Banco Santander México, S.A., Institución de Banca Múltiple, Grupo Financiero Santander México (NYSE:BSMX) Q3 2022 Earnings Conference Call October 28, 2022 10:00 AM ET
Company Participants
Hector Chavez – Managing Director and Head of Investor Relations
Felipe García – Chief Executive Officer
Didier Mena – Vice President of Administration and Finance
Conference Call Participants
Jason Mollin – Scotiabank
Nicolas Riva – Bank of America Merrill Lynch
Carlos Gomez-Lopez – HSBC
Operator
Good day, everyone, and welcome to Banco Santander Mexico’s Third Quarter 2022 Earnings Conference Call. Today’s call is being recorded. Following the speakers’ prepared remarks, there will be a question-and-answer session.
I’d now like to turn the conference over to Mr. Hector Chavez, Managing Director and Head of Investor Relations, who will make some opening remarks and introduce today’s other speakers. Please go ahead.
Hector Chavez
Thank you, operator. Good day, and welcome to our third quarter 2022 earnings conference call. We appreciate everyone’s participation today. By now, you should have access to our earnings press release and the presentation for today’s call, both of which were distributed yesterday after the market closed and can be found on our Investor Relations website.
Presenting on our call today will be Felipe García, CEO of Banco Santander Mexico; and Didier Mena, Vice President of Administration and Finance.
If you are reviewing our third quarter results, we would like to remind you – to remind the market that as previously announced, our parent company, Grupo Santander intends to increase its ownership in our bank to a 100% from 96.2%. In other words, it will acquire the remaining 3.8% of common stock held by minority shareholders with the intention to delete the shares from both the Mexican and the New York Stock Exchanges.
As always, we also remind you that certain statements made during the course of the discussion may constitute forward-looking statements, which are based on management’s current expectations and beliefs and are subject to a number of risks and uncertainties, including COVID-19 pandemic that could cause actual results to materially differ, including factors that could be beyond the Company’s control.
For the explanation of these risks, please refer to our filings with the SEC and the Mexican Stock Exchange. Felipe, please go ahead.
Felipe García
Thank you, Hector, and good morning, everyone, and good afternoon to those of you participating from Europe. I’m very pleased to share with you that the third quarter was our best quarter ever in terms of net income. In turn, this drove our highest ROE since the third quarter of 2013. These strong results were possible thanks to the solid performances of our core businesses, and to maintaining excellent asset quality throughout the loan portfolio.
Total loans grew 12% year-on-year, with strong performance across our entire loan book. In individual loans, we had a significant increase compared to last year, mainly due to double-digit growth in credit cards, payroll, auto loans and mortgages. It is worth noting that August was our 29th consecutive month of market share gains in individual loans.
In deposits, we remain almost flat year-on-year, as we continue prioritizing demand deposits from individuals and forgoing some relatively expensive corporate deposits. Also, given the higher rate environment, time deposits continue to increase for both individuals and commercial clients.
Regarding asset quality, our improved NPL ratio and cost of risk reflect positive performance related to certain clients that enabled us to release some provisions that we booked during the pandemic. They also reflect healthy asset quality across our entire loan book. Thus, at the end of the quarter, our NPL ratio stood at 2% and cost of risk at 1.5%.
In terms of profitability, we posted a 20% ROE that, as I said, was our highest ROE since the third quarter of 2013. This was a result of the strategies we have implemented to support loan demand from our clients, mainly in the individual portfolio to strong asset quality as well as normalizing capital levels. Also, during the quarter, we continue to maintain a strong balance sheet as reflected in our solid capital ratio and liquidity position.
The charts on Slide 4 show a still complex environment for Mexico’s economy. While GDP expectations for 2022 are slightly better, the forecast for 2023 has been declining due to expectations of rising uncertainty and slowing investments. This is in line with a slowdown expected in LATAM for 2023 where some countries such as Brazil, Chile and Puerto Rico are starting to waken ahead of us.
Regarding inflation, we expected to remain temporarily high above Mexico’s target range, reaching 8.8% by year-end. Consequently, there has been a tightening of monetary policy. Given current price conditions, the market expects additional rate hikes in 2022, reaching 10.5% by year-end.
According to the Mexican Institute of Social Security, more than 789,000 new jobs were created between January and September of this year, representing the third highest increase on record and bringing total jobs to 21,409,000, of which 87% are permanent. However, and this is important to highlight, most of these jobs are of low quality.
Other macro indicators have also shown improved performance. Private consumption is now 20% higher than before the pandemic, while industrial activity remains [perfectly] at the same pre-pandemic levels. By contrast, investments have been lagging due to lower confidence levels in the business sector. Although the operating environment is still marked by challenges and uncertainty, we are well positioned to continue contributing to Mexico’s economic growth by supporting our customers’ financial needs.
On Slide 5, you can see that system loan volumes in August maintained their solid growth trend, increasing low double-digits year-over-year. The highest growth rate since June of 2018. This good performance was mainly driven by continued growth in consumer loans, which increased almost 15% as well as improved demand in commercial loans. System deposits continue their strong rebound, growing more than 10% year-on-year with demand deposits increasing 8%.
Now please turn to Slide 6, where I would like to spend some time to provide an update on two key growth initiatives as well as a new one that we have also been focusing on. I’ll start by pointing out that we are revolutionizing the Mexican market with Cash Back Baby, our aggressive cash back program launched during September. To a very simple scheme, customers using our LikeU credit cards and debit cards will start getting back up to 15,000 pesos a year that’s roughly $760.
It is worth highlighting that more than 716,000 LikeU credit card users and almost 5 million payroll customers were automatically enrolled in our new Cash Back Baby program as owners of these cards are already enjoying the program’s benefits. This is a truly unique offering. No bank or fintech has anything similar that is focused on promoting the use of card payment methods and reducing cash use while enhancing the customer experience.
12 months ago, we launched LikeU, since [indiscernible] products launch, we have issued almost 716,000 LikeU cards exceeding our own expectations. Currently, almost 90% of LikeU card holders have activated their card. So far, we are pleased with the results and the market’s strong acceptance of our unique card that mainly targets young people. 45% of LikeU card holders are new generations between 18 and 30 years old compared with 21% of our other credit cards.
Also, I would like to point out that LikeU credit card can be a 100% digitally the client wants and there is also the physical version for those who prefer as we designed this credit card for everyone, but everyone can make it their own. Given the product’s strong success, we will soon launch a campaign to tap the open market with the aim of maintaining solid growth in this business segment and to offer this product to many more Mexicans.
In auto loans, we continue to rapidly expand this business, gaining 507 basis points of market share during the last 12 months with 15% of the market are auto loan business is in line with our market share in loans to individuals, consolidating our position as a third player in the market. We are very proud of the significant accomplishment and remain determined to rank up soon. In addition to our alliances with leading automakers in Mexico, our growth and gaining market share were facilitated by our Super Auto Santander platform, which integrates financing and insurance offering in a single place, a significant convenience for car buyers in Mexico.
Digitalization of our products and services remains a top priority, which is why we continue investing in technology to further transform our bank and get even closer to our clients. We also want to better understand our client’s behavior and rely more on data analytics to offer them more tailored solutions as well as maintain the optimal service model.
To that end, our digital evolution includes collaborating with fintechs and other tech companies to introduce faster and more convenient digital tools and functionalities. The strategy is well aligned with global priorities and groups commitment to invest more in Mexico despite delisting. We are confident that with the support of our new global CEO and his deep knowledge of the Mexican market will allow us to effectively continue expanding our customer-focused strategy and help us further consolidate Mexico’s participation as a strategic business of Grupo Santander. We feel very proud of the new global CEO is a Mexican, who led Banco Santander for many years and will now lead the global bank.
I will now turn to Didier, who will continue with a deeper discussion of the results this quarter. Didier, please go ahead.
Didier Mena
Thank you, Felipe, and thank you, everyone for joining us today.
Turning to Slide 7. Our total loans increased over 12% year-on-year above the systems growth rate and posting a sequential increase of more than 2%, reflecting our solid performance in individual loans. On the commercial front, loan demand is also improving among middle market companies and government and financial entities, increasing by low-double digits together with loans to corporate growing in the high-single digits year-on-year. As a result, we continue seeing an upturn in higher yielding segments, which coupled with higher interest rate should boost our margin expansion while we maintain sound and sustainable asset quality.
On Slide 8, you can see that individual loans grew close to 15% year-on-year, our highest growth level since March, 2016. Our mortgage portfolio continues expanding at a solid pace of more than 10% year-on-year and 13%, organically. Over the years, we have distinguished ourselves with an innovative and competitive offering in mortgages. Also, we have made substantial progress in the digitalization of processes, improving the customer experience and creating another point of differentiation in the market.
Within consumer products, auto loans continue showing strong growth. Today, the balance of our auto business is close to MXN 24 billion. In addition, with the aim of expanding the business further, we are now very active in the used cars segment of the market. As of today, used car loans represent 10% of our total auto loan portfolio. Moreover, we are targeting at 25% level in the medium to long-term. Similarly, payroll loans also delivered solid performance during the quarter, increasing close to 18% year-on-year of personal loans increased almost 2%.
In this business, we are recovering the monthly rhythms through all the strategies we are implementing, including improving our offer, processes and benefits programs among others. At the same time, credit cards are accelerating with a solid 20% year-on-year increase or 5% sequentially. This encouraging performance was mostly driven by our flagship credit card LikeU. Currently, 11% of total billing comes from this relatively new credit card.
For our new payment and credit value offerings, we are confident that we will acquire a significant number of new LikeU users within our customer base. Together with customers participating in our new recurring program, Cash Back Baby, which Felipe explained earlier, will boost our loyalty program by offering clients complimentary benefits. Launching our LikeU credit card in the open market in the coming months will also enable us to keep growing steadily and organically in this business line and we will do so without compromising prudent risk management in any way.
Turning to Slide 9. Solid expansion of loyal and digital customers continues with year-on-year increases of 10% each. The ratio of loyal customers also continues to increase now representing 43% effective clients compared with 41% in the same quarter of last year. The growing loyal customers reflects consistent improvements across a large number of our products and services as we aim to be the best option for our clients. During the quarter, product sales via digital channels accounted for 61% of total sales, a substantial increase compared to 53% a year-ago.
Digital monetary transactions also maintained an upward trend, reaching 48% of our total with mobile transactions accounting for 98% of total digital transactions. In addition, mobile clients grew nearly 11% over the past year to over $5.5 million, thanks to promotional campaigns and incentives we offer through digital channels. As part of the bank’s digital transformation, going forward, we will focus on enhancing customer experience.
As shown on Slide 10, commercial loans increased almost 9% year-on-year, driven by a double-digit increase in loans to mid-market businesses and to grow and maintain financial entities and by high single-digit growth in loans to corporate. Note that these types of businesses are being more active with loan demand versus last year. We are maintaining the same pace of these years to previous quarters given the complex economic environment we are facing.
Conversely, SME loans are still being affected by weak economic conditions that are resulting in low credit demand. This category of loans decreased 7.6% year-on-year and 3.1% on a sequential basis similar to prior quarter’s sequential contraction.
Moving on to funding on Slide 11. Total deposits were practically flat year-on-year and 3.3% lower sequentially. Like the previous quarter, deposits were driven by term deposits increasing almost 20% year-on-year on the back of a higher interest rate environment. Demand deposits decreased 7% year-on-year, mainly to a 13.8% drop in corporate deposits, as we continue foregoing certain expensive corporate deposits in order to improve the overall cost of our deposits.
Demand deposits from individuals increased 6% year-on-year, supported by our promotional campaigns. As a result, we have been able to show greater resilience to central bank rate hike, increasing our cost of deposits by 70 basis points year-over-year, but the reference rate had increased 450 basis points as of September.
Turning to Slide 12. We continue with a very strong capital and liquidity positions. Our liquidity coverage ratio stands at 181.1%, representing a substantial buffer and still far above the regulatory threshold. Our core equity Tier 1 and capitalization ratios as of September are 13.46% and 18.90%, respectively, significantly above the minimum requirement established for systemically important financial institutions like ours.
It is worth recalling that on June 28 and July 28, we made dividend payments of roughly MXN 9 billion and MXN 8.8 billion, respectively. With these payments, we have exhausted our capacity to pay out dividends, perfect layers recommendations this year. We also maintained a sound funding position at the end of the quarter with our net loans to deposit ratio of 102.3%.
As you can see on the Slide 13, net interest income had a solid double-digit increase of 17% year-on-year and more than 6% quarter-on-quarter, mainly driven by higher retail volumes in loans and deposits, as well as higher interest rates. During the quarter, Banxico increased the reference rate by 150 basis points to 9.25%. As a result, our NIM expanded 30 basis points year-on-year to 4.94% for the quarter.
Please turn to Slide 14. Net commissions and fees had a strong increase of 18.5% year-on-year. The solid performance was mainly driven by 18.5% increase in insurance fees and credit cards, which increased 18% year-on-year, mainly due to the excellent performance of our LikeU credit card that we’ve been discussing. Besides financial advisory services had a one-off increase of almost 57% year-on-year.
Going forward, we expect to sustain good performance in credit card fees as our ambitions for the LikeU credit card are to continue increasing average monthly billings while achieving a better mix of fee income.
Turning to Slide 15. Gross operating income increased more than 14% year-on-year. This growth was driven by solid performance in net interest income supported by our individual loans and deposits and by higher interest rate. The high double-digit increases in credit card and insurance fees were also strong contributors as discussed earlier.
Moving on to asset quality on Slide 16. Our NPL ratio improved 55 basis points sequentially to 2% benefiting from the reclassification of a specific corporate client that was assessed as Stage 3 during the pandemic, due to an imminent risk of default, but subsequently upgraded to Stage 1. Healthy trend in the rest of the loan portfolio also improves our NPL ratio.
Excluding the one-off benefit of this specific corporate client, our NPL ratio would be 2.44%, still showing an improvement compared to the previous quarter. Provisions in the quarter declined almost 73% sequentially and 82% year-on-year, mainly driven by the release of provisions related to certain corporate clients together with a positive performance in our retail portfolio.
With this, the cost of risk stood at 1.54%, a 121 basis points year-on-year decrease, and a 52 basis points sequential decrease. Excluding the release of provisions, cost of risk have been 2.03%, still showing a decrease compared to the previous quarter. Going forward, we expect provisions to normalize as we are raising our risk levels in regard to credit cards and consumer loans.
Turning to costs on Slide 17. Administrative and promotional expenses decreased 3% year-on-year or increased 6% when excluding the IPAB reclassification. On a sequential basis expenses increased 2.7%, mainly driven by administrative expenses as higher inflation impacted our supply costs. Expenses also rose due to salary increases in July and to depreciation and amortization costs related to our investment plan.
Thanks to our solid revenue growth and strict cost control. We managed to improve our efficiency ratio by 469 basis points year-over-year to 46.3% at the end of the quarter. It is noteworthy that we accomplished this despite inflation pressures. We feel confident about both the dynamics of the business and our disciplined cost control. However, we expect cost to increase around 8% to 9% by year-end, in line with inflation as we continue investing in our digital capabilities and with inflation pressure expected to continue.
Turning to profitability on Slide 18. Net income increased almost 70% year-on-year to MXN 8.2 billion, mainly due to the solid increase in net interest income and fees along with lower provisions. Profit before taxes rose 88% year-on-year for the quarter and 26% sequentially, reflecting the strong performance of our core business.
Return on average equity was slightly above 20%. 818 basis points higher than a year-ago level and the highest since 2013 as Felipe noted at the beginning of his remarks. If we exclude the one-off benefit from the provisions release, ROE would have been 13.6%, still 159 basis points higher than a year-ago level. On the other hand, our effective tax rate was 27.5%, 819 basis points higher than last year’s period. We anticipate the effective tax rate to be between 25% and 26% by year-end.
Before the Q&A session, let me share with you some brief closing thoughts and a couple of new adjustments to our full-year performance outlook. Given the strategy that we are following, and with the aim of prioritizing individual demand deposits and letting go some expensive corporate deposits, we are adjusting expected growth in total deposits to a range of 0% to 2%. In terms of asset quality concerning the excellent results we have achieved to date, we are adjusting the cost of risk to below 2%, which is a very positive sign considering the challenging environment we have been operating in during this year as well as our greater risk appetite in certain lines of the business.
On expenses, due to persistently high inflation, we now expect expenses to increase between 8% and 9% as I noted earlier. As for the tax rate, again, we are expecting it to lie between 25% and 26%, considering the high inflation rate expected for the remainder of 2022. Lastly, we now forecast their income to grow north of 40%, taking all these adjustments into account and consistent with our efforts that have been consistently delivering strong results.
In summary, we continue successfully advancing and working on our strategic priorities while implementing new growth initiatives such as Cash Back Baby. Although we have made good progress with operational transformation, simplifying processes and operations, we are nevertheless mindful that we must step up the pace in working to our goal of being a more customer-focused bank.
This concludes our prepared remarks. We are now ready to take your questions. Operator, please open the call for questions.
Question-and-Answer Session
Operator
Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] First question comes from Jason Mollin with Scotiabank. Please go ahead.
Jason Mollin
Hi. Congrats on the strong profitability in the quarter. Thank you, Felipe and Didier for the presentation, opportunity to ask the question. My question is on the competitive landscape. How do you view the entrance of fully digital banks and specifically if you can provide an update on Santander’s plan to launch open bank in Mexico, and maybe kind of in the context of competition as a follow-up on the deposit base evolution or the mix really because your demand deposits fell 7% and term deposits were up almost 20%, and that that definitely contrasts to some of your largest competitors that showed double-digit growth in demand deposits and only low single-digit growth in term deposits. Thank you.
Didier Mena
Hi, Jason. Very, very nice to hear you. Regarding the competitive landscape on the digital banks, I think that given the dynamics in the Mexican market that provides, in my opinion, scale and the profitability. I think that more – we should be expecting more players to come to the Mexican market. And not only let’s say new players, but also incumbents having an option to provide a fully digital bank, as you know, a few weeks ago, but not sure. The news that they’ve been approved with a banking license to operate [indiscernible] fully digital bank. I think it’s – taking advantage of a higher digital adoption as a consequence of the pandemic and also taking advantage of adjunct population.
For instance, as Felipe mentioned, close to 45% of our new clients in LikeU credit card are within the 18 to 30 years age, okay. And I think that that segment of the population is very open and keen to interact with the bank on a fully digital basis, okay. So in my opinion, there’s strong demand for the service. Also, not only in existing banking clients, but also there is a significant unbanked population in Mexico that with this possibilities of interacting with a bank on a digital basis, I’m sure that services and products that in the past were not able to be offered on a – due to high cost can now be offered to this unbanked population.
Regarding our plans to launch fully digital bank has taken longer than expected. We have already submitted the application to regulators for the approval of full banking license on a digital basis, and we’re expecting to receive, if regulators do not provide additional comments, the approval during the first quarter of next year and typically you have six to nine months in order to start operations once you get the approval of the banking commission. So we are aiming on having fully operational open bank in Mexico at the end of next year.
Regarding your question on the evolution on the deposit fee, I would say, a couple of things. First, the market is growing faster than – and that’s for sure. And we recognized the fact that we’ve been executing a strategy to reduce our cost of funds, part of it has to do with letting go certain high cost deposits in demand deposit, corporate deposit, I would say in demand deposit. So you have to separate both effect, we’re growing the single digits on demand deposits from individuals, but we are more sensitive to interest rates, our reports are more sensitive to interest rates than our competitors, given the exposure that we have to corporate deposits.
Now we recognize as well that, at least the two of our competitors are shown a very positive performance in terms of the demand deposits. We think that this is the case, given that they’re slightly more advanced than us in terms of their app, how user friendly it is, and also that they currently have a more simple interaction with their clients. So we have identified that and we have actions in order to reduce the gaps that we currently cast, that our customers tell us and clients from other banks tell us about how easy or how simple it’s to interact with those two banks. So we expect Jason, that as we have improved our deposit mix over the last few years with the actions that we’re going to take over the next few quarters, we will reduce the gap and therefore, we are aiming at increasing the dynamic in demand deposits from individuals.
Jason Mollin
Didier, really appreciate the comments. Very helpful. Thank you.
Operator
Next question comes from Nicolas Riva with Bank of America. Please go ahead.
Nicolas Riva
Thanks very much, Didier, for taking the questions. So I have two questions. So the first one, if you can discuss a bit your refinancing plus for the $1 billion senior bond maturity in November, if you have already prefunded that, if you’re going to monetize some of your investment portfolio, if you plan to do a local [indiscernible], et cetera.
Then the second question is, so next year, you have the call option on the 28s on the Tier 2s. I know you are still a year away, but if you can discuss a bit how you are thinking about that call option. For example, one of your largest competitors keep saying that they plan to honor the calls of all their perps. So if you can, in your case, given that they start losing capital treatment after the call date, if you can talk to us about your early thoughts in terms of that call option. And if you were to call them, if the idea would be to place – if you were to call them a new Tier 2, the idea would be to have the variant company Santander Spain, by most of it has been the case in past? Thanks.
Didier Mena
Hi, Nicolas. Regarding the first question, we have shared with you in prior calls that we have anticipated funding. We’ve been quite active in the local market over the last four to five quarters. I think that the most effective funding source for us is the local market, and we’ve been quite active over this time period. So it’s been pre-funding, okay. And regarding, Tier 2, two things. In uncertain times a year is too long, okay, so we’ll definitely consider what is the best alternative under circumstances under market conditions.
Historically, we have exercised all the call options, okay. I think it’s important and also given the implementation of TLAC in Mexico and the fact that only Tier 1 and Tier 2 capital securities are accounted for TLAC, then we definitely need to issue these instruments in order to comply with TLAC. So we’ll definitely look at market conditions. We have always honored the culinary instruments, and we definitely have a need to issue these types of securities to be fully compliant with this.
Nicolas Riva
Thanks very much, Didier. If I can do just one quick follow-up, that comment you just made about the local bond market being perhaps the best avenue for you, especially with regards to senior maturities, does it also apply to Tier 2s? I mean, do the local pension funds, Siefores have any restrictions to buy loss absorbing debt like the Basel III Tier 2 or the perps?
Didier Mena
Well, in the past they haven’t been active in that space. I think, in my opinion, there’s no restriction for them to participate, but they’ve been reluctant to do that. It’s somehow a nuances class for them. I would love for them to be willing to invest in the securities as this will provide in my opinion, a more cost effective funding for us. But international market is quite big. So if we don’t have still the capacity to place these securities in the local market, I think that we have plenty of options.
Nicolas Riva
Okay. Thanks very much, Didier.
Operator
Next question comes from Carlos Gomez with HSBC. Please go ahead.
Carlos Gomez-Lopez
Hello, Didier. Hello, Hector. I think first of all to congratulate you on the results and to congratulate you and thank you for continuing to be so active in communicating with the market ahead of the delisting of the company. Really appreciate it. Questions, in particular, I wanted to hear your comments about a decline in lending to SMEs and whether that is a reaction to perhaps having less availability of support from the government? And second, could you remind us what your optimal level of capital would be? You have a CET1 of 13.46%, as you said, you have exhausted the capacity to pay more dividends. But that doesn’t mean that you don’t have room to not pay more as an extra dividend, I imagine. Where would you like to go in terms of CET1? Thank you.
Didier Mena
Hi, Carlos. I’ll take your second question and I’ll let Felipe comment on what we’re thinking about [Visa] and the dynamics on SMEs. Our optimal capital level or Tier 1 is should be around 12%, 12.2%. The comment that I made that we have exhausted our capacity to make given payments this year is because of regulatory – or regulator’s recommendation. And I would like to be very clear in this regard. Legally speaking, we could pay more dividends, okay, but there’s recommendation from the banking commission stating that the dividends that the banks pay this year have to be aligned with the stress test that we submitted at the beginning of the year with the banking commission, and this stress test taking into account several scenarios for several years and also that you need to be compliant with TLAC design, okay.
So with that, we proposed a certain dividend – maximum dividend payment for this year that complies with this exercise and with the restriction to be compliant with TLAC. So that’s why I mentioned that we have exhausted our capacity. At the beginning of next year, we’ll be submitting to CNBV this new exercise. And in my opinion, we should be paying back excess capital. There’s not a need to a significant growth in loan demand or significant expectation of increase in risk weighted assets, we should be paying out excess capital, okay. Now on SMEs, Felipe, you’d like to comment on recent talks with Visa and what we’re thinking on that.
Felipe García
Sure, Carlos. Nice to talk to you. Let me give you a quick update on where we are with fee based SMEs. As you can see the total loan portfolio has been declining, and this is just basically because the rate at which the loans are amortizing, which are relatively short-term has obviously been faster than the demand for loans. And what I would also mention is that we pretty much can break it down into two. All of our SMEs portfolio, part of it has a guarantee from [indiscernible] and part of it does not. The part that does not have a guarantee has been increasing. However, we haven’t really used the guarantees all that much as a result of the pandemic and all of the adjustments that were made with some of our banks having to use the guarantees. The cost of the guarantees have increased and it didn’t make it feasible at times to use them. I think we’ve had discussions with [indiscernible] and that’s being regularized.
So we are hoping that we’re going to be able to do the guaranteed product also going forward, which will enable us to grow also, the portfolio. It is important to mention that traditionally we’ve been very active in the lending side with the SMEs. This year not only do we see low demand, but we see relatively high cash balances. We’ve made very well with them in terms of the deposits. However, on the lending side, again, the demand hasn’t been there, and given the fact that we haven’t been using the guarantees, that’s what explains the decline.
Carlos Gomez-Lopez
Thank you. And if you can clarify on the guarantees, you said they are more costly, but that has been regularized. Is that because the price has declined or the guarantee itself has been extended, and how much do you usually pay for this product?
Felipe García
Yes. I don’t have the exact date, number of what exactly do we pay and I’m not sure that I can share that number because I think that it’s not the same price for every single bank. It really depends on how much you use it, how much you recover after you exercise the guarantees. So it’s not a single price. We haven’t been using it throughout the year because the price that was suggested for this year was above where we – above the threshold where we believe we can do it without a guarantee and make it more profitable.
So that’s the main reason why we believe and given the latest discussions with [indiscernible], that the price will be less expensive going forward and that the plan has been – it’s still in the works, there’s a lot of modifications to the plan, and that’s going to apply for every single bank that we will make the plan more appealing. I think in general, I think all of us in the industry use the guarantee product less this year, so they know that probably there was a bit of an overshoot, so now they’re trying to make it more attractive for next year.
Carlos Gomez-Lopez
So that will be for next calendar year. So for the rest of the year, we should expect much…
Felipe García
Correct.
Carlos Gomez-Lopez
Okay. Thank you very much.
Operator
Thank you. If there are no further questions, I would like to turn the floor back to Mr. Hector Chavez for any closing comments.
Hector Chavez
Well, as always, thank you very much, operator and everyone for joining us on this call and we remain available for any comments or questions that you might have, and you can contact us directly. Thank you very much.
Operator
This concludes today’s conference call. You may disconnect your lines at this time and thank you again for your participation.
Be the first to comment