Mexico's three largest banks will look to streamline non-interest operating expenses in the coming quarters as the impact of the pandemic on their bottom lines has drawn the focus of their attention to their efficiency ratios.
Banco Santander México SA, Grupo Financiero Banorte SAB de CV and Grupo Financiero BBVA Bancomer SA de CV scaled back their non-interest expenses in the second quarter and boosted their digital investment, in an attempt to offset a spike in provisions, tighter interest margins and lower revenues. The three largest financial institutions by total assets saw their provisions shoot up by an average of 55.4% during the first half of 2020, and their net income decline by an average of 18.5%.
By cutting operating expenses and ramping up digitization, Santander México and Banorte managed to lower their efficiency ratios in the second quarter, despite posting lower quarterly gross operating income. BBVA, which made the sharpest quarterly adjustment in spending, slashing salary and benefit expenses by 15.1%, was unable to compensate a 15.4% drop in total income in the three-month period.
The drive toward cost reduction through digital consolidation was boosted by recent regulatory easing from the CNBV banking commission, which waived the requirement for account openings and loan requests to be conducted at physical branches — a move the banks hope will be made permanent.
More room to streamline
But despite the quarterly reduction, non-interest operating expenses for the three institutions clocked in higher in the second quarter than in the year-ago period, while Santander México was the only bank to gain efficiency year over year.
“We're going to basically rationalize all spending," Santander México CEO Héctor Blas Grisi Checa told analysts in the bank's earnings call, pointing to the IT platform and digitalization of the bank as the "most important thing" in the path to cost reduction. The bank is currently working on a three-year plan that includes expense adjustments.
In the immediate future, "there will be an effort to control personnel expenses, primarily related to variable compensation, as well as amortization expenses related to strategic and IT investments," the bank's investor relations officer Lorena Romero Granados told S&P Global Market Intelligence.
While Santander increased its second-quarter spending on technology services by 15.2% from the previous quarter — and by 46.2% year over year — it reduced salaries and benefits as well as promotional and advertising expenses.
In Banorte's case, the bank is aiming to reduce the growth in operating expenses this year to below 4%, down from the original guidance of between 5% and 5.5%, COO and CFO Rafael Victorio Arana de la Garza told analysts during the second-quarter earnings presentation.
"One of the positive outcomes of this pandemic has been the unprecedented hike in adoption and utilization rates of the bank's digital channels," and "leveraging on this significant increase, we kept enhancing our digital product suite," the executive noted.
Reduction of infrastructure in the medium term
The Mexican banking association is in talks with the CNBV to permanently allow bank account creation and loan origination via digital channels, José Luis Muñoz Domínguez, Banorte's investor relations director told S&P Global Market Intelligence.
This would imply plenty of room for the bank to scale down its physical infrastructure although not within the next two years, he said.
"Once we have our entire product offering available digitally, the reliance on branches for origination will be smaller, and this will be an incentive to reduce the branch count," the director added.
The lender's operations, human resources and finance departments are also already re-evaluating personnel and office expenses, Muñoz Domínguez said. Out of the 70% of Banorte's corporate staff which is currently working from home, approximately 40% could continue to do so indefinitely, which could lead to decreased leasehold expenses and a reconfiguration of corporate buildings, he added.
Banorte is not planning headcount reductions in 2020, but variable compensation will be limited considerably, while all non-essential projects, including some consultancy and marketing, have been postponed until further notice, Muñoz Domínguez said.
BBVA did not respond to requests for comment, but highlighted the importance of its continued development of digital channels during the second quarter in a release. The bank, whose branch count rose by two from the linked period, noted that its digital client count had risen by 28% during the first semester compared to the year-ago period, with 61% of the lender's total sales now stemming from digital channels.
Banks are currently operating with only 70% to 80% of their total branches, Fitch analyst Verónica Chau said. "We will have to see how many are closed permanently once normal activities resume, as a result of banks opting for more of an electronic strategy," she added.
This could also lead to a reduction in their employee count, she said, while she highlighted that the pandemic has sparked a shift in consumer habits toward digital channels that will likely consolidate this trend.
Tighter margins and higher provisions are resulting in a clear effort from banks to improve on efficiency even more than before the pandemic, and digital solutions are key in that process, Fitch analyst Alejandro Tapia, told S&P Global Market Intelligence.