Regional SAB de CV
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Ladies and gentlemen, thank you for standing by, and welcome to the Regional's Second Quarter 2020 Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions]
I would now like to hand the conference over to your speaker today, Mr. Manuel Rivero Zambrano, CEO of Regional. Thank you. Please go ahead.
Good morning, everyone. Before anything, I would like to send my best to you and your families, hoping they are healthy and well. Welcome to the conference call for Regional's second quarter results of 2020. We appreciate everyone's participation today.
Although the situation has been complex, we have been seeing better results in our portfolio, core deposits and nonfinancial income. We have focused our efforts on taking greater efficiencies and productivity, reducing our staff by 200 people, reducing bonuses and have continued our digitalization projects, helping maintaining our profitability and our strengths.
We have a solid capitalization position, with a Tier 1 capital of 14.6% as of May 2020, and we expect to reach 16.0% by the end of the year. Adjusting to the new normality has presented new opportunities and possibilities for our processes and operations, and we will continue to grow in a very prudent manner, helping our customers regain operations as we're seeing their businesses expanding month-to-month.
The performing loan portfolio increased 5% year-on-year. Regarding our segments year-on-year growth, 4% on wholesales, 11% on SME loans, 10% on consumer loans, 13% on auto loans and 1% on mortgage loans. Demand deposits increased 19% and retail deposits, 7%, driven by our strategy of rebalancing our funding structure to achieve a lower cost of funding.
We currently have MXN 14 billion liquidity buffer, and we were able to expand it, if needed, to MXN 32 billion. Although the policy rate has decreased 325 basis points, the NIM has only contracted 38 basis points, reaching 6.0%, and the NIM of total loans, 6.3%. The financial margin for the second quarter reached MXN 1,856 million.
On the second quarter of -- the year-to-date nonfinancial income reached MXN 1,297 million with a 17% year-on-year growth. We continue to strengthen our strategy to grow the nonfinancial products, promoting through cross-selling, attracting new customers, including nonfinancial fees, leasing that standout with 11 -- 18% and 11%, respectively, year-on-year growth. As mentioned, our productivity and efficiency have produced good results. Expenses grew 8% year-on-year, reaching a total of MXN 1,156 million, maintaining the efficiency ratio at 44.0%.
Given the above, the net income was MXN 777 million, which represents a 10% contraction year-on-year. The ROAE and the ROAA stood at a very healthy 18.4% and 2.5%, respectively.
Regional is characterized by its asset quality in our loan portfolio, and is one of the healthiest in the Mexican financial system. In the second quarter of 2020, the NPL ratio has remained stable, reaching 1.5%. With our segments, the NPL was 0.7% in wholesale, 5.5% in retail, 3.1% in consumer, 2.4% in mortgage and 0.4% for auto loans. In this quarter, provisions reached MXN 157 million, while the last 12 months cost of risk stood at 0.6%. Additionally, 27% of our loan portfolio is one of the several scheme programs, giving liquidity to our customers, helping them face economic impact caused by COVID-19 pandemic.
One of the risk maintaining factors are the way we currently structure our loans where 90% have some type of guarantee. We have fully analyzed our portfolio, and we have been -- quantified the write-off prospecting of 2020 to be between 607 -- MXN 680 million and MXN 790 million compared to MXN 593 million in 2019.
Thank you very much. We appreciate any questions.
[Operator Instructions] Your first question comes from Ernesto Gabilondo with Bank of America.
My first question is on provision charges. As you have already anticipated, you will recognize write-offs in the second half of this year. So my question is on -- how are you going to recognize them in the second half? Will it be half and half between the third quarter and fourth quarter? Or do you expect to have all the impact in the last quarter?
Then my second question is in operating expenses. I believe at the beginning of the year, you were expecting double-digit OpEx growth, but now I think that you're expecting single-digit growth. So can you elaborate on your expectations and strategy to reduce operating expenses?
And finally, my last question is on Hey, your digital bank, can you provide us some key differences of this initiative when compared to other fintechs in the industry? And when do you expect to have deployed most of the products? I don't know if you're already approaching a potential private equity or a fintech to invest into digital bank.
Thank you, Ernesto. Thank you for your questions. So in terms of the provisions, we are expecting to have higher provisions both quarters, for sure. We're going to be more aggressive on write-offs, much lowering the 18 months that we take on, for example, small business loans, and lower that to 6 months. So being a little more aggressive on write-offs. And that's going to be -- that's going to hike provisions up to the point that we already guided of MXN 1,000 million of provisions this year. So to get your question right, so we're doing it, I think, more aggressive, actually more on this quarter than the next. But still, I think, it's going to be even out on both of them.
Okay. And there's a...
Yes. I don't know if that was clear enough.
No. No, I agree. I agree, it was.
We're expecting around, I'll say, like MXN 250 million, around, more this following quarter. And then MXN 200 million, MXN 250 million again in the next quarter, above the MXN 350 million that we are normally doing per quarter. So as we have gathered more information and we're seeing how the portfolios have been impacted, we've been seeing some small businesses that are not going to be able to withstand it, so that's why we're going to hike the write-offs and get that over with. And so as we have the government guarantee up to 50%, we're more than eager to just accelerate that path and get the guarantee from the government.
Outside that, we've not seen any deterioration on our large company loans, which are very resilient and have been -- have done very well since May, that was the hardest hit. Every industry is behaving different, obviously, tourism, that we're not in, has behaved very severely. So for example, in terms of agriculture loans, which are very -- has had a lot of demand for probably the United States and there's a lot of demand in terms of credit for the agrobusiness. And for the homeowner, the home -- the homebuilders are doing very well and are having a lot of demand. Mortgages are growing, as you know, 10%. In -- NAREIT mortgage is growing, too, at a very good rate. They've been giving more subsidies in different forms, but they give us more subsidies, and so we see that the demand and the mortgage -- the availability is still there. And so we see that sales are very -- are having a lot of strength, and so the demand for more loans in that industry is behaving very positively.
So in a sense, we've seen very asymmetric results from the -- from how the pandemic has really impacted the industries, and we see some that are pretty damaged, as I said, tourism, and others that are behaving quite positively, like, for example, agriculture that has very positive dynamics.
Well in terms of operating expenses, we've been doing very aggressive things in order to lower the expense -- the OpEx, as you said. We've canceled the infrastructure programs that we have for potential building and branches, which we don't need at the moment, and obviously, that's going to translate into efficiencies.
And then we've -- as already mentioned, we've let go around 200 people in staff that are giving us good results in productivity. And I will say, we've lowered a lot of excesses in terms of policy, in terms of things that we don't quite need to -- in order to continue to grow. As you've seen, the business is continue to growing. We've grown our checking accounts pretty well in our individual side, in our -- and then obviously, a 36% increase in small business, checking loans, we're pretty happy about it, so things are going very well here.
In terms of net interest income, we're really happy how things are going in terms of insurance, in terms of FX fees. The merchant-acquiring business is growing pretty good. So we're happy with some numbers in terms of how things are picking up, and we're pretty sure things are going to really go along the way.
Obviously, there -- the worst is behind us. For example, in terms of FX fees, May was the lowest point. Now we're almost at par. So I think -- in this quarter. So I think it's -- we're expecting a good result for some of the noninterest income.
And for Hey, things are going pretty well. The main differentiation that we have is, obviously, having a lower expense on channels gives you the advantage that you can give more value to your products in order to have clients, having more features, more -- better pricing and having, obviously, a pretty efficient way to distribute products.
So things are going pretty well. We're opening around 16,000 accounts per month. Obviously, that's much more than we can start doing in banks because of the pandemic. But Hey it's growing at 16,000 accounts per month, which is pretty amazing. And we think that's going to be -- I mean, we have 200,000 clients at this moment, and we're going to finish around 300,000.
We're going to -- we are launching the new app of Hey Banco this -- in this following -- in August 10. We're checking with checking -- with a checking account that has a 5.5% yield. So it's a pretty aggressive yield that we're paying this -- it has a Level 3 account, you can go up to MXN 65,000 per month on deposit. So it's pretty aggressive, and we can do that because, obviously, we don't have those costs that branches have. And it pays the balance -- it pays -- you have to have a MXN 3,000 balance in order to receive the 5.5%. So it's a very aggressive play to get deposits. We are very aggressively hiking deposit. We're going to have a 6.5% in savings and a 7.5% in your time deposits. And that's what we really want to position Hey Banco as a deposit -- a very strong deposit franchise.
Things are pretty -- are going very well too with private equity investors. We have already had a lot of preliminary talk with them or we have already had 7 talks. And I think the interest is there. We've already seen that the digital -- state of the digital -- the digital solutions are really having a lot of good demand right now because of obvious reasons, and I think that's going to be the case now on because branches are still going to have difficulties operating under these circumstances until we don't have a vaccine, which is going to probably be on March or June the next year, right? So it's -- so we see that the dynamics for the digital offerings are going to be more and more. And I think private equity investors are seeing that, obviously, and are very positive on this momentum.
Your next question comes from Thiago Batista with UBS.
I have two questions. The first one on asset quality. When do you believe that the NPL or the cost of risk will peak? You had mentioned that second half of the year, we're probably going to see a higher level of provision. But do you believe second half will be peak or we can see...
Thiago, I'm having a lot of difficulty to understand. I don't know if I'm the only one. I don't know if you can -- can you try again?
It's better now?
Slightly, but yes.
Okay. I'll try to speak very slow and let's see. If -- when do you believe that the peak of provisions and EBITDA ratio will happen, if this will happen in the second half or in 2021? And the second question is about Coji (sic) [ CoDi ]. How do you see Coji (sic) [ CoDi ] in your strategy with Hey?
CoDi?
CoDi.
CoDi. It's okay.
Well let me answer the first question -- or the second question first. In terms of CoDi, what we think it's -- I mean, CoDi, and there's another feature that we're rolling out at banks, which is a peer-to-peer transfer with your -- only your cellphone. So you're going to be able to marry, if you will, to couple your phone number and your bank account. And if you don't have a bank account, it's going to prompt you into opening any other -- any options that you want to handle.
So it's CoDi, and this form of payment, I think, is going to be very well received because -- obviously, because of the pandemic and having touchless payment, it's pretty convenient as money -- as paper money has its issues. And we think that's going to be very well received for clients that are willing to go fully digital. And I think it's -- that we'll see that more and more to be the case.
All right, Thiago. About the first one -- this is Enrique Navarro. The peak of provisions and the peak of write-offs that Manuel is speak in the conference call, in our presentation, will happen partially in the second half of the year. Most of the relief programs finished in September and October. Then for November, we will have a better understanding who has been able to retake the payments schedule. And as you know, we have to expect, to wait for 3 few more months. But as Manuel said, in the companies that we don't see that they will be able to repay, we will go directly to their write-off. We will not wait, as usually, we wait for the 18 months. Then most of the provisions that we expect are in the first half of 2021.
Your next question comes from Neha Agarwala with HSBC.
Firstly, I wanted to clarify on the write-off and provisions. I read in the presentation that you're now expecting write-off of MXN 680 million to MXN 790 million during this year, whereas previously, you talked about MXN 400 million to MXN 600 million of write-off. So why this increase? Are you seeing worse asset quality for some of the clients than what you had anticipated? And you previously talked about provisions of MXN 1,000 million to MXN 1.4 billion for this year, does that still make sense or do you see a risk to the upside on this number?
Thank you, Neha. I will answer the last part first. We are still expecting between MXN 1,000 million to MXN 1.4 billion for provisions, closer to the MXN 1,000 million amount that you have seen the provisions that we have done for this year. And as I mentioned, the -- most of the relief programs will finish in September and October. The first required payment for these customers will be end of September or end of October. Then if they don't pay the first payment, we will start seeing a little bit of provisions. If you remember our methodology, that is CNBV , [ we don't have a secondary methodology.] We record partially the first and second and the third month, and then we do 45% after it becomes NPL or past due after 90 days. That's the reason we say most of the provisions will go to the next year. But yes, this year, we expect around MXN 1 billion.
In terms of write-offs, basically some of the customers that were already in past due in nonperforming loans, with COVID, we recognized that they will not be able to go back in business, then -- mainly in the very small business segment, then we are doing the write-off this year. I don't know if I was clear. The ones that were already bad were in the write-offs. The ones that were doing pretty well before the relief program, we will wait and see.
Enrique, another question on the development bank funding. You mentioned that about MXN 8 billion of the total portfolio is funded by the development bank. Is that still the amount or has this changed? And how do you see this -- the loan portfolio fund the development bank going forward? Should the proportion increase or decrease?
Yes. The funding from banca de desarrollo or development banks is around 8% of the fundings.
8% of the total loans are funded by the development bank?
Yes, approximately. Yes.
Okay. And should it remain stable around this level? Or should we expect to see an increase?
No. We should expect it to be at this level. We don't expect it to go forward. Although there's -- as I said, there's a lot of demand in terms of agrobusiness, so we can see in agrobusiness there is a very good program from the government, which -- and this part of development bank, it's part of Banco de México's. It's a trust that is specialized for the agrobusiness, and they give very cheap funding. So they -- it may hike if we see more demand. And they're really very aggressive on pricing, so we do -- might see a bit more, but not like doubling, no. Nothing in that sense.
Your next question comes from Yuri Fernandes with JPMorgan.
I have a first question behind the rationale of adopting the special accounting. I mean why do you expect it to reduce only the second half and not starting provision now in the second Q and all that. So why to talk about this kind of special account? So what is the benefit on that?
And my second question is regarding other operating expenses. This line used to be very low in 2018, but in the last 2 quarters, it has been moving higher. So I just would like to understand what is driving, like, the increase in other operating expenses.
And finally, the last one regarding your credit card operation, your acquiring business. It's pretty important, right? It's like 25% of your total fees. And this was a weak quarter, and I totally get because of the volume of COVID-19, but if you can provide us some visibility on how the last data in July is tracking, like how much the volume of credit card have rebound from the bottom in May and April?
Can you repeat your second question? I didn't fully get it.
The second question is regarding your other operating expenses. I think it's a portion of the MXN 88 million negative you had this quarter. I think it was about MXN 50 million, whatever expenses this quarter, but these were...
Other expenses?
Yes. Other operating expenses.
Yes, yes, yes. Those are the valuations of the swaps. The inefficiencies of the valuation of the -- we have our portfolio of swaps, and we have to mark-to-market those swaps. And obviously, that as a coverage, portfolio -- for the mortgage portfolio that we have, though some inefficiencies are presented and those inefficiencies go in the valuation as a negative valuation in other expenses, so that explains most of it.
And for the first question, I'll say that we do it -- we do provisions when we see the information that we have, that if a client does not have the possibility of paying back, we're going do 100% of write-off in that moment, so we -- of the provision, sorry, at that moment. So we are not hiding anything. We're just giving client moments to regain their foothold and seeing how they would stand. We've seen, as I said, very positive results in checking accounts going up in the small company's loans. So -- small companies, so we're seeing how they're managing their books. In, for example, all the merchant-acquiring business, as I said, May was the slowest point. Right now, we're at par. So small companies are at par in sales in their merchant-acquiring side.
So things are going, as I said, much better, obviously, not to the point that we're very comfortable in. So as we have more information that we are comfortably saying that the provisions that we guided are there and are the ones that are going to be -- that we're going to do this coming in 2 quarters, and that's practically why we've done it because then we have a clear view and you have more information.
I understand there's a lot of uncertainty for you guys, but please make sure that we are trying to do our best in having the most efficient in operation and having the most transparent way to give you clarity. And I know that's not going to be as easy for the next 2 quarters, but we're going to do our best.
We're very comfortable in our large company loans, none have presented a big problems. The problems that we had prior to the COVID are the ones that we have right now, nothing new. So that's like a huge thing because, obviously, that's the bulk of our portfolio. We don't see any other -- further problems in mortgages in auto loans, and we do have a collateral there. So it's -- small company loans are the ones that are more fragile, but in terms of what we've -- in the last 2 years, we've been very eager to have very quality loans for small companies, and having a 50% collateral from the government for mortgage or any other thing, we're comfortable that the numbers we've given is as close as they're going to -- are as close as what we think they're going to be.
And the third question was about card fees, right?
Card and merchant fees.
Yes. Card fees.
Yes. In Terms of giving a little bit of color of card fees -- well you would see June. June is better than May and May is better than April. And July is better than the other 3. We see a recovery in -- for 2 main reasons. We have affiliated new merchants, mainly one large e-commerce merchant and some others. Small merchants that are increasing their invoicing. And then you will see an interchange fee increase for the next quarter.
Also in the credit card business, with the pandemic, obviously, most of the credit cards were used mainly online, were not physically-present card. As Manuel mentioned, we see an increase in transactions. But July looks better than both lines of fees, credit card, debit card. And interchange fee from merchant-acquiring business are recovering, I won't say the same level to the previous quarter, to the first quarter, but much better than the second quarter.
Your next question comes from [ Amagi Rehost ] with Citi.
I just have a quick follow-up on other operating expenses. You mentioned a swap. I just wanted to understand if there's likely to have this movement going forward in the next quarter?
Yes. I will elaborate a little bit more in the answer. It's mainly the valuation of the swaps. We don't expect that much amount -- the same amount of, we call it, the inefficiency because most of the valuation was directed to the equity. When it's for a coverage, then we don't expect a similar amount as we don't expect the same decrease on the policy rate for the next quarter. We have seen in less than a year, 300 basis points. We don't expect another 300 basis points in the next 3 months.
Okay. Can you give me just a little bit more color on why admin expenses have decreased a little bit more than expected in this quarter?
Yes. Give me just 1 second.
Sure.
Admin expenses basically have decreased, as Manuel mentioned. We reduced some of the publicity and advertising that we were doing, mainly for Hey and for our credit card business. But also we have reduction in expense, travel expenses, and some of other related to the [ discretionary, ] as we reduced the increases in transactions on credit card and debit card, also the expenses related to that businesses have decreased. And in terms of people or remuneration [indiscernible] we are not covering the [indiscernible] that we have. The net effect is less, less personnel.
There are no further questions at this time.
Well thank you very much for your participation. Anything else, please let us know and we would likely address it. Thank you very much.
Thank you.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.