Regional S.A.B. de C.V. (RA) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen, and thank you for standing by. Welcome to Regional's Second Quarter 2025 Earnings Conference Call. We are joined today by Manuel Rivero Zambrano, Chief Executive Officer of Regional; Enrique Navarro Ramírez, Chief Financial Officer; and Alejandro Lobeira, Head of Strategy Planning and Investor Relations. [Operator Instructions] Please be advised that today's conference call is being recorded. I would now like to hand the conference over to your speaker, Manuel Rivero Zambrano. Thank you, and please go ahead.

Good morning, everyone. I hope you and your families are doing well. We're presenting our second quarter results, which reflect our disciplined execution and operating focus. We are operating in an uncertain environment with GDP's growth having slowed and with uncertainty around trade policies. Our commercial strategies continue to focus on expanding our presence in key regions while maintaining risk cost control and credit underwriting discipline. We remain focused on diversifying our income streams, particularly through nonfinancial revenue growth and the increase in fixed rate loans, which provide some compensation from margin pressures. Net income for the quarter reached MXN 1,639 million, a 2% year-on-year increase. Our return on average equity contracted 228 basis points year-on-year to 20.1%, while this represents a decline from prior periods, it remains at healthy levels and reflects our focus on maintaining asset quality and profitability as priorities. Our consolidated NPL ratio increased to 1.5%, up from 1.3% a year ago. Our cost of risk rose to 1%, while it remains at manageable levels, we are closely monitoring credit trends and maintaining conservative underwriting standards. Regional posted a solid year-on-year loan growth with 10%, fueled by sustained commercial activity, particularly in high-performing regions such as Jalisco. On the funding side, core deposits CASA grew 7% year-on-year, while the total deposits increased by a strong 14%, highlighting the continued trust and engagement from our clients. This dynamic growth in both lending and deposits contributed to a 9% expansion in the financial margin supported by higher volumes and disciplined pricing strategies. Our diversification efforts continued to show progress with card merchant fees growing at 19% and insurance fees growing 25% year-on-year. Nonfinancial income posted 8% year-on-year increase, providing some offset to margin pressures we anticipate in the future periods. Operating expenses grew 11% year-on-year, driven by technology expense, strategic investments in geographic expansion and our commercial workforce as well as inflationary pressures and operating costs. This resulted in our efficiency ratio increasing to 40.8%, reflecting a 188 basis points year-on-year increase. While we expect some stabilization in expense growth, we acknowledge the inflationary environment continues to present pressures as we actively manage expenses. The wholesale loan portfolio grew 10% year-on-year, while particularly strengthening in Jalisco at 18% growth. However, we are seeing some moderation in demand and business adopt a more cautious stance. We anticipate that loan demand may remain subdued until the greater clarity on trade policies and economic direction. We maintain a cautious approach to risk management given current uncertainties, while our direct exposure to cross-border dynamics represent 2% only of our total loan portfolio and having 10% indirect ties to the United States, we're closely monitoring potential impacts from trade policies. Wholesale banking demand deposits increased 23% year-on-year, while help improve our CASA ratio to 47.1%. Retail banking continues to show healthy momentum and demand deposits grew 11% and time deposits grew 14%, reflecting solid client engagement and trust. Our branch network continues to expand in a disciplined manner, focused on high potential locations and aligned with the evolving customer needs. Notably, individual checking accounts rose 19% year-on-year, an indicator of growth, client acquisition and deepening relationships, though we anticipate a normalization of this space going forward. Our asset quality remains a key strength with non-performing loans ratio at healthy levels across all segments, SME and consumer portfolio with state-of-the-art NPLs with 2.9% and auto loans with 0.5% and mortgages at just 1.3%. These figures reflect the effectiveness of underwriting standards and the resilience of our customer base. While we remain digital in shifting macroeconomic environment, we are well-positioned to navigate potential challenges, thanks for proactive risk management and diversified portfolio strategy. Hey Banco continues advancing its strategic shift towards profitability over pure growth, prioritizing higher-quality customers over volume expansion. This disciplined approach is yielding results. Individual deposits grew 22% year-on-year, while our loan portfolio reached -- our business loan portfolio reached MXN 4,215 million, an impressive 23% increase, demonstrating solid traction in target segments. Hey Banco reported a financial margin of MXN 229 million with an net interest margin of 8.5%, a notable increase of 130 (sic) [ 137 ] basis points year-on-year, reflecting improved asset yields and a more profitable customer mix. Our efficiency ratio improved to 69.9%, reflecting the progress in cost containing even as we continue investing in automation and digital capabilities to mitigate structural cost pressures. Our active customer base now reaches 508,000 customers, fully aligned with our strategy to prioritize quality over scale. We reduced our cost of risk by 160 basis points to 6.10%, though we remain vigilant about credit trends in the current environment. The spin-off process remains on course for completion this semester. Following the 2 quarters of performance below our original budget, we are updating the market guidance by the remainder of the year. We anticipate loan growth moderation over the next quarters due to macroeconomic uncertainty. Given these conditions, we are adjusting our loan growth expectations between 7% and 10%, Down's from previous 10% to 15% guidance. Our loan diversification strategy continues maintaining focus on high-quality customers across regional operating sectors. The new Banregio app designed consistently with Hey Banco will drive cross-selling opportunities, especially in consumer credit products. This diversification approach helps mitigate NIM pressure by leveraging our proven credit risk management capabilities. We are maintaining our NIM guidance between 6% and 6.5%, reflecting the stability of our core generation capabilities. Similarly, our deposit growth expectations are being adjusted between 7% and 10% from previous 10% to 15% range, aligning with a more conservative credit environment with strong capital and liquidity positions, we continue investing in Regional's future through infrastructure expansion and operational modernization. Our automation initiatives proven successful at Hey Banco will be implemented at Banregio, delivering enhanced results at scale. Advanced in machine learning and Generative AI present compelling alternatives to workforce-dependent solutions, while primary benefits will materialize in 2026, we expect initial results in the upcoming quarters. By developing proprietary technology capabilities, Regional eliminates intermediaries and captures full execution advantages. We expect to maintain efficiency around 40% -- below 40%, offsetting potential income or expense pressures, evolving, developing platforms, reduce coding requirements while accelerating infrastructure deployment. This acknowledging developments support our optimistic outlook. As we navigate the environment, we are taking a more prudent approach to provisioning, our cost of risk guidance moving from 0.8% to 1% from the previous 0.7% to 0.9% range. This conservative position ensures we maintain strong asset quality standards with our NPL target remaining as previous guidance. This reinforced our commitment to operational excellence and customer service, strengthening security capabilities and market reach. The combination of these factors leads to adjust our net income growth expectations between 5% to 10% down from our previous 10% to 15% guidance, primarily reflecting expected margin normalization as interest rates decline. Consequently, our ROE target moves from 19% to 20% from the previous 20% to 21% range, still representing healthy profitable levels that reflect our disciplined approach to delivering consistent results in the current environment. We believe this updated guidance provides a realistic foundation for the remainder of 2025 while maintaining our strategic focus on long-term value creation and operating excellence. Thank you. We appreciate any questions.

[Operator Instructions] Our first question comes from Brian Flores from Citi.

Maybe a quick question on the guidance updates you just made. The NPL ratio remains stable. As you mentioned, you want to be a bit more maybe aggressive on provisioning, more cautious, if you will. Can you explain if what you're seeing is an increase on isolated cases? Is this generalized? Just any -- a bit more color on that would be helpful. And then a second question on the other line, which is growth that you revised. You mentioned lower demand. Is this also coming in particular states, particular segments of the economy? Any color here would be really helpful.

Yes, Brian. Thanks. In terms of NPLs and cost of risk, we expect a very similar next 2 quarters in general, but specifically in these two lines. NPL, as we have mentioned, we are very sensible for specific large loans. They are not concentrated. Obviously, almost half of our loan book is related to real estate and the largest loans that we have are real estate related, mainly homebuilders or rental for commercial and industrial properties. The largest cases in past due loans are there. There is not a concentration in geography or even the type of builders, homebuilders are specific cases. And most of them as we have the real estate collateral will be sold in time. It's just a matter -- we have just finished two large foreclosures, then we have to sell all the flats. These two specific cases are flats in Mexico City. But for the rest are diversified from agro, a couple of agro business, a couple of manufacturing from the large ones. In terms of cost of risk and provisioning, as Manuel mentioned, we are being very prudent. We are following the CNBV methodology with no exceptions. And some of the changes to Stage 2 that you can see in the report also generate provisions. We don't expect a large deterioration or to increase a lot NPLs. I don't know if that was clear about NPLs and cost of risk.

Yes. No, super clear. So just following this up, should we expect maybe better NPL creation trends, right, from going forward? This is basically to match the numbers you put in the guidance?

Maybe not better. The guidance, can you put it back, please? We maintain it in 1.8%. It's not because we believe we can reach that. It's maybe 1.5%, 1.6% at most for the whole year as some of them will roll off, others will be collected, then there are new entrants and some exits.

Okay. Perfect. Understood. And on loan growth?

On loan growth, basically, yes, we have seen due to the uncertainty, we have seen less demand in general, in particular, in industrial parks. We haven't seen any vacancy or any aggressive cancellation. But what we have seen is less demand for new industrial parks in general in the North, mainly Nuevo León and Coahuila states. But the lack of demand for new investments, we see a lot of demand to increase the lines for working capital but not for capital expenditure. Some of the customers or businessmen, they explained that they are waiting until all these tariffs and trade are resolved or to see some clarity to new investments. And some of the other customers that have liquidity are paying that also affects the growth on loans. It's not only the demand for new loans, but also -- and it's not that they are moving to other bank or competition or some sort of that type of effect is they have liquidity, they prefer just to prepay their loans.

Our next question comes from Olavo Arthuzo with UBS.

Actually, I have two. And the first one is related to your margins and the NII that you guys presented. And we are in the midst of easing monetary policy cycle in the country. So just wanted to hear from you an update on the sensitivity to your margins or NII 100 bps change in the policy rate? And my second question is related to the payout strategy because I just wanted to understand what is the target for capital of the bank because it stood at around 14.1% this quarter. And I was just trying to understand at what levels should we work with for your capital ratio going forward?

In terms of the margin, we still maintain the same sensibility. We have been projecting 13% to 14%. What we have seen in reality in the last 250 reduction of the policy rate is 14 basis points. It's showing -- as we show the NIM is last 12 months, it looks like it doesn't move. But if you do the calculation for the quarterly or even with the CNBV with the monthly, you can see year-on-year, month of month, the last one available is May, that is basically 14 basis points per 100. Then once it's finished all the reductions, it should be around that stable. In terms of capitalization index or capital strategy, our risk appetite, our level -- internal level for the Board and for the risk committee is 12.5%. That's our own internal minimum considering with and without enhancers, then we should not expect in any future close time to reach that level above in order to decide the dividend. If you remember, we have decided to split the dividend in two payments, one in April with the general assembly for the results and then another one in October, November after the Board. Then at that moment, we will decide if it still is as we are planning above 14%, there is still ample room to do it. And also remember that this level is only for regional bank, Banco Regional already being capitalized Hey Banco. Then once the migration of customers is approved, it will increase for Banco Regional the capitalization index.

That was my follow-up, but you already answered. So that's very, very clear.

Our next question comes from Ricardo Buchpiguel from BTG.

I have two here on my side. So during the quarter, I understand that Regional's NIM faced two headwinds, right? So you had a change in asset mix because of the increase in repos portfolio and also you had a reduction in reference interest rates and you have the sensitivity that you just mentioned about changes in the reference rate, right? Still, we saw the NIM remain flat quarter-over-quarter. So I wanted to understand what tailwinds helped to support NIM during this quarter and whether we can expect that going forward? And also, could you also provide an update on what we should expect in terms of growth and profitability for Hey in the coming quarters?

In terms of the NIM, as you mentioned, we have been renewing in advance or buying in advance securities investments. Basically, what we are acquiring, our portfolio is basically 2-year status. Then the securities investments has helped the NIM and will continue helping to protect the NIM. It's not a hedge. It's basically that we decided to increase the repo business and to do some of the renewals in advance. That's the main reason, but still the sensibility that I mentioned is very similar once all the reductions finish. By the way, one of the main changes or reasons, as Manuel mentioned, to change the guidance is in margin as we -- if you remember, we were expecting 8.5% policy rate at the end of the year when we did the budget and when we did the guidance. And right now, we are expecting a 7.25%. But that's the reason. And also, it helps the mix. We have been growing especially autos and leasing. Leasing not so much in this quarter, but the previous quarters has been above 20% this quarter slowdown. But auto is continue about 18%, 16% and is only fixed rate.

Very clear. And about Hey?

About Hey, we will continue growing the loans to small businesses, and also auto. Basically, if you see the loan growth is coming -- we have made a split of auto to differentiate auto for individuals from auto for companies. Then in the business section, you can see the auto for companies. In general, auto for businesses and commercial loans, as we call in Mexico, that are business loans in general, both simple lines or working capital or revolving lines. Both of them are growing. That's our main focus on loans. In individuals, we are growing back credit card, but not as aggressive as we did 2 years ago, mainly focused also in auto and personal loans. In terms of number of customers, as we have been mentioning, we are not focused to do a very large growth, but more profitable growth, both asset quality as well as better balances in deposits.

And just a quick follow-up. We saw that Hey bottom line decreased a little bit quarter-over-quarter and the cost of risk also went down. So if you could comment what drove this slight reduction in the bottom line and if we can expect like a recovery in the bottom line more towards the second half of the year as you keep growing in this more less risky credit lines and grow the portfolio.

It was partially provisions as well as expenses in between first quarter and second quarter. Yes, expenses on marketing on the second quarter. We -- it's seasonal, and we are doing an alliance with Sami Rivers. There is a very well-known influencer in Mexico. And also, we are sponsoring again some music festivals. That's the main difference. And also in provisions, even though the cost of risk year-over-year or quarter-over-quarter reduces, which could publish the quarterly one to see the difference, but it was higher provisions, mainly in credit card and small businesses. What changes? To be more concrete on the answer, yes, we expect it to recover. As Manuel mentioned, we are doing a lot of efficiencies and a lot of automation in Hey Banco then later on, we will do in Banregio. But in Hey Banco will be shown this next 2 quarters, the efficiencies.

Our next question comes from Ernesto Gabilondo with Bank of America.

I have three questions from my side. The first one is a follow-up on your NIM expectations. So you mentioned that you're expecting interest rates to be at 7.25% by the end of 2025. What do you see the interest rates next year? Where do you see the interest rates normalizing? And my last -- my second question is on OpEx. I believe you didn't mention anything related to OpEx. You have mentioned in the past to be around the double digit. So if you can give us some color, if you still want to open some branches in the second half? Also, if you can talk a little bit about the promotions that you're doing at Hey, how much of the OpEx is related to that? Any color on OpEx will be very helpful. And my last question is on your net income growth guidance. Just wondering how you see the trends for the earnings growth in the second half? We have seen first half practically flat. So just wondering if we can start to see the double-digit earnings growth in the third quarter? Or do you think it's something that it will more likely to come in the last quarter when you have better than seasonality and when it tends to be the highest quarter?

In terms of the expectation for the TA even though we haven't started the budget for next year. We expect, in general, around 6.25% or 6% at most. And we believe that will be on a stable rate. And we maintain the sensibility, maybe for the investment securities I already mentioned, if the rate goes down faster will help to defend the margin temporarily for a couple of quarters. Then that's about normalizing TA or policy rate. In terms of OpEx, yes, we expect, as we mentioned since the last quarter, to converge between 10% to 12% growth, the full OpEx line, including both salaries and general operating expenses. Then that will be -- we usually don't guide, but it's what we expect between 10% to 12% of growth for the end of the year. Branches, yes, we will open maybe not the 20 during the next 6 months, but at least we have more than 10 in process. And the team is focused on the 20 focusing, as Manuel mentioned, on profitability and location where it makes sense. We are not opening branches just for the sake to fulfill a budget. It's where it makes sense, where we forecast that we will be more profitable every point, every single point. Maybe for October, we will have a more precise number. But right now, we are working on 12 and we have 8 more on the line. Then if everything happens legally in contracts as well as in adaptations and construction in time, maybe we could end up with the 20, maybe 16, 18, but we are not stopping. That will be the summary. We are not stopping the opening of branches, but also we are not rushing. We are selecting very carefully the each location. And in terms of OpEx of Hey, as I mentioned, some of the promotions and some of the marketing investment that is not marketing -- digital marketing is, as I mentioned, sponsorship and alliances and some promotions in terms of what we call super cashbacks. We are giving for a short period of time, higher cashbacks, 10% in selected merchants. Then yes, it's included in the OpEx, but it's not the main reason of the increase. The main reasons are still the branches, the new branches, plus, as we mentioned last time, all the technology investments that were made in the last 2 years that we are amortizating in these quarters.

Excellent. Enrique, the last question.

Yes. Let me -- I will open my file. Your question is...

About the trend.

Two digits, but barely two digit, we see it for the fourth quarter, but it will depend on seasonality, as you will say it. As you know, the last quarter is a lot of transactions and a lot of loans, but it will be the only one where we see two-digit growth. And I don't have the projection for the next year.

Our next question comes from Neha from HSBC.

Could you tell us what is your exposure to the real estate sector, agribusiness, and to the exporters?