Regional SAB de CV
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Ladies and gentlemen, thank you for standing by, and welcome to the Banregio's Fourth Quarter 2019 Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions]
I would now like to turn the call over to your speaker today, Manuel Rivero Zambrano, Banregio's CEO. Please go ahead, sir.
Good morning. Welcome to our conference call to recognize fourth quarter results 2019. We appreciate everyone's participation today. We had great yearly results, both regarding growth and quality, and we continue to further our relationship with our customers, adding more value to Regional. Regarding growth, the total loan portfolio had a 10% year-on-year growth, much above the system average. Meanwhile, the different segments of Banregio, the wholesale segment grew 9%, while the SME loan portfolio increased 9% year-on-year. Within the preferred banking segment, the add-on the consumer portfolio grew 25% and 26%, respectively, and the mortgage portfolio grew by 6% year-on-year.
On the other hand, we continued the consolidation in the regions where we have presence, standing out in Jalisco, where we had a growth of 17%, Mexico City, 8% and Nuevo Leon grew 6%, while the remaining regions grew a very good 13% growth. One recognized constant objective is the continuous growth of our time deposits, which is why we are constantly improving our channels. We finished the successful implementation of the orange model in all of our branches and kept improving our merchant acquiring business, and we have expanding our offer of the digital option. Having very good results with the 13% year-on-year growth in time deposits and 11% year-on-year on demand deposits.
In terms of profitability, the NIM stands stable at 6.2% and the NIM of total loans at 6.6%, despite the decrease in the reference rate. We have increased our income diversification through cross-selling of the nonfinancial products taken to complement the needs of our clients. In the fourth quarter, the nonfinancial income line reached MXN 678 million. This included the services in terms of insurance with a year-on-year growth of 20%, foreign exchange at 41%, point-of-sale fees at 27%, card fees at 20% and leasing net income with a growth of 16% year-on-year.
In addition, the efficiency ratio improved to 42.4% with a variation of 38 basis points during the year, while the quarterly expenses remained with the expected levels with a 3% year-on-year growth. Given the above, the quarterly net income in the fourth quarter was MXN 919 million, which represents a 7% year-on-year growth.
As for the full year 2019, I would like to highlight the good results achieved with a 10% growth of the financial margin and 19% of the nonfinancial income, also a control growth of expenses of 11% reaching MXN 3,675 million of net income, and this reflects an ROE of 20.1% and an ROA of 2.7%.
We continue to strengthen our risk figures and focusing on quality customers, achieving a nonpreferred loan ratio of 1.8% in the last 12 months reached cost of 0.7%. While in terms of segments, the wholesale NPL ratio was 0.9%. And with the retail segment, the NPL ratio is 5.1% for SMEs, 3.2% for customer loans, [ 2.6% ] for mortgage and 1.1% for auto.
To close, we believe the strategy mentioned above will keep supporting the growth of Regional in 2020. And we hope the results for the following year will remain within the ranges of the following guide: so portfolio growth between 8% and 12%; core deposits growth between 9 and 14% ; net interest margin within 6% and 6.5%; growth in net profit, 10% to 13%; ROE between 19% and 20%; NPL ratio below 2%; efficiency ratio below 45%. The last 12 months, risk costs between 0.7% and 0.9%. Thank you very much.
We appreciate any questions.
[Operator Instructions] Your first question comes from Ernesto Gabilondo with Bank of America.
I have 3 questions. The first one is related to some surprises during the quarter. We noticed that the NIM was affected due to slightly lower interest rates. So do you think this trend to continue in 2020? Then in terms of expenses, we noticed they came a little bit lower from what you were guiding. So just to know what was behind this? Then my second question is, if you can elaborate what will be the upside risks and the downside risks that you are seeing for Regional this year? And finally, my last question is, we have seen some Mexican banks analyzing the possibility to distribute special dividends in 2020. Do you think that could be the case for the Regional? If yes, when can we expect an announcement?
Ernesto, I'm Enrique Navarro. I will answer the first question about the surprises. In terms of expenses, basically, what we did in the fourth quarter, is we capitalized some technology projects. As you know, we are doing a lot of investment in '19, both for internal processes as well as for customer-facing apps and electronic banking. And in September, October and November, we finalized the documentation to capitalize this project, and that's the impact that is shown in the benefits and salaries line. That's the explanation of why the -- that line reduced at 6% quarter-on-quarter.
In terms of the NIM down, basically, the decrease of the rate, the reference rate, as you know, we have 72% or 73% around the percentage of loans that are valuable and are priced in factors way, 30 days and 60 days at most. But the liability side and time deposits, the average per pricing is 90 days after renewal. Then we have seen that effect due to the reduction of the rates. What can we expect? A little improvement as the cost of interest will reduce a little bit with the renewal of all the time deposits. But a similar effect we can expect if we have annual decrease that since the launch, the active rate goes down. And 2 or 3 months later, the time deposits. I don't know if I was clear, Ernesto.
So just a follow-up in this. So it will be reasonable [ to expect ] stable means in 2020 considering the dual benefit from the repricing of the liability in 90 days, but you can also be affected by potential lower interest rates at some point. What are you expecting for interest rates this year?
We are expecting at least 50 basis points lower between 50 and 27 -- and 75, sorry -- 20 -- 50 and 75, 5-0 and 7-5 [indiscernible] along the year. First quarter, third quarter and fourth quarter, that's our expectation or the ways our budget and guidance model.
And with these 50 to 75 basis points cut, what will imply for NIMs? They will remain stable because of the benefit of the repricing of the liabilities?
No. It will be produced by 15 basis points -- between 12 and 15 down. Unless, we manage to continue growing faster, the consumer loan and small loans that have a higher rate, a little bit of mix -- change of mix where, ceteris paribus, will be an impact of 12 to 15 basis points down considering the 75, that is the highest expectation that we have or the most.
Perfect. And then for my other questions?
Yes.
Manuel will answer.
Yes. Thank you for your questions. Regarding risk, definitely, we've been very cautious about origination and we want to maintain our cost of risk. I think that's our biggest, I will say, concern. But definitely, we're always reinforcing our strategies in terms of collection and origination. So I think that's -- I mean, we see a good year going ahead in terms of risk. That's our main -- one of our main focuses right now. In terms of dividends, definitely, we're looking on implementing our payout ratio. And we're looking into, as we've talked about before, seeing a subordinate obligations Tier 1 and that might voted on this year, increment dividends, a little bit more. So we're analyzing that too. So yes, we're going to see more dividend payout ratio in the -- in this coming year and -- definitely.
And this will be increasing your dividend payout ratio policy? Or it will be special dividend?
No. I wouldn't say it's special dividend, but definitely, I mean, we've -- we have enough capital for -- still continuing to grow. We've been growing at 10%, 12% per year. And I think that's what we're going to grow for next year, definitely. And I think there's enough capital to implement the payout ratio. I wouldn't say in the policy, but definitely, next year, definitely we'll analyze the needs. If economy continues to [ hover to a 1% and 2% ], I think how are we going to repeat next year.
And so for example, for this year, the payout ratio, if you wanted to increase it, you will announce in the next shareholders' meeting?
Yes. I would say like [ 40% to 50% ] of the payout -- of the net income at the year's net income.
And would it be announcing the next shareholders' meeting?
Yes, definitely.
Your next question comes from the line of Brian Flores with Citibank.
Just a question. One, could you expand a bit on the drivers of deposit growth that we saw in this quarter? And the second question is that we saw a decrease in the [indiscernible] wholesale business. I mean if you could expand a bit further on that?
Thank you, Brian. Thank you for your question. In terms of the wholesale, we had some corporates that we just -- we're not interested in individual loans anymore. So it was just -- it was around MXN 2,000 million which are not there anymore, low -- very low margin. So we've had a recurrent growth in Nuevo León of around 12%. We have considered that [indiscernible] and growth in the bank would have been around 11%. And in terms of the first question, the drivers of deposit growth, we always finish the year with promotions in terms of deposits. So that explains most of the growth.
Your next question comes from the line of Yuri Fernandes with JPMorgan.
Congratulations on growing earnings mid-teens in such a challenging year for GDP in Mexico. I had a question regarding asset quality. Cost of risk was super okay. But looking to the new NPL formation, we note a big increase versus the previous quarters. So my question is, what happened there? Like it seemed the deterioration in NPL was regarding the SME book. So if you can explain if these were like a few cases and specific in industry, if this would be a trend and still reflecting in the cost of goods for 2020? It seems it isn't because you have like the 0.7, 0.8 cost of risk guidance. But just checking what is the moving part on the new NPL formation.
And my second question is regarding expense, a follow-up on Ernesto's point. I understood this was regarding some CapEx, some expenses that were capitalized this quarter. But what should we expect for 2020? Your revenue line seems to be okay, right? Loan growth, growing 8 to 12. Fees should continue to be healthy. But still, you have the cost-to-income very high, below 45, but seems to be pretty high. So this -- it's likely pointing that G&A should still grow high single digits, low teens. So just checking if that's the case. If you can comment a little bit on your investment plans like what should be next, the branches in the shopping malls and all like -- just to have a color on how the expense line should behave in 2020?
Well, thank you, Yuri. In terms of -- thank you for your question, and thank you for your remarks on the -- we're very proud about the increment and the net income. I think this year is going to be -- this 2020 is going to be the same as risk. Definitely, we had a challenging November, but nothing that we see as a trend right now. We'll definitely give you more feedback if we do have on it.
But what we've seen is that risk is on check. And definitely, we'll maintain the same trends as we had in this previous year. In terms of expenses growth, we're going to see a decrease on expenses growth this coming year, mostly because of -- we incremented our expense growth in terms of, for example, developers. And that's one of the main reasons that you see in the last quarter, a decrease in expenses because we capitalized with the developer. And obviously, the technology lasts more than -- it's not disposable, it lasts. And recapitalizing it to 4 years, which is very prudent. And I think in terms of what we're expecting for next year, it's a more moderate growth, and most of it is because of a lowering the expensive technology, which obviously, we had implemented -- Oracle implemented Salesforce, [indiscernible] the NPL service measurements, et cetera, and reinforcing cybersecurity, which, right now, they're not going to repeat themselves. So it's -- we do not see a lower trend on expenses. And obviously, that's going to play out in a more -- going forward, we're going to see, obviously, more operating leverage there, and we're able we hope to lower the interest rate even further and further in the coming years.
So if I understand correctly, maybe cost income may be lower than the 43 you had this year, right? If that's a trend because revenue's growing low teens like...
It should, it should. Yes, definitely.
Your next question comes from Carlos Gomez with HSBC.
And congratulations on the results. Two specific questions. One, on the construction industry, we would like to know your view. We have heard some of your competitors being a bit concerned about construction or some areas of construction or some geographies in the country today, we would like to get your view. Second, we would like to get a comment on the leasing business. Finally, you mentioned before, a growth of 10% to 12%. Is that your expectation? And would you expect to maintain the ROE at the same level?
Thank you, Carlos. Can you repeat the last question, I was making notes in the first, I'm sorry.
Yes. I'm particularly trying to get your view on the guidance. So I wanted to know if you expect loan growth between 10% and 12%. And do you expect your profitability, your ROE, to also be around the 20% you reported this year?
Thank you, Carlos. Thank you for your question. Well, in terms of regarding construction, definitely we see, in terms of government spending, we've seen this -- the whole year, and we've not seen any recovery yet in terms of infrastructure plan. Obviously, it's on their way. So we might see this year a bit of a pickup in terms of government construction.
Housing definitely, it was a challenge for lower income, which had subsidies in the past, which I don't have any more. So you might see some housing information there that might give you an idea of the housing sector. It's not good, but definitely getting that out of way, there's still a lot of demand in terms of housing, obviously, because of the economic models. And we see that still, and you can see mortgages growing at 10% year-on-year on the whole system, which gives you an idea that things are going, I think, pretty good.
In terms of commercial real estate, we do still see a lot of demand in those series. And I think that's a little bit of how construction is going to behave in 2020. I mean I think we'll see a good 2020 for -- in terms of loans to that sector. And I think the NPL ratio would maintain at the same level.
So just [indiscernible] overbuilding in any particular segment or area at this point in time?
No, definitely no. There's -- I mean, there's -- I mean you know, there's no bubbles in terms of housing in Mexico as mortgages cost around 9%, 10%. Most of our other housing, it's brought by users. And it's pretty steady need in most of the cities. We've been seeing still a good growth in the north part in the [ hill ] region, in the Peninsula Yucatán, definitely.
In terms of -- in terms of what we're expecting for loan growth, definitely we've seen areas that are growing, were very encouraging, for example, in terms of agriculture. As we said, some housing manufacturing in the north, still growing at a good pace. So we still see a good need for growth -- for loans. So that's what we've guided, I think, 10% to 12% growth in terms of loans, it's a good number. It's a good target. I think if the economy continues to better, I think we could do a little more than that. Let's see how this year goes through. But in terms of net income, and we're going to be as thoughtful this year as we were in previous years, so we think that our target is pretty much very accessible. And I think it's -- we're going to have a pretty good 2020 than as we had in 2019, I think.
And obviously, we would love to see a better loan growth and more demand, but I think that's going to be a little bit down the road.
Okay. So again, the level of profitability, they are similar to this year?
Yes, definitely. And even further, if we see a little bit of programs in terms of the subordinated debt. I don't know, let's see how the year goes.
Your next question comes from Arturo Langa from Itaú BBA.
I think all of my questions have been answered.
Your next question comes from Neha Agarwala with HSBC.
I have 2 questions. First, on your digital bank, can we get any update on the number of users? And how is the Regional bank doing? And should we expect that to strengthen your retail deposit base? And my second question is on the wholesale loan growth in Mexico, which is growing below what we see for the other regions. Why is that? Are you being cautious? Or are you still tweaking your model in Mexico City? Any update there would be very helpful.
Yes. Thank you, Neha. Thank you for you call. I think your question -- well, in terms of the [ bank's goods ], going great. We're growing around 10,000 accounts per month, which gives you an idea. I mean each branch opens about 500 accounts per month. So you can see the -- we're encouraging about [ payback ] and how it's growing. And definitely, we will see in the future more about it and how it goes in terms of how would -- it will impact Regional's results. We would give you more color there. Just -- I mean we've seen that demand and the way things are changing quite rapidly. So we'll give you more color when we have it.
In terms of loan growth of Mexico City, yes, we had -- I mean, there were challenges in Mexico City for growth. I mean government spending, definitely, quite the loan growth in Mexico City for last year. And there were challenges for homebuilders, for example, in terms of permits. So I think it's -- you can see that the effect of the government spending slowing down in 2019. And obviously, the most impacted is going to be Mexico City. So that's why you see that decrease. We think government would -- it's going to be more encouraging to really spend or have a more coherent plan for investment in spending, and we think it's going to be a better year. We had the same issue with [indiscernible] . The first year at [indiscernible], things lowered down quite much. You will definitely see an information, even NPLs rose quite good. And you see that with [indiscernible] are going at the same rate, although NPL ratio has maintained very steady in the systems. So we are very encouraging about that. And [indiscernible] more dynamic for this year.
Okay. But in terms of quality, the portfolio is performing as per your expectations in Mexico City?
The NPL, you said the NPLs?
Yes.
Yes. We had some issues in -- as we've said in the past conference call that we've already changed what we thought was the problem, and we think right now, we're more focused on quality clients that are going to be -- that are going to have a better behavior than what we have in the past.
Your next question comes from Gabriel Nóbrega with Citibank.
I actually wanted to ask about competition. You've been growing in both of your markets, and I realize this is mainly due to the fact that you're exposed to more faster-growing states, right? So how have you perceived competition from maybe some banks similar to your size, but also to larger banks trying to get on the some states, which have an increase in loan demand? And as for my second question, that's actually a follow-up on the NPL ratios. I understand that the 60 bps deterioration in your SME portfolio, this was already expected. But if I got it right, and just to clarify here, you expect maybe these NPL ratios to improve over the coming year? Is that right?
Well, in terms of competition, we see the same competition we had in a little bit less than when one seller that was more active. So we've seen price to be very coherent. Some banks, I mean, I think that the big banks have not stopped lending and they're practically at the same level that you had before. So in terms of competition, we see the same circumstances.
In terms of the SME NPL ratio, we think, we think it shouldn't be -- I mean, as we already guided the customer base, we think it should hover as the figure we have right now. It might lower in terms of customer base that -- I mean, it should -- this quarter was a bit bigger than we had previously. And we think in terms of NPL ratios is going to maintain at the same level that we have right now, which are well below the system in every portfolio that we have, basically.
Your next question comes from Piedad Alessandri with Credicorp Capital.
I wanted to ask if you could repeat first the detail you gave on cost of risk for the different segments. And if you could repeat please your guidance for 2020.
Yes. Well, we don't have guidance for cost of risk by segment...
No. No. No. Look at it, you said the [ wholesale ] was [ 0.7% ], and if you could repeat those.
Okay. The total growth of the -- for the [indiscernible], between 8% to 12% growth. [ Deposit ] 9% to 14%. The NIM, the net interest margin to stay around between 6% and 6.5%. As we answer the question of Ernesto at the beginning, going down to the answer to -- closer to the 6% if the rate continues going down.
Growth in net profit, 10% to 15%. And we believe 11% or 12% is achievable. The ROE, as we already talked, that the dividend would increase. We believe it will be maintained around 20s or high 19s. The NPL ratio, as Manuel mentioned, very similar to what it is right now, 1.8, 1.9. We are guiding below 2 just to be safe. And the efficiency ratio also below 45 in similar levels as we have right now around 43. And finally, the risk of cost for the whole year between 0.7 and 0.9. As you could see, it's very variable depending on the deterioration in the quarter, but we had quarters like this of 0.9, but we have other quarters of 0.5, 0.6, and the average, we expect to be between 0.7 and 0.9 for the whole.
[Operator Instructions] Your next question comes from Natalia Zamora with GBM.
We saw a very solid performance from the consumer and mortgage segments and as well from the net commissions in leasing and insurance business. I was wondering if you could tell us what you expect for the long-term in terms of the retail lending within the total portfolio. And how long do you expect the other businesses to keep growing above -- in the double digits?
Well, thank you very much for your questions. In terms of loan growth, we just definitely see that we still have a lot of potential in [ leasing and lending ]. There's a lot of growth that we see in the region of loans. There's still a lot of demand, not demand -- I would say a lot of market share that we can gain in the cities that we already have infrastructure. We're already, last year, we did have segmentation project, which is going to be, I think, quite good in terms of growing the middle part of the segment of the SME lending, which is pretty much very profitable. It would help expand our NIM. And we see the -- a pocket of around MXN 15,000 million to MXN 20,000 million that we can have in the next 3 to 5 years. Just getting the market share that we should have had in the past.
And so there's still good growth, I would say, in small company loans. We definitely see that there's still a lot of market penetration. We're not in the business of getting new customers into the financial system. We practically work with already-banked customers that we can know the risk and the -- and what populations are we taking. Obviously, as we have had a good strategy on NPL service, most companies that's what you see -- the pickup that we have. There's a lot of, I would say, demand for good service in terms of banking for small companies.
And in terms of what we call the big wholesale company loans, I think the -- still, we have good growth between 10% and 12% for the coming years. We've seen growth in terms of what we can have in market share in Mexico City or Guadalajara. They're good cities. They are definitely very economically buoyant and definitely they need -- we can have a better market penetration there. I mean you can -- in the region that we have a market inflation around 20% -- 19%, 20%. And in Jalisco, around 7%, 8% in this segment. And in Mexico City, we only had 1%. So you can see there, there's still a lot of market growth -- a market share we could grow within the years.
In terms of what we've seen in terms of consumer lending, most of our consumer lending is mainly due to cross-sell products to our depositor base. So what we've seen in terms of deposits is, they definitely need -- well, we like them to be -- we like to be the first relationship they have. I mean we want to be the main bank for those customers, and they need the credit card and need the needs of terms of personal loans. So that's why you've seen the growth that it's pretty much very stable. It's pretty much very good quality. I mean you can see the NPL ratio we have compared to the system in all the consumer credit portfolios, and it's at least half of what others have. So you can see the quality of the customers.
We definitely think we still have a lot of room there to grow around 30%, 25%, 20% depending on how strategy in terms of commercial growth goes. But I think now with all our branches in our orange model, and I think the growth should be very steady around the same places that you see right now. I mean we don't see the consumer lending portfolio to grow outstandingly compared to what we have in terms of Banregio. And we do like that in terms of how undergoing in commercial, and we were -- we're very happy about the results in terms of cross-selling and in terms of implementing the CRM and implementing the commercial and risk strategies that are very -- that are producing a lot of operating leverage. So we're very happy about how things are going in terms of the consumer lending, although it's not that much of a big portfolio for Banregio. I don't know if I was clear about how things are going to go.
Yes. Yes, that's very clear. And as for the leasing and insurance business question, we still have very solid performance. I was just wondering how much longer do you -- could we expect to see double-digit growth rates there?
Well, I think there's still a lot of demand in terms of leasing in Mexico. And there's still, in terms of many -- I mean, it adds a lot of production or productivity in companies and they like the fiscal treatment that they have. So I think it's still -- I mean, double-digit growth. I mean low double-digit will definitely happen in the next years.
Your next question comes from Enrique Mendoza with Actinver.
Something happened with my communication. It was interrupted. Sorry then, if I'm asking for questions that were already answered.
Don't worry. Don't worry.
[indiscernible] About the payout ratio that you expect for 2020 is almost the same as the previous year or do you expect a...
Yes. We're expecting at [indiscernible] between 40% to 50% of last year's net income.
Sorry, sorry. Just to take it up [indiscernible] between 18% to 20%?
No. No. From 40% to 50%.
40% to 50%?
Yes, of last year net income.
It's a huge increase from the previous year's payout ratio or the used payout ratio. Should we expect this payout ratio to be sustained for the next years?
Yes. As you already -- the answer was, we're definitely not changing the policy. But we're definitely think that as the economy continues to hover between 1% and 2%. The payout ratio for next year will remain the same or very similar.
Okay. That’s very good. And considering the SG&A expenses growth for 2020 and the cost of risk, could you repeat [ the expenses ] for 2020?
Yes. We're expecting expenses to grow around 8% in terms of cost of risk, 0.7% -- in between 0.7% and 0.9%.
0.7% to 0.9%, okay. Okay. And are you expecting to open branches during the 2020?
Not that many, no.
Okay. Okay. And what we saw in terms of asset quality of that -- it seems that the retail portfolio [ eroded ] a little bit in consumer and mortgage. And if I understand well, do you see this which is not -- nothing has a trend yet. Should we expect the sudden low down on the pace of growth of those products?
Enrique, this is Enrique. We expect a similar growth in consumer lending with a similar risk between 20% to 25%. Last year was 27% in some portfolios. For corporates or wholesale, we're expecting less growth from 8% to 12%. That's what we are expecting on larger loans. In terms of cost of risk, very similar to the year. Some quarters with some deterioration and some quarters with improvement at average 0.7% to 0.9%.
Well, thank you very much for your participation. To wrap up, I think we had a very good 2019. We do expect things to continue as good this 2020, and we're open to any more questions and doubts, please let us know anything else. Thank you. Thank you for your participation. See you on the next conference call.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.