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Edited Transcript of RA.MX earnings conference call or presentation 29-Jul-19 3:00pm GMT

Q2 2019 Regional SAB de CV Earnings Call

Aug 12, 2019 (Thomson StreetEvents) -- Edited Transcript of Regional SAB de CV earnings conference call or presentation Monday, July 29, 2019 at 3:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Enrique Navarro Ramírez

Regional S.A.B. de C.V. - CFO and Director of Finance & Planning

* Manuel Gerardo Rivero Zambrano

Sinca BanRegio, S.A. de C.V. - CEO & Member of the Board of directors

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Conference Call Participants

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* Enrique Mendoza Farías

Actinver Casa de Bolsa, S.A. de C.V., Research Division - Research Analyst

* Ernesto María Gabilondo Márquez

BofA Merrill Lynch, Research Division - Associate

* Gilberto Garcia

Barclays Bank PLC, Research Division - Assistant VP & Equity Research Analyst

* Neha Agarwala

HSBC, Research Division - Analyst, LatAm Financials

* Roy Kama

The Blu Fund - Vice President

* Yuri R. Fernandes

JP Morgan Chase & Co, Research Division - Analyst

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Presentation

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Operator [1]

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Good morning. My name is Kenzie, and I will be your conference operator today. At this time, I would like to welcome everyone to the Regional Second Quarter 2019 Results Conference Call. (Operator Instructions)

Thank you. Manuel Rivero Zambrano, CEO Regional, you may begin your conference.

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Manuel Gerardo Rivero Zambrano, Sinca BanRegio, S.A. de C.V. - CEO & Member of the Board of directors [2]

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Hello, and good morning. Welcome to our conference call for Regional's second quarter results of 2019. I would like to share with you the main financial highlights on profitability.

Our net income grew 11% and the NIM of total loans was 6.8%. The ROE and the ROA were 19.7% and 2.6%, respectively, and our efficiency ratio was 43.3%. On growth, the performing loan portfolio plus leasing grew 17%; and the time deposits and demand deposits grew 20% and 13% year-on-year, respectively. On risk, the nonperforming loans ratio was 1.7% and the cost of risk last 12 months was 0.8%, a very good result for the quarter. As of May 2019, the capitalization ratio of Banco Regional was 13.1%.

As you can see in the income statement, the financial margin showed a 13% year-on-year growth and the total expenses increased 14% year-on-year. And the net income shows a 5% growth year-on-year. The nonfinancial income as a whole grew 10% year-on-year. As you can see in the nonfinancial income, the commissions and the fees grew 20%; and insurance and FX increased 17% year-on-year, a very, very good growth.

I would like to share with you some financial highlights of our segments. For the wholesale business segment, we grew 12% our demand deposits, a 21% on time deposits. As a risk, the cost of risk the last 12 months for the segment was 0.3% and NPL ratio of 0.9%.

And the growth by region, Nuevo León grew 29%; Mexico City, 8%; Jalisco grew 9%; and the total locations growing at a very good pace of 15%.

As for the retail banking segment, our year-on-year growth, the SME loan portfolio grew 12% as well as demand 19% and time deposits 40% for SMEs. For auto, consumer, mortgage portfolio, growth was very good at 29%, 27% and 11%, respectively. As for the preferred banking, time and demand deposits grew 11% and 7% year-on-year, respectively.

And our cost of risk was 1.6%. In terms of NPL, SMEs, 4.8%; auto, 1.1%; consumer, 2.6%; and mortgage, 1.9%, very good results for the quarter.

As for growth by region, we've been able to grow very well in all geographies, Nuevo León grew 10%; Mexico City, 16%; Jalisco, 18%; and the remaining locations at 17%.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from the line of Ernesto Gabilondo with Bank of America.

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Ernesto María Gabilondo Márquez, BofA Merrill Lynch, Research Division - Associate [2]

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A couple of questions from my side. In the first one, we saw loan growth at double digit but net income at single digit. So shouldn't we see loan growth normalizing, but recognizing higher interest income in the second half while net income returning to double-digit growth? And my second question is in terms of interest rates. Can you remind us the net income sensitivity to a reduction in interest rates of 100 basis points? And how could this reduction eventually help to bring higher credit demand?

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Manuel Gerardo Rivero Zambrano, Sinca BanRegio, S.A. de C.V. - CEO & Member of the Board of directors [3]

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Thank you, Ernesto. Thank you for your question. Definitely, we do had a loan growth about 17%. I wanted to speak a little bit more about it. Loan growth for this quarter was good definitely, but organic growth really was 13%. 13% was loans really allocated on our core customers and mainly on the north region of our -- of the country. So our home city, Nuevo León, grew at a very good pace and definitely with very good clients. The remaining 4% are nonrecurring loans. We did some larger-than-average tickets for AAA financial institutions here in Mexico based in Monterrey and some leasing -- some -- not leasing, some factoring to providers, suppliers to [Monterrey] corporates. They're AAA, so it's -- we saw the opportunity and we wanted to take it.

So I think in terms of what we're expecting for growth for the next part of the -- for the remaining year, it's something more to the downside definitely. We see as the economy decelerates, we think that this number should be around 10% definitely. So the low part of our guidance. And how has that -- I mean the net interest income, it had a very good result, I think. Not as good as we wanted to expect. I mean our medium-sized clients didn't grow as much their checking accounts. Obviously, this is probably due to the high interest rate that -- as you were discussing.

So in terms of what we want to achieve in the interest income, I think we should have a bit more growth there as we want to continue our efforts in growing our checking accounts definitely. And everything that we're doing in our branches, I think, is resulting in great results. Our small companies' checking accounts are growing at a 25% pace. So we're doing things that are going in a very good manner. And I think that figure [mostly] be better in the near future.

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Ernesto María Gabilondo Márquez, BofA Merrill Lynch, Research Division - Associate [4]

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Okay. And this sensitivity, you can remind us your experience.

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Manuel Gerardo Rivero Zambrano, Sinca BanRegio, S.A. de C.V. - CEO & Member of the Board of directors [5]

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Definitely.

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Enrique Navarro Ramírez, Regional S.A.B. de C.V. - CFO and Director of Finance & Planning [6]

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Ernesto, the sensitivity, if you remember is around 7 basis points per 50 basis points of decrease or increase. That 7 basis points being our current portfolio around MXN 100,000 million will be like [MXN 50 million] on the net income on a yearly basis.

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Ernesto María Gabilondo Márquez, BofA Merrill Lynch, Research Division - Associate [7]

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So [MXN 15 million] in net income, a reduction of 100 basis points?

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Enrique Navarro Ramírez, Regional S.A.B. de C.V. - CFO and Director of Finance & Planning [8]

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No. 50, 50 basis points.

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Ernesto María Gabilondo Márquez, BofA Merrill Lynch, Research Division - Associate [9]

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50 basis points.

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Enrique Navarro Ramírez, Regional S.A.B. de C.V. - CFO and Director of Finance & Planning [10]

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So that will be around MXN 100 million of reduction of net income on a yearly basis, obviously.

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Ernesto María Gabilondo Márquez, BofA Merrill Lynch, Research Division - Associate [11]

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Okay. Perfect. And then, if we have a lower interest rate at some point, how can we think about the credit demand? Are you expecting [to see] 100%?

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Manuel Gerardo Rivero Zambrano, Sinca BanRegio, S.A. de C.V. - CEO & Member of the Board of directors [12]

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Yes. I definitely think there's going to be more demand. I think it's going to take a little bit more time. I don't think it's the only reason. I think it's a big reason, but it's not the only one. I think, obviously, we need to see a better economy in order to make sure I can say that a lower interest rate will continue to increase demand in credit. I think it would help. Definitely. I would love to see 50 basis points lower interest rates definitely. I think it would alleviate a bit NPL, a little bit more demand. Yes. Definitely.

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Operator [13]

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(Operator Instructions) Your next question comes from the line of Neha Agarwala from HSBC.

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Neha Agarwala, HSBC, Research Division - Analyst, LatAm Financials [14]

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My question is also on the margin. We've continued to see some pressure on the net interest margin despite risk being at such high levels. And we note that your current and savings account as a percentage of your total deposits has gone down from 45% 2 years ago to 38% now. You mentioned that you have some strategy to improve your checking accounts. How are you attracting more checking and savings account in terms of deposits? And are there any other measures that you're taking to improve your NIM?

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Manuel Gerardo Rivero Zambrano, Sinca BanRegio, S.A. de C.V. - CEO & Member of the Board of directors [15]

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Well, thank you, Neha. Yes. Definitely. I think the NIM should continue to grow -- I mean continue to be stable as it's right now. I think the NIM shouldn't be pressured that much. And I'm telling you this for sure -- I'm not so sure, but I'm telling you this because I think we're going to be able to grow a little bit more the small and the medium-sized companies rather than the larger companies in terms of loans. And I think that the things that we're doing in our branches are producing very good results for our preferred. And I'm talking about individuals and I'm talking about small companies that are producing very good results for those clients in the branches.

Sadly, the medium-sized companies -- or the largest companies are -- have bigger treasuries and they're maximizing their financial costs as the interest rates, obviously, promotes that. And I think that's the main reason we're not showing a great result in checking accounts for the 6 months of the year.

Now we're doing a lot of revamping on our electronic banking for our medium to larger clients. So we're doing it right now. We're already in production. Everything is going smoothly. And we think this is going to help in the medium term to have better capacity, to attract better and bigger clients in terms of checking accounts for larger clients. Definitely, payroll is going to make services that we're going to start -- we start giving to our clients. That solution we're just about to get to market. So I think that's going to be part of the growth there.

So I think there is enough strategies to make sure we get the NIM where we wanted it. Our NIM is something that is very important to us, and we definitely take care of it in terms of -- even we think we have the opportunity for growth. But to be very conservative, I should say we're going to maintain that NIM with these interest rates, obviously.

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Neha Agarwala, HSBC, Research Division - Analyst, LatAm Financials [16]

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Okay. So next year, we could see some pressure on the NIMs as interest rates go down?

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Manuel Gerardo Rivero Zambrano, Sinca BanRegio, S.A. de C.V. - CEO & Member of the Board of directors [17]

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Yes. There's -- I think there's a possibility of a little bit of shrinking if the interest rate goes on. Yes. Definitely.

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Neha Agarwala, HSBC, Research Division - Analyst, LatAm Financials [18]

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And could you kindly repeat your NIM sensitivity? You mentioned 50 basis point decline in rates would impact your net income by MXN 50 million per year or MXN 100 million?

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Enrique Navarro Ramírez, Regional S.A.B. de C.V. - CFO and Director of Finance & Planning [19]

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MXN 50 million.

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Neha Agarwala, HSBC, Research Division - Analyst, LatAm Financials [20]

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MXN 50 million?

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Enrique Navarro Ramírez, Regional S.A.B. de C.V. - CFO and Director of Finance & Planning [21]

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7 bps on the margin.

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Neha Agarwala, HSBC, Research Division - Analyst, LatAm Financials [22]

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7 bps of the margin?

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Enrique Navarro Ramírez, Regional S.A.B. de C.V. - CFO and Director of Finance & Planning [23]

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Yes. On the net income.

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Neha Agarwala, HSBC, Research Division - Analyst, LatAm Financials [24]

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Okay. That's very clear. And one last question on asset quality. Are you seeing any pockets in which you're concerned about asset quality? Any specific sector or region where you're more concerned?

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Manuel Gerardo Rivero Zambrano, Sinca BanRegio, S.A. de C.V. - CEO & Member of the Board of directors [25]

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Neha, in terms of NPLs or any concern in any of the region, no, not at the moment. Not at the moment. No. And we're checking the whole industry here. Where I'm seeing any alarm, yes, that is concerning.

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Operator [26]

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Your next question comes from the line of Gilberto Garcia with Barclays.

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Gilberto Garcia, Barclays Bank PLC, Research Division - Assistant VP & Equity Research Analyst [27]

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We have seen across your peers a rather marked shift to time deposits, customers take advantage of high rates. Can you give us some color in terms of what you're seeing in market dynamics? How you and your peers and perhaps, particularly for you in Nuevo León, the nonbank players in terms to attract the deposits with this high rate environment?

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Manuel Gerardo Rivero Zambrano, Sinca BanRegio, S.A. de C.V. - CEO & Member of the Board of directors [28]

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Well, thank you, Gilberto. Yes. Definitely. I mean for sure, our main concern is growing our deposit base. We have been able to make sure we have the best service in all Mexico and that, obviously, translates to a bigger growth in our deposit base. Definitely, price is something of a sensitivity, but people just don't like -- I mean they not only go for the interest rate for a bank, they go for service, they go for full solution that we're giving them. And obviously, that's going to -- that's translating to a better customer experience, better deposits with a good price.

Definitely, we think we have an opportunity. We've done it here in Nuevo León, and we're looking to do it outside of Nuevo León in a more and more dynamic way. We've already revamped our branches. We've already gone through 100 branches. We're rebranding them. We're getting all the processes to be customer-oriented, simplifying all the products to be able to do this. So definitely, it's producing results and it's going to continue to do it. I mean there's going to be competitors for sure, but we right now are the best in class to be able to continue our growth in demand and checking accounts. I'm sorry. I'm trying to [remind you]. Definitely. Thanks.

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Operator [29]

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Your next question comes from the line of Roy Kama with The Blu Fund.

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Roy Kama, The Blu Fund - Vice President [30]

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I had a question regarding valuation of your bank and perhaps banks in general. So you're seeing that all the banks and you too, as I mentioned, are selling at multiyear lows in terms of PEs, price to book and other metrics; whereas the operational metrics and profitability metrics are at multiyear highs given the high ROEs and margins and all that. So my question to you is do you think the market is missing anything, meaning that the market is expecting some kind of falloff in profitability ROE maybe going back to 16%? Or do you think these levels of profitability kind of maintain given where we are in the economy and perhaps we get a new cycle with the new government? So just would like to get your thoughts on that subject.

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Manuel Gerardo Rivero Zambrano, Sinca BanRegio, S.A. de C.V. - CEO & Member of the Board of directors [31]

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That's interesting. Definitely. We think there is -- we think right now that the market is very cautious about growth in Mexico, definitely. I think that's part of uncertainty and part of the discount in terms of -- that we're having. Obviously, I think we have a discount [not only Regional] but every bank in Mexico has it. I think that we've been able to show the market that -- I mean the whole banking sector has been producing great results, and we're still growing.

Definitely there is the concern about the deceleration of the economy and that for every bank right now, I think, it's a concern. And we're going to be more cautious about growth, definitely. So I think that's part of the explanation. I think if things continue to be as good or better right now in terms of -- even if we have a little bit less growth, I think banks in Mexico are undervalued for sure at probably 20% or 30% undervalued.

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Roy Kama, The Blu Fund - Vice President [32]

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Very interesting. And just related to that, obviously, you've got government disbursements that have not kind of flowed through into the economy, given the presidential cycle, et cetera. When do you think that these disbursements start kind of increasing their pace into the economy? And could that be kind of -- create a positive feedback loop going forward where it could surprise to the upside?

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Manuel Gerardo Rivero Zambrano, Sinca BanRegio, S.A. de C.V. - CEO & Member of the Board of directors [33]

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Yes. Definitely. I think it's going to take more time than normally to think -- that people think. I think it's going to take more time. Definitely, I think it's creating a lot of certainty in terms of consumer confidence. I think we'll need more time for that to permeate, and we would love to see that through in the business segment for sure. I think it's going to take a little bit more time. I probably see an economy as we have it right now for the next year for sure.

I don't see any driver -- I don't see any short-term driver that you can pull on. I mean NAFTA definitely is going to produce good results. I mean -- not NAFTA, the treaty with Canada and United States. I think it's going to be -- when it's done, probably next year, I think that's going to be very good for the economy in the short term. But then, again, social, I think it's going to be a little bit more time for people to really start -- to create the positive feedback like you said.

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Operator [34]

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Your next question comes from the line of Yuri Fernandes with JPMorgan.

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Yuri R. Fernandes, JP Morgan Chase & Co, Research Division - Analyst [35]

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I have a question on the number of clients you have, like on the individual side. We are seeing a lot of growth on fees, especially current accounts. The consumer loan growth is growing quickly. So my question is after you improve your branches, all this focus on service, how you're seeing the bank on the consumer side? I know it seems really small but if you can provide any math on the number of clients and how these number of clients are growing. So that's my first question. And how you see this is marked? Like, it's still very small for you. The economy is decelerating in Mexico. So what's going to be the message of Regional? Do you see that as an opportunity? So you want to get bigger on this consumer and take advantage of fixed loans within a declining interest rate environment? Or will the bank get more cautious also in the consumer side?

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Manuel Gerardo Rivero Zambrano, Sinca BanRegio, S.A. de C.V. - CEO & Member of the Board of directors [36]

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Yuri, can you -- I didn't hear the first question as well as I wanted to. So the main concern you have is or the...

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Yuri R. Fernandes, JP Morgan Chase & Co, Research Division - Analyst [37]

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No. I just want to know the number of clients you have on individuals and how this trends year-over-year. Like, how much -- how many clients are you adding year-over-year?

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Manuel Gerardo Rivero Zambrano, Sinca BanRegio, S.A. de C.V. - CEO & Member of the Board of directors [38]

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Okay. We're growing -- we have 260,000 clients, and we're growing at a pace of 15% per year. And then we think we're more -- the main driver in terms of individuals, we call it the preferred banking segment. So it's above what normally banks have in their branches. It's like the select of Santander or the Premier of HSBC. So those clients that we cater normally they are looking for much better service. We have even concierge service, we have the best products, we have the best prices for them, we have the best services, everything they want we have those.

And we -- obviously, compared to other banks, we're 20% -- even 20% -- even 40% better in service compared to other banks. I mean our NPL is the best in class, and we're producing every quarter new and new strategies to make that better. We're opening a checking account under 8 minutes now. There's no bank in Mexico that has it, right? None. And the typical amount of time it takes for you to open a checking account, it's going to take an hour in another bank. For us, it's taking 8 minutes. So there's definitely things that you can do to make that service much better and to give the clients -- obviously, there's a huge opportunity there.

Obviously, the main concern for me there is productivity. We wanted to do that growth in a very steady manner. We don't like to do things like explosively. We want to take in productivity quarter-to-quarter. We're obviously investing as you see. Everything is producing results, and the pace that we're doing right now, I think it's producing a good advantage over other banks in terms of the digital strategy that we have. And lowering the cost to attract new clients, definitely. I think that's what we're producing.

And I don't see an explosive growth in terms of loans, definitely. Nothing to change the story in the short term. I see much more growth in terms of our medium and small company loans. I think that's going to be the main driver for loans in urban banking but definitely, there is a lot of clients that we're catering right now that are very -- I mean they're very product -- I mean it's very profitable operation. It's very healthy.

In terms of NPLs, we have the lowest in class credit card. We have almost 4x lower the NPLs of the system in terms -- NPLs were cost of reserves. So in terms of what we're producing, I think we're very comfortable with the results that we're having right now. And we're seeing it as a not only credit, obviously, mainly for our deposit base. And cross-selling credit for those clients and making it more sticky. So it's the other way around, right?

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Yuri R. Fernandes, JP Morgan Chase & Co, Research Division - Analyst [39]

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And what about the growth? Like, do you plan to decelerate a little bit on consumer? Because you're growing at 30% pace and growing the number of clients by 15%, you are increasing the average [slippage] per client, right? So you are getting leverage in the clients you have. Does that concern you in the deceleration environment? Or given it's a more preferred client, more high-income kind of client, you don't -- you are not that concerned on asset quality?

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Manuel Gerardo Rivero Zambrano, Sinca BanRegio, S.A. de C.V. - CEO & Member of the Board of directors [40]

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Yes. In every segment that we pursue, we're pursuing AAA clients. This is our main objective. We have the size, obviously, to get and do the cherry picking of the clients. We're not producing -- we're not bringing in new customers to the banking sector. We're getting out the banks that have a pretty bad service, and we're bringing it to a better service, better prices and we're bringing AAA clients in, definitely. That's the main objective.

We're not producing here, we're not banking for the unbanked mainly. I mean we do have Hey Bank, which is our brand for the entry-level banking, that is mainly checking accounts that we're focusing on and giving in time deposits. But to see how much that would take, I mean of the credit of loans, it's going to be a very small amount. I mean a very small amount still. So definitely, I think that what we're doing it's not in terms of risky. I mean when you see the amount of checking accounts we have in individuals and when you compare that to the amount of loans we have, it's ridiculous. It's very -- it's pretty concerning that we don't have enough credit for those clients that are having the time deposits with us, which are obviously the best clients that we can serve in credit.

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Operator [41]

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(Operator Instructions) Our next question comes from the line of Enrique Mendoza with Actinver.

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Enrique Mendoza Farías, Actinver Casa de Bolsa, S.A. de C.V., Research Division - Research Analyst [42]

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Most of my questions have been answered, but the remaining is related to SG&A expenses. According to monthly data from the CNBV, your SG&A expenses rose in an important way during May. Can you tell us which was the main driver for that increase? And if we should expect the -- that level of monthly expense prevail for the next months?

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Manuel Gerardo Rivero Zambrano, Sinca BanRegio, S.A. de C.V. - CEO & Member of the Board of directors [43]

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Thank you, Enrique, for the question. Can you repeat which expense you said wasn't in -- are you highlighting?

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Enrique Mendoza Farías, Actinver Casa de Bolsa, S.A. de C.V., Research Division - Research Analyst [44]

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Yes, yes. The operating expenses, the nonfinancial expenses, administrative and personnel expenses.

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Manuel Gerardo Rivero Zambrano, Sinca BanRegio, S.A. de C.V. - CEO & Member of the Board of directors [45]

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Okay. Definitely. Well, we -- the main drivers for our growth in operating expenses are, one is technology for sure. We've invested in buying Oracle and implementing Salesforce, which -- and [went out there] for the service. All of those are incrementing our productivity in a very good manner. We're already producing results, and I think that -- that explains part of the increase.

The other is the overhauling of our branches, obviously, is producing a little bit more CapEx, but we are right now at a 100 out of 150. And I mean doing the overhaul without incrementing the efficiency, I think it's a very good result. And obviously, that's going to produce better and better results in the coming years.

And the other which explains most of the part is, we're growing at a very good pace, the nonfinancial income. And I mean, for example, FX exchange, it's growing at 25% increase and obviously, that translates in growth in expenses. I mean we have to pay the fees. If that problem continues to grow, we're going to have more expenses, which is a good thing, obviously. So you're seeing a bank that is, obviously, changing the way we're banking. We have to invest in making sure our customers have the best solutions. I mean we are right now the first group of banks that's operating in CoDi. We are -- I mean even -- something very curious, the Governor of Banco de México was using our app to have the first [operations] in CoDi. So I think that's a very good thing. So we are in the sweet spot. Not every bank in Mexico can say that. And I think for sure that's part of the explaining about how we're incrementing our expenses. Having that, obviously, it's a good thing.

And the second part would be that we are more concerned about the customer experience that clients have and obviously, that's going to produce better results. I mean we have a lot of younger and younger customers. I mean our sales force is in average 27 years, and we're attracting the customers between 25 and 40 years old are growing at a much better -- I mean at 25% pace. So we are attracting a very well new generation of depositors, which obviously is very encouraging. And that, obviously, is translating in higher expenses in our sales force, which is good. We're very comfortable in growing that.

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Enrique Mendoza Farías, Actinver Casa de Bolsa, S.A. de C.V., Research Division - Research Analyst [46]

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Okay. That makes a lot of sense, but in case of a deeper deceleration of loan growth or larger-than-expected shrinkage of interest margins, how much of a margin of maneuver do you have to offset those potential headwinds with lower operating expenses?

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Manuel Gerardo Rivero Zambrano, Sinca BanRegio, S.A. de C.V. - CEO & Member of the Board of directors [47]

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Well, I think if we entered into a -- I mean most of it is sales force that you can get rid of and most of it is developers that you can get rid of. I wouldn't -- obviously, I wouldn't advise to it, but it's definitely something you can make happen within 6 months. I mean you can lower the -- we're not doing anything that cannot be undone in the short term. Definitely not. For you -- I mean you know for sure that our main concern for the bank is its ROE and its -- incrementing the value of our investors. So I mean definitely. If things continue -- I mean if things continue to deteriorate to a point that we should do the appropriate thing and lower that, that can happen for sure.

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Operator [48]

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There are no further questions.

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Manuel Gerardo Rivero Zambrano, Sinca BanRegio, S.A. de C.V. - CEO & Member of the Board of directors [49]

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Well, thank you very much for participating. We appreciate any further questions you have with the IR team, with me, with Enrique. So thank you. Thank you for participating, and hopefully, we'll talk soon. Thank you.

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Operator [50]

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This concludes today's conference call. You may now disconnect.