Banco Santander Mexico: Pending Buyout Caps The Upside Potential

Main Mexican financial institution Santander Mexico’s (NYSE:BSMX) monetary place will not be fairly as sturdy as that of its friends BBVA Bancomer (BBVA) and Banorte (OTCQX:GBOOF), however profitability has been enhancing in current quarters. Its third-quarter P&L outcomes, as an example, have been boosted by contained working bills, robust mortgage progress, and fee-based revenue whereas sustaining asset high quality below management.

Within the close to time period, outcomes ought to proceed to learn from the tailwinds noticed in Q3 2022 – price hikes have proven no indicators of abating anytime quickly, whereas the restoration of Mexico’s financial system stays on observe. The valuation is affordable as nicely, however given the success of parentco Santander Group’s (SAN) tender provide for the remaining minority curiosity, any upside might be capped by the fwd e-book worth of the corporate heading into an anticipated delisting in Q1 2023.

Broad-Based mostly Energy Drives Report Excessive ROEs

BSMX outpaced consensus in Q3, with web revenue reaching P$8.2bn (+19% QoQ and +69% YoY), largely on the again of a significant P$3.7bn launch of provisions associated to giant company loans. Whereas this can be a one-off earnings enhance, the optimistic efficiency elsewhere, significantly within the retail portfolio, was commendable. The accelerated progress right here means the share of client loans inside the BSMX mortgage portfolio now stands at 17.0% in Q3 2022 – a powerful 2percentpt acquire relative to the 15.0% share in Q3 2020.

General, the online curiosity revenue enlargement above mortgage progress for the quarter at (+6% QoQ and +17% YoY) was optimistic, and though the online curiosity margin (NIM) remained at 4.3%, this was right down to progress in interest-earning property (+10% QoQ and +18% YoY). The mix of BSMX’s basic energy and decrease provisions meant ROE expanded to a document excessive of 20.5% in Q3 – a +360bps QoQ rise and nicely above the 11.9% achieved final yr. Maybe much more impressively, this progress was achieved with out sacrificing asset high quality – BSMX reported a big decline in delinquencies for the quarter, in addition to traditionally low (and nicely under pre-COVID) NPL ranges.

Steerage Revision Alerts Continued Momentum Forward

Coming off the Q3 outperformance, administration has revised its steerage numbers increased. Earnings progress is now guided to hit ~40% this yr (up from 30% beforehand), with price will increase anticipated to be in step with inflation at +8-9% this yr. The fee steerage comes regardless of the financial institution’s dedication to investing in digital initiatives, together with a separate digital financial institution. Per administration, the financial institution has utilized for a digital banking license and expects to obtain approval in Q1 2023, with operations slated to start by end-2023. Whereas it stays early days, the rise of digital banking probably means extra competitors (and extra spending) within the coming years, given the emergence of different new digital gamers. But, the expansion alternative from digital adoption, in addition to the numerous unbanked inhabitants in Mexico, ought to assist a sexy long-term ROI.

The outlook for the financial institution’s capital place additionally appears to be like good – administration has guided to a normalizing price of threat within the coming quarters regardless of the shift towards higher-risk client and bank card loans. This is smart, in my opinion, provided that in Q3, all segments sustained charge-off ratios at multi-year lows regardless of the robust progress throughout the BSMX mortgage portfolio. Flexibility on capital return is proscribed, nonetheless, given the financial institution is constrained by a 12-12.2% tier-1 ratio goal. That stated, I wouldn’t be stunned to see the financial institution pay out extra capital subsequent yr ought to it cross the upcoming capital stress checks (as a result of be offered to the Mexican Nationwide Banking and Securities Fee (CNBV) early subsequent yr).

Santander Buyout on Observe

Heading into earnings, parentco SAN had disclosed a money provide for the remaining 3.76% stake in BSMX that it doesn’t already personal at a valuation equal to the e-book worth per share of the final quarterly report. For context, the e-book worth previous to the provide was P$23.61/share (equal to $5.90/ADR), so at a high-single-digit % premium to the pre-announcement closing worth, the deal is a financially enticing one for SAN.

The deal will come as no shock to buyers – recall that SAN had beforehand launched three tender affords for minorities, with the final one in December 2021 ensuing within the parentco crossing the 96% possession threshold. Strategically, the tender provide additionally makes good sense, in my opinion, given SAN’s total technique of rising its presence in progress markets like Mexico. It additionally displays the parentco’s confidence within the high quality of the BSMX franchise in addition to the long-term progress potential. Assuming the execution goes as deliberate, the deal is anticipated to shut earlier than Q1 2023, topic to regulatory clearance.

Pending Buyout Caps the Upside Potential

BSMX delivered document ROEs in Q3 2022, as its bottom-line outcomes acquired a well timed enhance from a reversal of provisioning bills, together with stronger income and below-inflation working bills. Even assuming no additional provisioning reversals within the subsequent few quarters, although, BSMX has ample room to develop its ROEs as rates of interest in Mexico transfer (and keep) increased for an prolonged time frame. The continuing restoration of Mexico’s financial system presents a pleasant earnings tailwind as nicely. But, the tender provide from parentco Santander Group to amass the remaining float means any upside might be capped on the fwd e-book worth. With the valuation already at ~1x e-book and a competing bid unlikely, I’m impartial on BSMX.