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 Fourth 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 Gálvez, Head of Strategy and Planning and Investor Relations. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Manuel Rivero Zambrano. Thank you, and please go ahead.

Good morning, everyone. I hope your families are doing well. Today, we are presenting our fourth quarter results, which reflect disciplined execution and continued focus on operating performance. We're operating in a certain environment as Mexico GDP's growth has slowed and there remains uncertainty around trade policies. Our commercial strategy continues to prioritize expanding our presence in key regions while maintaining strict cost control and disciplined credit underwriting. We also remain focused on diversifying our income streams, particularly through nonfinancial revenue growth as well as increasing cross-selling, which helps partially offset lower demand. Net income for the quarter reached MXN 1,814 million, representing a 7% year-on-year increase. Return on average equity decreased by 224 basis points year-on-year, reaching 19.1%. While this is lower than our prior period remains at healthy levels and reflects our continued prioritization of asset quality and profitability. Our consolidated NPL ratio remained at 1.3 and 1 basis point year-on-year, and our cost of risk declined by 3 basis points to 1%. Overall, we are pleased with portfolio health and have observed any significant deterioration in credit quality. We remain disciplined in underwriting and risk management. Regional delivered solid year-on-year loan growth of 8%, supported by sustained commercial activity, particularly in high-performing regions such as Jalisco and segments like SMEs and auto loans. On the funding side, core deposits grew 13% year-on-year, highlighted by continued client trust and engagement. Growth in both loans and deposits contributed a 7% expansion in the financial margin, supported by higher volumes and disciplined pricing. Our diversified efforts continue to gain traction, while card merchant fees up 17% year-on-year and insurance fees 25% quarter-on-quarter. Nonfinancial income increased 10% quarter-on-quarter, providing some offset to the margin pressure we anticipate further in future periods. Operating expenses increased 17% year-on-year, driven by technology expenses, strategic investments in geographic expansion and inflationary pressures and operating costs. As a result, the efficiency ratio rose to 40.2%, an increase of 258 basis points year-on-year. The wholesale loan portfolio grew 7% year-on-year, while the notable strength in Jalisco growth reached 21%. We continue seeing the same environment, although the increase of policy could start motivating more demand. Wholesale banking demand deposits increased 42% year-on-year, bringing our CASA ratio to 45.7%. Retail banking continued to show healthy momentum with preferred banking demand deposits growing 9%, reflecting solid client engagement and trust. Our branch network continues to expand its disciplined manner, focus on higher potential locations that align with evolving customer needs. Notably, auto and consumer loans grew 13% and 10% respectively, an indicator of growing client acquisitions and deepening relationships. Asset quality remains in key strength with nonperforming loans ratios at healthy levels across all segments. The wholesale portfolio reported an NPL ratio of 1% consumer portfolio 3.2%, auto and outstanding of 0.6% and mortgages 1.2%. These metrics reflect the effectiveness of our underwriting standards as a resilience of our customer base. While we remain vigilant amid shifting and macroeconomic environment, we believe we are well positioned to navigate potential challenges through proactive risk management and a diversified portfolio. Hey Banco continues to advance in a strategic shift forward profitability over pure growth prioritizing high-quality customers over volume expansion. This disciplined approach is delivering results individual demand deposits grew 20% year-on-year, while our business loans portfolio grew an impressive 33%, demonstrating strong traction in targeted segments. Hey Banco reported a financial margin of MXN 297 million, and net interest margin reached 10%, an increase of 302 basis points year-on-year, reflecting improved asset yields and a more profitable customer mix. Our efficiency ratio improved to 57.6%, a 1,403 basis points year-on-year reduction, highlighting progress in the cost containment even as we continue investment in automation and digital capabilities to mitigate structural cost pressures. Our active individual consumer base now stands at 476,000, consistent with our strategy of prioritizing quality over scale. We reduced our cost of risk by 166 basis points to 5.47% while remaining vigilant on credit trends in the current environment. We are happy to announce that the spin-off process of Hey Banco will be completed this weekend. Profitability continues to improve as Hey Banco, we are encouraged by the ongoing upward trend. Net income for the quarter reached MXN 55 million. And given the progress we've made in customer mix, pricing discipline and cost containment, we expect profitability to continue trending higher going forward. Turning on Hey Payment, we continue to see positive performance across our payment businesses. Total Billing increased 34% year-on-year. Growth during the quarter was primarily driven by the payments facilitator segment, which increased by 150% year-on-year, reflecting a broader adoption of the acquiring and processing solutions among partner merchants. At the same time, we continue to see stable contributions from aggregators and large corporate clients supporting diversification of volumes. Looking ahead, we expect payment business to remain an important contributor to growth while maintaining a disciplined focus on scalability, operating efficiency and profitability. Our results this quarter reinforce the strength of our core operations and the consistency of our strategic priorities while continuing to generate sustainable growth even amid a more challenging environment. This momentum we've seen across our key business lines together with our prudent risk management and ongoing cost discipline give us a high degree of visibility and confidence in meeting targets we set to 2026. While this solid foundation and growing momentum, we anticipate delivering top results again in 2026, guided by our targets of total loan growth between 5% to 10%, total deposits growth between 5% to 10%, net interest margin between 6% and 6.3%, efficiency ratio around 42%, net income growth between 5% to 10%, return on equity between 8% and 19%, cost of risk between 0.8% and 1%, NPL ratio below 1.8, loan growth between 15% to -- excuse me, Hey Banco's guidance, loan growth between 15% to 20% and net income growth between 65% to 90%. Moving forward, we will continue to enhance our operations and explore new opportunities, fully committed to our strategic goals. We are confident that Regional will remain a strong financial performance in the coming years, ensuring superior profitability and asset quality within the system. Thank you very much. We appreciate any questions.

[Operator Instructions] Our first question comes from Eric Ito from Bradesco BBI.

I have 2 here on my side. The first one is on your guidance on NPLs. You're guiding for 1.8%, but you ended the year with 1.2%, 1.3%. So I just want to understand if you expect major deterioration throughout the year. And then my second question, which is also linked to this one, is regarding the potential regulatory changes. So if we look at your write-offs, it went up from around MXN 400 million in the third quarter to almost MXN 800 million in this quarter. So I just want to understand what should we think about the recurring level for these write-offs going forward in 2026? And then the last one, if you could comment on your updated estimated impact from the potential changes from the interchanges would be good.

Thank you. In terms of NPLs, our guidance, as you can see on the screen, we usually guide below 1.8%. We expect some deterioration, normal or regular around 1.5%. But we wanted to have room for specific cases that is what was happening for the whole year at the end of the year. And I will move to the second one. At the end of the year, we managed to reduce the NPL to 1.3%, 1.28% based mainly on the recovery of -- well, the foreclosure of one of these large customers, we foreclosed many flats from a building. And then in the other one, we managed to restructure and they paid at least 3 payments during the year. That's the main part that is on the move from NPL to regular ones. And as you mentioned, we wrote off -- usually, we do at the end of the year, this -- we evaluate all the loans that has been past due. And with the new methodology of provisions also we validate the possibility of recovery because we have -- most of them are on the legal process. And we decided to roll off all the ones where we don't see possibilities of recovering. That is around MXN 300 million that you can see on the quarterly report. That explains the increase. We don't guide or we don't have an expected regular amount of write-offs. Mainly, we can project in consumer or mortgage or small businesses, but in large or what we call [indiscernible], we don't forecast write-offs. We don't see a large amount in the next 2 or 3 quarters similar to the ones on the fourth quarter. But just regular day-to-day in consumer, we write off regularly once they reach 180 days, 6 months past due. In small businesses, basically after 1.5 years, 18 months. But in large business it's really when we have the certainty that there is no possible recovery. Then we don't see -- the main impact that we see in terms of regulatory changes is not in write-offs, even though the regulation change and it will take longer to do the deductibility in taxes. The process is similar. And for this year, the rule is that after 2 years of starting the legal procedure or demanding the customer suing -- sorry, suing the customer legally, we can write off. Usually, we take longer than it won't affect in the large customers, we take longer than that period. The other one that is already reflected on the net income growth is the non-deductibility of the 75% of the [indiscernible]. As you know, the government say that it's more a tax than an expense. Then, we cannot deduct the 100%, only the 25%. You will see that our tax effective rate will be increased in the next quarters due to that change. It's the only real material one. The other ones will not have a lot of impact at least for us.

Okay. And could you...

In terms of the interchange is still on consultation, the request for information from the government to the many different entities that we participate on the payment market is finished the next Friday, the 31st -- officially 31st the Saturday, but the next Friday, they are open to receive feedback, and then they will decide if they apply the change to the interchange fee. But right now, we are not considering any change in our budget. We are considering the same level of fees both on debit cards as well as in credit cards as we will expect -- we will wait, and we are expecting that process to finish during the next 2 quarters.

Okay. Perfect. And then just a follow-up, if I may. Just on your effective tax rate, you mentioned that you expect to increase in the next quarters due to the APA change. Could you give us some color here on the expectation on the levels that could go up?

Yes. It has been between 25%, 26% for the last quarters, and we expect it to move to 27%, 28% for the next quarters.

Our next question comes from Ricardo Buchpiguel from BTG Pactual.

I have 2 here on my side. So first, it will be interesting if you could provide more details on what should be the main segments and regions driving loan growth this year? And also comment if you do believe any new resolution or agreement in the USMCA deal is necessary to reach this 5% to 10% loan growth or eventually a resolution on this topic would be like a potential upside risk to share loan growth numbers. And for my second question, [indiscernible] finished the year with nearly 15% capital ratio. So if you could also remind us what is your target capital ratio and what should be your dividend policy for '26? And also comment that if you eventually be a bit below -- a bit above the target capital ratios because of eventually a potential weaker loan growth, if it makes sense to expect any additional payments that you usually pay compared to historical levels?

On the first question, I will move to the second part first. No, our budget doesn't take into account an immediate solution or agreement, but it considers a better second half. That's where it is implicit, but it's not -- it will be more an upside risk than downside risk if there is not an agreement. We are expecting it for October, even though the dates that the government, especially the Secretary of Economy, he mentioned the July date that is on the agreement, on the USMCA agreement. Our improvement is only on the last quarter. Then for the most part of the year, it's not included any benefit or improvement from the USMCA agreement. It includes a small improvement due to the rate reduction and it's in all the regions. It's more by segment than really for region. It's mainly on small businesses, small and medium, not only small. And in terms of products, also auto, auto lending is a segment where we have been growing around 20% because it's growing both in Banregio as well as in Hey. And basically will be the 2 main segments. Large customers will be in line with the guidance between 5% to 10% is -- the other 2 are above 10%. That will be in terms of capital ratio, yes. And as Manuel mentioned, this weekend, we will have the spin-off, the migration of the customers of Hey Banco to Hey Banco legal entity or the new license, their own license operating fully because right now, it's operating just with the equity. Say that the capital ratio for Banco Regional will improve. And yes, we are planning to present to the general assembly a dividend. We will follow the same strategy that we are following for the last 3 years that is to pay the 25% pay out this after this general assembly, the ordinary general assembly that will take place someday in April. We have not yet defined a specific date. And then in October Board meeting, we will again review the possibility. We see, as we mentioned in last quarter conference call, that there is a higher possibility to pay the fully 50% this year once the Hey migration is done.

That's clear. Just one quick follow-up. What would be the gain in capital ratios from the spin-off of Hey?

Because we will migrate the around MXN 10 billion loans from Banco Regional legal entity to the Hey Banco, but Hey Banco already have the equity, then it will be reduced the loans in Banco Regional. And it will be very low reduction on the equity. It will be not proportionally because if you remember last year, we paid dividends to capitalize or to increase the capital of Hey Banco legal entity. Then basically, the short answer is the MXN 10 billion will be reduced on the loan book of Banco Regional without further significant reduction of the equity.

Our next question comes from Ernesto Gabilondo from Bank of America Merrill Lynch.

The first one is, if you can provide a little bit more color on your NIM expectations. You guided between 6% to 6.3%. And I remember you ended with around 6.3%. So that will imply a NIM pressure of 30 basis points in the low end. So what is the level of interest rates that you are assuming for 2026? And how are you picturing the lower rate to go throughout the year? Do you think it will be throughout all the year in the first half? It could give us a little bit color on what will be the evolution of the NIM. And then my second question is in terms of your operating expenses. I believe it was a little bit high than what we were expecting. It was around 14% for the full year in 2025. And I believe you were expecting more like a high single digit, low double digit. So I just wanted to understand if you're anticipating some expenses for 2026? And how should we think about the OpEx growth in 2026?

Yes. In terms of the policy rate reduction, we are expecting between 6% to 6.5% or say on the opposite, between 2 and 4 cuts along the year. Our budget is in the middle with 3 cuts, but the last one doesn't have a real impact. We expect 2 in the first semester and in the second half of the year. That is about the rate expectancy for us. In terms of NIM, you are right. As you -- as the NIM is an average of 1 year, we will see the capture of the reduction after 1 full year of the reduction of the policy rate, then we expect to continue reducing not all the way of the 30 basis points, but some point in the middle. As you -- as we have been also mentioning in previous conference calls, part of the -- instead of hedging or something like that, as you have suggested on other occasions or question -- not suggestion, sorry, question if we are doing -- we have increased our investment, our portfolio on Certis mainly as a defensive way for at least 1 year. Our portfolio have increased to MXN 53 billion. And then that could help to reduce the impact immediately. But after 1 year, we will continue renewing the Certis portfolio, the investment securities portfolio. That is mainly Certis or bonds are government bonds. In terms of operating expenses, yes, as we mentioned, it's basically the same items. What we expect for the -- there is technology and the expansion plan for this -- last year, we opened 10 new branches. And for this year, we expect around 15, mainly in the first half of the year. Then that's the part that will be not reducing cost is even though it's an investment is reflected as an expense mainly for rents and for people. But the effort that we did in the third quarter for cost reduction on people will be shown this quarter, the first quarter of '26 and for the whole year. Then in summary, we expect a small increase in cost for salaries and benefits, I guess, is the way that is mentioned on the quarterly report, but not yet in the other expenses nor the ones related to the expansion nor the ones related to technology. That part should be around mid-teens for the whole year until '27. In total, we will be very close to 10%. But as you have access to our split data, at least in 4 or 5 lines, you will see that salaries that is the larger number will be below 10%, but the other 3 will not be below 10%.

Perfect. No, this is super helpful, Enrique. Just a last question in terms of the strong peso, we have been -- it's already below 17.5%. So just wondering if there's like a sensitivity for a peso appreciation? What does that imply for your dollar portfolio? And also, if you are seeing like it could eventually have an impact in exporters?

Not really. It doesn't have really a big impact. We have around MXN 16 billion denominated in dollars. That will be the amount that we have in deposits. Then when we do the valuation every month, it will show less deposits. In terms of loans, is half of that, then it is less than -- it's around 5% of the loan book is denominated in dollars. Then it doesn't have a big impact. And that's the level we have on direct exporters. As you remember, we have been doing this analysis about exporters and impacts on the USMCA treaty. And it's very small, the number of exporters that are our customers. Mainly our -- we have some indirect impacts in terms of providers of exporters, but not -- we haven't seen any large customer that is only dependent on exportations.

Our next question comes from Brian Flores from Citi.

I have 2 questions. The first one is on Hey Banco. I think the unit economics are showing continuous improvement. Very good traction, I would say, across individuals and businesses. And as you mentioned, it is now an independent operation. So I just wanted to ask, how do you see Hey Banco in 3 to 5 years? I think at some point, it was mentioned a possibility was an IPO. I know maybe for now, it is not the base case, but I think in terms of the strategy, it would be great to hear from you how are you thinking about this asset? And then related to this, I wanted to ask you if the spin-off brings the focus from management entirely back to Banregio? Or are we going to see some still split focus or attention in the 2 entities?

Thank you for your question. Well, the focus remains on Regional, right? So obviously, the technology we've been developing here in Hey has already produced great results in Banregio already. So we've been very happy with this evolution. And in that sense, I guess, the whole group continues evolving in that manner. In terms of a capital raise from Hey Banco individually, I think it will remain a question about ROEs, right? So we will see a better capital cost if we have an ROE above Banregio. So in that sense, we want to continue evolving Hey Banco to have more credit because we'll still have a super [indiscernible] on deposits, and we've been having it for many times -- for many years. So in that sense, we still continue growing, and that's the main focus, as you can see in our guidance. And that we'll continue to bring on more profitability. And in that sense, we want to maintain a continued growth on income from fees, which will, I think, be happening in the next 12 to 24 months. So it takes a little bit more time, but definitely something that will continue to drive profitability going forward. And I think there's -- I mean, Hey Banco in that sense is a complement to Banregio because, as I said, Banregio doesn't want to be like BBVA that has 2,000 branches, right? So Banregio is -- will continue growing branches, I think, up to 350 at the most, right? So in that sense, Hey Banco has the reach to go to all the other segments, right? So -- and the segments that are more prone to productivity, more prone to understanding financial products better because they understand technology better. And in that sense, Hey Banco strategy and offering will have a greater impact. Banregio as a brand is not working for -- in that sense, it's not something that it won't work for everyone, right? So in that sense, Hey Banco complements it very well as a brand portfolio in that manner, right? So we are the ones that are the best in class in Mexico in terms of the amount of products we have that digitally offer. So no one has -- no Nubank or Revolut even that has only started. We are the entity that has the most digital products out there, both for individuals and sole proprietors and businesses. So we have the full spectrum. We have all the services. We have payments. We have everything going on. So in that sense, what we have right now is the opportunity to focus on growth. And that will drive profitability and efficiency and being able to really have the best-in-class productivity entity as Regional out there. So I think it's amazing what we have been able to achieve, and we're very happy with the results and profitability is being a pretty good effort on our side. And I think as you might know already, that's what we thrive on. And there's other players with other plays, which is fine. But our is a story of consistency, right? So in that sense, we're very happy with the results and how things are evolving. And we're open for any opportunities that might arise on that matter, right?

Great. And if I may, just 2 quick follow-ups on sensitivity. You mentioned, I think, on Eric's question, you're not considering the impact of higher interchange fees. I don't know if you have run any sensitivities in terms of if the law passes as it is suggested, if you have any sensitivity as to how much it could impact earnings? And then also, if you could remind us of your NIM sensitivity, I think it was around 13 bps per 100 bps in [indiscernible], right? I just wanted to confirm if this has changed or you have adjusted slightly the sensitivity.

For the second question, our sensitivity for the whole loan book is around 13 basis points or for the whole asset book. For the loans, it's around 15, as you mentioned. But the total NIM is around 13 per 100. And as I mentioned, it takes a full year to absorb the change or to reflect it in the full NIM, yearly NIM. If you do the calculation of quarterly or monthly, it will be reflected faster. In terms of the sensitivity about the interchange rate, we have done some scenarios where -- but obviously, it's reduced the income in terms of the one that we present as transactional, but we -- it's not material for Regional. That's as much as we can say because it will be a speculation in terms of -- because we see an upside in the acquiring business if we interpret correctly the proposal, but then we prefer to wait and see the final proposal for both sides. It has an impact -- negative impact, a reduction of fees in the issuing business, but it has a potential benefit in the acquiring business, not totally offsets one to the other, but it could partially offset the impact.