Regional SAB de CV
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Hello. And welcome to the Regional's First Quarter 2020 Conference Call. [Operator Instructions] As a reminder, today's call is being recorded.
Thank you. I will now turn today's call over to Manuel Rivero. Please go ahead.
Good morning. Welcome to our conference call for Regional's first quarter results of 2020. We appreciate everyone's participation today. Regional is well-known for its resilience. And as said, we are well prepared to affront this health emergency and its economic impact. We have a strong liquidity and capital positions. And furthermore, we're in constant communications with our customers and now are evaluating their liquidity needs and have provided solutions in order to recover their payment, allowing them to have more liquidity.
Additionally, we have reviewed this quarter our portfolio thoroughly, and we expect an additional write-off between MXN 400 million and MXN 600 million this year and the next. As an essential industry, Regional is aligned to the prevention measures established by the government and has maintained most of its branches operating with a minimum staff and well-established sanitary protocols. In addition, our administrative staff is working mostly remotely.
Our first quarter results reflect Regional's strong balance sheet with healthy portfolio and strong solid financial indicators. The loan portfolio in the first quarter had an 11% year-on-year growth. Meanwhile, for the different segments, we can see the wholesale segment grew 10%; the SME portfolio, 13%; for the Preferred Banking, auto and consumer loan portfolio grew 24%, 25%, respectively. Likewise, mortgage grew 4% year-on-year.
On the other hand, we continue to consolidate in the regions where we have presence, expanding out in Jalisco, where we had a growth of 14%; Mexico City of 13%; and Nuevo León, 9%. The rest of the regions grew 13%.
I want to highlight and remark about Regional's presence in regions where GDP growth is higher than the country average. Therefore, we expect economic contraction due to COVID-19 contingency will be less severe than committed for Mexico's GDP.
One of Regional's constant objective is the continuous growth of core deposits, which is why we are constantly improving our channels. The first quarter results are a year-on-year growth of 6% on time deposits and 20% year-on-year growth on demand deposits, the last one, mainly driven by SME segment and exchange rates.
The financial margin in the first quarter was MXN 1,963 million, keeping the NIM stable at 6.1% and the NIM for this quarter -- for the full year at 6.5% despite the decrease in the reference rate.
We have promoted our income diversification through cross-selling of nonfinancial products, seeking to complement the needs for our clients. On the first quarter, the nonfinancial income line reached MXN 638 million. These services include insurance with a year-on-year growth of 14%, foreign exchange at 46%; point-of-sale fees at 24%, card fees at 20% and leasing income with a growth of 23%. In addition, the efficiency ratio improved to 42.9% with a variation of 2 basis points year-on-year, while expenses remain within the expected levels with a 13% year-on-year growth.
Given the above, the net income in the first quarter was MXN 887 million, which represents a 2% year-on-year growth, with a 5% growth in the nonfinancial -- financial margin and a 29% growth in other nonfinancial income, which results in an ROE of 19.6% and an ROA of 2.6%.
One of the pillars of Regional is the quality of its asset. And therefore, our portfolio is one of the healthiest in the system with an NPL ratio of 1.8% and the last-12-months cost of risk of 0.7%. While in terms of segments, wholesale has an NPL ratio of 0.9%; SMEs, 6.8%; consumer loans at 3.6%; mortgage at 3%; and auto at 0.7%. The capitalization ratio of the total risk capital of Banco Regional stood at 13.6% as of February 2020.
As of our guidance, our deposit rate has been further adjusted. We have made slight changes to our guidance on profitability. And when I say guidance, I'm going to go line-by-line in terms -- to give more color on guidance.
The total credit portfolio, we had 8% to 12%, and new is 4% to 8%. In core deposit growth, we had 9% to 14%, and now it's 4% to 8%. The net interest margin, we had 6% to 6.5%, and now we have 5.7% to 6.2%. The growth in net profit, we had 10% to 13%, and now we have minus 15% to 0%. And the ROE from 19% to 20% to a new 14% to 17%. And the NPL ratio, 0%, 2% and the new between 1.8% and 2.8%.
And the last-12-month cost of risk between 0.7% to 0.9%, to a new 1% to 1.4%. Thank you very much. We appreciate any questions.
[Operator Instructions] And your first question is from the line of Ernesto Gabilondo of Bank of America.
Manuel and Enrique. My question is on your cost of risk. I think it was kind of strange that it was lower when compared to the previous quarter, but you're guiding write-offs of MXN 400 million to MXN 600 million in 2020 and 2021, which is roughly between 55% and 88% of all the provisions generated in 2019. On the other hand, we have seen U.S. banks, we have seen banks in Spain recognizing in first quarter, a significant amount of provisions based on expected losses. So I would like to know your point of view on the provisioning. Wouldn't it be better to start creating the provisions now than at the end of the year? If you're already expecting 40% to 50% of the loan portfolio to be restructured, wouldn't it make sense to start building these provisions, especially as the Mexican banks have a strong capital ratio to support the level of provisions.
Well, thank you, Ernesto. Well, we've talked with our regulators, and this is not possible. I know there's some banks, one bank in particular, that announced it. I don't particularly know how they did it. It would be interesting to know how. That's all right. There's...
But do you think that you can start creating provisions based on expected losses in some part of your portfolio?
We've talked with our regulators before about this, trying to create provisions for clients that we knew that were not going to be able to repay, and it was not authorized.
Okay. Understood. And then for the rest of the portfolio...
So we don't see that as an option, but we have.
Okay. Can you give us about this grace period that you're going to provide to your clients? Is that applying for your total portfolio or only some kind of segments?
Thank you, Ernesto. Well, it's for all kinds of segments. It's been very useful for most of companies that are -- that need some help right now. We found that most of the companies, I would say, the majority of them are subscribed only in deferment of capitals. So they are repaying an interest. So this gives you a stronghold of how clients are covered with contingency. So we expect, as we said, between 40% and 50% of fines to be in some kind of plan in the next 2 or 3 months.
Right now, we are at 20% of our -- the advance that we see. We've talked to our clients, we've been very close -- we talk with each client each year. I'm having problems with the audio, I don't know why. I'm sorry. Can you hear me well?
Yes, we can hear you well.
Perfect. As I said, we've been in conversation with our clients, where we know their needs, we've talked with them, we've provided the solutions. The clients that need help, we've been helping them. So in a sense, we know the complete portfolios, how it's contracted the contingency in a sense that we know what the problem of the clients could be.
Okay. So and considering that clients will not be having delays on their payments, when do you see asset quality starting to show up? Do you think that will come more on the third quarter, fourth quarter of this year?
Yes. We -- what we are considering is the fourth quarter of this year should be a pickup on provisions, and we expect to be provisioning around MXN 1,400 million this year compared to what we -- in our budget, we had around 800,000 -- MXN 800 million. So we're hiking up around -- this year could be around MXN 1,400 million in reserves. And that's being a little bit more prudent because we might see a smaller number and probably spanning out in the next quarter of next year. So that's when we see the focus on the clients that couldn't make their cash flow enough to repay their debt.
We talk to our clients. And as I said, we are not exposed to clients that are not -- that they're not going to have a good recovery or in the medium term, the next 6 months. We're not, as you know, invested heavily on tourism. We're not in airliners so we're not in those segments that are hit the most. And we're going -- we are in industries that are going to start probably in half of May and the 1st of June their operations. So we're going to see a pickup in cash flows. And those companies that couldn't make a comeback, you're going to see those problems emerge in the last quarter or in the first part of the year.
Now if we see those clients could not pay their debt, obviously, those clients, we will give you more color on them because we want to make sure you have the correct information of what's happening with our portfolio. We don't -- we want to give you a complete color of what's going on. So we want to make sure that you have the complete information to see how the portfolio is evolving.
But right now, I want to just make sure that we meet our clients, we're talking with them and giving them solutions. And we're -- obviously, we're not happy because of the situation, but we're happy about how the response is going, and we're happy about how things are panning out, considering the situation.
Your next question is from the line of Thomas Peredo of BTG.
I have 2 questions, if I may. The first 1 is that the guidance implies a 17% to 18% ROE. In the first quarter, it was very close to 18%. So it doesn't assume a sharp deterioration in the ROE in the coming quarters despite the impact that should count for the COVID-19. This is probably because of the -- that you are not able to anticipate provisions? And can we assume to that at 2021, we will see a lower base recovery pace? And my second question is regarding the government loan -- government lines, sorry, that are the back loans to clients, how is the level of collateralization? And how is the exposure to these lines during this crisis? Could it be a strategy to mitigate higher delinquency?
So your first question is about the ROE. In terms of what we're expecting is we're expecting a decrease in ROE. But one thing is we're not -- we didn't give dividends, so we have a higher base. So that's one of the main reasons. And the other would be we have some income that related to, for example, in terms of the transactionality of credit cards or the transactionality of the POS services, the merchant acquiring services that we didn't give. So those are going to have a smaller income. Obviously, we're right now at 40% level. We're -- those levels are not going to be as they're going to be in 2019. It's going to be a slow recovery. It's going to take a little bit more time for those to go into.
Now on the other hand, expenses are going to go down dramatically because we're not going to have bonuses. We're not going to have as much -- we're not going to have expenses related to expenses, for example. We're not going to buy credit cards. We're going to buy POSs. We're not going to buy ATMs, we're not going to put on new branches. We're not going to -- we delayed a central burden -- in operations building we were going to make. We delayed more investments. So in a sense, expenses will go down, and that would make a sense of we're anticipating a net income of around MXN 3,000 million at the end of the year. That's our -- a budget that we're aiming at, that's our target.
Now with stronger capital base, obviously, they are always not going to look as good. But then we have some room in the next future -- in the future if things evolve positively to regain -- to keep dividends, then the ROE should go up. I don't know if that explains a little bit more about how things are going to pan out in terms of ROE. And then...
Just a follow-up. Just looking for 2021, the point is more that the ROE guidance for this year seems to be kind of optimistic. I just wanted to make sure if that's because you are not being able to anticipate provisions. And as part of the delinquency deterioration will come only in 2021, if we could expect -- if we should expect a lower recovery next year due to that?
No, we wouldn't think so. That's not we're expecting. We're expecting income should go up in the next quarter -- in the next year, sorry, gradually.
Your next question is from the line of Neha Agarwala of HSBC.
First, I wanted to clarify your guidance. There has been a change, if I understood correctly, from -- in the 2020 guidance versus what you published a couple of weeks -- a week back. I think primarily, the net profit guidance is at minus 15% to 7% now, and ROE of 14% to 17%?
Yes, that's right. We've -- we want to make sure to incorporate the volatility and the expected interest rate that we expected. We expected 50 points less than what we right now expect. So that's why we want to make sure we incorporate those into our guidance.
Okay. The only other change is the NPL ratio, which is now 1.8% to 2.8%, that is the range.
Yes.
The cost of risk remains unchanged. So most of the impact on net profit is coming from the lower rates and NII, not from cost of risk.
That's right.
Okay. And you mentioned that you're budgeting about MXN 3,000 million in net income. But that would indicate about 17% -- 17%, 18% contraction in the bottom line. Is that your base case or...
No, as I said, it's -- we're -- as I said, we're going in a prudent pace with MXN 1,400 million in reserves compared to the budget that we have of MXN 800 million. So we're adding MXN 700 million of reserves that we are currently budgeting. So that's where we're aiming at MXN 3,000 million, as I said very prudently. So we wanting to incorporate that into the budget.
Do you expect most of the impact on provisions to be incorporated in 2020? Or do you expect spillover in '21?
The -- we expect it to enter '21. But we're budgeting into 2020, just to make sure we have...
Okay. So you are providing everything -- almost everything in 2020 in your provisions? This...
In the budget that we're making, yes. In the budget that we're making, we're going to have MXN 1,400 million of reserves for this year, so yes.
Okay. Last question on the credit lines. Are you using credit lines from development banks to give out more loans?
Well, we've been using a little bit more of the lines that we have with the development banks, not as much, but we have ample room to grow with them. So we've talked with them, and they're happily assisting us if we have more need. But right now, there's not enough demand.
Okay. And last question. Would you say that given your business model, wherein you are working very closely with your clients, that gives you an advantage in controlling asset quality? And any particular region in Mexico City or Jalisco where you are more concerned? I believe you are more comfortable with Nuevo León. But any other region that you're more concerned about?
Well, I'd say the regions are depending on tourism are definitely going to recover lately. We don't have any substantial risk there, so -- but it's still something that we're going. I think that definitely our model it's -- as it's based on relationships and knowing our clients well. And obviously, the client base is much smaller. We can have much more control and have a better picture in a very short time compared to other banks. So we're in constant contact with them, and that's an advantage, obviously, when things deteriorate from this right now. I think having a very massive bank, it's going to have a toll, obviously, and some clients, they cannot reach the banks as easily.
Your next question is from the line of Yuri Fernandes with JPMorgan.
I have a few questions, too. If you can repeat only the net income guidance? I'm not sure if I got it correctly. I think it's negative 15% to negative 7%. So just if you can clarify that range. My second question is regarding loan growth. You are growing about 11% now, and I think the guidance is from 4% to 8%. So my question is how you are seeing demand. Like should we see deceleration? Because as of now, it's being like more risk adverse, being more conservative and not giving loans to the demand you are seeing. Or actually, the demand is lower. Because I think that's actually now the demand for credit is probably -- it's much higher, right? So my point is like how you are seeing like this 4% to 8% guidance? It's a decision of the bank, or you don't think demand will be there for you this year.
And finally, if you can comment a little bit on renegotiation. I think you mentioned from 40% to 50% of your loans could be renegotiated. What are the figures you are seeing so far? Like if you can give any color on April, how much of -- like where are you in those levels, at this level?
Well, thank you. In terms of the net income guidance, it's from minus 15% to 0%. In terms of your second question about loan growth. Yes. Loan growth should be -- that's going to be a very little tricky thing to see how it's going to play out. There's no new projects that we're aiming for right now. So we're not financing new projects, but we're giving clients their liquidity that they need. So if they need more liquidity, we've been providing them with this liquidity. Until now, there is not -- there is no need of our liquidity or an extended liquidity. There's -- we haven't seen that much of a demand for liquidity for our customers. But even the checking accounts are even hiking a little bit from the levels we saw prior to the -- in March. So we haven't seen any liquidity necessities until now. And clients don't need it at the moment.
I think when the recovery starts, I think companies should start demanding more loans in order to start again their operations. And definitely, that's going to -- we're going to be there for them, and we're going to, obviously, be very interested in how to continue providing enough liquidity to them to recover. That's going to -- I think that's going to be not very -- we're not going to see a spike in terms of loan growth. We're going to see -- because of there's no vaccine for the next 12 months, so in a sense, the recovery should be slow, should be steady but slow. And this will also be -- demand a slow loan growth. So as where we think loan growth should be -- as companies, right now, their focus is to regain their operations, I think that most of the companies are going to start needing a little bit more loans.
And then further back, I think companies are going to delay a little bit other projects that they're aiming for. So probably, if they have 4 projects or 3 projects, they're going to delay 1 of them, they're going to delay a couple of them, but -- and see how the recovery starts and then picking up, probably in the next year. So I think those shock is going to continue in terms of companies being more risk averse to regain their projects. As we, for example, delayed one of our buildings, I think companies are going to delay some of their projects. And for sure, that's going to be probably regaining in 2021. I think this year, all companies are going to be very -- more focused on trying to navigate and trying to regain and trying to restart. And I think that's one of the biggest themes.
What the government is doing is they're giving MXN 25,000 to 3 million people, which they think will give consumers a purchasing power and regaining the economy through fomenting the consumer spending, I think that, that will help alleviate in the bigger banks some of their asset quality, as we're not exposed to, as you know, those types of segments. Yuri?
I'm here. And with regard to renegotiations.
Yes, yes. Yes, I will answer. Enrique Navarro. Yuri, in terms of renegotiations, as you know, we have different segments and different bankers distribution. Basically, we are talking right now about portfolio, and we haven't given any follow-up in terms of number of customers because number of customers at this point of time could be misleading, mixing large companies with small companies or with individuals for next quarter or maybe previously, we will give some advance by product and by segment. Right now, what we have already been completed is all the scoring and all the approach and communication with the customers from what we call [ empresarial ], that will be large customers, and then medium-sized companies and the small ones.
And in terms of portfolio, in terms of volume pesos, we expect between 40% and 50% to be -- to join any of the programs that we are offering them in the calls. Right now, we are working to finish this week -- at least the end of the month on around 20% of the portfolio should be already -- we call it restructure, but deferred will be the right word.
[indiscernible], I guess, you explaining.
Okay. And we expect, at least in volume, some of the largest loans to request also as, Manuel mentioned, on deferral of principal. And then we still don't have exact numbers as we are working very hardly to finish before end of month. We have -- we are working on mortgage and credit card. There are the other 2 type of loans and auto. Also in auto, we are providing 4 to 6 months of deferral of principal.
Okay. If I may, a last one here about Nuevo León. How do you think like the relationship with the U.S., right? Because I think like one of the concerns is that Mexico has a pretty small fiscal package, while the U.S. has a pretty big one. And usually, like Mexican economy is pretty leveraged to the U.S. And I don't know, like should we expect Nuevo León to suffer more in the first moment, but rebound quicker as the U.S. rebounds? Like what's your view on the U.S. relationship in Mexico?
Well, yes, totally. In 2008, 2009, we did see the north suffer more in terms of the [Foreign Language] or having a very light employment rate. And we see -- we saw that the hike didn't happen, as you said. What we're seeing in this scenario right now, what we're seeing is -- what we're hearing from the industrial sector is that they're aiming to open the industries at the same time as United States and coordinating the opening of the industries, for example, the auto industry that's going to open on -- very shortly and in the aerospace industry as well as electronics. And so that's what we are seeing right now. So I think the recovery -- it doesn't feel right now that the employment rate is hiking, not at the moment. But definitely, I think having a stimulus package bigger in the United States than in Mexico, obviously, that's much helpful, much more helpful to the north than any stimulus package that Mexico could have. So yes, I think the relationship between -- in Mexico and United States, as you now know, the treaty got approved, and it's going to be implemented very shortly, and that's going to -- I think that's good news for the north and the central part of Mexico.
Your next question is from the line of Brian Flores with Citibank.
Just 2 quick questions. The first one is, could you elaborate a bit on the duration of the portfolio? And any efforts that you're making to mitigate the NIM exposure?
And the second question is regarding asset quality. Particularly, we saw a bit of the NPLs regarding the mortgage portfolio. So just any color there would be well appreciated.
Can you repeat the second part of your first question?
Sure. Are you making any particular efforts to mitigate the exposure looking at a new contraction going forward?
Okay. In terms of duration, we have not changed. We have an average of 5 years on the large companies and 3 years on the small portfolio. That's the term of the contract. If you translate that to the ratio, it will be 2 years and 3 years average. Right now, with the deferral of payments, it will be a little bit enlarged by 3 to 4 months average, if you consider the numbers that we have already given on the 4 to 6 months of deferral to 40% to 50% of the portfolio.
In terms of NIM, to avoid the contraction of the NIM, we haven't done anything in terms that -- if you mean something like a reversal swap or something like that, not, we maintain our policy of floating rates on the most part of our portfolio. And we only have swaps for the rate in the mortgage.
Then I will move to the part of the past due. In mortgage case, we have seen an increase in the past due launch. Is we have some large mortgage, mainly in Mexico City, where we have seen problems. We are not worried in terms that these are very good departments in very well-known zones. Then we are doing all the job to foreclose and repossess the assets. But yes, in number of cases, it's very similar to the last year. But in the size, it's larger than -- how much more do we expect? We don't expect a lot more. It was January and February, it was really bad, but it's something we cannot really control in terms that we maintain the same policy and sometimes are larger and sometimes are smaller to the loans.
Your next question is from the line of Claudia Benavente of Santander.
And I was only wondering if you may provide a little bit more color on the leasing business. How we should be performing this year under this context?
Yes, the leasing business is -- I will talk only about the pure leasing business. That is the largest proportion of our leasing business. Basically, as you know, the accounting rules for past due is different and also the type of programs that we are applying to our customer service. We are doing also deferral of payments. But as it's a rent, it's deferral of the rents. We're sending 4 full payments or 6 to the last payment. That's mainly the head we are providing to the customers.
We see it very solid as we have -- is one of the portfolios that have 100% collateral as the property is ours, the cars or the buses or whatever we are doing, the yellow machinery or technology. And we haven't seen any deterioration as we only lease critical assets for the companies. We have seen some yellow machinery companies that are requesting to defer. But as Manuel said, we're expecting 4 to 6 months, the activity to pick up or to recover. And that's exactly the time that we are deferring the payment of the monthly rents.
Your next question is from the line of Thomas Peredo of BTG.
Two questions, mainly. If you could give some details on how much of the loan portfolio is collateralized by government lines? And if this could be a strategy to mitigate the higher delinquency? And the second one is how we could imagine NIM going forward because we foresee the pressure from the funding side with the -- do you foresee any pressure from the funding side and also the lower benchmark interest rates should pressure spreads, but you also should see a higher risk on these loans and should reprice spreads? So how could we imagine the NIM going forward?
In terms of how much with the government banks was development banks, we have around MXN 8,000 million of the total loan of portfolios, mainly on the small businesses that will translate to half of it, around MXN 4,000 million is covered because the average collateral in government, in development banks is 50%. Most of it is nothing said, but also we have FIRA warranties. That's in terms -- what we are doing in terms of mitigating relief with them is exactly the same that with the larger customers. We have all the bankers focused on their portfolios. We have changed their bonuses goals not to grow the loan, but to maintain the quality to be close to the customer and to ensure we understand what are their liquidity needs. It's a broader action than in the larger customers, but we are performing a very similar strategy. We're identifying which customers could potentially not recover, but most of them is a liquidity problem for the next 2 to 4 months. Then it's very similar what we are doing. And we have also the advantage that if the customer doesn't recover, we have covered half of it with the development bank.
In terms of NIM, as we changed the guidance and some people, some questions from investors we received, it was not addressed to change from 6% to 5.7%. The truth is that is mainly due to the external, as you mentioned, the benchmark rate or the policy rate of the central bank. We already have from the last time we spoke 100 basis points that we were not expecting to happen this fast, and the market is already discounting another 50 basis points in May or June. Then as you remember, we were affected around 14 to 16 basis points per 100. That's why we changed it all the way to 5.7% to 6.2%. We see it in the middle range, around 5.9%. But if the decrease continues, we -- at the beginning of the year, we were thinking that it was impossible to reach 5% at the end of the year. And right now, we believe it's feasible, the 5% at the end of the year. That's mainly -- we are not repricing. Right now, all the -- in the SMB rules for all the programs say that we cannot change the condition of the loan. Basically, what is allowed is just to defer the payment of 4 or 6 months, and we are applying very strictly that rules.
And at this time, there are no further questions.
Well, thank you very much. Thank you for your time. I want to make sure that you get a sense of where we're going to focus on this year. Obviously, we're going to be supporting our clients in their needs as we have done at the moment. We have enough liquidity to give the clients their needs. And the second thing is we're going to focus on productivity. We want to make sure expenses are rationalized in the circumstances, and we're going to expect lower in expenses. And we're going to be starting digitalizing more, and clients have been more into digitalizing, and we're going to -- commercially, we're going to digitalize in order to gain more deposits. So that's what are going to be our main objectives this year. We're going to give you all the color you need. We're going to be very transparent. So do let us know anything you need in order to have the right information for you. Thank you. Yes. Any further questions, please let us know.
Thank you. And this does conclude today's conference call. you may now disconnect.