Alibaba Group Q2 2024 Earnings Call Transcript

Quartr
Provided by Quartr
August 2, 2024

There are 7 speakers on the call.

Operator

Ladies and gentlemen, thank you for standing by. And I would like to welcome you to Banco Santander Chile 2Q 2024 Results Conference Call on the 2nd August, 2024. At this time, all participant lines are in listen only mode. The format of the call today will be a presentation by the management team, followed by a question and answer session. So without further ado, I would now like to pass the line to Mr.

Operator

Emiliano Muratore, the CFO of Banco Santander Chile. Please go ahead, sir.

Speaker 1

Good morning, everyone. Welcome to Banco Santander Chile's Q2 2024 Results Webcast and Conference Call. This is Emiliano Muratore, CFO, and I'm joined today by Christian Vicuna, Chief of Strategic Planning and Investor Relations and Carmen Gloria Silva, our Economist. The agenda for today is the following: 1st, Carmen Gloria will discuss the macro scenario then Christian will review the strategy and results of the Q2 and guidance for the year, and finally, we will have a Q and A session. Now I pass it on to Carmen Gloria.

Speaker 2

Thank you, Emiliano. The tiller economy has continued to show signs of recovery, although at a more moderate pace. Following a better than expected performance at the beginning of the year, the preliminary estimate for GDP growth for the Q2 is just 1.6% annually. This result has been influenced by transitory factors, such as the decline in educational services and the calendar effect. However, the seasonally adjusted activity index exhibited growth consistent with this trend.

Speaker 2

Domestic demand has been gradually recovering, especially in consumption, while investment performance has remained weak. The contribution of the mining sector to activity growth has been substantial and the external impulse is greater given the higher international copper prices and better term of trade. The labor market continues to gain momentum with the participation rate approaching pre pandemic levels. Real wages continue to rise, which along with employment growth has been supporting credit consumption. Looking ahead, we estimate that the economy will continue to grow.

Speaker 2

However, the recent lower level of activity has led us to revise the annual GDP estimate downward this year from 2.8% to 2.5% and to 2.4% for 2025. The exchange rate appreciated by 4% in the 2nd quarter, but exhibited high volatility. The most important drivers were the rising copper prices and the shift in risk appetite from global investors. In the baseline scenario, we estimate that the local currency will continue a gradual process of convergence towards its equilibrium values, led by expectations of a greater interest rate differential hovering at a level slightly below MXN 900 as of December this year. In the first half of twenty twenty four, inflation followed the predicted trend with a decline in both the total and core indexes.

Speaker 2

This reflects a moderate pass through of the depreciation of the peso in the 1st month of the year and the increase in oil prices. Inflationary pressures are expected to rise in the coming months due to the anticipated adjustment in electricity rates and the rebound in domestic demand. Therefore, the CPI estimate has been raised from 3.9% to 4.3%, which means a U. S. Variation of 4% this year and to 3.4% for 2025.

Speaker 2

Inflation is expected to reach the 3% target in the Q1 of 2026. The Central Bank continued with the rate cutting process during the first half of twenty twenty four, accumulating a decline of 2 50 basis points in the monetary policy rate. In this week's meeting, the Board held a rate at 5.75% and highlighted that it would have gathered the bulk of the cuts we're seeing for this year. In the central scenario, the rate will be reduced further over the 2 year horizon. With this, we estimate a reduction of between 25 50 basis points for the following meetings of the year, bringing the rate close to 5 point 25% by December 2024 and to its neutral value of 4.25% in the Q1 of 2026.

Speaker 2

On Slide 5, we present the advances in the relevant regulatory framework. The tax compliance bill aims to increase tax revenue by 1.5% of GDP and reduce tax evasion and avoidance. This bill is currently being discussed in the Senate, where it has received support from opposition parties and was approved in general terms. Meanwhile, the pension system reform is still undergoing intense negotiation process in Congress to gain approval. The government presented new proposals related to the distribution of the 6% additional contribution, considering 3% to individual accounts and 3% to solidarity.

Speaker 2

The first impressions from opposition parties suggest that there's still a long way to go to reach an agreement. In July, the CMS published finance system. The rule becomes effective 24 months after publication and considers the progressive submission of information to be shared by banks and payment card issuers within the next 18 months, with an additional 18 month period for the rest of the participants. Restlessly, changes to the fraud law were approved with the aim of containing so called self fraud. The responsibility remains with the issuer, but now the client must file a compliance before requesting a reform.

Speaker 2

It also establishes situations where reimbursement can be suspended and thresholds for reimbursements are reduced. Finally, the consolidated debt registry law was published in June and will become effective in 21 months.

Speaker 3

Thank you, Camber and Gloria. Turning our attention to slide 7. Let me begin by reminding you of our commitment to our Chile First strategy. We aspire to lead the Chilean banking industry in terms of contribution to its various stakeholders. This strategy we have named Chile first with 4 pillars.

Speaker 3

The first two pillars focus on what we want to become and the second two pillars on how we want to do it. So first and foremost, we are engaged in a transformative journey towards becoming a digital bank with branches. Our transformation into a digital bank is not only about adopting the cutting edge technology, but also about having a friendly physical presence through our innovative work efforts. These spaces are more than just places to interact with retail customers. They are dynamic hubs that promote connectivity for both customers and potential customers.

Speaker 3

With advanced technology and a commitment to excellent service, our work cafe are designed to redefine the banking experience. The medium term objective is to reach 5,000,000 customers and 450,000 SME clients. Our second pillar is centered on providing specialized value added services tailored to some business segments. Our commitment is to deliver premium transactional trade, foreign exchange, sustainable finance and advisory products and services, ensuring our clients receive a top notch experience. Examples of this include our corporate investment bank, our specialized attention model for commercial banking, our Santander Consumer business that offer Cars Financing and Getnet, our acquiring business.

Speaker 3

In our 3rd pillar, we are committed to fostering innovation and propelling growth by challenging status quo and creating new business opportunities. A good example of this is the disruption we incurred in Chile with the 4 part model when we introduced our acquiring business GetNet to the market. So we aim to lead the change in redefining the banking landscape. We actively seek out new business opportunities, pioneering the sustainable transformation of our customers. By challenging conventions, we aim to drive growth and cultivate success.

Speaker 3

Lastly, we place great importance on the role of our organization. To realize our objectives, we need the best talent. We are dedicated to building an agile, collaborative and high performing culture. We recognize that diversity is our strength and individuals will flourish based on merit. We are constructing a thriving community where talents are nurtured and innovative ideas are highly valued.

Speaker 3

The outstanding success of our digital products has been firmly established during 2023 with the continued growth of our digital client base. Key initiatives such as Santander Life and more recently, Mas Lucas have been instrumental in achieving this. The Mas Lucas account was launched in March 23 and is the first 100% deed of site on savings account for the mass market. In recent months, we have launched a Maslucas account for young people too. In total, there are now more than 177,000 Maslucas account with activity, exceeding our expectations, with an average of 15,000 new accounts opened per month.

Speaker 3

Notably, the onboarding process for Masluca's entire digital featuring facial recognition technology and no password requirements. This account comes with no fixed or variable costs and accepts deposits of up to COP5 1,000,000. On slide 9, we can see how the advances of our digital strategy is allowing us to continue the transformation of the branch network through work cafes to improve productivity. Our bank's Work Cafe branches are expanding to cater to the specific needs of our clients. We have launched 3 types of new Work Cafe formats: successful Work Cafe Espresso, which consolidates cash operations into transaction hubs, while maintaining our Work Cafe ambiance.

Speaker 3

This is a great initiative as it provides an efficient and secure banking experience for our customers. We have already opened 7 of these branches, impacted positively in the communities that use them with better levels of experience, extended hours and increased security. We also have our work as a startup, which offers a comprehensive solution to all the needs of entrepreneurs and especially to increase banking usage, carry out pilot programs with the bank and even offer financing. This is a great way to support entrepreneurs and help them grow their business. Finally, we have launched Work Cafe in Berciones, a dedicated asset management Work Cafe designed especially for investment advice for clients and non clients independent of their income situation.

Speaker 3

In this branch, we offer weekly talks about different investment products or economic trends to provide advice services and in this way support financial education. At the bottom of the slide, you can see how the use of digital channels and the transformation of our branch network has led to a new level of branch footprint, decreasing 15% in 2023 and a further 1% in 2024 to a level of 244 branches as of today. Notably, 35% of our branches no longer have human tellers, with these branches providing value added services like our traditional work effect. At the same time, our productivity has continued to improve with loan and deposit volumes per branch increasing 10.2% year over year and 6 point 7 rise in the same metric per employee during the same period. On slide 10, we can see how we have rolled out key initiatives to meet company needs and add value to their businesses.

Speaker 3

Our digital life account for SMEs is low cost and simple to open. It continues to prove popular with a 29% year over year in current account for businesses as reported by the CMF, capturing 37.2% of the market as of April 2024. GetNet, our acquiring business, continues to be an important driver for capturing new clients. Our range of payment solutions integrated with the banking services such as the current account have attracted smaller merchants and we are now expanding into larger, more sophisticated clients using a host to host solution, providing a more integrated payment system. Currently, there are more than 227,000 active GetNet points of sales terminals across the country.

Speaker 3

These POSs serve a total of 170 1,000 clients, including some 140,000 SMEs. During the 1st semester of 2024, Getnet generated fees totaling Ps. 29,900,000,000 and a net income of Ps. 7,700,000,000. On Slide 11, we would like to highlight the latest products that we have launched in the last quarter.

Speaker 3

As we briefly mentioned a few minutes ago, we have launched a Masluca's account for 12 to 17 year olds, free of charge with monthly interest gains. This is a 100% digital side account with a debit card. With this, we aim to attract clients as they begin their banking relationship, delivering digital products that allow for debit cards and in line transfers. We also launched a common supplementary health insurance with the UC Christus Medical Centers, where they implemented a revolutionary medical model for Chile. Clients have access to a primary care doctor who is available for both in person and online consultations and who refers patients to the appropriate specialist and maintains a holistic view of the patient, encouraging prevention and reducing waiting times for specialists.

Speaker 3

In June 24, we opened our Autocompara platform up to non bank customers. Autocompara is a digital platform to compare car insurance in a transparent and efficient way, allowing people to make an informed decision before purchasing the insurance. This is one of the few platforms available in Chile with this service. We also market our foreign exchange platform. We can currently make currency transfers to 28 countries online through the platform.

Speaker 3

These transfers are safer and faster than swift transfers and are free of charge for our customers. On slide 12, we are pleased to show that we have been very consistent in leading market in terms of customer recommendation, Net Promoter Scores NPS, sustaining levels of around 60 points. Our NPS score is based on feedback from over the 50,000 surveys measuring over 30 NPS metrics across our various service channels on a daily basis. This invaluable feedback allow us to proactively manage and improve our client service. Our DDoS and remote channels continue to receive very high levels of satisfaction from our clients with our app and our website achieving scores of above 70 points.

Speaker 3

Our contact center is also highly rated, outperforming our peers. On slide 13, we can see how we are highly recognized as leaders in our industry. This year, Euromoney has awarded us with the best bank in Chile for SMEs and ESG, ALAS 20, an initiative that evaluates the public disclosure of sustainable development position us in 1st place in sustainability in Chile. Regarding our sustainability rankings, we continue to lead the industry with Sustainalytics improving our ranking to 14.1, the best among Chilean banks. Now let's talk about the trends in our results and balance sheet in 2024 and in the second quarter.

Speaker 3

On slide 15, we show a robust rebound of profitability and return over average equity on the Q2 of the year. As we can see, we reached an ROE of 20.7 percent in the quarter, and net income in the quarter totaled ARS218,000,000,000, an 81% increase compared to the Q1 of this year. With this, our ROE year to date improved 280 5 basis points year over year to reach 15.8%, well within our guidance for 2024 with net income increasing 28 point 6% year over year. These notable results are mainly due to our improvement in our main income lines, as we will see in the coming slides, with operating income improving 19.4% in the quarter, driven by better margins. On slide 16, we can see the trends in our loan book.

Speaker 3

Our retail loans continue to grow steadily with loans driven by consumer and mortgage, while commercial loans contracted 5.5% in the quarter. This contraction in the commercial loan book is in part due to a change in our consolidation perimeter. Vansa, a company dedicated to financing automotive dealers, is now excluded from the consolidation of the bank, decreasing the commercial loan book by 1%. Furthermore, the commercial loan book has been impacted by slower economic activity. Mortgage loans grew in line with the U.

Speaker 3

S. Variation, while consumer lending was driven by credit cards and auto loans, with the latter in part explained by a loan portfolio purchased by our subsidiary Santander Consumer. Overall, our loan book is following the economic cycle and we expect modest growth for the full year. Regarding our funding, we see that time deposits decreased 5% in the quarter in response to the fall in short term rates in Chile, while our demand deposits also fell 2.1%, leading to an overall decrease in our deposit base of 3.7% in the quarter. Despite this quarterly contraction, our total deposits increased 4% on a yearly basis.

Speaker 3

However, we have seen our clients strongly preferring mutual funds, where we are the exclusive broker of Santander Asset Management. Mutual funds increased 39% year over year and close to 8% in the quarter, achieving a high growth of AUMs. Furthermore, the bond issuance went up, taking advantage of local and global fixed income markets. During the pandemic, we obtained a ARS6.2 trillion in credit lines from the Central Bank of Chile. This credit line had 2 deadlines, 1 on April 1, representing 55% of the credit line and the 2nd installment and final one on July 1.

Speaker 3

We used the liquidity deposit program provided by the Central Bank to make these payments with no liquidity issues on making these payments. On Slide 18, for the Q2 of 2024, we achieved a net interest margin of 3.6% and 3.1% year to date, confirming our recovery as planned. Our net interest income grew 54.5% year on year and 26 percent in the quarter. The NII in the 2nd quarter benefited from higher interest income as the lower monetary policy rate reduced our funding cost to 5% in the semester, down 2% in the same period last year. This improvement in cost of funds is explained by the fall in short term rates from an average rate of 11.25% in the 1st semester of 2023 to 7% in the 1st semester of this year.

Speaker 3

Our liabilities tend to have a lower duration than our assets and therefore when rates fall, the cost of our funding falls faster than the asset yield. Our net readjustment income improved 81.8% in the quarter after a weak start to the year as the U. S. Variation increased from 0.8% in the Q1 to 1.3% in the 2nd quarter. Year on year, the U.

Speaker 3

S. Variation was less than in 2023, and therefore, we saw a year over year decrease in this line. The first payment of the FCIC reduced our interest earning assets by around 5% in the quarter and contributed to the improvement in our NIM ratio. We expect our NIM to keep recovering in the next quarters and to reach between 3.33.5 for the 2024 full year. This considers a U.

Speaker 3

S. Variation of around 4% for the year with an average monetary policy rate of around 6%. With this, our cost of funds should continue to improve in the coming months and we will see a further reduction in interest earning assets with the second payment of the FDIC that we made in July 1, driving the improvement in the NIM calculations. Regarding asset quality, we see that our NPL and impair ratio is rising. The slight deterioration in this asset quality ratio is mainly explained by the effect of the economic cycle on both the numerator, our clients' payment behavior and the denominator, the slower growth of our loan book.

Speaker 3

The June figure for consumer loans NPLs was 2.4 and the mortgage NPLs was 1.6, while our commercial portfolio NPL was 3.8 for the quarter. As we can see, most of the NPL growth is explained by commercial loans and to a lesser extent by the mortgage loan book in the semester. The growth in commercial loans NPLs is explained largely by some particular names in the agricultural industry and some real estate companies, most of them already considered in the impaired portfolio. In general, all mortgage loans and some commercial loans have guarantees reducing the risk exposure. Our impaired loan ratio reached 6.2% at the end of June.

Speaker 3

This ratio includes NPLs, restructured loans and customer deterioration in the commercial single names. The coverage ratio of our NPLs when including voluntary provision in prior years reached 138% in June. Since the pandemic, the composition of our loan portfolio has changed with the weight of mortgage loans increasing from around 1 third to over 40% of the loan book due to the strong growth of the U. S. Dominated loans in recent years.

Speaker 3

As mortgages are backed by a property, they need less coverage, so the change in loan mix will require less total coverage. Our consumer loan book coverage is high at 3 54%, while commercial portfolio coverage is at 123% and the mortgage portfolio coverage is 69% with strong collateral and a solid loan to value. Moving on to cost of credit on Slide 20. The cost of credit was 1.25 percent in the quarter year to date. As shown, our cost of credit has increased slightly along with the changes in asset quality also remained contained, thanks to the high levels of collateral.

Speaker 3

As a head up, in July, the bank will recognize a onetime provision of ARS18 1,000,000,000 for the commercial portfolio due to a model adjustment in the valuation of guarantees. This represents approximately 2% in additional stock of commercial provisions and concludes the CMF review from the Q3 of 2023. With all this, we reaffirm our estimation that the cost of credit will stay around 1.3 for the full year following the economic cycle and labor market conditions. Next, we look at the non NIR revenue sources. Fee income increased 6.5% on the quarter on quarter as our clients used our digital platform more for our main products.

Speaker 3

The small year on year decline is mostly because of the effect of the interchange fee regulation that started in the last quarter of 2023. Income from financial transactions went down year over year, mainly because of lower income from the Riodic contract after a strong comparison base last year. In the Q2 of this year, results in this line improved due to better results from our liquidity portfolio. Our core expenses increased 4.2% year over year consistent with inflation and grew 4.7% in the quarter, mainly due to a seasonality in personnel expenses in the Q1 related to the holiday season. Though as we can see in this line decreased 8.5% year on year mainly due to a decrease in the number of employees.

Speaker 3

Our administrative expenses have increased in the year due to outsourced services indexed to inflation or in foreign currency such as our services related to technology. In the Q1 of this year, we recorded a one time operating expense of ARS17 1,000,000,000 related to restorations provisions. This is aligned with our strategy related to the branch network transformation and the progress of digital banking. As a result of our controlled expenses and improved financial income, our efficiency ratio was 37.6% in the quarter and 42.1% year to date. During 2024, the bank is continuing to concentrate on the implementation of its $450,000,000 investment plan for the years 'twenty three to 'twenty six for technology projects and branch renovation.

Speaker 3

Moving on to capital. At the end of June, the bank reported a debt ratio of 17.4% and a core equity ratio of 10.6%. In the past shareholders meeting, the Board was granted the authority to raise the dividend payout provision above the legal minimum 30% for 2024 and onwards. So in June 2024, the bank increased the dividend provisions to 60% of our 2024 income. This 60% is in line with our historical dividend payout.

Speaker 3

And with this, our equity base was reduced and our capital ratio was impacted by 26 basis points. As a reminder, we currently do not have a Pillar 2 requirement. However, it is important to mention that the measurement of the market risk on the banking book will continue to be discussed by the regulator and capital charges may be made in the coming years. Finally, on slide 25, we conclude with a review of our 2024 guidance. Based on our current macro expectations for 2024, we have updated our guidance for several line items.

Speaker 3

Loan growth remains dependent on the economic cycle and we continue to expect mid single digit growth for the full year. Given the increased estimate of the U. S. Variation and better evolution of the recovery of our NIMs, where we have already reached a year to date figure of 3.1%, we are increasing our NIM guidance to the range of 3.3 to 3.5 for the full year. Our fees should reach a growth of mid single digits considering the second stage of the implementation of the interchange fee regulation in the Q4 of this year.

Speaker 3

With financial income back on track, our efficiency ratio should return to normalized levels of high 30s percent. As discussed, we expect our cost of risk to remain around 1.3% for the year. With the ROE year to date already at 15.8% on our expectations for the second half of this year, we are upgrading our guidance for 2024 ROE to a range of 17% to 18%. This signals the return of our performance to historical levels as we expect 2024 to finish within our long term ROE range for very high teens. With this, I finish the presentation and hand over to Emiliano Muratore.

Speaker 3

Thank you, Christian. Now we will welcome your question, please.

Operator

Thank you very much for the presentation. We will now be moving to the Q and A part of the call. Our first question comes from Mr. Yuri Fernandes from JPMorgan. Please go ahead, sir.

Speaker 4

Thank you. Hi, Emiliano. Good morning, Christian, and congrats on the quarter. Christian, I guess you already mentioned Banza during the presentation. But can you provide more details like why is this no longer consolidated within the bank?

Speaker 4

I know it is small, but just to understand the moving parts on these bonds deconsolidation, where is this going? Like are you still consolidating any kind of equity income from this investment? Just any color on this. And then I can ask a second question. Thank you.

Speaker 1

Hello, Judith. So regarding Banza, basically Vansa was the entity that was doing the what we call the floor plan, basically the stock financing for dealers in the related to our auto loan business. So even though because of legal restriction, that's the stock financing is not an activity that the bank nor its subsidiaries can do, that VASA was the entity doing that business. Because of the commercial dependence to Santander Consumer Finance, which is the company that does the auto loan, basically, we don't do the stock finance by itself. We do the stock finance because then we create what we call the retail part of the auto business.

Speaker 1

So that's why from the accounting point of view, Vansa was consolidating into Santander Consumer Finance. That is a subsidiary of the bank that consolidates into the bank. So basically, Vansa was moving down was moving up from Santander Consumer to the bank. But on the ownership point of view, neither consumer, neither the bank owns a single dollar of balances. So basically, we were consolidated the balance the balances on the asset and on the liabilities, but 100% of the results of the company were taken out on the minority's interest line.

Speaker 1

So now basically, BANSA, because of the relationship with the company that funds the activity in terms of lending, Now it's like, let's say, more dependent on that company than on the commercial link to Santander Consumer. And that's why from the considering the accounting rules, it has to consolidate into the company that funds Vansa rather than consumer that was like, let's say, the commercial partner of Vansa. So basically, it's affecting the consolidated view in terms of asset and liability, but has, let's say, no impact on net income, neither, let's say, ROE because 100% of that result was taken out on the minority interest line. I don't know if it was clear or not.

Speaker 4

No, that's clear. But just to be clear, like do you receive any money, like any compensation on that, like the consolidation? Like is this kind of a sale or

Speaker 1

No, no, no. It's not a sale because there was no ownership on Vansa, neither from the bank nor Santander Consumer. I mean, Vansa is, let's say, owned by other part of the Santander Group. So basically, it was a pure accounting consolidation because of the commercial, let's say, dependence on Santander Consumer to do the stock final. But there was no ownership on Balsan, either the revenues or the cost of that activity.

Speaker 4

Got you. So we never like owned the company. We're just consolidating for this regulation. Now you're no longer consolidation, but we were never the owner. We were just consolidating for the owner.

Speaker 1

Never the owner. So if you look even though the number is small that, let's say, part of the minority interest that were taken out of the consolidated net income, Now it will be smaller because we don't have to take out the bonds apart. And before it was, let's say, 100% taken out on the minority interest

Speaker 4

line. No, no, super clear. Now a little bit more structural question on loan growth. I know we are not discussing 2025 yet, but I think 2024, it's pretty clear like the trends are better, margins, you are doing very well on efficiency. Christian and Liano, what can you expect on growth in Chile?

Speaker 4

Because over the past many years, we have been seeing very timid loan growth. And I don't know, like, can we anticipate, I don't know, loan growth accelerating even further in 2025? Any kind of color on your expectations for maybe the industry like for us to maybe see high single digits? Like what could we think about loan growth and where the growth will come from? Will it continue to be retail?

Speaker 4

Will it continue to be auto loans? Where can we be more positive on growth here? Thank you.

Speaker 1

Yes. So I mean, regarding loan growth, as you said, I mean, the last few years, were very slow pace of growth. And actually, if you, let's say, take out the indexation effect of the UF, that in real terms, that was even lower. But it's important to mention that it was in a context of low GDP growth and also the fact that all the liquidity injected into households had through the pension fund withdrawals and the hopes that the government handed in during the pandemic. So looking to 2025 with GDP expected to grow in the 2.4, 2.5 in real terms and inflation expected to be, let's say, between 3 to 3.5.

Speaker 1

Non GAAP GDP growing around 5. We do expect the multiplier of loan growth to GDP to be again above 1, maybe definitely not as high as it was maybe some years ago that it was closer to 2%. But we do expect the system as a whole to grow in the nominal terms in that high single digits, 7% to 8%. And that's driven by consumer and in our case auto loans too, which is a relevant part of our consumer business and because of some factors. 1st, GDP growth and activity improving, then rates much lower than in the past.

Speaker 1

So the tendency of the prevention for people to borrow at this level of rates is definitely higher than in the past. And also the normalization of the liquidity position of households that was extremely high during the last 2 to 3 years. And now let's say, it's going back to, let's say, normal situation where people, let's say, will have a higher propensity to borrow. So on the consumer part, we are, let's say, supportive. In terms of mortgages, we always have the UF and deflation at the base for the growth of the total balance.

Speaker 1

And then again, with rates much lower, we do expect that the real estate market to improve for next year, maybe closer to the second half of next year with when long term rates normalizes and go down from where they are now and they were in the recent past. And going into commercial, then we see a couple of very positive tailwinds for us, I mean, related to all the growth we are getting through GetNet in in SMEs and all the visibility that Getnet give us in terms of the flows and the activity of clients. So we are let's say, positive on loan growth prospects on commercial lending related to the whole SMEs and payments ecosystem. And maybe the higher or the bigger question mark is related to commercial lending with, let's say, more CapEx oriented or CapEx related that definitely that will be driven by the potential rebound or improvement in investments that it's expected to be timid going forward. And so that maybe is where we have the higher level of uncertainty about the growth prospect in terms of lending.

Speaker 1

But as a whole, the system, we do expect the system to grow that, let's say, from 6% to 8% as a range, and we should be also in that range.

Speaker 4

No, super. Very good answer. Thank you, guys. And again, congrats on the ROE improvement lately. Thank you.

Speaker 1

Thank you, Europe.

Operator

Okay. Thank you very much. Next question comes from Beatrice Abrau from Goldman Sachs. Please go ahead, ma'am. Your line is open.

Speaker 5

Hi, everyone. Good morning and thank you for taking my question. I guess just a quick follow-up on the Bensa loans, just to make sure that we understand. So does that explain the contraction in the corporate CIB line? How much of the bands loans exclusion can be explained in that line just because of the big drop there quarter over quarter?

Speaker 5

And then just the second question on asset quality, right? So NPLs did increase quite a bit this quarter. And I guess what gave you comfort to keep the cost of risk guidance at 1.3 this year? Is there any chance that you will have to increase provisions going forward in addition to this $18,000,000,000 onetime additional provisions for commercial loans that you mentioned? Thank you.

Speaker 1

Thank you, Beatriz, for your question. I mean regarding Valsa, that was part of the middle market segment. It's not part of the CIB. So it's not it doesn't explain any of the CIB fall, but it's much more related to the, let's say, the concentration of the CIB that there are few but larger tickets and some of them weren't renewed in the quarter. And so that explains the fall in CIB.

Speaker 1

Banza, it's in the middle market. It's, let's say, a relevant part, but not most of the fall in middle market. It was like MXN 250,000 portfolio that was deconsolidated. So the trends or the drivers in commercial lending related to middle market and the CIB had more to do of, let's say, lack of demand in terms of credit and borrowing and, let's say, the peculiarities in the CIB segment that a few syndicated loans that were originated in lower level of rates environment during the pandemic expired and weren't renewed. But Vantaa was not is an element, but it was not the most part of the fall.

Speaker 1

And regarding cost of risk and asset quality, basically, we don't we are, let's say, in a high level of cost of risk compared to where we were in the past, and we do expect that to stay where it is. So the 1.25 that we have year to date, we think that we'll be there for the rest of the year. So we are not seeing yet an improvement or fall in cost

Speaker 3

of risk by neither

Speaker 1

further deterioration considering what we are seeing in the behaviors of the portfolios. And also, as I said before, the level of rates, it's now definitely given some room for people regarding the burden of their payments in the consumer and also in the mortgage business. And so we expect to stay where we are around like ARS 40,000,000,000 in terms of net provisions a month, then that will take us to the 1.3 year cost of risk for the year, even though and also, let's say, compensating this one off that we are pointed out that we'll have in July, even considering that one off, we reaffirmed the 1.3% for the year.

Speaker 3

To add to Emiliano's answer, we are seeing mild improvements in the job market in terms of unemployment figures, and that makes us also be somehow a little more confident on that turnaround coming in the next semester or final quarters of the year, starting to see early signs of improvement in the job market.

Speaker 5

That's very clear. Thank you so much.

Operator

Okay. Thank you very much. Our next question comes from Mr. Eric Ito from Bradesco BBI. Please go ahead, sir.

Operator

Your line is open. Mr. Eric Eifel, your line is open in case you are muted. Okay. We'll come back to Eric's line in a second.

Operator

In the meantime, we'll take the line from Mr. Daniel Moura from Credicorp Capital. Please go ahead, sir. Your line is open.

Speaker 3

Hi, good morning and thank you for the presentation. I have just one question regarding the asset quality indicators. When do you expect to see the NPLs to start decreasing? Especially in the commercial segment, you already explained that these the performance of the NPL has been explained by agriculture and also real estate. But I want to understand if those segments are under control and you're now expecting the second half of the year or in 2025 to see an improvement?

Speaker 3

And also, I would like to understand what will be a normalized figure of NPLs considering the portfolio structure that you're having, the increase in SMEs, the increase in consumer auto loans, what will be a normalized figure of NPLs when economic activity recovers and rates and inflation will be normal? Thank you, Daniel. Answering your second question first, what we expect as a normal range of NPLs for the current type of portfolio that we have, it's something in the low 2s. So something between 2.2 to 2.4, a little over what we had at the beginning of the pandemic that was somehow slightly higher than 2%. So a little higher than that, especially because of the increased composition of the SME part in the commercial portfolio and an expectation of an increase in our consumer loan portfolio too.

Speaker 3

So that's what we should expect to stabilize the figure in terms of NPLs. In terms of when are we expecting a turnaround on the commercial portfolio, We some part of the deterioration of the impaired ratio is explained by the decrease in the total size of the loan book of the portfolio in the quarter. So that figure actually is not as high as it seems, like the 8.6% of the in preparation and the 3.8% of the NPLs actually suffering from the decrease that we mentioned in the quarter. So having that in mind, we are seeing not as a huge increase in the total impaired volume of the portfolio or the NPL figures. We're seeing some sign of decrease in the acceleration of those figures in absolute terms.

Speaker 3

So that makes us believe that we are close to the turnaround point in terms of at least of the absolute figures. And we are expecting this to happen in the next 6 to 5 months 6 to 9 months.

Operator

Okay. Once again, we will unmute Eric Ito's line. Eric Ito, Bradesco BBI. Please go ahead, sir. Your line is open.

Speaker 6

Hello. Can you hear me?

Operator

Yes, please go ahead.

Speaker 6

Okay. Hi, guys. Good morning. Thanks for taking my question here and for the opportunity. I have two questions as well.

Speaker 6

First one is regarding the expectations for 2025. I think you already gave some expectations regarding loan growth. But maybe a quick follow-up on NIMs. I think this year, we should have a quite volatile variation of NIMs because on the one hand, we have these changes in interest rates, we have the impact from FCIC. But I guess next year, we should have lower funding, lower inflation, and I guess FCIC will not be an issue again.

Speaker 6

So just want to get what you guys are expecting for NIMs for 2035 considering the loan mix you guys will also have? And my second question is regarding efficiency ratio, mainly focused on fees. I think we should have the full impact from the interchange rate cap fully loaded in 2025. I think you guys estimate an impact of €50,000,000,000 for the full year. So just want to get your sense on what how much can we expect fees to grow in 2025 as well?

Speaker 6

So thank you.

Speaker 1

Hello, Eric. Thank you for your question. I'll take the first one and I'll leave the second one for Christian. So regarding NIM outlook for 2025, as you said, I would say that maybe the biggest source of volatility for next year would be the level of inflation that should be slightly or let's say below what we have this year. So that's going to be a headwind NIM.

Speaker 1

But as you can see in the quarterly evolution, our NIM during the Q2 was like 3.6% in the Q2. So going forward, we expect to be around that level. The inflation in the Q2 was relatively high. So going forward, it should be below that level. And with that, we see the 2nd semester with a NIM level of 3.6, 3.7, and that take us to this 3.3, 3.5 full year for 2024.

Speaker 1

So for 2025, as I said, inflation should be a headwind bad. Interest rates should still fall in the short part of the curve, maybe, let's say, from 50 to 100 basis points in the next 12 months. So that will take the yield curve to recover some positive slow. That's also going to be positive for NIMs. And in terms of loan growth and loan mix, that also should be kind of positive.

Speaker 1

So even though it's still early to call, we do see NIMs next year to around the level that we'll have during the second half of this year, let's say, to 3.5%, 3.7% subject to the evolution of inflation and rates.

Speaker 3

Thank you, Emiliano. Regarding your fee question, Erik, so the main driver of our fee expansion, it's the growth in terms of our customer base and the increased customers' interactions. And you can see how that is translating into our checking account growth year over year and quarter over quarter. This growth has been sustained, and it's also impacted positively on our card fees figure. Because if you take into consideration that we have the impact of the interchange fee cap incorporated in the first half of the year figures, actually, the growth in the card transactional volume and fees is actually pretty impressive.

Speaker 3

We also expect Getnet to continue its growth performance, although at a slightly lower rate. And we are also seeing opportunities on the asset management business because we are seeing some interest for customers to find higher yielding assets from moving out from the deposits, the time deposits that where they put the money into 2022 and 'twenty three with the high monetary policy rate. With all of that, we are expecting our fees figure to grow slightly higher than our stabilized net interest income figures. So we should be aiming for high single digit growth in fees for next year. That should consider also the impact of the card fees, so mid to high single digit growth in total.

Speaker 6

Great. And just a follow-up, if I may. You mentioned that customers are moving out from time deposits. Could you just recall us what's the cost of funding regarding this time deposits compared to the mutual funds that they are migrating in? Thank you.

Speaker 1

Yes. So, let's say that the level are similar in the sense that today when you look at the rate for time deposits compared to the yield on mutual funds on the clients, let's say, on the I don't know how to put it, but on the spot or if you look at the numbers today, it's like the same. The point is that mutual funds, usually the short part, the money market mutual funds are has like, let's say, 60 to 90 days average duration, and they don't go like mark to market on their net asset value. So they have like a kind of lag into recognizing the fall of rates. So when you have a cycle of rates going down, especially a sharp cycle as the one we are having, You still have mutual funds yielding a higher return on investors until the level of rates kind of plateau and stay.

Speaker 1

So what I'm trying to say is that for the next still 3 to 6 months, you will have, let's say, higher yields on mutual funds until the level of rates stabilizes and you have some kind of indifference levels. The point there is that when that happens by the end of this year, early next year, again, the slope of the curve will be positive again and that will, let's say, give people more appetite to go a bit longer on their duration. And usually, that kind of extension in their duration, people tend to do it through mutual funds, fixed income mutual funds rather than taking longer tenure deposits.

Speaker 6

Very clear. Thank you.

Operator

Okay. Thank you very much. It looks like we have no further questions at this point. I'll pass the line to the management team for the concluding remarks.

Speaker 1

So thank you all very much for taking the time to participate in today's call. We look forward to speaking with you again soon.

Operator

Thank you very much. This concludes today's conference call. We'll now be closing all the lines. Thank you and goodbye.

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Alibaba Group Q2 2024
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