Regional SAB de CV
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Good morning, ladies and gentlemen, and thank you for standing by. Welcome to Regional's First Quarter 2022 Earnings Conference Call. We're joined today by Manuel Rivero Zambrano, Chief Executive Officer of Regional; Enrique Navarro Ramírez, Chief Financial Officer; and Alejandro Lobeira, Head of Investor Relations.
At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today's conference is being recorded.
I would now like to hand the conference over to your speaker today, Manuel Rivero Zambrano. Thank you, and please go ahead.
Good morning, everyone. I hope you and your family is in healthy and well. We appreciate everyone's participation today. We're very satisfied with the performance of Regional this quarter. We achieved great results, mainly driven by a better credit demand, strong growth across all of our revenue sources and our successful strategy to continue expanding our core deposits.
During the first quarter, Regional reported a net income of MXN 1,150 million. This represents a growth of 20% quarter-on-quarter and 43% year-on-year, resulting in an ROE -- a quarterly ROE of 20% and an ROA of 2.4%. We reached a financial margin of MXN 2,090 million, a 15% year-on-year increase, mainly due to a better demand in higher margin loans, a higher policy rate and an increase in demand deposits. The NIM was 5.3% and the NIM of total loans was 6.5%.
Regional's asset quality keeps showing a great evolution with the NPL ratio at 1.5% and reflecting a better cost of risk, resulting in a minus 0.16%. During the first quarter, MXN 49 million of provisions were released. Our nonfinancial income keeps expanding at a fast pace, totaling MXN 850 million, a 20% growth year-on-year, mainly due to a strong performance of merchant acquiring fees and FX fees, which expanded 43% and 15%, respectively.
All of these factors generated a total net income of MXN 2,819 million, which is 24% higher than the first quarter of 2021. Operating expenses amounted to MXN 1,261 million and the efficiency ratio decreased 226 basis points and stood at 46.1% as a result of our cost control initiatives. Capitalization ratio remained solid, showing an excellent figures, reaching 16.5% as of February 2022, which generates an excess of capital of 446 basis points compared to an internal limit of 12%.
During the quarter, Regional expanded total loan portfolio by 6%, mainly due to our growth of the wholesale segment, auto and consumer portfolios, which is last to keep growing at double-digit growth rates.
Regarding the performance of Banregio, the wholesale portfolio, had loan growth of 7%. The demand is mainly originated from the North region in Mexico and Jalisco. Moreover, we are -- we see greater dynamics in industries like homebuilders, industrial warehouses and agro business and manufacturing. We expect credit growth to continue to recover in a gradual way and more focused on the northern regions. Deposits continue to exceed our budgets and will continue helping improving our margins.
As of [indiscernible], we continue to grow the number of clients in an accelerated manner, although this quarter, our main focus was to relaunch our app and our complement to offer to include full proprietors and small businesses as well as children's accounts. Commercial strategies are underway to further our reach and accelerate our client growth. We reached 430,000 active clients with 1.7 products per client and an NPS of 71%, a cost of acquisition of MXN 232 and lifetime value of MXN 3,860 and a lifetime value over cost of acquisition of 16.7.
We remain developing our capabilities to increase our value and differentiator offer into different segments based on size, sectors and special needs, always taking into consideration an increase in our customer lifetime value through cross-selling.
In conclusion, our efforts have been reflected in a better consistent for asset quality at extended customer loyalty, which translates into higher deposits and a better asset quality. The continuous growth on nonfinancial income and the excellent results of our digital solutions. We are confident to achieve our guidance, and we expect the economy to recover to pre-pandemic levels in the following quarters. Thank you very much. We appreciate any questions.
[Operator Instructions] Our first question comes from Ricardo Buchpiguel.
I have 2 questions. First, after the release provision saw during Q1, what we should expect in terms of cost of risk and PLs for the following quarters? And second, we saw a relevant improvement in Hey Banco unit economics, especially with a better income per client and a lower CAC. Can you also please give more color on what drove those improvements? Thank you.
Thank you, Ricardo. I will answer the first question about the cost of risk. As we explained in the document in the quarterly report, in the nexus, we created MXN 397 million of provisions directly to the balance due to the change of methodology for greater supporting for the commercial loans, for businesses loans. And as a part of that, we managed making an advance to some of the provisions. But we had a very good quarter in terms of improvement on the quality of the customers.
If you remember in the last quarter, we talked about a very large customer growth that went to past due. And this customer was restructured and has made the prepayments and is totally current right now. It's not in past due, it's in Stage 1. And as this customer, we have many other customers that have paid, then it's a mix of both a lot of recoveries that you can also see the amount around MXN 698 million of recoveries from Stage 3 to Stage 2 or Stage 1 and also the new methodology of provisions. What could we expect for the following quarters? We continue our collection efforts and negotiation with some customers that are still in Stage 3, but it should be more normalized going back to 0.7%, 0.8% cost of risk that what we expect in the following quarters, that's it.
Yes, in terms of regarding the cost of acquisition and the increments in the lifetime value, we -- it was mainly due to our cross-selling strategies for -- with higher volume growth loans, auto and mortgages mainly.
And in terms of cost of acquisition, we definitely lower our spending in -- compared to the last quarter of last year, mainly due to us, as I said, that we were mainly focused on relaunching our app and adding the segments of small business and small proprietors and children. And definitely, we will continue to further develop our growth this following quarters, although we want to maintain our cost of acquisition in the ranges that we've already talked about. So we shouldn't have a larger cost of acquisition where we are just having a change on our onboarding processes to do with more mono product and that we think will continue to further our reach and doing it in a more productive manner. So in a sense, we think the evolution will continue as well as having a more accelerated growth of clients and volume going on further.
Thank you. Very clear.
Our next question comes from Olavo Arthuzo.
Hi, everybody, can hear me well?
Yes.
Yes.
Okay. Actually, I have 2 quick questions related to Hey Banco. And the first one is about this cross-sell index because in this quarter, it increased to 1.7x when compared to the 4Q at 1.6x. So I just wanted to know which products these clients from the digital bank are demanding? So in other words, what products are being considering in this index?
And my second question on this topic as well. It is about the target for the number of clients of payment book because with this ongoing gradual increase in competition in Mexico, within the individuals profit, what is the short-term target for the number of clients of Hey Banco? And thinking about this year, if you could provide us some targets for the next year as well? I would be very, very appreciated. Thank you.
Yes. Thank you, Olavo. Thank you for your question. The products that we are considering the debit account, the savings accounts, then we have an immediate savings account, then we have an investment, which is a time deposit, then we have funds. We have stocks trading, credit card, guaranteed credit card, auto loan, personal credit line, mortgage and insurance products. So those are all the products that we're offering. There's an ample growth in many lines. So there's -- I mean, there's a lot of going on. We do have that information, we can give it to you, so...
Okay. If I just may do a little follow-up on this. This calculation of 1.7x, which is basically 2 products I believe it's the current account. Which is the other one, just for me to understand?
So that would be the savings and then the time deposit. And then that would be credit card as a force and then there's a lot of many with -- yes, so those are the 4 main ones. If something change, definitely that had a boost. I mean, we sold 26 -- how many, we sold 23,000...
Trading accounts.
Yes, top trading accounts in the first quarter, so that was huge. So we definitely have a lot of response for our clients. There's a lot of engagement. The data that we have is that our clients have loans outstanding with other banks of MXN 10,000 million. So those are clients that are very high value. We do consider them to be very productive. So we're pretty encouraged to continue our cross-selling strategies because we know for sure that this type of clients have a lot of opportunity to continue developing and increasing our lifetime value.
So these are not clients that are incoming to the financial system. So these are -- I mean we do cater them but just with a debit account or an insured credit card, but our main segment that we're catering is the already banks that are looking for better service, better products, better pricing, better technology, better service, more engagement, et cetera, right? So it is pretty different from what others I think are doing, and we are very positive that the type of clients that we are engaging with our higher value than anything that we have seen in other fintechs or here in Mexico for sure.
Okay. It's still the service clients. And the second question, I just wanted to have a little more color for this target?
Yes, definitely. So we -- our target is 1 million. At the pace that we are right now, we should be at 600,000 at the end of the year. So we do think that our strategies are underway already. We will continue to further our growth. And it should accelerate in the next following quarters for sure, which changed our onboarding, as I said, to a more mono line, which will be more productive than we've done so in the past or doing a mono line for credit card and for a credit line for our business.
And so it would be more -- much more productive and will add more efficiency to our cost of acquisition. So we're very encouraging. I think it will continue our growth, and we will definitely see better growth in the next quarters. For next year, I don't -- we don't have a public guidance as of right now. So we all have to do it for the next quarter. So we will give you more information further on. But for right now, our objective for this year is the 1 million mark, and we will definitely try to do so.
Next question comes from Yuri Fernandes.
I have a first one regarding the guidance. I guess there are 2 lines that call my attention here. The first one is margins. I guess when you released the guidance in the previous quarter, expectations were for rates to be around 7%. I guess your -- like Hey's expectation was for 6.75%. And I guess we have like a more, I would say, material hiking cycle ahead, right? We are already at 6.5%. So my question is regarding the guidance. Do you see upside the risk here for your margin guidance?
And also regarding the cost of risk, just a follow-up because you said that you expect the coming quarters to continue running around 0.8% cost of risk. But if we keep 0.8% in the coming quarters, I guess your cost of risk guidance will also be below your initial expectations for cost of risk that I guess was 0.7% and 0.9%. So my question is like how to think about those things, right? Like the moving pieces, we are already almost in May. What should we see regarding the guidance on the upside or even downside risk here? And I can -- ask a second question later. Thank you.
Thank you, Yuri. About the cost of risk, you are right. When we did our guidance, we didn't consider the impact of the change of methodology. Then if we have 3 quarters of 0.8% or 0.7%, that will be more close to 0.7% as we see right now, improving the quality of the loan portfolio. The average will be 0.5%, 0.6%. We are not going to change the guidance as we prefer to recognize that we didn't consider the changes on the accounting and IFRS also as CNBV new methodology for businesses. But you are right, the annual one should be lower than we guided.
And in terms of margin expansion, we did our budget and our guidance considering a range between 6.5% and 7%. We're already above 6.5% right now indeed. We expect new rate increases in the following quarters. But we are not changing probably now the guidance. As you can see, we have a double effect. Also, we are increasing our repo business and our -- in contrast, the securities investment. Then the total NIM, not the one only for loans will be in range and is the one that we guided. The one that should improve more is the NIM of total loans. We don't have an exact calculation as we are moving all the excess of equity to repos -- to repurchase agreements, then that will impact. The NIM will increase the margin. The margin in pesos will be higher, but the NIM of repos is smaller than the NIM of loans.
No. Super clear, Enrique. It's a mix like of your increasing of repo business because of, I guess, maybe the new accounting, right? If I may, also on accounting, what is the criteria for Stage 2 and Stage 3? This is new, and we are not totally aware like if you consider GDP, unemployment or if you are using a past due methodology. So if you can help us here to understand what is the overall criteria? I know this is an expected loss, but just like some high-level view on what should we see in each of those buckets?
Just a very high level because there are some details. The Stage 3 is very similar what used to be past due loans is 90 days past due. That's better for some customers, especially in credit cards and some revolving lines that used to be 60 days past due. That's where you see some improvement. We have less improvement than other banks, obviously, by the proportion of our credit card business, credit card for companies that is very small for us, not credit card for individuals. You could see and is the way we are explaining to internally. Basically, Stage 2 is from day 31, 31 days of past -- of due to 89 or 30 because it's including 30 to 89, and Stage 3 is above 90, including 90.
And the other difference is forcing us to be more strict and more -- with better discipline to collect is that if a customer change of a stage during the month, you cannot change the stage status at the end of the month if the customer pays. Let's say, the customer is due -- the payment is due the day 15, but the customer pays the day 21. In the previous methodology, we change it, the status, because at the end of the month was correct. But right now, we are being very strict that if the customer pays later, even though at the end of the month has already paid, he is in the Stage 1, Stage 2, sorry, in Stage 2 for that matter, for that case.
Our next question comes from Jorge Henderson.
And I have a question on Hey Banco. So I mean, congratulations on the results. The loan portfolio grew almost 50% quarter-on-quarter. You already mentioned you grew on auto and mortgage loans mainly, but how was Hey Banco loan growth by segment in more detail? Did you also grow on credit card and business loans?
Well, we've not -- we mean in credit cards, we did grow to around 40,000 -- MXN 400 million in outstanding loans. And in terms of business loans, we just are launching it. So in a sense, we're going to have more volume in the next quarters. In terms of the composition, credit cards, as I said, MXN 463 million, autos are MXN 1,730 million and mortgages are MXN 746 million.
Okay. I have another question. It's on the bank's NIM, NIM loans. We noticed that your cost of funding increased a little bit. I don't know if you can give us a little bit color on what drove this increase in cost of funds. And I will appreciate any detail on that.
Yes. As I mentioned in the answer to Yuri, as we are increasing the repo business, the repo business has 2 sides, the liability that is the repurchase agreement and the asset that is securities investment. In the liabilities, a very expensive liability because we are repo-ing bonds from government, government bonds and paying the customer an average of 90% of fee. As we increase the repo business, we increase the cost. Obviously, we increase also the income, increase the cost of expense and...
Next question comes from Brian Flores.
Can you hear me, okay?
Yes.
Yes.
Perfect. Just wanted to ask if you could elaborate a bit on your strategy in social media presence. I have seen this segment called Hey Media. So I would just like to ask what are the objectives there? And how do they tie to Hey Banco in terms of monetization? And if we should expect this to become a priority also in terms of the strategy going forward?
Thank you, Brian. Well, definitely, we're working on the long term in terms of our strategy of our brand being known. So we are seeing that the cost of ads, words for the main social networks will definitely have an increase in the following 5 years for sure. So we're going to see more spending on those platforms with those search words. So Hey Media will allow us to have a client base, if you will, of a product, which is content, which is very -- it's cheaper to produce and definitely will allow us to have a recognition of our brand in a more viral way.
So it is easier to sell a piece of content, a 15 or 5-segment video on TikTok that needs to sell an account. So definitely, this will allow us to have much reach and recognition in our brand. So in the future will allow us to have a cost of acquisition in these objectives that we are looking for. So it is something for the long term. We are not expect to invest a lot of OpEx. It is very organic. So it is cheaper to produce. But definitely is working pretty well.
It is producing good results in terms of number of followers and engagement, which is pretty good and different from what we've seen with other banks. I mean even we have -- it is nothing that we are proud of, but definitely something good. And even we have a much better engagement than the big banks. So definitely, social media, so definitely something that we are looking for and a strategy to have a brand awareness in a more positive way than just spending ads on Google and Facebook, which is good and effective, but it will be part of our strategy.
Perfect. That is very clear. And if I may, just a quick follow-up. Is it just limited to social media, as you said, some videos, bits, something like this? Or are you also planning to elaborate at some point maybe your own programs, I'm talking about maybe digital channels, TV content, something like this in the long run, as you said?
Well, we're producing our content. So it is -- we're producing in our in -- for all the platforms. We do have a website that we're launching this month. And we do have a newsletter that already has 200,000 active subscribers, to the Hey Media newsletter. So it is working pretty well. I think it will continue to add. As I said, we're not producing -- I mean, you would -- as I said, the content we're producing is much more organic. It is nothing more scripted. It's nothing -- it's not news related. So it is very soft content. And in a sense, that's where we're aiming for to be -- to have a presence and have a reach in customers and segments that normally are not first buyers of financial products in a sense, broadening the segments that we're reaching to.
Very clear.
So an example would be women. And sadly, we have only 30% of our customers are women in a sense that -- I mean, that's something that we are trying to figure out and content, it is a way to reach in a more -- having conversations with our clients and being able to give them more confidence into buying the products in a more -- well, in a more peaceful manner for them, right? So they need to have more confidence on what they're buying in a sense that's one of our ways to reach these clients, this segment of clients and being able to have conversations and being able to create a community and then obviously reaching to sell more products in the long term, right?
Our next question comes from Gilberto Garcia.
I had a couple of follow-ups on different subjects. First, on provisions. You mentioned in the press release that there was a very significant transfer from NPLs to performing in business loans. Is this exclusively related to the client you mentioned that restructure? Or did it have anything to do with the change in methodology?
It's both, but it's mainly customers that are being restructured or they are paying or they are -- we are foreclosing their collateral and then reducing their NPLs. It's more improvement in any of the 3 ways than to do with the methodology.
Okay. Understood. And my second follow-up on -- just to double check, you mentioned that the increase in the cost of funds has to do with the growth in the repo business. Was there any impact from the greater growth in Hey Banco given that it has higher rates for deposits?
Not in the aggregate. Obviously, there should be some basis points on the -- in the Hey Banco time savings cost is like 6.2% in average because we have 5% and 7% as rates. It's below tier, then even it is improving if you compare to the cost of the funding of Hey Banco versus tier. But obviously, it affects, but the size is MXN 5 billion are in Hey Banco with cost in the whole MXN 120 million -- MXN 120 billion of funding is not relevant. It's more relevant to repo that is MXN 25,000 million at the end of March. And it started in the last March at 15%, then is almost 50% of increase. And the repo business is very close to the tier in cost then is still more costly than the time savings from Hey Banco.
Understood. Thank you very much.
Our next question comes from Carlos Gomez-Lopez.
I'm actually going to go back to 2 things that you've already commented about. The first one is your guidance. So you are telling us that your NII will actually increase in pesos, the NIM will not, but the NII will be higher. Your provisions will also be lower because the guidance did not incorporate IFRS 9. So why would the bottom line not be higher? Why should the guidance not increase? It may simply be like you don't want to do that in the first quarter, you don't want to revise it every time, which we understand. But is there another reason why you would not like to increase the guidance at this point given that 2 of the 4 main lines are going to move in the right direction.
And the second one refers to the number of clients at Hey Banco. We calculated the increase this quarter was only 33,000. So that's low compared to the 1 million target that you have this year? Is this a particularly low quarter and you will accelerate later?
In terms of not changing the guidance, is too soon for us to change the guidance, especially on the net income. Obviously, we believe with the increase in the rate, increase in the margin and lower provisions for the full year, we will be at least in the higher range of 17% but still in guidance. We will prefer to wait and see the second quarter and maybe at the end of the second quarter, we can change these 3 lines that you are mentioning both provisions or cost of risk because we don't guide provision, we guide cost of risk and NIM. If we absorb and we see new increases on the rate and obviously, net income, if we believe that we are going to exceed the 17%. But right now, as we are on the top side of -- still of the guidance, and we believe it's too soon to change it.
In terms of client growth -- in terms of -- sorry, -- in terms of client growth, we did some extraordinary promotions at the end of last year, and we hiked the ad spending in the last quarter. So we definitely had a boost from that. This quarter, we -- our main focus was to relaunch our app and add -- to be able to be adding, sub-proprietors, small businesses and the children's account.
So it was a big relaunch. So we lowered our ad spending this quarter. We've -- as I said, we are changing our onboarding processes to be more mono line. So the risk assessment will happen pretty fast for the clients. If the client wish continue the onboarding process, it will continue in the app. So that, in a sense, will allow us to be more efficient and to continue incrementing our ad spending, but not necessarily low ad incrementing our cost of acquisition. So that's our main objective.
And the other thing would be that obviously, remain -- I mean, as I said, 1 million objective continues to be there. But the main focus right now is to have the best experience for our customers and have the best service and having a -- and have a business that generates profitability in the short term because of the cross-selling of the products that we're doing and because of the customers that we are targeting.
So as we are doing this for the long term, we're not adding clients just for the number. We're adding clients because we think that will produce a lot of profitability in the medium term and being able to do so with quality customers. And as we've done so with Banregio's brand, and that's something that we want to generate too in Hey Banco. So definitely, the 1 million mark is something that we're looking for. We already have strategies underway to further their increase.
For example, we are selling the card in 7-Elevens. So that will be something, for example, much easier for clients to go for 7-Eleven, just buy the debit accounts or buy the debit card. So it's very easy to do those type of things and being able to generate more volume but always focusing on customers that are of quality for sure, not just adding volume because of volume because that, obviously, in the long term, we will not do the results that we're looking for.
Our next question comes from Eric Ito.
I have 2 quick ones. The first one regarding NPLs. I just wanted to get your sense on what do you think there's a new sustainable level for the NPL ratio? And then the second one regarding -- going back to your guidance. Just wanted to get -- if you could position -- give us a position regarding your loan growth. So do you think it could beat the expectations or maybe it fits closer to the lower range of the guidance?
Okay. In terms of NPLs, the -- we expect to continue the variability, as we always guide below 2%. Honestly, we expect below 1.8%. As I mentioned with this customer that went to past due or to a Stage 3 in November, and it was MXN 300 million customer or line of credit, then one single customer can move 200 basis points or 20 basis points from 1.5% to 1.7%. In general, we expect to maintain between 1.5% and 1.8%, that will be the short answer.
And in terms of loan growth, we think it would be 10% -- 8% to 10%. We -- as I said, we see a gradual economy recovery in the next following quarters. So we do see a lot of positive trends in terms of more investment in the north. We see the consumer spending and confidence is pretty good. We see the tourism industries gathering much more speed. So in a sense, we definitely see that the recovery will definitely produce more loan growth going on further, but still we think not to a sense to say with a very confident way that we're going to be able to achieve more than 12% growth at the moment.
Our next question comes from Jose Cuenca.
Just very 2 quick follow-ups. With regard to this client that went past due and then was restructuring and recovered. Can you just quickly remind me, please, what's the industry that this client belongs to? Just a reminder. And my second question is, if it would be fair to say that with regards to Hey strategy, could we expect like growth in the same products that you just alluded to, namely savings, time deposits, credit card. Just wanted to confirm if those would be like the main drivers of growth in the short term?
So the client was in the travel business segment, so the prolonged state business segment, it was a conjoined loan that we did with Scotiabank and the owner was a private equity fund. So things got -- the paperwork was more tougher for those 2 regions -- reasons. So working with our global bank and with a fund, it is much difficult to working with private clients.
But in a sense, the recovery has already been. Their sales are incrementing in a very positive manner. So we do -- are confident that they are recovering in a very good manner, though the assets are pretty good quality. So we think as their economy continues to recover and things continue to normalize, those clients will continue to have positive cash flows in a way to repay in a more convenient manner.
And the second was in terms of the drivers. Yes. Yes, the main driver has -- the main driver for the client growth in terms of quality customers has been for the time deposits and for the investment part of our solution. So the most attraction has been for those, although the ad spending continues to be much more prone to be credit cards and credit related than debit accounts. So in a sense, we've organically grown a lot of good deposit clients. And in terms of the ad spending, what's much more -- that has more traction. So the pieces that are related to credit are the ones that are more attractive.
Our next question comes from [ Andres Jimenez ].
Can you hear me?
Yes.
Yes.
Thank you. Well, my question is regarding dividends. We see that in the cash flow statement, you say you pay around MXN 3.9 billion. So can you elaborate more about this? And what are the status with the talks with the regulators?
Yes. Well, the dividend has been already paid April 11 -- April 12. And that's it. We had our general assembly on March, the last day of March. And there is nothing more to say. They have already been paid.
Our next question comes from Eric Cohen. Since there are no more questions, on behalf of our senior management, I would like to thank everyone for joining the call. We look forward to speaking with many of you in the coming weeks, and if additional questions arise, please don't hesitate to reach out to Alejandro on our Investor Relations team. Thank you for your interest in Regional and have a good day.
Thank you, everyone. Good day.