slide, you have our contact information for forever you need. Thank you very much.

[Operator]

[Operator Instructions]

The first question is coming from Ernesto Gabilondo of Bank of America.

[Ernesto María Gabilondo Márquez, analyst]

Good morning, José-Oriol, Ramon and team, and I have a couple of questions from my side. On the first one, how do you see the cash equities trading activity for Bolsa, considering the expectations of interest rates heading to above 9%? And then on my second question is we have seen your revenues diversification towards a potential economic recession. So given your experience in the past crisis or recessions, what do you think will be Bolsa's most defensive revenues? And what will be the weakest one?

[José-Oriol Par, executive]

Thank you very much for your question. Regarding the first one on the interest rate expectations going to 9%, I would say that -- most of the increases in interest rates across the world and the monetary policy actions that some central banks have already taken and that are expected to take. I would say that this is mostly price team in the market unless we see for price, much higher or much lower than the expectations. We are not expecting a big impact in the market. And on the second one.

[Ramón Sarre, executive]

In terms of a recession, I would say our diversified business model helps us, which would be more impacted, will give to see more impact on the trading revenues on the start of the business that's affected by trading, which is -- you could get some impact on listing as well, but we also have a strong base of recurring revenues that are very less likely to be affected by a potential recession. We also have a large number of institutional investors participating or, let's say, the majority of our participants are institutional investors, which are less affected by a recession on the retail market.

[Operator]

The next question is coming from Alonso Garcia of Crédit Suisse .

[Ricardo Garcia, analyst]

So my question is, maybe you could provide or you have any sense on the potential boost to revenues from the different ongoing projects that you mentioned in Slide 13. I mean compared to the 3% growth in recurring revenues that we have seen over the first 6 months of this year, what's the potential revenue growth that you could experience from all these projects? And if you have any color on the potential timing for direct cost of the margin deposits, I mean if this is something that we should expect still easy? Or do you think that's something more for 2023?

[Roberto González Barrera, executive]

On the direct custody, we believe that we would be able to get part of the projects approved this year. We are -- we let and part of that should be approved in the following quarter in this quarter. On the anyone clearing house. I think that is a project that might take longer because a lot of the changes that are required, not only on the [indiscernible] part, but on the trading side. So we do not foresee any revenue for this year. We would expect that, that should come -- or start working -- trading on the first semester the following year. And on the alternative for pension funds, that discussion has been -- has taken several alternatives research, and we hope that a structure could be approved this year. And we have taken that [indiscernible] this day that we had another conversation with [indiscernible] and we believe that it could provide them a great benefit to manage better their position. So in summary, direct cost we would expect some revenues this year. And for the other two, it might be out for the end of the year, alternately or the first semester of the following year.

[Ricardo Garcia, analyst]

Perfect. And you have a sense on the potential boost for instance, very costly for Indeval on your derivatives business, if these projects are approved and implemented.

[Roberto González Barrera, executive]

We are still running the numbers. So it will really depend on how the structure for derivatives is secure. That would be the 1 that could impact stronger in the shorter term. But again, we still need -- and we have a lot of discussions because we need some adjustments on secondary relation. So at this point, I think that we cannot have the numbers, but in order to provide a more accurate figure.

[Operator]

[Operator Instructions]

The next question is coming from [indiscernible] of [indiscernible].

[Unknown Analyst]

This one is related to this strategic lending that you are trying to provide to the market in the new platform. Could you give us a little bit more insight of what type of securities are going to be part of this security lending? And the second one is regarding on the derivatives. Could you give us a little bit more of characteristics of these new derivatives because if I remember correctly, at some point, Bolsa was trying to develop an energy derivative regarding to electricity, but of course, those demonstrations, it's kind of difficult. So could you give us a little bit more color about that?

[José-Oriol Par, executive]

So on securities lending, basically, we've had this platform back for the last 20 years as such. For different reasons, we didn't invest much on it and we've seen other platforms in the market being more active. And we also have been talking with the foreign investors and also with pension funds that are interested in having a more friendly and active platform and also looking at the [indiscernible] potential trading, electronic trading that would be relevant for the market.

So basically, it would be an enhancement of the platform that we already have. The intention, we have some most of the [indiscernible] done through our platform today. But for bonds, we participated in a very small size stake. So the intention is to have a more flexible, more aggressive and more easy to manage platform so that we can put all the pension funds and some international portfolios available for traders. So we want to attack the bank fees and also to be -- to have more capacity to get not only for fair coverage transactors and equities but also for strategic lending. For derivates?

[Ramón Sarre, executive]

Could you kind of repeat the question about the derivates please?

[Unknown Analyst]

Yes. If you can give us a little bit more color about what type of new derivatives are you developing? And if you can give us a little bit of more information about their characteristics.

[Ramón Sarre, executive]

Well, we are working with the authorities to lead new products as the futures and options of the SIC stock -- the SIC stocks, we believe that the growth that the cash market has been reflecting during the last years, we can hope this growing to the derivatives market. We can offer this product to the retail customers. So we are working to -- with authorities too to deliver a cross currency swap between the software rates and the 28 interest rates. And these are the 2 more important products that we are working to release in the next months.

[Unknown Analyst]

Last question, José-Oriol mentioned about the new platform. Bolsa App. So I'm wondering if this app at some point will evolve through the other apps that it's on the platform on a model app meaning there is a feeble to act with information from the Bolsa App to the Mexican stock exchange. So at some point, it's going to be only one platform or there are 2 different goals from that point.

[José-Oriol Par, executive]

No, they are very different apps. One is C-Bolsa, which is information-based. And this everyone is more, let me say, focused for the local retail investors and has information on issuers and funds and it's more of a get to know the market kind of app for retail -- local retail investors. It's more of an education kind of app, I would say. So we don't plan to merge the 2.

[Operator]

The next question is coming from Gilberto Garcia of Barclays.

[Gilberto Garcia, analyst]

I'm wondering if you could comment on the decline in Custody revenues. You mentioned that it had to do with the lower international activity. Was this more of a one-off this quarter? Or do you believe that this could impact the next quarters as well?

[Roberto González Barrera, executive]

Well, regard post revenue was a little bit up, but certainly, we would see some impact of -- impact that we've seen in the markets. But I think that the revenue that was down versus last quarter was all the activity related to the exchanges or the conversions between when you buy [indiscernible] in the U.S. when you bring into Mexico or from Mexico and you deliver them to the U.S.. So you see the numbers are similar to previous quarters. Last one was a particularly good one. So this activity, the conversion, the international [indiscernible] is very linked also to the arbitration to the volatility and the peso dollars. So it's -- what I would say is a normal standards, but above last quarter, that was a particularly good quarter. So that piece of the revenue depends more on the volatility and the trading volumes that we might see on the following quarters.

[Operator]

Thank you. At this time, I'd like to turn the floor back over to Mr. Bosch for any closing comments.

[José-Oriol Par, executive]

Okay. Thank you very much to all of you for participating in this call, and thank you very much for the questions you had. If there's something else we can do for you, you all have our contact information. So thank you very much, and bye.

[Operator]

Ladies and gentlemen, thank you for your participation. You may disconnect your lines or log off the webcast at this time, and enjoy the rest of your day.