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 2026 Earnings Conference Call. We are joined today by Manuel Rivero Zambrano, Chief Executive Officer of Regional; Enrique Navarro Ramírez, Chief Financial Officer; and Alejandro [ Luerra ], Head of Strategy and 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.

Good morning, everyone. Today, we are presenting Regional's results for the second quarter of 2026, which reflect disciplined execution and continued focus on operating performance in a more demanding environment. Mexico's economic performance has been challenging. GDP growth has slowed and trade policy uncertainty continues to weigh in on business confidence and translates into more cautious credit demand, particularly among wholesale clients. Against this environment, our priorities have not changed. We continue to expand selectively in key regions, maintain straight cost control and underwriting discipline. Net income for the quarter reached MXN 1,526 million, 7% below the same quarter last year. Return on average equity stood at 17.7% on a last 12-month basis. While the lower rate environment has compressed profitability remains at solid levels. On margins, as we anticipated in our provisions call, the first quarter marked the low point. But our Net Interest Margins, quarterly NIM recovered 7 basis points to 5.8%, driven by repricing of our liabilities and supported by the protection provided by our fixed rate loan portfolio and our investment security portfolio acting as a natural hedges. While gross line has faced pressure, our adjusted net of provisions remained solid. On growth, total loans grew 11% year-on-year, with particularly strong momentum in Mexico City, where the wholesale portfolio expanded 28%. This was driven by our new sustainable growth pace in Mexico City, expanding our branch network and enhancing our corporate team alongside some large corporate operations unique to the capital. We expect this healthy growth in regions to continue at a rate of 10% to 15% annually. Core deposits grew 16% and our CASA ratio stood at 45.2%, 370 basis points above the previous quarter supported by 11% a year-on-year expansion in demand deposits. Regarding funding, the wholesale time deposits grew, we are actively shifting our focus toward transactional banking and payroll services to attract lower cost demand deposits. We have launched a comprehensive funding offensive across multiple initiatives directly targeting cost of funds compression. Asset quality remains resilient during the quarter. Our consolidated NPL ratio stood at 1.4%, a 16 basis points improvement year-on-year, while the cost of risk remained stable at 1.0, both metrics reflecting the discipline on our underwriting standards. We continue to monitor credit trends closely, particularly given the current macro environment. Then we had also addressed the increase in commercial stage 2 loans, which reflect MXN 2,791 million this quarter. This reflects the migration of a small number of wholesale clients. We are working closely with each of these clients. We do not expect significant impact on our NPL ratio from these migrations. To put this figure in perspective, total stage loans represent [ 1.8x ] of our total portfolio, and our coverage stands at 1.4x the nonperforming book. Our diversification efforts to go in to show progress, net fees grew 9% year-on-year, led cards and management fees 15%, which now represent over half of our net fee income. Insurance income grew 7% year-on-year, moderating from our exceptionally strong first quarter. in total nonfinancial income grew 3% year-on-year, continuing our progress toward a more diversified revenue base. Operating expense grew 7% year-on-year driven primarily by technology investments and geographic expansion, both delivery decisions that support our medium-term growth agenda. This resulted in an efficiency of MXN 43.5 million a 260 basis points increase year-on-year. As investment cycle matures, we expect great growth -- expense growth to continue to moderate and efficiency to improve progressively. As AI continues developing better tools for the we're constantly adjusting our development force and now adjusting 15% of this quarter without compromising the output. And finally, our capital, Banco Regional capital ratio stood at 15.2% as of May 2026, 83 basis points higher year-on-year, a solid position that supports our growth plans. On capital ratios currently include our excess buffer. At our October Board meeting, we expect to propose a temporary increase in our dividend PL ratio above 50%, not as a permanent change, but as an adjusting to reflect this excess capitalization. As loan growth accelerates in the coming quarters, this excess will be absorbed actually and the payout ratio should normalize. As of Banregio, the wholesale loan portfolio grew 12% year-on-year with particularly performance in Mexico City up 28%, Jalisco 14%, and we have seen some moderation in originating demand and business adopt a more cautious stance. At trend, we believe sector-wide is consistent with macro environment. On the funding side, wholesale deposits increased 70% year-on-year, reflecting to a strong [ indiginal ] client activity and demand deposits grew 70%. And wholesale and asset quality remains excellent. The NPL ratio stood at 1.1% and 27 basis points better than a year ago with a cost of risk stable at 0.4%. Retail Banking continues to show healthy momentum. Preferred banking deposit grew 13% year-on-year, reflecting solid client engagement and trust. And our branch network continues to expand in a disciplined manner, focused on high potential locations. On the lending side, consumers grew 14% year-on-year and mortgages 9%, a clear indicator of client acquisition and deepening relationships. Asset quality in retail remained solid overall. Auto at 0.7% consumers at 2.8%, improving 10 basis points and a mortgage at 1.1% in our SME and NPL ratio improved 3% this quarter. As of Hey Banco continues to advance the strategic focus on profitability over pure growth, prioritizing higher-quality customers over volume and discipline delivering results. Hey has found is it put by shifting our focus on SME and other loans. We have achieved a NIM total loans of MXN 10.7 million, up 225 basis points year-on-year. Net income for this quarter reached MXN 70 million, up 241 year-on-year basis. The financial margin reached MXN 287 million, up 25% year-on-year. NIM reached 2.7 -- excuse me, 10.7%, 225 basis points higher than a year ago, reflecting improved asset yields and a more profitable customer mix. This efficiency ratio stood at 58.7% and a [indiscernible] basis of improvement on 838 basis points year-on-year, and automation and digital capabilities continue to scale, or [indiscernible] active individual customer base stands at approximately 438,000, down 14% year-on-year, consistent with our strategy of operating quality over sale and shifting our growth of clients to SMEs. Our priority is now firmly on credit growth, particularly SME lending, which is where we are strong and competitive advantage. SMEs are at least contested segment in digital banking, and we have a natural edge giving our background and infrastructure, we're focusing laboratory service, and we are the only digital bank offering the full array of financial products, both for individuals and salt proprietors and SMEs, competing for lower margin, higher operating cost individual customers with intense competition does not make sense when SMEs are far more attractive for our platform. We have sufficient funding to support this credit expansion and our road map is clear, scale the lending book, not the user account. This commitment to financial strength has been recognized by Moody's, which reflect the assigned Hey Banco on A+ rating. Guidance for 2026, reflect the delivery of investment cycle and more challenging macro environment, both of which had we anticipate, which gives us companies going into the rest of 2026 is not headline growth rate but underlying quality of the franchise. Asset quality remains resilient. Hey Banco's reaching profit is continuing the profitabilities. And our core business continues to generate consistent growth. Before moving to Q&A, let me the guidance for 2026, we are updating three metrics: NIM,, net income and ROE and keeping the rest of our guidance unchanged. On NIM, as I mentioned, this actual recovery is unfolding as we anticipated by the current pace of rate cost, its magnitude will not be sufficient to bring the full year margin back to our original range. We are, therefore, revising our NIM guidance to 5.6% to 6% from 6% to 6.3%. As a consequence, we now expect making to growth of minus 5% to 0% for the year from 5% to 10% previously and the ROE of 16.5% to 17.5% from 18% to 19%, still having levels of profitability for this environment. Everything else remains unchanged. We continue to expand loan growth and core deposit growth from 5 to 10 NPL ratio, 1.8% and the cost of rates between 0.8% and 1%, reletting our confidence in asset quality, and we maintain our efficiency guidance around 42%. We believe this updated guidance provides a real estate foundation for the [ Reno2026 ] and reflect the same principle that has always guided consistent execution and long-term value creation. Thank you very much. We appreciate any questions.

[Operator Instructions] Our first question comes from Ricardo Buchpiguel from BTG Pactual.

We saw the stronger commercial loan growth during this quarter. And from where we saw it was largely driven from the financial sector, right, financial institutions. So I have two questions on this. First was the pickup somewhat opportunistic? Or does it reflect a broader strategy to gain share in the segment, perhaps competition is not as stuff there or any other remarks in that sense? And second, was this change in mix, the main factor harming the NIM recovery for Q2 and let you guys should reduce the guidance for NIM in 2026? Or there were other factors at play such as increase in repos issue securities, which made the bank a little more liquid?

The financial sector are -- there is not a change in terms of customers, as we have mentioned in reviews. Conference calls, which are some of the larger firms or leasing companies in Mexico, mainly from other banks and also from the automakers. Just they required more loans or the demand for loans this quarter was higher, but are the same customers, we are not changing the strategy. And we are not going to a new segment, a different type of financial entities. Partially is linked in the second question, if you see by the breakdown, the government and financial grew faster, but also the wholesale grew. This has an impact on the NIM, but because they are launched with our rate active rate, but also the mix of funding, when -- if you saw May, you could notice an improvement on the checking accounts or demand deposit accounts on June, it was not enough to average the whole quarter. That's why we expect to improve -- if we maintain that new mix that you see as the final balance in June, it will improve the margin for the next quarters, and we will be able to reduce repos and what we call the our more expensive type of term deposits, time deposits that are mainly from private banking that will be part. And we increased the liberate and deliver a way the issuance of goes well debt for the leasing company as we decided to have more liquidity on the leasing company available for growth, even though it's not growing the leasing yet. We are -- as Manuel mentioned, focusing heavily on growth leasing and all the fixed rate types of lending.

Our next question comes from Arthur Chuki from Bradesco BBI.

And have also two questions on loan growth. So can you give us some color on the decision to maintain your guidance range for the year, right? Because this quarter, you had above your guidance range 11%. And if you also comment, how are you seeing the pipeline and client demand, if you could give us a breakdown for each portfolio. And the second question would be regarding the 2027 expectations. If you could give us some color regarding the USMCA pipeline, if you should expect an acceleration for next year? What is the base case here?

Okay. We decided to maintain the guidance in 5% to 10%, mainly because we expect to be on close to 0 in the fourth quarter is challenging in terms of comparison as a base. Also, as I mentioned and we mentioned in the first quarter, and you can see on government, we usually do not lend to government. We took that was opportunistic on December and January this year, [ MXN 3,000 million ] that could happen again, but it's not something that we are pursuing. It was an invitation from the government to all the banks, not exclusively to Banregio, it's a syndicated loan where more than 10 banks participate. Then aside the MXN 3,000 million, everything else is organic. And as you can see on the wholesale loan book 7%, that's the figure that if it grows about 7% to 10% or 11% without government, maybe we could reach above 10%. But right now, we feel comfortable maintaining the guidance, we don't see any reason to increase 1% or 2% for just a probability to achieve it. We see very feasible the 9% or 10%. We don't see -- we are not sure about 11% or 12%. For 2027, we still don't have a formal guidance, an official guidance. But as the -- after the USA elections and it looks like the new normal is that will be reviewing the USMCA every year, we expect to have a higher demand on loans not only a specific sector. As you know, we are participating a lot in industrial parks and industrial warehouses then we expect the demand to increase on the second half of the year, but more importantly, next year, up to now, but we hope there is no new surprises or new unexpected events during the next 6 months.

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

My first question is on your new guidance. Just wondering what could be the key drivers to expect a stronger second half? And also considering the annual revisions of the USMCA and the softer economic backdrop, how should we think about the earnings growth next year? I know it's too early to have a guidance, but this year, the earnings have been affected because of NIM pressure on the lower rates it seems that the rates are already on hold for the next year. So just wondering if we could be more constructive in earnings next year? That's my first question. And my second question is on Hey Banco. We saw we delivered again a net profit of MXN 70 million although it is decelerating from what we saw in the first quarter. So also just wanted to see what could be the drivers for hay in the second half, if there is some seasonality to think it could be a little bit better from what we saw in the first half. And also, if you have like some targets of how should we think of contributing to Regional in the next years. Today, it's around 5%. So just wondering if there's a target it could represent a little bit more in the next years.

Well, the drivers right now for the improvement on the second half is the growth that we already have on had in loans that will be maintained and even will continue growing the loan book for the next 6 months. We are making a lot of efforts within the small and medium where who are more profitable because they have a higher active rate. We still [indiscernible] one, as we have already missed this quarter, we feel we don't have enough information to guide something about MXN 27 million earnings per share gains or total net profit. If everything is the same or as they say [Foreign Language] should be very in line with the growth of the loans. Most of the repricing has already happened both in assets and liabilities. And even with some new customers that we have been changing the rates the second half doesn't reflect any improvement as well in the first part of the question. If we maintain that for the whole 2027 will be between 5% and 6% improvement, also considering that will be a full year with this effective tax rate that we have due to the IPAB nondeductibility in the taxes. That's why maybe it's not the 10% or 8%, we expect a similar year, 5% to 10% growth in loans, and that will be similar on net income. There are not and other changes, the increase on the technology expenses year-on-year will not grow, even it's being reduced very slowly, but is improving. What was the second -- Hey Banco in the first 2 quarters, there are some issues -- or items, no issues because there are no issues, items that are still adjustments from the spin-off or the customer. Taking that out, we expect also a second quarter, third quarter and fourth quarter, more similar to the first one, around MXN 80 million per quarter. And then is still the same that we have said from the beginning, 5% to 10% of the contribution. This year could be because it is a smaller than expected the total profit around 5% or 4-point something for this year. For the next year, the goal is still 5 % to 10%.

Perfect. Very helpful, Enrique. And just if I can ask a last question. What will be the main key risks that you are perceiving for the second half of next year?

The main what?

The main risk.

We don't have visibility for second half of the next year. We don't have elections. We don't have -- well, we have midterm elections, but we don't see any risk in either way of the result of the midterm elections. We don't see an improvement, but also, we don't see any deterioration on the USMCA negotiations then we don't see any specific different risks than the ones we already have.

Our next question comes from Brian Flores with Citi.

I have two. The first one is that the -- obviously, the guidance you just presented points to an efficiency ratio around 42%, yet I would say the run rate for the first half of the year is higher. So I just wanted to check with you what gives you the confidence that it can improve from here given your revision downwards in terms of NIM? And also what you're seeing in the other segments. I just wanted to check with you as to why are you, I would say, a bit of the mystic on the improvements on the efficiency side. And then I just wanted another second question, if I may. There is a bit more qualitative. We have had a couple of downward revisions in terms of guidance, right, in the last quarters. So if we do oppose more than -- I just wanted to ask you, in your view, what has been the key drivers here? Is it -- was it the NIM? Is it that conditions in terms of growth were than you were expecting? Is it, I don't know, fees? Just -- I mean, looking backwards, what would you say was the main driver of this downward revisions?

I will start with the second one. Last year was directly that in our initial budget and guidance. we didn't consider as many reductions on the rate has happened last year in '25. Then it was -- we were expecting 100 basis points and were more than 200 basis points. And as you know, we are asset sensitive to the rate and that drove the change in guidance. This year was different. We consider some on the other income as recurrent and were not recurrent. And in terms of NIM, that is the main driver of the change the mix, the fierce quarter specifically was pretty bad in checking accounts with 0 cost it not only didn't grow, it was reduced, and we were not expecting the mix. And also, as I mentioned in the first quarter conference call, we have some impacts that we didn't put in place on the NIM with the spin-off as Hey Banco was migrated MXN 14,000 million, that was lost in Banregio liquidity levels. Banregio has to increase the funding to many or the risk expected level we have around 115% liquidity index, the CCL then that affected the whole mix. We are adjusting as we are evolving through the year to this issues. We don't see a negative mix on funding, and we don't see any further reduction on the rate that will impact also the asset rates. That's why we are more confident and we are -- that's also why we didn't guide within the 0% in the middle. We guided below that to ensure that we were considering these two main items. Efficiency. Well, maybe we're being back, and I want to clarify, we say around [ 42 -- it's 42 point something, 0.9% ]. We feel we are on guidance. Maybe that's not clear. We expect improvement on the year-to-year comparison. As we mentioned, we did during last quarter of the last year, some reductions, but it was the cost of the layoffs, the severance payments. This year, we don't see that level of -- that amount in the whole bank. Manuel mentioned for some small areas or some areas, not small, but some areas. But that's one part. And the other part is we are finishing the number of branches. We expect to open 14 new branches on this year. We already opened seven. We are expecting seven more for the second half. But last year, we opened 15 and were more the increase on expenses were higher. We didn't expect to reduce expenses, but we expect to reduce a lot the growth of expenses. As you can see right now, it's 7% or 9% depends what you see or which lines but it's already below -- it's already one single digit, and we expect that to be maintained. Our main fixed cost is branches and everything that is included their depreciation trends and people. And the other one fix is IT investment that is being amortized.

No, super clear, Enrique. If I may, just a final follow-up. Given what you replied to Ernesto on the potential pace of growth in earnings. I think maybe in previous calls, we had the notion that the sustainable ROE were to be anywhere between 18%, 19%, right, high teens. I just wanted to check with you if given that you're expecting, I would say, okay, decent growth, but not stellar, not double digit or not way above double-digit that if you think maybe for '26, '27, the ROE level should be closer to your actual guidance, right, which is around 17%?

Yes. between 17% and 18% if you consider only these 2 years, also, as Manuel mentioned at the beginning, maybe -- and it's just maybe we could pay a higher dividend that, as you know, we have only CET1 capital or basic equity capital then if we pay a higher dividend than the one that is already in place expected of 25% payout of the last year. then that will help to have a better ROE for the next year.

Our next question comes from Neha Agarwala from HSBC.

Can we touch a bit upon asset quality and the cost of risk which has been slightly elevated? You'd probably still come within range, but it seems like more towards the higher end of range, the guidance range for cost of risk, does that sound reasonable? And how are you seeing the asset quality trends evolve? Any pressure that you might be noticing in any particular sector?

Yes. In terms of the cost of risk, we decided to maintain the guidance even though we have been for 4 quarters just below or a little bit above the higher end of the cost of risk. This is still very sensible to this large loans that, for example, the ones that this quarter moved from Stage 1 to Stage 2, they are already controlled it's maybe even a lack of discipline to follow some of these customers as they are very large even a couple of days of delay on the payment having impacts. And we don't see any deterioration there from Stage 2 to Stage 3, specifically in these large customers on the wholesale segment. That's the main reason we -- if we take out these large customers out of the equation, even though are part of our portfolio, we see more close to 2.9 our recurrent cost of risk. And we don't see any deterioration in the other portfolios. Sometimes you can see the quarterly some increases like SMEs this quarter increases 20 basis points, but then it reduced, and we don't see any significant deterioration. We believe that we can maintain the 0.9% that is our goal and to have some range for one. In terms of risk on any sector, not the our largest loans, and that's the reason that usually, when we talk about the specific cases, usually, they are on the real estate sector on construction. But because it's real estate, they have good collaterals and we have a very good relationship with these large customers, then we don't see as a generalized risk. It just happens that are the largest ones on our loan book than any issue with these customers on the collection or any liquidity problem that they have temporarily. It affects but then when the loan is sold or the customer pays 2 or 3 months that is behind then the provisions go back. If you remember, I remember December 24 that we recovered two very large loans one via collection and the other one -- it was 25, sorry, one via collection and the other one via foreclose and then we have three of provisions.