UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 20-F
(Mark One)
☐ | REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934 |
OR
☒ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
OR
☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
OR
☐ | SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number: 000-55899
BANCO SANTANDER MÉXICO, S.A., INSTITUCIÓN DE BANCA MÚLTIPLE,
GRUPO FINANCIERO SANTANDER MÉXICO
(Exact name of Registrant as specified in its charter)
United Mexican States
(Jurisdiction of incorporation or organization)
Avenida Prolongación Paseo de la Reforma 500
Colonia Lomas de Santa Fe
Alcaldía Álvaro Obregón
01219 Mexico City
(Address of principal executive offices)
Fernando Borja Mujica
Deputy General Legal and Compliance Director
BANCO SANTANDER MÉXICO, S.A., INSTITUCIÓN DE BANCA MÚLTIPLE,
GRUPO FINANCIERO SANTANDER MÉXICO
Avenida Prolongación Paseo de la Reforma 500
Colonia Lomas de Santa Fe
Alcaldía Álvaro Obregón
01219 Mexico City
Telephone: +(52) 55-5257-8000
Fax: +52 55-5269-2701
(Name, Telephone, E-mail and/or Facsimile number and Address of Company Contact Person)
Securities registered or to be registered pursuant to Section 12(b) of the Act:
Title of each class | Trading Symbol | Name of each exchange on which registered |
American Depositary Shares, each representing five shares of the Series B common stock of Banco Santander México, S.A., Institución de Banca Múltiple, Grupo Financiero Santander México, par value of Ps.3.780782962 | BSMX | New York Stock Exchange |
Series B shares, par value of Ps.3.780782962 | BSMX | New York Stock Exchange* |
* | Banco Santander México, S.A., Institución de Banca Múltiple, Grupo Financiero Santander México’s Series B shares are not listed for trading, but are only listed in connection with the registration of the American Depositary Shares, pursuant to the requirements of the New York Stock Exchange. |
Securities registered or to be registered pursuant to Section 12(g) of the Act:
None
(Title of Class)
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act:
None
(Title of Class)
Indicate the number of outstanding shares of each of the issuer’s classes of capital stock or common stock as of the close of the period covered by the annual report.
Series B shares: 3,322,685,212
Series F shares: 3,464,309,145
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
☐ Yes ☒ No
If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.
☐ Yes ☒ No
Note – Checking the box above will not relieve any registrant required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 from their obligations under those Sections.
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
☒ Yes ☐ No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
☒ Yes ☐ No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or an emerging growth company. See definition of “large accelerated filer," accelerated filer,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer ☐ | Accelerated filer ☒ | Non-accelerated filer ☐ |
| | Emerging growth company ☐ |
If an emerging growth company that prepares its financial statements in accordance with U.S. GAAP, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards† provided pursuant to Section 13(a) of the Exchange Act. ☐
† The term “new or revised financial accounting standard” refers to any update issued by the Financial Accounting Standards Board to its Accounting Standards Codification after April 5, 2012.
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☒
If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of an error to previously issued financial statements. ☐
Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentivebased compensation received by any of the registrant’s executive officers during the relevant recovery period pursuant to §240.10D-1(b). ☐
Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:
U.S. GAAP ☐ | International Financial Reporting Standards as issued by the International Accounting Standards Board ☒ | Other ☐ |
If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow.
☐ Item 17 ☐ Item 18
If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
☐ Yes ☒ No
(APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PAST FIVE YEARS)
Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. ☐ Yes ☐ No
BANCO SANTANDER MÉXICO, S.A., INSTITUCIÓN DE BANCA MÚLTIPLE, GRUPO FINANCIERO SANTANDER MÉXICO
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PRESENTATION OF FINANCIAL AND OTHER INFORMATION
Definitions
Unless otherwise indicated or the context otherwise requires, all references in this annual report on Form 20-F (hereinafter the “Report”) to “Banco Santander México,” the “Bank,” “we,” “our,” “ours,” “us” or similar terms, refer to Banco Santander México, S.A., Institución de Banca Múltiple, Grupo Financiero Santander México, together with its consolidated subsidiaries.
When we refer to “Banco Santander Parent” or the “Parent,” we refer to our controlling shareholder, Banco Santander, S.A., a Spanish bank.
When we refer to “Former Holding Company,” we refer to Grupo Financiero Santander México, S.A.B. de C.V., our former parent company.
When we refer to “Grupo Financiero Santander México” we refer to Grupo Financiero Santander México, S.A. de C.V. our parent company from January 1, 2018, which is not a public company and is a wholly-owned subsidiary of Banco Santander Parent.
When we refer to “Casa de Bolsa Santander, S.A. de C.V., Grupo Financiero Santander México”, a Mexican broker-dealer, we refer to the Former Holding Company’s brokerage subsidiary, which is now owned by Grupo Financiero Santander México.
When we refer to “Gestión Santander,” we refer to SAM Asset Management, S.A. de C.V., Sociedad Operadora de Sociedades de Inversión (formerly known as Gestión Santander, S.A. de C.V., Grupo Financiero Santander México) (entity sold in December 2013).
When we refer to “Seguros Santander”, we refer to Zurich Santander Seguros México, S.A. (formerly known as Seguros Santander, S.A., Grupo Financiero Santander) (entity sold in November 2011).
When we refer to the “Santander Group,” we refer to the worldwide Banco Santander Parent conglomerate and its consolidated subsidiaries.
References in this Report to certain financial terms have the following meanings:
● | References to “IFRS” are to the International Financial Reporting Standards as issued by the International Accounting Standards Board (“IASB”) and IFRIC interpretations, which are developed by the IFRS Interpretations Committee (previously the International Financial Reporting Interpretations Committee or IFRIC) and issued after approval by the IASB. |
● | References to “Mexican Banking GAAP” are to the accounting standards and regulations prescribed by the Mexican National Banking and Securities Commission (Comisión Nacional Bancaria y de Valores, or “CNBV”) for credit institutions, as amended. |
● | References to our “audited financial statements” are to the audited consolidated financial statements of Banco Santander México as of December 31, 2021 and 2022, and for each of the fiscal years ended December 31, 2020, 2021 and 2022, together with the notes thereto. The audited financial statements were prepared in accordance with IFRS and are contained in this Report. |
● | References herein to “UDIs” are to Unidades de Inversión, a peso-equivalent unit of account indexed for Mexican inflation. UDIs are units of account created by the Mexican Central Bank on April 4, 1995, the value of which in pesos is indexed to inflation on a daily basis, as measured by the change in the National Consumer Price Index (Índice Nacional de Precios al Consumidor). Under a UDI-based loan or financial instrument, the borrower’s nominal peso principal balance is converted either at origination |
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or upon restructuring to a UDI principal balance and interest on the loan or financial instrument is calculated on the outstanding UDI balance of the loan or financial instrument. Principal and interest payments are made by the borrower in an amount of pesos equivalent to the amount due in UDIs at the stated value of UDIs on the day of payment. As of December 31, 2022, one UDI was equal to Ps.7.64680 (U.S.$0.3920). |
As used in this Report, the following terms relating to our capital adequacy have the meanings set forth below, unless otherwise indicated. See “Item 4. Information on the Company—B. Business Overview—Supervision and Regulation.”
● | “Capital Ratio” refers to the ratio of the total net capital (capital neto) to risk-weighted assets calculated in accordance with the methodology established or adopted from time to time by the CNBV pursuant to the Mexican Capitalization Requirements. |
● | “General Rules Applicable to Mexican Banks” means the General Provisions Applicable to Credit Institutions (Disposiciones de Carácter General Aplicables a las Instituciones de Crédito) issued by the CNBV. |
● | “Mexican Capitalization Requirements” refers to the capitalization requirements for commercial banks, including Banco Santander México, set forth in the Mexican Banking Law (Ley de Instituciones de Crédito) and in the General Rules Applicable to Mexican Banks, as such laws and regulations may be amended from time to time or superseded. |
● | “Tier 1 capital (capital básico)” means the basic capital (capital básico) of the Total Net Capital (capital neto), as such term is determined based on the Mexican Capitalization Requirements, as such determination may be amended from time to time, which is comprised of Fundamental Capital (capital fundamental) and Additional Tier 1 Capital (capital básico no fundamental). |
● | “Tier 2 capital (capital complementario)” means the additional capital (capital complementario) of the Total Net Capital (capital neto), as such term is determined based on the Mexican Capitalization Requirements, as such determination may be amended from time to time. |
As used in this Report, the term “billion” means one thousand million (1,000,000,000).
In this Report, the term “México” refers to the United Mexican States, and the terms “Mexican government” or the “government” refer to the federal government of México. References to “U.S.$,” “U.S. dollars” and “dollars” are to United States dollars, and references to “Mexican pesos,” “pesos,” or “Ps.” are to Mexican pesos. References to “euros” or “€” are to the common legal currency of the member states participating in the European Economic and Monetary Union.
Financial and Other Information
Market position. We make statements in this Report about our competitive position and market share in the Mexican financial services industry and the size of the Mexican financial services industry. We have made these statements on the basis of statistics and other information from third-party sources, primarily the CNBV, that we believe are reliable.
Currency and accounting standards. We maintain our financial books and records in pesos. Our consolidated income statement data for each of the years ended December 31, 2020, 2021 and 2022 and our consolidated balance sheet data as of December 31, 2020, 2021 and 2022 included in this Report, have been audited under the standards of the Public Company Accounting Oversight Board (“PCAOB”), and are prepared in accordance with IFRS. For regulatory purposes, including Mexican Central Bank regulations and the reporting requirements of the CNBV, we concurrently prepare and will continue to prepare and make available to our shareholders, statutory financial statements in accordance with Mexican
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Banking GAAP, which prescribes generally accepted accounting criteria for all financial institutions in México.
IFRS differs in certain significant aspects from Mexican Banking GAAP. We adopted IFRS in 2014. While we have prepared our consolidated financial data as of and for the years ended December 31, 2020, 2021 and 2022 in accordance with IFRS, data reported by the CNBV for the Mexican financial sector as a whole as well as individual financial institutions in México, including our own, is prepared in accordance with Mexican Banking GAAP and, thus, may not be comparable to our results prepared in accordance with IFRS. All statements in this Report regarding our relative market position and financial performance vis-à-vis the financial services sector in México, including financial information as to net income, return-on-average equity and non-performing loans, among others, are based, out of necessity, on information obtained from CNBV reports, and accordingly are presented in accordance with Mexican Banking GAAP. Unless otherwise indicated, all financial information provided in this Report has been prepared in accordance with IFRS.
Effect of rounding. Certain amounts and percentages included in this Report and in our audited financial statements have been rounded for ease of presentation. Percentage figures included in this Report have not in all cases been calculated on the basis of such rounded figures but on the basis of such amounts prior to rounding. For this reason, certain percentage amounts in this Report may vary from those obtained by performing the same calculations using the figures in our audited financial statements. Certain other amounts that appear in this Report may not sum due to rounding.
Exchange rates and translation into U.S. dollars. This Report contains translations of certain peso amounts into U.S. dollars at specified rates solely for your convenience. These translations should not be interpreted as representations by us that the peso amounts actually represent such U.S. dollar amounts or could, at this time, be converted into U.S. dollars at the rate indicated. Unless otherwise indicated, we have translated peso amounts into U.S. dollars at an exchange rate of Ps.19.5089 per U.S.$1.00, the rate calculated on December 30, 2022 (the last business day in December) and published on December 30, 2022 by the Mexican Central Bank, as the closing exchange rate (tipo de cambio de cierre de jornada). The Mexican Central Bank publishes the Closing Exchange Rate at 2:10 p.m. every bank business day. The translation of consolidated income statement transactions expressed in pesos using such rates may result in presentation of dollar amounts that differ from the U.S. dollar amounts that would have been obtained by translating Mexican pesos into U.S. dollars at the exchange rate prevailing when such transactions were recorded.
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GLOSSARY OF SELECTED TERMS
The following is a glossary of selected terms used in this Report.
Afore | Administradora de Fondo para el Retiro, a private financial entity established pursuant to Mexican law that manages independent retirement accounts. The main functions of an Afore include, among others, (i) managing pension funds, (ii) creating and managing individual pension accounts for each worker, (iii) creating, managing and operating specialized pension funds known as Siefores, (iv) distributing and purchasing Siefores’ stock, (v) contracting pension insurance, and (vi) distributing, in certain cases, the individual funds directly to the pensioned worker |
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ALCO | Our Assets and Liabilities Committee (Comité de Activos y Pasivos), which is responsible for determining guidelines for managing risk with respect to financial margin, net worth and long-term liquidity |
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Basel III | An international framework of capital and liquidity standards for internationally active banking organizations that includes, among other things, the definition of capital, capital requirements, the treatment of counterparty credit risk, the leverage ratio and the global liquidity standard. The Basel III framework was designed by the Basel Committee in 2010 |
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Basel Committee | Basel Committee on Banking Supervision, which includes the supervisory authorities of twelve major industrial countries |
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BIVA | Bolsa Institucional de Valores, S.A. de C.V. |
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BMV | Bolsa Mexicana de Valores, S.A.B. de C.V. |
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BSC | Banking Stability Committee (Comité de Estabilidad Bancaria) |
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Cetes | Mexican Treasury Bills (Certificados de la Tesorería de la Federación) |
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CDI | Certificate of interbank deposit |
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CNBV | Mexican National Banking and Securities Commission (Comisión Nacional Bancaria y de Valores) |
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CNSF | Mexican National Insurance and Bonding Commission (Comisión Nacional de Seguros y Fianzas) |
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COFECE | Mexican Federal Antitrust Commission (Comisión Federal de Competencia Económica) |
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CONSAR | Mexican National Commission for the Mexican Pension Saving System (Comisión Nacional del Sistema de Ahorro para el Retiro) |
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CONDUSEF | Mexican National Commission for the Protection and Defense of Financial Service Users (Comisión Nacional para la Protección y Defensa de los Usuarios de Servicios Financieros) |
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COVID-19 | SARS-CoV-2 virus or coronavirus |
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CRM | Customer relationship management |
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Exchange Act | Securities Exchange Act of 1934, as amended |
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Federal Official Gazette | Diario Oficial de la Federación |
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IASB | International Accounting Standards Board |
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IFRS | International Financial Reporting Standards, accounting standards issued by the International Accounting Standards Board and IFRIC interpretations, which are developed by the IFRS Interpretations Committee (previously the International Financial Reporting Interpretations Committee or IFRIC) and issued after approval by the IASB |
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IMPI | Mexican Institute of Industrial Property (Instituto Mexicano de la Propiedad Industrial) |
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Infonavit | Mexican Institute of the National Housing Fund for Workers (Instituto Nacional para el Fomento de la Vivienda de los Trabajadores) |
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Investment Services Rules | Disposiciones de Carácter General Aplicables a las Entidades Financieras y otras Personas que Proporcionan Servicios de Inversión |
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IPAB | Mexican Institute for the Protection of Bank Savings (Instituto para la Protección al Ahorro Bancario) |
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IT | Information Technology |
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Law of the Mexican Central Bank | Ley del Banco de México |
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LCR | Liquidity Coverage Ratio |
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LIC | Mexican Banking Law (Ley de Instituciones de Crédito) |
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LMV | Mexican Securities Market Law (Ley del Mercado de Valores) |
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Mexican Banking GAAP | The financial accounting standards and regulations prescribed by the CNBV for financial institutions, as amended |
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Mexican Central Bank | Banco de México |
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Mexican Corporations Law | Ley General de Sociedades Mercantiles |
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Mexican Financial Groups Law | Ley para Regular las Agrupaciones Financieras |
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Mexican Stock Exchange | Bolsa Mexicana de Valores, S.A.B. de C.V. |
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MIEA | Internal Methodology with Advanced Approach (Metodología Interna con Enfoque Avanzado) |
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MIEB | Internal Methodology with Basic Approach (Metodología Interna con Enfoque Básico) |
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Morena | Mexican Political Party “Morena,” also known as “Movimiento de Regeneración Nacional” |
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MVE | Market value of equity |
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NAFIN | Nacional Financiera, Sociedad Nacional de Crédito, Institución de Banca de Desarrollo, a Mexican government bank that provides support for SMEs |
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National Consumer Price Index | Índice Nacional de Precios al Consumidor |
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NIM | Net interest margin |
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NYSE | New York Stock Exchange |
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NSFR | Net Stable Funding Ratio |
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PCAOB | Public Company Accounting Oversight Board (United States) |
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Public Registry of Commerce | Registro Público de Comercio |
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RNV | Mexican National Securities Registry (Registro Nacional de Valores) |
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RWA | Risk-weighted assets |
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Santander Consumo | Santander Consumo, S.A. de C.V., Sociedad Financiera de Objeto Múltiple, Entidad Regulada |
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Santander Servicios Especializados | Santander Servicios Especializados, S.A. de C.V. |
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SEC | U.S. Securities and Exchange Commission |
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Santander Tecnología | Santander Tecnología México, S.A. de C.V. (formerly Isban México, S.A. de C.V.) |
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SHCP | Mexican Ministry of Finance and Public Credit (Secretaría de Hacienda y Crédito Público) |
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Siefores | Specialized pension funds (Sociedades de Inversión Especializadas de Fondos para el Retiro) established pursuant to Mexican law |
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Skip Payments | A debtor relief program established by the CNBV in response to the COVID-19 pandemic permitting individuals and SMEs to defer principal and/or interest payments due on loans for up to four months, with the possibility of extending it for an additional two months, without such loans being considered impaired under Mexican Banking GAAP. |
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SME | Small and medium-sized enterprises, consisting of small companies with annual revenue of less than Ps.250,000,000 (U.S.$12,814,664). |
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Sofoles | Sociedades Financieras de Objeto Limitado, non-banking institutions in México that focus primarily on offering credit or financing for specific purposes (housing, automobiles, personal loans, etc.) to middle- and low-income individuals. All existing Sofol authorizations automatically terminated on July 19, 2013. Existing Sofoles had the option of converting to Sofomes or otherwise extending their corporate purpose to include activities carried out by Sofomes |
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Sofomes | Sociedades Financieras de Objeto Múltiple, non-banking institutions in México that engage in lending and/or financial leasing and/or factoring services and may be regulated or non-regulated |
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TIIE | Mexican benchmark interbank money market rate (Tasa de Interés Interbancaria de Equilibrio) |
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UDI | Unidades de inversión, a peso-equivalent unit of account indexed for Mexican inflation |
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VaR | Value at risk, an estimate of the expected maximum loss in the market value of a given portfolio over a one-day time horizon at a 99% confidence interval |
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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Report includes forward-looking statements, principally under the captions “Item 3. Key Information—D. Risk Factors,” “Item 4. Information on the Company—B. Business Overview” and “Item 5. Operating and Financial Review and Prospects.” These statements appear throughout this Report and include statements regarding our intent, belief or current expectations in connection with:
● | asset growth and sources of funding; |
● | growth of our fee-based business; |
● | expansion of our distribution network; |
● | financing plans; |
● | competition; |
● | impact of regulation and the interpretation thereof; |
● | action to modify or revoke our banking license; |
● | exposure to market risks including interest rate risk, foreign exchange risk and equity price risk; |
● | exposure to credit risks including credit default risk and settlement risk; |
● | projected capital expenditures; |
● | capitalization requirements and level of reserves; |
● | investment in our information technology platform; |
● | liquidity; |
● | trends affecting the economy generally; and |
● | trends affecting our financial condition and our results. |
Many important factors, in addition to those discussed elsewhere in this Report, could cause our actual results to differ substantially from those anticipated in our forward-looking statements, including, among other things:
● | changes in capital markets in general that may affect policies or attitudes towards lending to México or Mexican companies; |
● | changes in economic conditions, in México, in particular, in the United States, or globally; |
● | the monetary, foreign exchange and interest rate policies of the Mexican Central Bank; |
● | inflation; |
● | deflation; |
● | unemployment; |
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● | unanticipated turbulence in interest rates; |
● | the deterioration of the terms of trade between México, the United States and Canada; |
● | the implementation of new economic policy by the administration in México; |
● | movements in foreign exchange rates; |
● | movements in equity prices or other rates or prices; |
● | changes in Mexican and foreign policies, legislation and regulations; |
● | changes in requirements to make contributions to, for the receipt of support from programs organized by or requiring deposits to be made or assessments observed or imposed by, the Mexican government; |
● | changes in taxes and tax laws; |
● | competition, changes in competition and pricing environments; |
● | our inability to hedge certain risks economically; |
● | economic conditions that affect consumer spending and the ability of customers to comply with obligations; |
● | the adequacy of allowance for impairment losses and other losses; |
● | increased default by borrowers; |
● | our inability to successfully and effectively integrate acquisitions or to evaluate risks arising from asset acquisitions; |
● | technological changes; |
● | changes in consumer spending and saving habits; |
● | increased costs; |
● | unanticipated increases in financing and other costs or the inability to obtain additional debt or equity financing on attractive terms; |
● | changes in, or failure to comply with, banking regulations or their interpretation; and |
● | the other risk factors discussed under “Item 3. Key Information—D. Risk Factors” in this Report. |
The words “believe,” “may,” “will,” “aim,” “estimate,” “continue,” “anticipate,” “intend,” “expect,” “forecast” and similar words are intended to identify forward-looking statements. You should not place undue reliance on such statements, which speak only as of the date they were made. We undertake no obligation to update publicly or to revise any forward-looking statements after we distribute this Report because of new information, future events or other factors. Our independent public accountants have neither examined nor compiled the forward-looking statements and, accordingly, do not provide any assurance with respect to such statements. In light of the risks and uncertainties described above, the future events and circumstances discussed in this Report might not occur and are not guarantees of future performance.
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Because of these uncertainties, you should not make any investment decision based upon these estimates and forward-looking statements.
SUMMARY OF RISK FACTORS
Our business is subject to a number of risks, including risks that may prevent us from achieving our business objectives or may adversely affect our business, financial condition, results of operations, cash flows, and prospects. See "Item 3. Key Information—D. Risk Factors" for more information.
Risks Associated with Our Business
The credit quality of our loan portfolio may deteriorate and our allowance for impairment losses could be insufficient to cover our actual losses, which could have a material adverse effect on us.
Our exposure to individuals and small and medium-sized businesses could lead to higher levels of non-performing loans, allowances for impairment losses and write-offs.
We may generate lower revenues from commission-based businesses.
The financial problems faced by our customers could adversely affect us.
Risks Related to Macroeconomic Factors and Market Risk
We are vulnerable to disruptions and volatility in the global financial markets.
Our financial results are constantly exposed to market risk. We are subject to fluctuations in interest rates and other market risks, which may materially and adversely affect us and our profitability.
Market conditions have resulted, and could result, in material changes to the estimated fair values of our financial assets. Negative fair value adjustments could have a material adverse effect on our operating results, financial condition and prospects.
The retail banking market is exposed to macroeconomic shocks that may negatively impact household income, and a downturn in the economy could result in increased loan losses.
Liquidity and funding risks are inherent in our business and could have a material adverse effect on us.
Risks Related to Government Regulation
Mexican government banking laws and regulations may have a material adverse effect on us.
Future Mexican government restrictions on interest rates or commissions could have a material adverse effect on us.
We are subject to potential action by any of our regulators or supervisors, particularly in response to customer complaints.
We may be required to make significant contributions to the IPAB.
We are subject to Mexican regulatory inspections, examinations, inquiries or audits, and future sanctions, fines and other penalties resulting from such inspections and audits, including the revocation of Banco Santander México’s banking license, could have a material adverse effect on us.
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Risks Related to our Operations and Controls Regulation
If we are unable to manage the growth of our operations or to integrate successfully our inorganic growth, this could have an adverse impact on our profitability.
Any failure to improve or upgrade our information technology infrastructure and information management systems in an effective, timely and cost-effective manner, including in response to new or modified cybersecurity and data privacy laws, rules and regulations, could have a material adverse effect on us.
Risks Relating to México
Adverse economic conditions in México could have a negative effect on us.
Political decisions in México could have a material adverse effect on us.
The volatility in peso exchange rates and interest rates in México could have a material adverse effect on our business.
ENFORCEMENT OF JUDGMENTS
We are a stock corporation (sociedad anónima de capital fijo) incorporated in accordance with the laws of México. All of our directors and officers and experts named herein are non-residents of the United States, and all or substantially all of the assets of such persons and substantially all of our assets are located outside the United States. As a result, it may not be possible for investors to effect service of process within the United States upon such persons or to enforce against them or us in United States courts judgments predicated upon the civil liability provisions of United States federal securities laws. We have been advised by our special counsel as to Mexican law, that there is doubt as to the enforceability, in original actions in Mexican courts, of liabilities predicated solely on U.S. federal securities laws and as to the enforceability in Mexican courts of judgments of United States courts obtained in actions predicated upon the civil liability provisions of U.S. federal securities laws. We have been advised by such special Mexican counsel that no bilateral treaty is currently in effect between the United States and México that covers the reciprocal enforcement of civil foreign judgments. In the past, Mexican courts have enforced judgments rendered in the United States by virtue of the legal principles of reciprocity and comity, consisting of the review in México of the United States judgment, in order to ascertain, among other matters, whether Mexican legal principles of due process and the non-violation of Mexican law and/or the Mexican public policy (orden público) have been complied with, without reviewing the merits of the subject matter of the case, provided that U.S. courts would grant reciprocal treatment to Mexican judgments.
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PART I
ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
A. Directors and Senior Management
Not applicable.
B. Advisers
Not applicable.
C. Auditors
Not applicable.
ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE
A. Offer Statistics
Not applicable.
B. Method and Expected Timetable
Not applicable.
ITEM 3. KEY INFORMATION
A. | [Reserved] |
B. Capitalization and Indebtedness
Not applicable.
C. Reasons for the Offer and Use of Proceeds
Not applicable.
D. Risk Factors
Our business, financial condition and results could be materially and adversely affected if any of the risks described below occur. As a result, the market price of our American Depositary Shares, or ADSs, or our Series B shares could decline, and you could lose all or part of your investment. This annual report also contains forward-looking statements that involve risks and uncertainties. See “Special Note Regarding Forward-Looking Statements.” The risks described below are those known to us or that we currently believe may materially and adversely affect us; other risks not currently known to us may arise in the future or may reach a greater level of materiality, which may materially and adversely affect us and our business.
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Risks Associated with Our Business
The credit quality of our loan portfolio may deteriorate and our allowance for impairment losses could be insufficient to cover our actual losses, which could have a material adverse effect on us.
Risks arising from changes in credit quality and the recoverability of loans and amounts due from counterparties are inherent to a wide range of our businesses. Credit-impaired and non-performing loans or low credit quality loans have in the past negatively impacted our results of operations and could do so in the future. In particular, the amount of credit-impaired and non-performing loans may increase as a result of growth in our total loan portfolio and/or future portfolio acquisitions (the credit quality of which may turn out to be worse than we had anticipated), or factors beyond our control, such as adverse changes in the credit quality of our borrowers and counterparties or a general deterioration in economic conditions, including as a result of inflationary pressures, supply chain issues, labor shortages and increases in commodity prices (including as as result of the war in Ukraine) and the lingering effects of the COVID-19 pandemic with the emergence of variants resistant to existing vaccines. If we were unable to control the level of our credit-impaired and non-performing loans or poor credit quality loans, this could have a material adverse effect on us.
Our allowance for impairment of losses is assessed based on our current expectations of various factors affecting the quality of our loan portfolio. These factors include, among other things, our customers’ financial condition, repayment abilities and repayment intentions, the realizable value of any collateral, the prospects for support from any guarantor, government macroeconomic policies, interest rates and the legal and regulatory environment. Because many of these factors are beyond our control and there is no precise method for predicting loan and credit losses, we cannot assure that our current or future allowance for impairment losses will be sufficient to cover actual losses. If our assessment of and expectations concerning the above-mentioned factors differ from actual developments, if the quality of our total loan portfolio deteriorates for any reason, including the increase in lending to segments in which the Bank is focused, such as mortgages, payroll and auto loans, and the introduction of new products, or if the future actual losses exceed our estimates of expected losses, we may be required to increase our allowance for impairment losses, which may adversely affect us. Additionally, in calculating our allowance for impairment losses, we employ qualitative tools and statistical models which may not be reliable in all circumstances and which are dependent upon historical data that may not reflect future events. For further details regarding our risk management policies, see the risk “Failure to successfully implement and continue to improve our risk management policies, procedures and methods, including our credit risk management system, which is affected by the quality and scope of information available in México, could materially and adversely affect us and we may be exposed to unidentified or unanticipated risks” below.
We believe that recoveries of write offs and non-performing loans as a percentage of our total non-performing loan portfolio are likely to decline over time because of the aging of our non-performing loan portfolio. In addition, because the mortgage foreclosure process relating to collateral in México (which is regulated differently depending on the state in which the assets are located), takes three years on average to be fully completed due to procedural requirements under Mexican law, other factors such as third-party claims, mechanic’s liens and deterioration of the relevant property may impair the value of the collateral during the foreclosure process.
Our exposure to individuals and small and medium-sized businesses could lead to higher levels of non-performing loans, allowances for impairment losses and write-offs.
A substantial number of our customers are individuals, approximately 44.8% of our total loans and advances to customers as of December 31, 2022, and, to a lesser extent, SMEs (companies with annual revenues of less than Ps.250 million (U.S.$12.8 million), which accounted for approximately 6.2% of our total loans and advances to customers as of December 31, 2022. Individuals and SMEs loans, are more likely to be adversely affected by downturns in the Mexican economy than large corporations and high-income individuals, who have greater economic resources. For example, we deferred payments and refinanced a number of loans for individuals and SMEs pursuant to COVID-19 relief programs in 2020,
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which led to an increase in non-performing loans in 2020 and 2021. If we experience higher levels of non-performing loans as a result of any of these factors, it could result in increases in our allowance for impairment losses, which in turn will affect our financial condition and results. For the year ended December 31, 2022, non-performing loans were Ps.21,203 million and total written-off loans debited against our allowance for impairment losses were Ps.19,169 million. Non-performing loans related to individuals and SMEs represented 73.6% and 7.8%, respectively, of our total non-performing loans for the year ended December 31, 2022, as compared to 56.1% and 6.8%, respectively, of our total non-performing loans for the year ended December 31, 2021. Written-off loans related to individual and SMEs loans represented 73.2% and 15.3%, respectively, of our total written-off loans for the year ended December 31, 2022, as compared to 65.0% and 26.7%, respectively, for the year ended December 31, 2021. There can be no assurance that the levels of non-performing loans and subsequent write-offs will not be materially higher in the future and that this activity will not have an adverse effect on us.
Part of our current growth strategy is also to increase volume in the mortgage portfolio, at the same rate or a slightly higher rate than the market, which may increase the level of non-performing loans in our total loan portfolio. As of December 31, 2022, our mortgage loan portfolio totaled Ps.217,109 million, representing 26.5% of our total loans and advances to customers. If the economy and real estate market in México experience a significant downturn due to any global financial and economic crisis, this could materially and adversely affect the liquidity, businesses and financial conditions of our customers, which may in turn cause us to experience higher levels of non-performing loans, thereby resulting in a higher allowance for impairment losses and subsequent write-offs. This may materially and adversely affect our asset quality, results and financial condition.
We may generate lower revenues from commission-based businesses.
The revenues from commissions that we earn from the different banking and other financial services that we provide represent a significant source of our profitability. Market downturns have led, and are likely to continue to lead, to a decline in the volume of transactions that we execute for our customers and, therefore, to a decline in our non-interest revenues. In addition, because the fees that we charge for managing our customers’ portfolios are in many cases based on the value or performance of those portfolios, a market downturn that reduces the value of our customers’ portfolios or increases the amount of withdrawals would reduce the revenues we receive from our private banking and custody businesses and adversely affect our results. Moreover, our customers may further significantly decrease their risk tolerance to non-deposit investments such as stocks, bonds and mutual funds, which would adversely affect us, including our revenues from commissions.
Our fees and commissions income (net) from credit and debit cards can also be affected by general economic conditions. For example, although credit card transaction volume and billings recovered from the COVID-19 pandemic in 2021, this recovery slowed in early 2022 in credit card transaction volume and billings, due to among other reasons, declining consumer confidence as a result of economic uncertainty resulting from the challenging macroeconomic conditions. Transaction volumes increased by the fourth quarter of 2020 and we saw strong growth in credit card transaction volume and invoicing in 2022. However, any further decline in consumer confidence could further decrease credit card transactions, which could have a material adverse effect on our results of operations and financial condition.
Even in the absence of a market downturn, our revenues from commissions may also be reduced by legislative changes affecting the financial system.
The financial problems faced by our customers could adversely affect us.
Potential market turmoil and economic recession could materially and adversely affect the liquidity, credit ratings, businesses and/or financial conditions of our borrowers. In 2022, inflationary pressures intensified due to a number of factors, including the revitalization of demand for consumer goods, labor shortages, supply chain issues and the rise of the prices of energy, oil, gas and other commodities exacerbated by the
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war in Ukraine. In an effort to contain inflation, central banks, including the Bank of México, have increased interest rates. These interest rate increases contributed to a slowdown of the global economy. These or other conditions causing market turmoil or economic recession in the future could increase our non-performing loan ratios, impair our loan and other financial assets and result in decreased demand for borrowings and deposits in general. Macroeconomic conditions in 2022 also led to significant volatility in financial markets. As a result, our customers have decreased, and may in the future decrease their risk tolerance to non-deposit investments such as stocks, bonds and mutual funds, which would adversely affect our fee and commission income. We may also be adversely affected by the negative effects of the heightened regulatory environment on our customers due to the high costs associated with regulatory compliance and proceedings. Any of the conditions described above could have a material adverse effect on our business, financial condition and results of operations.
Increased competition, including from non-traditional providers of banking services such as financial technology providers, and industry consolidation may adversely affect our results.
We face substantial competition in all parts of our business, including in payments, in originating loans and in attracting deposits. The competition in originating loans comes principally from other Mexican and foreign banks, mortgage banking companies, consumer finance companies, insurance companies and other lenders and purchasers of loans. We anticipate that we will encounter greater competition as we expand our operations. In addition, certain of our competitors, such as “non-regulated Sofomes,” are financial companies which are not regulated and thus, not subject to the same extensive banking regulation, including capitalization and allowance for impairment losses requirements. As a result, certain of our competitors may have advantages in conducting certain businesses and providing certain services and, particularly, may be more aggressive in their loan origination strategies. However, non-regulated Sofomes, are subject to the supervision and oversight of the CNBV, but only with respect to compliance with anti-money laundering and anti-terrorism preemptive regulations.
Our main competitors are BBVA Bancomer, S.A., Institución de Banca Múltiple, Grupo Financiero BBVA Bancomer; Banco Nacional de México, S.A., integrante del Grupo Financiero Banamex; Banco Mercantil del Norte, S.A., Institución de Banca Múltiple, Grupo Financiero; HSBC México, S.A., Institución de Banca Múltiple, Grupo Financiero HSBC; Banco Inbursa, S.A., Institución de Banca Múltiple, Grupo Financiero Inbursa; and Scotiabank Inverlat, S.A., Institución de Banca Múltiple, Grupo Financiero Scotiabank Inverlat.
For a number of years, foreign financial institutions have been permitted to establish subsidiary financial groups, banks, broker-dealers and other financial entities in México. According to the CNBV, as of December 31, 2022, México’s ten largest domestic banks, measured in terms of assets, held 83.6% of the total assets in the Mexican banking system; five of these ten banks are foreign-owned. These foreign financial institutions are generally well capitalized, and have substantial resources (such as personnel, technology and product development, and organization); if any of them pursue the Mexican market aggressively by establishing or expanding operations, we may be unable to compete with them.
The CNBV continues, from time to time, to grant banking licenses, including licenses to niche banks that are solely permitted to engage in limited activities. Newly licensed banks are likely to aggressively pursue market expansion, which may adversely affect our activities and results.
In addition, legal and regulatory reforms in the Mexican banking industry have also increased competition among banks and among other financial institutions. In particular, rules applicable to all banks permit the substitution of loans by banks (and the resulting acquisition of customers) by complying with minimum requirements, which are likely to result in banks losing customers to their competitor institutions that embark in aggressive pricing strategies. We believe that the Mexican government’s policies of adopting market-oriented reforms in the financial industry have brought greater competition. Some foreign financial institutions, having greater resources than we do, have entered and may continue to enter the Mexican market either by themselves or in partnership with existing Mexican financial institutions and compete with us. There can be no assurance that we will be able to compete successfully with such domestic or foreign financial institutions.
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Additionally, there has been a trend towards consolidation in the banking industry, which has created larger and stronger banks with which we must now compete. There can be no assurance that this increased competition will not adversely affect our growth prospects and therefore our operations. We also face competition from non-bank competitors, such as brokerage companies, department stores (for some credit products), leasing and factoring companies, mutual fund and pension fund management companies, insurance companies and recently Finance Technology, or FinTech, institutions focused on digital business models. The Mexican government has prepared a law to further regulate FinTech platforms (Ley para Regular las Instituciones de Tecnología Financiera or “FinTech Law”), which was approved by the Mexican Congress and published in the Federal Official Gazette on March 9, 2018. Also on September 10, 2018, the “General Provisions applicable to Financial Technology Institutions” were published in the Federal Official Gazette. One of the main purposes of the document is to establish measures and proceedings that must be complied with by FinTech institutions in order to prevent and detect acts, omissions or operations that could assist or cooperate with terrorism financing activities, as provided in article 139 of the Federal Criminal Code (Código Penal Federal). Although the law allows Mexican banks to operate Finance Technology platforms, it still requires them to use a different corporate name and branding for such platforms, which may provide FinTech platforms not connected to a bank with a competitive advantage over us.
Moreover, there has been a significant increase of FinTech companies in México. The largest segment served by these FinTech institutions in México is payments and remittances, while companies dedicated to lending make up the second largest. However, the operation of FinTech companies in Mexico continues to evolve and is currently shifting, from their original one-product scheme, to a multi-product model through the acquisition of financial entities, such as Sofomes. As a result, some FinTech companies are expanding into other segments such as wealth, enterprise and financial management, crowdfunding, financial wellbeing, insurance and others.
The continuous growth of FinTech institutions in the Mexican financial services sector paired with their wider product offering results in a more challenging and competitive environment. Due to their nimble infrastructure and flexibility, FinTech institutions are taking advantage over traditional banks to enter the market with new and innovative solutions for Mexican businesses and consumers. Low capital requirements, developing regulatory framework and low administrative expenses applicable to FinTech institutions help foster the development of the Mexican FinTech ecosystem.
Non-traditional providers of banking services, such as Internet based e-commerce providers, mobile telephone companies and Internet search engines may offer and/or increase their offerings of financial products and services directly to customers. These non-traditional providers of banking services currently have an advantage over traditional providers because they are not subject to banking regulation. Several of these competitors may have long operating histories, large customer bases, strong brand recognition and significant financial, marketing and other resources. They may adopt more aggressive pricing and rates and devote more resources to technology, infrastructure and marketing. New competitors may enter the market or existing competitors may adjust their services with unique product or service offerings or approaches to providing banking services. If we are unable to successfully compete with current and new competitors, or if we are unable to anticipate and adapt our offerings to changing banking industry trends, including technological changes, our business may be adversely affected. In addition, our failure to effectively anticipate or adapt to emerging technologies or changes in customer behavior, including among younger customers, could delay or prevent our access to new digital-based markets, which would in turn have an adverse effect on our competitive position and business.
Furthermore, the widespread adoption of new technologies, including distributed ledger, artificial intelligence and/or biometrics, to provide services such as cryptocurrencies and payments, could require substantial expenditures to modify or adapt our existing products and services as we continue to grow our Internet and mobile banking capabilities. Our customers may choose to conduct business or offer products in areas that may be considered speculative or risky. Such new technologies and mobile banking platforms in recent years could negatively impact the value of our investments in bank premises, equipment and personnel for our branch network. The persistence or acceleration of this shift in demand towards Internet
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and mobile banking may require changes to our retail distribution strategy, which may include closing and/or selling certain branches and restructuring our remaining branches and work force. These actions could lead to losses on these assets and may lead to increased expenditures to renovate, reconfigure or close a number of our remaining branches or to otherwise reform our retail distribution channel. Furthermore, our failure to swiftly and effectively implement such changes to our distribution strategy could have an adverse effect on our competitive position.
In particular, we face the challenge to compete in an ecosystem where the relationship with the consumer is based on access to digital data and interactions. This access is increasingly dominated by digital platforms which are already eroding our results in very relevant markets such as payments. This privileged access to data can be used as a leverage to compete with us in other adjacent markets and may reduce our operations and margins in core businesses such as lending or wealth management. The alliances that our competitors are starting to build with large technology firms, can make it more difficult for us to successfully compete with them and could adversely affect us.
Increasing competition could also require that we increase our rates offered on deposits or lower the interest rates we charge on loans, which could also have a material adverse effect on us, including our profitability. It may also negatively affect our business results and prospects by, among other things, limiting our ability to increase our customer base and expand our operations and increasing competition for investment opportunities.
If our customer service levels were perceived by the market to be materially below those of our competitor financial institutions, we could lose existing and potential business. If we are not successful in retaining and strengthening customer relationships, we may lose market share, incur losses on some or all of our activities or fail to attract new deposits or retain existing deposits, which could have a material adverse effect on our operating results, financial condition and prospects.
In addition, the Mexican Congress passed the FinTech Law in 2018, whose main purpose is to regulate the financial services provided by the Collective Financing (Crowdfunding) Institutions and Electronic Payment Institutions. Collective Financing (Crowdfunding) Institutions are intended to put members of the public in contact with one another so that any member of the public can provide financing to any other member of the public. Electronic Payment Institutions are intended to provide the public with applications, digital interfaces, Internet pages and other means of electronic or digital communications that they can use to make electronic payments in their day-to-day personal and professional lives. The CNBV is the authority responsible for granting authorizations and supervising their organization, operation and functioning. In addition, the FinTech Law also regulates transactions carried out with digital assets. A digital asset is an asset that represents value registered electronically that can be used by the public as a means of payment for any kind of legal activity and whose transfer can only be carried out through electronic media. The law limits digital assets, noting that the FinTech institutions can only operate with digital assets approved by the Mexican Central Bank. It also provides for the creation of the Inter-institutional Committee, which will be responsible for making decisions, such as the granting of authorizations and impositions of penalties, among others, in connection with activities pursuant to the FinTech Law. The Committee will also serve as the examining body of the CNBV and will be composed of public servants of the SHCP, the Mexican Central Bank and the CNBV.
In accordance with the FinTech Law, we may establish our own FinTech institution, although we may not use our name or our corporate brand. As a result, we may not be able to realize our full competitive advantage over other companies. In addition, FinTech institutions that obtain authorization from the CNBV could represent a source of new and strong competition for us, which could have an adverse effect on our operations and results, and require additional capital expenditures for further investments in technology.
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We are subject to counterparty risk in our banking business.
We are exposed to counterparty risk in addition to credit risks associated with lending activities. Counterparty risk may arise from, for example, investing in securities of third parties, entering into derivative contracts under which counterparties have obligations to make payments to us or executing securities, futures, currency or commodity trades from proprietary trading activities that fail to settle at the required time due to non-delivery by the counterparty or systems failure by clearing agents, clearing houses or other financial intermediaries.
We routinely transact with counterparties in the financial services industry, including brokers and dealers, commercial banks, investment banks, mutual funds, hedge funds and other institutional customers. Defaults by, and even rumors or questions about the solvency of, certain financial institutions and the financial services industry generally have led to market-wide liquidity problems and could lead to losses or defaults by other institutions. Many of the routine transactions we enter into expose us to significant credit risk in the event of default by one of our significant counterparties.
The value of the collateral securing our loans may not be sufficient, and we may be unable to realize the full value of the collateral securing our loan portfolio.
The value of the collateral securing our loan portfolio may fluctuate or decline due to factors beyond our control, including as a result of macroeconomic factors affecting México’s economy or a prolonged COVID-19 pandemic with the emergence of variants resistant to existing vaccines. The value of the collateral securing our loan portfolio may be adversely affected by force majeure events, such as natural disasters (including as a result of climate change), particularly in locations where a significant portion of our loan portfolio is composed of real estate loans. The performance of the real estate market may affect us, as real estate represents a significant portion of the collateral securing our residential mortgage loan portfolio. As of December 31, 2022, the loan-to-value ratio of our mortgage loan portfolio and the loan-to-value ratio for originations were 53.2% and 69.7% on average, respectively. We may also not have sufficiently recent information on the value of collateral, which may result in an inaccurate assessment for impairment losses of our loans secured by such collateral. If any of the above were to occur, we may need to make an additional allowance for impairment losses to cover actual impairment losses of our loans, which may materially and adversely affect our results of operations and financial condition. The value of the guarantees of a portion of the delinquent portfolio has been updated to minimize additional credit losses.
In addition, other factors such as failure to perfect our security interests, fraudulent transfers by customers, attachments by other creditors obtaining priority over collateral or a reduction in the value or liquidity of the collateral may impair our ability to recover on our collateral. Accordingly, there can be no assurance that we will be able to realize the full value of our collateral.
The growth of our loan portfolio may expose us to increased loan losses.
From December 31, 2020 to December 31, 2021, total loans and advances to customers increased by 6.9% to Ps.762,088 million (U.S.$39,064 million), during which period our consumer loans to individuals increased by 9.5% to Ps.321,891 million (U.S.$16,500 million) and our mortgage loan portfolio increased by 12.8% to Ps.200,488 million (U.S.$10,277 million). From December 31, 2021 to December 31, 2022, total loans and advances to customers increased by 7.6% to Ps.820,314 million (U.S.$42,048 million), during which period our consumer loans to individuals increased by 14.3% to Ps.367,769 million (U.S.$18,851 million) and our mortgage loan portfolio increased by 8.3% to Ps.217,109 million (U.S.$11,129 million).
The expansion of our loan portfolio (particularly in the mortgage, payroll and auto loan segments) can be expected to expose us to a higher level of loan losses and require us to establish higher levels of allowance for impairment losses.
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Our loan portfolio may not continue to grow at the same rate. Economic turmoil may lead to a contraction in our loan portfolio.
There can be no assurance that our loan portfolio will continue to grow at similar rates to the historical growth rate described elsewhere in this Report. For example, in 2020 our total loans and advances to customers decreased by 1.6%, in line with market trends and weak demand conditions due to the COVID-19 pandemic. In 2021 our total loans and advances to customers increased by 6.9%. In 2022 our total loans and advances to customers increased by 7.6%. Nevertheless, a reversal of the rate of growth of the Mexican economy or a further slowdown in the growth of customer demand as a result of the new variants of COVID-19 pandemic could adversely affect the rate of growth of our loan portfolio and our risk index and, accordingly, increase our required allowance for impairment losses. An increase in market competition, changes in governmental regulations or changes in our credit risk appetite could have similar effects on the growth of our loan portfolio and our required allowance for impairment losses. Economic turmoil could materially adversely affect the liquidity, businesses and financial condition of our customers as well as lead to a general decline in consumer spending and a rise in unemployment. All this could in turn lead to decreased demand for borrowings in general, adversely affecting us.
Our loan and investment portfolios are subject to risk of prepayment, which could have a material adverse effect on us.
Our fixed rate loan and investment portfolios are subject to prepayment risk, which results from the ability of a borrower or issuer to pay a debt obligation prior to maturity. Generally, in a low interest rate environment, prepayment activity increases, which reduces the weighted average lives of our earning assets and could have a material adverse effect on us. We would also be required to recognize net premiums or commissions as income over a shorter period of time, thereby reducing the corresponding asset yield and net interest income. Prepayment risk also has a significant adverse impact on credit card and collateralized mortgage loans, since prepayments could shorten the weighted average life of these assets, which may result in a mismatch in our funding obligations and reinvestment at lower yields. Although we saw a decline in prepayment activity in 2022 as a result of the rising interst rate environment, prepayment risk is inherent to our commercial activity and an increase in prepayments in the future could have a material adverse effect on us.
Portions of our loan portfolio are subject to risks relating to force majeure events and any such event could materially adversely affect our results.
Our financial and operating performance may be adversely affected by force majeure events, such as natural disasters, particularly in locations where a significant portion of our loan portfolio is composed of real estate loans. In 2020, the COVID-19 pandemic constituted a force majeure event under a portion of our real estate loans. Although this did not have a material impact on the Bank's loan portfolio, similar events in the future could have a negative impact on the Bank's financial condition and results. Similarly, natural disasters such as earthquakes, hurricanes and floods may cause widespread damage, which could impair the asset quality of our loan portfolio and could have an adverse impact on the economy of the affected region.
The credit card industry is highly competitive and entails significant risks, including the possibility of over-indebtedness of customers, which could have a material adverse effect on us.
The credit card industry in México is dominated by institutions that may possess greater financial resources and broader coverage in this market than we do. The current growth of FinTech institutions, such as Nubank and others, in this market segment has also increased competition for traditional banks. There is no assurance that we will be able to effectively compete for and retain customers in this competitive industry or that we will be able to implement our experience in the Mexican market successfully.
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Our credit card business is subject to a number of risks and uncertainties, including the possibility of over-indebtedness of our customers, despite our focus on low-risk and medium- and high-income customers. We currently segment our credit card portfolio into eight groups based on a composite score comprised of a behavior score based on internal and external data and a credit capacity score based primarily on external data. We perform monthly validations of our scores to test their predictive capacity so that the methodologies can be adjusted, if necessary. Our risk groups, are aligned on our limits strategy. We measure the loss rates for each of the eight groups over a one-year period and compare the average loss rate to our risk appetite within the credit card portfolio. As of December 31, 2022, approximately 93.0% of our credit card portfolio was included in the top seven groups, which together had an average loss rate of 4.9%, which we consider to be low risk.
Credit card products are characterized by higher consumer default than other consumer credit products, and defaults are highly correlated with macroeconomic indicators that are beyond our control. If Mexican economic growth slows or declines, or if we fail to effectively analyze the creditworthiness of our customers (including by targeting certain sectors), we may be faced with unexpected losses that could have a material adverse effect on us. For example, during 2020, our credit card loan portfolio decreased 9.5%, as the COVID-19 pandemic led to a decline in consumer confidence and negatively affected credit card usage and balances. Our credit card loan portfolio recovered somewhat in 2021 in line with the broader economic recovery from the pandemic, but still declined 0.7% year over year as the recovery has been uneven to date. During 2022, our credit card portfolio normalized and grew 21.6%.
Our ability to maintain our competitive position depends, in part, on the success of new products and services we offer our customers and on our ability to offer products and services that meet the customers’ needs during the whole life cycle of the products or services. Our failure to manage various risks we face as we expand our range of products and services that could have a material adverse effect on us.
The success of our operations and our profitability depends, in part, on the success of new products and services we offer our customers and our ability to offer products and services that meet the customers’ needs during all their life cycle. In addition, success also depends, to a certain extent, on our ability to continue offering products and services from third parties. However, we cannot ensure that our new products, services and promotional campaigns will be responsive to the needs of our customers or will be successful once offered to our customers, or that they will be successful in the future.
However, our customers’ needs or desires may change over time, and such changes may render our products and services obsolete, outdated or unattractive and we may not be able to develop new products that meet our customers’ changing needs. Our success is also dependent on our ability to anticipate and leverage new and existing technologies that may have an impact on products and services in the banking industry. Technological changes may further intensify and complicate the competitive landscape and influence customer behavior. If we cannot respond in a timely fashion to the changing needs of our customers, we may lose potential or existing customers, which could in turn materially and adversely affect us. In addition, the cost of developing products is likely to affect our results of operations.
As we expand the range of our products and services, some of which may be at an early stage of development in the Mexican market, we will be exposed to new and potentially increasingly complex risks, such as conduct and reputational risk in the relationship with customers, and development expenses.
Our employees and risk management systems, as well as our experience and that of our partners may not be sufficient to enable us to properly manage such risks. Any or all of these factors, individually or collectively, could have a material adverse effect on us.
Further, our customers may issue complaints and seek redress if they consider that they have suffered loss from our products and services, for example, as a result of any alleged mis-selling or incorrect application of the terms and conditions of a particular product. This could in turn subject us to risks of potential legal
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action by our customers and intervention by our regulators. We have in the past experienced losses due to claims of mis-selling in and may do so again in the future.
While we have successfully increased our customer service levels in recent years, should these levels ever be perceived by the market to be materially below those of our competitor financial institutions, we could lose existing and potential new business. If we are not successful in retaining and strengthening customer relationships, we may lose market share, incur losses on some or all of our activities or fail to attract new deposits or retain existing deposits, which could have a material adverse effect on our operating results, financial condition and prospects.
Changes in our pension liabilities and obligations could have a material adverse effect on us.
We provide retirement benefits for many of our former and current employees through a number of defined benefit pension plans. We calculate the amount of our defined benefit obligations using actuarial techniques and assumptions, including mortality rates, the rate of increase of salaries, discount rates, inflation, the expected rate of return on plan assets, and others. The accounting and disclosures are based on IFRS. Given the nature of these obligations, changes in the assumptions that support valuations, including market conditions, can result in actuarial gains or losses which would in turn impact the financial condition of our pension funds. Because pension obligations are generally long-term obligations, fluctuations in interest rates have a material impact on the projected costs of our defined benefit obligations and therefore on the amount of pension expense that we accrue.
Any increase in the current size of the funding deficit in our defined benefit pension plans could result in our having to make increased contributions to reduce or satisfy the deficits, which would divert resources from use in other areas of our business. Any such increase may be due to certain factors over which we have no or limited control. Increases in our pension liabilities and obligations could have a material adverse effect on our business, financial condition and results.
On April 23, 2021, a decree (Decree) was published by the Federal Government to regulate labor subcontracting, when a natural or legal person provides its own workers for the benefit of another person.
When the Decree entered into force, various laws were reformed, added and repealed in order to:
i.)Prohibit the subcontracting of personnel for activities that are part of the corporate purpose and the main activity of the entity, and
ii.)Allow the subcontracting of services and specialized works that are not part of the corporate purpose or main activity of the entity, as long as certain requirements are met, such as the contractor is registered in the public register with the Ministry of Labor and Social Security (“STPS” by its Spanish acronym) and is renewed every three years, and
In compliance with the Decree, the Bank hired 4,891 employees who provided non-specialized services who previously worked in its subsidiaries, and 1,044 Bank employees were transferred to some of its subsidiaries. The impact of the Decree was not material for the pension liabilities of the Bank. However, any future changes to labor laws in México could have a material adverse effect on our pension liabilities.
We rely on third parties and affiliates for important products and services.
Third party vendors and certain affiliated companies provide key components of our business infrastructure such as loan and deposit servicing systems, back office and business process support and software, information technology production and support, Internet connections and network access, including cloud-based services, as well as those of our service providers. Relying on these third parties and affiliated companies can be a source of operational and regulatory risk to us, including with respect to security breaches affecting such parties. We are also subject to risk with respect to security breaches affecting the
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vendors and other parties that interact with these service providers. As our interconnectivity with these third parties and affiliated companies increases, we increasingly face the risk of operational failure with respect to their systems. We may be required to take steps to protect the integrity of our operational systems, thereby increasing our operational costs and potentially decreasing customer satisfaction.
In addition, any problems caused by these third parties or affiliated companies, including as a result of them not providing us their services for any reason, or performing their services poorly, could adversely affect our ability to deliver products and services to customers and otherwise conduct our business, which could lead to reputational damage and regulatory investigations and intervention. While we have diversified providers for the main services and keep strict and close monitoring on them, in some instances, replacing these third party vendors could also entail significant delays and expense. Further, the operational and regulatory risk we face as a result of these arrangements may be increased to the extent that we restructure such arrangements. Any restructuring could involve significant expense to us and entail significant delivery and execution risk which could have a material adverse effect on our business, operations and financial condition.
We engage in transactions with our subsidiaries or affiliates that others may not consider to be on an arm’s-length basis.
We and our affiliates have entered into a number of services agreements, pursuant to which we render services such as administrative, accounting, finance, treasury, legal and other services agreements with our subsidiaries and affiliates. In 2022, the aggregate amount of our expenses related to the service agreements we have with our subsidiaries and affiliates was Ps.5,478 million, or 16.2% of our administrative expenses, and we had an insignificant amount of income related to such agreements. In addition, we have entered into services agreements with certain affiliates to allow these companies to offer their products and services within our branch network or that assist with our activities in consideration for certain fees.
Mexican law applicable to public companies and financial institutions, as well as our bylaws, provide for several procedures designed to ensure that the transactions entered into with or among our financial subsidiaries and/or affiliates do not deviate from prevailing market conditions for those types of transactions, including the requirement that our Board of Directors approve such transactions.
We are likely to continue to engage in transactions with our subsidiaries or affiliates (including our controlling shareholder Banco Santander Parent). While the CNBV has not disagreed with our determinations that the terms of these transactions are “substantially on market conditions” in the past, we can provide no assurances that the CNBV will agree with any of our future determinations. Future conflicts of interests between us and any of our subsidiaries or affiliates, or among our subsidiaries and affiliates, may arise, which conflicts are not required to be and may not be resolved in our favor. See “Item 7. Major Shareholders and Related Party Transactions—B. Related Party Transactions.”
Future acquisitions may not be successful and may be disruptive to our business.
From time to time, we evaluate acquisition opportunities that we believe offer additional value to our shareholders and are consistent with our business strategy. However, we may not be able to identify suitable acquisition candidates, and we may not be able to acquire promising targets on favorable terms or at all. We base our assessment of potential acquisitions on limited and potentially imprecise information and on assumptions with respect to operations, profitability and other matters that may prove to be incorrect. For example, we face the risk of undisclosed liabilities. Our ability to benefit from any such acquisitions will depend in part on our successful integration of those businesses. We can give no assurances that our expectations with regards to integration and synergies will materialize. The integration of acquired businesses entails significant risks, including:
● | unforeseen difficulties in integrating operations and systems; |
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● | inability to modify accounting standards rapidly; |
● | problems assimilating or retaining the employees of acquired businesses; |
● | challenges retaining customers of acquired businesses; |
● | unexpected liabilities or contingencies relating to the acquired businesses, including legal claims; |
● | the possibility that management may be distracted from day-to-day business concerns by integration activities and related problem-solving; and |
● | the possibility of regulatory restrictions that prevent us from achieving the expected benefits of the acquisition. |
In addition, an acquisition could result in the loss of key employees and inconsistencies in standards, controls, procedures and policies. Moreover, the success of the acquisition will at least in part be subject to a number of political, economic and other factors that are beyond our control. Any or all of these factors, individually or collectively, could have a material adverse effect on us.
Goodwill impairments may be required in relation to acquired businesses.
We have made business acquisitions in past years and may make further acquisitions in the future. It is possible that the goodwill, which has been attributed, or may be attributed, to these businesses may have to be impaired, if our valuation assumptions are required to be reassessed as a result of any deterioration in their underlying profitability, asset quality and other relevant matters. Impairment testing in respect of goodwill is performed annually or more frequently if there are impairment indicators present, and comprises a comparison of the carrying amount of the cash-generating unit with its recoverable amount. Goodwill impairment does not, however, affect our regulatory capital. While no impairment of goodwill was recognized in 2022, there can be no assurances that we will not have to write off the value attributed to goodwill in the future, which would adversely affect our results and net assets.
Damage to our reputation could cause harm to our business prospects.
Maintaining a robust risk management framework based on robust ethical principles and corporate values is critical to protect our reputation and our brand, attract and retain customers, investors and employees and conduct business transactions with counterparties. Damage to our reputation could therefore cause significant harm to our business and prospects. Harm to our reputation could arise from numerous sources, including, among others, employee misconduct, including the possibility of fraud perpetrated by our employees, litigation or regulatory enforcement, failure to deliver minimum standards of service and quality, negative perceptions regarding our ability to maintain the security of our technology systems and protect customer data (including as a result of a cybersecurity incident), dealing with sectors that are not well perceived by the public (weapons industries or embargoed countries, for example), dealing with customers in sanctions lists, rating downgrades, significant variations in our share price throughout the year, compliance failures, unethical behavior, actual or alleged conduct in any number of activities, including lending practice, sales and marketing, corporate governance and corporate culture, and the activities of customers and counterparties, including activities that negatively affect the environment. Further, negative publicity regarding us may result in harm to our prospects.
Actions by the financial services industry generally or by certain members of, or individuals in, the industry can also affect our reputation. For example, the role played by financial services firms in the financial crisis and the seeming shift toward increasing regulatory supervision and enforcement has caused public perception of us and others in the financial services industry to decline.
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Additionally, we could suffer significant reputational harm that could affect our business, results of operations and prospects from any negative perceptions regarding topics related to environmental, social and corporate governance policies. There has been increased focus by customers, shareholders, investor advocacy groups, employees, regulators and other stakeholders on these topics, and our policies, practices and disclosures in these areas could come under scrutiny. Governments may implement new or additional regulations and standards or investors, customers and other stakeholders may impose new expectations or focus investments in ways that cause significant shifts in disclosure, consumption and behaviors that may have negative impacts on our business. If regulators or stakeholders consider our efforts to be ineffective, inadequate or unsatisfactory, whether real or perceived, it could harm our reputation, business and prospects and we could be subject to enforcement, other supervisory actions or other harm.
We could also suffer significant reputational harm if we fail to identify and manage potential conflicts of interest properly. The failure, or perceived failure, to adequately address conflicts of interest could affect the willingness of clients to deal with us, or give rise to litigation or enforcement actions against us, which could have an adverse effect on our operating results, financial condition and prospects.
We may be the subject of misinformation and misrepresentations deliberately propagated to harm our reputation or for other deceitful purposes, or by profiteering short sellers seeking to gain an illegal market advantage by spreading false information about us. There can be no assurance that we will effectively neutralize and contain a false information that may be propagated regarding the Bank, which could have an adverse effect on our operating results, financial condition and prospects.
We rely on recruiting, retaining and developing appropriate senior management and skilled personnel.
Our continued success depends in part on the continued service of key members of our senior executive team and other key employees. The ability to continue to attract, train, motivate and retain highly qualified and talented professionals is a key element of our strategy. The successful implementation of our strategy and culture depends on the availability of skilled and appropriate management, both at our head office and in each of our business units. If we or one of our business units or other functions fails to staff its operations appropriately, or loses one or more of its key senior executives or other key employees and fails to replace them in a satisfactory and timely manner, our business, financial condition and results of operations, including control and operational risks, may be adversely affected.
Our ability to attract and retain qualified employees is affected by perceptions of our culture, social and corporate governance policies and management, our profile and the professional opportunities we offer. In addition, the financial industry has and may continue to experience more stringent regulation of employee compensation, which could have an adverse effect on our ability to hire or retain the most qualified employees. If we fail or are unable to attract and appropriately train, motivate and retain qualified professionals, our business may also be adversely affected.
Climate change can create transition risks, physical risks, and other risks that could adversely affect us.
There is an increasing focus over the risks of climate change and related environmental sustainability matters.
Climate change may imply two primary drivers of financial risk that could adversely affect us:
● | Transition risks associated with the move to a low-carbon economy, both at idiosyncratic and systemic levels, such as through policy, regulatory and technological changes and business and consumer preferences, which could increase our expenses and impact our strategies; |
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● | Physical risks related to discrete events, such as flooding and wildfires, and extreme weather impacts and longer term shifts in climate patters, such as extreme heat, sea level rise and more frequent and prolonged drought, which could result in financial losses that could impair asset values and the creditworthiness of our customers. Such events could disrupt our operations or those of our customers or third parties on which we rely and do business with, including through direct damage to assets and indirect impacts from supply chain disruption and market volatility; and |
These primary drivers could materialize, among others, in the following financial risks:
● | Credit risks: Physical climate change could lead to increased credit exposure. Additionally, companies with business models not aligned with the transition to a low-carbon economy may face a higher risk of reduced corporate earnings and business disruption due to new regulations or market shifts. |
● | Market and liquidity risks: Market changes in the most carbon-intensive sectors could affect energy and commodity prices, corporate bonds, equities and certain derivatives contracts. Increasing frequency of severe weather events could affect macroeconomic conditions, weakening fundamental factors such as economic growth, employment and inflation. Companies could face liquidity risks derived from cash outflows to improve their reputation in the market or solve climate-related problems. |
● | Operational risks: Severe weather events could directly impact business continuity and both our customers’ and our operations. |
● | Regulatory compliance risks: Increased regulatory compliance risk may result from the increasing focus, pace, breadth and depth of regulatory expectations requiring implementation in short timeframes across multiple jurisdictions and from changes in public policy, laws and regulations in connection with climate change and related environmental sustainability matters. |
● | Conduct risks: Conduct risks could develop associated with the increasing demand for ‘green’ products where there are differing and developing standards or taxonomies. |
● | Reputational risks: Our reputation and client relationships may be damaged as a result of our practices, disclosures and decisions related to climate change and the environment, or to the practices or involvement of our clients, vendors or suppliers in certain industries or projects associated with causing or exacerbating climate change. Furthermore, parties who may suffer losses from the effects of climate change may seek compensation from those they hold responsible such as state entities, regulators, investors and lenders. |
Additionally, the Bank has increased focus on the impact of climate risk change on market, structural and liquidity risk, which arise from the possibility that changes in climate may adversely affect the value of a financial instrument, a portfolio or the Bank as a whole. This risk may have an impact both on financial instruments fair value or portfolios and on the Bank's liquidity. The Bank measures this risk through stress scenarios for both market and liquidity risk.
As climate risk is interconnected with all key risk types, we have developed and continue to enhance processes to embed climate risk considerations into our core processes and risk management cycle; however, because the timing and severity of climate change may not be predictable and is rapidly evolving, our risk management strategies may not be effective in mitigating climate risk exposure. Additionally, we may become subject to new or heightened regulatory requirements relating to climate change, which may result in increased regulatory, compliance or other costs. As the risks, perspective and focus of regulators, shareholders, employees, and other stakeholders regarding climate change are evolving rapidly, it can be difficult to assess the ultimate impact on us of climate change-related risks, compliance risks, and uncertainties.
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Any of the conditions described above, or our failure to identify other climate-related risks, could have a material adverse effect on our business, financial condition and results of operations.
The global COVID-19 pandemic has materially impacted our business, and the continuance of this pandemic or any future outbreak of any other highly contagious diseases or other public health emergency, could materially and adversely impact our business, financial condition, liquidity and results of operations.
Although the global economy has begun to recover from the COVID-19 pandemic, certain adverse effects of the pandemic continue to impact the macroeconomic environment and may persist for some time. Should the ongoing effects of the COVID-19 pandemic continue for an extended period of time, or worsen, our business, financial position, liquidity, results of operations and prospects could be adversely affected.
In 2021, high vaccination rates in many countries and a progressive relaxation of health and safety restrictions, together with the fiscal and monetary policy measures implemented, contributed to an increase in employment levels and recovery of the global economy generally, with some variations across sectors and regions. In 2022, certain adverse consequences of the pandemic continued to impact the macroeconomic environment and may persist for some time, including labor shortages and disruptions of global supply chains, that contributed to rising inflationary pressures. The pandemic remains dynamic and the emergence of variants resistant to existing vaccines remains uncertain.
If new COVID-19 waves force countries to re-adopt measures that restrict economic activity, the macroeconomic environment could deteriorate and adversely impact our business and results of operations, which could include, but is not limited to (i) a continued decreased demand for our products and services; (ii) further material impairment of our loans and other assets including goodwill; (iii) decline in value of collateral; (iv) constraints on our liquidity due to market conditions, exchange rates and customer withdrawal of deposits and continued draws on lines of credit; and (v) downgrades to our credit ratings. See “Risk Factors—Risks Associated with Our Business—Credit, market and liquidity risk may have an adverse effect on our credit ratings and our cost of funds. Any downgrade in our credit rating would likely increase our cost of funding, require us to post additional collateral or take other actions under some of our derivative and other contracts and adversely affect our interest margins and results of operations.”
Moreover, our operations could still be impacted by risks from remote work or bans on non-essential activities. While in 2022 we have progressively returned to the office, we still maintain flexibility to work remotely. If we become unable to successfully operate our business from remote locations including, for example, due to failures of our technology infrastructure, increased cybersecurity risks, or governmental restrictions that affect our operations, this could result in business disruptions that could have a material and adverse effect on our business.
The extent to which the consequences of the COVID-19 pandemic affect our business, financial condition, liquidity and results of operations will depend on future developments that remain uncertain, including the rate of distribution and administration of vaccines globally, the severity and duration of any resurgence of COVID-19 variants, future actions taken by governments, central banks and other third parties in response to the pandemic, and the effects on our customers, counterparties, employees and third-party service providers. Any future outbreak of any other highly contagious diseases or other public health emergency may also have similar adverse effects on our business, financial condition, liquidity and results of operations or cause other risks to us.
Risks Related to Macroeconomic Factors and Market Risk
We are vulnerable to disruptions and volatility in the global financial markets.
A slowdown or recession in México or in the global economy could lead major financial institutions, including some of the world’s largest global commercial banks, investment banks, mortgage lenders, mortgage
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guarantors and insurance companies, to experience significant difficulties, including runs on deposits and the need for government assistance of the need to reduce or cease providing funding to borrowers (including to other financial institutions).
In 2020, México and several other countries experienced a severe recession as a result of the COVID-19 pandemic. Although the Mexican economy and the global economy began to recover in 2021, macroeconomic conditions began to change in the beginning of 2022 as a result of inflationary pressures, labor shortages, supply chain disruptions and an increase in commodity prices (including, in part, as a result of the war in Ukraine). These conditions led central banks around the world, including the Mexican Central Bank and the U.S. Federal Reserve, to increase interest rates rapidly and caused goblal financial markets to experience episodes of volatility linked to uncertainty about the future evolution of monetary policy in industrialized economies. These episodes in global markets had repercussions in Mexican financial markets, which also experienced volatility.
The continuation of these conditions, together with any future downturn in activity in the United States (U.S.), U.S. policies on trade and immigration, and volatility in global financial markets, could have a material adverse effect on the Mexican economy and its growth prospects, which could have an unfavorable impact on our business. The evolution of U.S. monetary policy, and divergent monetary policies around the world, including in México, might also have a negative impact on the Mexican economy and adversely affect our business.
In particular, we face, among others, the following risks related to the economic downturn and volatile conditions:
● | Reduced demand for our products and services. |
● | Increased regulation of our industry. Compliance with such regulation will continue to increase our costs and may affect the pricing for our products and services, increase our conduct and regulatory risks related to non-compliance and limit our ability to pursue business opportunities. |
● | Inability of our borrowers to timely or fully comply with their existing obligations. Macroeconomic shocks may negatively impact the income of our customers, both retail and corporate, and may adversely affect the recoverability of our loans, resulting in increased loan losses. |
● | The process we use to estimate losses inherent in our credit exposure requires complex judgments, including forecasts of economic conditions and how these economic conditions might impair the ability of our borrowers to repay their loans. The degree of uncertainty concerning economic conditions may adversely affect the accuracy of our estimates, which may, in turn, impact the reliability of the process and the sufficiency of our allowance for impairment losses. |
● | The value and liquidity of the portfolio of investment securities that we hold may be adversely affected. |
● | Our ability to access capital and liquidity on financial terms acceptable to us, if at all, may be adversely affected. If capital markets financing ceases to become available, or becomes excessively expensive, we may be forced to raise the interest rates we pay on deposits to attract more customers and/or become unable to maintain certain liability maturities. |
● | Any worsening of global economic conditions may delay the recovery of the international financial industry and impact our financial condition and results. |
In this setting of rapid changes in macroeconomic policies, uncertainty remains concerning the future economic environment. Such economic uncertainty could have a negative impact on our business and results. A deceleration of the Mexican economy, a deep or prolonged recession in the U.S., unexpected
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impacts from U.S. monetary policy or unexpected changes to economic policy in México would likely aggravate the adverse effects of these difficult economic and market conditions on us and on others in the financial services industry.
If all or some of the foregoing risks were to materialize, this could have a material adverse effect on our financing availability and terms and, more generally, on our results, financial condition and prospects.
Our financial results are constantly exposed to market risk. We are subject to fluctuations in interest rates and other market risks, which may materially and adversely affect us and our profitability.
Our financial results are constantly exposed to market risk. In 2022, inflationary pressures, increases in the prices of energy, oil, gas and other commodities, the war in Ukraine and the lingering effects of the COVID-19 pandemic caused and could continue to cause high market volatility, which could materially and adversely affect us and our trading and banking book.
Economic activities exposed to market risk include (i) transactions where risk is assumed as a consequence of potential changes in interest rates, inflation rates, exchange rates, stock prices, credit spreads, commodity prices, volatility and other market factors; (ii) the liquidity risk from our products and markets; and (iii) the balance sheet liquidity risk.
As described below, market risk affects (i) our interest income / (charges); (ii) the market value of our assets and liabilities, in particular of our securities holdings, loans and deposits and derivatives transactions; and (iii) other areas of our business such as the volume of loans originated or credit spreads.
The performance of financial markets may cause changes in the value of our investment and trading portfolios. The volatility of world equity markets due to the continued economic uncertainty and sovereign debt crisis has had a particularly strong impact on the financial sector. Continued volatility may affect the value of our investments in equity securities and, depending on their fair value and future recovery expectations, could become a permanent impairment which would be subject to write-offs against our results.
Market risk could include unexpected or unpredictable risks related to periods in which the market does not calculate prices efficiently (for example, during market interruptions or shocks).
Interest rates are sensitive to many factors beyond our control, including increased regulation of the financial sector, monetary policies and domestic and international economic and political conditions. Variations in interest rates could affect the interest earned on our assets and the interest paid on our borrowings, thereby affecting our interest income / (charges), which comprises the majority of our revenue, reducing our growth rate and potentially resulting in losses. In addition, costs we incur as we implement strategies to reduce interest rate exposure could increase in the future (which, in turn, will impact our results). We monitor our interest rate risk using the Net Interest Margin, or NIM, sensitivity, which is the difference between the return on assets and the financial cost of our financial liabilities based on a one-year period and a parallel movement of an increase or decrease in market interest rates. A movement of 100 basis points (1%) in market interest rates is considered for high volatility currencies, and a movement of 25 basis points for low volatility currencies. As of December 31, 2022, the NIM sensitivity was Ps.432 million.
Increases in interest rates may reduce the volume of loans we originate. Sustained high interest rates have historically discouraged customers from borrowing and have resulted in increased delinquencies in outstanding loans and deterioration in the quality of assets. Increases in interest rates may reduce the value of our financial assets and may reduce gains or require us to record losses on sales of our loans or securities. Additionally, a shrinking yield premium between short-term and long-term market interest rates coupled with inflation, could adversely affect our business and results of operations.
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In addition, we may experience increased delinquencies in a low-interest-rate environment when such an environment is accompanied by high unemployment and recessionary conditions.
The market risk in relation to the change in the market value of our assets and liabilities refers to the loss of value of assets or increase in the value of liabilities due to fluctuations in their prices in the markets where those assets or liabilities are traded, or even if not traded, in the value that a third party outsider would be willing to offer in a hypothetical transaction.
The standard methodology that we apply for risk management is Value at Risk (VaR), which measures the maximum expected loss within a certain confidence level and time frame.
We are also exposed to foreign exchange rate risk as a result of mismatches between assets and liabilities denominated in different currencies. Fluctuations in the exchange rate between currencies may negatively affect our results and the value of our assets and liabilities.
If any of these risks were to materialize, our net interest income or the market value of our assets and liabilities could suffer a material adverse impact.
Market conditions have resulted, and could result, in material changes to the estimated fair values of our financial assets. Negative fair value adjustments could have a material adverse effect on our operating results, financial condition and prospects.
In the past, financial markets have been subject to significant stress resulting in steep falls in perceived or actual financial asset values, particularly due to volatility in global financial markets, which tends to cause a widening of credit spreads, including as a result of the war in Ukraine or the lingering effects of the COVID-19 pandemic. We have material exposures to securities, loans and other investments that are recorded at fair value and are therefore exposed to potential negative fair value adjustments. Asset valuations in future periods, reflecting then-prevailing market conditions, may result in negative changes in the fair values of our financial assets and these may also translate into increased impairments. In addition, the value ultimately realized by us on disposal may be lower than the current fair value. Any of these factors could require us to record negative fair value adjustments, which may have a material adverse effect on our operating results, financial condition or prospects.
In addition, to the extent that fair values are determined using financial valuation models, such values may be inaccurate or subject to change, as the data used by such models may not be available or may become unavailable due to changes in market conditions, particularly for illiquid assets, and particularly in times of economic instability. In such circumstances, our valuation methodologies require us to make assumptions, judgments and estimates in order to establish fair value, and reliable assumptions are difficult to make and are inherently uncertain and valuation models are complex, making them inherently imperfect predictors of actual results. Any consequential impairments or write-offs could have a material adverse effect on our results, financial condition and prospects.
The retail banking market is exposed to macroeconomic shocks that may negatively impact household income, and a downturn in the economy could result in increased loan losses.
One of our main strategies is to focus on the retail banking sector with customer centricity and to grow our individual loan portfolio, particularly mortgage, payroll and auto loans. The recoverability of retail loans and our ability to increase the amount of loans outstanding, and our results and financial condition in general, may become increasingly vulnerable to macroeconomic shocks that could negatively impact the household income of our retail customers and result in increased loan losses that could have a material adverse effect on us. In 2020, the Mexican economy experienced an unprecedented contraction of 8.5% as a result of the COVID-19 pandemic and then recovered in part in 2021 with GDP growth of 5.0%. In 2022, the Mexican economy continued its recovery, with a growth rate of 3.0%. We can provide no assurance that GDP growth rates will increase in the future, or that they will not regress further.
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Furthermore, because the penetration of bank lending products in the Mexican retail sector historically has been low, there is little basis on which to evaluate how the retail sector will perform in the recovery from the crisis caused by the coronavirus pandemic. Consequently, our historical loan loss experience may not be indicative of the performance of our loan portfolio in the future.
Liquidity and funding risks are inherent in our business and could have a material adverse effect on us.
Liquidity risk is the risk that we either do not have sufficient financial resources available to meet our obligations as they become due, or we can only secure them at an excessive cost. This risk is inherent to any banking business and can be heightened by both enterprise-specific factors, including over-reliance on a particular source of funding, changes in credit ratings, and market-wide phenomena such as market dislocation, including as a result of the war in Ukraine or new outbreaks of the COVID-19 pandemic. While we have in place liquidity management processes to mitigate and control these risks, systemic market factors make it difficult to eliminate these risks completely. Constraints in the supply of liquidity, including in interbank lending, could materially and adversely affect the cost of funding of our business, and extreme liquidity constraints may affect our current operations and our ability to fulfill regulatory liquidity requirements, as well as limit growth possibilities.
Disruption and volatility in the global financial markets could also have a material adverse effect on our ability to access capital and liquidity on terms acceptable to us.
Our cost of obtaining funding is directly related to prevailing interest rates, general liquidity conditions in the financial system and to our credit spreads. Increases in interest rates and/or in our credit spread, or deterioration of general liquidity conditions, could significantly increase the cost of our funding. Credit spreads variations are market-driven and may be influenced by market perceptions of our creditworthiness. Changes to interest rates and our credit spreads may occur frequently and could be unpredictable and highly volatile.
For example, during 2020 and 2021, the COVID-19 pandemic had a major impact on the global economy, leading central banks to adopt unprecedented measures to support economic activity and financial markets. As a result, many central banks kept reference rates at historically low levels and used other type of monetary policy tools, such as asset purchases. More recently, in 2022, central banks began increasing interest rates in response to inflationary pressures, with the Mexican Central Bank raising interest rates eight times during the year by a total of 500 basis points.
We rely, and will continue to rely, primarily on retail and commercial deposits to fund lending activities. The ongoing availability of this type of funding is sensitive to a variety of factors beyond our control, such as general economic conditions and the confidence of retail depositors in the economy and in the financial services industry, and the availability and extent of deposit guarantees, as well as competition for deposits between banks or with other products, such as mutual funds. Any of these factors could increase the amount of retail deposit withdrawals in a short period of time, thereby reducing our ability to access retail deposit funding on appropriate terms, or at all, in the future. If these circumstances were to arise, this could have a material adverse effect on our operating results, financial condition and prospects.
If wholesale debt financing and related markets cease to be available, or become excessively expensive to us, we may be forced to raise the interest rates we pay on deposits, in order to attract more customers, and/or to sell assets, potentially at discounted prices. The persistence or worsening of these adverse market conditions or an increase in base interest rates could have a material adverse effect on our ability to access liquidity and the cost of funding.
More recently, as the outlook for the global economy has improved and inflation pressures have begun to rise, some central banks have started a gradual tightening of monetary policy. The pace and timing of policy tightening has varied across countries depending on a range of factors, including the overall state of the
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economy and the outlook for inflation. Regarding the United States, the Federal Reserve raised the reference rates seven times for aggregate 425 basis points throughout 2022 to reach a range of 4.25-4.50% as of year end.
In Mexico, the Central Bank kicked-off the tightening process earlier and raised the reference rate on five occasions for an aggregate of 150 bps during 2021 to reach 5.50% as of year end and an additional 500 basis points during 2022 to reach 10.50% as of year end.
We anticipate that our customers will continue, in the near future, to make deposits, and we intend to maintain our emphasis on the use of banking deposits as our main source of funds. The short-term nature of some deposits could cause liquidity problems for us in the future, if deposits are not made in the volumes we expect or if we face a higher than expected churn rate. If a substantial number of our depositors withdraw their demand deposits or do not roll-over their time deposits upon maturity, we may be materially and adversely affected.
We cannot assure that in the event of a sudden or unexpected shortage of funds in the banking system, we will be able to maintain levels of funding without incurring high funding costs, a reduction in the term of funding instruments or the liquidation of certain assets. If this were to happen, we could be materially adversely affected.
Many Mexican banks have suffered severe liquidity problems from time to time. We have not suffered material liquidity problems since the 1995 to 1996 period, when we experienced a significant increase in the cost of funding as a result of the financial crisis in México. During that period, we were able to obtain the required funding, but at a higher cost. While we have not suffered material liquidity problems in recent years, we cannot assure that liquidity problems will not affect the Mexican banking system or that liquidity constraints will not affect us in the future. While we expect to be able to refinance our liabilities, we cannot assure that we will be able to repay our liabilities or refinance our liabilities on favorable terms or at all.
Finally, the implementation of internationally accepted liquidity ratios might require changes in business practices that affect our profitability. The Liquidity Coverage Ratio (LCR) is a liquidity standard to measure if banks have sufficient high-quality liquid assets to cover expected net cash outflows over a 30-day liquidity stress period. As of December 31, 2022, our LCR ratio was 196.6%, above the 100% minimum requirement. The Net Stable Funding Ratio (NSFR) provides a sustainable maturity structure of assets and liabilities such that banks maintain a stable funding profile in relation to their activities. As of December 2022, the NSFR ratio for the Bank was 119.97%. Both ratios are calculated in accordance with the European Central Bank. When calculated pursuant to the regulatory requirements of the Mexican Central Bank and the CNBV, the Bank’s average LCR for 2022 was 185.82%.
Credit, market and liquidity risk may have an adverse effect on our credit ratings and our cost of funds. Any downgrade in our credit rating would likely increase our cost of funding, require us to post additional collateral or take other actions under some of our derivative and other contracts and adversely affect our interest margins and results of operations.
Credit ratings affect the cost and other terms upon which we are able to obtain funding. Rating agencies evaluate us on a regular basis, and their ratings of our debt are based on multiple factors, including both our financial strength and conditions affecting the financial services industry. In addition, due to the methodology of the main rating agencies, our credit rating may be affected by the rating of Mexican sovereign debt. If Mexico’s sovereign debt is downgraded our credit rating could also likely be downgraded.
Any downgrade in our debt credit ratings would likely increase our borrowing costs, could limit our access to capital markets and adversely affect our commercial business. For example, a significant ratings downgrade could adversely affect our ability to sell or market some of our products, engage in certain longer-term and derivatives transactions and retain our customers, particularly customers who need a
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minimum rating threshold in order to invest. Any of these results of a ratings downgrade could reduce our liquidity and have an adverse effect on us, including our operating results and financial condition.
On December 1, 2022, Fitch Ratings affirmed all Banco Santander México’s credit ratings. The Outlook is Stable.
On May 9, 2022, Moody’s affirmed our Adjusted Baseline Credit Assessment at baa1. Our Senior Unsecured Ratings, both foreign and domestic currency, were affirmed at Baa1 with a stable outlook. Additionally, Moody’s affirmed our long- and short-term counterparty risk assessments (CRAs) at A3(cr) and P-2(cr), respectively.
As part of our funding tools, we rely in part on domestic, peso-denominated issuances with long-term maturities, and we continue to be rated Aaa.mx and AAA(mex) by Moody’s and Fitch Ratings, respectively. We have not been required to post additional collateral or take other actions under any of our derivative contracts.
Banco Santander Parent’s long-term debt is currently rated investment grade by the major rating agencies: A2 stable outlook by Moody’s Investors Service España, S.A., A+ stable outlook by Standard & Poor’s Ratings Services and A- stable outlook by Fitch Ratings Ltd (long term bank deposit rating).
However, any downgrade of Spain’s sovereign debt, Banco Santander Parent’s debt and our related downgrades could adversely affect our cost of funding on any further debt issuances in the international capital markets. It is difficult to determine the quantitative impact of a two-notch rating downgrade on our funding costs. However, based on current market intelligence, we estimate the impact could be approximately 35 to 55 basis points for new long-term debt issued in the international capital markets.
While certain potential impacts of these downgrades are contractual and quantifiable, the full consequences of a credit rating downgrade are inherently uncertain, as they depend on numerous dynamic, complex and inter-related factors and assumptions, including market conditions at the time of any downgrade, whether any downgrade of our long-term credit rating precipitates downgrades to our short-term credit rating, and assumptions about the potential behaviors of various customers, investors and counterparties. Actual outflows could be higher or lower than the preceding hypothetical examples, depending upon certain factors including which credit rating agency downgrades our credit rating, any management or restructuring actions that could be taken to reduce cash outflows and the potential liquidity impact from loss of unsecured funding (such as from money market funds) or loss of secured funding capacity. Although unsecured and secured funding stresses are included in our stress testing scenarios and a portion of our total liquid assets is held against these risks, a credit rating downgrade could still have a material adverse effect on us.
In addition, if we were required to cancel our derivatives contracts with certain counterparties and were unable to replace such contracts, our market risk profile could be altered.
There can be no assurance that the rating agencies will maintain the current ratings or outlooks. In general, the future evolution of our ratings is linked, to a large extent, to the general macroeconomic outlook which includes the impact of inflationary pressures, labor shortages, rising commodity prices, the war in Ukraine and the COVID-19 pandemic (including, for example, new variants, new lockdowns, etc.) on our asset quality, profitability and capital. Failure to maintain favorable ratings and outlooks could increase our cost of funding and adversely affect interest margins, which could have a material adverse effect on us.
We are subject to market, operational and other related risks associated with our derivative transactions that could have a material adverse effect on us.
We enter into derivative transactions for trading purposes as well as for hedging purposes. We are subject to market, credit and operational risks associated with these transactions, including basis risk (the risk of loss associated with variations in the spread between the asset yield and the funding and/or hedge cost)
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and credit or default risk (the risk of insolvency or other inability of the counterparty to a particular transaction to perform its obligations thereunder, including providing sufficient collateral).
In addition, in connection with Mexican domestic derivative transactions, Mexican courts have had limited experience in dealing with issues related to derivative transactions, as most disputes have typically been resolved through negotiations among Mexican financial institutions. As a result, the outcomes of disputes regarding derivatives transactions reaching the Mexican judicial system are not fully predictable.
Market practices and documentation for derivative transactions in México may differ from those in other countries. In addition, the execution and performance of these transactions depends on our ability to maintain adequate control and administration systems. Moreover, our ability to adequately monitor, analyze and report derivative transactions continues to depend, largely, on our information technology systems. These factors further increase the risks associated with these transactions and could have a material adverse effect on us.
We may not effectively manage risks associated with the replacement or reform of benchmark indices.
Interest rate, equity, foreign exchange rate and other types of indices which are deemed to be “benchmarks,” including those in widespread and long-standing use, have been the subject of ongoing international, national and other regulatory scrutiny and initiatives and proposals for reform. Some of these reforms are already effective while others are still to be implemented or are under consideration. These reforms have caused and may in the future cause benchmarks to perform differently than in the past, or to disappear entirely, or have other consequences, which cannot be fully anticipated.
Various regulators, industry bodies and other market participants in the U.S. and other countries have worked to develop, introduce and encourage the use of alternative rates to replace certain benchmarks. A transition away from the widespread use of interest rate benchmarks to alternative rates has begun and will continue over the course of the next few years. While central bank-sponsored committees in various jurisdictions have recommended alternative rates for various important interest rate benchmarks, if a particular benchmark were to be discontinued and an alternative rate had not been successfully introduced to replace that benchmark, this could result in widespread dislocation in the financial markets, engender volatility in the pricing of securities, derivatives and other instruments, and suppress capital markets activities, all of which could have adverse effects on our results of operations. In addition, the transition of a particular benchmark to a replacement rate could affect hedge accounting relationships between financial instruments linked to that benchmark and any related derivatives, which could adversely affect our results.
On March 5, 2021, the U.K. Financial Conduct Authority (the FCA), which regulates the London interbank offered rate (LIBOR), published an announcement to confirm the dates immediately after which all LIBOR settings would either cease to be provided by any administrator or no longer be representative. The FCA announced that on December 31, 2021 all tenors would cease to be provided by any administrator except for the overnight, 1-, 3-, 6- and 12-month USD LIBOR tenors, which will be discontinued on June 30, 2023.
In March 2022, the US Congress passed the Adjustable Interest Rate (LIBOR) Act ('the LIBOR Act'). This legislation establishes a uniform process, on a nationwide basis, for replacing LIBOR in existing contracts the terms of which do not contain fallback provisions by automatically replacing LIBOR, on the LIBOR replacement date (expected to be the first London banking day after June 30, 2023), with the 'Board-selected benchmark replacement'. On December 16, 2022, the Federal Reserve Board adopted a final rule that implements the LIBOR Act and identifies these benchmark replacements, which differ for different contracts, but are all based on SOFR.
We have focused and continue to focus on making all the contractual, commercial, operational and technological changes necessary to address relevant pending milestones. Most of our contracts affected
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by the USD LIBOR Reform are adhered to the International Swaps and Derivatives Association (ISDA) Protocol and will transition automatically to the new reference rates.
These and other reforms have caused and may in the future cause benchmarks to perform differently than in the past, or to disappear entirely, or have other consequences which introduce a number of risks for us. These risks include (i) legal risks arising from potential changes required to documentation for new and existing transactions; (ii) risk management, financial and accounting risks arising from market risk models and from valuation, hedging, discontinuation and recognition of financial instruments linked to benchmark rates; (iii) business risk of a decrease in revenues of products linked to indices that will be replaced; (iv) pricing risks arising from how changes to benchmark indices could impact pricing mechanisms on some instruments; (v) operational risks arising from the potential requirement to adapt IT systems, trade reporting infrastructure and operational processes; (vi) conduct risks arising from the potential impact of communication with customers and engagement during the transition period and inquiries, reviews or other actions from regulators regarding our preparation, readiness and transition plans and (vii) litigation risks and risks relating to other disputes and actions with clients, counterparties, investors and other parties regarding our existing products and services, which could adversely impact our profitability.
The implementation of alternative benchmark rates may have a material adverse effect on our business, results of operations, financial condition and prospects. We may also be adversely affected if the change restricts our ability to provide products and services or if it necessitates the development of additional information technology systems.
Failure to successfully implement and continue to improve our risk management policies, procedures and methods, including our credit risk management system, which is affected by the quality and scope of information available in México, could materially and adversely affect us and we may be exposed to unidentified or unanticipated risks.
Risk management is a central part of our activities. We seek to manage and control our risk exposure through a forward-looking management model, based on robust governance and advanced tools, supported by a risk culture that permeates the organization. While our management model uses a broad and diversified set of risk monitoring, control and mitigation techniques, such management model may not be fully effective at mitigating our risk exposure in all economic market environments or against all types of risk, including risks that we may fail to identify or anticipate.
Some of our tools and metrics for managing risk are based on our use of observed historical market behavior. We apply statistical and other tools to these observations to arrive at quantifications of our risk exposures. These tools and metrics may fail to predict future risk exposures. These risk exposures could, for example, arise from factors we did not anticipate or correctly evaluate in our statistical models. This would limit our ability to manage our risks. Thus, our losses could be significantly higher than the historical measures indicate. In addition, our statistical models may not take all risks into account or measure emerging risks correctly.
Our approach to managing risks could prove insufficient, exposing us to material unanticipated losses. We could face adverse consequences as a result of decisions, which may lead to actions by management, based on models that are poorly developed, implemented or used, or as a result of the modelled outcome being misunderstood or the use of such information for purposes for which it was not designed. If existing or potential customers or counterparties believe our risk management is inadequate, they could take their business elsewhere or seek to limit their transactions with us. Any of these factors could have a material adverse effect on our reputation, operating results, financial condition and prospects.
As a retail and commercial bank, one of the main types of risks inherent in our business is credit risk. For example, an important feature of our credit risk management system is to employ an internal credit rating to assess the particular risk profile of individual customers and SMEs. As this process involves detailed analyses of the customer, taking into account both quantitative and qualitative factors, it is subject to human
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or IT systems errors. In exercising their judgment on current or future credit risk behavior of our customers, our employees may not always be able to assign an accurate credit rating, which may result in a higher exposure to credit risks than indicated by our risk rating system.
Some of the models and other analytical and judgment-based estimations we use in managing risks are subject to review by, and require the approval of, our regulators. If models do not comply with all their expectations, our regulators may require us to make changes to such models, may approve them with additional capital requirements or we may be precluded from using them. Any of these possible situations could limit our ability to expand our businesses or have a material impact on our financial results.
Failure to effectively implement, consistently monitor or continuously improve our credit risk management system may result in an increase in the level of non-performing loans and a higher risk exposure for us, which could have a material adverse effect on us.
In addition, the effectiveness of our credit risk management is affected by the quality and scope of information available in México. In assessing customers’ creditworthiness, we rely largely on the credit information available from our own internal databases, the Mexican credit information companies and other sources. Due to limitations in the availability of information and the developing information infrastructure in México, our assessment of credit risk associated with a particular customer may not be based on complete, accurate or reliable information. In addition, although we have been improving our credit scoring systems to better assess borrowers’ credit risk profiles, we cannot assure that our credit scoring systems collect complete or accurate information reflecting the actual behavior of customers or that their credit risk can be assessed correctly. Without complete, accurate and reliable information, we have to rely on other publicly available resources and our internal resources, which may not be effective. As a result, our ability to effectively manage our credit risk and subsequently our impairment losses and allowance for impairment losses may be materially adversely affected.
Risks Related to Government Regulation
Mexican government banking laws and regulations may have a material adverse effect on us.
We are subject to extensive laws and regulations regarding our organization, operations, lending and funding activities, capitalization, transactions with related parties, and taxation and other matters. These laws and regulations impose numerous requirements on us, including the maintenance of minimum credit risk-based, market risk-based and operating-risk capital levels and allowance for impairment losses under Mexican Banking GAAP, prohibited activities, regulation of our business practices and practices relating to risk-profile and sales of securities, regulation on money laundering and its prevention, regulation on derivatives transactions, rates charged, application of required accounting regulations under Mexican Banking GAAP and tax obligations. Many of the applicable laws and regulations have changed extensively in recent years, some with a negative impact on us. There may be future changes in the legal or regulatory system or in the interpretation and enforcement of the laws and regulations, which may have a material adverse effect on us.
On November 1, 2013, the Mexican Congress approved several tax reforms that have become effective. These reforms include changes to the Income Tax Law (Ley del Impuesto sobre la Renta), the Value Added Tax Law (Ley del Impuesto al Valor Agregado) and the Mexican Federal Tax Code (Código Fiscal de la Federación). The tax reforms also repeal the Single Rate Corporate Tax Law (Ley del Impuesto Empresarial a Tasa Única) and the Tax Law on Cash Deposits (Ley del Impuesto a los Depósitos en Efectivo). On November 26, 2013, the Mexican Congress approved a financial reform package that granted broader authority to financial authorities and ordered the Mexican competition authorities to initiate an investigation into the fairness of trade practices in the Mexican financial system. See “Item 4. Information on the Company—B. Business Overview—The Mexican Financial System.”
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The Mexican Congress also approved a number of changes to the Mexican Banking Law in recent years. One of the main changes to the Mexican Banking Law was the grant of authority to the SHCP to conduct evaluations of Mexican banks. The SHCP conducts evaluations of Mexican banks through the Guidelines for the Assessment on the Performance of Credit Institutions (the “Guidelines”), which were published in the Federal Official Gazette on December 31, 2014 and the “Strategic Questionnaire” which is completed annually.
The final result for the Bank on its performance evaluation for 2020 and 2021 was “Satisfactory”, considering the qualification obtained by Banco Santander México on the “Banks’ Evaluation Index” and the qualification obtained on the “Strategic Questionnaire”. On February 15, 2023, we filed our responses to the 2022 "Strategic Questionnaire" with the SHCP.
Results of evaluations are required to be made publicly available by the SHCP. Negative or deficient results of evaluations may result in corrective measures being ordered, including a requirement to present a plan to correct such deficiencies. It is uncertain what such measures may be and whether the imposition of such measures on us may have a material adverse effect on our business.
We cannot predict the terms that will be included in the evaluation report prepared by the SHCP, particularly in relation to lending to certain sectors of the economy. However, if the SHCP determines, after an evaluation, that we have not complied with applicable requirements, we may be forced to lend to certain sectors of the economy or to certain persons that may not meet our credit quality or other standards specified in our policies, that we may not be familiar with or that are not acceptable credit risks, which in turn may impact our financial condition and results. Furthermore, if we were to fail any evaluation, publicity surrounding such failure may impact our reputation, which in turn may adversely impact our ability to conduct business in México and our financial condition and results.
Given the current environment affecting the financial services sector, and due to the several regulatory changes that have taken place under the auspices of the administration of Mr. Andrés Manuel López Obrador, that came to power as a result of the Mexican general elections held on July 1, 2018, including tax reforms, there may be future changes in the regulatory system or in the interpretation and enforcement of the laws and regulations that could adversely affect us. See “Item 4. Information on the Company—B. Business Overview—Supervision and Regulation” for a discussion of the Mexican governmental authorities that regulate us.
The Federal Law for Protection of Personal Data Held by Private Persons (Ley Federal de Protección de Datos Personales en Posesión de los Particulares) protects personal data collected and requires that we ensure the confidentiality of information received from customers. We have modified our processes, procedures and systems as required in order to facilitate the implementation of this law and the supervision of our activities thereunder and as a means to obtain the consent of our customers prior to using any personal information provided by them. Violations of this law could have a material adverse effect on us, including increasing our operating costs and subjecting us to fines and penalties in the event of violations of the provisions of such law.
In June 2014, the Mexican Supreme Court of Justice (Suprema Corte de Justicia de la Nación) issued a thesis, of mandatory application, allowing federal judges to determine ex officio if an interest rate agreed in a promissory note is evidently excessive, violating an individual’s human rights, and consequently establishing a reduced interest rate. The elements the judge should take into account to determine if an interest rate is evidently excessive are: (i) the type of relationship between the parties; (ii) the qualification of the persons intervening in the issuance of the promissory note and if the activity of the creditor is regulated; (iii) the purpose of the credit; (iv) the amount of the loan; (v) the term of the loan; (vi) the existence of guarantees or collateral for the payment of the loan; (vii) the interest rates applied by financial institutions in transactions similar to the one under analysis, as a mere reference; (viii) the variation of the national inflation index during the term of the loan; (ix) market conditions; and (x) other issues that may be relevant for the judge. The mandatory and partly discretionary application of such criteria in the lawsuits affecting our loan portfolio could have a material adverse effect on the interest rates we charge and on our results.
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As of the date hereof, the interest rates Mexican banking institutions, including the Bank and regulated multiple purpose financial institutions, which conform the Mexican Financial System, are entitled to the presumption that the interest rates they charge are not usurious. On November 11, 2016, the Mexican Supreme Court of Justice published a separate thesis (tesis aislada) establishing that the interest rates charged on loans made by Mexican banking institutions are not excessive nor usurious, due to the fact that the loans offered to the public by credit institutions are supervised by the Mexican Central Bank, which supervision has the objective of ensuring that their conditions are accessible and reasonable for the public. Additionally, multiple Mexican courts have rendered new judgments that extended judicial powers regarding loan and credit interest rate reductions, which have established a pattern of limiting freedom for negotiating interest rates and their assessment.
Future Mexican government restrictions on interest rates or commissions could have a material adverse effect on us.
In México, the Law for the Protection and Defense of Financial Services Users (Ley de Protección y Defensa al Usuario de Servicios Financieros) does not impose any specific limit on interest rates or commissions. However, under the Law for the Transparency and Ordering of Financial Services (Ley para la Transparencia y Ordenamiento de los Servicios Financieros), the Mexican Central Bank may issue regulations, and has veto power, in respect of interest rates or commissions, if it determines that economic conditions are not conducive to competition (after hearing the opinion of the COFECE). Although the Mexican government could impose limitations or additional informational requirements regarding such interest rates or commissions in the future, as of the date of this Report, the Mexican Congress and Mexican regulators (including the Mexican Central Bank) have not proposed any specific limit to the interest rates or commissions we may charge. A large portion of our revenues and operating cash flow is generated by interest rates or commissions we charge to our customers, and any such limitations or additional information requirements could have a material adverse effect on us.
We are subject to potential action by any of our regulators or supervisors, particularly in response to customer complaints.
As noted above, our business and operations are subject to increasingly significant rules and regulations that are required to conduct banking and financial services business. These apply to business operations, affect financial returns, include allowance for impairment losses under Mexican Banking GAAP and reporting requirements, and prudential and conduct of business regulations. These requirements are set by the Mexican Central Bank and regulatory authorities that authorize, regulate and supervise us.
In their supervisory roles, the regulators seek to maintain the safety and soundness of financial institutions with the aim of strengthening the protection of customers and the financial system. The supervisors’ continuing supervision of financial institutions is conducted through a variety of regulatory tools, including the collection of information by way of prudential returns, reports obtained from skilled persons, visits to our offices and regular meetings with management to discuss issues such as performance, risk management and strategy. In general, these regulators have a more outcome-focused regulatory approach that involves more proactive enforcement and more punitive penalties for infringement, including intervening institutions, and restricting dividends or bonuses to employees in case of a decrease of regulatory capital. As a result, we face increased supervisory scrutiny (resulting in increasing internal compliance costs and supervision fees), and in the event of a breach of our regulatory obligations we are likely to face more stringent or burdensome regulatory fines or sanctions. Some of the regulators are focusing intently on consumer protection and on conduct risk, including profiling customers considering role, and will continue to do so. This has included a focus on the design and operation of products, the behavior of customers and the operation of markets. Such a focus could result, for example, in pricing regulations that could restrict our ability to charge certain levels of interest in credit transactions or in regulation that would prevent us from bundling products that we offer to our customers.
The regulators could conclude that our products cause significant detriment to consumers because of certain product features or governance flaws or distribution strategies. Such rules may prevent institutions
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from entering into product agreements with customers until such problems have been solved. Regulations require us to be in compliance across all aspects of our business, including the training, authorization and supervision of personnel, systems, processes and documentation. If we fail to comply with the relevant regulations, there would be a risk of an adverse impact on our business from sanctions, fines or other actions imposed by the regulatory authorities, including the revocation of our authorization and the intervention in our operations. Customers of financial services institutions, including our customers, may seek redress if they consider that they have suffered loss as a result of the mis-selling of a particular product, or through incorrect application of the terms and conditions of a particular product. Given the inherent unpredictability of litigation and the evolution of judgments by the relevant authorities, it is possible that an adverse outcome in some matters could harm our reputation or have a material adverse effect on our operating results, financial condition and prospects arising from any penalties imposed or compensation awarded, together with the costs of defending such an action, thereby reducing our profitability. Furthermore, pursuant to a binding Mexican judicial precedent (jurisprudencia), issued by the first circuit of the Mexican Federal Judicial Power in June 2019, and which is binding to judges and collegiate courts in the first circuit, it was ruled that a Mexican banking institution might be deemed to be, under certain circumstances, responsible authority (autoridad responsable) for purposes of a writ of protection (juicio de amparo), provided that a Mexican bank is only deemed to be a responsible authority when (i) it acts in a manner comparable to an authority, (ii) affects rights of individuals, and (iii) acts as determined by a law. As a consequence, the categorization of the Mexican banking institutions, under certain circumstances, as responsible authorities may subject such institutions to the provisions of the Mexican Ley de Amparo (which purpose is to protect human rights and fundamental rights established in the Mexican Constitution, against laws or acts of authority which violate individual guarantees or acts of the federal authority that infringe or restrict the sovereignty of the states), which effects and consequences are still unknown, and may increase the regulatory charges of the Bank.
Claims by COFECE
Investigation by COFECE in the payment systems market
In 2018, COFECE initiated an investigation proceeding regarding the payment systems market, with the purpose of determining the possible existence of barriers to free competition. In México, payments are processed by two payment switches, Promoción y Operación, S.A. de C.V. (PROSA) and EGLOBAL. PROSA is owned by six banks, including Banco Santander México. COFECE required Banco Santander México, as a participant of the investigated market and a shareholder of PROSA, to provide information to COFECE in connection with the investigation.
On December 16, 2020, COFECE published an excerpt of its preliminary opinion on the investigation proceeding, in which it determined that four barriers to free competition existed in the payment systems market and issued several corrective measures. Among the corrective measures set forth in the preliminary opinion, COFECE determined that the shareholders of PROSA sell, at least, 51% of the shares representing their capital stock granting voting rights (equity and corporate rights), through the issuance of unlisted shares on the stock market. Although the Bank does not currently expect such divestment would have a material impact on the Bank’s business, financial condition or results of operations, COFECE’s final resolution has not yet been issued.
On June 15, 2022, we petitioned COFECE to issue a resolution concluding the PROSA investigation, as the statute-of-limitations for COFECE to issue a resolution had expired. However, COFECE has postponed the issuance of its final resolution due to a lack of quorum of its board. We expect COFECE to resolve this investigation by March 2023.
Should COFECE publish a final resolution on this matter, such resolution will contain COFECE’s final determination of the existence of barriers to free competition in the payments systems market as well as whether to proceed with the divestment order with respect to PROSA or impose other penalties. Any adverse finding or penalty imposed beyond that issued in the preliminary opinion could have a material adverse effect on our reputation, financial condition or results.
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Antitrust Class Action Filed in NY
A putative class action filed in New York federal court by two U.S. pension funds on March 30, 2018, alleges that the Bank, along with other members of the Santander Group including Santander España, violated U.S. antitrust laws by conspiring with other major financial institutions, including Banco Bilbao Vizcaya Argentaria (BBVA), J.P. Morgan Chase, HSBC, Barclays, Deutsche Bank, Bank of America and Citi, to rig auctions and fix prices of MGBs, allegedly inflating prices.
In particular, the complaint alleges that the defendants: (1) rigged MGB auctions through collusive bidding and information sharing; (2) sold MGBs purchased at auction at artificially higher prices; and (3) agreed to fix the "bid-ask spread" artificially wider, overcharging and underpaying customers in every MGB transaction by suppressing the "bid price" at which the defendants offered to buy MGBs and increasing the "ask price" at which they offered to sell. The complaint further alleges that these activities resulted in MGB prices being between 20% and 50% higher than they otherwise would have been in a competitive market.
According to the complaint, the alleged conspiracy came to light following an April 2017 announcement that the COFECE had uncovered evidence of anticompetitive behavior in the MGB marketplace.
In addition, the Manhattan and Bronx Surface Transit Operating Authority Pension Plan and the Metropolitan Transportation Authority Defined Benefit Pension Plan Master Trust, filed a second putative antitrust class action in New York federal court alleging the Bank along with other members of the Santander Group conspired with other financial institutions to fix MGB auctions and purchase prices. These actions were consolidated into one case.
As mentioned above, on October 8, 2019, COFECE issued its report determining that the alleged antitrust practices were probably executed by two former employees of Banco Santander México. Following the publication of COFECE’s report, the plaintiffs asked the court to extend their deadline to file an amended complaint until December 9, 2019. On October 1, 2019, the court dismissed the complaint based on the fact that the plaintiff had not filed a claim. However, the plaintiffs filed an amended complaint thereafter. We filed our defense.
On November 30, 2020, the Court resolved the case dismissing the complaint due to lack of jurisdiction. The plaintiff challenged such decision, and we are currently awaiting a final resolution. In case of an appeal, while the Bank does not currently anticipate incurring any liability in connection with this class action, it is not possible to predict its final outcome and any adverse finding or penalty imposed could have a material adverse effect on our reputation, financial condition or results.
We may be required to make significant contributions to the IPAB.
IPAB manages the bank savings protection system and the financial support granted to banks in México. Under Mexican law, banks are required to make monthly contributions to IPAB to support its operations that are equal to 1/12 of 0.004% (the annual rate) multiplied by the average of certain liabilities minus the average of certain assets. Mexican authorities impose regular assessments on banking institutions covered by IPAB for funding. We contributed to IPAB Ps.3,859 million in 2020, Ps.3,801 million in 2021 and Ps.3,981 million in 2022. In the event that IPAB’s reserves are insufficient to manage the Mexican bank savings protection system and provide the necessary financial support required by troubled banking institutions, IPAB maintains the right to require extraordinary contributions to all banking institution participants in the system, which we may be required to make and may be significant. Although we have not been required to make extraordinary contributions to the IPAB in the past, we may be required to make extraordinary contributions in the future. Such extraordinary contributions would increase our expenses and could have a material adverse effect on us.
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We are subject to Mexican regulatory inspections, examinations, inquiries or audits, and future sanctions, fines and other penalties resulting from such inspections and audits, including the revocation of Banco Santander México’s banking license, could have a material adverse effect on us.
We are subject to comprehensive regulation and supervision by Mexican regulatory authorities, such as the Mexican Central Bank, the CNBV and the SHCP. See “Item 4. Information on the Company—B. Business Overview—The Mexican Financial System.” These regulatory authorities have broad powers to adopt regulations and other requirements affecting or restricting virtually all aspects of our capitalization, organization and operations, including changes to capital adequacy and allowance for impairment losses requirements under Mexican Banking GAAP, the activities we may and may not conduct (including limitations on derivative transactions), supervision of compliance with rules relating to secrecy, the imposition of anti-money laundering measures and the authority to regulate the terms of products, including the interest rates we charge and the fees we collect in exchange for services. Moreover, Mexican financial regulatory authorities possess significant powers to enforce applicable regulatory requirements, including the imposition of fines, requiring that new capital be contributed, inhibiting us from paying dividends to shareholders or paying bonuses to employees, or the revocation of licenses to operate our business (including our banking or broker-dealer licenses). In the event that we encounter significant financial problems or become insolvent or in danger of becoming insolvent, Mexican banking authorities would have the power to take over our management and operations. Pursuant to the Law for the Protection and Defense of Financial Services Users, the CONDUSEF is entitled to, among other things, initiate class actions against Mexican financial institutions in connection with events of any nature that affect groups of users of financial services. Likewise, COFECE is entitled to initiate investigations on the commercial practices relating to equity markets within the Mexican Financial System, as well as to impose certain penalties provided for by law. See ”Item 4. Information on the Company—B. Business Overview—Supervision and Regulation.”
Broad regulatory authority granted to CONDUSEF and COFECE may result in measures being taken that affect our operations and financial condition.
CONDUSEF has broad powers to regulate our activities and activities of other Mexican banks, which may have an adverse impact on us. CONDUSEF is entitled to (i) order amendments to our standard form commercial banking documentation (such as loan and account agreements), if CONDUSEF deems that provisions included in such agreements are detrimental to users, (ii) order the attachment of our assets for the benefit of our customers, and (iii) initiate class actions for the benefit of groups of customers. CONDUSEF has broad and discretionary authority to take this and other similar actions, including the imposition of fines and the publication of information that may be detrimental to our business and reputation. Actions taken by CONDUSEF against us, whether on an isolated or recurrent basis, may have a material adverse impact on us.
In addition, on November 26, 2013, the Mexican Congress approved a financial reforms package through which they broadened the regulatory authority granted to financial authorities, including COFECE.
As a result of such expansion, COFECE has the ability to initiate investigations on the equality of commercial practices, including with respect to antitrust practices, within the Mexican Financial System, as well as to impose fines and penalties established in the laws applicable to COFECE at any time, which could have a material adverse effect on our reputation, business, financial condition or results of operation. As of the date of this Report, no such investigations have commenced. See “–We are subject to potential intervention by any of our regulators or supervisors, particularly in response to customer complaints” above.
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We may not be able to detect or prevent money laundering and other financial crime activities fully or on a timely basis, which could expose us to additional liability and could have a material adverse effect on us.
We are required to comply with applicable anti-money laundering, anti-terrorism (“AML/CFT”), anti-bribery and corruption, sanctions and other laws and regulations (collectively, financial crime compliance (“FCC”) regulations). These laws and regulations require us, among other things, to conduct full customer due diligence (including sanctions and politically-exposed person screening), keep our customer, account and transaction information up to date and have FCC policies and procedures in place detailing what is required from those responsible. We are also required to conduct FCC training for our employees, the members of our Board of Directors and to report suspicious transactions and activity to appropriate law enforcement following full investigation by our local FCC team.
Financial crime continues to be the subject of enhanced regulatory scrutiny and supervision by regulators globally. AML/CFT, anti-bribery and corruption and sanctions laws and regulations are increasingly complex and detailed. Key standard-setting and regulatory bodies continue to provide guidelines to strengthen the interaction and cooperation between prudential and AML/CFT supervisors. Compliance with these laws and regulations require automated systems, sophisticated monitoring and skilled compliance personnel.
We maintain updated policies and procedures aimed at detecting and preventing the use of our banking network for money laundering and other financial crime-related activities. On the other hand, emerging technologies, such as cryptocurrencies and innovative payment methods, could limit our ability to track the movement of funds. However, we continue to implement controls for the detection and prevention of the aforementioned operations through such technological means.
Our ability to comply with the legal requirements depends on our ability to improve detection and reporting capabilities and reduce variation in control processes and oversight accountability. These require implementation and embedding within our business effective controls and monitoring, which in turn requires on-going changes to systems and operational activities. Financial crime is continually evolving and, as noted, is subject to increasingly stringent regulatory oversight and focus. This requires proactive and adaptable responses from us so that we are able to deter threats and criminality effectively. As one of the largest Mexican banks and a member of a global banking group through Banco Santander Parent, we are particularly exposed to this risk. Even known threats can never be fully eliminated, and there will be instances where we may be used by other parties to engage in money laundering and other illegal or improper activities. In addition, we rely heavily on our employees to assist us by spotting such activities and reporting them, and our employees have varying degrees of experience in recognizing criminal tactics and understanding the level of sophistication of criminal organizations. Where we outsource any of our customer due diligence, customer screening or anti-financial crime operations, we remain responsible and accountable for full compliance and any breaches. If we are unable to apply the necessary scrutiny and oversight of third parties to whom we outsource certain tasks and processes, there remains a risk of regulatory breach.
If we are unable to fully comply with applicable laws, regulations and expectations, our regulators and relevant law enforcement agencies have the ability and authority to impose significant fines and other penalties on us, including requiring a complete review of our business systems, day-to-day supervision by external consultants and ultimately the revocation of our banking license.
The reputational damage to our business and brand would be severe if we were found to have breached AML/CFT, anti-bribery and corruption or sanctions requirements. Our reputation could also suffer if we are unable to protect our customers’ bank products and services from being used by criminals for illegal or improper purposes.
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In addition, while we review our relevant counterparties’ internal policies and procedures with respect to such matters, we expect our relevant counterparties to maintain and properly apply their own appropriate compliance procedures and internal policies. Such measures, procedures and internal policies may not be completely effective in preventing third parties from using our (and our relevant counterparties’) services as a conduit for illicit purposes (including illegal cash operations) without our (and our relevant counterparties’) knowledge. If we are associated with, or even accused of being associated with breaches of AML/CFT, anti-bribery and corruption, anti-terrorism, or sanctions requirements our reputation could suffer and/or we could become subject to fines, sanctions and/or legal enforcement (including being added to any “watch lists” that would prohibit certain parties from engaging in transactions with us), any one of which could have a material adverse effect on our operating results, financial condition and prospects.
Any such risks could have a material adverse effect on our operating results, financial condition and prospects.
See also “Item 4. Information on the Company—B. Business Overview—Supervision and Regulation—Banking Regulation—Money Laundering Regulations.”
Data breaches and other security incidents with respect to our or our third-party vendors’ systems could adversely affect our business or reputation, and create significant legal, regulatory or financial exposure.
Like other financial institutions, in conducting our banking operations, we receive, manage, hold, transmit and otherwise process certain proprietary, sensitive or confidential information, including personal information of customers and employees, as well as a large number of assets. Accordingly, our business relies on our ability to process a large number of transactions efficiently and accurately, and on our ability to rely on our digital technologies, computer and email services, software and networks, as well as on the secure storage, transmission and other processing of confidential, sensitive or personal data and other information using our computer systems and networks or those of our third-party vendors. The proper and secure functioning of our financial controls, accounting and other data collection and processing systems is critical to our business and to our ability to compete effectively. Data breaches, security incidents and data losses can result from, among other things, inadequate personnel, inadequate or failed internal control processes and systems, or external events or actors that interrupt normal business operations. We also face the risk that the design of our or our third-party vendors’ cybersecurity controls and procedures prove to be inadequate or are circumvented such that our data or client records are incomplete, not recoverable or not securely stored. Any material disruption or slowdown of our systems could cause information, including data related to customer requests, to be lost or to be delivered to our clients with delays or errors, which could reduce demand for our services and products, produce customer claims and materially and adversely affect us.
Although we work with our clients, vendors, service providers, counterparties and other third parties to develop secure data and information processing, collection, authentication, management, usage, storage and transmission capabilities and to ensure the eventual destruction of sensitive and confidential information, including personal information, to prevent against information security risk, we routinely manage personal, confidential and proprietary information by electronic means, and we, our third-party vendors or other third parties with which we do business may be the target of attempted cyberattacks or subject to other information security incidents or breaches. This is especially applicable in the current global environment, with the war in Ukraine resulting in an increased risk of cyberattacks, and other disruptions in response to, or retaliation for, the sanctions and costs imposed on Russia and certain other countries directly or indirectly involved in the war. Additionally, the shift to remote work policies for a significant portion of our workforce, as they access our secure networks remotely, and our customers’ increased reliance on digital banking products and other digital services, including mobile payment products, has also increased the risk of cyberattacks. If we cannot maintain effective and secure electronic data and information (including personal information), management and processing systems or if we fail to maintain complete physical and electronic records, it could result in disruptions to our operations, litigation or claims from
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customers, regulators, employees and other third parties, as well as violations of applicable privacy and other laws, rules or regulations, regulatory sanctions and serious reputational and financial harm to us.
We are required to report every event related to information security issues, such as hacking or hacking attempts, events where customer information may be compromised, unauthorized access and other security breaches to the CNBV.
During 2022 and to date in 2023, we have not experienced any material information security problems and we have not had to report any such events to the CNBV.
Although we take protective measures and monitor and develop our systems to protect our technology infrastructure, data and information from misappropriation or corruption, our and our third-party vendors’ systems, software and networks nevertheless may be vulnerable to breaches, disruptions, failures or other security incidents caused by, among other things, unauthorized access or misuse, malware and ransomware affecting our services and end- user technologies, social engineering and phishing attacks, denial-of- service attacks, misconduct, fraud, and other events that could have a serious impact on us. Although we have procedures and controls in place to safeguard personal and other confidential or sensitive information in our possession, we have been and continue to be subject to a range of cyber-attacks, such as denial of service, malware and phishing attacks. While we generally perform cybersecurity due diligence on our key vendors, because we do not control our vendors and our ability to monitor their cybersecurity is limited, we cannot ensure the cybersecurity measures they take will be sufficient to protect any information we share with them. Due to applicable laws and regulations or contractual obligations, we may be held responsible for security breaches, cyber-attacks or other similar incidents attributed to our vendors as they relate to the information we share with them. Moreover, it is not always possible to deter or prevent employee misconduct, and the precautions we take to detect and prevent this activity may not always be effective.
In addition, we may also be impacted by cyber-attacks against the national critical infrastructure, such as telecommunications networks. Our information technology systems are dependent on such national critical infrastructure and any cyber-attack against such critical infrastructure could negatively affect our ability to service our customers. As we do not operate such national critical infrastructure, we have limited ability to protect our information technology systems from the adverse effects of such a cyber-attack or regulators, as applicable.
We have seen in recent years the information technology and computer systems of companies and organizations being increasingly targeted, and the techniques used to obtain unauthorized, improper or illegal access to information technology and computer systems have become increasingly complex and sophisticated. Furthermore, such techniques change frequently and are often not recognized or detected until after they have been launched and can originate from a wide variety of sources, including not only cyber criminals, but also activists and terrorists, nation states, nation state-supported actors and others. As attempted attacks continue to evolve in scope and sophistication, we may incur significant costs in order to modify or enhance our protective measures against such attacks, or to investigate or remediate any vulnerability or resulting breach, or in communicating cyber-attacks to our customers, affected individuals or regulators, as applicable.
If we or our third-party vendors fall victim to successful cyber-attacks, penetrations, compromises, breaches or circumventions of our information technology systems or experience other security incidents in the future, we may incur substantial costs and suffer other negative consequences, such as disruption to our operations, misappropriation of personal, proprietary, confidential or sensitive information, remediation costs (including liabilities for stolen assets or information, repairs of system damage, among others), increased cybersecurity protection costs, lost revenues arising from the unauthorized use of personal, proprietary, confidential or sensitive information or the failure to retain or attract our customers following an operational or security incident, litigation and legal risks (including regulatory action, reporting obligations, investigation, fines and penalties), increased insurance premiums, reputational damage affecting our customers’ and the investors’ confidence, as well as damages to our competitiveness, stock price and long-
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term shareholder value. In addition, our remediation efforts may not be successful, and we may not have adequate insurance to cover these losses. Moreover, even when a failure of or interruption in our or our third-party vendors’ systems or facilities is resolved in a timely manner or an attempted cyber-attack, data breach or security incident is successfully avoided or thwarted, substantial resources and management attention are expended in doing so, and to successfully avoid or resolve any such incidents, we may be required to take actions that could adversely affect customer satisfaction or retention, as well as harm our reputation.
Although we have procedures and controls in place to safeguard personal and other confidential or sensitive information in our possession, unauthorized access or disclosures could subject us to legal actions and administrative sanctions, as well as damages and reputational harm that could materially and adversely affect our results, financial condition and prospects. Further, our business is exposed to risk from employees’ potential non-compliance with policies, misconduct, negligence or fraud, which could result in regulatory sanctions and serious reputational and financial harm. In addition, we may be required to report events related to information security issues, events where customer information may be compromised, unauthorized access to our systems and other security breaches, to the relevant regulatory authorities.
Taking into account the increase, in recent years, in the cyber-attacks suffered by banking institutions active in México and internationally, we have established security controls to prevent cyber-attacks and/or other breaches to the security of our networks and information technology systems. We periodically update our equipment, networks and software as a security measure, following market standards and allocating a percentage of our annual budget to such measures. If we are not able to maintain adequate security systems, we could be subject to regulatory sanctions and reputational and/or financial damage.
Any cybersecurity or data breach incident that we experience could result in claims by our customers or class action litigation, which could lead to a loss of consumer trust, negatively impact our reputation and lead to loss from legal and regulatory proceedings.
We are exposed to risk of loss from legal and regulatory proceedings and derived from our trustee activity.
We face risk of loss from legal and regulatory proceedings, including tax proceedings, that could subject us to monetary judgments, regulatory enforcement actions, fines and penalties. The current regulatory and tax enforcement environment, which suggests an increased supervisory focus on enforcement, combined with uncertainty about the evolution of the regulatory regime, may lead to material operational and compliance costs.
We are from time to time subject to regulatory investigations and civil and tax claims, and party to certain legal proceedings incidental to the normal course of our business, including among others in connection with conflicts of interest, lending and derivatives activities, trustee activities, relationships with our employees and other commercial, data protection or tax matters. In view of the inherent difficulty of predicting the outcome of legal matters, particularly where the claimants seek very large or indeterminate damages, or where the cases present novel legal theories, involve a large number of parties or are in the early stages of investigation or discovery, we cannot state with certainty what the eventual outcome of these pending matters will be or what the eventual loss, fines or penalties related to each pending matter may be. We believe that we have made adequate provisions related to the costs anticipated to be incurred in connection with these various claims and legal proceedings. As of December 31, 2022, we have set aside Ps.3,009 million (U.S.$154 million) as provisions for these legal actions (including tax-related litigation). For more details on provisions for tax and legal matters, see Note 24.a to our audited financial statements included elsewhere in this Report. However, the amount of these provisions, which considers the likelihood of future cash outflows associated with each of such claims, is substantially less than the total amount of the claims asserted against us, and in light of the uncertainties involved in such claims and proceedings, there is no assurance that the ultimate resolution of these matters will not significantly exceed the provisions currently accrued by us. As a result, the outcome of a particular matter may be material to our results for a particular period.
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We are subject to extensive regulation and regulatory and governmental oversight, which could adversely affect our business, operations and financial condition.
The effective management of our capital position is important in operating our business, continuing our organic growth and implementing our business strategy. However, changes to the regulatory capital framework or other present and future changes that limit our ability to manage our balance sheet effectively, or to access funding on commercially acceptable terms, may cause a material adverse effect on both our financial condition and regulatory capital position.
As a financial institution, we are subject to extensive regulation, including regulation by the Mexican Central Bank, the CNBV and the SHCP, which materially affects our businesses. The statutes, regulations and policies to which we are subject, in particular those relating to the banking sector and financial institutions, may be changed at any time, and the interpretation and application of those laws and regulations by regulators is also subject to change. The wide range of regulations, actions and proposals which most significantly affect us, or which could most significantly affect us in the future, relate to capital, funding, and liquidity requirements. These and other regulatory reforms adopted or proposed in the recent years in México, the United States or worldwide have increased and may continue to materially increase our operating costs and negatively affect our business model. Furthermore, regulators have substantial discretion in how to regulate banks, and this discretion, and the means available to the regulators, have been increasing during recent years. Regulation may be imposed on an ad hoc basis by governments and regulators in response to a crisis, and these may especially affect financial institutions such as us that are deemed to be domestic systemically important institutions. Additionally, the volume, granularity, frequency and scale of regulatory and other reporting requirements demands a robust and transparent data-management strategy to enable consistent aggregation, and reporting of financial and operational information. Inadequate management information systems or processes, including those relating to risk data aggregation and risk reporting, could lead to a failure to meet regulatory reporting requirements or other internal or external information demands, and we may face supervisory measures as a result.
For example, regulators are able to restrict the payment of dividends by financial institutions such as the Bank and in response to the COVID-19 pandemic, the SHCP through the CNBV issued a recommendation that banking institutions not pay dividends to shareholders in 2020. Banco Santander México did not pay dividends in 2020.
Any legislative or regulatory actions and any required changes to our business operations resulting from such legislation and regulations, as well as any deficiencies in our compliance with such legislation and regulation, could result in significant loss of revenue, limit our ability to pursue business opportunities in which we might otherwise consider engaging, limit our ability to provide certain products and services, affect the value of assets that we hold, require us to increase our prices and therefore reduce demand for our products, impose additional compliance and other costs on us or otherwise adversely affect our businesses. In particular, legislative or regulatory actions resulting in enhanced prudential standards, in particular with respect to capital and liquidity, could impose a significant regulatory burden on us and could limit our ability to distribute capital and liquidity. Future liquidity standards could require us to maintain a greater proportion of our assets in highly-liquid but lower-yielding financial instruments, which would negatively affect our net interest margin. Moreover, our regulators, as part of their supervisory function, periodically review our allowance for impairment losses. Such regulators may require us to increase our allowance for impairment losses or to recognize further credit losses. Any such additional allowance for impairment losses, as required by these regulatory agencies, whose views may differ from those of our management, could have an adverse effect on our earnings and financial condition. During 2020, the CNBV issued certain resolutions and temporary accounting provisions in response to the COVID-19 pandemic. As part of these resolutions, the CNBV postponed the adoption of several amendments to the Mexican Banking GAAP standards applicable banks, which were originally scheduled to go into effect on January 1, 2021. These amendments primarily relate to the way in which we account for our allowance for impairment losses for local purposes to align them more closely with IFRS 9 and went into effect on January 1, 2022.
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The Bank is subject to capital adequacy requirements adopted by the CNBV which provide for a minimum ratio for operations of risk-weighted assets for credit, market and operational risk of 8%, along with: (i) a 2.5% capital conservation buffer, (ii) a 1.20% domestic-systemically important bank supplement (which corresponds to all banks that fall in the Grade III category), and (iii) a counter-cyclical capital buffer (currently at 0.0%), that combined add up to an 11.7% capital requirement. Any failure by us to maintain this minimum will result in administrative actions and/or sanctions which may affect our ability to fulfill our obligations, including losing our banking license. As of December 31, 2022, the Bank maintains capital indices above regulatory levels.
We are subject to regulatory capital and liquidity requirements that could limit our operations, and changes to these requirements may further limit and adversely affect our results, financial condition and growth prospects.
In response to the 2008 financial crisis, the Basel Committee issued comprehensive changes to its regulatory capital standards as part of a comprehensive capital and liquidity framework, known as Basel III. The Basel III framework includes heightened capital standards reflecting increases in both the quality and quantity of the regulatory capital base and enhancements to the risk coverage of the capital framework. The Basel III minimum risk-based capital ratio standards require a minimum ratio of 8% over total risk-weighted assets from which a minimum of 4.5% concerns Ordinary Level 1 Capital over total risk-weighted assets and a minimum of 6% Total Capital Level 1 (Ordinary Level 1 Capital plus Additional Level 1) over total risk-weighted assets. In addition to these minimum capital requirements, the Basel III capital standards also include capital buffers that must be maintained above the minimum capital requirements in order to avoid corrective measures from CNBV. These capital buffers include, on a fully phased-in basis, a 2.5% capital conservation buffer, a variable surcharge of up to 2.25% for certain global systemically important banks and a countercyclical buffer of up to 2.5% (during excessive credit growth periods). Basel III also introduces a leverage ratio for institutions as a backstop measure, to be applied alongside the risk-based regulatory capital requirements. The Basel III capital standards are intended to be implemented at a national level subject to transitional arrangements, with the principal requirements being phased in from January 2013 to January 2019 and the remaining requirements fully effective in 2022. After the 2010 publication, the Basel III capital standards have continued to evolve, with the Basel Committee issuing new standards on, among other things, the measurement of risk-weighted assets for counterparty credit risk, exposures to central counterparties and market risk.
The CNBV issued amendments to the capital requirements, which became effective on January 1, 2013 and implemented the Basel III capital standards in all material respects.
In addition to the changes to the capital standards described above, the Basel III framework also introduces the Basel Committee’s global quantitative liquidity standards, which include the Liquidity Coverage Ratio, or LCR, and the Net Stable Funding Ratio, or NSFR. The objectives of the LCR and NSFR, respectively, are to (1) promote the short-term resilience of banks’ liquidity risk profiles by ensuring they have sufficient high-quality liquid assets to meet 30-day cash outflows during a significant stress scenario; and (2) promote resilience over a longer time horizon by creating incentives for banks to fund their activities with more stable sources of funding on an ongoing basis. On August 23, 2021, the CNBV published in the Federal Official Gazette a resolution containing the rules aimed to provide new liquidity requirements for banks (“las nuevas Disposiciones de carácter general sobre los requerimientos de liquidez para las Instituciones de Banca Múltiple”) which took effect on March 1, 2022. Among the principal changes is to require a new funding ratio for local purposes, the Coeficiente de Financiación Estable Neta (“CFEN”), as well as to change the method in which we account for deposits for local purposes. Our calculation of the LCR and NSFR is not affected by these changes.
As part of our liquidity management model, in recent years we have been managing the implementation, monitoring and early compliance with the new liquidity requirements set by international financial legislation.
Our LCR levels exceeded 100% throughout 2022, thereby surpassing regulatory requirements.
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In addition, pursuant to CNBV resolutions adopted in 2016, we are required to calculate on a monthly basis and publish our leverage ratios on a quarterly basis. Such ratio is calculated as Tier 1 capital divided by leverage exposure. Exposure is calculated as the sum of the following items:
● | Accounting assets, excluding derivatives and items treated as deductions from Tier 1 capital (for example, the balance of loans is included, but not that of goodwill). |
● | Off-balance-sheet items (mainly guarantees, unused credit limits granted and documentary credits) weighted using credit conversion factors. |
● | The net value of derivatives (gains and losses vis-à-vis the same counterparty are netted, less the collateral if certain conditions are met) plus an add-on for potential future exposure. |
● | An add-on for the potential exposure of securities financing transactions. |
Our leverage ratio as of December 31, 2022 was 7.13%, as of November 30, 2022 was 6.82%, as of October 31, 2022, was 6.86%, as of September 30, 2022 was 6.85%, as of June 30, 2022 was 7.13%, as of March 31, 2022 was 7.97%, and as of December 31, 2021 was 8.92%.
On June 18, 2021, the CNBV published in the Federal Official Gazette a resolution containing the rules to implement Total Loss-absorbing Capacity (“TLAC”) standards for Domestic Systemically Important Banks (“D-SIBs”). The objective of the TLAC standards is to improve financial stability by requiring banks to maintain sufficient loss-absorbing capacity for both business as usual and in the event of a liquidation, resolution or insolvency.
The TLAC standards will apply to D-SIBs, including Banco Santander México, and will be phased in over a four year period starting on December 31, 2022.
Changes in taxes and other assessments may adversely affect us.
The Mexican government regularly enacts reforms to tax and other assessment regimes to which we and our customers are subject. Such reforms include changes in the rate of assessments and, occasionally, enactment of temporary taxes, the proceeds of which are earmarked for designated governmental purposes. The effects of these changes and any other changes that result from enactment of additional tax reforms cannot be quantified and there can be no assurance that any such reforms would not, once implemented, have an adverse effect upon our business. Furthermore, such changes may produce uncertainty in the financial system, increasing the cost of borrowing and contributing to the increase in our non-performing loan portfolio.
Risks Related to our Operations and Controls Regulation
If we are unable to manage the growth of our operations or to integrate successfully our inorganic growth, this could have an adverse impact on our profitability.
We allocate management and planning resources to develop strategic plans for organic growth, and to identify possible acquisitions and disposals and areas for restructuring our businesses. From time to time, we evaluate acquisition and partnership opportunities that we believe offer additional value to our shareholders and are consistent with our business strategy. However, we may not be able to identify suitable acquisition or partnership candidates, and our ability to benefit from any such acquisitions and partnerships will depend in part on our successful integration of those businesses. Any such integration entails significant risks such as unforeseen difficulties in integrating operations and systems, unexpected liabilities or contingencies relating to the acquired businesses, including legal claims and delivery and execution risks. We can give no assurances that our expectations with regards to integration and synergies will materialize. We also cannot provide assurance that we will, in all cases, be able to manage our growth
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effectively or deliver our strategic growth objectives. Challenges that may result from our strategic growth decisions include our ability to:
•manage efficiently the operations and employees of expanding businesses;
•maintain or grow our existing customer base;
•assess the value, strengths and weaknesses of investment or acquisition candidates, including local regulation that can reduce or eliminate expected synergies;
•finance strategic investments or acquisitions;
•align our current information technology systems adequately with those of an enlarged group;
•apply our risk management policy effectively to an enlarged group; and
•manage a growing number of branch offices without over-committing management or losing key personnel.
Any failure to manage growth effectively could have a material adverse effect on our operating results, financial condition and prospects.
In addition, any acquisition or venture could result in the loss of key employees and inconsistencies in standards, controls, procedures and policies.
Moreover, the success of the acquisition or venture will at least in part be subject to a number of political, economic and other factors that are beyond our control. Any of these factors, individually or collectively, could have a material adverse effect on us.
Any failure to improve or upgrade our information technology infrastructure and information management systems in an effective, timely and cost-effective manner, including in response to new or modified cybersecurity and data privacy laws, rules and regulations, could have a material adverse effect on us.
Our ability to remain competitive depends in part on our ability to upgrade our information technology in an effective on a timely and cost-effective manner. We must continually make significant investments in, and improvements to, our information technology infrastructure and information management systems in order to meet the needs of our customers. For 2023, 74.1% of our capital expenditures budget for information technology is designated for replacing obsolete hardware and software in order to minimize technological risk and the implementation of new digital technologies. We cannot guarantee that in the future we will be able to maintain the level of capital expenditures necessary to support the continuous improvement and upgrading of our information technology infrastructure and information management systems. To the extent we are dependent on any particular technology or technological solution, we may be harmed if such technology or technological solution becomes non-compliant with existing industry standards or applicable laws, rules or regulations, fails to meet or exceed the capabilities of our competitors’ equivalent technologies or technological solutions, becomes increasingly expensive to service, retain and update, becomes subject to third-party claims of intellectual property infringement, misappropriation or other violation, or malfunctions or functions in a way we did not anticipate. Additionally, new technologies and technological solutions are continually being released. As such, it is difficult to predict the problems we may encounter in improving our technologies’ functionality. There is no assurance that we will be able to successfully adopt new technology as critical systems and applications become obsolete and better ones become available. Any failure to effectively improve or upgrade our information technology infrastructure and information management systems in an effective, timely and cost-efficient manner could have a material adverse effect on us. Any failure to effectively improve or upgrade our information technology
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infrastructure and information management systems in an effective, timely and cost-efficient manner could have a material adverse effect on us.
In addition, the Mexican government is increasingly focused on data breaches and other information technology risks and may implement new regulations in the future. A failure to successfully implement all or some of these new global and local regulations, that in some cases have severe sanctions regimes, could have a material adverse effect on us.
Our financial statements are based in part on assumptions and estimates which, if inaccurate, could cause material misstatement of the results of our operations and financial position.
The preparation of financial statements requires management to make judgments, estimates and assumptions that affect the reported amounts of assets, liabilities, income and expenses. Due to the inherent uncertainty in making estimates, actual results reported in future periods may be based upon amounts, which differ from those estimates. Estimates, judgments and assumptions are continually evaluated and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. Revisions to accounting estimates are recognized in the period in which the estimate is revised and in any future periods affected. The accounting policies deemed critical to our results and financial position, based upon materiality and significant judgments and estimates, include fair value measurement and disclosures of financial instruments, allowance for impairment losses and provisions for off-balance sheet risk, recognition and measurement of deferred tax assets, goodwill and business combinations, impairment of goodwill, defined benefit plan, provisions and contingent liabilities, the lease term and the discount rate for leases as a lessee.
The valuation of financial instruments measured at fair value can be subjective, in particular where models use significant inputs not observable in market data. Given the uncertainty and subjectivity associated with valuing such instruments, it is possible that the results and financial position could be materially misstated if the estimates and assumptions used prove to be inaccurate.
If the judgments, estimates and assumptions we use in preparing our audited financial statements are subsequently found to be incorrect, there could be a material effect on our results and a corresponding effect on our funding requirements and capital ratios.
We prepare our financial statements in accordance with IFRS, and these financial statements are not directly comparable to the financial statements that we have historically prepared and that we will continue to prepare in accordance with Mexican Banking GAAP. In addition, some of the financial data presented in this Report are not easily comparable from period to period.
We prepare our financial statements in accordance with IFRS. As a result, our financial data as of and for the years ended December 31, 2020, 2021 and 2022 presented in this Report has been derived from our audited financial statements prepared in accordance with IFRS. However, as per Mexican Central Bank regulations and CNBV reporting requirements, we also prepare our financial statements in accordance with Mexican Banking GAAP. Because IFRS differs in certain significant respects from Mexican Banking GAAP, any Mexican Banking GAAP financial information related to our business for any period is not directly comparable to our IFRS financial data. The lack of comparability of our IFRS and Mexican Banking GAAP financial data from period to period may make it difficult to gain a full and accurate understanding of our operations and financial condition.
Changes in accounting standards could impact reported earnings.
The accounting standard setters and other regulatory bodies periodically change the financial accounting and reporting standards that govern the preparation of our audited financial statements included elsewhere in this Report. Changes in accounting standards can materially impact how we recognize and report our financial condition and results, as well as affect the calculation of our capital ratios. In some cases, we
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could be required to apply a new or revised standard retroactively, resulting in the restatement of prior period financial statements.
In the past, we have identified material weaknesses in our internal control over financial reporting. If we identify material weaknesses in the future, investor confidence in the Bank and the market price of our shares and ADSs may be adversely affected.
We concluded in our assessment of the effectiveness of our internal control over financial reporting as of December 31, 2022 that our internal control over financial reporting was effective. If we experience material weaknesses in the future or otherwise fail to maintain an effective system of internal controls, we may not be able to accurately or timely report our financial information and such failure could result in a negative reaction in the financial markets due to a loss of confidence in the reliability of our financial information, which could negatively affect the market price of our shares. In addition, we may be required to incur additional costs in connection with improving our internal control system and hiring additional personnel. Any such action could negatively affect our results of operation and cash flows.
Disclosure controls and procedures over financial and non-financial reporting may not prevent or detect all errors or acts of fraud.
Disclosure controls and procedures, including internal controls over financial and non-financial reporting, are designed to provide reasonable assurance that information required to be disclosed by the Bank in reports filed or submitted under the Exchange Act is accumulated and communicated to management, and recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.
These disclosure controls and procedures have inherent limitations which include the possibility that judgments in decision-making can be faulty and that breakdowns occur because of errors or mistakes. Additionally, controls can be circumvented by any unauthorized override of the controls. Consequently, our business is exposed to risk from potential non-compliance with policies, employee misconduct or negligence and fraud, which could result in regulatory sanctions, civil claims and serious reputational or financial harm. In recent years, a number of multinational financial institutions have suffered material losses due to the actions of ‘rogue traders’ or other employees. It is not always possible to deter employee misconduct and the precautions we take to prevent and detect this activity may not always be effective. Accordingly, because of the inherent limitations in the control system, misstatements due to error or fraud may occur and not be detected.
Risks Relating to México
Adverse economic conditions in México could have a negative effect on us.
We are a banking institution, and substantially all of our operations and assets are in México and are dependent upon the performance of the Mexican economy. As a result, our business, financial condition and results may be affected by the general condition of the Mexican economy, the depreciation of the peso as compared to the U.S. dollar, price instability, inflation or deflation, interest rates, regulation, taxation, social instability and other political, social and economic developments in or affecting México, over which we have no control. The economy of México has experienced significant volatility in past decades, characterized, in some cases, by slow or regressive growth and contraction, declining investment and high inflation. This volatility has resulted in fluctuations in the levels of deposits and in the relative economic strength of various segments of the economy to which we lend.
A substantial amount of our loans is to customers doing business in México. Accordingly, the recoverability of these loans in particular, and our ability to increase the amount of loans outstanding and our results and financial condition in general, are dependent to a significant extent on the level of economic activity in México. Our results and financial condition could be affected by changes in economic or other policies of
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the Mexican government, which has exercised and continues to exercise substantial influence over many aspects of the private sector, or other political or economic developments in México.
Negative and fluctuating economic conditions, such as a changing interest rate environment, affect our profitability by causing lending margins to decrease and leading to decreased demand for higher-margin products and services. Negative and fluctuating economic conditions in México could also result in government defaults on public debt. This could affect us in two ways: directly, through loan portfolio losses, and indirectly, through the instability that a default in public debt could cause to the economy in general and the banking system as a whole, particularly since commercial banks’ exposure to government debt is high in México. No assurance can be given that our growth, asset quality and profitability will not be affected by volatile macroeconomic conditions.
According to the Mexican National Institute of Statistics and Geography (Instituto Nacional de Estadística y Geografía), and the Mexican Central Bank. In 2020, GDP decreased 8.5% in the context of the COVID-19 pandemic and inflation reached 3.15%. In 2021, GDP increased 5.0% and inflation reached 7.36% with the economy recovering partially from the pandemic. In 2022, GDP increased 3.0% and inflation reached 7.82%, as the economy continued to recover and inflation increased globally.
México also has, and is expected to continue to have, volatility in exchange and interest rates. The annualized interest rates on 28-day Mexican Treasury Bills (Cetes) averaged approximately 5.3%, 4.4% and 7.8% for 2020, 2021 and 2022, respectively. Relative to the U.S. dollar, the peso depreciated by 5.6% in 2020, depreciated by 3% in 2021 and appreciated to Ps.19.51 per U.S. $1.00 on December 31, 2022, all in nominal terms. The peso continues to be affected by uncertainty and volatility in the global markets.
Our business may be significantly affected by the general condition of the Mexican economy, by the rate of inflation or deflation in México, interest rates in México and exchange rates for the Mexican peso or by changes in oil prices. Decreases in the growth rate of the Mexican economy, periods of negative growth and/or increases in inflation or interest rates may result in lower demand for our services and products, lower real pricing of our services and products or a shift to lower-margin services and products. Because a significant percentage of our costs and expenses are fixed, we may not be able to reduce costs and expenses upon the occurrence of any of these events, and our profit margins may suffer as a result.
Political decisions in México could have a material adverse effect on us.
The Mexican government exercises considerable influence over many aspects of the Mexican economy. Our revenues are subject to risk of loss from unfavorable political and diplomatic developments, social instability, changes in the financial, governance and operating structure of state-owned enterprises, such as Petróleos Mexicanos (PEMEX) and Comisión Federal de Electricidad (CFE), and changes in governmental policies, including expropriation, nationalization, international ownership legislation, interest-rate and fee caps, as well as tax policies. As a result, the actions of the Mexican government concerning the economy and regulation of certain industries, including the financial services sector, could have a significant effect on Mexican private sector entities, including us, and on market conditions, prices and returns on Mexican securities, including our securities.
Since taking office in 2018, Andrés Manuel López Obrador government’s stance regarding macroeconomic policy has been focused on maintaining economic stability with an explicit emphasis on the importance of Mexican Central Bank’s autonomy and balanced public finances, as shown by the reluctance to increase public spending even in the face of the COVID-19 pandemic. Some measures in specific sectors, including energy and infrastructure, have generated uncertainty and led to weaker private investment and overall growth.
In 2020, in the midst of an uncertain economic environment given the COVID-19 pandemic, a modest economic support package and concerns regarding PEMEX’s financial conditions, all three major credit rating agencies downgraded México’s sovereign rate, although they maintained its investment grade rating
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in all cases. Moody’s downgraded Mexico’s rating from A3 to Baa1 with negative outlook; S&P downgraded México’s rating from BBB+ to BBB with negative outlook; and Fitch downgraded México’s rating to BBB- with stable outlook. In 2021, the three major rating agencies confirmed their rating and outlook from the previous year. In 2022, Moody’s downgraded México’s rating from Baa1 to Baa2, thereby maintaining its investment grade, and changed its outlook from negative to stable. Subsequently all three major rating agencies reaffirmed their ratings and their stable outlook.
The Bank also has exposure to the electricity industry. In the past, the Bank has been a main participant in the funding and development of renewable energy projects. However, the current administration introduced several legal reforms that aim to reverse the liberalization of the sector since the 2013 reform that have made funding such projects more difficult. Any changes in regulations in the energy and electricity industries that negatively impact our customers may have a material adverse effect on our results and financial condition.
In 2021, México held federal elections for 500 members of congress, 16 state governors as well as local members for congress and city halls. The results were mixed for the governing party, Morena, which was able to win several governorships, giving the party a strong political platform ahead of the 2024 presidential election. However, Morena and its political coalition lost their qualified majority in the lower house of Congress, which implies that President López Obrador requires the opposition parties in order to secure constitutional reforms. We cannot provide any assurance that future political events in México, over which we have no control, will not have an unfavorable impact on our financial position or results.
Developments in other countries may affect us, including the prices for our securities.
Financial and securities markets in México are, to varying degrees, influenced by economic and market conditions in other countries in Latin America and beyond. Negative developments in the economy or securities markets in one country, particularly in an emerging market, may have a negative impact on other emerging market economies. These developments may adversely affect our business, financial condition and results. Although economic conditions in other countries may differ significantly from economic conditions in México, investors’ reactions to adverse developments in other countries may have an adverse effect on the market value of securities of Mexican issuers, including us. For example, although we do not have operations in Europe, since the first quarter of 2022, the war in Ukraine has caused significant increases in commodity prices, including energy prices, globally and led to significant volatility in financial markets globally.
In addition, in recent years, economic conditions in México have become increasingly correlated to economic conditions in the United States. Accordingly, any adverse change in U.S. trade or other policy with respect to México or change in the U.S. economy, such as higher interest rates or changes in fiscal and monetary policies in the U.S. may have an adverse impact on the Mexican economy. In particular, monetary policy in the United States and the U.S. administration’s policies on trade and immigration, particularly towards México, have led to episodes of volatility of the peso/dollar exchange rate. The relative strength or weakness of the U.S. dollar against other currencies, including the Mexican peso, may also impact the growth of the national manufacturing sector, thus affecting economic activity in México, as well as domestic prices and inflation. Thus, we cannot assure that any developments in the United States or elsewhere will not materially and adversely affect us in the future.
As a majority subsidiary of our controlling shareholder, Banco Santander Parent, significant aspects of our strategy, infrastructure and capital funding are dependent on our controlling shareholder. Although our controlling shareholder has a significant presence in various markets around the world, its results are materially affected by conditions in the capital markets and the economy generally in Europe, Latin America and the United States. Accordingly, a significant decline in general economic conditions in Europe, Latin America or the United States, whether caused by recession, inflation, unemployment, changes in securities markets, acts of terrorism or other occurrences, could impact our controlling shareholder, and, in turn, have a material adverse effect on our financial condition and results.
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The volatility in peso exchange rates and interest rates in México could have a material adverse effect on our business.
We are exposed to currency risk any time we hold an open position in a currency other than pesos and to interest rate risk when we have an interest rate repricing gap or carry interest-earning securities having fixed real or nominal interest rates. Peso exchange rates and interest rates in México have been subject to significant fluctuations in recent years. Because of the historical volatility in peso exchange rates and interest rates in México, the risks associated with such positions may be greater than in certain other countries. Our foreign currency liabilities are subject to regulation by the Mexican Central Bank, which imposes liquidity requirements in matching currencies, depending upon the maturities of such liabilities. As of December 31, 2022, the value at risk, or VaR, associated with our financial instruments sensitive to interest rates and foreign currency exchange rates was U.S.$2 million (Ps.38 million) and U.S.$1 million (Ps.15 million), respectively. Although we follow various risk management procedures in connection with our trading and treasury activities and are subject to regulations that seek to avoid important mismatches, there can be no assurance that we will not experience losses with respect to these positions in the future, any of which could have a material adverse effect on our business, including our results.
Severe devaluation or depreciation of the peso may have an adverse effect on us by, for example, increasing in peso terms the amount of our foreign currency-denominated liabilities and the rate of default among our customers or affecting our results when measured in U.S. dollar terms. In addition, severe depreciations may result, as in the past, in the implementation of exchange controls that may impact our ability to convert pesos into U.S. dollars or to transfer currencies outside of México, which may have an impact on us.
Negative economic conditions and volatility in global financial markets, fluctuations in oil and commodity prices, geopolitical conflicts, slow economic activity in advanced and emerging markets, uncertainty about interest rates in the United States and episodes of heightened risk aversion have translated into high volatility in international and domestic markets in the past.
As a result, the Mexican peso has suffered significant fluctuations in the past years. For instance, as of December 31, 2020, the peso depreciated to 19.91 per U.S.$1.00. As of December 31, 2021, the peso depreciated to 20.51 per U.S.$1.00. As of December 31, 2022, the peso appreciated to Ps.19.51 per U.S.$1.00.
The peso continues to be affected by uncertainty and volatility in the global markets. The Mexican government has occasionally implemented measures to limit the volatility of the peso, including auctions of U.S. dollars in the foreign exchange market and regulating hedges of foreign currency-denominated liabilities of Mexican banks. However, we cannot assure that such measures will be put in place if new episodes of volatility materialize, or that they will be effective if they are implemented, or how such measures would impact the Mexican economy.
Severe devaluation or depreciation of the peso may also result in government intervention, as has occurred in other countries, or disruption of international foreign exchange markets. While the Mexican government does not currently restrict, and for several decades has not restricted, the right or ability of Mexican or foreign persons or entities to convert pesos into U.S. dollars or to transfer other currencies outside of México, the Mexican government has taken such measures in the past and could institute restrictive exchange control policies in the future. Accordingly, fluctuations in the value of the peso against the U.S. dollar could have a material adverse effect on us.
Fluctuations in the exchange rate between the peso and the U.S. dollar, particularly depreciations in the value of the peso, may adversely affect the U.S. dollar equivalent of the peso price of the Series B shares on the Mexican Stock Exchange. Such peso depreciations also will likely affect our revenues and results when measured in U.S. dollar terms and the market price of the ADSs. Exchange rate fluctuations would
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also affect the U.S. dollar equivalent value of any cash dividends paid in pesos and other distributions that we pay in pesos in respect of the Series B shares.
Our corporate disclosure may differ from disclosure regularly published by issuers of securities in other countries, including the United States.
Issuers of securities in México are required to make public disclosures that are different from, and that may be reported under presentations that are not consistent with, disclosures required in countries with more developed capital markets, including the United States. In particular, for regulatory purposes, we currently prepare and will continue to prepare and make available to our shareholders statutory financial statements in accordance with Mexican Banking GAAP, which differs from IFRS in a number of respects. In addition, as a foreign private issuer, we are not subject to the same disclosure requirements in the United States as a domestic U.S. registrant under the Exchange Act, including the requirements to prepare and issue quarterly reports, or the proxy rules applicable to domestic U.S. registrants under Section 14 of the Exchange Act or the insider reporting and short-swing profit rules under Section 16 of the Exchange Act. Accordingly, the information about us available to you will not be the same as the information available to shareholders of a U.S. company and may be reported in a manner that you are not familiar with.
Violence in México has adversely impacted, and may continue to adversely impact, the Mexican economy and could have a material adverse effect on us.
México has experienced a significant increase over the past years in violence related to illegal drug trafficking. This increase in violence has had an adverse impact on economic activity throughout México. Also, social instability in México or adverse social or political developments in the country could adversely affect our ability to conduct our business and offer our services and our ability to obtain financing. We cannot assure that the levels of violent crime in México, over which we have no control, will not increase or decrease and will have no further adverse effects on México’s economy or on us.
Furthermore, illegal activities have resulted in more detailed and comprehensive anti-money laundering rules and an increased supervision of such activities by Mexican regulators, which have affected the way in which we conduct our foreign-currency cash business and have resulted in a requirement to enhance our systems and the reinforcement of our compliance measures. If we fail to detect and report anti-money laundering activities, we may be subject to fines and penalties and which may have an adverse impact on our business and results.
Mexican governmental institutions have exercised, and continue to exercise, considerable influence over the Mexican economy, including to control inflation. This involvement, together with México’s political and economic conditions, could adversely affect our financial condition and the market price of our securities.
Mexican public institutions frequently intervene in the Mexican economy and occasionally make significant changes in policies and regulations. Actions by Mexican public institutions to control inflation and other policies and regulations historically have involved, among other measures, increases in interest rates, changes in tax policies, price controls, currency fluctuations, taxation on investment flows, capital controls and limits on imports. Our business, financial condition and results, as well as the market price of our securities, may be adversely affected by changes in policies or regulations involving, among others:
● | interest rates; |
● | exchange rates and controls and restrictions on the movement of capital out of México; |
● | reserve requirements; |
● | capital requirements; |
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● | currency fluctuations; |
● | inflation; |
● | liquidity of the domestic capital and lending markets; |
● | restrictions on our operations due to public health concerns; and |
● | tax and regulatory policies. |
México has experienced high rates of inflation in the past and has therefore implemented monetary policies that have resulted in high nominal interest rates. In 2021, and throughout 2022, inflation began increasing globally, including in México, prompting central banks to increase interest rates. For example, in 2022, the Mexican Central Bank raised interest rates eight times throughout the year by a total of 500 basis points in aggregate. The Mexican government’s measures to fight inflation, principally through the Mexican Central Bank, have had and may in the future have significant effects on the Mexican economy and our business. Tight monetary policies with high interest rates and high compulsory deposit requirements may restrict México’s growth and the availability of credit, reduce our loan volumes and increase our impairment losses. Conversely, more lenient government and Mexican Central Bank policies and interest rate decreases may trigger increases in inflation, and, consequently, growth volatility and the need for sudden and significant interest rate increases, which could negatively affect our interest rate spreads.
Although the Mexican government has implemented what we consider to be relatively sound macroeconomic policies over the past years, uncertainty over whether the Mexican government will implement changes in policy or regulation in the future may contribute to economic uncertainty in México and to heightened volatility in the Mexican securities markets and in the securities issued abroad by Mexican issuers. These uncertainties and other developments in the Mexican economy may adversely affect us and the market value of our securities.
Exposure to Mexican government debt could have a material adverse effect on us.
Like many other Mexican banks, we invest in debt securities of the Mexican government (including those issued by the Mexican Central Bank). As of December 31, 2022, approximately 19.6% of our total assets and 76.3% of our debt securities portfolio was comprised of debt securities issued by the Mexican government (including those issued by the Mexican Central Bank). Any failure by the Mexican government to make timely payments under the terms of these securities, or a significant decrease in their market value, will have a material adverse effect on us.
Investors may find it difficult to enforce civil liabilities against us or our directors, officers and controlling persons.
We and all of our subsidiaries are organized under the laws of México. Our directors, officers and controlling persons reside outside the United States. In addition, all or a substantial portion of our assets and the assets of our directors and officers are located outside the United States. Although we have appointed an agent for service of process in any action against us in the United States with respect to our ADSs, none of our directors, officers or controlling persons has consented to service of process in the United States or to the jurisdiction of any United States court. As a result, it may be difficult for investors to effect service of process within the United States on such persons.
Additionally, investors may experience difficulty in México enforcing foreign judgments obtained against us and our executive officers, directors and controlling persons, including in any action based on civil liabilities under the U.S. federal securities laws. Based on the opinion of our Mexican counsel, there is doubt as to the enforceability against such persons in México, whether in original actions or in actions to enforce
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judgments of U.S. courts, of liabilities based solely on the U.S. federal securities laws. See “Enforcement of Judgments.”
Risks Relating to the ADSs and Our Series B Shares
Our status as a controlled company and a foreign private issuer exempts us from certain of the corporate governance standards of the NYSE, limiting the protections afforded to investors.
We are a “controlled company” and a “foreign private issuer” within the meaning of the NYSE corporate governance standards. Under the NYSE rules, a controlled company is exempt from certain NYSE corporate governance requirements. In addition, a foreign private issuer may elect to comply with the practice of its home country and not to comply with certain NYSE corporate governance requirements, including the requirements that (1) a majority of the Board of Directors consist of independent directors, (2) a nominating and corporate governance committee be established that is composed entirely of independent directors and has a written charter addressing the committee’s purpose and responsibilities, (3) a compensation committee be established that is composed entirely of independent directors and has a written charter addressing the committee’s purpose and responsibilities and (4) an annual performance evaluation of the nominating and corporate governance and compensation committees be undertaken.
Although we have similar practices, they do not entirely conform to the NYSE requirements for U.S. issuers; therefore, we currently use these exemptions available to foreign private issuers and intend to continue using them. Accordingly, you will not have the same protections afforded to shareholders of companies that are subject to all NYSE corporate governance requirements.
For example, under our bylaws and in accordance with the Mexican Banking Law, at least 25% of the members of our Board of Directors must be independent, but independence is determined in accordance with Article 22 of the Mexican Banking Law and our bylaws, rather than NYSE standards. The independence standards in Article 22 of the Mexican Banking Law and our bylaws may not necessarily be consistent with, or as stringent as, the director independence standards established by the NYSE. In addition, like U.S. companies, we are required to have an audit committee that satisfies the requirements of Rule 10A-3 under the Exchange Act, including basic independence standards. However, as a foreign private issuer, we are exempt from additional requirements relating to independence and the audit committee charter. As a result, the oversight of our Audit Committee may be different from, or more limited than, the oversight provided by audit committees of U.S. companies listed on the NYSE.
Our controlling shareholder has a great deal of influence over our business and its interests could conflict with yours.
We operate as a stand-alone subsidiary within the Santander Group. Our principal shareholders have no liability for our banking operations, except for the amount of their respective holdings of our capital stock. Banco Santander Parent, our controlling shareholder, currently beneficially owns directly and indirectly 96.16% of our common stock (including Series B and Series F shares) through its 100% ownership of Grupo Financiero Santander México and its direct ownership of a significant percentage of our Series B shares. Due to its share ownership, our controlling shareholder has the ability to control us, including the ability to:
● | elect the majority of the directors and exercise control over Banco Santander México and subsidiaries; |
● | cause the appointment of our principal officers; |
● | declare the payment of any dividends; |
● | agree to sell or otherwise transfer its controlling stake in us; and |
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● | determine the outcome of substantially all actions requiring shareholder approval, including amendments of our bylaws, transactions with related parties, corporate reorganizations, acquisitions and disposals of assets and issuance of additional equity securities, if any. |
We follow Banco Santander Parent’s Group-Subsidiary Governance Model and Guidelines for Subsidiaries, which were updated and simplified in 2019 and 2020 and approved by Banco Santander México’s Board of Directors on October 31, 2019, April 23, 2020, January 28, 2021, April 22, 2021, October 28, 2021, and October 27, 2022, subject to certain overarching principles, such as precedence of applicable laws and regulations over the framework to the extent they are in conflict. See “Item 16G. Corporate Governance.”
The interests of Banco Santander Parent may differ from our interests or those of our other shareholders, and the concentration of control in Banco Santander Parent will limit other shareholders’ ability to influence corporate matters. As a result, we may take actions that our other shareholders do not view as beneficial.
There may be a lack of liquidity and market for our shares and ADSs.
Since 2017, our ADSs have been listed and traded on the NYSE under the symbol “BSMX” and our Series B shares have been listed and traded on the Mexican Stock Exchange under the symbol “BSMX”. As December 31, 2022, we had 6,786,994,357 shares of common stock outstanding, including 3,322,685,212 Series B shares and 3,464,309,145 Series F shares. The Mexican securities markets are substantially smaller, less liquid and more volatile than major securities markets in the United States.
Moreover, there can be no assurance that a liquid trading market for our Series B share will continue to exist. Beginning in March 2021, Banco Santander Parent announced a mandatory delisting tender offer in order to repurchase the outstanding shares of the Bank that it did not own (8.3%). On June 8, 2021, Banco Santander Parent changed the terms of the tender offer to be a voluntary tender offer, instead of a mandatory delisting tender offer. On November 3, 2021, Banco Santander Parent announced an exchange offer for the outstanding shares of the Bank at a price of Ps.26.50 for each share of the Bank and the equivalent in US dollars of Ps.132.50 for each outstanding American Depositary Share (ADS). Consequently, Banco Santander Parent increased its participation in the Bank to 96.15% from 91.64%. The tender offer and exchange offer further reduced the liquidity and market for our shares and ADSs. In addition, in October 2022, Banco Santander Parent announced that it intends to make concurrent cash tender offers in México and the United States to acquire all of the issued and outstanding Series B shares, subject to receipt of regulatory approvals. In November 2022, our shareholders approved the deregistration of our shares from the Mexican National Securities Registry and the delisting of the ADSs from the NYSE, subject to completion of the tender offers. There can be no guarantee that an active trading market for the ADSs will exist following such deregistration and delisting.
A limited trading market in general and our concentrated ownership in particular may impair the ability of an ADS holder to sell in the Mexican market Series B shares obtained upon withdrawal of such shares from the ADR facility in the amount and at the price and time such holder desires, and could increase the volatility of the price of the ADSs.
In addition, if the trading volume of our ADSs on the NYSE or our Series B shares on the Mexican Stock Exchange were to decline below certain levels, the ADSs or the Series B shares could be delisted or deregistered, further reducing liquidity of our ADSs and Series B shares.
Preemptive rights may be unavailable to non-Mexican holders of our Series B shares and ADSs and, as a result, they may suffer dilution.
Except in certain circumstances (including a follow-on public offering), under Mexican law, if we issue new shares of common stock as part of a capital increase, we generally grant our shareholders the right to subscribe and pay for enough shares to maintain their existing ownership percentage. Rights to subscribe and pay for shares in these circumstances are known as preemptive rights. We may not legally be permitted
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to allow holders of our Series B shares or ADSs in the United States to exercise any preemptive rights in any future capital increase, unless we file a registration statement with the SEC with respect to that future issuance of shares or the offering qualifies for an exemption from the registration requirements of the Securities Act. Similar restrictions may apply to holders of our Series B shares or ADSs in other jurisdictions. We cannot assure that we will file a registration statement with the SEC or any other regulatory authority, or that an exemption from registration will be available to allow holders of our Series B shares or ADSs in the United States or any other jurisdiction, to participate in a preemptive rights offering. At the time of any future capital increase, we will evaluate the costs and potential liabilities associated with filing a registration statement with the SEC, and any other factors, that we consider important to determine whether we will file such a registration statement. Under Mexican law, sales or other transfers by the depositary of preemptive rights and distribution of the proceeds from such sales to ADS holders is not possible. See “Item 10. Additional Information—B. Memorandum and Articles of Association—Preemptive Rights.”
Holders of ADSs may be unable to exercise voting rights with respect to the Series B shares underlying their ADSs at our shareholders’ meetings.
We will not treat holders of ADSs as our shareholders and they may not be able to exercise shareholder rights. The depositary is the holder of the Series B shares underlying the ADSs and holders may exercise voting rights with respect to the Series B shares represented by the ADSs only in accordance with the deposit agreement relating to the ADSs. There are no provisions under Mexican law or under our bylaws that limit the exercise by ADS holders of their voting rights through the depositary with respect to the underlying Series B shares. However, there are practical limitations on the ability of ADS holders to exercise their voting rights due to the additional procedural steps involved in communicating with these holders. For example, holders of our Series B shares will receive notice of shareholders’ meetings generally through publications in newspapers of wide distribution in México and will be able to exercise their voting rights by either attending the meeting in person or voting by proxy. ADS holders, by comparison, will not receive notice directly from us. Instead, in accordance with the deposit agreement, we will provide the notice to the depositary. If we ask it to do so, the depositary will mail to holders of ADSs the notice of the meeting and a statement as to the way in which voting instructions may be given by holders. To exercise their voting rights, ADS holders must then instruct the depositary as to voting the Series B shares represented by their ADSs. Due to these procedural steps involving the depositary, the process for exercising voting rights may take longer for ADS holders than for holders of Series B shares. The Series B shares represented by ADSs for which the depositary fails to receive timely voting instructions may, if requested by us, be voted as we instruct at the corresponding meeting.
ADS holders may be subject to additional risks related to holding ADSs rather than shares.
Because ADS holders do not hold their shares directly, they are subject to the following additional risks, among others:
● | as an ADS holder, you may not be able to exercise the same shareholder rights as a direct holder of ordinary shares; |
● | distributions on the Series B shares represented by your ADSs will be paid to the depositary, and before the depositary makes a distribution to you on behalf of your ADSs, withholding taxes, if any, that must be paid will be deducted and the depositary will be required to convert the pesos received into U.S. dollars. Additionally, if the exchange rate fluctuates significantly during a time when the depositary cannot convert the pesos received into U.S. dollars, or while it holds the pesos, you may lose some or all of the U.S. dollar value of the distribution; |
● | we and the depositary may amend or terminate the deposit agreement without the ADS holders’ consent in a manner that could prejudice ADS holders or that could affect the ability of ADS holders to transfer ADSs; and |
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● | the depositary may take or be required to take actions under the deposit agreement that may have adverse consequences for some ADS holders in their particular circumstances. |
As a holder of ADSs you will have different shareholders’ rights than do shareholders of companies incorporated in the United States and certain other jurisdictions.
Our corporate affairs are governed by our bylaws and Mexican Corporations Law (including specific laws that regulate us as a bank) which may differ from the legal principles that would apply if we were incorporated in a jurisdiction in the United States or in certain other jurisdictions outside México. Under Mexican Corporations Law, you may have fewer and less well-defined rights to protect your interests than under the laws of other jurisdictions outside México. For example, under Mexican law, the protections afforded to minority shareholders and the fiduciary duties of officers and directors are, in some respects, less than, or different from, those existing in the United States and certain other jurisdictions.
Actions against officers and directors may only be initiated by holders of blocks of 5% of our outstanding Series B shares (including Series B shares underlying ADSs), as opposed to a single shareholder or group of affected shareholders, and are shareholders’ derivative suits, which benefit us (as the affected company) rather than affected shareholders directly. Rules and policies against self-dealing and regarding conflicts of interest may also be less well-defined and enforced in México than in the United States, putting holders of our Series B shares and ADSs at a potential disadvantage. In particular, the Mexican legal regime concerning fiduciary duties of directors is not as comprehensive or developed as in the United States. The duties of care and loyalty of directors and officers are solely defined by the Mexican Securities Market Law and have not been interpreted or defined by courts and, as a result, the judicial interpretation of the meaning and extent of such duties is uncertain. Although México recently passed laws that permit the initiation of class actions, rules implementing applicable law have not fully developed procedural requirements for class action lawsuits. There has not been a considerable number of claims relating to breach of duties, whether as class actions or as derivative suits, to encourage litigation based upon breaches of fiduciary duties or to assist in the predictability of the outcome of any potential action. As a result, it may be more difficult in practice for our minority shareholders to decide to exercise or enforce their rights against us and our directors, officers or controlling shareholders than it would be for shareholders of a U.S. company.
Although Mexican Corporations Law imposes restrictions on insider trading and price manipulation, the form of these regulations and the manner of their enforcement may differ from that in the U.S. securities markets or markets in certain other jurisdictions. In addition, in México, self-dealing and the preservation of shareholder interests may be regulated differently, which could potentially disadvantage you as a holder of the shares underlying ADSs.
Certain provisions of Mexican law and our bylaws impose limitations on the trading of our securities and may delay or limit a change of control of Banco Santander México.
In accordance with the LIC, LMV and our by-laws, any person or entity, or group of persons or entities, may directly or indirectly, in one or a series of related transactions, acquire our Series B shares, in terms of article 17 of the LIC. In case any person(s) or entity(ies) intend to acquire directly or indirectly more than 5% (five percent) of our Series B shares or grant a guarantee on the shares representing such percentage, the prior authorization of the CNBV is required. In case a person or a group of persons (shareholders or not) intend to purchase 20% (twenty percent) or more of our Series B shares or to obtain the Bank’s control, the prior authorization of the CNBV is required.
Additionally, the persons who acquire or transfer Series B shares for more than 2% (two percent) shall give notice to CNBV within 3 (three) business days following the purchase or the transfer and any person that, directly or indirectly, purchases 30% or more of our Series B shares, through one or more transactions, simultaneous or successive, shall be obliged to carry out the acquisition by means of a mandatory public offering, in terms of article 98 of the LMV.
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Foreign governments shall not participate, directly or indirectly, in the Bank’s capital stock, except in cases provided for by article 13 of the LIC.
The aforementioned provisions may delay or limit a change of control of Banco Santander México or a change in our management.
The relative volatility and illiquidity of the Mexican securities markets may substantially limit ADS holders’ ability to sell the Series B shares underlying the ADSs at the price and time they desire.
Investing in securities that trade in emerging markets, such as México, often involves greater risk than investing in securities of issuers in the United States, and such investments are considered to be more speculative in nature. The Mexican securities market is substantially smaller, less liquid, more concentrated in a limited number of broker-dealers and institutional participants, and can be more volatile than securities markets in the United States. There is also significantly greater concentration in the Mexican securities market than in major securities markets in the United States. Accordingly, although ADS holders are entitled to withdraw the Series B shares underlying the ADSs from the depositary at any time, their ability to sell such shares in the Mexican securities market at a price and time they desire may be limited.
Our shareholders may be subject to liability for certain votes of their securities.
Shareholders who have a conflict of interest with us and do not abstain from voting on a resolution that ultimately causes damages and losses to us, may be held liable for such damages and losses, but only if the transaction would not have been approved without the favorable vote of such shareholders. See “Item 10. Additional Information—B. Memorandum and Articles of Association—Conflicts of Interest.”
ITEM 4. INFORMATION ON THE COMPANY
A. History and Development of the Company
General
We are the second-largest bank in México based on total assets, the third-largest based on total loans and net profit and the fourth-largest based on deposits, as of December 31, 2022, in each case as determined in accordance with Mexican Banking GAAP, according to information published by the CNBV. As a bank and through our subsidiaries, we provide a wide range of financial and related services, principally in México, including retail and commercial banking, and securities underwriting. As of the date of this report, our main subsidiaries are: (i) Santander Inclusión Financiera, S.A. de C.V., Sociedad Financiera de Objeto Múltiple, Entidad Regulada and (ii) Santander Tecnología México, S.A. de C.V.
Our principal executive offices are located at Avenida Prolongación Paseo de la Reforma 500, Colonia Lomas de Santa Fe, Alcaldía Álvaro Obregón, 01219, Mexico City, México. Our telephone number at that address is +52 55 5257-8000 and our website is www.santander.com.mx. None of the information contained on our website is incorporated by reference into, or forms part of, this Report.
Our agent for service of process is Banco Santander, S.A., New York Branch, Attn.: James H. Bathon, Chief Legal Officer, 45 E. 53rd Street New York, New York 10022.
History
Banco Santander México was incorporated on November 16, 1932, under the name Banco Mexicano. Following several mergers and changes thereafter, in 1997, Banco Santander Parent ultimately acquired the predecessor to our former holding company, Grupo Financiero Santander México, S.A.B. de C.V. (the “Former Holding Company”). Some of the key milestones of the Bank in recent years include:
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On December 8, 2017, the shareholders of the Bank approved the merger of the Former Holding Company with and into the Bank, with the Bank as the surviving company (the “Merger”) and by official letter UBVA/077/2017 dated December 13, 2017, the SHCP authorized the Merger. On December 8, 2017, the Bank and the Former Holding Company entered into a merger agreement, which became effective exclusively between the parties and for accounting purposes as of January 1, 2018 pursuant to Mexican law. On January 26, 2018, the Merger became effective before third parties.
Immediately following the effectiveness of the Merger before third parties, (i) Banco Santander Parent contributed all of the shares of the Bank held by it as a result of the Merger to a new holding company, Grupo Financiero Santander México, S.A. de C.V., and (ii) the Bank sold all of the shares of Casa de Bolsa held by it as a result of the Merger to its new holding company, Grupo Financiero Santander México, S.A. de C.V. As a result of the Merger, the Former Holding Company’s Series B shares were delisted from the Mexican Stock Exchange and their registration with the RNV was cancelled; the Bank’s Series B shares were listed on the Mexican Stock Exchange and registered with the RNV; and the shares underlying the Former Holding Company’s ADSs were substituted for shares of the Bank and the ADSs were listed on the NYSE in the Bank’s name.
On March 23, 2021, Banco Santander Parent announced a mandatory delisting tender offer in order to repurchase the outstanding shares of the Bank that it did not own (8.3%). On June 8, 2021, Banco Santander Parent changed the terms of the tender offer to be a voluntary tender offer, instead of a mandatory delisting tender offer. On November 3, 2021, Banco Santander Parent announced an exchange offer for the outstanding shares of the Bank at a price of Ps.26.50 for each share of the Bank and the equivalent in US dollars of Ps.132.50 for each outstanding American Depositary Share (ADS). Consequently, Banco Santander Parent increased its participation in the Bank to 96.15% from 91.64%.
On December 22, 2021, Banco Santander México obtained the authorization from Banco Santander Parent to carry out the merger through absorption of Santander Consumo and Santander Servicios Especializados into Banco Santander México, with Banco Santander México the surviving entity. On December 15, 2022, the SCHP further authorized the aforementioned merger with an effective date of January 1, 2023.
In addition, in October 2022, Banco Santander Parent announced that it intends to make concurrent cash tender offers in México and the United States to acquire all of the issued and outstanding Series B shares, subject to receipt of regulatory approvals. In November 2022, our shareholders approved the deregistration of our shares from the Mexican National Securities Registry and the delisting of the ADSs from the NYSE, subject to completion of the tender offers. The offers commenced on February 7, 2023 and will expire on March 8, 2023, which expiration date may be extended in accordance with applicable law.
Capital Expenditures and Divestitures
In 2020, our capital expenditures were Ps.5,879 million, 68.8% (Ps.4,045 million) of which was spent on information technology and the remainder Ps.1,834 million which was spent on furniture, fixtures and equipment. In 2021, our capital expenditures were Ps.5,905 million, 71.5% (Ps.4,222 million) of which was spent on information technology and the remainder Ps.1,683 million which was spent on furniture, fixtures and equipment. In 2022, our capital expenditures were Ps.7,191 million, 68.8% (Ps.4,948 million) of which was spent on information technology and the remainder Ps.2,243 million which was spent on furniture, fixtures and equipment.
For 2023, we have a capital expenditures budget of Ps.10,466 million (U.S.$536 million), 74.1% of which (Ps.7,752 million) will be spent on information technology and the rest of which will be spent on furniture, fixtures and equipment (Ps.2,714 million). Of our capital expenditures spent on furniture, fixtures and equipment, 15% will be used for ordinary course updates to our furniture, fixtures and equipment, 85% will be used for the transformation of our distribution network and the remainder will be used to expand our product offerings. Our management expects that cash flows from operations will be sufficient to meet our liquidity requirements over the next 12 months, including our expected 2023 capital expenditures.
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B. Business Overview
Overview
We are the second-largest bank in México based on total assets, the third-largest banks based on total loans and net profit and fourth-largest based on deposits as of December 31, 2022, in each case as determined in accordance with Mexican Banking GAAP, according to information published by the CNBV. As a bank and through our subsidiaries, we provide a wide range of financial and related services, principally in México, including retail and commercial banking and securities underwriting. As of December, 31, 2022, our principal subsidiaries were Santander Consumo, S.A. de C.V., Sociedad Financiera de Objeto Múltiple, Entidad Regulada, Santander Inclusión Financiera, S.A. de C.V., Sociedad Financiera de Objeto Múltiple, Entidad Regulada and Santander Tecnología México, S.A. de C.V. As of December 31, 2022, we had total assets of Ps.1,813,421 million (U.S.$92,954 million), total equity of Ps.163,454 million (U.S.$8,378 million), and a market capitalization of Ps.156,033 million (U.S.$7,998 million), and for the year ended December 31, 2022, we had net income of Ps.24,108 million (U.S.$1,236 million), which represented a return-on-average assets of 1.23% and a return-on-average equity, or ROAE, of 15.43% for that period. Our net tangible book value as of December 31, 2022 was Ps.152,773 million and our net tangible book value per share as of December 31, 2022 was Ps.22.53. As of December 31, 2022, we had total loans, net of allowance for impairment losses, of Ps.768,662 million (U.S.$39,401 million), total deposits of Ps.1,146,281 million (U.S.$58,757 million) and 1,345 offices located throughout México.
We offer a differentiated financial services platform in México focused on the customer segments that we believe are most profitable, such as high- and mid-income individuals, SMEs and middle-market and large corporations in México, while also providing integrated financial services to low-income individuals. We developed our customer segmentation strategy in 2008 with clearly defined customer segments: high- and mid-income individuals, SMEs and middle-market corporations. Since then, we have focused our efforts on further refining our customer segmentation, developing our product offerings, information technology systems and internal practices, as well as enhancing our distribution channels in order to maximize service in our key customer segments.
The following chart sets forth the Retail Banking and Corporate and Investment Banking operating segments of the Bank and their main focus.
Retail Banking |
| Corporate and Investment Banking |
---|---|---|
Focusing on the following categories of customers: · Individuals, for individuals with net worth of less than Ps.8 million, categorized as classic, preferred or select. · Private banking, for individuals with net worth in excess of Ps.15 million. · Individuals, with a net worth between Ps.8 million and Ps.15 million are attended to by either the Individuals segment or the Private Banking segment described above, depending on the product offering that suits them best. · SMEs, with annual gross revenues of less than Ps.250 million. · Middle-market corporations, with annual gross revenues of more than Ps.250 million that are not customers of Corporate and Investment Banking. · Government institutions, comprised of Mexican government agencies, state agencies and | | Offering our largest customers (mainly Mexican and multinational corporations, financial groups and large institutional customers) financial services and products such as: · Global Transaction Banking (GTB), which includes cash management, working capital and trade finance solutions. · Global Debt Finance (GDF), which includes structuring and distribution of bonds, syndicated loans, project and asset based financing. · Banking and Corporate Finance, which includes mergers and acquisitions, and equity capital markets. · Markets, which includes “plain vanilla” and tailored fixed income, foreign exchange and hedging solutions. · Corporate and Investment Banking products and solutions for retail customers, which offers tailor-made products and solutions in order to meet specific needs. |
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Retail Banking |
| Corporate and Investment Banking |
---|---|---|
municipalities, as well as Mexican public universities. |
In addition, we have a Corporate Activities operating segment comprised of all other operational and administrative activities that are not assigned to a specific segment or product listed above. These activities include the centralized management of our financial investments, the financial management of our structural interest rate risk and foreign exchange position and the management of our liquidity and equity through securities offerings and the management of assets and liabilities.
Our insurance activities are included in the Retail Banking segment.
The following table sets forth the breakdown of our net interest income and operating profit before tax by operating segment.
| | | | | | | | | | | | | | | | | | | | | | | |
| | IFRS | |||||||||||||||||||||
| | Net interest income | | | Operating profit before tax | ||||||||||||||||||
| | For the year ended December 31, | | | For the year ended December 31, | ||||||||||||||||||
|
| 2020 |
|
| 2021 |
|
| 2022 | |
| 2020 |
|
| 2021 |
|
| 2022 | ||||||
| | (Millions of pesos) | |||||||||||||||||||||
Retail Banking | | Ps. | 61,444 | | | Ps. | 58,045 | | | Ps. | 65,477 | | | Ps. | 21,956 | | | Ps. | 21,984 | | | Ps. | 28,589 |
Corporate and Investment Banking | |
| 5,605 | | |
| 4,295 | | |
| 9,216 | | |
| 5,243 | | |
| 3,350 | | |
| 7,131 |
Corporate Activities | |
| (1,239) | | |
| 1,092 | | |
| 419 | | |
| (1,999) | | |
| 433 | | |
| (3,448) |
Total | | Ps. | 65,810 | | | Ps. | 63,432 | | | Ps. | 75,112 | | | Ps. | 25,200 | | | Ps. | 25,767 | | | Ps. | 32,272 |
The following table shows certain of our financial and operational data.
| | | | | | | | | | | | |
| | IFRS |
| |||||||||
| | As of and for the year ended |
| |||||||||
| | December 31, |
| |||||||||
|
| 2020 |
|
| 2021 |
|
| 2022 | | |||
| | (Millions of pesos, except percentages, |
| |||||||||
| | offices and customer data) |
| |||||||||
Offices(1) |
| | 1,350 |
| | | 1,346 |
| | | 1,345 | |
Customers |
| | 18,707,976 |
| | | 19,664,670 |
| | | 21,338,060 | |
Total assets | | Ps. | 1,837,914 | | | Ps. | 1,678,213 | | | Ps. | 1,813,421 | |
Loans | | Ps. | 687,432 | | | Ps. | 741,053 | | | Ps. | 798,662 | |
Deposits(2) | | Ps. | 1,139,855 | | | Ps. | 1,102,767 | | | Ps. | 1,146,281 | |
Total equity | | Ps. | 153,834 | | | Ps. | 163,588 | | | Ps. | 163,454 | |
Non-performing loans as a percentage of total loans(3) | |
| 3.07% | | |
| 2.97% | | |
| 2.58% | |
Efficiency(4) | |
| 41.95% | | |
| 45.02% | | |
| 44.33% | |
ROAE(5) | |
| 13.42% | | |
| 13.21% | | |
| 15.42% | |
(1) | Includes traditional branches (including those offering Santander Select service), offices and branches that serve SMEs, traditional bank tellers (ventanillas – including those offering Santander Select service), Santander Select offices (including centers (Centros Select), spaces (Espacios Select), box offices and corners) as well as Santander Select units (módulos). |
(2) | Includes demand, time deposits, repurchase agreements and deposits from the Mexican Central Bank and credit institutions. |
(3) | See Note 2.g to our audited financial statements included elsewhere in this Report for more details on the classification of credit-impaired or non-performing loans. |
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(4) | Efficiency ratios are equal to administrative expenses plus depreciation and amortization, divided by total income. |
(5) | Calculated based upon the average daily balance of equity. |
As a result of the Merger, Grupo Financiero Santander México directly owns 74.96% of our capital stock. Banco Santander, S.A., or Banco Santander Parent, owns 99.99% of the capital stock of Grupo Financiero Santander México. In addition, as a result of the Tender Offers, Banco Santander Parent also directly owns 43.28% of our Series B shares. With aggregate ownership of 96.15% of our share capital, Banco Santander Parent is our controlling shareholder. As of December 31, 2022, the Santander Group had total assets of €1,735 billion (U.S.$.1,629 billion), equity of €97,585 million (U.S.$91,611 million) and a market capitalization of €47,066 million (U.S.$44,185 million). It also generated an attributable profit of €9,605 million (U.S.$9,017 million) in the year ended December 31, 2022. We represented approximately 9% of the Santander Group’s attributable profit in the year ended December 31, 2022, making us the fourth largest contributor of attributable profits to the Santander Group. We also represented approximately 5% of the Santander Group’s assets in the year ended December 31, 2022, according to the annual report of the Santander Group for 2022.
Our Competitive Strengths
Leading market position in select categories
We are ranked second in terms of total assets, third in terms of total loans and net profit and fourth in terms of deposits among private-sector banks in México, with market shares of 14.7%, 13.0%, 11.2% and 12.1%, respectively, as of December 31, 2022, in each case as determined in accordance with Mexican Banking GAAP, according to information published by the CNBV. Among the seven largest private-sector banks in México, we believe that we hold leading market positions in most of our key product lines, such as mortgages, auto and credit cards loans.
The following table shows rankings and market shares as of December 31, 2022, according to information published by the CNBV. All statements in this Report regarding our market position and relative financial performance vis-à-vis the financial services sector in México are based, out of necessity, on information obtained from CNBV reports, and accordingly are presented in accordance with Mexican Banking GAAP. For a more detailed description of our performance relative to the Mexican banking industry, see “—Competition.”
| | | | | | |
| | Mexican Banking GAAP |
| |||
| | As of December 31, 2022 |
| |||
| | | | | |
|
| | | | | | |
| | | | | Market Share |
|
| | Position of Banco | | | of Banco |
|
| | Santander | | | Santander |
|
| | México among | | | México among |
|
Rankings and Market Share |
| banks(1) |
|
| banks(2) |
|
Total loans | | 3 | | | 13.0 | % |
Deposits | | 3 | | | 12.1 | % |
Total assets | | 2 | | | 14.7 | % |
Asset quality(3) | | 4 | | | — | |
Total equity | | 3 | | | 12.0 | % |
Net income | | 3 | | | 11.2 | % |
Efficiency(4) | | 4 | | | — | |
ROAE(5) | | 3 | | | — | |
Source: CNBV.
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(1) | Among the largest private banks in México in terms of total assets, which are Banco Santander México; BBVA Bancomer, S.A., Institución de Banca Múltiple, Grupo Financiero BBVA Bancomer; Banco Nacional de México, S.A., integrante del Grupo Financiero Banamex; Banco Mercantil del Norte, S.A., Institución de Banca Múltiple, Grupo Financiero Banorte; HSBC México, S.A., Institución de Banca Múltiple, Grupo Financiero HSBC; Banco Inbursa, S.A., Institución de Banca Múltiple, Grupo Financiero Inbursa; and Scotiabank Inverlat, S.A., Institución de Banca Múltiple, Grupo Financiero Scotiabank. |
(2) | We calculate market share data based on information published by the CNBV. |
(3) | Defined as total non-performing loans as a percentage of total loans. |
(4) | We calculate the efficiency ratio as administrative and promotional expenses, which include depreciation and amortization, divided by total income, using information published by the CNBV. |
(5) | Calculated based on the average balance of equity. |
We believe that our scale and market leadership provide us with exceptional competitive opportunities, including the ability to gather market intelligence to support decision-making in determining business opportunities and in meeting our customers’ needs.
Focus on well-defined customers segments resulting in superior track record
We believe our market share in our key customer segments (high- and mid-income individuals and middle-market corporations) will continue to contribute to our profitability. We have posted ROAE levels of 13.6%, 11.1% and 16.4% in 2020, 2021 and 2022, respectively, making us the third most profitable bank among the seven largest private-sector banks in Mexico under that metric in 2022, as determined in accordance with Mexican Banking GAAP, according to information published by the CNBV.
In addition, we believe our targeted efforts have helped us organically increase our market share in key business lines. For example, we gained market share in consumer loans of 40 basis points, especially in auto and payroll loans with gains of 350 basis points and 30 basis points, respectively, in 2022, making us the third and fourth bank among the seven largest private-sector banks in México, meanwhile, we maintain our market share of 13.8% in credit card loans. In terms of mortgages loans, we are the third-largest provider of residential mortgages in México in 2022 as determined in accordance with Mexican Banking GAAP, according to information published by the CNBV.
Efficient and business-oriented operational platform
Our operations are supported by our modern business-oriented information technology systems and our omnichannel distribution strategy. This strategy consists of using both traditional and alternative distribution channels such as branches, Internet banking, mobile banking, contact centers, Fuerza Asesor Santander and Santander Personal tailored to each of our customer segments and designed to reach a broad spectrum of customers in a cost-efficient manner, resulting in innovative ways to serve our customers.
We have well-developed customer relationship management, or CRM, tools that allow us to monitor our customers’ behavior and provide them with targeted product offerings through diverse channels. As a consequence, we are able to efficiently leverage alternative distribution channels, such as ATMs, Internet banking, our contact centers, Fuerza Asesor Santander and Santander Personal which are complementary to our traditional proprietary branch network, which enables us to deliver better service to our customers and increases our sales ratios.
We believe our efficient operations allow us to realize synergies and more profitable growth. As of December 31, 2022, we were the fourth most efficient bank among the seven largest private-sector banks in México, as calculated in accordance with Mexican Banking GAAP, according to information published
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by the CNBV. For this purpose, we calculate the efficiency ratio as administrative expenses divided by total income, using information published by the CNBV.
We believe this is a result of many factors, including our focus on cost-control and best practices that we can leverage from Banco Santander Parent, among others. We believe our efficiency ratio provides us with operating flexibility and enables us to be competitive in pricing versus our peers.
Synergies from our affiliation with the Santander Group
We believe that being an affiliate of the Santander Group offers us significant competitive advantages. The Santander Group is one of the largest banking groups in Latin America in terms of assets, the largest financial group in Spain and a significant financial system participant in various European countries, including the United Kingdom (UK), through its Santander U.K. subsidiary, Poland and Portugal, among others. Through Santander Consumer, Santander Group also operates a leading consumer finance franchise in the United States as well as in Germany, Italy, Spain and several other European countries. Our relationship with the Santander Group allows us, among other things, to:
● | benefit from the Santander Group’s operational expertise in areas such as internal control and risk management, with practices that have been developed in response to a wide range of market conditions around the world and that we believe will enhance our ability to grow our business within desired risk limits; |
● | strengthen our internal auditing function and, as a result of the addition of an internal auditing department that reports concurrently and directly to our Audit Committee and the Audit Committee of Santander Group, making it more independent from management; |
● | enhance our ability to manage credit and market risks through the adoption of policies and know-how developed by Santander Group; |
● | leverage the Santander Group’s latest-generation, customer-centered, global information technology platform, which reduces our technology development costs, provides operational synergies with the Santander Group, enhances our ability to support our customers and enables us to deliver products and services targeted to the needs of our customers; |
● | utilize the Santander Group’s management training and development, which is composed of a combination of in-house training and development with access to managerial expertise and best practices in other Santander Group units outside México. Santander Group also participates in monitoring key supervisory areas, including risk, auditing, accounting and financial control; |
● | identify the challenges to adapt to the new business environment and to contribute to a more inclusive and sustainable growth through eleven Group commitments that where set in 2018 for the years to come. The purpose is to invest in the Bank’s community, financially empower people, support higher education through scholarships and to leave an environmental footprint while we incentivize environmental, social, and governance (ESG) products across all business units; |
● | access the Santander Group’s multinational customer base and benefit from the Santander Group’s global presence, particularly in Latin America; |
● | support our large Mexican corporate customers in the internationalization of their businesses, through trade financing, international capital markets access, structured finance and syndicated loans, as well as transactional banking services; |
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● | benefit from selectively borrowing from Santander Group’s product offerings in other countries as well as from their know-how in systems management, while we all embrace the digital transformation across our business to build the Digital Investment Bank; |
● | replicate or adapt to the Mexican market successful product offerings and best practices from the Santander Group and its subsidiaries in other countries, as well as addressing common challenges within México; and |
● | benefit from Santander Group’s overall market presence and market campaigns such as Santander League. |
Although we benefit from our affiliation with the Santander Group, our executive officers are responsible for the management of our business and are independent from Banco Santander Parent.
Strong and sustainable funding and capitalization profile
Our principal source of funding is customer deposits, including repurchase agreements, which represented Ps.928,298 million, or 56.3%, of our total liabilities as of December 31, 2022. As of December 31, 2022, customer deposits represented 81.0% of our total deposits. Since we are primarily a commercial bank, customer deposits, a comparatively less expensive source of funding, constitute the main source of liquidity in our financing structure. This has allowed us to manage (i) our reliance on, and exposure to, riskier sources of funding and (ii) our liquidity requirements. We believe we have attractive capitalization levels based on our Tier 1 capital ratio, which has been near the median of the seven largest banks in México over the past five years. As of December 31, 2022, our total capitalization ratio was 19.38%, comprised of 13.93% of fundamental capital (CET1), 15.77% of Tier 1 capital, and 3.61% of complementary capital (Tier 2), in each case calculated in accordance with Mexican Banking GAAP.
ESG
We have accelerated the implementation of our sustainable finance classification system, strengthening internal processes to identify, promote and validate green/social transactions, ant thereby mitigate the risk of greenwashing. We also provided ESG training to more than 500 employees from different areas of the bank (mainly risk and business areas). With these actions, we have strengthened our position with the objective of being the bank of reference in México sustainable financings and a solution for those customers transitioning to a greener economy.
Experienced management team and skilled workforce
We benefit from a highly-experienced management team. Our senior management has an average of 23 years of experience in the financial industry and 18 years in the Santander Group. Our management team has guided us through economic cycles and, by anticipating recent macroeconomic developments. Our management has concentrated its efforts on establishing a successful working environment and employee culture, and has invested in rigorous personnel selection processes, training programs and evaluation processes to maintain a strong talent base and foster retention. We have promoted the development and strengthening of abilities and skills in managing people and teams. The experience and commitment of our senior management team has been a critical component in the growth of our franchise, as well as in the continuing enhancement of our operations and financial performance.
Our Strategy
During 2022, we enhanced our commercial strategy focusing towards two main objectives: (i) becoming our customers’ primary bank and (ii) being leaders in profitable growth.
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Based on our strong profitability and growth in key business lines, we will continue to focus on improving the experience of our customers and becoming their main bank. To achieve this, we continue to transform our distribution network and infrastructure, while we have launched new products and services through digital channels, as well as keep working on new ways to continue positioning the Bank as a market leader in value-added products. We are working to strengthen our retail banking business by targeting high- and middle-income individuals, SMEs and middle-market companies, the most dynamic and profitable segments of the Mexican economy.
We seek to achieve these objectives through the following strategies:
Establish a customer centric model that places the customer at the core of our business while we continue to expand and develop our customer base and further enhance customer loyalty
Customers are our main focus and our priority with respect to all of our commercial efforts. We seek to differentiate Banco Santander México by providing exceptional service and an attractive value proposition, allowing us to increase customer loyalty. We believe this model will allow us to strengthen our position in the retail segment by attracting new high-potential customers, retaining existing customers through transactional products and ultimately becoming their primary bank.
We intend to continue to use our extensive distribution network to proactively pursue and strengthen our relationships with (i) high- and middle-income customers through the offering of key products and (ii) SMEs and middle-market corporations through innovative business solutions. An important part of our strategy is the segmentation of our customer base. We classify our individual customers in three main categories: “Select,” “Preferred” and “Classic” customers. In addition, in 2020, the Bank designed a new service model for high income individuals, aiming to differentiate the value proposition for its three segments and continuing in its goal to provide the highest possible service to our clients: Select Black, Select and Evolution. This plan seeks to offer new standards of service to customers and to increase satisfaction levels. We believe that our clear customer classification allows us to offer our customers a portfolio of targeted products that fit their specific needs.
In retail banking, we strive to improve the processes for opening and contracting accounts and investments in branch and digital channels in 2022.
We improved our offering of promissory notes throughout our product portfolio and launched a new offering to attract to new funds, which in turn has allowed us to gain market share and improve our year-on-year growth to 14.00%.
We implemented 35 support schemes for the commercial network specialized in the sale of investments. We will consolidate the investment model of the Bank with actions like these in the medium term.
Some of our key programs include:
● | Cash refund program: We grant refunds in cash to customers who spend money at Grupo Soriana stores and Repsol’s gas stations, with a bonus of Ps.200 for every Ps.2,000 of consumption in a month. We believe this initiative is one of our principal engines to attract high potential customers and a valuable tool to foster its loyalty and become their “number one bank”. |
Furthermore, to take advantage of payroll portability regulations, we are seeking to leverage our unique position in the corporate, middle-market and SMEs segments to attract new payroll customers and grow our individual demand deposit base.
● | “Hipoteca Plus,” a mortgage product with an interest rate of 8.59%, which we decreased to 7.99% in 2019, the lowest rate in history for this type of loans and the best offer in the market. As of December 31, 2022, the interest rate offered on our Hipoteca Plus product was 9.30%, a |
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competitive rate available in the market in 2022 and 3,216 additional customers had signed up for the product. |
● | We have driven growth in the placement of loans for the purchase of new and pre-owned automobiles and motorcycles. We focused our efforts on our commercial alliances with brands and groups of distributors throughout the country through our own commercial force and branches. We continue with our alliances with Mazda, Suzuki, Honda, Acura and Tesla in the automobile sector and with KTM, Husqvarna, Triumph, Polaris, Royal Enfield, Indian and BRP in the motorcycles sector. We intend to continue gaining market share in order to move upward in the ranking of banks for this segment, in which we are currently ranked third. We believe the financing of hybrid, electric, plug-in hybrid, Chinese and pre-owned cars in general will be essential in the development of the business in the following years. We are working hard on the development of digital technologies that will help simplify the origination process and avoid losses derived from fraudulent transactions. In the business as a whole, we have a healthy income statement with controlled risk, allowing us to grow the business organically and gain market share in this segment, achieving 15.9% as of December 2022, an increase of 350 basis points from 2021. |
● | “Tuiio”, a financial inclusion program for low income individuals, which has its own operating model, infrastructure and brand, is a robust financial inclusion program that leverages technology to support the needs of México’s low-income segment. It generates measurable social impact through a broad offer of productive group and individual micro-lending, a digital savings account, life insurance, medical assistance products, its own branch network, staff, ATMs, point-of-sale terminals and access to electronic banking. The initiative also includes a financial education program for its customers, with the purpose of maximizing their skills and developing their potential. |
In December 2022, Microfinanza Rating granted Tuiio a customer protection certification and evaluated the impact Tuiio makes in the life of its customers.Tuiio got the silver award in terms of customer protection and the evaluation showed that Tuiio generates a positive impact in the life of its customers, not only in terms of the extent and depth of Tuiio’s offer, but also in the progress shown in the homes and income of its customers.
As of December 31, 2022, Tuiio had granted more than 893,000 microloans. Tuiio has 84 dedicated branches in 18 states across México, more than 390,000 helped customers and a loan portfolio of Ps.521 million.
This is what responsible banking means to us: helping people and businesses prosper, supporting the creation of new jobs and new opportunities taking into account the environmental footprint, and in this way, sharing the benefits of economic growth.
In order to meet its commitment to be a more responsible bank and help society address the main global issues, the Santander Group was one of the founding members of the Principles of Responsible Banking contributing to their elaboration in alliance with the United Nations Environment Program Finance Initiative. In addition, the Santander Group has set two main goals, one regarding the new business environment and the other to foster inclusive and sustainable growth.
The new business environment goal aims to make Santander Group employees feel part of a responsible working environment that is simple, diverse and inclusive, where leadership and engagement follow the “Simple, Personal and Fair” culture, while designing customer centered products.
The goal to achieve an inclusive and sustainable growth aims to invest in the Bank’s community, financially empowering people, supporting higher education through scholarships and reducing its environmental footprint while incentivizing ESG products across all business units.
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Upgrade and enhance our technological platforms and infrastructure and expand our product offering in order to offer our customers innovative and quality services that satisfy their changing needs
We are transforming processes, products and customer service schemes through new platforms to put technology at the service of our customers, creating solutions that provide them with ease, immediacy and security in the midst of an ecosystem of high-quality and innovative products and services by actively listening to their needs.
Aiming to position our customers at the center of our commercial strategy, in 2022, we began the transformation of our CRM, consolidating the customer knowledge we developed through the creation of the data hub and focusing our actions on the positioning of differentiated experiences, directed at increasing customer satisfaction and loyalty. We have created and use an emotional hub as the main guide to integrate the emotions and experiences of our customers in the strategic and operational decision-making of the entire organization.
In CRM, we are driving strategies based on customer-centric market intelligence, and we have consolidated comprehensive offerings by implementing new analytical methodologies to identify specific product and service needs, while focusing on anticipating our customer needs. We are thus increasing customer satisfaction and accelerating the effectiveness of our campaigns, and we are optimizing our commercial effort to increase customer loyalty and satisfaction and maintain the profitability of our portfolio.
We have developed a data hub to gain greater knowledge of customers and their transactions through predictive behavioral models, in order to better understand trends and provide personalized solutions. In addition, we created an emotional hub, which seeks to improve customer satisfaction and position experiences and emotions as a decision factor in the market. We also developed a differentiated onboarding service model, optimizing account opening and digital-loan contracting for our customers and non-customers. In this context, we have invested resources in the digitalization of services and operations in order to increase the number of customers served at a lower cost and improve customer experience.
We seek to increase our market share in commercial banking by offering innovative banking products, improving the quality of customer service and increasing customer satisfaction levels by leveraging new tools and technologies, as well as by enhancing operational processes to become the number one bank for our customers, and we intend to focus on key products, such as home loans, payroll loans, credit cards, auto loans, and corporate and deposit loans, where we believe there is an opportunity to increase our market share. For our non-commercial customers, we will continue to offer through our corporate and investment banking a range of products and services related to financing, guarantees, mergers and acquisitions, capital and debt capital markets, structured finance, trade finance, cash management services, collection services and electronic banking, including structured loans, syndicated loans, acquisition financing and investment plan financing, among others. We intend to improve the way we serve our customers by working on an omnichannel distribution strategy in relation to each of our customer segments, and we will continue to seek to maximize synergies and consolidate cross-selling opportunities between our corporate and commercial businesses. In this regard, we have established an area to improve the quality of our products and processes.
During 2022, security for our digital users has been strengthened through the implementation of more robust risk identification schemes and the redesign of our transactional flows within our digital assets, collaborating closely with the processes in physical channels.
Also during 2022, we transformed the digital factory operating model, streamlining the design, development and implementation of improvements, new products and our digital channels.
We also continue to carry out our transformation of traditional branches, which are being modified into the Smart Red format. As of the end of 2022, 64% of our total branches have been transformed. Some characteristics of this format that could contain this branches are a new external and internal design,
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providing more modern and innovative spaces, allowing for the improvement of the customer service experience through the implementation of a turn dispenser, a dividing wall with a screen, a waiting area with chairs, and additional kiosks with computers, telephones and printers.
In mortgages, the “Hipoteca Online” digital platform processed more than 97% of our mortgage operations digitally. Banco Santander México is the only bank in México to offer a tailored interest rate based on the customer’s profile. As a result of all of the above, we are the fifth-largest mortgage originator in the Mexican market in 2022.
In terms of credit cards, we aimed to increase cybersecurity for our customers in 2020 by launching the first “infoless” credit card in the Mexican market, aiming to protect customer’s information when purchasing. Security improvements include dynamic CVV codes for online purchases as well as shuffle plastic number and expiration date, and the integration of chip&pin in new and renewed credit and debit cards.
Finally, we were the first bank in México to be certified by the Mexican Central Bank to operate CoDI in 2019, which is a platform that users of any Bank can use to make digital payments with QR Code or NFC Technology, both P2P and in affiliated businesses. The CoDi platform has not been able to become widespread, so the Central Bank is analyzing new mechanisms and regulatory requirements to facilitate P2P payments.
In 2022 we consolidate branch formats, two new Work café branches were implemented, one in CDMX, and another in Monterrey. Additionally, we incorporated inclusive elements for people with disabilities in all remodeled branches (including, ramps, low windows, signage, among others). We also reinforced our self-service equipment by updating and adding more ATMs and full function ATMs in our branches. We increased the number of ticket routers to reinforce the service model with digital hosts to improve the experience of our clients.
In addition, we have continued our branch maintenance program, which allows us to give a better service and more security to both our clients and employees. This is supported by a division screen that separates the teller area from the rest of the office, providing more privacy in such area. All these projects combined have contributed to the optimization and evolution of our customer service.
We believe that our acceleration in digitalization will enable us to address the worldwide increase in the use of digital applications and capture a large opportunity in Mexico to use technology to facilitate financial inclusion and banking, as well as helping us face new competitors. These efforts are increasing our flexibility and capacity to serve our customers through various digital channels and strengthen their loyalty. As of December 2022, digital transactions accounted for 53% of total cumulative transactions, compared to 47% in the previous year. Data analytics and quality enhancements remain key to driving customer acquisition and digital sales as the Bank continues to promote the use of its digital channels and increase adoption levels. As of the end of 2022, 61.3% of product sales were made through digital channels, compared to 56% a year ago.
Leverage our leading market position to benefit from the significant growth potential of the Mexican banking sector
We seek to continue to increase our market penetration, focusing on our well-defined customer segments and high-margin or high-potential products, such as mortgages, consumer lending, and lending to middle-market corporations and SMEs. At the same time, we intend to continue developing our profitable and customer-centered global Corporate and Investment Banking. To achieve these objectives, we will continue to leverage our strong brand name, distribution channels and products with customer centricity, as well as seek to capture the benefits of growth in the banking sector as the Mexican economy grows and the level of penetration of financial services in México approaches those of other countries in Latin America. Furthermore, we will continue to focus our marketing efforts to grow our customer base and promote loyalty through the transactional use of our electronic and digital channels, as well as the cross-selling of products
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and tailored services to increase the number of products used by each of our customers. We intend to achieve this objective through ongoing technological innovation, meeting the new needs of with our customers and by cross-selling credit products, such as mortgage loans, auto loans, credit card loans, payroll loans, personal loans and insurance products, such as life, automobile, home, health, accident, fraud and unemployment insurance, to our customers. We aim to improve our competitiveness by further strengthening our brand awareness, particularly through the marketing of our products and the use of our omnichannel distribution platform and by continuing to focus on the development of innovative products aimed at satisfying the changing needs of each of our different customer segments.
In addition, we aim to increase our exposure to demand deposits from individuals in order to reduce our cost of funding and thus increase our profitability in the medium term. We plan to achieve this objective by attracting loyal customers with our product offering, as well as more payroll accounts and portability through cross-selling to our strong corporate customer base.
Capitalize on our risk management practices, cost-efficient culture and efficient capital allocation to promote profitable and sustainable growth
As we pursue our growth and profitability objectives, we will sharpen our focus on profitability and efficiency, by seeking to be a more balanced bank with a higher share of individual loans and lower cost deposits. We aim to underpin this strategy through efficient capital allocation, strong risk management, an efficient overhead structure and productive investments. We will continue applying risk policies aimed at generating an appropriate return on our risk-weighted assets. We intend to continue to carefully monitor the credit quality of our asset portfolio and adapt our risk policies accordingly, particularly assets in high growth segments such as individuals and SMEs, while diversifying our balance sheet. We plan to maintain a balanced growth profile with a strong emphasis on (i) liquidity, (ii) a stable and low-cost funding base and (iii) strong capital ratios.
Since the beginning of the COVID-19 pandemic, the Bank has focused on portfolio recovery and risk analysis, as well as implementing a series of measures focused on keeping the safety and well-being of employees and customers while assuring business continuity. We plan to make efficient use of technology and digitalization through alternative channels, such as mobile banking, internet banking, full-function, ATMs, our telephone contact centers, Fuerza Asesor Santander and Santander Personal in order to control the expenses associated with the continued expansion of our omnichannel distribution strategy. As of December 31, 2022, we were the fourth most efficient bank among the seven largest private-sector banks in terms of assets in the Mexican banking system, as determined in accordance with Mexican Banking GAAP, according to data from the CNBV. For this purpose, we calculate the efficiency ratio as administrative expenses divided by total income, using information published by the CNBV. We will continue to monitor our administrative and promotional expenses in order to seek to maintain a low efficiency ratio.
Operations Through Subsidiaries
As of December 31, 2022, we had three principal subsidiaries: Santander Consumo, S.A. de C.V., Sociedad Financiera de Objeto Múltiple, Entidad Regulada, Santander Tecnología México, S.A. de C.V. and Santander Inclusión Financiera, S.A. de C.V., Sociedad Financiera de Objeto Múltiple, Entidad Regulada.
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The following table shows total assets, net income and total equity of each of our principal subsidiaries as of and for the year ended December 31, 2022.
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| | IFRS | |||||||||
| | As of and for the year ended | |||||||||
| | December 31, 2022 | |||||||||
|
| Total assets |
|
| Net income / (Net loss) |
|
| Total equity | |||
| | (Millions of pesos) | |||||||||
Santander Consumo | | Ps. | 113,020 | | | Ps. | 6,483 | | | Ps. | 37,492 |
Santander Tecnología | | | 1,118 | | | | 2 | | | | 1,082 |
Inclusión Financiera | |
| 783 | | |
| (152) | | |
| 149 |
Our principal sources of funding are customer deposits. Customer deposits typically represent a substantial portion of our funding base because of our ability to attract deposits from customers through our extensive retail, wholesale and corporate network. Since we are primarily a commercial bank, customer deposits constitute the main source of liquidity in our financing structure. These deposits currently cover most of our liquidity requirements. Our control and management functions involve planning our funding requirements, structuring the sources of financing to achieve optimal diversification in terms of maturities, instruments and markets and setting forth contingency plans. In order to increase liquidity, we rely in part on local peso-denominated issuances. We also have access to international funding through U.S. dollar-denominated issuances with longer maturities. For a further discussion of our funding, see “Item 5. Operating and Financial Review and Prospects—B. Liquidity and Capital Resources.”
Retail Banking
General
Our Retail Banking segment’s activities include products and services for individuals, private banking customers, SMEs, middle-market corporations and government institutions. As of December 31, 2022, our Retail Banking segment accounted for approximately 84.3% of our total loans and advances to customers (excluding reverse repurchase agreements) based on the aggregate principal amount of loans in this segment, approximately 89.2% of our total demand and time deposits, 87.2% of our net interest income, 91.7% of our fee and commissions income (net) and 88.6% of our operating profit before tax. Our retail banking operations served 21,338,060 customers as of December 31, 2022, an increase of 1,673,390 customers since December 31, 2021.
In 2022, our branch network and alternative channels originated more than 970,000 credit cards, 628,000 consumer loans and 20,300 mortgage loans.
Individuals
We classify individual high-income customers as “select,” if they have a monthly income in excess of Ps.60,000 (U.S.$3,076); “preferred,” if they have a monthly income between Ps.10,000 (U.S.$513) and Ps.60,000 (U.S.$3,076); and low-income, or “classic”, if they have a monthly income below Ps.10,000 (U.S.$513). We believe that our clear customer classification allows us to offer our customers a portfolio of targeted products that fit their specific needs. Our focus is on select, and preferred customers, areas in which we have experienced growth as a result of our efforts to provide innovative products and services. Individual customers are then further classified into sub-segments according to their age, and each customer sub-segment is offered products tailored to their socioeconomic status and age. Through this strategy, we aim to build customer loyalty by developing products that meet our customers’ financial needs throughout their entire financial life cycle. As of December 31, 2022, individuals accounted for 44.8% of our total loans and advances to customers (excluding reverse repurchase agreements) and 44.4% of our deposits. As of December 31, 2022, individuals (including individuals served by our private banking business described below under “—Private Banking”) accounted for 54.0% of our fee income and 35.6% of our operating profit before tax in the year ended December 31, 2022.
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We follow different service models for each customer class:
● | Select customers: We offer a commercial model tailored to provide exclusive products and services through unique and differentiated branches. The customers in this segment have significant assets giving them access to specialized channels and an exclusive menu of products and services. To best serve our select customers, we offer different investment products (both short- and long-term), asset protection, personal credit, mortgage loans and credit cards. The select model offers the opportunity to be part of a network of both financial and non-financial benefits called Mundo Select, which is the key access point for the select commercial model. As of December 31, 2022, our select customers class included 778,776 customers, 573,001 of whom were attended to by 1,337 select managers that specialize in investment services and 100,000 advised customers by 100 certified bankers, through a remote and digital service channel. About 73.6% of our select customers were attended to by 334 executives specialized in Santander Select offices, which provide services in a private, distinguished and comfortable environment. |
Prior to 2021, we also had a segment called the "Premier" segment. In 2021, we replaced the "Premier" segment and created two categories of "Select" customers: "Select" and "Select Black". “Select Black” is an exclusive segment for profitable customers accessed by invitation that has a strong digital component, and specialized investment services, high-end credit cards, superior digital banking, mortgage and automotive loans.
● | Preferred customers: We use a multichannel service model, supported by our account managers as well as our contact center operators. We provide differentiated services with preferential benefits such as insurance, additional credit cards, consumer loans and automatic payments to these customers, whom we view as upwardly mobile. As of December 31, 2022, we had 8,491,611 preferred customers. |
● | Classic customers: Our emphasis is on serving our classic customers through alternative channels to support self-service and maintain a profitable business model. In our branches, classic customers are served under a standardized model through pools of account executives, with a sales-oriented approach. We offer differentiated services such as preferred bundled offers and payroll benefits to customers we view as upwardly mobile. As of December 31, 2022, we had 11,618,240 classic customers. |
Within the Retail Banking segment, customers classified as individuals, together with private banking customers, collectively accounted for 58.8% of our fee income and 40.2% of our operating profit before tax in 2022.
Private Banking
At Santander Private Banking our objective is to grow as a leader in the Private Banking market in México.
Santander Private Banking México is the part of our business that is specialized in the wealth management of our customers. It has a business model that is leveraged on the strengths of the Bank and the Santander Group, globally.
As in previous years, Euromoney recognized us as the “Best Private Bank” in México and for the second time, Santander Private Banking has been chosen as the “Best Private Bank” in México by the prestigious magazine, The Banker, of the Financial Times group.
We offer a differentiated, personal and high-level service with innovative products developed through a comprehensive risk management process that is adapted to the needs and investment profile of each customer.
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We have two segments within Private Banking: traditional private banking, specialized in serving customers who make investments greater than Ps.15 million and the ultra-high net worth segment, specializing in serving customers who make investments greater than Ps.300 million and who we offer differentiated financial services, including custody-execution services, consulting services, centralized management, advice on estate planning, real estate and financing services.
In 2022, we focused on improving the financial products and services we offered as well as strengthening our presence among private banking customers and ultra-high net worth customers.
SMEs
Our Retail Banking segment provides banking services and originates loans for SMEs. The maximum level of credit extended to such companies is generally limited to approximately Ps.13 million (U.S.$0.7 million) for standardized SMEs and Ps.100 million (U.S.$5 million) for portfolio SMEs in accordance with the minimum acceptance criteria described in our credit policy form SMEs. Approximately 46% of the SMEs loan portfolio has a certain type of guarantee granted by Nacional Financiera, Sociedad Nacional de Crédito, Institución de Banca de Desarrollo, or NAFIN, a Mexican government bank that provides support for SMEs.
Our SME business represented Ps.51,036 million (U.S.$2,616 million), of our total loan portfolio as of December 31, 2022, a decrease of 8.7% from December 31, 2021. We continue to see positive results obtained from the improvement in customer services via the “SME Santander Model,” through which we strive to be the preferred bank for SMEs by providing quality customer service, straightforward and targeted commercial and risk processes and a customer development program featuring financial educational courses offered both live and online that focus on issues relevant to SMEs in México. We also continue optimizing our specialized network of SME executives dedicated exclusively to attending SME customers. The specialized SME network included 1,016 dedicated SME specialists as well as 9 dedicated specialized offices (Centros Pyme, or SME Centers) as of December 31, 2022.
As of the end of 2022, we have been working with digital credit schemes for SMEs, especially focused on small and medium young digital native entrepreneurs. We have focused in digital schemes for account openings (Digital Onboarding) and credit products to simplify and make our processes more efficient.
Additionally, we have improved our SME value proposal, specifically for clients who require tailor-made solutions with the “Paquete Emprendedor SAS” (Sociedad por Acciones Simplicadas), with support from the Ministry of the Economy (Secretaría de Economía). With this program, we have become the first bank in México to have a SME client-specific product supported by digital onboarding to improve customer experience. We also launched “Paquete Agro” for marketers (preferential conditions on credit and products) to improve credit.
To continue consolidating our position with SMEs, since 2021, we have joined forces with corporate customers, such as supermarkets and auto dealers, and with the main commercial chambers in the country, to offer credits and transactional products with preferred conditions, which add value to our customers.
In our Acquiring Business, we have launched products with better technology (G-Smart and G-Mini), which have allowed our customers to provide improved business services, and have enhanced our procurement strategy with Getnet's innovative products.
Middle-Market Corporations
This business line is comprised of companies that generally have annual revenues of more than Ps.250 million (U.S.$13 million), are not customers of Santander Corporate and Investment Banking and meet certain other qualifying criteria. We offer middle-market corporations a wide range of products, including commercial loans, credit lines, leasing, factoring, foreign trade loans and guarantees, current accounts,
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savings products, mutual funds, payroll administration (a potential source for new individual customers), cash management, treasury services, financial advisory services, credit cards and insurance brokerage. We also offer our middle-market corporations customers with higher income the same products that we offer to our global corporate banking customers. As of December 31, 2022, we had 8,828 middle-market corporations customers, and 64 specialized offices, 219 senior executives, 20 agro-executives, 15 account directors, 17 deputy directors and 83 management officers (back office executives that support the sales force) located throughout México dedicated to attending these middle-market corporations customers.
Our middle-market corporations loan portfolio represented Ps.217,023 million (U.S.$11,124 million) of our total loans and advances to customers (excluding reverse repurchase agreements) as of December 31, 2022, an increase of 5.4% from December 31, 2021. The quality of this portfolio has not been affected by its growth; the non-performance rate was 2.0% as of December 31, 2021 and 1.8% as of December 31, 2022. As of December 31, 2022, our middle-market corporations customers represented 26.5% of our total loans and advances to customers (excluding reverse repurchase agreements) and 19.2% of our deposits. Middle-market corporations accounted for 21.3% of our fee and commission income (net) and 26.5% of our operating profit before tax in 2022.
The middle-market business is an important source of deposits and most of its revenues come from credit products. This business line has consistently increased its array of products designed to meet our customers’ needs in terms of cash management and collection solutions. Due to the low penetration in this market by Mexican banks, we believe we have an opportunity to further provide loans and cash management and collections solutions to middle-market corporations.
In addition, we have significantly increased cross-selling within this business unit. We have established a model to serve customers that actively use at least three products, including investment, credit, payroll administration and cash management, among others. We refer to these customers as a “Loyal Customer” (Vinculados Transaccionales). Our sales team has focused on increasing the volume of transactions of our middle-market corporations customers and, as a result, in 2022 we retained all of our 5,851 loyal customers that we had at the end of 2021.
We have a specialized area in our contact center to provide a more personalized service to corporations (SMEs and middle-market corporations), driven by efficient and high-quality services while keeping our executives current on the corporations’ specific needs and requests.
Institutions
This business unit caters to Mexican government agencies, states agencies and municipalities as well as Mexican universities. As of December 31, 2022, these customers represented 6.8% of our total loans and advances to customers (excluding reverse repurchase agreements) and 14.1% of our deposits. Institutions accounted for 2.8% of our fee income and 8.1% of our operating profit before tax in the year ended December 31, 2022. We had 1,798 institutional customers as of December 31, 2022.
We have 11 specialized representative zones in México that offer tailor-made products to meet our institutional customers’ needs. Among the products we offer to our governmental customers are current accounts, loans, payroll processing, cash management, collection services and payment processing services. Serving these institutions allows us to cross-sell current accounts, credit card services, loan products, insurance products and collection services to their employees.
We have a global business model called “Red Salud” that brings specialized service to health care institutions in México, through our nine branches. In addition, we have implemented a model to attend to several religious institutions, such as Parishes, Archdioceses and Dioceses in México.
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Santander Corporate and Investment Banking
General
The Santander Corporate and Investment Banking segment serves customers such as large Mexican companies and local and foreign multinational companies, which are also served globally by the Santander Group which, due to their size, complexity or sophistication require customized services and value-added corporate products. This segment also includes domestic and international financial groups, as well as large institutional customers.
This segment provides comprehensive products and services relating to finance, guarantees, mergers and acquisitions, equity and fixed income, structured finance, international trade finance, cash management, structured loans, syndicated loans, acquisition financing, among others, through two branch offices located in Mexico City and Monterrey. The Santander Corporate and Investment Banking segment uses its range of products, knowledge of the local market and expertise in order to customize financial solutions for customers.
As of December 31, 2022, the Santander Corporate and Investment Banking segment served 491 customers and accounted for 15.7% of our total loans and advances to customers (excluding reverse repurchase agreements), 10.3% of our total demand and time deposits, 8.4% of our fee and commission income (net) and 22.1% of our operating profit before tax.
The main products and services that our Corporate and Investment Banking segment provides are:
● | Global Transaction Banking, which includes cash management, working capital solutions and trade finance; |
● | Global Debt Finance (GDF), which includes origination, structuring and distribution of bonds, syndicated loans, and project and asset based financing; |
● | Banking and Corporate Finance, which provides financial, strategic and execution advisory services on mergers and acquisitions, and equity capital markets processes; |
● | Markets, which includes solutions and services for investing and hedging using both plain vanilla and structured products such as interest rates, equity and foreign exchange, as well as the intermediation in organized markets; and |
● | Corporate and Investment Banking products and solutions for retail customers, which offers tailor-made products and solutions in order to meet specific needs. |
Global Transaction Banking
Our Global Transaction Banking segment focuses on facilitating and optimizing the most common banking transactions of corporate and institutional customers in the Santander Corporate and Investment Banking segment by offering products and services such as:
● | Cash Management. We offer our customers our electronic banking platforms, enabling them to manage payments, collections and liquidity efficiently. |
● | Working Capital Solutions. We offer solutions to allow our customers to operate efficiently by optimizing cash cycles through: |
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o | Commercial Financing: Structured and non-structured products for payments and collections chains (Confirming, Factoring, Receivables Purchase Program) and monetization of commercial contracts. |
o | Basic Financing: Credit lines and short-and medium-term bilateral loans to finance working capital needs. |
o | Structured Trade: Structured financing products for the acquisition of machinery and equipment. |
● | Trade finance. Products to finance everything related to international trade, including: |
o | Documentary Trade: Plain vanilla management through letters of credit and guaranties administration. |
o | Trade: Management of everything related to structured financing through guaranties to acquire foreign machinery and equipment covered by Export Credit Agency and specific projects. |
Global Debt Finance
The credit markets operations of Santander Corporate and Investment Banking are in the scope of our GDF area, which includes project finance, syndicated loans, project and asset based finance, and debt capital markets:
● | Project Finance. We originate, structure and finance projects generally sponsored by a private institution, with public sponsorship and/or productive state enterprises. We have participated in transactions in almost all economic sectors, most notably in energy, oil and gas, logistics, infrastructure and water, among others. |
● | Syndicated Loans and Acquisition Finance. Medium-and long-term financing to attend our customers’ investment or corporate needs. Due to the size and importance of the operations, we usually act as Structuring Agent and look for other banks to join the financing. We aim to lead syndicated loan operations and look to reduce our risk exposure through the syndication. |
● | Project and Asset Based Finance. This team supports Capital for Infrastructure and Energy Projects through financing alternatives such as subordinate or mezzanine debt, convertible debt, or capital for projects; as well as long term financing based on assets such as long term leasing for the transport sector where we assume the capital risk in that framework. |
● | Debt Capital Market: Includes the design, advisory, and execution of issuance of fixed income securities in all modalities (fixed and floating obligations, structured bonds) from issuers from the private sector as well as from the public sector. |
Banking and Corporate Finance
Our Banking and Corporate Finance sub-division of our Santander Corporate and Investment Banking segment is engaged in the following activities.
Mergers and Acquisitions
We offer a wide range of investment banking services relating to mergers and acquisitions, including sell-side advisory, buy-side advisory, fairness opinions and capital raising services. As part of our universal banking model, we can offer financing to the parties we advise.
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Equity Capital Markets
We take care of the processes related to the placement of equity securities issued by Mexican companies, mostly stocks in the market (Mexican Stock Exchange). Types of transactions we facilitate include initial public offerings, follow-ons and public acquisition offers, among others. We evaluate, each issuer through different methodologies, analyze the market situation, elaborate proposals that best fit each issuer’s profile considering its balance, size and dilution, among others, as well as review all documentation necessary to complete each placement.
Markets
Our Markets area offers a variety of treasury products to customers, including institutional investors, corporate customers and individuals. We provide sophisticated and innovative derivative products to help our customers manage market risk exposure to foreign exchange rates and interest rates. We believe we have an effective customer coverage model based on dedicated sales teams for each customer segment that allows us to maintain specialists committed to providing for the specific needs of our individual customers. In addition, we have structuring and product development teams that work to maintain a cutting-edge portfolio of innovative customer solutions. The global network of Santander Group, with its strong presence in Europe and Latin America, gives us the ability to offer a wide range of international products as an integrated service for our local customers. Furthermore, we offer treasury products as a standardized solution, providing hedge and yield enhancement, to middle and retail market companies. We have implemented extensive suitability processes designed to ensure customers understand and accept the risks involved in the derivatives market.
We also have a team responsible for the management of the Bank’s relative value investment. In the management of the Bank’s books, we seek to maintain recurrent results for each single individual book with the main objective of preserving capital. The decision-making process is based on fundamental aspects of each market, supported by technical views. The relative value trading desks must comply with risk control policies established by our senior management and with those applied worldwide by Banco Santander Parent. All positions and processes are strictly monitored and controlled by specialized market and operational risk teams and finance and compliance departments.
Active Credit Portfolio Management
The goal of this area is to mobilize the balance of the corporate wallet by hedging exposures through credit derivatives, buy and sell of proprietary credit positions, and diversifying credit risk in order to obtain the appropriate risk profile.
Corporate and Investment Banking Products and Solutions for Retail Customers
We have specialized teams dedicated to bringing retail segment customers tailor-made corporate banking products and solutions in order to cover these customers’ needs in investment banking and markets.
Our retail markets team designs and provides adapted derivative and cash flow products (mainly interest rates and foreign exchange) for retail customers, distributing them through our branch network. They also provide tailor-made derivative products for those retail customers with specific and complex requirements.
Our Banking and Corporate Finance team is involved in structuring a variety of transactions, such as project and acquisition finance, mergers and acquisitions, and asset and capital structuring, bringing our retail customers products that address specific needs.
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Our Core Products
Deposit-Taking and Repurchase Agreements Transactions
We offer our retail banking customers a variety of deposit products, such as:
● | current accounts (also referred to as demand deposits), which do not bear interest; |
● | traditional savings accounts, which bear interest; and |
● | time deposits, which are represented mainly by notes with interest payable at maturity and which normally have a maturity of less than 36 months and bear interest at a fixed or floating rate. |
In addition, we accept deposits from financial institutions as part of our treasury operations, which are represented by certificates of interbank deposit, or CDIs, and which earn the interbank deposit rate. Besides representing a significant source of stable funding for us, we regard each account holder as a potential customer for the full range of products and services we offer.
We also enter into repurchase agreement transactions. Repurchase agreements are Mexican-law governed sale and repurchase agreements (reportos), also known as repos, pursuant to which a party agrees to a temporary purchase or sale of securities in exchange for (i) a specified premium to be paid or received and (ii) the obligation to resell or repurchase the underlying security. Under provisions (Circular) issued by the Mexican Central Bank, Mexican banks may enter into repurchase transactions with Mexican and foreign counterparties. Repurchase transactions may be entered into in respect of bank securities, Mexican government securities, debt securities registered with the CNBV and certain foreign securities. Repurchase transactions must be entered into under master agreements, such as the master agreements of the International Securities Market Association and the Public Securities Association. Collateral may be provided in connection with repurchase transactions.
Repurchase agreements totaled Ps.146,691 million at December 31, 2022, a 11.4% increase compared to the amount at December 31, 2021. We expect to continue using this funding source in the future due to its broad availability and low cost.
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The table below presents a breakdown of our total deposits by product type including repurchase agreements at the dates indicated.
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| | At December 31, | |||||||||
|
| 2020 |
|
| 2021 |
|
| 2022 | |||
| | (Millions of pesos) | |||||||||
Demand deposits: | | |
| | | |
| | | |
|
Interest-bearing deposits | | Ps. | 100,532 | | | Ps. | 105,095 | | | Ps. | 113,351 |
Non-interest-bearing deposits | |
| 398,926 | | |
| 436,162 | | |
| 425,058 |
Subtotal | | Ps. | 499,458 | | | Ps. | 541,257 | | | Ps. | 538,409 |
Time deposits: | |
|
| | |
|
| | |
|
|
Notes with interest payable at maturity | | Ps. | 175,702 | | | Ps. | 185,312 | | | Ps. | 208,582 |
Fixed-term deposits | |
| 1,931 | | |
| 1,345 | | |
| 976 |
Foreign currency time deposits | |
| 12,053 | | |
| 8,774 | | |
| 8,758 |
Subtotal | | Ps. | 189,686 | | | Ps. | 195,431 | | | Ps. | 218,316 |
Repurchase agreements | | Ps. | 138,616 | | | Ps. | 131,639 | | | Ps. | 146,691 |
Accrued interest(1) | |
| 873 | | |
| 877 | | |
| 1,910 |
Other deposits | |
| 43,860 | | |
| 22,760 | | |
| 22,972 |
Total customer deposits | | Ps. | 872,493 | | | Ps. | 891,964 | | | Ps. | 928,298 |
Deposits from the Mexican Central Bank and credit institutions(2) | |
| 267,362 | | |
| 210,803 | | |
| 217,983 |
Total deposits | | Ps. | 1,139,855 | | | Ps. | 1,102,767 | | | Ps. | 1,146,281 |
(1) | Mainly from time deposits. |
(2) | Includes Ps.206,188 million, Ps.132,621 million and Ps.152,629 million of repurchase agreements with the Mexican Central Bank and with credit institutions as of December 31, 2020, 2021 and 2022, respectively. |
Lending
The following table shows a breakdown of our total loans and advances to customers (excluding reverse repurchase agreements) by customer category at the dates indicated.
| | | | | | | | | | | | | | | |
| | | | | | | | | | Change, December 31, 2022 compared to |
| ||||
| | At December 31, | | | December 31, 2021 | | |||||||||
|
| 2021 |
|
| 2022 |
|
| (Millions of pesos) |
|
| (%) |
| |||
| | (Millions of pesos) |
| ||||||||||||
Individuals | | Ps. | 321,891 | | | Ps. | 367,769 | | | Ps. | 45,878 | | | 14.3% | |
SMEs | |
| 55,883 | | |
| 51,036 | | |
| (4,847) | | | (8.7)% | |
Middle-market corporations(1) | |
| 205,940 | | |
| 217,023 | | |
| 11,083 | | | 5.4% | |
Institutions | |
| 57,747 | | |
| 56,045 | | |
| (1,702) | | | (2.9)% | |
Subtotal | |
| 641,461 | | |
| 691,873 | | |
| 50,412 | | | 7.9% | |
Global corporate customers | |
| 120,627 | | |
| 128,441 | | |
| 7,814 | | | 6.5% | |
Total(2) | | Ps. | 762,088 | | | Ps. | 820,314 | | | Ps. | 58,226 | | | 7.6% | |
(1) | Includes private banking. |
(2) | These amounts do not include reverse repurchase agreements. |
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Retail Lending
General
We offer retail lending products to customers through our extensive branch network and on-site service units. See “—Distribution Network.” We divide our customers into separate categories based principally on their monthly income (for individuals) and annual gross revenues (for businesses). We tailor our products and services to the needs of each customer classification. Our loans are generally originated and serviced internally. We believe our underwriting system has the capability to process large application volumes (greater than the expected volume for the upcoming years), maintaining the tight controls and information requirements to improve the decision models.
We make credit available to our customers through the various loan products listed in the table below. The table sets forth the composition of our individual and SME loan portfolio at the dates indicated.
| | | | | | | | | | | | | | | |
| | | | | | | | | | Change, December 31, 2022 compared to |
| ||||
| | At December 31, | | | December 31, 2021 |
| |||||||||
|
| 2021 |
|
| 2022 |
|
| (Millions of pesos) |
|
| (%) |
| |||
| | (Millions of pesos) |
| ||||||||||||
Mortgages | | Ps. | 200,488 | | | Ps. | 217,109 | | | Ps. | 16,621 | | | 8.3% | |
Credit cards | |
| 53,405 | | |
| 64,957 | | |
| 11,552 | | | 21.6% | |
SMEs | |
| 55,883 | | |
| 51,036 | | |
| (4,847) | | | (8.7)% | |
Payroll loans | |
| 35,547 | | |
| 44,368 | | |
| 8,821 | | | 24.8% | |
Personal loans | |
| 14,182 | | |
| 15,363 | | |
| 1,181 | | | 8.3% | |
Other | |
| 18,269 | | |
| 25,972 | | |
| 7,703 | | | 42.2% | |
Total | | Ps. | 377,774 | | | Ps. | 418,805 | | | Ps. | 41,031 | | | 10.9% | |
The following table shows the annual interest rate applicable to the main categories of retail lending products at December 31, 2022.
| | |
| | Annual |
|
| interest rate |
| | (%) |
Credit cards | | 25.93% |
Personal loans (includes payroll loans, personal loans and others) | | 23.35% |
Mortgages | | 8.69% |
Payroll Loans
Payroll loans are a typical consumer lending product with a differentiated method of payment. We grant loans after conducting a risk assessment) to customers that receive their salaries through a current account at the Bank. The loan payments are made through automatic charges to the current account and are scheduled according to the payroll frequency of each employee (weekly, biweekly, monthly).
Our customers include employees from the public and private sectors. At December 31, 2022, payroll loans amounted to Ps.44,368 million (U.S.$2,274 million), representing approximately 5.4% of our total loans and advances to customers (excluding reverse repurchase agreements). We held approximately 13.4% of the market share in México in payroll loans at December 31, 2022, as determined in accordance with Mexican Banking GAAP, according to information published by the CNBV.
Personal Loans
Personal loans are loans granted to individuals with maturities of up to 48 months and the monthly installments to be paid by the customer may not exceed 65% of such customer’s net monthly salary. Personal loans are not secured by collateral. At December 31, 2022, personal loans amounted to Ps.15,363
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million (U.S.$787 million), representing approximately 1.9% of our total loans and advances to customers (excluding reverse repurchase agreements).
Credit Cards
We are the third-largest market player with respect to credit card loans in the Mexican market according to information published by the CNBV, and we had 3.7 million outstanding credit cards across 3.7 million accounts as of December 31, 2022. At December 31, 2022, we held a 13.8% of the market share in México, with a delinquency rate of 2.72%, in each case as determined in accordance with Mexican Banking GAAP, according to information published by the CNBV. At December 31, 2022, credit card loans amounted to Ps.64,957 million (U.S.$3,330 million), representing approximately 7.9% of our total loans and advances to customers (excluding reverse repurchase agreements).
We issue 20 different MasterCard, Visa and American Express credit cards designed for our different business segments. We mainly issue credit cards to our existing customers, such as deposit account holders and non-deposit account holders, greatly promoting the placement of additional cards since 2018. Our income from credit cards includes interchange merchant fees, interest on credit card balances, annual cardholder fees and fees charged for cash advances. 80% of our credit cards are placed through our branch network and contact center mainly under the pre-classified scheme while 20% are placed through digital channels (Súper Móvil, internet and ATM). From the beginning of the COVID-19 pandemic, we saw use of the digital channel increase significantly throughout, 2021 and 2022 compared to 2019.
We have launched credit card products designed to serve customer preferences and financial needs and aimed at encouraging demand for our products. The main customer preferences and needs that have been addressed are low rates, no commissions, total protection, miles/rewards programs and digital products that offer security.
We offer many benefits for our credit card customers, including: the Fiesta Rewards Platinum card, through which customers (a) receive points on the first purchase within 100 days of card authorization, points for every U.S. dollar consumed in any establishment and for every U.S. dollar in participating hotels, (b) can exchange points for hotel nights, plane tickets, car rental and catalog products and (c) can access our Concierge service and more than 850 “VIP” lounges with Priority Pass membership in the main airports regardless of the airline they are traveling with.
In February 2016, we launched a new travel credit card "TDC Santander-Aeroméxico", in conjunction with the most important airline in México, with exclusive benefits for 10 years. This card offers differentiated benefits to different customer segments: Santander Aeroméxico Infinite and Santander Aeroméxico Platinum for high income customers and Santander Aeroméxico Blanca for mid income and massive customers. Benefits to our “TDC Santander-AeroMéxico” credit card customers include “premier points” per trips and for each U.S. dollar spent, benefits when traveling including preferential boarding, additional baggage, airport transportation and access to airport and premium lounges, shopping protection and international emergency medical services, among others.
The Santander-Aeroméxico co-branded card has more than 367,000 cardholders issued at the end of 2022 since its launch in 2016.
We launched a series of new product campaigns to strengthen our position in the credit card market. For example, during 2018, we enhanced the value offering for our customers by launching digital signature on debit and credit cards to strengthen the level of card data protection. We also launched campaigns to increase card usage with an emphasis on entertainment and sports organizations, such as the Union of European Football Associations (the "UEFA") and Formula 1. We also sought to give value to the points accumulated through our rewards program with the opening of new redemption channels (Superwallet) and auction mechanisms to access unique experiences.
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In 2019, we launched a digital card for purchases that provides greater purchase security as it has a dynamic CVV (security code). We also renewed the image of our cards, which are now made with better materals and were enabled with Near Field Comunication (NFC) technology. We partnered with American Express to launch the legacy credit card for our private banking and high-income customers, whose benefits will be used to support the artistic and cultural education of outstanding students at public universities.
Additionally, we improved the customer experience through our digital apps, by increasing the functionality and operational capability of our financial products, such as digital contracting and activation, our clarification process and acceptance of credit limit increases in order to increase the digitalization and servicing of our customers through non-face-to-face channels such as SuperWallet and Supermóvil.
In January 2020, with the purpose of decreasing fraud by up to 90%, we launched a new, “infoless” credit card in order to make purchasing safer at the point-of-sale. This credit card only shows the name and the expiration date, currently this "infoless" modality is already available for all the offered cards with the exception of the “Infinite” and “AMEX” cards. In May 2021 we were recognized with the Platinum Award for Innovation by Fintech Americas for our “infoless” credit card.
On the other hand, 100% of our offerable cards have the possibility of generating a digital card with dynamic CVV, making it more secure for transactional e-commerce achieving a higher ranking in the “Digital Channel” for security and convenience of our customers. Invoicing campaigns were launched in 2021 that encouraged the adoption and use of digital cards, contributing to greater transactions with this secure modality and a reduction in frauds.
As a result of the strategy of adoption of secure technologies, net fraud in payment methods decreased 45% compared to 2021.
Also, in 2020, Mastercard recognized Banco Santander México for being the first bank in making productive transactions through Digital Secure Remote Payments, running 100% for the national trade.
In 2021, we reinforced our value proposition with a new product: “LikeU.” LikeU is the first credit card of its kind on the market. It is a digital-first, safe and altruistic credit card with no annual fee. It is also the first "financial-on-demand" card in México, as it allows clients to customize their benefits and compete with FinTechs.
The card is completely accessible through the Supermóvil app and may be used from day one to transact online for digital transactions. This product is designed with the most secure technological features in the market since it has an electronic signature, is infoless and contactless and has a dynamic CVX for all e-commerce purchases. In addition, it has no annual fee and our customers can customize the services and assistance benefits that they wish to acquire, turn on or turn off each one according to the customer's needs. The product has six altruistic causes to support, such as: the education of children and adolescents living in marginalized areas, the fight against breast cancer in Mexico, the nutrition and health of children and adolescents in our country, the cleaning of Mexican seas, the protection and restoration of forests and jungles in the country and the quality of life of children with cerebral palsy and people with autism. In September 2022, we enhanced the value proposal of this product with an attractive rewards program called Cash Back Baby, provides customers with cash-back reimbursements for certain purchases: 4% for purchases at gas stations, 5% for purchases at restaurants and entertainment businesses, and 6% for purchases at pharmacies. This program seeks to position LikeU as the main card for our customers.
In 2021, a new digital ecosystem was also enabled in partnership with Samsung, which consists of a digital Members Wallet that allows contactless payments in physical stores through NFC technology when using any Galaxy device. It also allows our customers to generate the dynamic CVV of digital cards for online
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purchases. In this ecosystem, the customer can contract both a digital deposit account and a Samsung Members credit card digitally.
These products are focused on attracting new customers to the Bank, having as a partner a strong player in mobile technology, such as Samsung, which has a 30% market share in mobile devices.
The Members Wallet and the Samsung Members digital deposit account were launched in December 2021 and by the end of 2022, 13,000 accounts had already been placed.
During 2022, we continued working in alliance with Samsung and Mastercard, and on December 7, 2022 we launched the Samsung Members credit card. By the end of the year, we had placed 2,100 of these cards.
The product was launched in September 2021 and by the end of 2021, 743,000 cards had already been placed, reaching a 21% share of the total account portfolio and 14.5% of the total portfolio.
The following table shows the non-performing loans in our credit card loan portfolio as a percentage of the total loans in our credit card loan portfolio for the periods indicated.
| | | | | | | | | |
| | IFRS |
| ||||||
| | As of December 31, |
| ||||||
|
| 2020 |
|
| 2021 |
|
| 2022 |
|
Total credit card non-performing loans as a percentage of total credit card loans | | 4.73 | % | | 2.49 | % | | 1.81 | % |
A special risk management unit for the credit card business continuously monitors portfolio performance. New acquisition and management models were implemented to manage new growth strategies. Also, the credit card portfolio is segmented by risk according to behavioral models and depending on such risk stratification, different offers are designed in order to grow, maintain or decrease exposure and profitability.
Our credit card business follows the Santander Group’s corporate model, which provides the following benefits:
● | Standardization across Santander Group’s markets through the generalized management of certain "business levers", acquisition, activation, billing, receivables, retention, loyalty and products. |
● | Knowledge transfer across geographies and business levers. Campaign definitions, design and results are shared by the Santander Group’s card units globally. |
● | Decision-making. Decision-making process based on commercial and business facts and information, supported by strong analytic capabilities and robust infrastructure that enable us to design and execute focused, aggressive strategies and tactics, directed by a group of experts who collectively identify portfolio-relevant trends, patterns and opportunities in order to grow the business. |
● | Campaign management. All marketing initiatives and campaigns are run through a proven statistical model that allows the managers of the business levers to measure and analyze each campaign. |
● | Product development. New product development is subject to a very strict methodology that provides deep opportunity analysis and filtering. |
We have invested in simplifying support and commercial processes. Due to our new issuing process, customers can leave the branch with their credit card in less than fifteen minutes. Our contact centers provide segmented customer service and retention activities, utilizing analytical tools as well as predictive retention models.
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Mortgage Loans
We offer loans to our customers for the purchase of real estate secured by mortgages with a maturity of up to 20 years. We have a leading position in this business among non-government-owned banks and, at December 31, 2022, held a 17.3% market share in México in terms of amounts of loans outstanding, as determined in accordance with Mexican Banking GAAP, according to information published by the CNBV. As of December 31, 2022, we had a total mortgage loan portfolio of Ps.217,109 million (U.S.$11,129 million), representing approximately 26.5% of our total lending portfolio (excluding reverse repurchase agreements).
On November 29, 2013, we completed the acquisition of the equity stock of ING Hipotecaria, a subsidiary of ING Group. In February 2014, ING Hipotecaria was renamed Santander Vivienda. The net assets acquired amounted to Ps.395 million, which included a loan portfolio with an unpaid principal balance of Ps.11,237 million and an estimated fair value of Ps.10,772 million. As part of the transaction, we made a cash payment of Ps.541 million (approximately U.S.$27 million) for ING Hipotecaria’s equity. Since the acquisition, the 20 branches operated by ING Hipotecaria have been closed, in an effort to consolidate the distribution network and increase operational efficiency. In September 2020, the merger of Santander Vivienda with Banco Santander México was completed; concentrating operations in a single entity.
We currently have the third-largest mortgage loan portfolio in the financial system, as determined in accordance with Mexican Banking GAAP, according to information published by the CNBV, in terms of the size of the mortgage portfolio.
On average, the loan-to-value ratio of our mortgage loan portfolio was 69.4% as of December 31, 2022. We generally do not make any loans for more than 80% of the value of the property to be purchased (if the property value is greater than Ps.10 million) or up to 90% (if the property value is less than or equal to Ps.10 million). Customers must meet certain minimum monthly income levels as evidenced by recent payroll information and tax returns. Customers must provide satisfactory documentary evidence to confirm their employment or other types of revenue and to otherwise evaluate their ability to pay.
Some of our key mortgage products include:
● | “Hipoteca Plus” program, which recognizes the level of relationship and punctual payment that the customer has with the Bank through the interest rate of their mortgage, allowing customers with positive payment histories to access the best market rate and improving the processes of approval of its credit card together with the mortgage. |
● | “Hipoteca Free”, the first product on the market that frees the client from paying commissions and insurance, the lowest origination cost when contracting a mortgage loan. |
● | Hipoteca Integral, a product that caters to the mixed-income population, i.e., fixed and variable incomes, recognizing the total income of families in order to have access to a mortgage loan. |
● | Damage insurance that covers the commercial value of the property (discounting the value of the land), the bonus of the opening commission with the Santander Plus program and the acceptance of the appraisal. |
● | “Hipoteca Online”, an online platform for selling mortgages through our broker channel. We launched “Hipoteca Online” in 2019 and were the first bank in México to implement a digital solution for executing a mortgage. Due to the application of new technologies and the continuous improvements of digital platforms, in 2022, “Hipoteca Online” processed more than 97% of the mortgage loan contracts in México. |
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● | “Sustitución Free,” which has the lowest cost of origination, as it relieves clients from paying opening and monthly commissions and covering property appraisal and insurance costs. |
Insurance Brokerage
We currently distribute insurance products from Zurich Santander Insurance America, S.L. as well as third-party providers. The joint venture we have with Zurich Financial Services Group issues products that we sell and, together with products sold by its predecessor, Seguros Santander, represented approximately 32.0% and 32.3% of the net commissions we earned in 2021 and 2022, respectively.
Total outstanding insurance premiums distributed by us increased 8.5%, or Ps.1,195 million in 2022, as compared to 2021, and total insurance commissions collected by us increased 14.2% in 2022 as compared to 2021.
The products we offer as part of our insurance brokerage services include life, car, home, health, accident, fraud, unemployment and life-savings insurance. We focus on simple standardized banking product-related insurance products primarily directed to the retail business. We cross-sell these insurance products with other banking products, offering an all-round assessment service to our customers. Insurance products are sold through our distribution networks, contact center, website, our ATM network and alternative channels such as Fuerza Asesor Santander and Santander Personal. We earn a service fee from insurers according to the number of the insurance sales.
We do not bear any underwriting risk in connection with our insurance brokerage services. All underwriting risk is assumed by, and all premiums are payable to, the relevant third-party insurance underwriters.
We offer several insurance products, including:
● | “Autocompara program”, which allows potential customers to compare car insurance quotes from the eleven largest insurance companies in México. Customers can access this program at our branches, on our website or by telephone. This program has been advertised throughout a national marketing campaign, which has positioned us among the top companies in the car insurance industry. By December 31, 2022, car insurances products had generated commissions of Ps.1,326 million (U.S.$68 million) based on a portfolio of approximately 0.9 million outstanding car insurance policies. |
● | "Protección Eventos Santander" affiliation program as an additional benefit of “Santander Plus” program, which awards our customers that have at least two insured assets with us (home, car, health or life) with a certificate of Ps.7,200 to celebrate the following five mayor life events: the birth or adoption of a child, getting married, getting a college diploma or moving to a new home. This program promotes the integral protection of our customers, it increases the profitability and strengthens our customer’s portfolio using the reward scheme. |
● | "Gastos Medicos Santander" through our branch network, offering specialized executives to make sure customers get the best assessment possible, eliminating waiting periods for COVID-19 disease coverage. |
● | “Objetivo Protegido Santander”. Through savings, this product allows our customers to achieve different goals set by them, such as paying for their children’s university or making the trip they have always dreamed of. We help our Select customers fulfill these objectives by providing life insurance, which guarantees that if the customer dies, their beneficiaries will receive payments through this program and be able to fulfill these goals. |
● | “Hogar Protegido Santander”, which covers earthquake, fire and hydrometeorological risks to homes, and are offering the most competitive rates in the insurance market. |
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● | Hospitalization + Teleassistance and Life Insurance + Teleassistance, which main characteristic is protection against COVID-19 disease from the first day of infection. |
● | “Seguro Blindaje Total”, an insurance policy that covers our customers against fraud on any credit card through any means, whether digital or physical. And we digitize 3 additional products that we now sell through our telephone banking app (Supermóvil) and they are a new “Hogar Protegido Santander”, new “Blindaje Total” and Hospitalization. |
In recent years, we have focused on the digital transformation of our business. Our website provides a three-step insurance buying process.
Corporate Lending
We offer a wide range of credit products to our corporate customers, including general corporate and working capital financing and foreign trade financing complemented by deposit-taking and cash management services. As of December 31, 2022, we had approximately 348,990 SME customers which approximately 205,136 are active, 52,261 middle-market corporation customers and 34,944 government institutional customers. Our middle-market corporation customers include companies across all industry sectors. Our SME and middle-market corporation customers’ coverage is handled by our officers who are appointed according to the customer’s geographic location in the case of middle-market customers, and according to the location of our corporate headquarters in Monterrey and Mexico City in the case of our large domestic companies customers.
Distribution Network
General
We refer to our strategy of using multiple distribution channels, such as branches, Internet banking, mobile banking, contact centers, third-party branches, Fuerza Asesor Santander and Santander Personal tailored to each of our customer segments and designed to reach a broad spectrum of customers in a cost-efficient manner as our multichannel distribution strategy. Our distribution network provides integrated financial services and products to our customers through a variety of channels, including our traditional proprietary branch network and on-site service units and complementary distribution channels such as ATMs, our contact centers and other direct sales distribution channels like Internet banking, which we refer to as alternative distribution channels. The principal aims of the complete omnichannel distribution strategy are to benefit from the synergy of the various channels and to direct customers to the most effective channel for the purposes of their transactions.
As of December 31, 2022, our distribution channels included:
● | Office network. We have 1,345 offices throughout México. |
● | ATMs. We have 9,689 ATMs with coverage throughout México, with more than 41.6 million transactions per month on average. |
● | Contact centers. We have 3,162 contact center positions with approximately 5,147 employees. We receive more than 3.5 million in-bound calls on average per month and generate 3.7 million transactions. |
● | Internet banking. We had, on average, more than 17.9 million banking transactions per month in 2022, with 1.6 million active customers. |
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● | Mobile banking. Our newly launched channel, which enables customers to complete transactions from their mobile phones and tablets. As of December 31, 2022, we had 5.7 million active customers and 500 million transactions per month on average. |
● | Specialized sales force. We have 283 agents in our Asesores Super Nómina network. See “—Alternative Distribution Channels—Specialized Sales Force.” |
● | Fuerza Asesor Santander (FAS). We have 400 sales executives, whose main task is to open digital payroll, make credit card sales, and manage insurance, payroll, place consumer loans, Linea Express and balance transfers, as well as advise customers to join digital channels. |
● | Santander Personal. This is a remote and digital service channel, through which we assist high income clients by assigning them a specialized Digital Banker. Today, this service has 100 Bankers, and we serve more than 100,000 customers mainly by email and telephone and through an exclusive digital platform designed for these customer. This service is available Monday to Friday from 08:00 to 18:00, and we also sell financial products and provide general solutions to customer service issues. |
● | Third-party branches (corresponsalía). We have 31,208 complementary branches provided by our agents, Financiera del Bienestar, Oxxo, 7-Eleven, Circle K, Tiendas Extra, K, Farmacias Guadalajara, Super 7/24, Woolworth, Tiendas del Sol, Farmacias del Ahorro and Soriana. See “—Alternative Distribution Channels—Third-Party Branches.” |
● | Third-party mortgage brokers. In the year ended December 31, 2022, approximately 63% of our mortgages were originated through third-party mortgage brokers. The rest of the mortgages were originated through our office network. |
During 2020, and as part of the commercial transformation strategy, the three-year plan of investments in infrastructure and systems has continued, aimed at improving and strengthening our multichannel distribution strategy and launching new commercial initiatives to attract and offer new customers more products and services.
During 2021, we launched the LikeU credit card in Supermóvil, we included the activation and administration functionalities in the Wallet mobile application, we doubled the number for invoice payment services and we strengthened the cybersecurity of our mobile channel through the implementation of risk engines and authentication mechanisms. In addition, we launched an online campaign through our website to encourage customers to visit our branches and update their file information, in order to support our web channel.
Our strategies to improve customer service in our branches include the following:
● | We promote the correct use of the address book by both our employees and our customers. |
● | We continue with the plan to open branch offices under our Work Café model in Monterrey (Fashion Drive) and CDMX (Mitikah). |
● | We have now four specialized branch formats, in addition to traditional ones: six Agile branches, three Work Café, two Inclusive branches and two disruptive branches in universities. |
● | We worked together with the real estate team to continue with the branch remodeling plan, improving 160 offices. |
● | We worked in coordination with the ATM area to update the self-service equipment and reinforce the fleet, replacing 735 ATM and 89 multiple teller machines due to obsolescence, in addition to adding 50 ATM and 2 new multiple teller machines to our network. |
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We continue to promote our omnichannel platform, our distribution strategy and strategic alliances with our correspondents. With the help of our correspondents we are able to expand our basic banking services for commercial customers, such as credit card payments, deposits, low commission transactions and cash withdrawals with debit and credit cards in a wider territory. The promotion of omnichannel services allows us to keep our customers updated on new options to make their transactions easier and faster.
Office Network
Our office network offers our products and services to our customers. The table below shows the number of offices in our branch network, which includes our branches (sucursales; traditional, traditional + select, smart, smart + select, centro select, Agile, Work Café, universities, salud, salud + select, Empresarial, express, express + select), cash tellers (ventanillas; traditional, business, business + select, espacio select, box select, corner select, universities and customs) and SME business centers, across México’s regions at the dates indicated. Information is provided with respect to the offices of Banco Santander México only. Cash desks are service areas that do not have a branch director and which are located in enclosed areas, for example, inside courthouses, corporations, universities, municipalities and airports. Santander Select offices include (i) Centros Select, which operate like individual branches and have a director and between four and five executives, (ii) Espacios Select, which are smaller and are inside or adjacent to a branch but function like an individual branch, with a director and approximately three executives, and (iii) box offices, which are inside of branches and have two executives but no cash tellers. Santander Select units are service areas that do not have a branch director and that are in enclosed areas, but are larger than cash desks. For example, Santander Select units may be located in universities or hospitals.
| | | | | | | | | | | | | | | |
| | | | | | | | | | | Change, December 31, 2022 compared to | | |||
| | At December 31, | | | December 31, 2021 | | |||||||||
|
| 2020 |
|
| 2021 |
|
| 2022 |
|
| # |
|
| % |
|
Central | | 155 | | | 154 | | | 153 | | | (1) | | | (0.6)% | |
Metro North | | 176 | | | 176 | | | 176 | | | — | | | 0.0% | |
Metro South | | 188 | | | 187 | | | 187 | | | — | | | 0.0% | |
Northeast | | 168 | | | 166 | | | 166 | | | — | | | 0.0% | |
Northwest | | 113 | | | 113 | | | 113 | | | — | | | 0.0% | |
North | | 114 | | | 117 | | | 117 | | | — | | | 0.0% | |
West | | 136 | | | 134 | | | 134 | | | — | | | 0.0% | |
South | | 119 | | | 118 | | | 119 | | | 1 | | | 0.8% | |
Southeast | | 181 | | | 181 | | | 180 | | | (1) | | | (0.6%) | |
Total(1) (2) | | 1,350 | | | 1,346 | | | 1,345 | | | (1) | | | (0.1%) | |
(1) | Includes 9 SME business centers. |
(2) | Does not include: 30 Banca de Empresas e Instituciones (BEI) offices, 24 offices of Private Banking, and, 11 Modules named “Terminales Financieras” (One Position). |
Alternative Distribution Channels
General
We also distribute our products and services through alternative distribution channels, which have experienced consistent growth in terms of sales, services, provision of product information and customer preference. These alternative distribution channels consist of ATMs, our contact centers, Internet banking, mobile banking, Asesores Super Nómina, third-party branches, Fuerza Asesor Santander and Santander Personal.
Because of their low cost and large attendance capacity, these channels are becoming one of the most efficient ways to interact with our customers at any time. We believe that alternative distribution channels
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are an important way to reach certain customers, in particular those in the low-income segment where we are able to have a more effective relationship with a broader customer base.
ATMs
We operate an extensive network of 9,689 ATMs throughout México, including those located in our branches and on-site service units. Our customers may use these ATMs to access their accounts and conduct banking transactions.
The following table shows the number of our ATM machines across México’s regions at the dates indicated.
| | | | | | | | | | | | | | | |
| | | | | | | | | | | Change, December 31, 2022 compared to | | |||
| | At December 31, | | | December 31, 2021 | | |||||||||
|
| 2020 |
|
| 2021 |
|
| 2022 |
|
| # |
|
| % |
|
Central | | 1,086 | | | 1,102 | | | 1,130 | | | 28 | | | 2.5% | |
Metro North | | 1,175 | | | 1,171 | | | 1,186 | | | 15 | | | 1.3% | |
Metro South | | 1,014 | | | 1,011 | | | 1,019 | | | 8 | | | 0.8% | |
Northeast | | 1,006 | | | 1,016 | | | 1,032 | | | 16 | | | 1.6% | |
Northwest | | 842 | | | 854 | | | 864 | | | 10 | | | 1.2% | |
North | | 823 | | | 831 | | | 864 | | | 33 | | | 4.0% | |
West | | 802 | | | 799 | | | 821 | | | 22 | | | 2.8% | |
South | | 1,045 | | | 1,057 | | | 1,091 | | | 34 | | | 3.2% | |
Southeast | | 1,655 | | | 1,657 | | | 1,682 | | | 25 | | | 1.5% | |
Total | | 9,448 | | | 9,498 | | | 9,689 | | | 191 | | | 2.0% | |
We designed a comprehensive strategy that includes installing additional ATMs to transfer operations currently performed by cashiers to ATMs, reducing the workload of cashiers and thus improving the quality of their services, by increasing the functions of ATMs to encourage self-servicing and replacing machines that were becoming obsolete. We have also devised an expansion plan to amplify the ATMs’ functions, including receiving credit card payments, payment services and deposit accounts.
Contact Centers
Our contact centers in Querétaro and Centrum in Mexico City can be used by customers to make inquiries, execute payment transactions or apply for products and services, such as personal loans. A portion of our contact center personnel is dedicated to contacting current account holders to offer them additional products and services, in particular insurance, credit cards and consumer loans. Those products are offered to preauthorized customers who are selected by our Risk and Commercial Intelligence departments in our central offices. Our contact centers also have a retention unit that handles customer requests for the cancellation of products or services.
Our contact centers serve three basic functions:
● | Customer service. We receive more than 2.9 million in-bound calls per month from our customers. |
● | Sales. Through our contact centers, we grant approximately 29.9% of the consumer loans and approximately 30.9% of the credit cards that we issue. |
● | Collecting receivables. With more than 77 million outbound and in-bound calls, we collect more than Ps.57,761 million (U.S.$2,961 million) of receivables per month. |
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Internet Banking
We view the Internet banking channel as the most efficient and convenient way to access bank services and as a key instrument for offering additional products. Our strategy includes four main components that seek to ensure the success of our Internet banking channel:
● | Accelerated customer acquisition: this includes a comprehensive strategy to easily sign up new customers and make product alliances to promote electronic banking as "easy, fast and secure". We seek to provide our customers with an intuitive operating platform. |
● | Digitalization of servicing: we seek to constantly improve the way our customers transact, facilitating the use of Internet banking and freeing the network from low-value transactions resulting in the optimization of operation costs. We do the foregoing by creating synergies within our channels. |
● | Acceleration of remote sales: we offer products according to the customer's profile and design increasingly easier and more efficient product acquisition processes. |
● | Customer Service: we seek to address the specific needs of our customers to improve their experience in the channels and thus their adoption and digital sales. |
As of December 31, 2022, we had approximately 1,628,672 active Internet banking customers. We had, on average, 17.9 million Internet banking transactions, either monetary or non-monetary, per month in the year ended December 31, 2022. The following table presents summarized operating statistics for our Internet banking channel:
| | | | | | | | | | | | |
| | | | | | | | Change, Year Ended | | |||
| | Monthly Average | | | December 31, 2022 compared to | | ||||||
| | Year ended December 31, | | | year ended December 31, 2021 | | ||||||
|
| 2021 |
|
| 2022 |
|
| # |
| | % |
|
Monetary transactions | | 5,186,684 | | | 5,234,036 | | | 47,352 | | | 1% | |
Non-monetary transactions | | 16,075,433 | | | 12,701,778 | | | (3,373,655) | | | (21)% | |
Total transactions | | 21,262,117 | | | 17,935,814 | | | (3,326,303) | | | (16)% | |
Mobile Banking
In March 2012, we launched our mobile banking (Banca Móvil or SúperMóvil) channel, which enables customers to effect transactions on mobile phones. The application comes with a “geo-reference” function, which allows our customers to locate the nearest branch or ATM. The application is compatible with most of the mobile phones available in the Mexican market, including smart phones. There is also a customized version for tablets.
Mobile banking lowers the cost of bringing services to our customers and makes our services more convenient, which we believe helps to increase customer transactions.
As of December 31, 2022, we had approximately 5,771,979 mobile banking active customers, with approximately 500.5 million monetary and non-monetary mobile banking transactions. The following table presents the statistical results of the mobile banking channel:
| | | | | | | | | | | | |
| | | | | | | | Change, year ended | | |||
| | Month average | | | December 31, 2022 compared to | | ||||||
| | Year ended December 31, | | | year ended December 31, 2021 | | ||||||
|
| 2021 |
|
| 2022 |
|
| # |
|
| % |
|
Monetary transactions | | 22,725,354 | | | 29,852,523 | | | 7,127,169 | | | 31% | |
Non-monetary transactions | | 393,685,354 | | | 470,727,752 | | | 77,042,398 | | | 20% | |
Total transactions | | 416,410,708 | | | 500,580,275 | | | 84,169,567 | | | 20% | |
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To date, our app, SúperMóvil, has the following functions: facial and fingerprint recognition access, clarification of unrecognized charges, account statement download, Super Token to authorize transactions (which is a timed dynamic cryptogram changing randomly), renewal, consumer credit availability, payroll portability, credit line increase request, or transfer of debts from other banks with preferential rates, payment of services, term investments, cardless cash withdrawals, "Mis Metas" savings plan, direct debits, cell phone credit recharge and "Santander TAP".
Specialized Sales Force
Our Asesores Super Nómina network is a specialized sales force responsible for delivering the payroll kits to the employees of the companies that have payroll services with the Bank. Payroll kits are welcome kits that describe all the benefits of the payroll deposit services to the customer. Upon the signature of a contract contained in this kit, the employee allows us to offer him pre-approved financial products (such as credit cards, consumer loans, insurance policies and investments) through all of our banking channels. This process is part of our 360-degree cross-selling strategy.
When the payroll kits are delivered, the Asesores Super Nómina also explain the different benefits of being a customer of the Bank and assist with the activation process of debit cards.
As of December 31, 2022, 283 agents belonged to our Asesores Super Nómina network. These agents are located throughout México, primarily at our branches but also at some of our corporate offices.
We delivered a monthly average of 162,000 total payroll kits in 2022, an increase of 43% from a monthly average of 1,353,000 payroll kits generated in 2021, this means 1,946,000 payroll kits delivered in 2022, which translates to an increase of 43% compared to 2021.
Third-Party Branches
We provide banking services to our customers through 21,310 Oxxo stores, 1,912 7-Eleven stores and 1,703 complementary branches provided through our below-described relationship with Financiera del Bienestar, 2,563 Farmacias Guadalajara stores, 1,504 Farmacias del Ahorro stores, 1,166 Circle K and Tiendas Extra stores, 777 Soriana stores, 146 7/24 Mix stores and 127 Woolworth Stores and Tiendas del Sol, which are third-party branches, as of December 31, 2022. At these third-party branches, we process more than 3.9 million transactions per month, offering basic banking services, such as debit and credit deposits, withdrawals and balance inquiries. These branches strengthen our national coverage and fortify our payroll service to companies with local coverage.
We are evaluating other joint strategies with third parties that might be interested in offering our services, which would increase the number of customers visiting their facilities and their revenues from commission received per transaction. We are also considering providing other services, such as “Referenced Deposits” and “Cellphone Deposits.”
Third-Party Mortgage Brokers
Approximately 63% of our mortgage loans were originated through third-party mortgage brokers in 2022. We have a direct relationship with the largest mortgage brokers in México and an indirect relationship with approximately 1,000 smaller brokers, which sometimes originate mortgage loans on behalf of the larger brokers.
Funding
Our principal source of funding is customer deposits, including repurchase agreements, which represented Ps.928,298 million (U.S.$47,583 million), or 56.3%, of our total liabilities as of December 31, 2022. Customer deposits typically represent a large portion of our funding base based on our ability to attract
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deposits from customers through our extensive retail, wholesale and corporate network. Since we are primarily a commercial bank, customer deposits constitute the main source of liquidity in our financing structure. These deposits currently cover most of our liquidity requirements. Our control and management functions involve planning our funding requirements, structuring the sources of financing to achieve optimal diversification in terms of maturities, instruments and markets and setting forth contingency plans.
In order to increase liquidity and extend our maturity profile, we rely in part on domestic peso-denominated issuances. We also have access to international funding through U.S. dollar-denominated issuances with longer maturities. For a further discussion of our funding, see “Item 5. Operating and Financial Review and Prospects—B. Liquidity and Capital Resources.”
The following table sets forth Banco Santander México’s funding and market share with respect to funding for the periods indicated.
| | | | | | | | | | | | | | | | | | | | | |
| | Mexican Banking GAAP |
| ||||||||||||||||||
| | As of December 31, |
| ||||||||||||||||||
| | 2020 | | | 2021 | | | 2022 |
| ||||||||||||
| | (Millions | | | (Market | | | (Millions | | | (Market | | | (Millions | | | (Market | | |||
Santander |
| Ps. | 893,327 | | | 13.4 | % |
| Ps. | 899,517 | | | 12.9 | % |
| Ps. | 942,777 | | | 12.4 | % |
BBVA | |
| 1,434,931 | | | 21.5 | | |
| 1,600,293 | | | 23.0 | | |
| 1,749,569 | | | 23.0 | |
Citi Banamex | |
| 917,241 | | | 13.7 | | |
| 913,751 | | | 13.1 | | |
| 973,446 | | | 12.8 | |
Banorte | |
| 855,668 | | | 12.8 | | |
| 825,103 | | | 11.9 | | |
| 930,180 | | | 12.2 | |
HSBC | |
| 516,902 | | | 7.7 | | |
| 528,030 | | | 7.6 | | |
| 541,311 | | | 7.1 | |
Scotiabank | |
| 473,182 | | | 7.1 | | | | 490,714 | | | 7.0 | | | | 535,220 | | | 7.0 | |
Inbursa | |
| 266,210 | | | 4.0 | | |
| 273,230 | | | 3.9 | | |
| 317,604 | | | 4.2 | |
Santander + Top 6 | | Ps. | 5,357,461 | | | 80.2 | % | | Ps. | 5,530,638 | | | 79.4 | % | | Ps. | 5,990,107 | | | 787 | % |
Total System | | Ps. | 6,671,738 | | | 100.0 | % | | Ps. | 6,961,764 | | | 100.0 | % | | Ps. | 7,615,723 | | | 100.0 | % |
Source: CNBV.
(1) Funding and market share data are calculated by us, using information published by the CNBV.
The following table sets forth Banco Santander México’s total demand deposits and market share with respect to demand deposits for the periods indicated.
| | | | | | | | | | | | | | | | | | | | | |
| | Mexican Banking GAAP |
| ||||||||||||||||||
| | As of December 31, |
| ||||||||||||||||||
| | 2020 | | | 2021 | | | 2022 |
| ||||||||||||
|
| (Millions |
|
| (Market |
|
| (Millions |
|
| (Market |
|
| (Millions |
|
| (Market | | |||
Santander | | Ps. | 515,449 | | | 12.4 | % | | Ps. | 563,481 | | | 12.4 | % | | Ps. | 551,241 | | | 11.2 | % |
BBVA | |
| 1,084,253 | | | 26.0 | | |
| 1,242,321 | | | 27.2 | | |
| 1,367,048 | | | 27.8 | |
Citi Banamex | |
| 720,625 | | | 17.3 | | |
| 736,381 | | | 16.1 | | |
| 737,224 | | | 15.0 | |
Banorte | |
| 531,522 | | | 12.7 | | |
| 535,642 | | | 11.7 | | |
| 618,937 | | | 12.5 | |
HSBC | |
| 317,627 | | | 7.6 | | |
| 355,893 | | | 7.8 | | |
| 366,997 | | | 7.5 | |
Scotiabank | |
| 202,371 | | | 4.9 | | |
| 209,758 | | | 4.6 | | |
| 231,802 | | | 4.7 | |
Inbursa | |
| 159,046 | | | 3.8 | | |
| 175,796 | | | 3.9 | | |
| 205,926 | | | 4.2 | |
Santander + Top 6(2) | | Ps. | 3,530,893 | | | 84.7 | % | | Ps. | 3,819,273 | | | 83.7 | % | | Ps. | 4,079,176 | | | 829 | % |
Total System | | Ps. | 4,171,724 | | | 100.0 | % | | Ps. | 4,561,703 | | | 100.0 | % | | Ps. | 4,920,072 | | | 100.0 | % |
Source: CNBV.
(1) | Market share data are calculated by us, using information published by the CNBV. |
(2) | Total demand deposits and market share data for “Santander + Top 6” are calculated by us, using information published by the CNBV. |
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The following table sets forth Banco Santander México’s total time deposits and market share with respect to fixed-term deposits for the periods indicated.
| | | | | | | | | | | | | | | | | | | | | |
| | Mexican Banking GAAP |
| ||||||||||||||||||
| | As of December 31, |
| ||||||||||||||||||
| | 2020 | | | 2021 | | | 2022 |
| ||||||||||||
|
| (Millions |
|
| (Market |
|
| (Millions |
|
| (Market |
|
| (Millions |
|
| (Market | | |||
Santander | | Ps. | 328,210 | | | 15.8 | % | | Ps. | 305,148 | | | 15.4 | % | | Ps. | 295,903 | | | 15.1 | % |
BBVA | |
| 327,862 | | | 15.8 | | |
| 313,136 | | | 15.8 | | |
| 332,533 | | | 16.8 | |
Banorte | |
| 306,897 | | | 14.8 | | |
| 264,876 | | | 13.4 | | |
| 288,214 | | | 14.7 | |
Scotiabank | |
| 203,586 | | | 9.8 | | | | 231,687 | | | 11.7 | | | | 221,683 | | | 11.3 | |
HSBC | |
| 179,265 | | | 8.6 | | |
| 144,298 | | | 7.3 | | |
| 145,233 | | | 7.4 | |
Citi Banamex | |
| 187,995 | | | 9.1 | | |
| 161,309 | | | 8.1 | | |
| 113,943 | | | 5.8 | |
Inbursa | |
| 76,320 | | | 3.7 | | |
| 76,518 | | | 3.9 | | |
| 91,755 | | | 4.7 | |
Santander + Top 6 | | Ps. | 1,610,135 | | | 77.6 | % | | Ps. | 1,496,971 | | | 75.5 | % | | Ps. | 1,489,265 | | | 75.8 | % |
Total System | | Ps. | 2,072,961 | | | 100.0 | % | | Ps. | 1,982,499 | | | 100.0 | % | | Ps. | 1,964,130 | | | 100.0 | % |
Source: CNBV.
(1) Total fixed-term deposits and market share data are calculated by us, using information published by the CNBV.
The following table sets forth Banco Santander México’s total interbank lending and market share with respect to interbank lending for the periods indicated.
| | | | | | | | | | | | | | | | | | | | | |
| | Mexican Banking GAAP |
| ||||||||||||||||||
| | As of December 31, |
| ||||||||||||||||||
| | 2020 | | | 2021 | | | 2022 |
| ||||||||||||
|
| (Millions |
|
| (Market |
|
| (Millions |
|
| (Market |
|
| (Millions |
|
| (Market |
| |||
Santander | | Ps. | 47,876 | | | 11.7 | % | | Ps. | 28,770 | | | 7.2 | % | | Ps. | 30,806 | | | 7.9 | % |
Scotiabank | |
| 66,612 | | | 16.2 | | |
| 48,408 | | | 12.2 | | |
| 49,518 | | | 12.7 | |
BBVA | |
| 17,860 | | | 4.4 | | |
| 39,433 | | | 9.9 | | |
| 39,162 | | | 10.0 | |
HSBC | |
| 19,155 | | | 4.7 | | |
| 26,821 | | | 6.7 | | |
| 23,941 | | | 6.1 | |
Inbursa | |
| 30,696 | | | 7.5 | | | | 20,685 | | | 5.2 | | | | 19,725 | | | 5.1 | |
Banorte | |
| 14,665 | | | 3.6 | | |
| 21,562 | | | 5.4 | | |
| 14,822 | | | 3.8 | |
Citi Banamex | |
| 3,432 | | | 0.8 | | | | 10,162 | | | 2.6 | | | | 1,552 | | | 0.4 | |
Santander + Top 6(2) | | Ps. | 200,296 | | | 48.9 | % | | Ps. | 195,841 | | | 49.2 | % | | Ps. | 179,527 | | | 46.0 | % |
Total System | | Ps. | 410,172 | | | 100.0 | % | | Ps. | 398,165 | | | 100.0 | % | | Ps. | 390,623 | | | 100.0 | % |
Source: CNBV.
(1) | Market share data are calculated by us, using information published by the CNBV. |
(2) | Total interbank lending and market share data for “Santander + Top 6” are calculated by us, using information published by the CNBV. |
Marketing
During 2022, in the advertising area, we worked in two main campaigns focused on attracting new customers.
In April 2022, we launched "Tu Sueldo Extra" to attract new payroll customers to the Bank, reaching an increase of 10% on the rate of new customer acquisition. The campaign had an empathic and humoristic tone to keep building on our brand credibility, which has defined us throughout the last years.
During the second half of 2022, we launched the largest communication campaign in terms of investment in recent years, "Cashback Baby". This campaign is aimed at providing our customers with a tangible benefit, seeking to position ourselves in the market as a bank that rewards customers for spending and thus extending our outreach to a larger number of potential customers. The result has been an increase on the LikeU customer acquisition rates of 40%.
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Our 2022 sponsorship strategy was based on three core goals: high-value customer relationships, high-end offerings and business commitments. To implement our strategy, we focused on four main pillars: wellness, sports, entertainment and gastronomy. We have focused on the well-being pillar, an area of opportunity with low bank participation and a growing trend that our customers are interested in and increasingly demand. Consequently, we decided to participate in 36 sporting events, 10 gyms with more than 110 branches nationwide and four nutrition platforms with exclusive promotions and many additional benefits.
During 2022, the Digital Marketing Team continued in the consolidation process as industry leaders, strengthening the relationship with global teams such as DMA and taking part in monthly working and insight Latam CRO sessions together with Argentina, Brazil, Chile and Uruguay. Additionally, we keep on entrenching teamwork with partners such as Criteo, Facebook, Google, Twitter, Teads and Waze and incorporate new partners, such as Amazon, TikTok and Spotify, reinforcing the Bank’s digital strategies together. In addition, with our campaign “Cashback Baby” we achieved more than 259.7 million full views in digital media and surpassed 72.7 million views in YouTube (increasing our views by 105% compared to our LikeU YouTube campaign views). Finally, we also launched a tagging documentation project of our digital websites and assets to map our data and events, and have been innovating in the use of new digital media channels, implementing Connected TV campaigns with partners such as Canela.tv.
In 2022, we were able to help digital sales of LikeU with digital marketing campaigns, placing more than 31.5% (increasing 1.5% compared to 2021) of our credit cards via digital channels, and also having deepened the implementation of Branch SDK (Software Development Kit) for measurement and digital e2e funnel attribution in our mobile assets, such as Supermóvil, Samsung Members Wallet and SuperWallet, also including Journeys and a Web SDK for sites.
In Autocompara, we continued our annual optimization and improvement of the cost per acquisition by 14.1% (Ps.311 million), achieving important results in digital acquisitions exceeding 64 thousand sales (decreasing 2% compared to 2021) in 2022 but improving performance optimization, as as we reduced our budget by 18% compared to 2021 (Ps.18 million). Banco Santander México currently appears in search engines as one of the main results on search pages related to credit cards and insurance products, concentrating over 35% of organic traffic to the site.
In the global digital program, we worked on the production of advertising campaigns that did not use cookies to ensure we are prepared to run cookieless campaigns when we are required to phase out cookies in 2024.
Banco Santander México has differentiated itself on advertising spending within its category. We occupy the fifth place on advertising spending among Mexican banks according to IBOPE AGB as of December 2022. Furthermore, our communication during the second half of the year allowed us to secure a position among the top three banks in terms of brand awareness.
In México, part of our efforts are dedicated to social responsibility. Our ATMs receive voluntary donations from our customers several times a year. With these contributions, we have supported the valuable work of the United Nations International Children’s Emergency Fund, or UNICEF, in México, helping children attend school and receive a quality education. This program has raised more than Ps.145 million in the past 21 years. We have also supported environmental projects led by Reforestamos México, raising more than Ps.40 million over the past 16 years. We also support Casa de la Amistad para Niños con Cancer in early detection and early childhood cancer care. In the last six years, we have raised more than Ps.18.3 million. In 2019, we began supporting Escuela SER, an organization dedicated to providing high quality basic education for underprivileged children. In the last four years, we helped it raise more than Ps.8.9 million. In 2020 we formed an alliance with Fundación Alsea, to help end hunger, especially in early childhood. The total amount raised in these three years was Ps. 4.2 million.
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In 2021, Santander launched its LikeU Credit Card, the first of its kind in México with a “financial on demand” concept. Besides its digital and safety specifications, the LikeU cards incorporate a social responsibility element, allowing customers to support six of the main social and environmental causes in alliance with prestigious organizations in the country, based on the color of their card: LikeU Green (supports reforestation in alliance with Reforestamos México); LikeU Red (supports children education in vulnerable areas in the country alongside UNICEF); LikeU Blue (gives resources for the cleaning of seas and rivers, with the help of World Wild Fund for Natures, WWF); LikeU Star (supports children with cerebral paralysis and people with autism through APAC and Iluminemos de Azul); LikeU Pink (supports the fight against breast cancer in alliance with Fundación Cima); and LikeU White (supports nutrition and health of children with UNICEF). Banco Santander México granted more than Ps.3.8 million in seed capital, in 2021, and in 2022, after one year of being launched, Santander donated an aggregate of Ps.18 million for all cards placed during the year.
Information Technology
Our main data center is located in México and our disaster recovery site is located in Spain. We continuously invest in new technologies and maintaining our existing equipment and infrastructure in order to improve our value proposition to our customers, increase our effectiveness and support business growth. We believe that the right technology management is key to proper management and growth of our business. Our technology platform is interconnected with the platform of Santander Group, which enables us to provide seamless coverage to our customers. Additionally, we are incorporating new digital technologies that allow us to implement modern systems in an agile and flexible way with better value for our customers, and that are accessible through traditional channels as well as through the new digital channels used by our customers.
Through our Information Technology Governance Model, we ensure that information technology investments are aligned with our strategy and business plan prior to approval. In this model, we strongly encourage Process Automation in order to increase efficiency and speed of business operations.
In June 2020, we began the implementation of a three-year strategic plan that will conclude in 2023. Today, there is a noticeable improvement in IT regarding the modernization and growth of our business in the following areas:
Cloud: Continue leading cloud adoption, facilitating complete migration to next-generation infrastructure platforms, expanding our business continuity capabilities with our private/public cloud operating model.
Focus on Payments: Through agreements with PagoNXT, Getnet and Global Cards, we have acquired new capabilities and flexible platforms, which have allowed us to use advanced technology to minimize time, cost and reliance on third-party suppliers, while strengthening our infrastructure, improving our online services and enhancing customer experience by addressing requests faster and providing additional tools for payments.
APIs: Promote the implementation of new digital assets, with the creation of an API-based architecture to increase our value delivery speed to customers.
Talent: Launch of talent plans to increase our technical skills and capabilities in information technology and cybersecurity areas, with the incorporation of new personnel and specific training plans.
The regional strategy enables us to leverage our local and global scale, capturing the benefits of consolidation, shared capability, scale, diversified expertise from our collaborators, and exchange of best practices and simplified governance, without the risk of losing control of the core activities.
Our Information Technology architecture is the central pillar of our banking operations. Our focus is to serve our customers on a global scale leveraging an architecture that is uniquely customer-centric, provides
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business support and increases the efficiency of our processes, all within a framework of enhanced security and regulatory compliance.
Our operational platform efficiently combines our modern digital business-oriented information technology systems with our multichannel distribution strategy, resulting in innovative ways to reach, support and serve our customers and attract potential new customers. We continue to incorporate new digital technologies and agile methodologies and to increase cloud adoption for the development of systems and tools as well as new biometric recognition technologies for authentication, which will allow us to efficiently implement digital and secure solutions that improve the customer experience. In order to enhance customers’ banking experience, we are also growing our nationwide installed ATM infrastructure and strategically replacing the old infrastructure, adding new features to the existing machines, and updating the CRM tools and strategies that allow us to monitor our customers’ behavior and provide them with targeted and real-time product offerings through diverse channels.
As a result, we are able to efficiently leverage alternate distribution channels, such as ATMs, digital banking, and our contact centers, which are complementary to our traditional proprietary branch network. These alternative distribution channels enable us to provide better service and support to our clients, thus increasing our digital customer satisfaction, and promoting an increase of digital activities.
We remain focused on strengthening the coordination between our information security and fraud teams, as the nature of many cyber-attacks and data breaches requires both teams' participation and our operational resilience against cybersecurity incidents depends on responding quickly and effectively in order to mitigate business risk and disruptions. We implemented a cybersecurity transformation plan that aims to ensure that our forensic and incident management team has the required tools and support to effectively address major incidents.
IT will continue supporting the Bank's growth strategy and the new operating models by strengthening and aligning our capabilities, working with the business to simplify processes and products.
Intellectual Property
In México, ownership of trademarks can be acquired only through a validly approved registration with the Mexican Institute of Industrial Property (Instituto Mexicano de la Propiedad Industrial or IMPI), the agency responsible for registering trademarks and patents in México. After registration, the owner has exclusive use of the trademark in México for ten years. Trademarks registrations can be renewed indefinitely for additional ten-year periods, if the registrant proves that it has used such trademark within the last three years.
We have several trademarks, most of which are brand names of our products or services. All our material trademarks are registered or have been submitted to IMPI for registration by the Santander Group or us.
We own the principal domain names used in our business, which include www.santander.com.mx. None of the information contained on our websites is incorporated by reference into, or forms part of, this Report.
Competition
General
We face strong domestic competition in all aspects of our business from other Mexican financial groups, commercial banks and insurance companies, as well as from non-Mexican banks and international financial institutions. We compete for both commercial and retail customers with other large Mexican banks, including subsidiaries of foreign banks. In some parts of México, Banco Santander México also competes with regional banks. Banco Santander México also competes with certain non-Mexican banks (principally
100
those based in the United States and Spain) for the business of the largest Mexican industrial groups and government entities, as well as high net worth individuals.
Our principal competitors are BBVA Bancomer, S.A., Institución de Banca Múltiple, Grupo Financiero BBVA Bancomer; Banco Nacional de México, S.A., integrante del Grupo Financiero Banamex, which is part of Citigroup; Banco Mercantil del Norte, S.A., Institución de Banca Múltiple, Grupo Financiero Banorte; HSBC México, S.A., Institución de Banca Múltiple, Grupo Financiero HSBC; Banco Inbursa, S.A., Institución de Banca Múltiple, Grupo Financiero Inbursa; and Scotiabank Inverlat, S.A., Institución de Banca Múltiple, Grupo Financiero Scotiabank Inverlat. Some of the banks with which Banco Santander México competes are significantly larger and have more financial resources than Banco Santander México, including a larger asset size and capital base.
The following table shows the rankings and market share of Banco Santander México as of December 31, 2022, according to information published by the CNBV.
| | | | | | |
| | Mexican Banking GAAP | ||||
| | As of December 31, 2022 | ||||
| | | | | | |
| | | | | | |
| | | | | Market Share | |
| | Position of Banco | | | of Banco | |
| | Santander | | | Santander | |
| | México among | | | México among | |
Rankings and Market Share |
| banks(1) |
|
| banks(2) |
|
Total loans |
| 3 |
| | 13.0 | % |
Deposits |
| 3 |
| | 12.1 | % |
Total assets |
| 2 |
| | 14.7 | % |
Asset quality(3) |
| 4 |
| | — |
|
Total equity |
| 3 |
| | 12.0 | % |
Net income |
| 3 |
| | 11.2 | % |
Efficiency(4) |
| 4 |
| | — |
|
ROAE(5) |
| 3 |
| | — |
|
Source: CNBV.
(1) | Among the largest private banks in México in terms of total assets: Banco Santander México, BBVA Bancomer, S.A., Institución de Banca Múltiple, Grupo Financiero BBVA Bancomer; Banco Nacional de México, S.A., integrante del Grupo Financiero Banamex; Banco Mercantil del Norte, S.A., Institución de Banca Múltiple, Grupo Financiero Banorte; HSBC México, S.A., Institución de Banca Múltiple, Grupo Financiero HSBC; Banco Inbursa, S.A., Institución de Banca Múltiple, Grupo Financiero Inbursa; and Scotiabank Inverlat, S.A., Institución de Banca Múltiple, Grupo Financiero Scotiabank. |
(2) | We calculate market share based on information published by the CNBV. |
(3) | Defined as total non-performing loans as a percentage of total loans. |
(4) | We calculate the efficiency ratio as administrative expenses divided by total income, using information published by the CNBV. |
(5) | Calculated based upon the average balance of equity. |
Our prominence in México’s financial system has been recognized in the Mexican business community. In 2022, LatinFinance magazine named Banco Santander México’s CIB as the Investment Bank of the Year in México. Euromoney named Banco Santander México’s Private Banking as the Best Private Bank Wealth Manager Overall and the Best Private Bank Wealth Manager for High Network Clients in México. Global Finance Magazine recognized Banco Santander México for its Outstandig Leadership in Transition/Sustainable Linked Loans. Moreover, World Economic Magazine named Banco Santander
101
México as the Best Commercial Bank México 2022, the Most Innovative Private Bank México 2022 and the Most Innovative Retail Bank México 2022. In addition, Banco Santander México also received the Financial Innovator of the Americas Platinum Award by Fintech Americas in the category Payments and Wallets Innovation, and was named the Best Mortgages Banking Brand in the Global Brand Awards. Furthermore, Banco Santander México ranked 7th place in Global Finance’s Safest Bank in Latin America Award 2022.
The Mexican Center for Philanthropy (Centro Mexicano para la Filantropia or CEMEFI) and the Alliance for Corporate Social Responsibility (AliarRSE) awarded Banco Santander México, for the eighteenth time, with the prestigious Socially Responsible Company (ESR) distinction. In 2022, for the third consecutive year, we were selected as a member of the Dow Jones Sustainability MILA Pacific Alliance Index (DJSI MILA 2022) in recognition of our performance in sustainable banking activities. In addition, the Bank was included in the S&P Global Sustainability Yearbook 2022 for our practices in ESG matters for the second consecutive year. Also in 2022, we were recognized as the Most Socially Responsible Bank in México for the sixth time by the International Finance Magazine and, for the first time, we were ranked as Market Leaders by Euromoney and outstanding in the seven categories of this ranking that evaluates social commitment, business, and digital solutions. Lastly, for the 15th time, we were recognized by Reforestamos México for our long-term alliance to promote the sustainable development of forests and communities.
Regarding diversity and inclusion practices, we were awarded with the Gender Equality Award by the Mexican Institute of Finance Executives (IMEF), and Best LGBTQ+ Places to Work 2022 by the Human Rights Campaign. In addition, Santander was included in the Top 10 Company to work for ranking by Grupo Expansión and was recognized as one of the Best Companies 2022 by LinkedIn.
The banking sector in México can be classified into two groups: the mature, established “large banks” and the recently created “new banks.” As of December 31, 2022, the four largest banks, BBVA Bancomer, Banco Santander México, Banamex and Banorte, held in the aggregate 62.4% of the total deposits in México, followed by a total of 17.6% held in the aggregate by HSBC, Scotiabank and Inbursa, all of which are established large banks. The remaining 20.0% was distributed among 43 other banks as determined in accordance with Mexican Banking GAAP, according to information published by the CNBV.
We also compete with credit unions in México. Credit unions are financial institutions that are formed for the purpose of providing access to funding and favorable conditions for savings and receipt of loans and financial services. Credit unions do not provide services to the public in general, since they are only authorized to carry out transactions with their members. The operation of a credit union is carried out by its own members. In order to be a member of a credit union, one must comply with the eligibility requirements established for that organization and acquire a certain number of shares of the credit union.
The deposits of members with a credit union are not subject to any form of deposit insurance. There are credit unions for many different economic groups, ranging from fishermen to industrialists, but there are also “mixed” credit unions that accept members who perform different economic activities and “social sector” credit unions that serve economic sectors that are unable to access traditional financial institutions due to social, economic and geographic conditions.
Commercial banks in México also compete in the retail market with non-banking institutions known as Sofomes, which focus primarily on offering consumer, commercial and mortgage loans to middle- and low-income individuals. Until recently, the commercial credit market for middle- and low-income individual customers has been serviced almost exclusively by non-banking institutions. Currently, more than 50 non-banking institutions are licensed to operate in México. Mexican non-banking institutions may engage in certain specific lending activities, but are prohibited from engaging in many banking operations, including receiving deposits, foreign trade financing, offering current accounts and engaging in foreign currency operations. Traditional banks have begun to extend their credit services to the markets previously dominated by Sofoles (now abolished) and Sofomes.
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Commercial, “universal” banks such as Banco Santander México, also compete with banks incorporated solely to engage in certain activities, as permitted by the Mexican Banking Law. These banks have lower capital requirements and therefore reduced operational costs.
Commercial banks also face increasing competition from securities firms and other financial intermediaries that can provide larger companies with access to domestic and international capital markets as an alternative to bank loans.
Market Position of Banco Santander México
Net income
The following table sets forth net income and market share in terms of net income for the seven largest commercial banks in México for the periods indicated.
| | | | | | | | | | | | | | | | | | | | | |
| | Mexican Banking GAAP |
| ||||||||||||||||||
| | As of December 31, |
| ||||||||||||||||||
| | 2020 | | | 2021 | | | 2022 |
| ||||||||||||
| | (Millions of pesos) | | | (Market | | | (Millions of pesos) | | | (Market | | | (Millions of pesos) | | | (Market |
| |||
Santander |
| Ps. | 20,144 |
|
| 19.7 | % |
| Ps. | 18,068 |
|
| 9.9 | % |
| Ps. | 26,469 |
|
| 11.2 | % |
BBVA | |
| 36,172 |
| | 35.4 | | |
| 60,256 |
| | 33.1 | | |
| 76,537 |
| | 32.3 | |
Banorte | |
| 20,384 |
| | 20.0 | | |
| 26,086 |
| | 14.3 | | |
| 34,549 |
| | 14.6 | |
Citi Banamex | |
| 7,440 |
| | 7.3 | | |
| 22,396 |
| | 12.3 | | |
| 20,433 |
| | 8.6 | |
Inbursa | |
| 6,791 |
| | 6.6 | | |
| 13,931 |
| | 7.6 | | |
| 15,560 |
| | 6.6 | |
Scotiabank | |
| 3,020 |
| | 3.0 | | |
| 9,418 |
| | 5.2 | | |
| 11,117 |
| | 4.7 | |
HSBC | |
| (708) |
| | (0.7) | | |
| 2,806 |
| | 1.5 | | |
| 10,010 |
| | 4.2 | |
Others(2) | |
| 8,878 |
| | 8.7 | | |
| 29,209 |
| | 16.1 | | |
| 42,066 |
| | 17.8 | |
Mexican financial system | | Ps. | 102,121 |
| | 100.0 | % | | Ps. | 182,170 |
| | 100.0 | % | | Ps. | 236,743 |
| | 100.0 | % |
Source: CNBV.
(1) | Market share data is calculated by us, using information published by the CNBV. |
(2) | Net income and market share data for “Others” are calculated by us, using information published by the CNBV. |
Total equity
The following table sets forth shareholders’ equity and market share in terms of total equity (as a percentage of the total equity of 50 private banks in México) for the seven private-sector banks with the largest market shares for the periods indicated.
| | | | | | | | | | | | | | | | | | | | | |
| | Mexican Banking GAAP |
| ||||||||||||||||||
| | As of December 31, |
| ||||||||||||||||||
| | 2020 | | | 2021 | | | 2022 |
| ||||||||||||
| | (Millions of pesos) | | | (Market | | | (Millions of pesos) | | | (Market share (%))(1) | | | (Millions of pesos) | | | (Market |
| |||
Santander |
| Ps. | 158,930 |
|
| 13.4 | % |
| Ps. | 165,823 |
|
| 12.8 | % |
| Ps. | 166,235 |
|
| 12.0 | % |
BBVA | |
| 242,308 |
| | 20.4 | | |
| 282,724 |
| | 21.6 | | |
| 300,069 |
| | 21.6 | |
Citi Banamex | |
| 174,303 |
| | 14.6 | | |
| 182,786 |
| | 14.0 | | |
| 191,250 |
| | 13.8 | |
Banorte | |
| 135,044 |
| | 11.3 | | |
| 144,631 |
| | 11.0 | | |
| 144,673 |
| | 10.3 | |
Inbursa | |
| 99,904 |
| | 8.4 | | |
| 115,750 |
| | 8.8 | | |
| 132,098 |
| | 9.6 | |
Scotiabank | |
| 55,322 |
| | 4.6 | | |
| 67,350 |
| | 5.1 | | |
| 75,294 |
| | 5.4 | |
HSBC | |
| 65,366 |
| | 5.5 | | |
| 66,045 |
| | 5.0 | | |
| 71,884 |
| | 5.2 | |
Total for seven banks(2) | | Ps. | 931,177 |
| | 78.2 | % | | Ps. | 1,025,109 |
| | 78.3 | % | | Ps. | 1,081,504 |
| | 77.9 | % |
Source: CNBV.
(1) | Market share data are calculated by us, using information published by the CNBV. |
(2) | Total equity and market share data for the seven banks are calculated by us, using information published by the CNBV. |
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Return-on-average equity and equity to total assets ratio
The following table sets forth the return-on-average equity and equity to total assets ratio for the seven largest commercial banks in México for the periods indicated.
| | | | | | | | | | | | | | | | | | |
| | Mexican Banking GAAP |
| |||||||||||||||
| | As of December 31, |
| |||||||||||||||
| | 2020 | | | 2021 | | | 2022 |
| |||||||||
| | Return-on-average | | | Equity to total | | | Return-on-average | | | Equity to total | | | Return-on-average | | | Equity to total |
|
| | equity (%)(1) | | | assets ratio (%) | | | equity (%)(1) | | | assets ratio (%) | | | equity (%)(1) | | | assets ratio (%) |
|
Santander |
| 13.5 | % |
| 8.6 | % |
| 11.1 | % |
| 10.1 | % |
| 15.9 | % |
| 9.0 | % |
BBVA |
| 15.8 |
| | 9.9 |
| | 23.0 |
| | 11.5 |
| | 26.3 |
| | 10.9 | |
Banorte |
| 16.4 |
| | 10.7 |
| | 18.7 |
| | 11.7 |
| | 23.9 |
| | 9.3 | |
Scotiabank |
| 5.6 |
| | 8.7 |
| | 15.4 |
| | 10.0 |
| | 15.6 |
| | 10.0 | |
HSBC |
| (1.1) |
| | 8.4 |
| | 4.3 |
| | 9.2 |
| | 14.5 |
| | 9.2 | |
Inbursa |
| 6.9 |
| | 24.9 |
| | 12.9 |
| | 28.2 |
| | 12.6 |
| | 27.8 | |
Citi Banamex |
| 4.4 |
| | 12.8 |
| | 12.5 |
| | 13.3 |
| | 10.9 |
| | 12.9 | |
Mexican financial system |
| 9.0 | % | | 10.6 | % | | 14.6 | % | | 11.8 | % | | 17.6 | % | | 11.1 | % |
Source: Return-on-average equity and equity to total assets ratio data are calculated by us, using information published by the CNBV.
(1) | Calculated based upon the average balance of equity. |
Core capital ratio
The following table sets forth Banco Santander México’s and its peers’ core capital ratios for the periods presented. Core capital ratio is defined as Tier 1 Capital divided by risk-weighted assets.
| | | | | | | | | |
| | Mexican Banking GAAP |
| ||||||
| | As of December 31, |
| ||||||
| | 2020 | | | 2021 | | | 2022 |
|
| |
| |||||||
Santander |
| 14.3 | % |
| 14.8 | % | | 13.9 | % |
Inbursa | | 18.7 |
| | 21.5 |
| | 21.9 | |
BBVA | | 14.4 |
| | 16.7 |
| | 16.8 | |
Citi Banamex | | 14.2 |
| | 14.8 |
| | 15.5 | |
Banorte | | 13.9 |
| | 15.3 |
| | 15.1 | |
Scotiabank | | 11.9 |
| | 13.2 |
| | 13.6 | |
HSBC | | 11.7 |
| | 11.3 |
| | 11.5 | |
Median of seven banks | | 14.2 | % | | 14.8 | % | | 15.1 | % |
Source: CNBV.
Efficiency
As of December 31, 2022, Banco Santander México was the fourth most efficient bank among the seven largest commercial banks in México, according to each bank’s efficiency ratio. For this purpose, we calculate the efficiency ratio as administrative expenses divided by total income, using information
104
published by the CNBV. The following table sets forth Banco Santander México’s and its peers’ efficiency ratios for the periods indicated.
| | | | | | | | | |
| | Mexican Banking GAAP |
| ||||||
| | As of December 31, |
| ||||||
| | 2020 | | | 2021 | | | 2022 |
|
| | (%) |
| ||||||
Santander |
| 46.1 | % |
| 50.4 | % |
| 47.3 | % |
Citi Banamex |
| 63.6 |
| | 67.5 |
| | 66.8 | |
HSBC |
| 63.2 |
| | 73.2 |
| | 60.0 | |
Scotiabank |
| 57.2 |
| | 51.3 |
| | 52.7 | |
Banorte |
| 45.0 |
| | 48.2 |
| | 41.0 | |
BBVA |
| 40.0 |
| | 37.8 |
| | 32.8 | |
Inbursa |
| 37.3 |
| | 38.6 |
| | 31.7 | |
Median of seven banks |
| 49.3 | % | | 50.8 | % | | 47.3 | % |
Source: Efficiency ratios are calculated by us, using information published by the CNBV.
Total loans
The following table sets forth total loans and market share (as a percentage of the total loans of 50 private banks in México) for the seven private-sector banks with the largest market shares for the periods indicated.
| | | | | | | | | | | | | | | | | | | | | |
| | Mexican Banking GAAP |
| ||||||||||||||||||
| | As of December 31, |
| ||||||||||||||||||
| | 2020 | | | 2021 | | | 2022 |
| ||||||||||||
|
| (Millions |
|
| (Market |
|
| (Millions |
|
| (Market |
|
| (Millions |
|
| (Market |
| |||
Santander | | Ps. | 702,769 | | | 13.6 | % | | Ps. | 750,966 | | | 13.6 | % | | Ps. | 810,082 | | | 13.0 | % |
BBVA | |
| 1,245,943 | | | 24.0 | | |
| 1,310,832 | | | 23.6 | | |
| 1,516,177 | | | 24.3 | |
Banorte | |
| 791,036 | | | 15.3 | | |
| 810,614 | | | 14.6 | | |
| 905,914 | | | 14.5 | |
Citi Banamex | |
| 560,522 | | | 10.8 | | |
| 549,423 | | | 9.9 | | |
| 580,343 | | | 9.3 | |
Scotiabank | |
| 415,206 | | | 8.0 | | |
| 437,741 | | | 7.9 | | |
| 495,317 | | | 7.9 | |
HSBC | |
| 367,655 | | | 7.1 | | |
| 388,875 | | | 7.0 | | |
| 418,145 | | | 6.7 | |
Inbursa | |
| 227,978 | | | 4.4 | | |
| 252,131 | | | 4.5 | | |
| 291,837 | | | 4.7 | |
Total for seven banks(2) | | Ps. | 4,311,109 | | | 83.2 | % | | Ps. | 4,500,583 | | | 81.1 | % | | Ps. | 5,017,813 | | | 80.4 | % |
Source: CNBV.
(1) | Market share data are calculated by us, using information published by the CNBV. |
(2) | Total loans and market share data for the seven banks are calculated by us, using information published by the CNBV. |
The following table sets forth Banco Santander México’s total mortgage loans and market share based on total mortgage loans for the periods indicated.
| | | | | | | | | | | | | | | | | | | | | |
| | Mexican Banking GAAP |
| ||||||||||||||||||
| | As of December 31, |
| ||||||||||||||||||
| | 2020 | | | 2021 | | | 2022 |
| ||||||||||||
|
| (Millions |
|
| (Market |
|
| (Millions |
|
| (Market |
|
| (Millions |
|
| (Market |
| |||
Santander | | Ps. | 172,871 | | | 21.1 | % | | Ps. | 193,840 | | | 17.7 | % | | Ps. | 210,807 | | | 17.3 | % |
BBVA | |
| 257,273 | | | 31.4 | | |
| 279,745 | | | 25.6 | | |
| 310,821 | | | 25.5 | |
Banorte | |
| 189,394 | | | 23.1 | | |
| 202,536 | | | 18.5 | | |
| 228,797 | | | 18.8 | |
Scotiabank | |
| 151,492 | | | 18.5 | | |
| 171,161 | | | 15.6 | | |
| 197,127 | | | 16.2 | |
HSBC | |
| 78,926 | | | 9.6 | | |
| 102,775 | | | 9.4 | | |
| 123,938 | | | 10.1 | |
Citi Banamex | |
| 78,857 | | | 9.6 | | |
| 71,343 | | | 6.5 | | |
| 69,120 | | | 5.7 | |
Inbursa | |
| 5,812 | | | 0.7 | | |
| 5,619 | | | 0.5 | | |
| 5,961 | | | 0.5 | |
Santander + Top 6(2) | | Ps. | 934,625 | | | 93.9 | % | | Ps. | 1,027,020 | | | 93.8 | % | | Ps. | 1,146,572 | | | 94.1 | % |
Total System | | Ps. | 994,970 | | | 100.0 | % | | Ps. | 1,094,366 | | | 100.0 | % | | Ps. | 1,218,094 | | | 100.0 | % |
Source: CNBV.
(1) | Market share data are calculated by us, using information published by the CNBV. |
(2) | Total mortgage loans and market share data for “Santander + Top 6” are calculated by us, using information published by the CNBV. |
105
The following table sets forth Banco Santander México’s total consumer loans and market share based on total consumer loans for the periods indicated.
| | | | | | | | | | | | | | | | | | | | | |
| | Mexican Banking GAAP |
| ||||||||||||||||||
| | As of December 31, |
| ||||||||||||||||||
| | 2020 | | | 2021 | | | 2022 |
| ||||||||||||
|
| (Millions |
|
| (Market |
|
| (Millions |
|
| (Market |
|
| (Millions |
|
| (Market |
| |||
Santander |
| Ps. | 115,712 | | | 11.1 | % |
| Ps. | 121,762 | | | 11.8 | % |
| Ps. | 149,105 | | | 12.2 | % |
BBVA | | | 298,116 | | | 28.7 | | | | 311,596 | | | 30.1 | | | | 366,527 | | | 30.1 | |
Citi Banamex | | | 169,615 | | | 16.3 | | | | 161,551 | | | 15.6 | | | | 178,374 | | | 14.6 | |
Banorte | | | 121,183 | | | 11.7 | | | | 124,887 | | | 12.1 | | | | 147,877 | | | 12.1 | |
HSBC | | | 61,147 | | | 5.9 | | | | 73,566 | | | 7.1 | | | | 85,868 | | | 7.2 | |
Scotiabank | | | 41,563 | | | 4.0 | | | | 36,267 | | | 3.5 | | | | 34,091 | | | 2.8 | |
Inbursa | | | 35,010 | | | 3.4 | | | | 27,581 | | | 2.7 | | | | 29,965 | | | 2.5 | |
Santander + Top 6(2) |
| Ps. | 824,346 | | | 81.1 | % |
| Ps. | 857,211 | | | 82.9 | % |
| Ps. | 991,807 | | | 81.5 | % |
Total System |
| Ps. | 1,008,983 | | | 100.0 | % |
| Ps. | 1,034,550 | | | 100.0 | % |
| Ps. | 1,217,660 | | | 100.0 | % |
Source: CNBV.
(1) | Market share data are calculated by us, using information published by the CNBV. |
(2) | Total consumer loans and market share data for “Santander + Top 6” are calculated by us, using information published by the CNBV. |
The following table sets forth Banco Santander México’s total commercial loans and market share based on total commercial loans for the periods indicated.
| | | | | | | | | | | | | | | | | | | | | |
| | Mexican Banking GAAP |
| ||||||||||||||||||
| | As of December 31, |
| ||||||||||||||||||
| | 2020 | | | 2021 | | | 2022 |
| ||||||||||||
|
| (Millions |
|
| (Market |
|
| (Millions |
|
| (Market |
|
| (Millions |
|
| (Market |
| |||
Santander | | Ps. | 331,070 | | | 12.9 | % | | Ps. | 341,068 | | | 12.9 | % | | Ps. | 351,367 | | | 11.8 | % |
BBVA | |
| 500,860 | | | 19.6 | | |
| 522,190 | | | 19.8 | | |
| 623,512 | | | 21.0 | |
Banorte | |
| 299,412 | | | 11.7 | | |
| 306,616 | | | 11.6 | | |
| 333,611 | | | 11.2 | |
Citi Banamex | |
| 251,413 | | | 9.8 | | |
| 228,840 | | | 8.7 | | |
| 249,946 | | | 8.4 | |
Scotiabank | |
| 184,180 | | | 7.2 | | |
| 193,345 | | | 7.3 | | |
| 230,852 | | | 7.8 | |
Inbursa | |
| 173,457 | | | 6.8 | | |
| 187,457 | | | 7.1 | | |
| 217,828 | | | 7.3 | |
HSBC | |
| 185,871 | | | 7.3 | | |
| 175,661 | | | 6.6 | | |
| 174,016 | | | 5.9 | |
Santander + Top 6(2) | | Ps. | 1,926,263 | | | 75.3 | % | | Ps. | 1,955,176 | | | 74.0 | % | | Ps. | 2,181,132 | | | 73.4 | % |
Total System | | Ps. | 2,575,059 | | | 100.0 | % | | Ps. | 2,642,900 | | | 100.0 | % | | Ps. | 2,974,106 | | | 100.0 | % |
Source: CNBV.
(1) | Market share data are calculated by us, using information published by the CNBV. |
(2) | Total commercial loans and market share data for “Santander + Top 6” are calculated by us, using information published by the CNBV. |
The following table sets forth Banco Santander México’s total government and financial entities loans and market share based on total government and financial entities loans for the periods indicated.
| | | | | | | | | | | | | | | | | | | | | |
| | Mexican Banking GAAP |
| ||||||||||||||||||
| | As of December 31, |
| ||||||||||||||||||
| | 2020 | | | 2021 | | | 2022 |
| ||||||||||||
|
| (Millions |
|
| (Market |
|
| (Millions |
|
| (Market |
|
| (Millions |
|
| (Market |
| |||
Santander | | Ps. | 83,116 | | | 10.8 | % | | Ps. | 94,295 | | | 12.2 | % | | Ps. | 99,479 | | | 12.5 | % |
BBVA | | | 189,694 | | | 24.7 | | |
| 197,301 | | | 25.4 | | |
| 202,188 | | | 25.4 | |
Banorte | | | 181,047 | | | 23.6 | | |
| 176,574 | | | 22.7 | | |
| 177,579 | | | 22.3 | |
Citi Banamex | | | 60,637 | | | 7.9 | | |
| 87,690 | | | 11.3 | | |
| 82,596 | | | 10.5 | |
HSBC | | | 41,711 | | | 5.4 | | |
| 36,874 | | | 4.7 | | |
| 38,111 | | | 4.8 | |
Inbursa | | | 13,699 | | | 1.8 | | |
| 31,474 | | | 4.0 | | |
| 34,417 | | | 4.3 | |
Scotiabank | | | 37,971 | | | 4.9 | | |
| 36,968 | | | 4.8 | | |
| 33,540 | | | 4.2 | |
Santander + Top 6(2) | | Ps. | 607,875 | | | 79.1 | % | | Ps. | 661,176 | | | 85.1 | % | | Ps. | 667,910 | | | 840 | % |
Total System | | Ps. | 723,582 | | | 100.0 | % | | Ps. | 777,240 | | | 100.0 | % | | Ps. | 794,669 | | | 100.0 | % |
Source: CNBV.
(1) | Market share data are calculated by us, using information published by the CNBV. |
(2) | Total government and financial entities loans and market share data for “Santander + Top 6” are calculated by us, using information published by the CNBV. |
106
Deposits
The following table sets forth deposits and market share in terms of deposits (as a percentage of the total deposits of 50 private banks in México) for the seven private-sector banks with the largest market shares for the periods indicated.
| | | | | | | | | | | | | | | | | | | | | |
| | Mexican Banking GAAP |
| ||||||||||||||||||
| | As of December 31, |
| ||||||||||||||||||
| | 2020 | | | 2021 | | | 2022 |
| ||||||||||||
|
| (Millions |
|
| (Market |
|
| (Millions |
|
| (Market |
|
| (Millions |
|
| (Market |
| |||
Santander |
| Ps. | 762,996 | |
| 15.0 | % | | Ps. | 783,112 | |
| 12.6 | % | | Ps. | 774,644 | |
| 11.7 | % |
BBVA | |
| 1,328,151 | |
| 26.2 | | |
| 1,467,536 | |
| 23.6 | | |
| 1,610,762 | |
| 24.4 | |
Banorte | |
| 798,101 | |
| 15.7 | | |
| 775,832 | |
| 12.5 | | |
| 893,138 | |
| 13.5 | |
Citi Banamex | |
| 904,923 | |
| 17.8 | | |
| 894,775 | |
| 14.4 | | |
| 848,799 | |
| 12.9 | |
HSBC | |
| 451,162 | |
| 8.9 | | |
| 482,720 | |
| 7.8 | | |
| 500,938 | |
| 7.6 | |
Scotiabank | |
| 372,956 | |
| 7.3 | | |
| 410,554 | |
| 6.6 | | |
| 441,641 | |
| 6.7 | |
Inbursa | |
| 178,514 | |
| 3.5 | | |
| 196,151 | |
| 3.2 | | |
| 243,394 | |
| 3.7 | |
Total for seven banks | | Ps. | 4,796,803 | |
| 94.4 | % | | Ps. | 5,010,679 | |
| 80.7 | % | | Ps. | 5,313,315 | |
| 80.5 | % |
Source: Deposits and market share data are calculated by us, using information published by the CNBV.
Asset quality
The following table sets forth the asset quality, defined as total non-performing loans as a percentage of total loans by the CNBV, for the seven largest commercial banks in México for the periods indicated.
| | | | | | | | | |
| | Mexican Banking GAAP |
| ||||||
| | As of December 31, |
| ||||||
| | 2020 | | | 2021 | | | 2022 |
|
| | (Asset quality (%)) | | | (Asset quality (%)) | | | (Asset quality (%)) |
|
Santander | | 3.1 | % | | 2.2 | % | | 1.9 | % |
Scotiabank |
| 3.0 |
| | 3.9 |
| | 3.7 | |
HSBC |
| 2.8 |
| | 2.6 |
| | 3.0 | |
Citi Banamex |
| 2.9 |
| | 2.0 |
| | 2.7 | |
Inbursa |
| 2.2 |
| | 1.4 |
| | 1.6 | |
BBVA |
| 3.0 |
| | 1.7 |
| | 1.6 | |
Banorte |
| 1.1 |
| | 1.0 |
| | 1.0 | |
Mexican financial system |
| 2.6 | % | | 2.1 | % | | 2.1 | % |
Source: CNBV.
107
Branches and ATMs
The following table sets forth Banco Santander México’s total bank branches and market share based on number of bank branches for the periods indicated.
| | | | | | | | | | | | | | | | | | |
| | As of December 31, |
| |||||||||||||||
| | 2020 | | | 2021 | | | 2022 |
| |||||||||
| | | | | (Market | | | | | | (Market | | | | | | (Market | |
| | | | | share | | | | | | share | | | | | | share | |
| | (Branches) |
|
| (%))(1) |
|
| (Branches) |
|
| (%))(1) |
|
| (Branches) |
|
| (%))(1) |
|
Santander | | 1,012 | | | 8.4 | % | | 1,036 | | | 8.9 | % | | 1,037 | | | 8.8 | % |
BBVA | | 1,745 | | | 14.4 |
| | 1,716 | | | 14.6 | | | 1,731 | | | 14.6 | |
Citi Banamex | | 1,420 | | | 11.7 |
| | 1,276 | | | 10.9 | | | 1,267 | | | 10.7 | |
Banorte | | 1,193 | | | 9.9 |
| | 1,064 | | | 9.1 | | | 1,154 | | | 9.8 | |
HSBC | | 929 | | | 7.7 |
| | 912 | | | 7.8 | | | 878 | | | 7.4 | |
Inbursa | | 748 | | | 6.2 |
| | 644 | | | 5.5 | | | 643 | | | 5.4 | |
Scotiabank | | 521 | | | 4.3 |
| | 468 | | | 4.0 | | | 450 | | | 3.8 | |
Santander + Top 6(2) | | 7,568 | | | 62.6 | % | | 7,116 | | | 60.8 | % | | 7,160 | | | 60.5 | % |
Total System | | 12,106 | | | 100.0 | % | | 11,698 | | | 100.0 | % | | 11,831 | | | 100.0 | % |
Source: CNBV (R1 regulatory report on branches, ATMs and credit cards).
(1) | Market share data are calculated by us, using information published by the CNBV. |
(2) | Total bank branches and market share data for “Santander + Top 6” are calculated by us, using information published by the CNBV. |
The following table sets forth Banco Santander México’s total number of ATMs and market share in terms of ATMs for the periods indicated.
| | | | | | | | | | | | | | | | | | |
| | As of December 31, |
| |||||||||||||||
| | 2020 | | | 2021 | | | 2022 |
| |||||||||
|
| (ATMs) |
|
| (Market |
|
| (ATMs) |
|
| (Market |
|
| (ATMs) |
|
| (Market |
|
Santander | | 9,448 | | | 16.4 | % | | 9,498 | | | 16.1 | % | | 9,689 | | | 15.9 | % |
BBVA | | 12,950 | | | 22.4 | | | 13,400 | | | 22.8 | | | 14,019 | | | 22.9 | |
Banorte | | 9,387 | | | 16.2 | | | 9,668 | | | 16.4 | | | 9,938 | | | 16.3 | |
Citi Banamex | | 9,424 | | | 16.3 | | | 8,991 | | | 15.3 | | | 9,042 | | | 14.8 | |
HSBC | | 5,934 | | | 10.3 | | | 6,128 | | | 10.4 | | | 6,168 | | | 10.1 | |
Scotiabank | | 1,742 | | | 3.0 | | | 1,807 | | | 3.1 | | | 1,918 | | | 3.1 | |
Inbursa | | 750 | | | 1.3 | | | 665 | | | 1.1 | | | 667 | | | 1.1 | |
Santander + Top 6(2) | | 49,635 | | | 85.9 | % | | 50,157 | | | 85.2 | % | | 51,441 | | | 84.2 | % |
Total System | | 57,770 | | | 100.0 | % | | 58,841 | | | 100.0 | % | | 61,129 | | | 100.0 | % |
Source: CNBV.
(1) | Market share data are calculated by us, using information published by the CNBV. |
(2) | Total ATMs and market share data are calculated by us, using information published by the CNBV. |
Environmental Matters
We follow a strategic program of Corporate Social Responsibility, which promotes a continuous commitment to act responsibly, thus contributing to economic development and improving the quality of life of employees, their families and the community in general.
In this context, we have reaffirmed our respect and commitment to the environment by renewing our environmental policies and maintaining an Environmental Management System (EMS) for our corporate buildings in Santa Fe and Patio Santa Fe, in Mexico City.
That is why throughout the year, internal monitoring audits and environmental legal compliance reviews were carried out, as well as important improvement activities.
108
In accordance with the foregoing, in November 2022 the first follow-up audit was carried out by AENOR, under the ISO 14001:2015 guidelines, obtaining favorable results and zero non-conformities as we did in recent years, which will continue to place us at the forefront in matters of environmental commitment.
This commitment is ratified in our environmental policy, which integrates sustainability into our daily management, as carried out by senior management. This environmental policy sets forth the following:
● | Adopt practices focused on the efficient and responsible use of natural and material resources, minimize the generation of waste, pollutant emissions and wastewater resulting from our production processes. |
● | Comply with the requirements of environmental legislation, applicable to the environmental aspects of our production, administrative and support services and processes, as well as other requirements to which we subscribe. |
● | Maintain a commitment to continuous improvement of our EMS, which impacts in the environmental performance of the organization. |
This environmental policy is communicated to all employees through one or more of the following means: communication announcements, posters located within the workspace, intranet website and/or training courses for contractors and new employees.
In compliance with the regulations at the federal level, annual information is sent to SEMARNAT (Secretaría de Medio Ambiente y Recursos Naturales) through the Annual Operating Certificate (COA), relating to the consumption information that generates pollutant emissions into the atmosphere, facilitating the classification and monitoring of these by the environmental authority through the Mexican National Emissions Register (RENE).
In 2022, we bought 134,965 International Renewable Energy Contracts (IRECs) to offset greenhouse gas emissions generated by our electricity consumption. We are also bought 11,600 Certificates of Emission Reduction in 2022 to offset our fuel emissions.
With these two types of Certificates combined, we are a carbon-neutral company.
Below is a list of the recognitions and certifications we have obtained.
Corporate Center Santa Fe, Mexico City, México
● | In 2022, the Environmental Management System established at our Santa Fe corporate building celebrated 18 years of being implemented and certified. |
Technological Operations Center Santander (Centro Tecnológico de Operaciones Santander) (CTOS), Querétaro, México
● | Certification under the international standard ISO 14001 2015 Environmental Management System. |
● | Certification of Environmental Quality Level I –National granted by the Federal Procurator for Environmental Protection (Procuraduría Federal de Protección al Ambiente or PROFEPA) and which certifies compliance with environmental regulations required by law at the municipal, state and federal levels. |
Contact Center Santander (CCS), Querétaro, México
109
● | Certification under the international standard ISO 14001 2015 Environmental Management System. |
Data Processing Center (Centro de Procesamiento de Datos) (CPD Q), Querétaro, México
● | Certification under the international standard ISO 14001 2015 Environmental Management System. |
● | Certification of Environmental Quality Level I-National granted by PROFEPA and which certifies compliance with environmental regulations required by law at the municipal, state and federal levels. |
To the best of our knowledge and understanding, there are currently no international, federal, state or local environmental laws, rules or regulations that will materially adversely affect our results or our position with respect to our competitors. However, in the future there may be.
Selected Statistical Information
The following information is included for analytical purposes and is derived from, and should be read in conjunction with, the audited financial statements contained elsewhere in this Report as well as with “Item 5. Operating and Financial Review and Prospects.”
Average balance sheet data has been calculated based upon the sum of daily average for each month in the applicable period. Average income statement and balance sheet data and other related statistical information have been prepared on a consolidated basis. We believe that the average data set forth herein accurately reflect in all material aspects our financial condition and results at the date and for the periods specified.
Average Balance Sheet and Interest Rates
The following tables show our average balance sheet and interest rates for each of the periods presented. With respect to the tables below and the tables under “—Changes in Net Interest Income—Volume and Rate Analysis” and “—Assets—Earning Assets—Yield Spread,” we have stated average balances on a gross basis, before netting our allowance for impairment losses, except for the total average asset figures, which include such netting. All average data have been calculated using daily averages.
110
Average Balance Sheets, Income from Interest-Earning Assets and Interest on Interest-Bearing Liabilities
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | IFRS for the year ended December 31, |
| ||||||||||||||||||||||||||||||
| | 2020 | | | 2021 | | | 2022 |
| ||||||||||||||||||||||||
| | | | | | | | Average | | | | | | | | | Average | | | | | | | | | Average |
| ||||||
| | Average | | | | | | nominal | | | Average | | | | | | nominal | | | Average | | | | | | nominal |
| ||||||
|
| balance |
|
| Interest |
|
| rate |
|
| balance |
|
| Interest |
|
| rate |
|
| balance |
|
| Interest |
|
| rate |
| ||||||
| | (Millions of pesos, except percentages) |
| ||||||||||||||||||||||||||||||
Cash and balances with the Mexican Central Bank | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Pesos | | Ps. | 40,037 | | | Ps. | 1,951 |
| | 4.87% | | | Ps. | 40,156 | | | Ps. | 1,471 |
| | 3.66% | | | Ps. | 37,411 | | | Ps. | 2,587 |
| | 6.92% | |
Total | | Ps. | 40,037 | | | Ps. | 1,951 |
| | 4.87% | | | Ps. | 40,156 | | | Ps. | 1,471 |
| | 3.66% | | | Ps. | 37,411 | | | Ps. | 2,587 |
| | 6.92% | |
Loans and advances to credit institutions | |
| | | |
| |
| | | | |
| | | |
| |
| | | | |
| | | |
| |
| | | |
Pesos | | Ps. | 14,550 | | | Ps. | 58 |
| | 0.40% | | | Ps. | 1,496 | | | Ps. | 6 |
| | 0.40% | | | Ps. | 1,044 | | | Ps. | 14 |
| | 1.34% | |
Foreign currency(1) | |
| 115,721 | | |
| 354 |
| | 0.31% | | |
| 80,945 | | |
| 1,191 |
| | 1.47% | | |
| 36,171 | | |
| 704 |
| | 1.95% | |
Total | | Ps. | 130,271 | | | Ps. | 412 |
| | 0.32% | | | Ps. | 82,441 | | | Ps. | 1,197 |
| | 1.45% | | | Ps. | 37,215 | | | Ps. | 718 |
| | 1.93% | |
Loans and advances to customers—excluding credit cards | |
| | | |
| |
| | | | |
| | | |
| |
| | | | |
| | | |
| |
| | | |
Pesos | | Ps. | 602,182 | | | Ps. | 66,129 |
| | 10.98% | | | Ps. | 598,771 | | | Ps. | 59,800 |
| | 9.99% | | | Ps. | 650,042 | | | Ps. | 75,766 |
| | 11.66% | |
Foreign currency(1) | |
| 89,081 | | |
| 2,992 |
| | 3.36% | | |
| 70,806 | | |
| 2,248 |
| | 3.17% | | |
| 79,765 | | |
| 3,475 |
| | 4.36% | |
Total | | Ps. | 691,263 | | | Ps. | 69,121 |
| | 10.00% | | | Ps. | 669,577 | | | Ps. | 62,048 |
| | 9.27% | | | Ps. | 729,807 | | | Ps. | 79,241 |
| | 10.86% | |
Loans and advances to customers (excluding credit cards) and credit institutions - Reverse repurchase agreements | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Pesos | | Ps. | 68,794 | | | Ps. | 3,818 | | | 5.55% | | | Ps. | 81,323 | | | Ps. | 2,060 | | | 2.53% | | | Ps. | 126,911 | | | Ps. | 8,807 | | | 6.94% | |
Total | | Ps. | 68,794 | | | Ps. | 3,818 | | | 5.55% | | | Ps. | 81,323 | | | Ps. | 2,060 | | | 2.53% | | | Ps. | 126,911 | | | Ps. | 8,807 | | | 6.94% | |
Loans and advances to customers—credit cards | |
| | | |
| |
| | | | |
| | | |
| |
| | | | |
| | | |
| |
| | | |
Pesos | | Ps. | 55,511 | | | Ps. | 15,151 |
| | 27.29% | | | Ps. | 51,814 | | | Ps. | 13,154 |
| | 25.39% | | | Ps. | 58,378 | | | Ps. | 15,138 |
| | 25.93% | |
Total | | Ps. | 55,511 | | | Ps. | 15,151 |
| | 27.29% | | | Ps. | 51,814 | | | Ps. | 13,154 |
| | 25.39% | | | Ps. | 58,378 | | | Ps. | 15,138 |
| | 25.93% | |
Debt instruments- Taxable | |
| | | |
| |
| | | | |
| | | |
| |
| | | | |
| | | |
| |
| | | |
Pesos | | Ps. | 330,717 | | | Ps. | 20,261 |
| | 6.13% | | | Ps. | 353,811 | | | Ps. | 19,972 |
| | 5.64% | | | Ps. | 317,014 | | | Ps. | 22,554 |
| | 7.11% | |
Foreign currency(1) | |
| 86,072 | | |
| 1,378 |
| | 1.60% | | |
| 103,438 | | |
| 1,035 |
| | 1.00% | | |
| 128,985 | | |
| 1,753 |
| | 1.36% | |
Total | | Ps. | 416,789 | | | Ps. | 21,639 |
| | 5.19% | | | Ps. | 457,249 | | | Ps. | 21,007 |
| | 4.59% | | | Ps. | 445,999 | | | Ps. | 24,307 |
| | 5.45% | |
Debt instruments - Non taxable | |
| | | |
| |
| | | | |
| | | |
| |
| | | | |
| | | |
| |
| | | |
Foreign currency(1) | |
| 20,033 | | |
| 1,211 |
| | 6.05% | | |
| 25,951 | | |
| 1,482 |
| | 5.71% | | |
| 26,257 | | |
| 1,594 |
| | 6.07% | |
Total | | Ps. | 20,033 | | | Ps. | 1,211 |
| | 6.05% | | | Ps. | 25,951 | | | Ps. | 1,482 |
| | 5.71% | | | Ps. | 26,257 | | | Ps. | 1,594 |
| | 6.07% | |
Income from hedging operations | |
| | | |
| |
| | | | |
| | | |
| |
| | | | |
| | | |
| |
| | | |
Pesos | |
| | | | Ps. | 2,432 |
| | | | |
| | | | Ps. | 340 |
| | | | |
| | | | Ps. | 5,370 |
| | | |
Foreign currency(1) | |
| | | |
| — |
| | | | |
| | | |
| — |
| | | | |
| | | |
| — |
| | | |
Total | |
| | | | Ps. | 2,432 |
| | | | |
| | | | Ps. | 340 |
| | | | |
| | | | Ps. | 5,370 |
| | | |
Other interest-earning assets | |
| | | |
| |
| | | | |
| | | |
| |
| | | | |
| | | |
| |
| | | |
Pesos | |
| | | | Ps. | 250 |
| | | | |
| | | | Ps. | 353 |
| | | | |
| | | | Ps. | 1,068 |
| | | |
Foreign currency(1) | |
| | | |
| — |
| | | | |
| | | |
| — |
| | | | |
| | | |
| 166 |
| | | |
Total | |
| | | | Ps. | 250 |
| | | | |
| | | | Ps. | 353 |
| | | | |
| | | | Ps. | 1,234 |
| | | |
Total interest-earning assets | |
| | | |
| |
| | | | |
| | | |
| |
| | | | |
| | | |
| |
| | | |
Pesos | | Ps. | 1,111,791 | | | Ps. | 110,050 |
| | 9.90% | | | Ps. | 1,127,371 | | | Ps. | 97,156 |
| | 8.62% | | | Ps. | 1,190,800 | | | Ps. | 131,304 |
| | 11.03% | |
Foreign currency(1) | |
| 310,907 | | |
| 5,935 |
| | 1.91% | | |
| 281,140 | | |
| 5,956 |
| | 2.12% | | |
| 271,178 | | |
| 7,692 |
| | 2.84% | |
Total | | Ps. | 1,422,698 | | | Ps. | 115,985 |
| | 8.15% | | | Ps. | 1,408,511 | | | Ps. | 103,112 |
| | 7.32% | | | Ps. | 1,461,978 | | | Ps. | 138,996 |
| | 9.51% | |
(1) | Represents assets or liabilities denominated in foreign currencies. Values are presented in pesos. |
111
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | IFRS for the year ended December 31, |
| ||||||||||||||||||||||||||||||
| | 2020 | | | 2021 | | | 2022 |
| ||||||||||||||||||||||||
| | | | | | | | | Average | | | | | | | | | Average | | | | | | | | | Average |
| |||||
| | Average | | | | | | nominal | | | Average | | | | | | nominal | | | Average | | | | | | nominal |
| ||||||
|
| balance |
|
| Interest |
|
| rate |
|
| balance |
|
| Interest |
|
| rate |
|
| balance |
|
| Interest |
|
| rate |
| ||||||
| | (Millions of pesos, except percentages) |
| ||||||||||||||||||||||||||||||
Cash and loans and advances to credit institutions | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Pesos | | Ps. | 20,954 |
| | |
|
| |
| | | Ps. | 22,698 |
| | |
|
| |
| | | Ps. | 25,363 |
| | |
|
| |
| |
Foreign currency(1) | |
| 1,168 |
| | |
|
| |
| | |
| — |
| | |
|
| |
| | |
| 880 |
| | |
|
| |
| |
Total | | Ps. | 22,122 |
| | |
|
| |
| | | Ps. | 22,698 |
| | |
|
| |
| | | Ps. | 26,243 |
| | |
|
| |
| |
Allowance for impairment losses | |
| |
| | |
|
| |
| | |
| |
| | |
|
| |
| | |
| |
| | |
|
| |
| |
Pesos | | Ps. | (20,651) |
| | |
|
| |
| | | Ps. | (13,673) |
| | |
|
| |
| | | Ps. | (14,262) |
| | |
|
| |
| |
Foreign currency(1) | |
| (2,748) |
| | |
|
| |
| | |
| (1,728) |
| | |
|
| |
| | |
| (1,193) |
| | |
|
| |
| |
Total | | Ps. | (23,399) |
| | |
|
| |
| | | Ps. | (15,401) |
| | |
|
| |
| | | Ps. | (15,455) |
| | |
|
| |
| |
Tangible assets | |
| |
| | |
|
| |
| | |
| |
| | |
|
| |
| | |
| |
| | |
|
| |
| |
Pesos | | Ps. | 16,150 |
| | |
|
| |
| | | Ps. | 17,671 |
| | |
|
| |
| | | Ps. | 19,238 |
| | |
|
| |
| |
Total | | Ps. | 16,150 |
| | |
|
| |
| | | Ps. | 17,671 |
| | |
|
| |
| | | Ps. | 19,238 |
| | |
|
| |
| |
Intangible assets | |
| |
| | |
|
| |
| | |
| |
| | |
|
| |
| | |
| |
| | |
|
| |
| |
Pesos | | Ps. | 8,156 |
| | |
|
| |
| | | Ps. | 8,256 |
| | |
|
| |
| | | Ps. | 9,281 |
| | |
|
| |
| |
Total | | Ps. | 8,156 |
| | |
|
| |
| | | Ps. | 8,256 |
| | |
|
| |
| | | Ps. | 9,281 |
| | |
|
| |
| |
Other non-interest-earning assets | |
| |
| | |
| �� | |
| | |
| |
| | |
|
| |
| | |
| |
| | |
|
| |
| |
Pesos | | Ps. | 166,495 |
| | |
|
| |
| | | Ps. | 146,866 |
| | |
|
| |
| | | Ps. | 444,553 |
| | |
|
| |
| |
Foreign currency(1) | |
| 63,635 |
| | |
|
| |
| | |
| 9,182 |
| | |
|
| |
| | |
| 13,934 |
| | |
|
| |
| |
Total | | Ps. | 230,130 |
| | |
|
| |
| | | Ps. | 156,048 |
| | |
|
| |
| | | Ps. | 458,487 |
| | |
|
| |
| |
Total non-interest-earning assets | |
| |
| | |
|
| |
| | |
| |
| | |
|
| |
| | |
| |
| | |
|
| |
| |
Pesos | | Ps. | 191,104 |
| | |
|
| |
| | | Ps. | 181,818 |
| | |
|
| |
| | | Ps. | 484,173 |
| | | |
| |
| |
Foreign currency(1) | |
| 62,055 |
| | |
|
| |
| | |
| 7,454 |
| | |
|
| |
| | |
| 13,621 |
| | | |
| |
| |
Total | | Ps. | 253,159 |
| | |
|
| |
| | | Ps. | 189,272 |
| | |
|
| |
| | | Ps. | 497,794 |
| | |
|
| |
| |
Total average assets | |
| |
| | |
|
| |
| | |
| |
| | |
|
| |
| | |
| |
| | |
|
| |
| |
Pesos | | Ps. | 1,302,895 | | | Ps. | 110,050 |
| | 8.45% | | | Ps. | 1,309,189 | | | Ps. | 97,156 |
| | 7.42% | | | Ps. | 1,674,973 | | | Ps. | 131,304 |
| | 7.84% | |
Foreign currency(1) | |
| 372,962 | | |
| 5,935 |
| | 1.59% | | |
| 288,594 | | |
| 5,956 |
| | 2.06% | | |
| 284,799 | | |
| 7,692 |
| | 2.70% | |
Total | | Ps. | 1,675,857 | | | Ps. | 115,985 |
| | 6.92% | | | Ps. | 1,597,783 | | | Ps. | 103,112 |
| | 6.45% | | | Ps. | 1,959,772 | | | Ps. | 138,996 |
| | 7.09% | |
(1) | Represents assets or liabilities denominated in foreign currencies. Values are presented in pesos. |
112
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | IFRS for the year ended December 31, |
| ||||||||||||||||||||||||||||||
| | 2020 | | 2021 | | 2022 |
| ||||||||||||||||||||||||||
| | | | | | | | | | Average | | | | | | | | | | | Average | | | | | | | | | | | Average |
|
| | Average | | | | | | | nominal | | | Average | | | | | | | nominal | | | Average | | | | | | | nominal |
| |||
|
| balance |
|
| Interest |
|
| rate |
|
| balance |
|
| Interest |
|
| rate |
|
| balance |
|
| Interest |
|
| rate |
| ||||||
| | (Millions of pesos, except percentages) |
| ||||||||||||||||||||||||||||||
Deposits from the Mexican Central Bank and credit institutions | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Pesos | | Ps. | 152,138 | | | Ps. | 12,383 |
| | 8.14% | | | Ps. | 201,748 | | | Ps. | 10,814 |
| | 5.36% | | | Ps. | 201,034 | | | Ps. | 19,088 |
| | 9.49% | |
Foreign currency(1) | |
| 31,448 | | |
| 17 |
| | 0.05% | | |
| 14,466 | | |
| 153 |
| | 1.06% | | |
| 9,802 | | |
| 285 |
| | 2.91% | |
Total | | Ps. | 183,586 | | | Ps. | 12,400 |
| | 6.75% | | | Ps. | 216,214 | | | Ps. | 10,967 |
| | 5.07% | | | Ps. | 210,836 | | | Ps. | 19,373 |
| | 9.19% | |
Customer deposits— Demand accounts | |
| | | |
| |
| | | | |
| | | |
| |
| | | | |
| | | |
| |
| | | |
Pesos | | Ps. | 410,244 | | | Ps. | 9,030 |
| | 2.20% | | | Ps. | 456,422 | | | Ps. | 7,950 |
| | 1.74% | | | Ps. | 463,527 | | | Ps. | 11,357 |
| | 2.45% | |
Foreign currency(1) | |
| 56,705 | | |
| 13 |
| | 0.02% | | |
| 65,058 | | |
| 14 |
| | 0.02% | | |
| 71,858 | | |
| 18 |
| | 0.03% | |
Total | | Ps. | 466,949 | | | Ps. | 9,043 |
| | 1.94% | | | Ps. | 521,480 | | | Ps. | 7,964 |
| | 1.53% | | | Ps. | 535,385 | | | Ps. | 11,375 |
| | 2.12% | |
Customer deposits—Savings accounts | |
| | | |
| |
| | | | |
| | | |
| |
| | | | |
| | | |
| |
| | | |
Pesos | | Ps. | — | | |
| |
| | | | | Ps. | — | | |
| |
| | | | | Ps. | — | | |
| |
| | | |
Total | | Ps. | — | | |
| |
| | | | | Ps. | — | | |
| |
| | | | | Ps. | — | | |
| |
| | | |
Customer deposits— Time deposits | |
| | | |
| |
| | | | |
| | | |
| |
| | | | |
| | | |
| |
| | | |
Pesos | | Ps. | 244,181 | | | Ps. | 16,807 |
| | 6.88% | | | Ps. | 209,496 | | | Ps. | 9,633 |
| | 4.60% | | | Ps. | 221,531 | | | Ps. | 17,043 |
| | 7.69% | |
Foreign currency(1) | |
| 20,409 | | |
| 138 |
| | 0.68% | | |
| 14,100 | | |
| 68 |
| | 0.48% | | |
| 14,164 | | |
| 675 |
| | 4.77% | |
Total | | Ps. | 264,670 | | | Ps. | 16,945 |
| | 6.40% | | | Ps. | 223,596 | | | Ps. | 9,701 |
| | 4.34% | | | Ps. | 235,695 | | | Ps. | 17,718 |
| | 7.52% | |
Loans and advances to customers (excluding credit cards) and credit institutions - Reverse repurchase agreements | |
| | | |
| |
| | | | |
| | | |
| |
| | | | |
| | | |
| |
| | | |
Pesos | | Ps. | 152,173 | | | Ps. | 2,247 |
| | 1.48% | | | Ps. | 128,534 | | | Ps. | 1,559 |
| | 1.21% | | | Ps. | 129,895 | | | Ps. | 3,135 |
| | 2.41% | |
Total | | Ps. | 152,173 | | | Ps. | 2,247 |
| | 1.48% | | | Ps. | 128,534 | | | Ps. | 1,559 |
| | 1.21% | | | Ps. | 129,895 | | | Ps. | 3,135 |
| | 2.41% | |
Subordinated debentures | |
| | | |
| |
| | | | |
| | | |
| |
| | | | |
| | | |
| |
| | | |
Foreign currency(1) | | Ps. | 39,035 | | | Ps. | 1,767 |
| | 4.53% | | | Ps. | 41,125 | | | Ps. | 1,668 |
| | 4.06% | | | Ps. | 41,058 | | | Ps. | 1,646 |
| | 4.01% | |
Total | | Ps. | 39,035 | | | Ps. | 1,767 |
| | 4.53% | | | Ps. | 41,125 | | | Ps. | 1,668 |
| | 4.06% | | | Ps. | 41,058 | | | Ps. | 1,646 |
| | 4.01% | |
Marketable debt securities and other financial liabilities | |
| | | |
| |
| | | | |
| | | |
| |
| | | | |
| | | |
| |
| | | |
Pesos | | Ps. | 89,527 | | | Ps. | 3,170 |
| | 3.54% | | | Ps. | 59,392 | | | Ps. | 2,308 |
| | 3.89% | | | Ps. | 79,531 | | | Ps. | 4,777 |
| | 6.01% | |
Foreign currency(1) | |
| 49,785 | | |
| 2,586 |
| | 5.19% | | |
| 56,841 | | |
| 3,000 |
| | 5.28% | | |
| 53,456 | | |
| 2,855 |
| | 5.34% | |
Total | | Ps. | 139,312 | | | Ps. | 5,756 |
| | 4.13% | | | Ps. | 116,233 | | | Ps. | 5,308 |
| | 4.57% | | | Ps. | 132,987 | | | Ps. | 7,632 |
| | 5.74% | |
Other liabilities | |
| | | |
| |
| | | | |
| | | |
| |
| | | | |
| | | |
| |
| | | |
Pesos | | Ps. | 16,778 | | | Ps. | 703 |
| | 4.19% | | | Ps. | 22,039 | | | Ps. | 1,092 |
| | 4.95% | | | Ps. | 26,367 | | | Ps. | 1,806 |
| | 6.85% | |
Foreign currency(1) | | | — | | | | — | | | 0.00% | | | | — | | | | — | | | 0.00% | | | | 103 | | | | — | | | 0.00% | |
Total | | Ps. | 16,778 | | | Ps. | 703 |
| | 4.19% | | | Ps. | 22,039 | | | Ps. | 1,092 |
| | 4.95% | | | Ps. | 26,470 | | | Ps. | 1,806 |
| | 6.82% | |
Expense from hedging operation | |
| | | |
| |
| | | | |
| | | |
| |
| | | | |
| | | |
| |
| | | |
Pesos | | Ps. | — | | | Ps. | 193 |
| | | | | Ps. | — | | | Ps. | 300 |
| | | | | Ps. | — | | | Ps. | 99 |
| | | |
Foreign currency (1) | |
| — | | |
| — |
| | | | |
| — | | |
| — |
| | | | |
| — | | |
| — |
| | | |
Total | | Ps. | — | | | Ps. | 193 |
| | | | | Ps. | — | | | Ps. | 300 |
| | | | | Ps. | — | | | Ps. | 99 |
| | | |
Other interest expense | |
| | | |
| |
| | | | |
| | | |
| |
| | | | |
| | | |
| |
| | | |
Pesos | | Ps. | — | | | Ps. | 1,121 |
| | | | | Ps. | — | | | Ps. | 1,121 |
| | | | | Ps. | — | | | Ps. | 1,100 |
| | | |
Foreign currency(1) | |
| — | | |
| — |
| | | | |
| — | | |
| — |
| | | | |
| — | | |
| — |
| | | |
Total | | Ps. | — | | | Ps. | 1,121 |
| | | | | Ps. | — | | | Ps. | 1,121 |
| | | | | Ps. | — | | | Ps. | 1,100 |
| | | |
Total interest-bearing liabilities | |
| | | |
| |
| | | | |
| | | |
| |
| | | | |
| | | |
| |
| | | |
Pesos | | Ps. | 1,065,041 | | | Ps. | 45,654 |
| | 4.29% | | | Ps. | 1,077,631 | | | Ps. | 34,777 |
| | 3.23% | | | Ps. | 1,121,885 | | | Ps. | 58,405 |
| | 5.21% | |
Foreign currency(1) | |
| 197,382 | | |
| 4,521 |
| | 2.29% | | |
| 191,590 | | |
| 4,903 |
| | 2.56% | | |
| 190,441 | | |
| 5,479 |
| | 2.88% | |
Total | | Ps. | 1,262,423 | | | Ps. | 50,175 |
| | 3.97% | | | Ps. | 1,269,221 | | | Ps. | 39,680 |
| | 3.13% | | | Ps. | 1,312,326 | | | Ps. | 63,884 |
| | 4.87% | |
(1) | Represents assets or liabilities denominated in foreign currencies. Values are presented in pesos. |
113
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | IFRS for the year ended December 31, |
| ||||||||||||||||||||||||||||||
| | 2020 | | | 2021 | | | 2022 |
| ||||||||||||||||||||||||
| | | | | | | | | | Average | | | | | | | | | | | Average | | | | | | | | | | | Average |
|
| | Average | | | | | | | nominal | | | Average | | | | | | | nominal | | | Average | | | | | | | nominal |
| |||
|
| balance |
|
| Interest |
|
| rate |
|
| balance |
|
| Interest |
|
| rate |
|
| balance |
|
| Interest |
|
| rate |
| ||||||
| | (Millions of pesos, except percentages) |
| ||||||||||||||||||||||||||||||
Customer deposits— Demand deposits | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Pesos | | Ps. | — |
| | |
|
| |
| | | Ps. | — |
| | |
|
| |
| | | Ps. | — |
| | |
|
| | | |
Foreign currency(1) | |
| — |
| | |
|
| |
| | |
| — |
| | |
|
| |
| | |
| — |
| | |
|
| | | |
Total | | Ps. | — |
| | |
|
| |
| | | Ps. | — |
| | |
|
| |
| | | Ps. | — |
| | |
|
| | | |
Other liabilities— non-interest-bearing | |
| |
| | |
|
| |
| | |
| |
| | |
|
| |
| | |
| |
| | |
|
| | | |
Pesos | | Ps. | 91,170 |
| | |
|
| |
| | | Ps. | 69,693 |
| | |
|
| |
| | | Ps. | 389,726 |
| | |
|
| | | |
Foreign currency(1) | |
| 180,900 |
| | |
|
| |
| | |
| 101,410 |
| | |
|
| |
| | |
| 101,399 |
| | |
|
| | | |
Total | | Ps. | 272,070 |
| | |
|
| |
| | | Ps. | 171,103 |
| | |
|
| |
| | | Ps. | 491,125 |
| | |
|
| | | |
Total equity | |
| |
| | |
|
| |
| | |
| |
| | |
|
| |
| | |
| |
| | |
|
| | | |
Pesos | | Ps. | 141,364 |
| | |
|
| |
| | | Ps. | 157,459 |
| | |
|
| |
| | | Ps. | 156,321 |
| | |
|
| | | |
Total | | Ps. | 141,364 |
| | |
|
| |
| | | Ps. | 157,459 |
| | |
|
| |
| | | Ps. | 156,321 |
| | |
|
| | | |
Total non-interest-bearing liabilities and equity | |
| |
| | |
|
| |
| | |
| |
| | |
|
| |
| | |
| |
| | |
|
| | | |
Pesos | | Ps. | 232,534 |
| | |
|
| |
| | | Ps. | 227,152 |
| | |
|
| |
| | | Ps. | 546,047 |
| | |
|
| | | |
Foreign currency(1) | |
| 180,900 |
| | |
|
| |
| | |
| 101,410 |
| | |
|
| |
| | |
| 101,399 |
| | |
|
| | | |
Total | | Ps. | 413,434 |
| | |
|
| |
| | | Ps. | 328,562 |
| | |
|
| |
| | | Ps. | 647,446 |
| | |
|
| | | |
Total liabilities and equity | |
| |
| | |
|
| |
| | |
| |
| | |
|
| |
| | |
| |
| | |
|
| | | |
Pesos | | Ps. | 1,297,575 | | | Ps. | 45,654 |
| | 3.52% | | | Ps. | 1,304,783 | | | Ps. | 34,777 |
| | 2.67% | | | Ps. | 1,667,932 | | | Ps. | 58,405 |
| | 3.50% | |
Foreign currency(1) | |
| 378,282 | | |
| 4,521 |
| | 1.20% | | |
| 293,000 | | |
| 4,903 |
| | 1.67% | | |
| 291,840 | | |
| 5,479 |
| | 1.88% | |
Total | | Ps. | 1,675,857 | | | Ps. | 50,175 |
| | 2.99% | | | Ps. | 1,597,783 | | | Ps. | 39,680 |
| | 2.48% | | | Ps. | 1,959,772 | | | Ps. | 63,884 |
| | 3.26% | |
(1) | Represents assets or liabilities denominated in foreign currencies. Values are presented in pesos. |
Changes in our Net Interest Income—Volume and Rate Analysis
The following tables allocate the changes in our net interest income between changes in average volume and changes in average rate for the year ended December 31, 2022 compared to the year ended December 31, 2021 and changes for the year ended December 31, 2021 compared to the year ended December 31, 2020. We have calculated volume variations based on movements in average balances over the period and rate variance based on changes in interest rates on average interest-earning assets and average interest-bearing liabilities. We have allocated variations caused by changes in both volume and rate to volume. You should read the following tables and the footnotes thereto in light of our observations noted in “—Average Balance Sheet and Interest Rates.”
114
Change in Financial Income and Expense
| | | | | | | | | | | | |
| | IFRS for the year ended December 31, 2022 and 2021 | | |||||||||
|
| Volume |
|
| Rate |
|
| Net Change |
| |||
| | (Millions of pesos) | | |||||||||
INTEREST-EARNING ASSETS | | | | | | | | | | | | |
Cash and balances with the Mexican Central Bank |
| |
|
| | |
|
| | |
| |
Pesos | | Ps. | (190) | | | Ps. | 1,306 | | | Ps. | 1,116 | |
Total | | Ps. | (190) | | | Ps. | 1,306 | | | Ps. | 1,116 | |
Loans and advances to credit institutions | |
| | | |
| | | |
| | |
Pesos | | Ps. | (6) | | | Ps. | — | | | Ps. | (6) | |
Foreign currency(1) | |
| (871) | | |
| 384 | | |
| (487) | |
Total | | Ps. | (878) | | | Ps. | 384 | | | Ps. | (493) | |
Loans and advances to customers—excluding credit cards | |
| | | |
| | | |
| | |
Pesos | | Ps. | 5,976 | | | Ps. | 9,990 | | | Ps. | 15,966 | |
Foreign currency(1) | |
| 390 | | |
| 837 | | |
| 1,227 | |
Total | | Ps. | 6,366 | | | Ps. | 10,827 | | | Ps. | 17,193 | |
Loans and advances to customers (excluding credit cards) and credit institutions - Reverse repurchase agreements | | | | | | | | | | | | |
Pesos | | Ps. | 3,164 | | | Ps. | 3,583 | | | Ps. | 6,747 | |
Total | | Ps. | 3,164 | | | Ps. | 3,583 | | | Ps. | 6,747 | |
Loans and advances to customers—credit cards | |
| | | |
| | | |
| | |
Pesos | | Ps. | 1,702 | | | Ps. | 282 | | | Ps. | 1,984 | |
Total | | Ps. | 1,702 | | | Ps. | 282 | | | Ps. | 1,984 | |
Debt instruments - Taxable | |
| | | |
| | | |
| | |
Pesos | | Ps. | (2,618) | | | Ps. | 5,200 | | | Ps. | 2,582 | |
Foreign currency(1) | |
| 347 | | |
| 371 | | |
| 718 | |
Total | | Ps. | (2,271) | | | Ps. | 5,571 | | | Ps. | 3,300 | |
Debt instruments - Non taxable | |
| | | |
| | | |
| | |
Foreign currency(1) | | Ps. | 19 | | | Ps. | 93 | | | Ps. | 112 | |
Total | | Ps. | 19 | | | Ps. | 93 | | | Ps. | 112 | |
Income from hedging operations | |
| | | |
| | | |
| | |
Pesos | | Ps. | — | | | Ps. | 5,030 | | | Ps. | 5,030 | |
Foreign currency(1) | |
| — | | |
| — | | |
| — | |
Total | | Ps. | — | | | Ps. | 5,030 | | | Ps. | 5,030 | |
Other interest-earning assets | |
| | | |
| | | |
| | |
Pesos | | Ps. | — | | | Ps. | 715 | | | Ps. | 715 | |
Foreign currency(1) | |
| — | | |
| 166 | | |
| 166 | |
Total | | Ps. | — | | | Ps. | 881 | | | Ps. | 881 | |
Total interest-earning assets | |
| | | |
| | | |
| | |
Pesos | | Ps. | 6,994 | | | Ps. | 27,154 | | | Ps. | 34,148 | |
Foreign currency(1) | |
| (283) | | |
| 2,019 | | |
| 1,736 | |
Total | | Ps. | 6,711 | | | Ps. | 29,173 | | | Ps. | 35,884 | |
(1) | Represents assets or liabilities denominated in foreign currencies. Values are presented in pesos. |
115
| | | | | | | | | | | | |
| | IFRS for the year ended December 31, 2022 and 2021 | | |||||||||
|
| Volume |
|
| Rate |
|
| Net Change |
| |||
| | (Millions of pesos) | | |||||||||
INTEREST-BEARING LIABILITIES | | |
| | | |
| | | |
| |
Deposits from the Mexican Central Bank and credit institutions |
| |
| | | |
| | | |
| |
Pesos | | Ps. | (68) | | | Ps. | 8,342 | | | Ps. | 8,274 | |
Foreign currency(1) | |
| (136) | | |
| 268 | | |
| 132 | |
Total | | Ps. | (204) | | | Ps. | 8,610 | | | Ps. | 8,406 | |
Customer deposits—Demand accounts | |
| | | |
| | | |
| | |
Pesos | | Ps. | 174 | | | Ps. | 3,233 | | | Ps. | 3,407 | |
Foreign currency(1) | |
| 2 | | |
| 2 | | |
| 4 | |
Total | | Ps. | 176 | | | Ps. | 3,235 | | | Ps. | 3,411 | |
Customer deposits—Savings accounts | |
| | | |
| | | |
| | |
Pesos | | Ps. | — | | | Ps. | — | | | Ps. | — | |
Total | | Ps. | — | | | Ps. | — | | | Ps. | — | |
Customer deposits—Time deposits | |
| | | |
| | | |
| | |
Pesos | | Ps. | 926 | | | Ps. | 6,484 | | | Ps. | 7,410 | |
Foreign currency(1) | |
| 3 | | |
| 604 | | |
| 607 | |
Total | | Ps. | 929 | | | Ps. | 7,088 | | | Ps. | 8,017 | |
Customer deposits—Repurchase agreements | |
| | | |
| | | |
| | |
Pesos | | Ps. | 33 | | | Ps. | 1,543 | | | Ps. | 1,576 | |
Total | | Ps. | 33 | | | Ps. | 1,543 | | | Ps. | 1,576 | |
Subordinated debentures | |
| | | |
| | | |
| | |
Foreign currency(1) | | Ps. | (3) | | | Ps. | (19) | | | Ps. | (22) | |
Total | | Ps. | (3) | | | Ps. | (19) | | | Ps. | (22) | |
Marketable debt securities and other financial liabilities | |
| | | |
| | | |
| | |
Pesos | | Ps. | 1,210 | | | Ps. | 1,259 | | | Ps. | 2,469 | |
Foreign currency(1) | |
| (181) | | |
| 36 | | |
| (145) | |
Total | | Ps. | 1,029 | | | Ps. | 1,295 | | | Ps. | 2,324 | |
Other liabilities | |
| | | |
| | | |
| | |
Pesos | | Ps. | 296 | | | Ps. | 418 | | | Ps. | 714 | |
Foreign currency(1) | |
| — | | |
| — | | |
| — | |
Total | | Ps. | 296 | | | Ps. | 418 | | | Ps. | 714 | |
Expense from hedging operations | |
| | | |
| | | |
| | |
Pesos | | Ps. | — | | | Ps. | (201) | | | Ps. | (201) | |
Foreign currency(1) | |
| — | | |
| — | | |
| — | |
Total | | Ps. | — | | | Ps. | (201) | | | Ps. | (201) | |
Other interest expense | |
| | | |
| | | |
| | |
Pesos | | Ps. | — | | | Ps. | (21) | | | Ps. | (21) | |
Foreign currency(1) | |
| — | | |
| — | | |
| — | |
Total | | Ps. | — | | | Ps. | (21) | | | Ps. | (21) | |
Total interest-bearing liabilities | |
| | | |
| | | |
| | |
Pesos | | Ps. | 2,571 | | | Ps. | 21,057 | | | Ps. | 23,628 | |
Foreign currency(1) | |
| (315) | | |
| 891 | | |
| 576 | |
Total | | Ps. | 2,256 | | | Ps. | 21,948 | | | Ps. | 24,204 | |
(1) | Represents assets or liabilities denominated in foreign currencies. Values are presented in pesos. |
116
| | | | | | | | | | | | |
| | IFRS for the year ended December 31, 2021 and 2020 | | |||||||||
|
| Volume |
|
| Rate |
|
| Net Change |
| |||
| | (Millions of pesos) | | |||||||||
INTEREST-EARNING ASSETS | | | | | | | | | | | | |
Cash and balances with the Mexican Central Bank |
| |
|
| | |
|
| | |
| |
Pesos | | Ps. | 4 | | | Ps. | (484) | | | Ps. | (480) | |
Total | | Ps. | 4 | | | Ps. | (484) | | | Ps. | (480) | |
Loans and advances to credit institutions | |
| | | |
| | | |
| | |
Pesos | | Ps. | (52) | | | Ps. | — | | | Ps. | (52) | |
Foreign currency(1) | |
| (512) | | |
| 1,349 | | |
| 837 | |
Total | | Ps. | (564) | | | Ps. | 1,349 | | | Ps. | 785 | |
Loans and advances to customers—excluding credit cards | |
| | | |
| | | |
| | |
Pesos | | Ps. | (341) | | | Ps. | (5,989) | | | Ps. | (6,329) | |
Foreign currency(1) | |
| (580) | | |
| (164) | | |
| (744) | |
Total | | Ps. | (921) | | | Ps. | (6,153) | | | Ps. | (7,073) | |
Loans and advances to customers (excluding credit cards) and credit institutions - Reverse repurchase agreements | | | | | | | | | | | | |
Pesos | | Ps. | 318 | | | Ps. | (2,075) | | | Ps. | (1,757) | |
Total | | Ps. | 318 | | | Ps. | (2,075) | | | Ps. | (1,757) | |
Loans and advances to customers—credit cards | |
| | | |
| | | |
| | |
Pesos | | Ps. | (939) | | | Ps. | (1,058) | | | Ps. | (1,997) | |
Total | | Ps. | (939) | | | Ps. | (1,058) | | | Ps. | (1,997) | |
Debt instruments - Taxable | |
| | | |
| | | |
| | |
Pesos | | Ps. | 1,304 | | | Ps. | (1,593) | | | Ps. | (289) | |
Foreign currency(1) | |
| 174 | | |
| (517) | | |
| (343) | |
Total | | Ps. | 1,478 | | | Ps. | (2,110) | | | Ps. | (632) | |
Debt instruments - Non taxable | | | | | |
| | | |
| | |
Foreign currency(1) | | | 338 | | |
| (67) | | |
| 271 | |
Total | | Ps. | 338 | | | Ps. | (67) | | | Ps. | 271 | |
Income from hedging operations | |
| | | |
| | | |
| | |
Pesos | | Ps. | — | | | Ps. | (2,092) | | | Ps. | (2,092) | |
Foreign currency(1) | |
| — | | |
| — | | |
| — | |
Total | | Ps. | — | | | Ps. | (2,092) | | | Ps. | (2,092) | |
Other interest-earning assets | |
| | | |
| | | |
| | |
Pesos | | Ps. | — | | | Ps. | 102 | | | Ps. | 102 | |
Foreign currency(1) | |
| — | | |
| — | | |
| — | |
Total | | Ps. | — | | | Ps. | 102 | | | Ps. | 102 | |
Total interest-earning assets | |
| | | |
| | | |
| | |
Pesos | | Ps. | 1,343 | | | Ps. | (14,237) | | | Ps. | (12,894) | |
Foreign currency(1) | |
| (631) | | |
| 652 | | |
| 21 | |
Total | | Ps. | 712 | | | Ps. | (13,586) | | | Ps. | (12,873) | |
(1) | Represents assets or liabilities denominated in foreign currencies. Values are presented in pesos. |
117
| | | | | | | | | | | | |
| | IFRS for the year ended December 31, 2021 and 2020 | | |||||||||
|
| Volume |
|
| Rate |
|
| Net Change |
| |||
| | (Millions of pesos) | | |||||||||
INTEREST-BEARING LIABILITIES | | |
| | | |
| | | |
| |
Deposits from the Mexican Central Bank and credit institutions |
| |
| | | |
| | | |
| |
Pesos | | Ps. | 2,659 | | | Ps. | (4,228) | | | Ps. | (1,569) | |
Foreign currency(1) | |
| (180) | | |
| 316 | | |
| 136 | |
Total | | Ps. | 2,479 | | | Ps. | (3,912) | | | Ps. | (1,433) | |
Customer deposits—Demand accounts | |
| | | |
| | | |
| | |
Pesos | | Ps. | 804 | | | Ps. | (1,884) | | | Ps. | (1,080) | |
Foreign currency(1) | |
| 2 | | |
| (1) | | |
| 1 | |
Total | | Ps. | 806 | | | Ps. | (1,885) | | | Ps. | (1,079) | |
Customer deposits—Savings accounts | |
| | | |
| | | |
| | |
Pesos | | Ps. | — | | | Ps. | — | | | Ps. | — | |
Total | | Ps. | — | | | Ps. | — | | | Ps. | — | |
Customer deposits—Time deposits | |
| | | |
| | | |
| | |
Pesos | | Ps. | (1,595) | | | Ps. | (5,579) | | | Ps. | (7,174) | |
Foreign currency(1) | |
| (30) | | |
| (40) | | |
| (70) | |
Total | | Ps. | (1,625) | | | Ps. | (5,619) | | | Ps. | (7,244) | |
Customer deposits—Repurchase agreements | |
| | | |
| | | |
| | |
Pesos | | Ps. | (287) | | | Ps. | (401) | | | Ps. | (688) | |
Total | | Ps. | (287) | | | Ps. | (401) | | | Ps. | (688) | |
Subordinated debentures | |
| | | |
| | | |
| | |
Foreign currency(1) | | Ps. | 85 | | | Ps. | (184) | | | Ps. | (99) | |
Total | | Ps. | 85 | | | Ps. | (184) | | | Ps. | (99) | |
Marketable debt securities and other financial liabilities | |
| | | |
| | | |
| | |
Pesos | | Ps. | (1,171) | | | Ps. | 309 | | | Ps. | (862) | |
Foreign currency(1) | |
| 372 | | |
| 42 | | |
| 414 | |
Total | | Ps. | (799) | | | Ps. | 351 | | | Ps. | (448) | |
Other liabilities | |
| | | |
| | | |
| | |
Pesos | | Ps. | 261 | | | Ps. | 128 | | | Ps. | 389 | |
Foreign currency(1) | |
| — | | |
| — | | |
| — | |
Total | | Ps. | 261 | | | Ps. | 128 | | | Ps. | 389 | |
Expense from hedging operations | |
| | | |
| | | |
| | |
Pesos | | Ps. | — | | | Ps. | 107 | | | Ps. | 107 | |
Foreign currency(1) | |
| — | | |
| — | | |
| — | |
Total | | Ps. | — | | | Ps. | 107 | | | Ps. | 107 | |
Other interest expense | |
| | | |
| | | |
| | |
Pesos | | Ps. | — | | | Ps. | — | | | Ps. | — | |
Foreign currency(1) | |
| — | | |
| — | | |
| — | |
Total | | Ps. | — | | | Ps. | | | | Ps. | | |
Total interest-bearing liabilities | |
| | | |
| | | |
| | |
Pesos | | Ps. | 671 | | | Ps. | (11,548) | | | Ps. | (10,877) | |
Foreign currency(1) | |
| 249 | | |
| 133 | | |
| 382 | |
Total | | Ps. | 920 | | | Ps. | (11,415) | | | Ps. | (10,495) | |
(1) | Represents assets or liabilities denominated in foreign currencies. Values are presented in pesos. |
118
Assets
Earning Assets—Yield Spread
The following tables analyze our average earning assets, interest income and dividends on equity securities and net interest income and shows gross yields, net yields and yield spread for each of the periods indicated. You should read this table and the footnotes thereto in light of our observations noted in “—Average Balance Sheet and Interest Rates.”
| | | | | | | | | | | | |
| | IFRS for the year ended December 31, |
| |||||||||
|
| 2020 |
|
| 2021 |
|
| 2022 |
| |||
| | (Millions of pesos, except percentages) |
| |||||||||
Net Interest Margin and Spread | | | | | | | | | | | | |
Average earning assets |
| |
|
| | |
|
| | |
| |
Pesos | | Ps. | 1,111,791 | | | Ps. | 1,127,371 | | | Ps. | 1,190,800 | |
Foreign currency(1) | |
| 310,907 | | |
| 281,140 | | |
| 271,178 | |
Total | | Ps. | 1,422,698 | | | Ps. | 1,408,511 | | | Ps. | 1,461,978 | |
Net interest income | |
|
| | |
|
| | |
|
| |
Pesos | | Ps. | 64,396 | | | Ps. | 62,379 | | | Ps. | 72,899 | |
Foreign currency(1) | |
| 1,414 | | |
| 1,053 | | |
| 2,213 | |
Total | | Ps. | 65,810 | | | Ps. | 63,432 | | | Ps. | 75,112 | |
Gross yield(2) | |
|
| | |
|
| | |
|
| |
Pesos | |
| 9.90% | | |
| 8.62% | | |
| 11.03% | |
Foreign currency(1) | |
| 1.91% | | |
| 2.12% | | |
| 2.84% | |
Total | |
| 8.15% | | |
| 7.32% | | |
| 9.51% | |
Net yield(3) | |
|
| | |
|
| | |
|
| |
Pesos | |
| 5.79% | | |
| 5.53% | | |
| 6.12% | |
Foreign currency(1) | |
| 0.45% | | |
| 0.37% | | |
| 0.82% | |
Total | |
| 4.63% | | |
| 4.50% | | |
| 5.14% | |
Yield spread(4) | |
|
| | |
|
| | |
|
| |
Pesos | |
| 5.61% | | |
| 5.39% | | |
| 5.82% | |
Foreign currency(1) | |
| (0.38)% | | |
| (0.44)% | | |
| (0.04)% | |
Total | |
| 4.18% | | |
| 4.19% | | |
| 4.64% | |
(1) | Represents assets or liabilities denominated in foreign currencies. Values are presented in pesos. |
(2) | Gross yield is the quotient of interest divided by average interest-earning assets, which are loans, receivables, debt instruments and other financial assets that yield interest or similar income. |
(3) | Net yield is the quotient of net interest income divided by average earning assets. |
(4) | Yield spread is the difference between gross yield on earning assets and the average cost rate of interest-bearing liabilities. |
119
Interest-Earning Assets—Composition
The following table shows the percentage mix of our average interest-earning assets for the years indicated. You should read this table in light of our observations noted in “—Average Balance Sheet and Interest Rates,” and footnotes thereto.
| | | | | | | | | |
| | IFRS |
| ||||||
| | For the year ended December 31, |
| ||||||
|
| 2020 |
|
| 2021 |
|
| 2022 |
|
| | (Percentages) |
| ||||||
Average Interest-Earning Assets | |
|
| |
|
| |
| |
Cash and balances with the Mexican Central Bank | | 2.81% | | | 2.85% | | | 2.56% | |
Loans and advances to credit institutions | | 9.16% | | | 5.85% | | | 2.55% | |
Loans and advances to customers–excluding credit cards | | 48.59% | | | 47.54% | | | 49.92% | |
Loans and advances to customers (excluding credit cards) and credit institutions-Reverse repurchase agreements | | 4.84% | | | 5.77% | | | 8.68% | |
Loans and advances to customers–credit cards | | 3.90% | | | 3.68% | | | 3.99% | |
Debt instruments–Taxable | | 29.30% | | | 32.46% | | | 30.51% | |
Debt instruments–Non taxable | | 1.40% | | | 1.85% | | | 1.80% | |
Total interest-earning assets | | 100.00% | | | 100.00% | | | 100.00% | |
Other Selected Statistical Information
Investment Portfolio
The following table shows as of December 31, 2022, the balances and weighted-average yields for our debt securities not held at fair value through earnings, for each range of maturities. All average data have been calculated as the simple average of month-end balances over the relevant date range, which is not significantly different from having used daily averages. Yields on tax-exempt obligations have not been computed on a tax-equivalent basis. For each range of maturities and type of bond, the weighted-average yield is calculated as the average of the interest rates of the debt securities maturing in each period.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Maturity as of December 31, 2022 | | |||||||||||||||||||||||||||||
|
| Less than |
|
| Average |
|
| |
|
| Average |
|
| |
|
| Average |
|
| More than |
|
| Average |
|
| | | | ||||
| | 1 year | |
| yield | | | 1 to 5 years | |
| yield | | | 5 to 10 years | |
| yield | | | 10 years | |
| yield | | | Total | ||||||
| | (Millions of pesos, except percentages) | | |||||||||||||||||||||||||||||
Investment Securities | | |
|
| |
|
| | |
|
| | |
| | |
|
| |
|
| | |
|
| |
|
| | |
| |
Debt instruments issued by the Mexican government (excluding Mexican Central Bank) | | Ps. | 56,323 |
| | 9.46% | | | Ps. | 242,804 |
| | 7.94% | | | Ps. | 15,183 |
| | 5.75% | | | Ps. | 12,042 |
| | 6.77% | | | Ps. | 326,352 | |
Debt instruments issued by the Mexican Central Bank | |
| 1,619 |
| | 10.09% | | |
| 10,864 |
| | 10.20% | | |
| 16,822 |
| | 10.40% | | |
| — |
| | — | | |
| 29,305 | |
Foreign government debt securities | |
| 78,734 |
| | 4.76% | | |
| 23,272 |
| | 12.37% | | |
| — |
| | — | | |
| — |
| | — | | |
| 102,006 | |
Debt instruments issued by the private sector | |
| 5,119 |
| | 10.54% | | |
| 3,614 |
| | 10.31% | | |
| — |
| | — | | |
| — |
| | — | | |
| 8,733 | |
Total debt instruments | | Ps. | 141,795 |
| | 8.71% | | | Ps. | 280,554 |
| | 10.20% | | | Ps. | 32,005 |
| | 4.04% | | | Ps. | 12,042 |
| | 1.69% | | | Ps. | 466,396 | |
Loan Portfolio
As of December 31, 2020, 2021 and 2022 our total loans and advances to customers (excluding reverse repurchase agreements) equaled Ps.712,983 million, Ps.762,088 million and Ps.820,314 million, respectively, representing 38.8%, 45.4% and 45.2% of our total assets at such dates, respectively. Loans and advances to customers (excluding reverse repurchase agreements), net of allowance for impairment losses equaled Ps.687,432 million, Ps.741,053 million and Ps.798,662 as of December 31, 2020, 2021 and 2022, respectively, representing 37.4%, 44.2% and 44.0% of our total assets at such dates. We also have loan commitments drawable by third parties, which amounted to Ps.157,033 million, Ps.171,094 million and Ps.205,793 million as of December 31, 2020, 2021 and 2022, respectively. Loan commitments drawable by third parties include mostly credit card lines and commercial commitments. While credit cards lines are unconditionally cancelable by the issuer, commercial commitments are generally one-year facilities, subject to an evaluation of the customer’s projected cash flows and financial history. The loans guaranteed by
120
governmental entities are reported in non-performing loans without impact on or adjustment relating to the amount guaranteed, and therefore the guarantees have no impact on our non-performing loan ratios.
During the last three years our recoveries from written-off loans have been Ps.3,453 million, Ps.2,720 million and Ps.3,682 million for 2020, 2021 and 2022, respectively. Even though the pandemic negatively affected the economy in 2020, our recoveries were higher due to the sale of a significant portion of written-off loans. In 2021, the recoveries returned to pre-pandemic 2019 levels. This was possible, mainly, due to the re-opening of courts which allowed more judicial actions. In 2022, recoveries were positively impacted by SME and Mortgage portfolios recoveries.
In 2022, our strategy continued focusing on the individual loan portfolio, mainly aimed in increasing the market share of secured portfolios (mortgages and car loan portfolios); however, the weaker demand for corporates credits throughout the Mexican financial system impacted the overall growth of our portfolio and led to a change of the mix in our portfolio (secured vs. unsecured) leading to a better portfolio quality.
Maturity
The following tables set forth an analysis by maturity of our loans and advances to customers (excluding reverse repurchase agreements), by type of loan and status as of December 31, 2022.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | IFRS as of December 31, 2022 |
| ||||||||||||||||||||||||||||||||
| | Less than 1 year | | 1 to 5 Years | | 5 to 15 Years | | Over 15 Years | | Total |
| ||||||||||||||||||||||||
|
| Balance |
|
| % of total |
|
| Balance |
|
| % of total |
|
| Balance |
|
| % of total |
|
| Balance |
|
| % of total |
|
| Balance |
|
| % of total |
| |||||
| | (Millions of pesos, except percentages) |
| ||||||||||||||||||||||||||||||||
Public sector | | Ps. | 76,482 |
| | 21.14% | | | Ps. | 8,101 |
| | 2.72% | | | Ps. | — |
| | 0.00% | | | Ps. | — |
| | 0.00% | | | Ps. | 84,583 |
| | 10.31% | |
Commercial, financial and industrial | |
| 211,625 |
| | 58.48% | | |
| 142,801 |
| | 47.99% | | |
| 13,201 |
| | 9.33% | | |
| 29 |
| | 0.15% | | |
| 367,656 |
| | 44.82% | |
Mortgages | |
| 31,282 |
| | 8.64% | | |
| 62,674 |
| | 21.07% | | |
| 103,691 |
| | 73.32% | | |
| 19,462 |
| | 99.85% | | |
| 217,109 |
| | 26.47% | |
Installment loans to individuals | |
| 42,465 |
| | 11.74% | | |
| 83,962 |
| | 28.22% | | |
| 24,539 |
| | 17.35% | | |
| — |
| | 0.00% | | |
| 150,966 |
| | 18.40% | |
Revolving consumer credit card loans | |
| 14,576 |
| | 4.03% | | |
| 32,285 |
| | 10.85% | | |
| 18,096 |
| | 12.79% | | |
| — |
| | 0.00% | | |
| 64,957 |
| | 7.92% | |
Non-revolving consumer loans | |
| 27,889 |
| | 7.71% | | |
| 51,677 |
| | 17.37% | | |
| 6,443 |
| | 4.56% | | |
| — |
| | 0.00% | | |
| 86,009 |
| | 10.48% | |
Total loans | |
| 361,854 |
| | 100.00% | | |
| 297,538 |
| | 100.00% | | |
| 141,431 |
| | 100.00% | | |
| 19,491 |
| | 100.00% | | |
| 820,314 |
| | 100.00% | |
Allowance for impairment losses | |
| (9,200) |
| | | | |
| (8,363) |
| | | | |
| (4,089) |
| | | | |
| — |
| |
| | |
| (21,652) |
| | | |
Loans net of allowance for impairment losses | | Ps. | 352,654 |
| | 100.00% | | | Ps. | 289,175 |
| | 100.00% | | | Ps. | 137,342 |
| | 100.00% | | | Ps. | 19,491 |
| | 100.00% | | | Ps. | 798,662 |
| | 100.00% | |
Fixed and Variable Rate Loans
The following table sets forth a breakdown of our fixed and floating rate loans having a maturity of more than one year as of December 31, 2022.
| | | | | | |
| | Fixed and variable rate loans having a maturity of more than one year | | |||
|
| Pesos |
|
| Total |
|
| | (in millions of Pesos) | | |||
Fixed rate |
|
|
| |
|
|
Public sector | | — | | | — | |
Commercial, financial and industrial | | 33,384 | | | 33,384 | |
Mortgages | | 213,169 | | | 213,169 | |
Installment loans to individuals | | 85,843 | | | 85,843 | |
Revolving consumer credit card loans | | — | | | — | |
Non-revolving consumer loans | | 85,843 | | | 85,843 | |
Total Fixed Rate | | 332,396 | | | 332,396 | |
Variable Rate | | | | | | |
Public sector | | 84,583 | | | 84,583 | |
Commercial, financial and industrial | | 334,272 | | | 334,272 | |
Mortgages | | 3,940 | | | 3,940 | |
Installment loans to individuals | | 65,123 | | | 65,123 | |
Revolving consumer credit card loans | | 64,957 | | | 64,957 | |
Non-revolving consumer loans | | 166 | | | 166 | |
Total Variable Rate | | 487,918 | | | 487,918 | |
TOTAL | | 820,314 | | | 820,314 | |
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Movements in Allowance for Impairment Losses
Credit Ratios
| | | | | | | | | | | | |
| | As of December 31, | | |||||||||
|
| 2020 |
|
| 2021 |
|
| 2022 |
| |||
| | (Millions of pesos) | ||||||||||
Allowances for credit losses to total loans outstanding |
| |
|
| | |
|
| | |
|
|
Allowances for credit losses | | Ps. | (25,551) |
| | Ps. | (21,030) |
| | Ps. | (21,652) |
|
Total loans outstanding | |
| 712,983 |
| |
| 762,083 |
| |
| 820,314 |
|
Net Charge-offs during the period to average loans outstanding: | | | | | | | | | | | | |
Average amount outstanding | |
| 760,553 |
| |
| 741,028 |
| |
| 788,185 | |
Net Charge-off during the period | |
| — |
| |
| — |
| |
| — | |
Average amount outstanding | |
| — | | |
| — | | |
| — | |
Commercial, financial and industrial | | | | | | | | | | | | |
Net Charge-off during the period | |
| 7,919 |
| |
| 9,259 |
| |
| 5,130 | |
Average amount outstanding | |
| 451,946 |
| |
| 413,326 |
| |
| 446,254 | |
Mortgages | | | | | | | | | | | | |
Net Charge-off during the period | |
| 1,145 |
| |
| 1,572 |
| |
| 2,894 | |
Average amount outstanding | |
| 195,737 |
| |
| 212,409 |
| |
| 206,700 | |
Installment loans to individuals | |
| 112,870 |
| |
| 115,293 |
| |
| 135,231 |
|
Revolving consumer credit card loans | | | | | | | | | | | |
|
Net Charge-off during the period | |
| 7,020 |
| |
| 8,396 |
| |
| 5,670 | |
Average amount outstanding | |
| 55,513 |
| |
| 51,814 |
| |
| 58,378 | |
Non-revolving consumer loans | | | | | | | | | | | |
|
Net Charge-off during the period | |
| 5,506 |
| |
| 7,250 |
| |
| 5,475 | |
Average amount outstanding | |
| 57,357 |
| |
| 63,479 |
| |
| 76,853 | |
Total loans | | | | | | | | | | | | |
Net Charge-off during the period | |
| (21,590) |
| |
| (26,477) |
| |
| (19,169) | |
Average amount outstanding | |
| 760,553 |
| |
| 741,028 |
| |
| 788,185 |
|
The increase in the 2022 allowances for credit losses was driven by a decrease in net charge-off, due to higher charge-offs in 2021 due to COVID-19 debtor relief programs expiring in late 2020, partly offset by an increase in total loans outstanding, mainly due to the growth of payroll, auto and credit card loans, in line with our strategy and our prudent approach to risk management. In 2022, our loan loss reserves increased and our non-performing loan coverage ratio increased in 2022 as compared to 2021. See Note 2.g and 11 to our audited financial statements included elsewhere in this Report.
Non-performing loan levels decreased in 2022, mainly due to the reclassification of a certain large corporate customer that was assessed as stage 3 during the COVID-19 pandemic, due to an imminent risk of default, but subsequently upgraded to stage 1 due to its subsequent sustained performance under its loans.
For further discussion of material changes in credit ratios, see “Item 5. Operating and Financial Review and Prospects—A. Operating Results—Results for the Year Ended December 31, 2022 Compared to the Year Ended December 31, 2021—Impairment Losses on Financial Assets (Net)” below and “Item 5. Operating and Financial Review and Prospects—A. Operating Results—Results for the Year Ended December 31,
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2021 Compared to the Year Ended December 31, 2020—Impairment Losses on Financial Assets (Net) in our Annual Report on Form 20-F for the year ended December 31, 2021.”
Deposits
The principal components of our deposits are our demand accounts, savings accounts, time deposits and deposits from the Mexican Central Bank and credit institutions. For an analysis of average deposits for 2020, 2021 and 2022, see “ – Average Balance Sheet and Interest Rates.”
The following table shows the amounts of insured and uninsured total customer deposits.
| | | | | | | | | |
| | For the year ended December 31, |
| ||||||
| | 2020 | | | 2021 | | | 2022 |
|
| | (in millions of Pesos) | | ||||||
Insured deposits | Ps. | 354,876 | | Ps. | 364,765 | | Ps. | 409,421 | |
Uninsured deposits (1) | | 784,979 | | | 738,002 | | | 736,860 | |
Total deposits | Ps. | 1,139,855 | | Ps. | 1,102,767 | | Ps. | 1,146,281 | |
(1)Uninsured deposits are deposits that are not insured by the IPAB, the banking deposit insurance agency of Mexico.
The table below shows as of December 31, 2022, the amounts of insured and uninsured time deposits.
| | | |
| | As of December 31, | |
| | 2022 | |
| | (in millions of Pesos) | |
Time deposits | | | |
Insured time deposits | Ps. | 106,214 | |
Uninsured time deposits | | 115,662 | |
Total deposits | Ps. | 221,876 | |
The following table shows the maturity of time deposits (excluding inter-bank deposits) otherwise uninsured for the year ended December 31, 2022.
| | | | | | | | | |
| | Year ended December 31, 2022 |
| ||||||
| | Pesos | | | Foreign currency | | | Total |
|
| | (in millions of Pesos) | | ||||||
Under 3 months | Ps. | 146,944 | | Ps. | 8,537 | | Ps. | 155,481 | |
3 to 6 months | | 25,421 | | | 29 | | | 25,450 | |
6 to 12 months | | 40,431 | | | 115 | | | 40,546 | |
Over 12 months | | 313 | | | 86 | | | 399 | |
Total | | 213,109 | | | 8,767 | | | 221,876 | |
The Mexican Financial System
General
México’s financial system is currently comprised of commercial banks, national development banks, brokerage firms, development trust funds and other non-bank institutions, such as insurance and reinsurance companies, bonding companies, credit unions, savings and loans companies, foreign exchange houses, factoring companies, bonded warehouses, financial leasing companies, mutual fund companies, pension fund management companies, limited purpose financial institutions, multiple purpose financial institutions and limited purpose banks. In 1990, the Mexican government adopted the Mexican
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Financial Groups Law aimed at achieving the benefits of universal banking, which permits a number of financial services companies to operate as a single financial services holding company. Most major Mexican financial institutions, including Banco Santander México, are members of financial groups.
The principal financial authorities that regulate financial institutions, including commercial banks, are the SHCP, the Mexican Central Bank, the CNBV, the CONSAR, the CNSF, the IPAB and CONDUSEF.
Authorities of the Mexican Financial System
The principal authorities that regulate and supervise financial institutions related to the activities of Banco Santander México in México are the Mexican Central Bank, the SHCP, the CNBV, the IPAB and the CONDUSEF. These authorities are subject to several organic laws and other administrative regulations that govern their regulatory, supervisory and other powers. Also, these entities continually enact administrative regulations within the scope of their respective authority for the regulation of the corresponding financial entities, as further mentioned below. Banco Santander México, as a banking institution, is subject to the supervision and regulation of the CNBV. In addition, our financial subsidiaries are subject to the supervision and regulation of the corresponding financial authority, and are in constant interaction with such authorities during their normal course of business.
Banco de México
Banco de México is the Mexican Central Bank. It is a constitutionally autonomous entity (organismo constitucionalmente autónomo) that is not subordinated to any other body in the Mexican government. Its primary purpose is to issue the Mexican currency, as well as to maintain the acquisition power of such currency, to establish reference interest rates and to ensure that the banking and payments systems perform under safe and sound principles.
Monetary policy decisions are taken by the members of the Governing Board of the Mexican Central Bank. The Governing Board is composed of a Governor and four Deputy Governors, all of which are appointed by the President and ratified by the Senate or the Permanent Commission of Congress, as applicable.
Among the decisions that only the Governing Board may take are the authorization of the issuance of currency and the minting of coins, the decision to extend credit to the Mexican government, the determination of policies and criteria that the Mexican Central Bank uses in its operations and in the regulations that it issues, and the approval of its rules of procedure, budget, working conditions and similar internal matters.
SHCP
The SHCP is an agency of the Executive Branch that regulates, proposes, directs and controls the economic policy of the Mexican government in matters of economics, tax, finance, public budget, public debt and income. Together with the CNBV and the Mexican Central Bank, it is the primary regulator of commercial banks and national development banks. The SHCP participates in the process of incorporation, revocation, operation, merger, control and stock purchase of financial institutions.
CNBV
The CNBV is a deconcentrated entity (órgano desconcentrado) of the SHCP, having independent technical and executive powers. The CNBV is in charge of the supervision and regulation of financial entities, with the purpose of ensuring their stability and sound performance, as well as the maintenance of a safe and sound financial system. The scope of the CNBV’s authority includes inspection, supervision, prevention and correction powers. The primary financial entities regulated by the CNBV are commercial banks, national development banks, regulated multiple purpose financial institutions, brokerage firms, as well as
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publicly traded companies and other entities that have issued debt securities to the public. The CNBV is also in charge of granting and revoking banking and securities brokerage and FinTech licenses in México.
IPAB
After the 1994 financial crisis, the Mexican government created the IPAB, a decentralized public entity with its own legal standing and assets. The IPAB’s primary purpose is the protection and insurance of bank deposits, also having powers to provide solvency to banking institutions, contributing to the safe and sound development of the banking sector and the national payments system. The IPAB is also entitled to acquire assets from distressed banking institutions.
CONDUSEF
The CONDUSEF is a decentralized public entity (organismo público descentralizado) under the SHCP. The CONDUSEF is in charge of the provision of financial orientation, guidance and information to customers of financial services, as well as implementation of corrective measures through the processing of claims by such customers, with the primary purpose of protecting customer’s interests. The CONDUSEF may also act as arbitrator in disputes between financial institutions and their customers and establish regulations and impose sanctions to financial institutions in order to protect their customers.
Reforms to Mexican Banking Law
In November 2013, the Mexican Congress approved reforms to the Mexican financial system which, among other measures, seek to promote lending activities to small and medium-sized companies, improve banking supervision and regulations, improve regulatory powers of, and the ability to impose sanctions by, CONDUSEF, improve the banks’ ability to foreclose on collateral and correct deficiencies of the Mexican Commercial Bankruptcy Law, in respect of related policy sanctions and certain other activities.
Additionally, on March 9, 2019, reforms to the Mexican Banking Law were published in the Official Gazette, with the following purposes: (i) allow banking institutions to perform and carry out their activities and execute agreements with their customers through the use of the advanced electronic signature (firma electrónica avanzada) and other digital authentication tools, pursuant to certain rules issued by the CNBV and (ii) allow FinTech companies to perform and carry out banking activities under Article 103 of the Mexican Banking Law.
Initiatives to Improve Lenders’ Rights
The Mexican Congress has approved several laws to improve the rights and actions of lenders. Such laws include new collateral mechanisms and the Bankruptcy Law, which set forth benefits for the Bank.
Enforcement of loan collateral
The Mexican Congress also approved changes to the Commerce Code intended to expedite proceedings relating to the foreclosure of secured loans by financial institutions. These changes grant authority to Mexican courts to issue interim measures, such as ordering persons not to leave México or ordering assets to be frozen.
Reforms to the Mexican Bankruptcy Law
The current Mexican Bankruptcy Law (Ley de Concursos Mercantiles) was published in the Federal Official Gazette on May 12, 2000 and since such date has been reformed several times, including in January 2014. By virtue of such reforms and pursuant to a new paragraph added to Article 245 of the Mexican Banking Law, the Mexican Bankruptcy Law was no longer applicable to Mexican banks and the insolvency of such institutions began to be subject to the new provisions of the Mexican Banking Law. Nevertheless, the
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Mexican Bankruptcy Law still provides for the insolvency procedure of the auxiliary credit institutions (instituciones auxiliares de crédito) of a banking institution.
The Mexican Commercial Bankruptcy Law provides for a single insolvency proceeding encompassing two successive phases: a conciliatory phase of mediation between creditors and debtor, and bankruptcy, which is only applicable to persons that carry out commercial activities with liabilities that exceed 400,000 UDIs. The insolvency procedure applicable to persons that do not carry commercial activities, or with liabilities that do not exceed the aforementioned amount, is regulated by the relevant Civil Code (Código Civil).
The Mexican Commercial Bankruptcy Law establishes precise rules that determine when a debtor is in general default in its payment obligations. The principal indications are failure by a debtor to comply with its payment obligations in respect of two or more creditors, and the existence of any of the following two conditions: (i) 35% or more of a debtor’s outstanding liabilities are 30 days past due; or (ii) the debtor fails to have certain specifically defined liquid assets and receivables to cover at least 80% of its obligations which are due and payable.
On the date the insolvency judgment is entered, all peso-denominated obligations are converted into UDIs, and foreign currency-denominated obligations are converted into pesos at the rate of exchange for that date and then converted into UDIs. Only creditors with a perfected security interest (i.e., mortgage, pledge or security trust) continue to accrue interest on their loans. The Mexican Commercial Bankruptcy Law mandates the netting of derivative transactions upon the declaration of insolvency.
The Mexican Commercial Bankruptcy Law provides for a general rule as to the period when transactions may be scrutinized by the judge to determine if they were entered into for fraudulent purposes, which is 270 calendar days prior to the judgment declaring insolvency. This period is referred to as the retroactivity period. Nevertheless, upon the reasoned request of the conciliator, the controller, who may be appointed by the creditors to oversee the process, or any creditor, the judge may set a longer period.
The Mexican Congress has approved changes to the Mexican Commercial Bankruptcy Law, intended to improve the application of such law. Relevant changes include (i) the consolidation of bankruptcy proceedings affecting parent and subsidiary companies, (ii) the immediate application of liquid assets provided as collateral (without judicial intervention), in connection with the netting and close out of derivative and similar contracts, (iii) setting forth an outside limit to bankruptcy restructuring (three years), (iv) permitting trustees and other creditor representatives to submit claims on behalf of groups of creditors, (v) expressly recognizing subordinated creditors, and deeming related party creditors as subordinated creditors, and (vi) making members of the Board of Directors liable to the bankrupt debtor if such member acted when affected by a conflict of interest, self-dealing and otherwise against the interests of the bankrupt debtor.
Deregulation of Lending Entities and Activities
In July 2006, the Mexican Congress enacted reforms to the General Law of Auxiliary Credit Organizations and Activities (Ley General de Organizaciones y Actividades Auxiliares de Crédito), the Mexican Banking Law and the Foreign Investment Law (Ley de Inversión Extranjera), with the objective of creating a new type of financial entity called multiple purpose financial entities (sociedad financiera de objeto múltiple, or Sofom) (the “Sofom Amendments”). The Sofom Amendments were published in the Federal Official Gazette on July 18, 2006.
The main purpose of the Sofom Amendments was to deregulate lending activities, including financial leasing and factoring activities. Sofomes are Mexican corporations (sociedades anónimas) that expressly include as their main corporate purpose in their bylaws, engaging in lending and/or financial leasing and/or factoring services. Pursuant to the Sofom Amendments, the SHCP ceased to authorize the creation of new Sofoles, and all existing Sofol authorizations automatically terminated on July 19, 2013.
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Among other institutions, Sofomes that are affiliates of Mexican credit institutions (i.e., private or public banks) or the holding companies of financial groups that hold a credit institution are regulated and supervised by the CNBV, and required to comply with a number of provisions and requirements applicable to credit institutions such as capital adequacy requirements, risk allocation requirements, related party transactions rules, write-offs and assignment provisions, as well as reporting obligations. Regulated Sofomes are required to include in their denomination the words “Entidad Regulada” (regulated entity) or the abbreviation thereof, “E.R.” All other entities whose main purpose is engaging in lending, financial leasing and factoring activities are non-regulated Sofomes and must so indicate in their corporate denomination by including the words “Entidad No Regulada” (non-regulated entity) or the abbreviation thereof, “E.N.R.”. Non-regulated Sofomes are not subject to the supervision of the CNBV.
Sofomes (regulated or non-regulated) are subject to the supervision of the CONDUSEF as is the case with any other financial entity.
The Sofom Amendments also eliminated the restrictions on foreign equity investment applicable to Sofomes, financial leasing and factoring companies, which until the Sofom Amendments became effective, was limited to 49%. Accordingly, the Sofom Amendments resulted in an increase in competition in the financial services industry, from foreign financial institutions.
The Mexican Securities Market Law
The Mexican Securities Market Law, applicable to Banco Santander México, regarding the issuance of securities, sets standards for authorizing companies to organize and operate as brokerage firms, which authorization is granted by the CNBV with the approval of its Governing Board. In addition to setting standards for brokerage firms, the Mexican Securities Market Law authorizes the CNBV, among other things, to regulate the public offering and trading of securities, corporate governance, disclosure and reporting standards and to impose sanctions for the illegal use of insider information and other violations of the Mexican Securities Market Law. See “Item 9. The Offer and Listing—C. Markets—The Mexican Securities Market.”
Amendments to Financial Regulations Impacting Banks
The Mexican financial system has continued to advance in recent years, consistent with demands from regulators and market participants, developments in other jurisdictions and to address systemic issues resulting from the global financial crisis.
Even though the recent global financial crisis did not affect Mexican banks directly, many Mexican corporations were affected, primarily by having engaged in foreign currency-linked derivative transactions, which increased exposures substantially as a result of the devaluation of the peso, triggering a new regulation issued by the CNBV that seeks to improve disclosure standards as they relate to derivative transactions.
The Federal Law for Protection of Personal Data Held by Private Persons (Ley Federal de Protección de Datos Personales en Posesión de Particulares) requires us to ensure the confidentiality of information received from customers. We have modified our processes, procedures and systems as required to implement this law and the supervision of our activities thereunder and as a means to obtain the consent of our customers prior to using any personal information provided by them. We could be subject to fines and penalties in the event of violations of the provisions of such law.
On January 9, 2015, the General Rules Applicable to Financial Entities and other Persons that Provide Investment Services (Disposiciones de Carácter General Aplicables a las Entidades Financieras y otras Personas que Proporcionan Servicios de Inversión, or the “Investment Services Rules”) were published. The purpose of the Investment Services Rules includes having a sole regulation that contains the
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rules applicable to brokerage firms, credit institutions and investment advisors, companies that operate mutual funds and companies or entities that distribute shares of mutual funds.
In accordance with the Investment Services Rules, financial entities and investment advisors rendering advisory services in connection with investments shall ensure that any advice, recommendation or suggestion given to the client is reasonable for such client, and consistent with the client’s investment profile and the financial product profile.
The Investment Services Rules set forth obligations applicable to financial entities and investment advisors to create either a committee which shall be responsible for the analysis of financial products offered by such entities, and whose members shall be independent from the structuring area of the relevant entity, or an equivalent institution or responsible person.
The Investment Services Rules also require the creation of an Analysis Committee. Such Analysis Committee shall maintain minutes for each committee meeting held together with the relevant presentations, which documentation shall be kept by the entity and made available to the CNBV for at least five years.
The Analysis Committee shall approve each financial product offered, compensation applicable to investment portfolios and, prior to its delivery, all information given to any client regarding any investment recommendation, which information shall include at least the prospectus or memorandum describing the relevant securities or offering.
The Investment Services Rules also provide that the board of directors of the financial entity shall approve the policies and guidelines required for each entity to:
● | perform the necessary evaluation to determine the profile of its customers; |
● | carry out the analysis of the financial products to be offered to the customers; and |
● | comply with the evaluation of the “reasonableness” of recommendations, required to render advisory investment services. |
Such policies and guidelines must be submitted to the CNBV within 10 days from its approval by the Board of Directors, and the CNBV may order the relevant entity to incorporate corrections in order to make them consistent with the Investment Services Rules.
The Investment Services Rules provide that the Board of Directors must appoint an officer to verify compliance of each firm with the Investment Services Rules.
Pursuant to the changes to the Mexican Securities Market Law, (i) all offerings conducted outside of México by Mexican issuers, regardless of whether the offering is public or not, are required to be notified to the CNBV, (ii) clarifications were made in respect of the governance regime applicable to vehicles issuing asset-backed securities, (iii) required capitalization requirements and corrective measures in the absence of compliance with capitalization requirements applicable to broker-dealers were defined, (iv) rules implementing profiling of investors and provisions dealing with parties relating to the sale of securities have been incorporated into the Mexican Securities Market Law (as opposed to being left to implementing regulations), and (v) investment advisors are required to be registered with the CNBV, and are more strictly regulated.
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Supervision and Regulation
Introduction
Our operation is primarily regulated by the Mexican Banking Law and the rules and regulations issued by the SHCP, the CNBV and the Mexican Central Bank. Our operations are primarily regulated by the Mexican Banking Law, the Mexican Securities Market Law and the rules issued thereunder by the SHCP and the CNBV, as well as rules issued by the Mexican Central Bank and the IPAB. The authorities that supervise our financial subsidiaries’ operations are the SHCP, the Mexican Central Bank, CONDUSEF and the CNBV.
Banking Regulation
The SHCP, either directly or through the CNBV, possesses broad regulatory powers over the banking system. Banks are required to report regularly to the financial regulatory authorities. Reports to bank regulators are often supplemented by periodic meetings, formal or informal, between senior management of the banks and senior officials of the CNBV. In accordance with the Mexican Banking Law, banks must submit their unaudited monthly and quarterly and audited annual financial statements to the CNBV for review, and must publish on their website and in a national newspaper their unaudited quarterly balance sheets and audited annual balance sheets. The CNBV may order a bank to modify, correct and, as a precautionary measure, republish such balance sheets.
Additionally, banks must publish on their website, among other information:
● | the bank’s basic consolidated and audited annual financial statements, together with a report containing the management’s discussion and analysis of the financial statements and the bank’s financial position, including any important changes thereto and a description of the bank’s internal control systems; |
● | a description of the bank’s Board of Directors, identifying independent and non-independent directors and their background, education and experience; |
● | a description and the total sum of compensation and benefits paid to the members of the Board of Directors and senior officers during the past year; |
● | unaudited quarterly financial statements for the periods ending March, June and September of each year, together with any comments thereon; |
● | any information requested by the CNBV to approve the accounting criteria and special accounting registries; |
● | a detailed explanation regarding the main differences in the accounting used to prepare the financial statements; |
● | the credit rating of their portfolio; |
● | the capitalization level of the bank, its classification (as determined by the CNBV) and any modifications thereto; |
● | financial ratios; |
● | a brief summary of the resolutions adopted by any shareholders’ meeting, debenture holders’ meeting, or by holders of other securities or instruments; and |
● | the bank’s bylaws. |
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The CNBV has authority to impose fines for failing to comply with the provisions of the Mexican Banking Law, or regulations promulgated thereunder. In addition, the Mexican Central Bank has authority to impose certain fines and administrative sanctions for failure to comply with the provisions of the Law of the Mexican Central Bank and regulations and circulars adopted by it and the Law for the Transparency and Ordering of Financial Services, particularly as violations relate to interest rates, fees and the terms of disclosure of fees charged by banks to customers. Violations of specified provisions of the Mexican Banking Law are subject to administrative sanctions and criminal penalties.
The Mexican Baking Law permits foreign governments to acquire equity securities of Mexican banks on a temporary basis in connection with rescue or similar packages, and to acquire control of Mexican banks with the prior approval of the CNBV.
Mexican banks are required to obtain the express approval, through their Boards of directors, of compensation payable to officers and, for that purpose, will be required to observe general rules to be issued by the CNBV and to establish and maintain a compensation committee.
The Mexican Banking Law includes a provision for self-correcting irregularities detected by Mexican banks, arising from non-compliance with applicable law. Programs for self-correction are required to be approved by the board of directors of the applicable Mexican bank and must be supervised by the bank’s audit committee. General rules implementing the provisions are expected to be issued by the CNBV.
A Mexican bank may only be dissolved and liquidated, if the CNBV has issued a determination to that effect. Prior to such dissolution and liquidation, IPAB may provide temporary financial assistance to Mexican banks having liquidity problems.
Non-viable Mexican banks will be liquidated pursuant to a procedure set forth in the Mexican Banking Law, under which IPAB will act as liquidator, will conduct the procedures necessary to collect fees and pay creditors (respective parties specified under the Mexican Banking Law) and will take all measures conducive to the bank’s liquidations. The Mexican Banking Law reflects provisions related to the dissolution and liquidation of Mexican banks. Liquidation proceedings may be conducted in-court or out of court, depending upon the circumstances affecting the relevant Mexican bank.
The SHCP is authorized to conduct evaluations of Mexican banks. Although guidelines for such evaluations have already been issued, additional rules will be issued in the future. Such evaluations will be based upon the size of the banks and their participation in the relevant markets, and will determine whether or not a particular bank is lending to all sectors of the economy (primarily to small and medium-sized businesses). Results of evaluations are required to be made publicly available by the Ministry. Negative results from evaluations may result in corrective measures being ordered, however, it is uncertain what such measures may be.
We cannot predict the terms that will be included in implementing regulations in connection with requirements to be satisfied in respect of lending activities to certain sectors of the economy. However, if the SHCP determines, after an evaluation, that Banco Santander México has not complied with applicable requirements, it may be forced to lend to certain sectors of the economy or to certain persons that may not meet its credit quality standards, or other standards specified in its policies, that it may not know or that are not acceptable credit risks, which in turn may impact its financial condition and results. Furthermore, if the Bank were to fail any evaluation, publicity surrounding such failure may impact its reputation, which in turn may adversely impact its ability to conduct business in México and its financial condition and results.
Licensing of Banks
Authorization of the Mexican government is required to operate as a banking institution. The CNBV, with the approval of its Governing Board and subject to the prior favorable opinion of the Mexican Central Bank, has the power to authorize the establishment of new banks, subject to minimum capital standards, among
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other things. Approval of the CNBV is also required prior to opening, closing or relocating offices, including branches, of any kind outside of México or transfer of assets or liabilities between branches.
Intervention
The CNBV, with the approval of its Governing Board, may declare the managerial intervention (intervención) of a banking institution pursuant to Articles 129 through 146 of the Mexican Banking Law (a “CNBV Intervention”). In addition, the Governing Board of IPAB may also appoint a peremptory manager (administrador cautelar) if IPAB provides liquidity, in accordance with applicable law, to a banking institution.
A CNBV Intervention pursuant to Articles 129 through 146 of the Mexican Banking Law will only occur when (i) during a calendar month, the Capital Ratio of a bank is reduced from a level equal to or below the minimum Capital Ratio required under Article 50 of the Mexican Banking Law, to 50% or less than such minimum Capital Ratio, (ii) the bank does not maintain the minimum Capital Ratio required in accordance with the Mexican Banking Law, and such bank does not operate under the conditional regime referred to in article 29 Bis 2 of the law, or (iii) the bank (a) for an amount in pesos exceeding the equivalent of twenty million UDIs (1) does not pay loans granted by another bank, foreign financial entity or the Mexican Central Bank, or (2) does not pay the principal and interest amounts of securities issued by it and deposited in a securities deposit institution, (b) within two or more business days and for an amount in pesos exceeding the equivalent of two million UDIs (1) does not pay one or more participants the amounts due under any compensation process carried out through a clearinghouse or central counterparty, or does not pay three or more checks for a total amount of two million UDIs, that have been excluded from a clearinghouse for causes attributable to the drawee institution in terms of the applicable provisions, or (2) does not pay in the bank windows of two or more branches the banking deposits and cash withdrawals carried out by 100 or more of their customers and that total said amount.
The peremptory manager will be appointed by IPAB, if IPAB has granted extraordinary financial support to a bank in accordance with the Mexican Banking Law. The peremptory manager appointed by IPAB will assume the authority of the Board of Directors and the shareholders. The peremptory manager will have the authority to represent and manage the bank with the broadest powers under Mexican law, will prepare and submit to IPAB the bank’s budget (for approval), will be authorized to contract liabilities, make investments, undertake acquisitions or dispositions and incur expenses, is authorized to hire and fire personnel and may suspend operations. The appointment of the peremptory manager must be registered in the Public Registry of Commerce of the corresponding domicile.
Revocation of a License; Payment of Guaranteed Obligations
Revocation of Banking License. In the case that the CNBV revokes a license to be organized and operate as a banking institution, IPAB’s Governing Board will determine the manner under which the corresponding banking institution shall be dissolved and liquidated in accordance with Articles 166 through 187 of the Mexican Banking Law. In such a case, IPAB’s Governing Board may determine to carry out the liquidation through any or a combination of the following transactions: (i) transfer the liabilities and assets of the banking institution in liquidation to another banking institution directly or indirectly through a trust set up for such purposes; (ii) constitute, organize and manage a new banking institution owned and operated directly by IPAB with the exclusive purpose of transferring the liabilities and assets of the banking institution in liquidation; or (iii) any other alternative that may be determined within the limits and conditions provided by the Mexican Banking Law that IPAB considers as the best and least expensive option to protect the interests of bank depositors. As described above, amendments to the Mexican Banking Law approved by the Mexican Congress will substitute these provisions.
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Causes to Revoke a Banking License. The following are the events upon which the CNBV may revoke a banking license:
(i) | if a shareholder decision is made to request the revocation; |
(ii) | if the banking institution is dissolved or initiates liquidation procedures; |
(iii) | if the banking institution (a) does not comply with any minimum corrective measures ordered by the CNBV pursuant to Article 122 of the Mexican Banking Law, (b) does not comply with more than one special corrective measure ordered by the CNBV pursuant to such Article 134 Bis 1, or (c) repeatedly does not comply with an additional special corrective measure ordered by the CNBV; |
(iv) | if the banking institution does not comply with the minimum Capital Ratio required under the Mexican Capitalization Requirements; |
(v) | if the banking institution (a) does not timely repay loans or debt securities issued or (b) does not timely pay deposits or clear checks; |
(vi) | if the banking institution repeatedly undertakes prohibited or sanctioned transactions in accordance with the Mexican Banking Law or if it continues not complying with preventive or corrective actions imposed by the CNBV; or |
(vii) | if the banking institution does not have sufficient assets to cover its liabilities in accordance with Article 226 of the Mexican Banking Law. |
Upon publication of the resolution of the CNBV revoking a banking license in the Federal Official Gazette and in two newspapers of wide distribution in México and registration of such resolution with the corresponding Public Registry of Commerce, the relevant banking institution will be dissolved and liquidation will be initiated. Upon liquidation or the declaration of bankruptcy of a banking institution, IPAB is required to proceed to make payment of all “guaranteed obligations” of the relevant banking institution in accordance with the terms and conditions set forth in the Mexican Banking Law and the IPAB law.
Liabilities owed by the banking institution in liquidation will be paid in the following order of preference: (i) secured claims, (ii) labor claims and tax claims, (iii) claims entitled to special privileges under applicable law, (iv) claims guaranteed by IPAB, up to the amount guaranteed by IPAB, (v) claims in excess of the amount guaranteed by IPAB, (vi) other senior claims, (vii) subordinated preferred debentures, and (viii) subordinated non-preferred debentures. The remainder, if any, shall be paid to the shareholders.
Financial Support
Determination by the Banking Stability Committee. The BSC includes representatives of the SHCP, the Mexican Central Bank, the CNBV and IPAB. In the case that the BSC determines that if a bank were to default on its payment obligations and such default may (i) generate severe negative effects in one or more commercial banks or other financial entities, endangering their financial stability or solvency, and such circumstance may affect the stability or solvency of the financial system, or (ii) result in the operation of the payments’ system to be put at risk, then the BSC may determine, on a case-by-case basis, that a general percentage of all of the outstanding obligations of the troubled bank that are not considered “guaranteed obligations” under the IPAB Law and guaranteed obligations in amounts equal to or higher than the amount set forth under Article 11 of the IPAB Law (400,000 UDIs per person per entity), be paid as a means to avoid the occurrence of any of such circumstances. Notwithstanding the foregoing, under no circumstance may transactions such as liabilities or deposits in favor of shareholders, members of the Board of Directors and certain senior officers, and certain illegal transactions or the liabilities resulting from the issuance of subordinated debentures, be covered or paid by IPAB or any other Mexican governmental agency.
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Types of Financial Support. In the case that the BSC makes the determination referred to in the prior paragraph, then IPAB’s Governing Board will determine the manner according to which the troubled commercial bank will receive financial support, which may be through either of the following options:
(a) | If the BSC determines that the full amount of all of the outstanding liabilities of the relevant troubled bank (guaranteed and non-guaranteed) must be paid, then the financial support may be implemented through (i) capital contributions granted by IPAB in accordance with the Mexican Banking Law, or (ii) credit support granted by IPAB also in accordance the Mexican Banking Law, and in either case the CNBV shall refrain from revoking the banking license granted to such commercial bank. |
(b) | If the BSC determines that less than the full amount of all of the outstanding liabilities of the troubled commercial bank (guaranteed and non-guaranteed) must be paid, then the support will consist of transferring the assets and liabilities of such bank to any third party, as set forth in Articles 188 through 197 of the Mexican Banking Law. |
Conditional Management Regime. As an alternative to revoking the banking license, a new conditional management regime was created, which can be established in respect of commercial banks with a Capital Ratio below the minimum required pursuant to the Mexican Capitalization Requirements. To adopt this regime, the relevant bank, with prior approval of its shareholders, must voluntarily request from the CNBV the application of the conditional management regime. To qualify for such regime, the relevant commercial bank should (i) deliver to the CNBV a plan for the reconstitution of its capital, and (ii) transfer at least 75% of its shares to an irrevocable trust.
Banking institutions with a Capital Ratio equal to or below 50% of the minimum Capital Ratio required by the Mexican Capitalization Requirements may not adopt the conditional management regime.
Capitalization
The minimum subscribed and paid-in capital for banks is set in accordance with three different components: credit risk, market risk and operational risk. Pursuant to the Mexican Banking Law and the General Rules Applicable to Mexican Banks, banks may participate in any of the activities and render the services as provided under Article 46 of the Mexican Banking Law, as well as those permitted under other laws, depending on its capital level.
In accordance with the capitalization rules currently in effect, the minimum equity capital required for banks that engage in all banking activities under the Mexican Banking Law (such as Banco Santander México) is 90,000,000 UDIs.
The Mexican Capitalization Requirements set forth the methodology to determine the net capital (capital neto) relative to market risk, credit risk and operational risk. Under the relevant regulations, the CNBV may impose additional capital requirements. The Mexican Capitalization Requirements provide capitalization standards for Mexican banks similar to international capitalization standards, particularly with respect to the recommendations of the Basel Committee on Banking Regulations and Supervisory Practices, or the Basel Committee, which includes the supervisory authorities of twelve major industrial countries.
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The General Rules Applicable to Mexican Banks, currently specify that Mexican banks may be classified in several categories based on their Capital Ratio, Tier 1 capital and Fundamental Tier 1 Capital. The relevant corrective measures applicable to the Bank are determined based on the following classifications:
| | | | | | | | | |
Class |
|
| Capital Ratio |
|
| Tier 1 Capital |
|
| Fundamental Tier 1 Capital |
Class I | |
| Equal to or greater than 10.5% | |
| Equal to or greater than 8.5% | |
| Equal to or greater than 7% |
Class II | |
| Equal to or greater than 10.5% | |
| Equal to or greater than 6% | |
| Equal to or greater than 4.5% |
Class II | |
| Equal to or greater than 8% and less than 10.5% | |
| Equal to or greater than 6% | |
| Equal to or greater than 4.5% |
Class III | |
| Equal to or greater than 8% | |
| Less than 6.0% | |
| Equal to or greater than 4.5% |
Class III | |
| Equal to or greater than 7% and less than 8% | |
| Equal to or greater than 6% | |
| Equal to or greater than 4.5% |
Class IV | |
| Equal to or greater than 7% and less than 8% | |
| Less than 6% | |
| Equal to or greater than 4.5% |
Class IV | |
| Equal to or Greater than 4.5% and less than 7% | |
| Equal to or greater than 4.5% | |
| Equal to or greater than 4.5% |
Class V | |
| Less than 4.5% | |
| Not Applicable | |
| Less than 4.5% |
In cases in which the CNBV determines a Multiple Banking Institution as being of Local Systemic Importance, such institution is required to have a capital conservation supplement of the percentage determined by the CNBV, within a four year period ending in 2019. In April 29, 2016, the Bank was appointed by the CNBV as a systemic important bank, assigning a Grade III of systemic importance. As a result, the Bank should progressively constitute in four years a capital preservation supplement of 1.20%, starting 2016.
As of December 31, 2022, the Bank has constituted 100% of the capital preservation supplement required.
This table is based upon the table set forth in Article 220 of the General Rules Applicable to Mexican Banks, which should be consulted for a complete understanding of the applicable requirements.
Furthermore, the General Rules Applicable to Mexican Banks provide that none of Capital Ratio, Tier 1 capital or Fundamental Tier 1 Capital shall be subject to a maximum limit if (a) the Capital Ratio is equal to or exceeds 10.5%, (b) Tier 1 capital is equal to or exceeds 8.5%, and (c) Fundamental Tier 1 Capital is equal to or exceeds 7.0%
For clarification purposes, Tier 1 capital means the two components of Tier 1 capital (Fundamental Tier 1 Capital and Non-fundamental Tier 1 Capital) as such terms are defined in the Rules for Capitalization. Fundamental Tier 1 Capital means only the basic or fundamental amount of Tier 1 capital (excluding Non-fundamental Tier 1 Capital) as such term is defined in the Rules for Capitalization, as further described below. Tier 2 capital refers to the additional portion (parte complementaria) of total net capital; as such term is defined in the Rules for Capitalization. Tier 1 capital refers to the basic portion (parte básica) of total net capital, as such term is defined in the Rules for Capitalization.
Aggregate net capital consists of Tier 1 capital and Tier 2 capital. The Mexican Capitalization Requirements include among the Fundamental Tier 1 Capital, mainly, paid-in capital, which represents the most subordinated right to collect in case of liquidation of a credit institution, which are not due and do not grant reimbursement rights, profits (mainly including retained profits), and capital reserves, and subtract from such Fundamental Tier 1 Capital, among other things, certain subordinated debt instruments, issued by financial and non-financial entities, securities representing residual parts of portfolio securitization, investments in the equity of venture-capital funds and investments in or credits to related companies (only in instances where they exceed certain thresholds), reserves pending creation, loans and other transactions that contravene applicable law, and intangibles (including goodwill). Non-fundamental Tier 1 capital is comprised of preferential shares, regarding which the issuer has the right to cancel the dividend payments, and subordinated debt instruments, which are not subject to a due date or forced conversion, regarding which it is possible to cancel the interest payments and which may become shares of a credit institution or a controlling entity or are subject to cancellation (when capitalization problems arise).
The supplementary part of basic capital (Tier 2) comprises capitalization instruments, which are subordinated to deposits and any other debt of the credit institution, do not have any specific guarantee, have a term of at least five years and are convertible into shares at their maturity date or are subject of
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write-down procedures, and the difference between total admissible reserves and total expected losses up to an amount that does not exceed 0.6% of weighted assets by credit risk. These instruments shall be included as capital based on their maturity date: 100% if the due date exceeds five years, 80% if the due date exceeds four years but is less than five years, 60% if the due date exceeds three years but is less than four years, 40% if the due date exceeds two years but is less than three years, 20% if the due date exceeds one year but is less than two years, and 0% if the due date is less than one year.
The General Rules Applicable to Mexican Banks require Mexican banks to maintain a mandatory capital conservation buffer of 2.5% of risk-weighted assets, or RWA, resulting in a 10.5% minimum total capital (including the capital conservation buffer), plus a systemically important bank supplement of the percentage determined by the CNBV, within a four year period ending in 2019, and a countercyclical capital supplement. We have remained in compliance with the regulations in the sixth year of application, demonstrating that we have been fully compliant since such regulations’ establishment.
Every Mexican bank must create certain legal reserves (fondo de reserva) that are considered to be part of Tier 1 capital. Banks must separate and allocate 10.0% of their net income to such reserve each year until the legal reserve equals 100.0% of their paid-in capital (without adjustment for inflation). The remainder of net income, to the extent not distributed to shareholders as dividends, is added to the retained earnings account. Under Mexican law, dividends may not be paid out against the legal reserve.
Corrective Measures
The Mexican Banking Law and the General Rules Applicable to Mexican Banks establish the minimum corrective and special additional measures that banks must fulfill according to the category in which they were classified based on their capital. These corrective measures are designed to prevent and, when necessary, correct the operations of the banks that could negatively affect their solvency or financial stability. The CNBV is required to notify the relevant bank in writing of the corrective measures that it must observe, within five business days after the Mexican Central Bank has notified the CNBV the capitalization ratio of the bank, as well as verify its compliance with the corrective measures imposed. Class I is exempted from any corrective measure, but for the remainder of the categories such corrective measures include:
For Class II:
(a) | requiring the bank to (i) inform the Board of Directors about the bank’s classification, as well as the causes that caused the CNBV to make such classification, and submit a detailed report containing a comprehensive evaluation of the bank’s financial situation, its level of compliance with the regulatory framework and the main indicators that reflect the degree of stability and solvency of the bank, within 20 business days after the bank has received the CNBV notification of the corrective measure, (ii) include in such report any observations mandated, in accordance with their respective scope of authority, by each of the CNBV and the Mexican Central Bank, (iii) report in writing the financial situation to the chief executive officer and chairman of the board of directors of the bank or the board of directors of the bank’s holding company, in the event the bank is part of a financial group, (iv) abstain from entering transactions that will cause its Capital Ratio to be lower than required under the Capitalization Requirements, (v) abstain from increasing the current amounts of the financings granted to relevant related parties, and (vi) submit for approval to the CNBV, a plan for capital restoration which has as a result an increase of its Capital Ratio in order for the institution to be placed in Class I. Such plan shall be presented to the CNBV no later than 20 business days after the date the bank receives the CNBV notification of the corrective measure; |
For Class III and above:
(b) | requiring the bank’s Board of Directors to (i) within 15 business days as of the notice of its classification, submit to the CNBV, for its approval, a plan for capital restoration that will result in an increase in its Capital Ratio, which may contemplate a program for improvement in operational efficiency, streamlining |
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costs and increasing profitability, the carrying out of contributions to the capital and limits to the operations that the banks may carry out in compliance with their bylaws, or to the risks derived from such operations. The capital restoration plan shall be approved by such bank’s Board of Directors before being presented to the CNBV. The bank shall determine in the capital restoration plan that, in accordance with this subsection, it must submit, periodic targets, as well as the date in which the capital of such bank will get the capitalization level required in accordance with the applicable provisions. The CNBV, through its governing Board, must resolve all that corresponds to the capital restoration plan that has been presented to them, in a maximum of 60 calendar days from the date the plan was submitted; and (ii) comply with the plan within the period specified by the CNBV, which in no case may exceed 270 calendar days starting the day after the bank was notified of the respective approval. To determine the period for the completion of the restoration plan, the CNBV shall take into consideration the bank’s category, its financial situation, as well as the general conditions prevailing in the financial market. The CNBV, by agreement of its governing Board, may extend the deadline once by a period that will not exceed 90 calendar days. The CNBV will monitor and verify compliance with the capital restoration plan, without prejudice of the provenance of other corrective measures depending on the category in which the corresponding bank is classified; |
(c) | requiring the bank to suspend any payment of dividends to its shareholders, as well as any mechanism or act that involves the transfer of any economic benefits to the shareholders. If the bank belongs to the holding company, the measure provided in this subsection will apply to the holding company to which the bank belongs, as well as the financial entities or companies that are part of such holding company. This restriction on the payment of dividends for entities that are part of the same financial group will not apply in the event the dividend is being applied to the capitalization of the bank; |
(d) | requiring the bank to suspend any capital stock repurchase programs of the bank and, in the event that the bank belongs to a financial group, also the programs of the holding company of such group; |
(e) | requiring the bank to defer or cancel the interest payments on outstanding subordinated debt and, when applicable, defer the payment of the principal or exchange the debt into shares of the bank in the amount necessary to cover the capital deficiency, in advance and proportionately, according to the nature of such obligations. This corrective measure will be applicable to those obligations that are identified as subordinated debt in their indenture or issuance document; |
(f) | requiring the bank to suspend payment of any extraordinary benefits and bonuses that are not a component of the ordinary salary of the chief executive officer or any officer within the next two levels, as well as not granting any new benefits in the future for the chief executive officer and the officers until the bank complies with the minimum levels of capitalization required by the CNBV in accordance with the provisions referred to in Article 50 of the Mexican Banking Law; |
(g) | requiring the bank to refrain from increasing outstanding amounts of any credit granted to any individual who is a related party. |
For Class IV and above:
(h) | requiring the bank to request authorization from the CNBV to undertake new investments on non-financial assets, open branches or perform activities other than those made in the ordinary course of business, provided those investments or activities do not require authorization from SHCP or the Mexican Central Bank; and |
(i) | requiring the bank to undertake other corrective measures provided for in the general rules of Articles 225 I and IV and 226, 227 and 228 of the General Rules Applicable to Mexican Banks and Article 134 Bis 1 of the Mexican Banking Law (which are the General Rules Applicable to Mexican Banks), from time to time. |
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Regardless of the Capital Ratio of the banks, the CNBV may order the implementation of additional and special corrective measures. The additional and special corrective measures that, if applicable, the banks must comply with are: (a) define the concrete actions that it will carry out in order not to deteriorate its Capital Ratio; (b) hire the services of external auditors or any other specialized third party for special audits on specific issues; (c) refrain from agreeing to increases in the salaries and benefits of the officers and employees in general, except for agreed salary revisions and in compliance with labor rights; (d) substitute officers, members of the Board or external auditors with appointed persons occupying the respective positions; or (e) undergo other actions or be subject to other limitations as determined by the CNBV, based on the result of its functions of monitoring and inspection, as well as with sound banking and financial practices.
On July 26, 2010, the Group of Governors and Heads of Supervision, the oversight body of the Basel Committee, reached broad agreement on the overall design of a capital and liquidity reform package for internationally active banking organizations around the world, known as Basel III, which includes, among other things, the definition of capital, the treatment of counterparty credit risk, the leverage ratio and the global liquidity standard. On September 12, 2010, the Basel Committee announced a substantial strengthening of existing capital requirements in connection with Basel III. The full text of the Basel III rules and the results of a quantitative impact study to determine the effects of the reforms on banking organizations were published on December 16, 2010.
The Basel III rules for capitalization were implemented in México through an amendment to the General Rules Applicable to Mexican Banks published in the Federal Official Gazette on November 28, 2012, effective as of January 1, 2013. Banco Santander México currently complies with the minimum capital requirement.
Compliance with regulatory ratios
As part of its liquidity management model, in recent years the Bank has been managing the implementation, monitoring and early compliance with the new liquidity requirements set by international financial legislation.
In 2014, following the approval by the Basel Committee of the final definition of the short-term liquidity coverage ratio (LCR), the delegated act of the European Commission was adopted, which, within the scope of the Capital Requirements Directives (CRD) IV, defines the criteria for calculating and implementing this metric in the European Union. The implementation was delayed until October 2015, although the level of initial compliance was at 60% in 2015, which should gradually increase to 100% by 2019. Our LCR levels exceeded 100% throughout 2019, thereby surpassing regulatory requirements.
On December 31, 2014, the CNBV and the Mexican Central Bank published in the Federal Official Gazette, the “General Liquidity Requirements for Banking Institutions”, in accordance with those provided by the Banking Liquidity Regulation Committee on October 17, 2014. Such requirements entered into effect on January 1, 2015.
On December 31, 2015, the CNBV published in the Federal Official Gazette, a resolution modifying the General Liquidity Requirements for Banking Institutions. Such resolution entered into effect on January 1, 2016.
On June 22, 2016, the CNBV published in the Federal Official Gazette a resolution establishing the methodology to calculate the leverage ratio for banking institutions. Such resolution entered into effect on September 1, 2016. Our leverage ratio as of December 31, 2022 was 7.13%. We are currently in compliance with these requirements. This ratio is calculated as Tier 1 capital divided by leverage exposure. Exposure is calculated as the sum of the following items:
● | Accounting assets, excluding derivatives and items treated as deductions from Tier 1 capital (for example, the balance of loans is included, but not that of goodwill). |
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● | Off-balance-sheet items (mainly guarantees, unused credit limits granted and documentary credits) weighted using credit conversion factors. |
● | The net value of derivatives (gains and losses vis-à-vis the same counterparty are netted, less the collateral if certain conditions are met) plus an add-on for potential future exposure. |
● | An add-on for the potential exposure of securities financing transactions. |
Reserve and Compulsory Deposit Requirements
The compulsory reserve requirement is one of the monetary policy instruments used as a mechanism to control the liquidity of the Mexican economy to reduce inflation. The objective of the Mexican Central Bank’s monetary policy is to maintain the stability of the purchasing power of the Mexican peso and in this context, to maintain a low inflation level. Given the historic inflation levels in México, the efforts of the Mexican Central Bank have been directed towards a restrictive monetary policy.
Under the Law of the Mexican Central Bank, the Mexican Central Bank has the authority to determine the percentage of the liabilities of financial institutions that must be deposited in interest or non-interest-bearing deposits with the Mexican Central Bank (Depósitos de Regulación Monetaria). These deposits may not exceed 20% of the aggregate liabilities of the relevant financial institution. The Mexican Central Bank also has the authority to order that 100% of the liabilities of Mexican banks resulting from specific funding purposes, or pursuant to special legal regimes, be invested in specific assets created in respect of any such purpose or regime.
The Mexican Central Bank imposes reserve and compulsory deposit requirements on Mexican commercial banks. Bulletin 09/2014 published on June 17, 2014, stated that the total compulsory reserve deposit required of Mexican commercial banks was Ps.278.5 billion, which had to be deposited by June 19, 2014. The amount of the deposit that each bank had to make was equal to the amount of the compulsory deposits allocated as of June 18, 2014. Additionally, according to Bulletin 11/2014 published on June 25, 2014, an additional deposit of Ps.41.5 billion was required which had to be deposited in four installments, on August 14, September 11, October 9 and November 6, 2014. The amount of the deposit that each bank had to make was determined based on the total amount of the traditional customer deposits in Mexican pesos of each Mexican bank as of May 31, 2014.
The compulsory deposit reserves required under the terms of Bulletins 09/2014 and 11/2014 have an indefinite term. During the time these reserves are maintained on deposit with the Mexican Central Bank, each banking institution receives interest on such deposits every 27, 28, 29 or 30 days so that each last day of the period falls on a Thursday. The Mexican Central Bank will provide advance notice of the date and the procedure to withdraw the balance of these compulsory deposits at such time, if any, that the compulsory deposit reserves are suspended or terminated.
In order to promote the development of the Mexican monetary policy, on May 12, 2016, the Mexican Central Bank published in the Federal Official Gazette the rules for the auction by the Mexican Central Bank of Bonos de Regulación Monetaria Reportables (BREMS R) as an alternative for credit institutions to comply with their compulsory deposit requirements. The BREMS R can only be acquired by Mexican credit institutions through auctions made by the Mexican Central Bank and by means of repurchase transactions (reportos) between the Mexican Central Bank and the financial entities, or among financial entities, in accordance with the regulations set forth by the Mexican Central Bank. The BREMS R held by financial institutions shall be sold to the Mexican Central Bank at the date and in accordance with the terms included in general resolutions to be issued by the Mexican Central Bank. Furthermore, on June 13, 2019, the Mexican Central Bank issued Bulletin 9/2019, allowing banking institutions to use their BREMS R to secure overdrafts (sobregiros) in its sole account (cuenta única) at the Mexican Central Bank.
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On April 1, 2020, the Mexican Central Bank in order to promote the healthy development of the financial system as a consequence of COVID-19 pandemic reduced the total amount of compulsory deposits through which it regulates excess liquidity in the money market, so that banks may have additional resources to strengthen the continuity of their active operations, while maintaining an adequate implementation of monetary policy. We reduced our compulsory deposits by Ps.4,116 million.
As of December 31, 2022, the Bank held a BREMS R position amounting to Ps.7,799 million, which were purchased with funds arising from the cancelation of the compulsory deposits by the Mexican Central Bank.
Classification of Loans and Allowance for Impairment Losses
Non-performing loan portfolio
We apply the following criteria to classify loans as credit-impaired or non-performing loans:
● | Commercial, financial and industrial loans |
- | Loans with a single payment of principal and interest (non-amortizing loans), generally commercial loans for a short period of time, are considered impaired after 90 days in material arrears (DMA) of the maturity date. |
- | Loans with a single payment of principal at maturity and with periodic interest payments (interest-only loans) are considered impaired 90 days in material arrears after principal or interest become due. |
- | Loans whose principal and interest payments have been agreed in periodic installments (amortizing loans) are considered impaired 90 days in material arrears after an installment becomes due. |
● | Mortgage loans |
- | Mortgage loans are considered impaired when a payment is past due more than 90 days in material arrears. |
● | Installment loans to individuals |
- | Revolving consumer credit cards loans are considered impaired when payment is not received 90 days in material arrears after they become due. |
- | Non-revolving consumer loans whose principal and interest payments have been agreed in periodic installments are considered impaired 90 days in material arrears after an installment becomes due. |
● | If the borrower is declared or deemed to be bankrupt in accordance with the Mexican Commercial Bankruptcy Law. |
We also consider as credit-impaired the sum of all customer’s transactions when its loan balance categorized as credit-impaired is equivalent to more than 20% of its outstanding amount, or when the recently twelve months written-off balance represents more than 5% of the customer’s outstanding balance.
Any loans which are not impaired due to default but for which there are reasonable doubts about their full repayment (principal and interest) according to their contractual terms are considered impaired loans and are classified as Stage 1 loans in accordance with Mexican Banking GAAP. This analysis includes, among others, customers in situations involving deterioration in their creditworthiness, such as negative equity,
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continued losses, general delay in payments, inadequate economic or financial structure and insufficient cash flows to settle debt or inability to obtain additional financing, etc.
Credit-impaired loan that are classified as Stage 1 loans and are renegotiated will remain impaired until there exists evidence of sustained payment. Sustained payment is considered as the payment by the borrower without payment delay for the total amount due and payable in terms of principal and interest during certain period of time.
Loans in default are classified as Stage 2 loans under Mexican Banking GAAP. A loan is considered to be no longer in default (i.e., to have been cured) when all the contractual payments have been settled and a three-month probation period has elapsed, during which, the loan remains classified as Stage2. For those cases in which the borrower is in long-term forbearance and the financial asset does not fulfill the criteria to be considered as impaired, a twelve-month probation period is necessary in order to be considered as not impaired.
The entire loan balance relating to impaired assets continue to be recognized on the consolidated balance sheet, for their full amounts, until the recovery of any recognized amount is considered to be unlikely. The recovery of a loan is considered to be unlikely when there is a significant and irreversible deterioration of the borrower’s overall financial condition, resources, value of any guarantees and payment record which would lead a borrower to bankruptcy.
When the recovery of a loan is considered to be unlikely, it is written-off together with the corresponding allowance for impairment losses from the consolidated balance sheet without prejudice to any actions that the Bank may initiate to seek collection until their contractual rights are extinguished due to the expiration of the statute-of-limitations period, forgiveness or any other cause.
Loans and the related allowance for impairment losses are written-off considering the following:
● | Commercial, financial and industrial loans are evaluated on a case-by-case basis; as such, write-off will only take place after considering all relevant information such as the occurrence of a significant change in the borrower’s financial position, guarantees collateral and payment records. Within this portfolio, SME loans and revolving SME loans are written-off when the loans become 181 days and 151 days past due, respectively. |
● | Mortgage loans are written-off when they have been past due for 36 months. |
● | For installment loans to individuals, any portion of the balance that the Bank does not expect to collect is written-off at 151 days past due for revolving consumer credit card loans and 181 days past due for other non-revolving consumer loans. |
In the event of bankruptcy or similar proceedings, write-off may occur earlier than at the periods stated above. Collections procedures may continue after write-off.
In accordance with Mexican Banking GAAP, non-performing loans are classified as Stage 3 loans based on the following criteria:
● | Loans with a single payment of principal and interest at maturity are considered in Stage 3, 30 calendar days after the date of maturity. |
● | Loans with a single payment of principal at maturity and with scheduled interest payments are considered Stage 3, 30 calendar days after principal becomes past due and 90 calendar days after interest becomes past due. |
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● | Loans with a payment of principal and interest had been agreed to in scheduled payments are considered Stage 3, 90 days after the first installment is due. |
● | In the case of revolving credit, loans are considered Stage 3 when payment has not been received for two normal successive billing periods, or 60 days after they become due. |
● | Mortgage loans with periodic payments of principal and interest are considered Stage 3 when a payment is 90 days or more past due. |
● | Customer bank accounts showing overdrafts are reported as non-performing loans at the time the overdraft occurs. |
● | If the debtor files for bankruptcy protection, except for those loans: |
● | That continue to receive payments in terms of the provisions of section VIII of Article 43 of the Mexican Commercial Bankruptcy Law, or |
● | That have been granted under Article 75, Sections II and III of Article 224 of the Mexican Commercial Bankruptcy Law, applying different adjustment factors or deductions with respect to each type of guarantee. |
For Mexican Banking GAAP purposes, restructured or renewed Stage 3 loans are not considered as performing until there is evidence of sustained payment; i.e., evidence of payment by the borrower without arrears for the total amount due and payable in terms of principal and interest, for at least three consecutive installments under the credit payment scheme, or in the case of credits with installments that cover periods in excess of 60 calendar days, the payment of one installment as established in Mexican Banking GAAP.
Loans with a single payment of principal upon maturity and periodic payments of interest, which were restructured or renewed during the loan term, are considered as non-performing until there is evidence of sustained payment, as well as those in which at least 80% of the original term of the loan has not elapsed, which did not cover the total amount of the accrued interest or cover the principal of the original amount of the loan, and which should have been settled as of the date of renewal or restructuring in question. Sustained payment is evidenced when the borrower has paid at least 20% of the capital of the loan at the time of the restructuring or renewal, or when the borrower has paid the amount of accrued interest related to a period of 90 days under the restructuring or renewal scheduled payment.
Interest is recognized in income when it is accrued. However, the accrual of interest is suspended when loans become non-performing.
Likewise, the loans which are not yet impaired but for which there is reasonable doubt that they will be repaid in full according to their contractual terms are considered impaired loans. This analysis includes, among others, customers in situations involving deterioration in their creditworthiness, such as negative equity, continued losses, general delay in payments, inadequate economic or financial structure and insufficient cash flows to settle debt or inability to obtain additional financing.
Classification of loans and allowance for impairment losses under Mexican Banking GAAP
The loan classification and rating rules set forth under the General Rules Applicable to Mexican Banks, provide a General Methodology to classify (i) consumer loans (i.e., each of credit card exposure and loans to individuals, divided as separate groups), considering as principal elements (a) for credit card exposure, the possibility of non-payment and potential losses, and (b) for loans to individuals, the possibility of non-payment, potential losses (taking into account collateral and guarantees received), and credit exposure (net of allowance for impairment losses); (ii) mortgage loans (i.e., residential, including loans for construction, remodeling or improvements), considering as principal elements delinquency periods,
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possibility of non-payment and potential losses (taking into account collateral and guarantees received); and (iii) commercial loans, based principally on an evaluation of the borrower’s ability to repay its loan (including country risk, financial risk, industry risk and payment history) and an evaluation of the related collateral and guarantees.
The loan classification and rating rules also permit banks, subject to prior approval by the CNBV, to develop and adopt specific internal methodologies within certain parameters to grade the loans in their loan portfolio.
Generally, our subsidiaries follow the methodology set forth in the loan classification and rating rules. However, we received approval from the CNBV, to use our internal models to determine our allowance for impairment losses under Mexican Banking GAAP as an alternative to the standard generic models developed by the CNBV. Through different notes, the CNBV authorized the use of the Internal Methodology with Basic Approach (Metodología Interna con Enfoque Básico), or MIEB, and the Internal Methodology with Advanced Approach (Metodología Interna con Enfoque Avanzado) or MIEA, set forth in the Regulations, in order for us to determine the preliminary estimation of credit risk in the commercial loan portfolio.
● | We use the MIEB for the following segments: Corporate and Investment Banking and Financial Institutions; and |
● | We use the MIEA for the following segments: Middle Market Corporations, Real Estate Companies, and Mortgages. |
Within the amendments made to the Mexican Banking GAAP derived from the adequacy of the accounting criteria, as well as the classification and qualification of the credit portfolio to the IFRS 9 standard, the regulator requested that the portfolios with Internal Models for capital calculation currently approved by CNBV must have NIF C-16 (IFRS 9 Local) models before June 30, 2023, otherwise, the currently approved internal models should be abandoned. At the end of December 2022, Banco Santander México has implemented the models under internal NIF C16 methodologies for all models subject to this requirement.
Our internal methodology predicts expected losses more accurately than the standard methodology because it is based on the particular characteristics of our loan portfolio, whereas the standard methodology approved by the CNBV is based on the Mexican banking sector as a whole, which has a higher risk profile than us. While our internal methodology has resulted in the calculation of probabilities of default that are lower than the probabilities of default calculated and established by the CNBV in its standard methodology, the use of an internal methodology does not necessarily result in a reduction of capital requirements or in the allowance for impairment losses.
The internal models under NIF C16 consists of determining the probability of breach through a rating procedure that contemplates a quantitative or statistic module based on financial information of the client and a qualitative or expert module, based on the analyst opinion, who grades the variables of the model based on his experience and on the financial and expert analysis performed by the entity.
The automatic valuation is obtained from a linear regression model, in which variables are comprised by financial and credit information of the company in addition to the responses to a closed questionnaire to be analyzed by the expert analyst. The variables used have been previously identified as the ones which can more accurately predict the breach potential of an entity.
As a part of the internal models NIF C16 with Advanced Approach, the loss given default is determined, considering:
● | The internal experience of the recovery flows of the contracts in breach. |
● | Coherence with the definition of “default” proposed by Basel and the CNBV. |
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The loan classification and rating rules require that consumer loans to individuals be stratified on a loan-by-loan basis, considering the type of loan, amounts due, the number of unpaid billing periods applicable to the relevant loans, collateral received and other factors that may influence delinquency, on an expected loss basis; and that a statutory percentage be applied to loans that are past due for each level, as a means to create an allowance for impairment losses under Mexican Banking GAAP.
The loan classification and rating rules establish the following categories corresponding to levels of risk and applicable allowance for impairment losses and set forth procedures for the grading of commercial loans: A 1, A 2, B 1, B 2, B 3, C 1, C 2, D and E.
The allowance for impairment losses created in accordance with Mexican Banking GAAP may be decreased as the maturity of the applicable loan approaches and past due payments are made. Credit card loans must be reserved, on a loan-by-loan basis, considering amounts due, amounts paid to the relevant date, credit limits, and minimum payments required. Our total loans portfolio may be classified as A, B, C, D or E, depending upon the percentage of allowance required (from 0% to 100%); credit card consumer loans may be classified as A 1, A 2, B 1, B 2, B 3, C 1, C 2, D and E also depending upon the percentage of allowance required.
The grading of loans to government entities, such as states and municipalities, is also based on an expected loss model that is calculated on a loan-by-loan basis. In this model, the expected loss is based on both qualitative and quantitative characteristics of the debtor, as well as other factors established by the CNBV. The qualitative characteristics include socioeconomic risk and financial strength. The quantitative characteristics include payment experience, coverage of the debtor by rating agencies and financial statement ratios that capture the financial risk of the debtor.
The grading of commercial loan portfolios is also based on an expected loss model that is calculated on a loan-by-loan basis under Mexican Banking GAAP. In this model, the expected loss is based on both qualitative and quantitative characteristics of the debtor, as well on the type and coverage of the collateral and guarantees that cover the loans. The qualitative characteristics include country and industry risk, market position, corporate governance and quality of the management. The quantitative characteristics include payment experience in the credit bureau, payment experience with Infonavit and financial statement ratios that capture the financial risk of the debtor.
The loan classification and rating rules require that Mexican banks grade their commercial loan portfolio (except loans made to or guaranteed by the Mexican government) as of the end of each quarter and the classification must be reported to the CNBV. The classification of mortgage and consumer loans is required to be made monthly and reported to the CNBV.
All write-offs of uncollectible loans are recorded against the allowance for impairment losses. Mexican banks may write-off loans, once they demonstrate they have made all reasonable efforts to recover them and no further relevant recoveries are expected.
The allowance for impairment losses under IFRS 9 requirements differs in some significant respects from the allowance for impairment losses requirements under Mexican Banking GAAP. Both under IFRS and under Mexican Banking GAAP, we estimate the impairment of loans and receivables using an expected loss model. However, under IFRS 9 models are developed based on our historical experience of impairment and other circumstances known at the time of assessment, while under Mexican Banking GAAP, impairment losses are determined using prescribed formulas that are based primarily on an expected losses model developed by the CNBV using losses information compiled from the Mexican lending market as a whole, which may differ significantly from our credit loss experience. In addition, to these differences, IFRS 9 uses a different definition of default (New Definition of Default) both for portfolio classification and model development.
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The Bank defines a financial asset as being in default under IFRS 9 when either or both of the following conditions have taken place:
● | The obligor is past due more than 90 consecutive days on any material credit obligation (including any amount of principal, interest or fee), and/or |
● | There are indications that the obligor is unlikely to pay its credit obligations under a credit facility in full, without recurring to actions such as foreclosing on collateral. |
Liquidity Requirements for Foreign Currency-Denominated Liabilities
Pursuant to regulations of the Mexican Central Bank, the total amount of maturity-adjusted (by applying a factor, depending upon the maturity of the relevant liability) net liabilities denominated or indexed to foreign currencies that Mexican banks, their subsidiaries or their foreign agencies or branches may maintain (calculated daily), is limited to 1.83 times the amount of their Tier 1 capital. To calculate such limit, maturity-adjusted foreign currency-denominated or indexed assets (including liquid assets, assets with a maturity of less than one year, short-term derivatives and spot foreign exchange transactions) are subtracted from maturity-adjusted foreign currency-denominated or indexed liabilities, and the aforementioned factor is applied to the resulting amount.
The maturity-adjusted net liabilities of Mexican banks denominated or indexed to foreign currencies (including dollars) are subject to a liquidity coefficient (i.e., to maintaining sufficient foreign currency-denominated or indexed liquid assets). These permitted liquid assets include, among others:
● | U.S. dollar-denominated cash or cash denominated in any other currency freely convertible; |
● | deposits with the Mexican Central Bank; |
● | treasury bills, treasury bonds and treasury notes issued by the U.S. government or debt certificates issued by agencies of the U.S. government, which have the unconditional guarantee of the United States government; |
● | demand deposits or one- to seven-day deposits in foreign financial institutions rated at least P-2 by Moody’s Investors Service, Inc., or Moody’s, or A-2 by Standard & Poor’s Rating Services, or S&P; |
● | investments in mutual or similar funds or companies approved by the Mexican Central Bank, that satisfy certain requirements; and |
● | unused lines of credit granted by foreign financial institutions rated at least P-2 by Moody’s or A-2 by S&P, subject to certain requirements. |
Such liquid assets may not be posted as collateral, lent or be subject to repurchase transactions or any other similar transactions that may limit their transferability.
Banco Santander México is in compliance with the applicable reserve requirement and liquidity coefficients in all material aspects.
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Lending Limits
In accordance with the General Rules Applicable to Mexican Banks, limits relating to the diversification of a bank’s lending transactions are determined in accordance with the bank’s compliance with Mexican Capitalization Requirements. For a bank with:
● | a Capital Ratio greater than 8.0% and up to 9.0%, the maximum financing exposure to a person or a group of persons representing common risk to the bank, is limited to 12.0% of the bank’s Tier 1 capital; |
● | a Capital Ratio greater than 9.0% and up to 10.0%, the maximum financing exposure to a person or a group of persons representing common risk to the bank is limited to 15.0% of the bank’s Tier 1 capital; |
● | a Capital Ratio greater than 10.0% and up to 12.0%, the maximum financing exposure to a person or a group of persons representing common risk to the bank is limited to 25.0% of the bank’s Tier 1 capital; |
● | a Capital Ratio greater than 12.0% and up to 15.0%, the maximum financing exposure to a person or a group of persons representing common risk to the bank is limited to 30.0% of the bank’s Tier 1 capital; and |
● | a Capital Ratio greater than 15.0%, the maximum financing exposure to a person or a group of persons representing common risk to the bank is limited to 40.0% of the bank’s Tier 1 capital. |
These lending limits are required to be measured on a quarterly basis. The CNBV has discretion to reduce the aforementioned limits, if internal control systems or the risk management of the bank is inadequate.
The following financings are exempt from these lending limits: (i) financings guaranteed by unconditional and irrevocable security interests or guarantees, that may be enforced immediately and without judicial action, granted by foreign financial institutions with investment grade ratings and established in a country member of the European Union or the Organization for Economic Cooperation and Development (which guarantees must be accompanied with a legal opinion as to their enforceability), (ii) securities issued by the Mexican government and financings made to the Mexican government, Mexican local governments (subject to such financings being guaranteed by the right to receive certain Federal taxes), the Mexican Central Bank, the IPAB and development banks guaranteed by the Mexican government, and (iii) cash (transferred to the bank lender under a deposit that may be freely disposed of by the lender). However, such financings may not exceed 100% of a bank’s Tier 1 capital.
Likewise, financings granted to Sofomes for which the bank owns at least 99% of its capital stock, are exempted from the aforementioned limits, but such financings may not exceed 100% of a bank’s Tier 1 capital. In turn, the regulated Sofomes maintain or grant financing (regardless of the origin of the resources) to a person or a group of persons representing common risk, such financing shall comply with the aforementioned limits.
The aggregate amount of financings granted to the three largest borrowers of a bank may not exceed 100% of the bank’s Tier 1 capital.
Banks are not obligated to comply with the aforementioned limits with respect to financings granted to the Mexican government, local governments (subject to such financings being guaranteed by the right to receive certain Federal taxes), the Mexican Central Bank, IPAB and development banks guaranteed by the Mexican government.
Banks are required to disclose, in the notes to their financial statements for Mexican Banking GAAP purposes, (i) the number and amount of financings that exceed 10% of Tier 1 capital and (ii) the aggregate amount of financings made to their three largest borrowers.
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Funding Limits
In accordance with the General Rules Applicable to Mexican Banks, Mexican banks are required to diversify their funding risks. In particular, a Mexican bank is required to notify the CNBV, on the business day following the occurrence of the event, in the event it receives funds from a person or a group of persons acting in concert that represent in one or more funding transactions more than 100% of such bank’s Tier 1 capital. None of our liabilities to a person or group of persons exceeds the 100% threshold.
Related Party Loans
Pursuant to the Mexican Banking Law, the total amount of the transactions with related parties may not exceed 35% of the bank’s Tier 1 capital. For the case of loans and revocable credits, only the disposed amount will be counted. See “Item 7. Major Shareholders and Related Party Transactions—B. Related Party Transactions—Loans to Related Parties.”
Tier 1 capital is calculated by taking into account the balance as of the last day of each month. When calculating Tier 1 capital, the General Rules Applicable to Mexican Banks establish that if the aggregate amount of operations subject to credit risk relating to relevant related parties exceeds 25% of the bank’s Tier 1 capital then the excess must be subtracted in order to determine Tier 1 capital.
On a monthly basis, we monitor and implement controls relating to the consumption of both the 35% and 25% limits in order to ensure strict compliance with the abovementioned regulations.
Foreign Currency Transactions
Mexican Central Bank regulations govern transactions by banks denominated in foreign currencies. Mexican banks may, without any specific additional approval, engage in spot, foreign exchange transactions (i.e., transactions having a maturity not exceeding four business days). Other foreign currency transactions are deemed derivative transactions and require approvals as discussed below. At the end of each trading day, banks are generally obligated to maintain a balanced foreign currency position (both in the aggregate and by currency). However, short and long positions are permitted in the aggregate, so long as such positions do not exceed 15% of a bank’s Tier 1 capital. In addition, Mexican banks must maintain liquid assets, prescribed by regulations issued by the Mexican Central Bank, in connection with maturities of obligations denominated in foreign currencies (as discussed under “—Liquidity Requirements for Foreign Currency-Denominated Liabilities” above).
Derivative Transactions
Certain Mexican Central Bank rules apply to derivative transactions entered into by Mexican banks. Mexican banks are permitted to enter into swaps, credit derivatives, forwards and options with respect to the following underlying assets:
● | specific shares, groups of shares or securities referenced to shares; that are listed in a securities exchange, |
● | stock exchange indexes, |
● | Mexican currency, foreign currencies and UDIs (a peso-equivalent unit of account indexed for Mexican inflation), |
● | inflation indexes, |
● | gold or silver, |
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● | swine meat, pork and cattle, |
● | natural gas, diesel, gasoline and crude oil, |
● | aluminum, copper, nickel, platinum, lead and zinc, |
● | wheat, corn, soybean and sugar, |
● | rice, sorghum, cotton, oats, coffee, orange juice, cocoa, barley, cattle, swine, milk, canola, soybean oil and soybean paste, |
● | nominal or real interest rates with respect to any debt instrument, |
● | loans or other advances, and |
● | futures, options and swaps with respect to the underlying assets mentioned above. |
Mexican banks require an express general approval, issued in writing by the Mexican Central Bank, to enter into, as so-called intermediaries, derivative transactions, with respect to each class or type of derivative. Mexican banks that have not received the relevant general approval would require a specific approval from the Mexican Central Bank to enter into such derivative transactions (or even if in possession of such general approval, to enter into derivative transactions with underlying assets different from the assets specified above). Mexican banks may, however, enter into derivative transactions without the authorization of the Mexican Central Bank, if the exclusive purpose of such derivative transactions is to hedge the relevant bank’s existing risks. Authorizations may be revoked if, among other things, the applicable Mexican bank fails to comply with Mexican Capitalization Requirements, does not timely comply with reporting requirements, or enters into derivative transactions that contravene applicable law or sound market practices.
Banks that execute derivative transactions with related parties or with respect to underlying assets of which the issuer or debtor are related parties, shall comply with the corresponding limits set forth in the Mexican Banking Law in respect of related party transactions.
Institutions may collateralize derivative transactions through cash deposits, receivables and/or securities of its portfolio. Derivative transactions that are entered into in over-the-counter (OTC) markets, may be collateralized only when the counterparties are credit institutions, brokerage firms, foreign financial institutions, mutual funds, pension fund managers, Sofomes, and any other counterpart authorized by the Mexican Central Bank. Mexican banks are required to periodically inform their Board of Directors with respect to the derivative transactions entered into, and whether or not the Mexican bank is in compliance with limits imposed by the Board of Directors and any applicable committee. Mexican banks must also inform the Mexican Central Bank periodically of derivative transactions entered into and whether any such transaction was entered into with a related party. The counterparties in respect of hedging derivatives transactions entered into by Mexican banks must be other Mexican banks, Mexican financial entities authorized to enter into such derivatives by the Mexican Central Bank or foreign financial institutions or recognized markets. Derivative transactions must be entered into pursuant to master agreements that must include terms and guidelines, similar to international standards such as International Swap and Derivatives Association (ISDA) master agreements and master agreements approved for the domestic market. As an exception to applicable rules, Mexican banks may pledge cash, receivables and securities to secure obligations resulting from their derivative transactions.
The Bank has received approval from the Mexican Central Bank to engage in swaps, forwards and options related to stocks, indices, currencies and interest rates.
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The Bank carries out derivative financial transactions, with financial counterparties in order to cover the Bank’s own position, as well with customers who request so, in our ordinary course of business.
Restrictions on Liens and Guarantees
Under the Mexican Banking Law, banks are specifically prohibited from (i) pledging their securities or other assets as collateral, except (a) if the Mexican Central Bank or the CNBV so authorizes, including as described above with respect to derivative transactions, or (b) for obligations in favor of the Mexican Central Bank, IPAB, Mexican development banks or governmental trusts, (ii) guaranteeing the obligations of third parties, except, generally, in connection with letters of credit and bankers’ acceptances and (iii) make loans secured by subordinated debt or rights of trusts funded by subordinated debt.
Bank Secrecy Provisions; Credit Bureaus
Pursuant to the Mexican Banking Law, a Mexican bank may not provide any information relating to the identity of its customers or specific deposits, services or any other banking transactions (including loans) to any third parties (including any purchaser, underwriter or broker, or holder of any of the bank’s securities), other than (i) the depositor, debtor, accountholder or beneficiary and their legal representatives or attorneys-in-fact, (ii) judicial authorities in trial proceedings in which the accountholder is a party or defendant, (iii) the Mexican federal tax authorities for tax purposes, (iv) the SHCP for purposes of the implementation of measures and procedures to prevent terrorism and money laundering, (v) the Federal Auditor (Auditoría Superior de la Federación) to exercise its supervisory authority (including information on accounts or agreements involving federal public resources), (vi) the supervisory unit of the Federal Electoral Agency (Instituto Nacional Electoral), (vii) the federal attorney general’s office (Procuraduría General de la República) for purposes of criminal proceedings, (viii) the Treasurer of the Federation (Tesorería de la Federación), as applicable, to request account statements and any other information regarding the personal accounts of public officers, assistants and, as the case may be, individuals related to the corresponding investigation, and (ix) the Secretary and undersecretaries of the Ministry of Public Function (Secretaría de la Función Pública) when investigating or auditing the estates and assets of federal public officers, among others. In most cases, the information needs to be requested through the CNBV.
The CNBV is authorized to furnish foreign financial authorities with certain protected information under the Mexican bank secrecy laws, provided that an agreement must be in effect between the CNBV and such authority for the reciprocal exchange of information. The CNBV must abstain from furnishing information to foreign financial authorities if, in its sole discretion, such information may be used for purposes other than financial supervision, or by reason of public order, national security or any other cause set forth in the relevant agreement.
Banks and other financial entities are allowed to provide credit-related information to duly authorized Mexican credit bureaus.
Money Laundering Regulations
México has a local framework in effect for the prevention of money laundering and terrorist financing, which allows us to comply with the recommendations of international organizations, including the General Provisions on Money Laundering and Terrorist Financing, which have been in force since April 21, 2009 and have been subsequently amended through the publication of various resolutions on the Federal Official Gazette.
These General Provisions on Money Laundering and Terrorist Financing require the Bank to comply with various obligations, including:
● | The establishment and implementation of procedures and policies regarding customer identification and know-your-customer (“KYC”) policies in order to prevent and detect those transactions that may |
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be connected to terrorism or money laundering activities as defined in the Mexican Federal Criminal Code (Código Penal Federal); |
● | The implementation of procedures for detecting and reporting suspicious transactions (as defined in the General Provisions on Money Laundering and Terrorist Financing); |
● | Periodic reports of transactions in cash, dollars in cash and international transfers and cashier’s check above certain pre-established thresholds; and |
● | The establishment of a Committee (Communication and Control Committee), which in turn must designate a Compliance Officer who is in charge of among other matters, supervising compliance with anti-money laundering provisions and the institution’s anti-money laundering and terrorism financing program. |
Our institution is also required to maintain a file (an “ID file”) before establishing any business relationship or entering into any kind of transaction with a costumer for the identification of such customer.
Also the General Provisions on Money Laundering and Terrorist Financing require the Bank to have an anti-money laundering manual, which should be approved by the Audit Committee and include our anti-money laundering policies and procedures.
Additionally, in accordance with the reform to the LIC published in the DOF on January 10, 2014, the following fines will apply in case of non-compliance:
● | A fine of 10% to 100% of the amount of the activity, transaction or service performed by an entity for a customer or user whom the entity knows to be on the blocked persons list prepared by the SHCP. |
● | A fine of 10% to 100% of the amount of any unreported unusual transaction and, if applicable, any additional transactions related to same customer or user involved in the unreported transaction. |
● | A fine of 30,000 to 100,000 days’ worth of the minimum wage applicable in México for significant transactions or, if applicable, a series of related transactions involving international transfers and unreported transactions in cash undertaken in a foreign currency. |
● | A fine of 5,000 to 50,000 days’ worth of the minimum wage applicable in México for other failures to comply with applicable law. |
Rules on Interest Rates
Bulletin 3/2012 issued by the Mexican Central Bank limits the number of reference rates that may be used by Mexican banks as a basis for determining interest rates on loans. For peso-denominated loans, banks may choose any of a fixed rate, the Mexican benchmark interbank money market rate (Tasa de Interés Interbancaria de Equilibrio, or TIIE), Mexican Treasury bills (Cetes) rate, CCP (costo de captación promedio a plazo), the rate determined by the Mexican Central Bank as applied to loans funded by or discounted with NAFIN, the rate agreed upon with development banks in loans funded or discounted with them, the weighted bank funding rate (tasa ponderada de fondeo bancario) and the weighted governmental funding rate (tasa ponderada de fondeo gubernamental). For UDI-denominated loans, the reference rate is the UDIBONOS. For foreign currency-denominated loans, banks may choose any of a fixed rate or floating market reference rates that are not unilaterally determined by a financial institution, including the London Interbank Offered Rate, or LIBOR, or the rate agreed upon with international or national development banks or funds, for loans funded by or discounted with such banks or funds. For dollar-denominated loans, banks may choose either a fixed rate or any of the rates referred to in the prior sentence or the CCP-Dollars, as calculated and published in the Federal Official Gazette by the Mexican Central Bank.
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On January 15, 2020, the Mexican Central Bank published Bulletin 1/2020, by means of which the Mexican Central Bank started publishing a new reference rate denominated “TIIE de Fondeo”, which is a 1-day reference rate. The rules also provide that only one reference rate can be used for each transaction and that no alternative reference rate is permitted, unless the selected reference rate is discontinued, in which event a substitute reference rate may be established. A rate, or the mechanism to determine a rate, may not be modified unilaterally by a bank. Rates must be calculated annually, based upon 360-day periods.
On November 11, 2010, the Mexican Central Bank published new rules that regulate the issuance and use of credit cards. Such rules standardize the regulations and forms that enable cardholders to authorize charges for recurrent payments relating to goods and services and standardize the procedures for objecting to improper charges and cancelling such services quickly and securely. The rules also establish the way in which credit card issuers shall determine the amount of the minimum payment in each period by means of a formula that favors payment of a part of the principal at the time of each minimum payment, with the aim of achieving payment of debts within a reasonable time period. Such rules also include certain protection provisions for card users in case of theft or loss of their credit cards, the creation of incentives to credit card issuers to adopt additional measures to reduce risks derived from use of credit cards in Internet transactions and the wrongful use of information contained in credit cards. These rules did not have a material impact on our operations or financial condition.
In June 2014, the Mexican Supreme Court of Justice issued a thesis, of mandatory application, allowing federal judges to determine ex officio if an interest rate agreed in a promissory note is evidently excessive, violating an individual’s human rights, and consequently establishing a reduced interest rate. The elements the judge should take into account to determine if an interest rate is evidently excessive are: (i) the type of relationship between the parties; (ii) the qualification of the persons intervening in the issuance of the promissory note and if the activity of the creditor is regulated; (iii) the purpose of the credit; (iv) the amount of the loan; (v) the term of the loan; (vi) the existence of guarantees or collateral for the payment of the loan; (vii) the interest rates applied by financial institutions in transactions similar to the one under analysis, as a mere reference; (viii) the variation of the national inflation index during the term of the loan; (ix) market conditions; and (x) other issues that may be relevant for the judge.
As of the date hereof, the interest rates Mexican banking institutions, including the Bank, are entitled to the presumption that the interest rates they charge are not usurious. In addition, in November 2016, the Mexican Supreme Court of Justice published a separate thesis setting forth a rebuttable presumption that the interest rates charged on loans made by Mexican banking institutions are not excessive. The thesis was based on the fact that the loans offered to the public by credit institutions are supervised by the Mexican Central Bank, which supervision has the objective of ensuring that their conditions are accessible and reasonable for the public. Although this precedent is not binding and has been subject to further judicial review, we do not expect to have to adjust our interest rates or reimburse our customers for this concept.
Fees
Under Mexican Central Bank regulations, Mexican banks and Sofomes may not, in respect of loans, deposits or other forms of funding and services with their respective customers, among others, (i) charge fees that are not included in their respective, publicly disclosed, aggregate annual cost (costo anual total), (ii) charge alternative fees, except if the fee charged is the lower fee, and (iii) charge fees for the cancellation of credit cards issued. In addition, among other things, Mexican banks may not (i) charge simultaneous fees, in respect of demand deposits, for account management and relating to not maintaining minimum amounts, (ii) charge fees for returned checks received for deposit in a deposit account or as payment for loans granted, (iii) charge fees for cancellation of deposit accounts, debit or teller cards, or the use of electronic banking services, or (iv) charge different fees depending upon the amount of a money transfer. Under the regulations, fees arising from the use of ATMs must be disclosed to users.
Mexican banks and Sofomes operating or permitting customers to use ATMs must choose between two options for charging fees to customers withdrawing cash or requesting balances: (i) specifying a fee for the relevant transactions, in which case, Mexican banks and Sofomes issuing credit or debit cards may not
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charge cardholders any additional fee (credit or debit card issuers are entitled to charge operators the respective fee), or (ii) permit credit card or debit card issuers to charge a fee to customers, in which case, banks and Sofomes may not charge additional fees to customers.
The Mexican Central Bank, on its own initiative or as per request from the CONDUSEF, banks or Sofomes, may assess whether reasonable competitive conditions exist in connection with fees charged by banks or Sofomes in performing financial operations. The Mexican Central Bank must obtain the opinion of the COFECE in carrying out this assessment. The Mexican Central Bank may take measures to address these issues.
The Mexican Central Bank published rules that modified the rules on ATM user fees which limited the Bank’s ability to charge fees for the use of ATMs by customers and the amount of such fees for services including: (i) cash withdrawals, (ii) checking account balances, (iii) deposits and (iv) payments, both in bank windows and ATMs operated by the customers’ bank. The rules also specify that ATMs shall show a clear legend on their screens regarding costs of the transaction so the client may decide whether to proceed with the transaction.
IPAB Law
The IPAB Law, which became effective January 20, 1999, provides for the creation, organization and functions of IPAB, the Mexican bank savings protection agency. IPAB is a decentralized public entity that regulates the financial support granted to banks for the protection of bank deposits and other bank credits.
Only in exceptional cases may IPAB grant financial support to banking institutions.
According to the IPAB Law, banks must provide the information required by IPAB for the assessment of their financial situation and notify IPAB about any event that could affect their financial stability. The IPAB Law expressly excludes the release of such data from bank secrecy provisions contained in the Mexican Banking Law and expressly provides that IPAB and the CNBV can share information databases of banks.
IPAB will manage and sell the loans, rights, shares and any other assets that it acquires to perform its activity according to the IPAB Law, to maximize their recovery value. IPAB must ensure that the sale of such assets is made through open and public procedures. The President of México is required to present annually a report to Congress prepared by IPAB with a detailed account of the transactions conducted by IPAB in the prior year.
IPAB has a governing Board of seven members: (i) the Minister of the SHCP, (ii) the Governor of the Mexican Central Bank, (iii) the President of the CNBV, and (iv) four other members appointed by the President of México, with the approval of two-thirds of the Senate and, in their recesses, by the same proportion of members of the standing committee of the Congress.
The deposit insurance to be provided by IPAB to bank depositors will be paid upon determination of the dissolution and liquidation, or bankruptcy of a bank. IPAB will act as liquidator or receiver in the dissolution and liquidation, or bankruptcy of banks, either directly or through designation of a representative. IPAB will guarantee obligations of banks to certain depositors and creditors only up to the amount of 400,000 UDIs (or approximately U.S.$156,786 as of December 31, 2022), per person per bank.
Banks have the obligation to pay IPAB ordinary and extraordinary contributions as determined from time to time by the Governing Board of IPAB. For such purposes, banks must promptly deliver to the IPAB information regarding their liabilities for the determination of their ordinary quotas. Under the IPAB Law, banks are required to make monthly ordinary contributions to IPAB, equal to one-twelfth of 0.004% multiplied by the average of the daily outstanding liabilities of the respective bank in a specific month, less (i) holdings of term bonds issued by other commercial banks; (ii) financing granted to other commercial banks; (iii) financing granted by IPAB; (iv) subordinated debentures that are mandatorily convertible in
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shares representing the capital stock of the banking institution; and (v) restricted assets and liabilities resulting from the repurchase transactions (reportos) and lending of securities with the same counterparty, pursuant to the provisions issued by IPAB.
IPAB’s Governing Board also has the authority to impose extraordinary contributions in the case that, given the conditions of the Mexican financial system, IPAB does not have available sufficient funds to comply with its obligations. The determination of the extraordinary contributions is subject to the following limitations: (i) may not exceed, on an annual basis, the amount equivalent to 0.003% multiplied by the total amount of the liabilities outstanding of the banking institutions that are subject to IPAB ordinary contributions; and (ii) the aggregate amount of the ordinary and extraordinary contributions may not exceed, in any event, on an annual basis, an amount equivalent to 0.008% multiplied by the total amount of a bank’s liabilities subject to IPAB contributions.
The Mexican Congress allocates funds to IPAB on a yearly basis to manage and service IPAB’s liabilities. In emergency situations, IPAB is authorized to incur additional financing every three years in an amount not to exceed 6% of the total liabilities of certain Mexican banks as determined by the CNBV.
Under the IPAB law, in the event the quotas are not timely paid, between 30% and 100% of the value of the omitted quota may be imposed as a fine.
Law to Regulate Financial Groups
On January 10, 2014, the Mexican Law to Regulate Financial Groups (Ley para Regular Agrupaciones Financieras) was published in the Federal Official Gazette, abrogating the former Financial Groups Law, by virtue of which the controlling companies were authorized to indirectly hold shares in financial institutions belonging to a financial group, as well as in other entities allowed in such law. The purpose of the controlling companies of financial groups is generally restricted to holding the shares representing the capital stock of the entities of the group. The Law to Regulate Financial Groups allows the companies controlled by the controlling company to: (i) jointly act before the public, offer services that are supplemental to the services provided by the other and identify themselves as part of the same group, (ii) maintain common files, for anti-money laundering purposes, that may be used by all entities part of the financial group, (iii) use similar corporate names (except for FinTech companies), and (iv) conduct their activities in the offices and branches of other entities part of the same group. In addition, the Financial Groups Law requires that each financial services holding company enters into an agreement (convenio único de responsabilidades) with each of its financial services subsidiaries pursuant to which the holding company agrees to be secondarily liable and without limitation for the satisfaction of the obligations incurred by its subsidiaries and to be fully liable for certain losses of its subsidiaries, up to the total amount of the holding company’s assets. In the event that the assets of the financial services holding company are insufficient to cover the losses of its subsidiaries, the financial services holding company must first cover the liabilities of the banking institutions that are part of the group and, subsequently, the liabilities of any other entities that form the group, which will be prorated. For such purposes, a subsidiary is deemed to have losses if its assets are insufficient to cover its payment obligations. The subsidiaries will never be held liable for the losses of their holding company or for the losses of the other subsidiaries of the group.
Furthermore, on March 9, 2018, the Law to Regulate Financial Groups was modified in order to include FinTech companies in financial groups, provided, however, that such companies may not use denominations or names similar to those used by the other financial institutions, even if part of the same financial group. On June 4, 2020, the General Provisions related to the standardized computer application programming interfaces (“APIs”) referred to in the Law to Regulate Financial Technology Institutions were published in order to establish the rules for the transfer of open financial data. The open financial data, according to Law to Regulate Financial Technology Institutions are those that do not contain confidential information, such as information on products and services offered to the general public, the location of their offices and branches, ATMs among others. Institutions will have one year to establish APIs to allow data recipients access to such information.
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In compliance with the Law to Regulate Financial Groups, and particularly with respect to the single liability agreement, Grupo Financiero Santander México, S.A. de C.V. is liable, on a subsidiary basis and without limitation, for complying with the obligations of the financial institutions that are part of Grupo Financiero Santander México, corresponding to the activities that, in accordance with the applicable provisions, are specific to each one of them, even with respect to those contracted by these financial institutions prior to their integration into Grupo Financiero Santander México.
Law for the Protection and Defense of Financial Services Users
A Law for the Protection and Defense of Financial Services Users is in effect in México. The purpose of this law is to protect and defend the rights and interests of users of financial services. To this end, the law provides for the creation of CONDUSEF, an autonomous entity that protects the interests of users of financial services and that has very wide authority to protect users of financial services (including imposing fines). CONDUSEF acts as mediator and arbitrator in disputes submitted to its jurisdiction and seeks to promote better relationships among users of financial institutions and the financial institutions. Banco Santander México and its subsidiaries must submit to CONDUSEF’s jurisdiction in all conciliation proceedings (initial stages of a dispute) and may choose to submit to CONDUSEF’s jurisdiction in all arbitration proceedings that may be brought before it. The law requires banks to maintain an internal unit designated to resolve any and all controversies submitted by customers. The Bank maintains such internal unit.
CONDUSEF maintains a Registry of Financial Service Providers (Registro de Prestadores de Servicios Financieros), in which all financial services providers must be registered, that assists CONDUSEF in the performance of its activities. This Registry will be replaced as explained below. CONDUSEF is required to publicly disclose the products and services offered by financial service providers, including interest rates. To satisfy this duty, CONDUSEF has wide authority to request all necessary information from financial institutions. Furthermore, CONDUSEF may scrutinize banking services provided by approving and supervising the use of standard accession agreements.
CONDUSEF (i) is entitled to initiate class actions against Mexican financial institutions, in connection with events affecting groups of users of financial services, (ii) shall maintain a Bureau of Financial Entities (Buró de Entidades Financeras), which is to set forth any and all information deemed material for users of financial services, (iii) is empowered to order amendments to any of the standard form commercial banking documentation (such as account and loan agreements) used by financial institutions, if it considers provisions thereof as detrimental to users, (iv) is permitted to issue resolutions as part of arbitration proceedings, for the benefit of issuers, that would permit users to attach assets of a financial institution prior to the completion of arbitration proceedings, and (v) is given broader authority to fine financial institutions, if any such financial institution does not comply with an order issued by CONDUSEF.
Banco Santander México and its subsidiaries may be required to provide reserves against contingencies which could arise from proceedings pending before CONDUSEF. The Bank may also be subject to recommendations by CONDUSEF regarding our standard agreements or information used to provide our services. Our financial subsidiaries may be subject to coercive measures or sanctions imposed by CONDUSEF. The Bank is not the subject of any material proceedings before CONDUSEF. Regarding ordinary inspection visits, CONDUSEF may issue official notices containing observations and recommendations detected during the visits. If the observations are not remedied, CONDUSEF orders Mandatory Compliance Programs, and if applicable, penalties.
Law for the Transparency and Ordering of Financial Services
The Law for the Transparency and Ordering of Financial Services regulates (i) the fees charged to customers of financial institutions for the use and/or acceptance of means of payment, as with debit cards, credit cards, checks and orders for the transfer of funds, (ii) the fees that financial institutions charge to each other for the use of any payment system, (iii) interest rates that may be charged to customers, and
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(iv) other aspects related to financial services, all in an effort to make financial services more transparent and protect the interests of the users of such services. This law grants the Mexican Central Bank the authority to regulate interest rates and fees and establish general guidelines and requirements relating to payment devices and credit card account statements (see “—Rules on Interest Rates” and “—Fees” above). The Mexican Central Bank has the authority to specify the basis upon which each bank must calculate its aggregate annual cost (costo anual total), which comprises interest rates and fees, on an aggregate basis, charged in respect of loans and other services. The aggregate annual cost must be publicly disclosed by each bank. The law also regulates the terms that banks must include in standard accession agreements and the terms of any publicity and of information provided in account statements. Our subsidiaries operating in the financial sector must inform the Mexican Central Bank of any changes in fees at least 30 calendar days before they become effective.
As part of the financial reform made in 2013, the Mexican Congress approved changes to the Law for the Transparency and Ordering of Financial Services pursuant to which the Mexican Central Bank may use its veto capacity or issue temporary regulations applicable to interest rates and fees, if it or the COFECE determines that no reasonable competitive conditions exist among financial institutions. Also, the Mexican Central Bank and the CNBV are given authority to issue rules regulating the means to obtain funds (i.e., credit cards, debit cards, checks and funds transfers), as a means to ensure competition, free access, no discrimination and protecting the interests of users.
Law on Transparency and Development of Competition for Secured Credit
The Law on Transparency and Development of Competition for Secured Credit (Ley de Transparencia y de Fomento a la Competencia en el Crédito Garantizado, or the “Secured Credit Law”) provides a legal framework for financial activities and certain other services performed by private credit institutions (as opposed to governmental entities) in connection with secured loans relating to real property in general and housing in particular (i.e., purchase, construction, restoration or refinancing). In particular, the Secured Credit Law established specific rules requiring the following: (i) the disclosure of certain information by credit institutions to their customers prior to the execution of the relevant loan agreement, including the disclosure of certain terms relating to interest rates, aggregate costs and expenses payable; (ii) the compliance by credit institutions and borrowers with certain requirements in the application process; (iii) the binding effect of offers made by credit institutions granting secured loans; (iv) the inclusion of mandatory provisions in loan agreements; and (v) the assumption of certain obligations by public officers (or notaries) before whom secured loans are granted.
In addition, the Secured Credit Law seeks to foster competition among credit institutions by permitting security interests underlying a secured loan to survive any refinancing thereof, even if such loans were granted by different credit institutions. This provision of the Secured Credit Law is designed to reduce expenditures made by borrowers.
Law on the Regulation of Financial Technology Institutions
On March 9, 2018, the FinTech Law was published in the Federal Official Gazette. Its main purpose is to regulate financial services provided by Collective Financing (Crowdfunding) Institutions and Electronic Payment Institutions (jointly the "Financial Technology Institutions"), two types of entities which were created by the law. The CNBV is the authority responsible for granting authorizations and supervising their organization and operation. Collective Financing (Crowdfunding) Institutions are intended to put members of the public in contact with one another so that any member of the public can provide financing to any other member of the public. Electronic Payment Institutions are intended to provide the public with applications, digital interfaces, internet pages and other means of electronic or digital communications that they can use to make electronic payments in their day-to-day personal and professional lives. In addition, the FinTech Law also regulates transactions carried out with digital assets. A digital asset is an asset that represents value registered electronically that can be used by the public as a means of payment for any kind of legal activity and whose transfer can only be carried out through electronic media. The law limits digital assets, noting that the FinTech institutions can only operate with digital assets approved by the
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Mexican Central Bank. It also provides for the creation of the Inter-institutional Committee, which is responsible for making decisions, such as the granting of authorizations and impositions of penalties, among others, in connection with activities pursuant to the FinTech Law. The Committee also serves as the examining body of the CNBV and is composed of public servants of the SHCP, the Mexican Central Bank and the CNBV.
Additionally, on September 10, 2018, the regulation under the Fintech Law was published in the Federal Official Gazette with the general dispositions issued under Article 58 of the Fintech Law.
Insurance and Bonding Institutions Law
The Mexican insurance system is governed by the Insurance and Bonding Institutions Law (Ley de Instituciones de Seguros y Fianzas), the Insurance Contract Law (Ley Sobre el Contrato de Seguro) and other regulatory provisions issued by the SHCP and the CNSF. Insurance and bonding companies require the authorization of the Mexican government, through CNSF, for their incorporation and acting as such. The authorizations granted by the CNSF shall include the specific sector in which the insurance or bonding company will conduct business, including life, health care, property and casualty, civil and professional liability, among others. The CNSF may also grant authorization to perform reinsurance and co-insurance activities. Insurance companies are subject to stringent capital adequacy and investment rules, compliance with which is verified by the CNSF. These rules determine the type of assets into which insurance companies may invest, as well as the minimum amount of capital required to be maintained by such entities. Also, insurance companies are required to maintain technical reserves as protection against risks, which help such entities to maintain adequate liquidity levels.
The regulation and surveillance powers of the CNSF grant this entity the authority to verify compliance with the various financial and technical actuarial regulations, as well as with other corporate governance principles.
Retirement Savings System Law
The Retirement Savings Systems Law (Ley de los Sistemas de Ahorro para el Retiro) established the Afore pension system. Among other economic benefits and other services to be provided to participants in the retirement savings system, the Retirement Savings Systems Law provides that each employee may establish an independent retirement account, which is to be managed by an approved Afore. Under this system, employees, employers and the government are required to make contributions to the independent retirement accounts maintained by each employee. In addition to the mandatory contributions, employees can make voluntary contributions to their independent retirement accounts. Pursuant to the Retirement Savings Systems Law, the main functions of an Afore include, among others, (i) managing pension funds, (ii) creating and managing individual pension accounts for each worker, (iii) creating, managing and operating specialized pension funds (Siefores), (iv) distributing and purchasing Siefores’ stock, (v) contracting pension insurance, and (vi) distributing, in certain cases, the individual funds directly to the pensioned worker.
On December 16, 2020 the Retirement Savings Systems Law was amended in order to include a provision to regulate that the fees the Afores charged should have a maximum limit. Such limit should be calculated by the regulatory authority with the average of the fees charged in the U.S.A., Colombia and Chile. This makes the regulation of Afores more restrictive which, before this amendment, established a system of authorizations prior and annual of the regulator (CONSAR). CONSAR is considering the maximum limit to be in effect for 2022, since the fees applicable to 2021 were approved in 2010.
Afores and Siefores are subject to the supervision of the CONSAR, which is in charge of the coordination and regulation of the pension system.
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United States Supervision and Regulation
Financial Regulatory Reform
Banking statutes and regulations are continually under review by the United States Congress and bank regulatory agencies. In addition to regulations, the U.S. bank regulatory agencies may issue new and amend existing regulations, policy statements, interpretive letters and similar written guidance. Many changes to the U.S. financial regulatory framework have occurred as a result of the 2010 Dodd-Frank Act and its implementing regulations, most of which are now in place. The Board of Governors of the Federal Reserve System (the “Federal Reserve Board”), retains the right to apply enhanced prudential standards to foreign banking organizations (“FBOs”) with greater than U.S.$100 billion in global total consolidated assets, such as Banco Santander Parent, and in October 2019, the federal banking agencies issued final rules, or the “Tailoring Rules,” that adjust the thresholds at which certain enhanced prudential standards and capital and liquidity requirements apply to certain banking organizations, including large FBOs such as Banco Santander Parent. As a result, Banco Santander Parent is now generally subject to less restrictive enhanced prudential standards and capital and liquidity requirements than under previously applicable regulations.
Under the current administration, however, banking organizations, including large FBOs, may become subject to increased scrutiny and more extensive legal and regulatory requirements than under the prior presidential and congressional regime. In addition, changes in key personnel at the agencies that regulate such banking organizations, including the federal banking regulators, may result in differing interpretations of existing rules and guidelines and potentially more stringent enforcement and more severe penalties than previously.
Volcker Rule
Section 13 of the U.S. Bank Holding Company Act of 1956, as amended, and its implementing rules (collectively, the “Volcker Rule”) prohibits “banking entities” from engaging in certain forms of proprietary trading or from sponsoring or investing in “covered funds,” in each case subject to certain exceptions. The Volcker Rule also limits the ability of banking entities and their affiliates to enter into certain transactions with covered funds with which they or their affiliates have certain relationships. Banking entities such as Banco Santander México and Banco Santander Parent were required to bring their activities and investments into compliance with the requirements of the Volcker Rule by the end of the conformance period applicable to each requirement. Banco Santander Parent has assessed how the Volcker Rule affects its businesses and subsidiaries, including Banco Santander México, and has brought its activities into compliance. Santander Group has adopted processes to establish, maintain, enforce, review and test the compliance program designed to achieve and maintain compliance with the Volcker Rule. The Volcker Rule contains exclusions and certain exemptions for market-making, hedging, underwriting, trading in U.S. government and agency obligations, as well as certain foreign government obligations, and trading solely outside the United States, and also permits certain ownership interests in certain types of funds to be retained.
Banco Santander Parent’s non-U.S. banking organization subsidiaries, including Banco Santander México, are largely able to continue their activities outside the United States in reliance on the “solely outside the U.S.” exemptions from the Volcker Rule. Those exemptions generally exempt proprietary trading, and sponsoring or investing in covered funds if, among other restrictions, the essential actions take place outside the United States and any transactions are not with U.S. persons.
On July 21, 2017, the five regulatory agencies charged with implementing the Volcker Rule announced the coordination of reviews of the treatment of certain foreign funds that are investment funds organized and offered outside the United States and that are excluded from the definition of covered fund under the agencies’ implementing regulations. Also in July 2017, the Federal Reserve issued guidelines for banking
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entities seeking an extension to conform certain “seeding” investments in covered funds to the requirements of the Volcker Rule.
In June 2019, the five regulatory agencies charged with implementing the Volcker Rule finalized amendments to the Volcker Rule. These amendments tailor the Volcker Rule’s compliance requirements to the amount of a firm’s trading activity, revise the definition of trading account, clarify certain key provisions in the Volcker Rule, and modify the information companies are required to provide the federal agencies. Banco Santander México will still largely rely on the “solely outside the U.S. exemption” to conduct its trading activities.
In July 2020, the five federal agencies finalized additional amendments to the Volcker Rule related to the restrictions on ownership interests in, sponsorship of and relationships with covered funds. These amendments became effective in October, 2020, and did not have a material impact on our activities. Banco Santander Parent will continue to monitor Volcker Rule-related developments and assess their impact on its operations, including ours, as necessary.
U.S. Foreign Corrupt Practices Act
Banco Santander México, as a foreign private issuer whose securities are registered under the Exchange Act, is subject to the U.S. Foreign Corrupt Practices Act, or the “FCPA.” The FCPA generally prohibits such issuers and their directors, officers, employees and agents from using any means or instrumentality of U.S. interstate commerce in furtherance of any offer or payment of money to any foreign official or political party for the purpose of influencing a decision of such person in order to obtain or retain business. It also requires that the issuer maintain books and records and a system of internal accounting controls sufficient to provide reasonable assurance that accountability of assets is maintained and accurate financial statements can be prepared. Penalties, fines and imprisonment of Banco Santander México’s officers and/or directors can be imposed for violations of the FCPA.
Disclosure pursuant to Section 219 of the Iran Threat Reduction and Syria Human Rights Act
Pursuant to Section 219 of the Iran Threat Reduction and Syria Human Rights Act of 2012, which added Section 13(r) to the Exchange Act, an issuer is required to disclose in its annual or quarterly reports, as applicable, whether it or any of its affiliates knowingly engaged in certain activities, transactions or dealings relating to Iran or with individuals or entities designated pursuant to certain Executive Orders. Disclosure is generally required even where the activities, transactions or dealings were conducted in compliance with applicable law.
The following activities are disclosed in response to Section 13(r) with respect to the Santander Group and its affiliates. During the period covered by this annual report:
(a)Santander UK holds seven blocked accounts for five customers that are currently designated by the US under the Specially Designated Global Terrorist (SDGT) sanctions program. Revenues and profits generated by Santander UK on these accounts in the year ended December 31, 2022 were negligible relative to the overall profits of Banco Santander S.A.
(b)Santander Consumer Finance, S.A. holds through its Belgian branch seven blocked correspondent accounts for an Iranian bank that is currently designated by the US under the Specially Designated Global Terrorist (SDGT) sanctions program. The accounts have been blocked since 2008. No revenues or profits were generated by the Belgian branch on these accounts in the year ended December 31, 2022.
(c)Santander Brasil holds three blocked accounts for three customers with domicile in Brazil designated by the US under the Specially Designated Global Terrorist (SDGT) sanctions program. Revenues and profits generated by Santander Brasil on these accounts in the year ended December 31, 2022 were negligible relative to the overall profits of Banco Santander S.A.
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(d)Santander Consumer Finance, S.A. also held through its branch in Greece an auto finance loan for a client designated by the US under the Specially Designated Global Terrorist (SDGT) sanctions program. The relationship was terminated before the year end. Revenues or profits generated by the branch in Greece on this position in the year ended December 31, 2022 were negligible relative to the overall profits of Banco Santander S.A.
(e)The Santander Group also has certain legacy performance guarantees for the benefit of an Iranian bank that is currently designated by the US under the Specially Designated Global Terrorist (SDGT) sanctions program (stand-by letters of credit to guarantee the obligations – either under tender documents or under contracting agreements – of contractors who participated in public bids in Iran) that were in place prior to April 27, 2007.
In the aggregate, all of the transactions described above resulted in gross revenues and net profits in the year ended December 31, 2022 which were negligible relative to the overall revenues and profits of Santander Parent. The Santander Group has undertaken significant steps to withdraw from the Iranian market such as closing its representative office in Iran and ceasing all banking activities therein, including correspondent relationships, deposit taking from Iranian entities and issuing export letters of credit, except for the legacy transactions described above. The Santander Group is not contractually permitted to cancel these arrangements without either (i) paying the guaranteed amount (in the case of the performance guarantees), or (ii) forfeiting the outstanding amounts due to it (in the case of the export credits). As such, the Santander Group intends to continue to provide the guarantees and hold these assets in accordance with company policy and applicable laws.
C. Organizational Structure
Grupo Financiero Santander México, S.A. de C.V., our holding company, directly owns 74.96% of our capital stock. Banco Santander Parent owns 99.99% of the capital stock of Grupo Financiero Santander México S.A. de C.V.
Banco Santander Parent also owns 21.19% of the capital stock of the Bank, bringing its total ownership of the Bank to 96.15%.
The following chart shows our significant subsidiaries as of December 31, 2022:
| | |||
* IFRS at December 31, 2022 | * IFRS at December 31, 2022 | * IFRS at December 31, 2022 | ||
Total assets: Ps.113,020 million (6.2% of total) Net income: Ps.6,483 million (26.9% of total) Total equity: Ps.37,492 million (22.9% of total) | Total assets: Ps.1,118 million (0.06% of total) Net income: Ps.2 million (0.01% of total) Total equity: Ps.1,082 million (0.66% of total) | Total assets: Ps.783 million (0.04% of total) Net loss: Ps.152 million (0.7% of total) Total equity: Ps.149 million (0.1% of total) |
* These figures include our principal subsidiaries. All of our subsidiaries are incorporated in México.
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D. Property, Plants and Equipment
We are domiciled in Mexico City and own our principal executive office, which are located at Avenida Prolongación Paseo de la Reforma 500, Colonia Lomas de Santa Fe, Alcaldía Álvaro Obregón, C.P. 01219, México City, Mexico.
We also own two other buildings in Querétaro and rent 135 other buildings for central offices. We also own four branches’ buildings: Martinica located in León, Interna Santa Fe located in Mexico City and Interna Contact Center and Interna Cetos, both located in Querétaro. The branches operating at rented locations, they have lease terms varying from 1 to 10 years.
The following table sets forth our main properties as of the date indicated.
| | | |
Main properties as of December 31, 2022 |
|
| Number |
Central Offices | |
|
|
Owned | |
| 3 |
Rented | |
| 135 |
Total | |
| 138 |
Branches | |
|
|
Owned | |
| 4 |
Rented(1) | |
| 1,332 |
Total | |
| 1,336 |
SME Center | |
|
|
Owned | |
| — |
Rented | |
| 9 |
Total | |
| 9 |
Other Property(2) | |
|
|
Owned | |
| — |
Rented(2) | |
| 1,301 |
Total | |
| 1,301 |
(1) | Includes 69 branches under bailment (comodato). |
(2) | Consists mainly of back offices, storage, parking lots and ATMs. |
For additional information about our property, plants and equipment, see Note 14 to our audited financial statements included elsewhere in this Report.
ITEM 4A. UNRESOLVED STAFF COMMENTS
Not applicable.
ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS
Principal Factors Affecting Our Financial Condition and Results
All of our operations are located in México. Consequently, our results and our financial condition are strongly affected by the general economic environment and political conditions existing in México and the applicable regulations. For more detail on the applicable regulations, please see “Item 4. Information on the Company—B. Business Overview—The Mexican Financial System,” “Item 4. Information on the Company—B. Business Overview—Supervision and Regulation,” and “Item 4. Information on the Company—B. Business Overview—Supervision and Regulation—Banking Regulation.”
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Economic Environment
In 2020, the Mexican economy contracted at an annual rate of 8.5%, mainly due to the impact of the COVID-19 pandemic, and the lack of a robust public policy response to mitigate its effects on the economy. In response to the sharp decrease of activity and to reductions in rates in other economies, the Mexican Central Bank decreased the target interest rate by 300 basis points to a level of 4.25%. In this context, the peso showed significant volatility resulting in a depreciation of 5.6% against the U.S. dollar as of the end of the year.
In 2021, the Mexican economy recovered partially from the crisis with an annual growth rate of 5.0%, mainly caused by a favorable base effect given the impact of the COVID-19 pandemic in 2020, as a large part of the population was able to return to its normal activities as the infections and deaths from COVID-19 decreased. The Mexican Central Bank increased the target interest rate by 125 basis points to a level of 5.50% in response to a sharp increase in inflation. In this context, the peso showed significant volatility resulting in a depreciation, closing at Ps.20.51 per U.S.$1.00, as of the end of the year.
In 2022, the Mexican economy continued its recovery from the pandemic, as more sectors returned to their pre-crisis levels of activity, with an annual growth rate of 3.0%. However, 2022 also saw an increase in inflationary pressures, labor shortages, supply chain disruptions and an increase in commodity prices (including, in part, as a result of the war in Ukraine), which led to volatility in financial markets. In the context of the global surge in prices, inflation in Mexico increased from 7.36% to 7.82% in 2022. The Mexican Central Bank responded by increasing its monetary policy rate by 500 basis points to 10.50%. Despite the several episodes of volatility in financial markets that occurred during the year, the Mexican peso, appreciated by 4.9% to Ps.19.51 per U.S.$1.00 by the end of 2022.
Effects of Changes in Interest Rates
In 2020, the Mexican Central Bank decreased rates by 300 points, closing at a level of 4.25%. In 2021, the Mexican Central Bank increased rates by 150 points, closing at a level of 5.50%. In 2022, the Mexican Central Bank continued increasing rates by 500 points to 10.50%.
Interest rates affect both our cost of funding and our interest income in diverse ways depending on the portfolio or activity conducted. The Assets and Liabilities Committee (Comité de Activos y Pasivos, or ALCO) portfolio strategies (which are comprised mainly by Mexican sovereign bonds, in addition to interest rate swaps) are designed to protect our Net Interest Margin against changes in the interest rates. Our sensitivity to a parallel shift of 100 basis points in the interest rate curve over the course of the last five years has been below 2% of the net interest margin for each year. Therefore, impacts on margin from movements in interest rates have not been material over the last five years. Our balance sheet is currently positioned such that increases in interest rates would result in increases in the net interest margin. This is reflected in the current levels of NIM consumption, which show that a 100 basis point parallel shift in the interest rate curve would result in an increase in the net interest margin, and a 100 basis point parallel decrease in the interest rate curve would result in a decrease in the net interest margin. Our net interest margin sensitivity in 2022 was 0.63% of our total margin, which is defined as net interest income (including dividend income and income from entities accounted for using the equity method) plus fee and commission income (net) divided by average interest earning assets. For further detail on our management of interest rate risk. For further detail on our management of interest rate risk, see “Item 11. Quantitative and Qualitative Disclosures About Market Risk—Market Risk—Stress Tests—Assets and Liabilities Management (Banking Books).”
Critical Accounting Policies
IFRS requires that Bank’s Management make certain estimates and utilize certain assumptions to determine the valuation of items included in the consolidated financial statements and to make required disclosures.
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As a result of the impact of COVID-19, during 2021 and 2020, we were required to apply a greater degree of judgment in our critical estimates due to the evolving nature of the pandemic and limited recent experience of the economic and financial impacts of said event. The Bank's senior management, using the best information available, has evaluated the potential impacts of the COVID-19 pandemic on the estimates made during 2022, as a result, we have assessed that the effect of COVID-19 was not significant to the critical accounting estimates.
Although the actual results may differ, Bank’s Management believes that the estimates, assumptions and judgments utilized in preparing the consolidated financial statements and related disclosures were appropriate under the circumstances.
The critical accounting estimates applied are as follows:
- | Fair value measurement of financial instruments (see Note 2.d.iii and Note 45.d to our audited financial statements included elsewhere in this Report). |
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction in the principal (or most advantageous) market at the measurement date under current market conditions. The most objective and common reference for the fair value of a financial instrument is the price that would be paid for it on an active, liquid and deep market (quoted price or market price). Fair value under IFRS is an exit price regardless of whether that price is directly observable or estimated using another valuation technique.
When there is no market price for a given financial instrument, its fair value is estimated on the basis of the price established in recent transactions involving similar instruments and, in the absence thereof, of valuation techniques commonly used by the international financial community, taking into account the specific features of the instrument to be measured and, particularly, the various types of risk associated with it.
In estimating the fair value of an asset or a liability, the Bank takes into account the characteristics of the asset or liability if market participants would consider those characteristics when pricing the asset or liability at the measurement date. Fair value for measurement and/or disclosure purposes in the consolidated financial statements for certain financial instruments is determined on such a basis, except for share-based payment transactions that are within the scope of IFRS 2 Share-based Payment and measurements that have some similarities to fair value but are not fair value, such as value in use defined in IAS 36 Impairment of Assets.
When there is no market price available for an identical instrument, the Bank measures fair value using other valuation techniques that are commonly used by the financial markets that maximize the use of relevant observable inputs and minimize the use of unobservable inputs as explained in Note 2.d. to our audited financial statements included elsewhere in this Report.
The availability of observable prices or inputs varies by product and market, and may change over time. The level of judgment from Bank’s Management required in establishing fair value of financial instruments for which there is a quoted price in an active market is minimal. Similarly, there is little subjectivity or judgment required for instruments valued using valuation models that are standard across the industry and where all parameter inputs are quoted in active markets. The level of subjectivity and degree of judgment from Bank’s Management required are more significant for those instruments valued using specialized and sophisticated models and those where some or all of the parameter inputs are not observable.
In making appropriate valuation adjustments, the Bank follows methodologies that consider factors such as liquidity and credit risk (both counterparty credit risk in relation to financial assets and its own credit risk in relation to financial liabilities, which are at fair value through profit or loss).
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As of December 31, 2022, no significant reduction exists in observable prices from sources used for the valuation of financial instruments. Given the low market complexity as a rule for the Bank’s portfolios, there have been no significant reclassifications between levels. The Bank continues to monitor the evolution of the financial markets, their liquidity, and the observability conditions of the valuation inputs in order to apply the criteria established in the Bank for the levelling of assets and liabilities measured at fair value.
- | Fair value estimates used in disclosures (see Note 2.d.iii and Note 45.d to our audited financial statements included elsewhere in this Report). |
For financial reporting purposes, fair value measurements are categorized into Level 1, 2 or 3 according to IFRS 13 Fair Value Measurement based on the degree to which the inputs to the fair value measurements are observable and the significance of the inputs to the fair value measurement in its entirety, which are described as follows:
● | Level 1: inputs that are quoted market prices (unadjusted) in active markets for identical instruments; |
● | Level 2: inputs other than quoted prices included within Level 1 that are observable either directly (i.e., as prices) or indirectly (i.e., derived from prices). This category includes instruments valued using: quoted market prices in active markets for similar instruments; quoted prices for identical or similar instruments in markets that are considered less than active; or other valuation techniques in which all significant inputs are directly or indirectly observable from market data; and |
● | Level 3: inputs that are unobservable. This category includes all instruments for which the valuation technique includes inputs not based on observable data and the unobservable inputs have a significant effect on the instrument’s valuation. This category includes instruments that are valued based on quoted prices for similar instruments for which significant unobservable adjustments or assumptions are required to reflect differences between the instruments. |
This disclosure is provided in Note 2.d.iii to our audited financial statements included elsewhere in this Report.
For financial instruments measured at amortized cost (which include, balances with the Central Bank, loans and advances to customers, debt instruments, deposits and short-term and long-term debt issued), the Bank discloses the fair value. This disclosure is provided in Note 45.d to our audited financial statements included elsewhere in this Report; generally, there is no trading activity in these instruments and the fair value determination requires significant judgment from Bank’s Management.
Allowance for impairment losses and provisions for off-balance sheet risk
The Bank assesses on a forward-looking basis the expected credit losses associated with its financial assets carried at amortized cost and at fair value through other comprehensive income. The impairment methodology applied depends on whether there has been a significant increase in credit risk. The Bank considers a financial asset to have experienced a significant increase in credit risk, since initial recognition, taking into account different quantitative, qualitative or backstop criteria. If it is determined that a significant change in credit risk has occurred, the expected credit losses are re-evaluated and the credit losses are quantified.
The Bank uses the concept of expected credit loss methodology according to IFRS 9 to quantify the credit losses as further discussed in Note 2.g. to our audited financial statements included elsewhere in this Report.
The accounting estimates and judgments related to the allowance for impairment losses and provisions for off-balance sheet risk are a critical accounting estimate for the Bank because the underlying assumptions used to assess the impairment can change from period to period and may significantly affect the Bank’s
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profit, particularly in circumstances of economic and financial uncertainty. Further, the statistical models incorporate numerous estimates and judgments (for example, Probability of Default, Loss Given Default and segmentation of loans in groups with similar credit risk characteristics, etc.).
Further details about expected credit loss measurement are given in Note 2.g. to our audited financial statements included elsewhere in this Report.
The recognition and measurement of deferred tax assets.
As discussed in Note 2.v to our audited financial statements included elsewhere in this Report, deferred tax assets and liabilities include temporary differences, which are identified as the amounts expected to be payable or recoverable on differences between the carrying amounts of assets and liabilities and their related tax bases, tax losses and tax credit carryforwards. These amounts are measured at the tax rates that are expected to apply in the period when the asset is realized or the liability is settled.
The Bank has reassessed its ability to generate future taxable income in relation to the recoverability of deferred tax assets recognized in the consolidated balance sheet. The COVID-19 pandemic introduced new uncertainties, that the Bank has considered in its analysis of the recoverability of deferred tax assets, such as depth, severity and duration of the COVID-19 pandemic, and effectiveness of vaccination program and the new variants that have arisen in recent months. In determining the amount of deferred tax assets to be recognized, the Bank used updated expectations and estimates on projections of future events and trends, which may affect the consolidated financial statements, including a review of the eligible carryforward periods, available tax planning opportunities and other relevant considerations.
Bank’s Management considers that the recovery period of these assets would not be affected and that it is not necessary to adjust the deferred tax assets recognized based on the results of the analyses performed.
The Bank believes that the accounting estimate related to the deferred tax assets is a critical accounting estimate because it requires significant judgment of the Bank’s Management and the underlying assumptions used in the estimate can change from period to period (for example, future projected operating performance of the Bank).
Goodwill and business combinations
Goodwill and intangible assets include the cost of acquired subsidiaries in excess of the fair value of the tangible net assets recognized in connection with acquisitions as well as acquired intangible assets. Accounting for goodwill and acquired intangible assets requires estimates from Bank’s Management regarding: (1) the fair value of the acquired intangible assets and the initial amount of goodwill to be recognized, (2) the amortization period (for identified intangible assets other than those with indefinite lives or goodwill) and (3) the recoverability of the carrying value of acquired intangible assets.
The useful lives of acquired intangible assets are estimated based on the period over which the assets are expected to contribute directly or indirectly to the future cash flows of the Bank.
To determine the initial amount of goodwill to be recognized on an acquisition, the Bank determines the fair value of the consideration and the fair value of the net assets acquired. The Bank uses internal analysis, generally based on discounted cash flow techniques, to determine the fair value of the net assets acquired and non-cash components of the consideration paid. The actual fair value of net assets acquired could differ from the fair value determined, resulting in an under- or over-statement of goodwill.
Goodwill arising on an acquisition of a business is carried at cost as established at the date of acquisition of the business less accumulated impairment losses, if any.
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Impairment of goodwill.
IAS 36 requires that a cash-generating unit (CGU) to which goodwill has been allocated is tested for impairment annually, or more frequently when there is an indication that the CGU may be impaired. IAS 36 establishes a minimum of indicators in assessing whether there is any impairment indication. A CGU to which goodwill has been allocated is tested for impairment annually, or more frequently when there is an indication that the CGU may be impaired.
The Bank concluded that as of December 31, 2022 there are no impairment indications.
Determining whether goodwill is impaired requires an estimation of the value in use of the CGU to which goodwill has been allocated. The value in use calculation requires estimating the future cash flows expected to arise from the CGU and a suitable discount rate in order to calculate present value.
The estimated future cash flows are based on updated financial budgets and business plans that reflect the most recent developments, such as GDP, interest rates and inflation.
Where the actual future cash flows are less than expected, an impairment loss may arise. The impairment loss is allocated first to reduce the carrying amount of any goodwill allocated to the CGU and then to the other assets of the CGU pro rata based on the carrying amount of each asset in the CGU. Any impairment loss for goodwill is recognized directly in the consolidated income statement. An impairment loss recognized for goodwill is not reversed in subsequent periods.
On disposal of the relevant CGU, the attributable amount of goodwill is included in the determination of the profit or loss on disposal.
Details of the impairment of goodwill calculation are set out in Note 16 to our audited financial statements included elsewhere in this Report.
Defined benefit plan
The net cost of the defined benefit pension plan and other post-employment medical benefits and the present value of the pension obligation are determined using the projected unit credit method, with actuarial valuations being carried out at the end of each annual reporting period. An actuarial valuation involves making various assumptions that may differ from actual developments in the future. These assumptions include the determination of the discount rate. Any changes in these assumptions will affect the carrying amount of pension obligations.
The Bank determines the appropriate discount rate at the end of each year. This interest rate should be used to determine the present value of estimated future cash outflows expected to be required to settle the pension obligations. The Bank’s defined benefit obligation is discounted at a rate set by reference to market yields on Mexican government bonds at the end of the reporting period.
Further details about pension obligations are given in Note 24.c to our audited financial statements included elsewhere in this Report.
Recognition and measurement of certain provisions and contingencies.
Provisions are recognized when the Bank has a present obligation (legal or constructive) as a result of a past event; it is probable that an outflow of cash or other economic resources will be required to settle the obligation, and a reliable estimate can be made of the amount of the obligation. If an outflow is not probable, the item is treated as a contingent liability.
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The amount recognized as a provision is the best estimate of the consideration required to settle the present obligation at the end of the reporting period, taking into account the risks and uncertainties surrounding the obligation. When a provision is measured using the cash flows estimated to settle the present obligation, its carrying amount is the present value of those cash flows (when the effect of the time value of money is material).
The Bank estimates and provides for probable losses that may arise out of litigation, regulatory proceedings and uncertain income tax matters to the extent that a current obligation exists, the losses are probable and can be reasonably estimated. Significant judgment is required in making these estimates and the Bank’s final liabilities may ultimately be materially different. The Bank’s actual losses may differ materially from recognized amounts.
We are subject to certain claims and are party to certain legal proceedings, including a case brought by the heirs of Roberto Garza Sada. See “Item 8. Financial Information—A. Consolidated Statements and Other Financial Information—Legal Proceedings—Garza Sada.” In connection with the Garza Sada case, the Bank's management has recognized a provision to cover the risk originated by this claim in its consolidated financial statements as of December 31, 2022, the foregoing in accordance with IAS 37. However, the amount of cash outflows and their settlement date is uncertain and any provision recognized does not constitute an admission of wrongdoing or legal liability on the part of the Bank. Banco Santander México will continue to vigorously defend its case.
The total amount of payments made by the Bank arising from litigation in 2020, 2021 and 2022 were not material with respect to the consolidated financial statements.
Further details about recognition and measurement of certain provisions and contingencies are given in Note 24 to our audited financial statements included elsewhere in this Report.
Lease term
In determining the lease term, Bank’s Management considers all facts and circumstances that create an economic incentive to exercise an extension option, or not exercise a termination option. Extension options (or periods after termination options) are only included in the lease term if the lease is reasonably certain to be extended (or not terminated).
Further details about lease term are given in Note 2.k and Note 15 to our audited financial statements included elsewhere in this Report.
Discount rate for leases as a lessee
To determine the incremental borrowing rate, the Bank applies the Cross Section methodology, which consists of estimating the credit spread of the Bank based on the Credit Default Swaps information available from different entities. Under the Cross Section methodology, the following factors are considered to obtain the credit spread:
● | Economic sector, |
● | Geographical area, |
● | Rating, and |
● | An assumption to represent that at least one factor described above, match with the factors related to the Bank. |
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Further details about discount rate for leases as a lessee are given in Note 2.k and Note 15 to our audited financial statements included elsewhere in this Report.
COVID-19 Pandemic
COVID-19 significantly affected the world economy beginning in March 2020. Countries all over the world responded to the COVID-19 pandemic by imposing a variety of measures to try to contain its expansion and impact, including lockdowns on millions of people, the implementation of mass quarantines and other containment measures, travel restrictions, limiting public gatherings and the temporary suspension of most economic activity. The measures adopted led to a notable decrease in global economic activity, disruption of supply chains, contractions in production and demand, which resulted in significant Gross Domestic Product (GDP) reductions in many countries, including México, exchange rate volatility, sharp declines and high volatility in the financial and commodities markets worldwide, among others.
During 2021, high vaccination rates and the progressive relaxation of health and safety measures contributed to an increase in employment levels and a partial recovery of the Mexican economy. The Mexican economy continued to recover from the COVID-19 pandemic in 2022.
A. Operating Results
The following discussion of our financial condition and results should be read in conjunction with our audited financial statements as of December 31, 2021 and 2022 and for the years ended December 31, 2020, 2021 and 2022, and the notes thereto, included elsewhere in this annual report, as well as the information presented under “Presentation of Financial and Other Information.”
The following discussion contains forward-looking statements that involve risks and uncertainties. Our actual results may differ materially from those discussed in the forward-looking statements as a result of various factors, including those set forth in “Special Note Regarding Forward-Looking Statements” and “Item 3. Key Information—D. Risk Factors.”
In this section, we discuss the results of our operations for the year ended December 31, 2022 compared to the year ended December 31, 2021. For a discussion of the results of our operations for the year ended December 31, 2021 compared to the year ended December 31, 2020, please refer to “Item 5. – A. Operating Results – Results of Operations for the Year Ended December 31, 2021 Compared to the Year Ended December 31, 2020” and “Item 5. – A. Operating Results – Results of Operations by Segment for the Year Ended December 31, 2021 Compared to the Year Ended December 31, 2020” in our Annual Report on Form 20-F for the year ended December 31, 2021, which are included in our Annual Report on Form 20-F for the year ended December 31, 2021.
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Results for the Year Ended December 31, 2022 Compared to the Year Ended December 31, 2021
The following table presents our consolidated results for the year ended December 31, 2022 as compared to the year ended December 31, 2021.
| | | | | | | | | | | | | | | |
| | For the year ended December 31, | | ||||||||||||
| | 2021 |
|
| 2022 | | | 2022 |
|
| 2022/2021 | | |||
|
| | | | | | |
|
| (Millions of U.S. |
|
| | | |
| | (Millions of pesos) | | | dollars)(1) | | | (% Change) | | ||||||
Interest income | | Ps. | 94,045 | | | Ps. | 124,096 | | | U.S.$ | 6,361 | | | 31.95% | |
Interest income from financial assets at fair value through profit or loss | | | 9,067 | | | | 14,900 | | | | 764 | | | 64.33% | |
Interest expenses and similar charges | |
| (39,680) | | |
| (63,884) | | |
| (3,275) | | | 61.00% | |
Net Interest Income | |
| 63,432 | | |
| 75,112 | | |
| 3,850 | | | 18.41% | |
Dividend income | |
| 227 | | |
| 186 | | |
| 10 | | | (18.06)% | |
Income from entities accounted for using the equity method | | | 200 | | | | 182 | | | | 9 | | | (9.00)% | |
Fee and commission income (net) | |
| 17,206 | | |
| 19,232 | | |
| 986 | | | 11.77% | |
Gains/(losses) on financial assets and liabilities (net) | |
| 4,883 | | |
| 1,024 | | |
| 52 | | | (79.03)% | |
Exchange differences (net) | |
| (35) | | |
| (7) | | |
| — | | | (80.00)% | |
Other operating income | |
| 1,740 | | |
| 810 | | |
| 42 | | | (53.45)% | |
Other operating expenses | |
| (5,206) | | |
| (5,286) | | |
| (271) | | | 1.54% | |
Total Income | |
| 82,447 | | |
| 91,253 | | |
| 4,678 | | | 10.68% | |
Administrative expenses: | |
| (30,872) | | |
| (33,765) | | |
| (1,731) | | | 9.37% | |
Personnel expenses | |
| (16,485) | | |
| (18,915) | | |
| (970) | | | 14.74% | |
Other general administrative expenses | |
| (14,387) | | |
| (14,850) | | |
| (761) | | | 3.22% | |
Depreciation and amortization | |
| (6,243) | | |
| (6,686) | | |
| (343) | | | 7.10% | |
Impairment losses on financial assets not at fair value through profit or loss (net): | |
| (19,229) | | |
| (16,083) | | |
| (824) | | | (16.36)% | |
Financial assets at amortized cost | | | (19,229) | | | | (16,100) | | | | (825) | | | (16.27)% | |
Financial assets at fair value through other comprehensive income | | | — | | | | 17 | | | | 1 | | | 100.00% | |
Gains/(losses) on modification of financial assets (net) | | | — | | | | — | | | | — | | | — | |
Impairment losses on other assets (net): | | | (27) | | | | — | | | | — | | | (100.00)% | |
Non-current assets held for sale | | | (27) | | | | — | | | | — | | | (100.00)% | |
Provisions (net)(2) | |
| (386) | | |
| (2,521) | | |
| (129) | | | 553.11% | |
Gains/(losses) on disposal of assets not classified as non-current assets held for sale (net) | |
| 57 | | |
| 4 | | |
| — | | | (92.98)% | |
Gains/(losses) on disposal of non-current assets held for sale not classified as discontinued operations (net) | |
| 20 | | |
| 70 | | |
| 3 | | | 250.00% | |
Operating Profit Before Tax | |
| 25,767 | | |
| 32,272 | | |
| 1,654 | | | 25.25% | |
Income tax | |
| (4,966) | | |
| (8,164) | | |
| (418) | | | 64.40% | |
Profit for the year | | Ps. | 20,801 | | | Ps. | 24,108 | | | U.S.$ | 1,236 | | | 15.90% | |
Profit attributable to the Parent | |
| 20,801 | | |
| 24,108 | | |
| 1,236 | | | 15.90% | |
Profit attributable to non-controlling interests | |
| — | | |
| — | | |
| — | | | — | |
(1) | Results for the year ended December 31, 2022 have been translated into U.S. dollars, for convenience purposes only, using the exchange rate of Ps.19.5089 per U.S.$1.00 as calculated on December 31, 2022 and reported by the Mexican Central Bank on December 31, 2022 as the closing exchange rate. The Mexican Central Bank publishes the closing exchange rate at 2:10 p.m. every bank business day. These translations should not be construed as representations that the peso amounts represent, have been or could have been converted into, U.S. dollars at such or at any other exchange rate. |
(2) | Mainly provisions for off-balance sheet risk and tax and legal matters. |
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Summary
In 2022 net profit amounted to Ps.24,108 million, representing a 15.9% or Ps.3,307 million increase over the Ps.20,801 million generated in 2021.
This result reflects mainly:
● | a Ps.11,680 million, or 18.4%, increase in net interest income, mainly driven by our greater focus on invidual loans and deposits, as well as higher interest rates. During 2022, the Mexican Central Bank increased the reference rate by 500 bps to 10.50%; |
● | a Ps.3,146 million, or 16.4%, decrease in impairment losses on financial assets (net), mainly driven by a decrease in the impairment losses in our commercial, financial and industrial loan portfolio due to the release of provisions during 2022 after a sustained period of payment related to certain large corporates that were initially constituted in 2021, partly offset by an increase of impairment losses on financial assets (net) in our installment loans to individuals portfolio, mainly due to the growth of the loan portfolio, especially payroll, auto and credit card loans, in line with our strategy and our prudent approach to risk management; and |
● | a Ps.2,026 million, or 11.8%, increase in income from fees and commissions (net) mainly resulting from increases in insurance fees, credit and debit card fees, service charges on deposits accounts fees, investment funds management, collection and payment services and correspondent services. |
The increase in net profit was partially offset by:
● | a Ps.3,859 million, or 79.0%, decrease in gains on financial assets and liabilities (net), mainly driven by interest rate increases during the year by the Central Bank which affected bonds and derivatives positions, as well as the volatility of FX rate compared to 2021; |
● | a Ps.3,198 million, or 64.4%, increase in income tax that resulted in an effective tax rate of 25.30% in the year as compared to that of 19.27% in 2021, primarily explained by an increase in profit before tax and some additional reserves, including the amortization of non-recoverable shares among others; |
● | a Ps.2,893 million, or 9.4%, increase in administrative expenses, due primarily to increases in personnel expenses, information technology and system expenses, taxes other than income tax, travel costs and surveillance and cash courier services, which were partly offset by a decrease in administrative services; |
● | a Ps.2,135 million, increase in provisions (net) due to higher requirements for tax provision and legal matters, as well, an increase in provisions for off-balance sheet risk; |
● | a Ps.1,010 million, or 29.1%, increase in other operating expenses (net) due to an extraordinary income from sale of acquiring business contracts booked in 2021; and |
● | a Ps.443 million, or 7.1%, increase in depreciation and amortization due to costs related to our continuous investment program, as we remain focused on digitizing more of our services and reinforcing cybersecurity assets, among other ongoing technology investments. |
Net Interest Income
Our interest income consists mainly of interest from lending activities to customers and credit institutions, which generated Ps.103,904 million, or 74.8%, of our total interest income in 2022, with the remaining interest income of Ps.35,092 million consisting of interest from investments in debt instruments, hedging
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operations, cash and balances with the Mexican Central Bank and other interest income. Interest income increased by Ps.35,884 million, or 34.8%, in 2022 compared to that of 2021.
Our interest expenses and similar charges consist mainly of interest paid on customer deposits. In 2022, interest expenses on customer deposits was Ps.32,228 million, representing 50.4% of our total interest expenses and similar charges for that period. Interest expenses from time deposits, demand accounts and repurchase agreements related to Mexican government securities with non-financial institution customers amounted to Ps.17,718 million, Ps.11,375 million and Ps.3,135 million, respectively, in 2022, representing 27.7%, 17.8% and 4.9% of our total interest expenses and similar charges for the period, respectively. In addition, interest expenses on deposits from the Mexican Central Bank and credit institutions (which includes repurchase agreements with financial institutions) was Ps.19,373 million, representing 30.3% of our total interest expenses in 2022, while interest expenses on subordinated debentures was Ps.1,646 million, representing 2.6% of our total interest expenses in 2022. Finally, interest expenses on marketable debt securities and other financial liabilities, other liabilities, other interest expenses and interest expenses on hedging operations were Ps.7,632 million, Ps.1,806 million, Ps.1,101 million and Ps.98 million, respectively and represented 11.9%, 2.8%, 1.7% and 0.2%, of our total interest expenses, respectively, in 2022. Interest expenses and similar charges increased by Ps.24,204 million, or 61.0%, in 2022 compared to that of 2021.
Our net interest income in 2022 was Ps.75,112 million, a Ps.11,680 million, or 18.4% increase from Ps.63,432 million in 2021. This increase was mainly due to a higher average interest rate of 9.51% in 2022 as compared to 7.32% in 2021, combined with an increase of 3.8% in average total interest-earning assets. This increase was partly offset by an increase in our interest expenses, mainly due to an increase in the average interest rate on interest-bearing liabilities from 3.13% in 2021 to 4.87% in 2022. We continue working to improve our funding costs, prioritizing retail deposits and foregoing certain expensive corporate deposits.
The following table sets forth the components of our interest income and interest expenses and similar charges, for 2021 and 2022.
| | | | | | | | | | | |
| | For the year ended December 31, | | | |
| |||||
|
| 2021 |
|
| 2022 |
|
| 2021/2022 |
| ||
| | (Millions of pesos) | | | (% Change) |
| |||||
Interest income | | | | | | | | | | | |
Cash and balances with the Mexican Central Bank | | Ps. | 1,471 | | | Ps. | 2,587 | |
| 75.87% | |
Loans and advances to credit institutions | |
| 3,257 | | |
| 9,525 | |
| 192.45% | |
Loans and advances to customers—excluding credit cards | |
| 62,048 | | |
| 79,241 | |
| 27.71% | |
Loans and advances to customers—credit cards | |
| 13,154 | | |
| 15,138 | |
| 15.08% | |
Debt instruments | |
| 22,489 | | |
| 25,901 | |
| 15.17% | |
Income from hedging operations | |
| 340 | | |
| 5,370 | |
| 1,479.41% | |
Other interest income | |
| 353 | | |
| 1,234 | |
| 249.58% | |
Total | | Ps. | 103,112 | | | Ps. | 138,996 | |
| 34.80% | |
| | | | | | | | | | | |
Interest expense and similar charges | |
|
| | |
|
| |
|
| |
Deposits from the Mexican Central Bank and credit institutions | | Ps. | (10,967) | | | Ps. | (19,373) | |
| 76.65% | |
Customer deposits—Demand accounts | |
| (7,964) | | |
| (11,375) | |
| 42.83% | |
Customer deposits—Time deposits | |
| (9,701) | | |
| (17,718) | |
| 82.64% | |
Customer deposits—Repurchase agreements | |
| (1,559) | | |
| (3,135) | |
| 101.09% | |
Subordinated debentures | |
| (1,668) | | |
| (1,646) | |
| (1.32%) | |
Marketable debt securities and other financial liabilities | |
| (5,308) | | |
| (7,632) | |
| 43.78% | |
Other liabilities | |
| (1,092) | | |
| (1,806) | |
| 65.38% | |
Expenses from hedging operations | |
| (299) | | |
| (98) | |
| (67.22%) | |
Other interest expenses | |
| (1,122) | | |
| (1,101) | |
| (1.87%) | |
Total | | Ps. | (39,680) | | | Ps. | (63,884) | |
| 61.00% | |
Net interest income | | Ps. | 63,432 | | | Ps. | 75,112 | |
| 18.41% | |
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The following table sets forth the components of our average loans and advances to customers for 2021 and 2022.
| | | | | | | | | | | |
| | As of December 31, |
| ||||||||
|
| 2021 |
|
| 2022 |
|
| 2021/2022 |
| ||
| | (Millions of pesos) | | | (% Change) |
| |||||
Average loans and advances to customers | | | | | | | | | | | |
Commercial, financial and industrial | | Ps. | 413,326 | | | Ps. | 446,254 |
| | 7.97% | |
Mortgage | |
| 212,409 | | |
| 206,700 |
| | (2.69%) | |
Installment loans to individuals | |
| 115,293 | | |
| 135,231 |
| | 17.29% | |
Revolving consumer credit card loans | |
| 51,814 | | |
| 58,378 |
| | 12.67% | |
Non-revolving consumer loans | |
| 63,479 | | |
| 76,853 |
| | 21.07% | |
Total | | Ps. | 741,028 | | | Ps. | 788,185 |
| | 6.36% | |
In 2022, average total interest-earning assets amounted to Ps.1,461,978 million, representing a 3.8%, or Ps.53,467 million increase from Ps.1,408,511 million in 2021. This increase was mainly due to: (i) an increase in the average volume of loans and advances to customers excluding credit cards of 9.0%, or Ps.60,230 million, which went from Ps.669,577 million in 2021 to Ps.729,807 million in 2022; (ii) an increase in the average volume of loans and advances to customers (excluding credit cards) and credit institutions - Reverse repurchase agreements of 56.1%, or Ps.45,588 million, which went from Ps.81,323 million in 2021 to Ps.126,911 million in 2022; and (iii) an increase in the average volume of loans and advances to credit card customers of 12.7%, or Ps.6,564 million, which went from Ps.51,814 million in 2021 to Ps.58,378 million in 2022. These increases were partially offset by: (a) a decrease in the average volume of loans and advances to credit institutions of 54.9%, or Ps.45,226 million, which went from Ps.82,441 million in 2021 to Ps.37,215 million in 2022; (b) a decrease in the average balance of debt instruments - taxable of 2.5%, or Ps.11,250 million, which went from Ps.457,249 in 2021 to Ps.445,999 million in 2022; and (c) a decrease in the average volume of cash and balances with the Mexican Central Bank of 6.8%, or Ps.2,745 million, which went from Ps.40,156 million in 2021 to Ps.37,411 million in 2022.
Interest income from interest-earning assets increased by Ps.35,884 million, or 34.8%, from Ps.103,112 million in 2021 to Ps.138,996 million in 2022, due primarily to an increase in the average interest rate, which increased 219 basis points from 7.32% in 2021 to 9.51% in 2022, combined with an increase of Ps.53,467 million, or 3.8% in the average total interest-earning assets, reflecting our greater focus on invidual loans, as well as higher interest rates. The increase in interest income on loans and advances to customers excluding credit card loans was driven primarily by: (i) an increase of Ps.60,230 million, or 9.0%, in average volume, combined with a 159 basis points increase in the average interest rate in 2022 compared to 2021, mainly due to a Ps.33,776 million, or 8.2% increase in average volume of our commercial, financial and industrial loans and an increase in the average interest rate of 281 basis points, due to loan growth from middle-market and corporate customers during the year and rising interest rates, (ii) an increase of Ps.13,374 million, or 21.1% in the average volume and a decrease in the average interest rate of 315 basis points of our non-revolving consumer loan portfolio due to an increase in the amount of payroll and auto loans, and (iii) an increase of Ps.13,080 million, or 6.8% in the average volume and an increase in the average interest rate of 3 basis points of our mortgage loan portfolio. Our mortgage loan portfolio continues to be affected by the run-off of the ING and GE portfolios acquired in 2011 and 2013, respectively, but continues showing strong growth, supported by the innovative and competitive offering in mortgages, such as our “Hipoteca Plus” product, which accounted for 56% of total mortgage origination in the year. In addition, the digital onboarding platform for mortgages, “Hipoteca Online”, has allowed us to be more efficient in terms of response times, eliminating the need for our customers to visit a branch, all resulting in a much better customer experience. Additionally, the increase in the interest income on our revolving consumer credit card loan portfolio was mainly driven by a Ps.6,564 million increase in the average volume of the credit card loan portfolio and an increase in the average interest rate of 54 basis points, reflecting higher interest rates. Overall, we saw strong loan growth in 2022, highlighting a solid increase in individual loans, mainly due to double-digit growth in credit cards, payroll and auto loans. While loan volumes in the commercial, financial and industrial loan portfolio and public sector loan portfolio, were driven by increases of middle-market companies and global corporate customers.
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Average interest rates on interest-earning assets increased by 219 basis points, from 7.32% in 2021 to 9.51% in 2022, which was mainly due to: (i) a 441 basis points increase in the average interest rate on loans and advances to customers (excluding credit cards) and credit institutions - Reverse repurchase agreements, (ii) a 326 basis points increase in the average interest rate on cash and balances with the Mexican Central Bank, (iii) a 159 basis points increase in the average interest rate on loans and advances to customers excluding credit card loans, (iv) a 86 basis points increase in the average interest rate on debt instruments, (v) a 54 basis points increase in the average interest rate on loans and advances to credit card customers, and (vi) a 48 basis points increase in the average interest rate on loans and advances to credit institutions. In 2022, the Mexican Central Bank increased interest rates by 500 basis points, closing at a level of 10.50%.
Average interest rate on commercial, financial and industrial loans increased by 281 basis points. This increase was mainly driven by: (i) a 389 basis points increase in the average interest rate of repurchase agreements, (ii) a 380 basis points increase in the average interest rate of loans to our Corporate and Investment Banking clients, (iii) a 291 basis points increase in the average interest rate of loans and advances to credit institutions, (iv) a 261 basis points increase in the average interest rate of SMEs, and (v) a 246 basis points increase in the average interest rate of loans to middle-market corporations.
In addition, there was an increase in the average loan volume in the Corporate and Investment Banking, middle-market corporations and credit institutions portfolios, of Ps.29,253 million, Ps.14,286 million and Ps.2,082 million, respectively. These increases were partly offset by decreases in the average loan volume in the repurchase agreements and SMEs portfolios, of Ps.9,145 million and Ps.2,701 million, respectively. The decrease in the SME average loan volume was from weak economic conditions that resulted in low credit demand.
Interest income from repurchase agreements decreased by Ps.32 million, from Ps.838 million in 2021 to Ps.805 million in 2022, due to a decrease of Ps.9,145 million in the average balance of our trading portfolio, from Ps.18,789 million in 2021 to Ps.9,644 million in 2022, partially offset by an increase of 389 basis points in the average interest rate of our trading portfolio.
Interest income from debt instruments - taxable increased by Ps.3,300 million, from Ps.21,007 million in 2021 to Ps.24,307 million in 2022, or 15.7%, mainly explained by a 86 basis points increase in the average interest rate, and partially offset by a decrease of Ps.11,250 million, or 2.5%, in the average balance of the portfolio, from Ps.457,249 million in 2021 to Ps.445,999 million in 2022.
Average total interest-bearing liabilities in 2022 were Ps.1,313,326 million, a Ps.43,105 million, or 3.4% increase from Ps.1,269,221 million in 2021. Interest expenses and similar charges increased by Ps.24.204 million, or 61.0%, from Ps.39,680 million in 2021 to Ps.63,884 million in 2022. The main drivers of this increase were: (i) an increase of Ps.8,406 million, or 76.6% in interest expense on deposits from Mexican Central Bank and credit institutions, due primarily to an increase of 412 basis points in the average interest rate paid, from 5.07% in 2021 to 9.19% in 2022, partially offset by a decrease of Ps.5,378 million in the average balance, (ii) an increase of Ps.8,017 million, or 82.6% in interest expense on time deposits, due mainly to an increase of 318 basis points in the average interest rate, from 4.34% in 2021 to 7.52% in 2022, together with an increase in the average balance of Ps.12,099 million, (iii) an increase of Ps.3,411 million, or 42.8% in interest expense on demand deposits, due primarily to an increase of 59 basis points in the average interest rate, from 1.53% in 2021 to 2.12% in 2022, together with an increase in the average balance of Ps.13,905 million, (iv) an increase of Ps.2,324 million, or 43.8% in interest expense on marketable debt securities and other financial liabilities, due primarily to an increase in the average interest rate of 117 basis points from 4.57% in 2021 to 5.74% in 2022, together with an increase in the average balance of Ps.16,754 million, (v) an increase of Ps.1,576 million, or 101.1% in interest expense on repurchase agreements, due primarily to an increase in the average interest rate of 120 basis points, from 1.21% in 2021, to 2.41% in 2022, combined with an increase in the average balance of Ps.1,361 million, and (vi) an increase of Ps.714 million, or 65.4% in interest expense on other liabilities, due primarily to an increase in the average interest rate of 187 basis points from 4.95% in 2021 to 6.82% in 2022, together with an increase in the average balance of Ps.4,431 million. These increases were partially offset by a
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decrease of Ps.22 million, or 1.3% in interest expense on subordinated debentures, due primarily to an decrease in the average interest rate of 5 basis points from 4.06% in 2021 to 4.01% in 2022, combined with an increase in the average balance of Ps.67 million.
The positive effect of the increase in our average yield on interest-earning assets was partially offset by an increase in the average interest rate of our interest-bearing liabilities in 2022 compared to 2021. The combined effect of an increase of 219 basis points in the average yield on our interest earning-assets together with an increase of 174 basis points in the average cost of our interest bearing liabilities from 3.13% in 2021 to 4.87% in 2022 resulted in an increase in the net interest spread of 45 basis points. Net interest income increased by Ps.11,680 million, or 18.4%, due mainly to the increase in the average interest rate of 219 basis points and an increase in average volume of interest-earning assets of Ps.53,467 million, partially offset by an increase in the average cost of our interest bearing liabilities of 174 basis points and an increase in average volume of interest bearing liabilities of Ps.43,105 million. During 2022, we saw an increase in retail deposits, as a result of our focus on driving profitability with a higher reliance on retail deposits. The interest rate paid on time deposits, which accounted for 27.7% of interest expense and similar charges, increased from 4.34% in 2021 to 7.52% in 2022, while the interest rate paid on demand deposits, which accounted for 17.8% of interest expense and similar charges, increased from 1.53% in 2021 to 2.12% in 2022.
Additionally, the interest rate on deposits in the Mexican Central Bank and credit institutions, which accounted for 30.3% of interest expense and similar charges, increased from 5.07% in 2021 to 9.19% in 2022.
For additional information on interest income and interest expenses and similar charges, see Notes 33, 34 and 35 to our audited financial statements included elsewhere in this Report.
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Net Fee and Commission Income
Our net fee and commission income consists mainly of commissions charged to customers for credit and debit card purchases, sales of insurance products, investment fund management fees, fees from collection and payment services and fees from financial advisory services.
Net fee and commission income in 2022 amounted to Ps.19,232 million, which represented a 11.8%, or Ps.2,026 million increase from Ps.17,206 million in 2021.
The following table presents a breakdown, by product, of our fee and commission income and expense for 2021 and 2022.
| | | | | | | | | | | |
| | For the Year Ended December 31, |
| ||||||||
|
| 2021 |
|
| 2022 |
|
| 2021/2022 |
| ||
| | (Millions of pesos) | | | (% Change) |
| |||||
Fee and commission income | | | | | | | | | | | |
Service charges on deposits accounts | | Ps. | 2,593 | | | Ps. | 3,012 | |
| 16.16% | |
Credit and debit cards | |
| 8,379 | | |
| 9,892 | |
| 18.06% | |
Insurance | |
| 5,508 | | |
| 6,203 | |
| 12.62% | |
Collection and payment services | |
| 2,206 | | |
| 2,350 | |
| 6.53% | |
Investment funds management | |
| 1,747 | | |
| 1,900 | |
| 8.76% | |
Foreign currency transactions | |
| 1,510 | | |
| 1,539 | |
| 1.92% | |
Checks and others | |
| 172 | | |
| 157 | |
| (8.72%) | |
Capital markets and securities activities | |
| 523 | | |
| 634 | |
| 21.22% | |
Administration and custody | |
| 459 | | |
| 394 | |
| (14.16%) | |
Financial advisory services | |
| 1,307 | | |
| 1,415 | |
| 8.26% | |
Other fees and commissions | |
| 951 | | |
| 999 | |
| 5.05% | |
Total | | Ps. | 25,355 | | | Ps. | 28,495 | |
| 12.38% | |
Fee and commission expense | |
| | | |
| | |
| | |
Credit and debit cards | | Ps. | (3,938) | | | Ps. | (4,964) | |
| 26.05% | |
Fund management | |
| (1) | | |
| (1) | |
| 0.00% | |
Checks and others | |
| (48) | | |
| (68) | |
| 41.67% | |
Capital markets and securities activities | |
| (202) | | |
| (296) | |
| 46.53% | |
Correspondent services | | | (802) | | | | (674) | | | (15.96%) | |
Collections and transactional services | |
| (305) | | |
| (254) | |
| (16.72%) | |
Financial advisory services | |
| (6) | | |
| (6) | |
| 0.00% | |
Other fees and commissions | |
| (2,847) | | |
| (3,000) | |
| 5.37% | |
Total | | Ps. | (8,149) | | | Ps. | (9,263) | |
| 13.67% | |
Net fee and commission income | | Ps. | 17,206 | | | Ps. | 19,232 | |
| 11.77% | |
Fee and commission income amounted to Ps.28,495 million in 2022, representing a 12.4%, or Ps.3,140 million increase from Ps.25,355 million in 2021, mainly due to an increase in fees and commissions from: (i) credit and debit cards of Ps.1,513 million, or 18.1%, from Ps.8,379 million in 2021 to Ps.9,892 million in 2022, (ii) the sale of insurance products of Ps.695 million, or 12.6%, from Ps.5,508 million in 2021 to Ps.6,203 million in 2022, (iii) service charges on deposits accounts of Ps.419 million, or 16.2%, from Ps.2,593 million in 2021 to Ps.3,012 million in 2022, (iv) investment funds management of Ps.153 million, or 8.8%, from Ps.1,747 million in 2021 to Ps.1,900 million in 2022, (v) collection and payment services of Ps.144 million, or 6.5%, from Ps.2,206 million in 2021 to Ps.2,350 million in 2022, (vi) capital markets and securities activities of Ps.111 million, or 21.2%, from Ps.523 million in 2021 to Ps.634 million in 2022, and (vii) financial advisory services of Ps.108 million, or 8.3%, from Ps.1,307 million in 2021 to Ps.1,415 million in 2022.
Fee and commission expense amounted to Ps.9,263 million in 2022, representing a Ps.1,114 million or 13.7% increase from Ps.8,149 million in 2021, mainly due to an increase in fees and commissions paid on credit and debit cards of Ps.1,026 million, or 26.1%, compared with 2021, and an increase in other fees and commissions paid of Ps.153 million, or 5.4%, compared with 2021. Net fee and commission income amounted to Ps.19,232 million, representing a 11.8%, or Ps.2,026 million increase from Ps.17,206 million in 2021. Net fee and commission as a percentage of operating expenses (calculated as total administrative expenses plus depreciation and amortization) was 47.54% for 2022 as compared to 46.36% for 2021.
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For additional information on fee and commission income and fee and commission expenses, see Notes 37 and 38 to our audited financial statements included elsewhere in this Report.
Gains /(Losses) on Financial Assets and Liabilities (Net)
Our gains/(losses) on financial assets and liabilities consist mainly of gains and losses on financial instruments and derivatives. The following table shows a breakdown of our net gains/(losses) on financial assets and liabilities for 2021 and 2022.
| | | | | | | | | | | |
| | For the Year Ended December 31, |
| ||||||||
|
| 2021 |
|
| 2022 |
|
| 2021/2022 |
| ||
| | (Millions of pesos) | | | (% Change) |
| |||||
Interest rate products | | Ps. | (82) | | | Ps. | (4,574) | | | 5,478.05% | |
Debt instruments | |
| (8,413) | | |
| (10,402) |
| | 23.64% | |
Interest rate derivatives | |
| 8,331 | | |
| 5,828 |
| | (30.04%) | |
Equity products | |
| 81 | | |
| 156 |
| | 92.59% | |
Equity securities | |
| 398 | | |
| 290 |
| | (27.14%) | |
Equity derivatives | |
| (317) | | |
| (134) |
| | (57.73%) | |
Exchange rate products | |
| 4,857 | | |
| 5,557 |
| | 14.41% | |
Foreign exchange securities | |
| 1,906 | | |
| 1,188 |
| | (37.67%) | |
Foreign exchange derivatives | |
| 2,951 | | |
| 4,369 |
| | 48.05% | |
Commissions paid to brokers | |
| 27 | | |
| (115) |
| | (525.93%) | |
Total | | Ps. | 4,883 | | | Ps. | 1,024 |
| | (79.03%) | |
Gains on financial assets and liabilities (net) in 2022 amounted to Ps.1,024 million, a decrease of Ps.3,859 million, or 79.0%, from a gain of Ps.4,883 million in 2021, mainly due to a decline in the market making activities of our Santander Corporate and Investment Banking segment with customers, where gains decreased by Ps.3,445 million in 2022 compared to 2021, a decrease in Retail Banking, where gains decreased by Ps.238 million in 2022 compared to 2021, and corporate activities, where gains decreased by Ps.220 million in 2022 compared to 2021. During 2022, the Mexican Central Bank increased the target interest rate by 500 basis points to a level of 10.50%.
The result in gains on financial assets and liabilities (net) was mainly due to the following:
(i) An increase on interest rate products of Ps.4,492 million, from a loss of Ps.82 million in 2021 to a loss of Ps.4,574 million in 2022. This loss was mainly caused by a decrease on interest rate derivatives, from a gain of Ps.8,331 million in 2021 to a gain of Ps.5,828 million in 2022, mainly resulting from losses on interest rate swaps and interest rate caps and floors, partly offset by gains in cross-currency swaps, together with an increase of Ps.1,989 million in debt instruments, to a loss of Ps.10,402 million in 2022 from a loss of Ps.8,413 million in 2021.
The result in gains on financial assets and liabilities (net) was partially offset by an increase in gains on exchange rate products of Ps.700 million, or 14.4%, from a gain of Ps.4,857 million in 2021 to a gain of Ps.5,557 million in 2022, mainly explained by a Ps.4,369 million gain in foreign exchange derivatives in 2022, which compared to a Ps.2,951 million gain in 2021, mainly due to increases of Ps.1,318 million and Ps.1,073 million, in foreign exchange options and futures, respectively, partly offset by a decrease in foreign exchange forwards of Ps.977 million. Gains on foreign exchange securities decreased by Ps.718 million, from a gain of Ps.1,906 million in 2021 to a gain of Ps.1,188 million in 2022.
For additional information on gains/(losses) on financial assets and liabilities (net), see Note 39 to our audited financial statements included elsewhere in this Report.
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Exchange Differences (Net)
Exchange differences (net) shows the gains or losses arising from the translation of monetary items in foreign currency to the functional currency as a result of changes in foreign exchange rates. During 2022, exchange differences (net) amounted to a loss of Ps.7 million, against a loss of Ps.35 million in 2021.
Other Operating Income (Net)
Other operating income decreased by Ps.930 million, or 53.4%, from Ps.1,740 million in 2021 to Ps.810 million in 2022, due to an extraordinary income from sale of acquiring business contracts booked in 2021.
Other operating expenses increased by Ps.80 million or 1.5%, from Ps.5,206 million in 2021 to Ps.5,286 million in 2022, mainly due to increases of Ps.180 million, or 4.7%, in IPAB contributions, from Ps.3,801 million in 2021 to Ps.3,981 million in 2022, and Ps.15 million, or 2.0%, in write-offs and bankruptcies, from Ps.735 million in 2021 to Ps.750 million in 2022, partly offset by a decrease of Ps.115 million, or 17.2%, in other expenses.
Other operating expense (net) increased by Ps.1,010 million, or 29.1%, from Ps.3,466 million in 2021 to Ps.4,476 million in 2022 as a result of the foregoing.
For additional information on other operating income and other operating expenses, see Note 41 to our audited financial statements included elsewhere in this Report.
Administrative Expenses
Our administrative expenses consist of personnel and other general expenses. Our personnel expenses consist mainly of salaries, social security contributions, bonuses and our long-term incentive plan for our executives. Our other general expenses mainly consist of: expenses related to information technology and systems, administrative services, which are mainly services outsourced in the areas of information technology, taxes other than income tax, rental of properties and hardware, advertising and communication, surveillance and cash courier services and expenses related to maintenance, conservation and repair, among others.
Administrative expenses increased by Ps.2,893 million, or 9.4%, from Ps.30,872 million in 2021 to Ps.33,765 million in 2022, due primarily to increases in personnel expenses, information technology and system expenses, related to our continuous investment program, as we remain focused on digitizing more of our services and reinforcing cybersecurity assets, among other ongoing technology investments, taxes other than income tax, travel costs, and surveillance and cash courier services. These increases, were partly offset by a decrease in administrative services.
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The following table sets forth administrative expenses for 2021 and 2022, by type.
| | | | | | | | | | | |
| | For the Year Ended December 31, |
| ||||||||
|
| 2021 |
|
| 2022 |
|
| 2021/2022 |
| ||
|
| (Millions of pesos) | | | (% Change) |
| |||||
Personnel expenses | | Ps. | (16,485) | | | Ps. | (18,915) | |
| 14.74% | |
Other general expenses | |
| (14,387) | | |
| (14,850) | |
| 3.22% | |
Administrative services | |
| (1,603) | | |
| (1,424) | |
| (11.17%) | |
Taxes other than income tax | |
| (1,915) | | |
| (2,030) | |
| 6.01% | |
Surveillance and cash courier services | |
| (1,237) | | |
| (1,341) | |
| 8.41% | |
Advertising and communication | |
| (696) | | |
| (753) | |
| 8.19% | |
Maintenance, conservation and repair | |
| (773) | | |
| (736) | |
| (4.79%) | |
Rents | |
| (556) | | |
| (614) | |
| 10.43% | |
Information technology and systems | |
| (5,945) | | |
| (6,108) | |
| 2.74% | |
Stationery and supplies | |
| (234) | | |
| (156) | |
| (33.33%) | |
Insurance premiums | |
| (103) | | |
| (100) | |
| (2.91%) | |
Credit cards | |
| (156) | | |
| (183) | |
| 17.31% | |
Travel costs | |
| (62) | | |
| (175) | |
| 182.26% | |
Operating costs | |
| (325) | | |
| (424) | |
| 30.46% | |
Other | |
| (782) | | |
| (806) | |
| 3.07% | |
Total administrative expenses | | Ps. | (30,872) | | | Ps. | (33,765) | |
| 9.37% | |
Our personnel expenses increased by Ps.2,430 million, or 14.7%, from Ps.16,485 million in 2021 to Ps.18,915 million in 2022, primarily because of an increase of 28.6% in bonuses, an increase of wages and salaries of 10.3%, coupled with an increase of 9.7% in other staff costs. Other staff costs include personnel benefits such as medical expenses, social security costs and pension plans.
The increase in personnel expenses resulted from an increase of Ps.2,161 million, or 15.1%, in retail banking, from Ps.14,312 million in 2021 to Ps.16,473 million in 2022; an increase of Ps.138 million, or 50.0%, in our corporate activities, and an increase of Ps.131 million, or 6.9%, in our Santander Corporate and Investment Banking segment. The increase in retail banking was due to an increase of Ps.1,050 million, or 31.0% in bonuses, from Ps.3,384 million in 2021 to Ps.4,434 million in 2022, an increase of Ps.825 million, or 11.4% in salaries, from Ps.7,243 million in 2021 to Ps.8,068 million in 2022, and an increase of Ps.286 million, or 7.8% in other staff costs, from Ps.3,685 million in 2021 to Ps.3,971 million in 2022. In addition, the increase in Santander Corporate and Investment Banking segment was due to an increase of Ps.113 million, or 17.1% in bonuses, from Ps.659 million in 2021 to Ps.772 million in 2022, an increase of Ps.15 million, or 1.6% in salaries, from Ps.933 million in 2021 to Ps.948 million in 2022, and an increase of Ps.3 million, or 1.0% in other staff costs, from Ps.305 million in 2021 to Ps.308 million in 2022.
Other general expenses increased by Ps.463 million, or 3.2%, from Ps.14,387 million in 2021 to Ps.14,850 million in 2022, mainly due to increases of Ps.163 million, or 2.7% in information technology and system expenses, mainly due to our continuous investment program, as we remain focused on digitizing more of our services and reinforcing cybersecurity assets, among other ongoing technology investments, Ps.115 million, or 6.0% in taxes other than income tax, Ps.113 million, or 182.3% in travel costs, Ps.104 million, or 8.4% in surveillance and cash courier services, and Ps.99 million, or 30.5%, in operating costs. These increases were partly offset by a decrease of Ps.179 million, or 11.2% in administrative services.
For additional information on personnel expenses and other general administrative expenses, see Notes 42 and 43 to our audited financial statements included elsewhere in this Report.
Impairment Losses on Financial Assets (Net)
Our impairment losses on financial assets (net) decreased by Ps.3,146 million, or 16.4%, from Ps.19,229 million in 2021 to Ps.16,083 million in 2022, mainly reflecting a decrease in impairment losses on financial assets (net) of Ps.6,138 million in our commercial, financial and industrial loan portfolio and a decrease of
176
Ps.649 million on expenses paid to recovery agencies. These decreases were partly offset by increases of: (i) Ps.1,997 million in our non-revolving consumer loan portfolio, (ii) Ps.1,094 million in our revolving consumer credit card loan portfolio, and (iii) Ps.550 million in our mortgage portfolio. The decrease in impairment losses on financial assets was mostly as a result of a decrease in the impairment losses in our commercial, financial and industrial loan portfolio due to the release of provisions during 2022 after a sustained period of payment related to certain large corporates that were initially constituted in 2021, partly offset by an increase of impairment losses on financial assets (net) in our installment loans to individuals portfolio, mainly due to the growth of the loan portfolio, especially payroll, auto and credit card loans, in line with our strategy and our prudent approach to risk management.
For additional information on impairment losses on financial assets, see Note 11 to our audited financial statements included elsewhere in this Report.
Non-performing loans totaled Ps.21,203 million as of December 31, 2022, a decrease of Ps.1,450 million, or 6.4%, as compared to Ps.22,653 million as of December 31, 2021, due to decreases in non-performing loans in our commercial, financial and industrial loan portfolio of Ps.4,350 million and non-performing loans in our revolving consumer credit card loan portfolio of Ps.153 million. These decreases were partially offset by increases in non-performing loans in our non-revolving mortgage loan portfolio and consumer loan portfolio, of Ps.2,142 million and Ps.911 million, respectively. The ratio of our non-performing loans as a percentage of total loans, or NPL ratio, decreased from 2.97% as of December 31, 2021 to 2.58% as of December 31, 2022, mainly due to the reclassification of a certain large corporate customer that was assessed as stage 3 during the COVID-19 pandemic, due to an imminent risk of default, but subsequently upgraded to stage 1 due to its subsequent sustained performance under its loans. This also resulted in a NPL ratio for our commercial, financial and industrial loan portfolio of 1.52% as of December 31, 2022, that decreased from the 2.80% reported as of December 31, 2021.
Finally, the non-performing loan ratio in our consumer loan portfolio stood at 2.99% as of December 31, 2022, which compares with the 2.40% reported as of December 31, 2021, the non-performing loan ratio in our mortgage loan portfolio as of December 31, 2022 stood at 5.47%, an increase from 4.87% in December 31, 2021 and the non-performing loan portfolio in our revolving consumer credit card loan portfolio loan portfolio as of December 31, 2022 stood at 1.81% a decrease from 2.49% in December 31, 2021. The increases of our NPL ratio in our consumer loan portfolio and mortgage loan portfolio, were mainly due to the growth of the loan portfolio, especially payroll, auto and credit card loans, in line with our strategy and our prudent approach to risk management.
The following table shows the ratio of our non-performing loans to total computable credit risk and our coverage ratio as of December 31, 2021 and 2022.
| | | | | | | | |
| | As of December 31, |
| |||||
|
| 2021 |
|
| 2022 |
| ||
| | (Millions of pesos, except percentages) |
| |||||
Computable credit risk(1) | | Ps. | 843,857 | | | Ps. | 923,398 | |
Non-performing loans(4) | |
| 22,653 | | |
| 21,203 | |
Written-off loans | |
| 26,477 | | |
| 19,169 | |
Allowance for impairment losses(5) | |
| 21,035 | | |
| 21,652 | |
Ratios | |
|
| | |
|
| |
Non-performing loans to computable credit risk | |
| 2.68% | | |
| 2.30% | |
Non-performing loans coverage ratio(2) | |
| 92.86% | | |
| 102.12% | |
Written-off loans coverage ratio(3) | |
| 3.14% | | |
| 2.08% | |
(1) | Computable credit risk is the sum of the face amounts of loans (including non-performing loans) amounting to Ps.820,314 million and guarantees and documentary credits amounting to Ps.103,084 million. When guarantees or documentary credits are contracted, we recognized them as off-balance sheet accounts. We present the off-balance sheet information to better demonstrate our total managed credit risk. |
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(2) | Allowance for impairment losses as a percentage of non-performing loans. |
(3) | Written-off loans as percentage of computable credit risk. |
(4) | See Note 2.g to our audited financial statements included elsewhere in this Report for more details on the classification of credit-impaired or non-performing loans. |
(5) | Amounts prepared in accordance with IFRS 9. |
The following table shows our non-performing loans by type of loan as of December 31, 2021 and 2022:
| | | | | | | | | | | |
| | As of December 31, | | | | | |||||
|
| 2021(1) |
|
| 2022(1) |
|
| 2021/2022 | | ||
| | (Millions of pesos) | | (% Change) | | ||||||
Commercial, financial and industrial | | Ps. | 9,937 | | | Ps. | 5,587 | |
| (43.78%) | |
Mortgage | |
| 9,725 | | |
| 11,867 | |
| 22.03% | |
Installment loans to individuals | |
| 2,991 | | |
| 3,749 | |
| 25.34% | |
Revolving consumer credit card loans | |
| 1,328 | | |
| 1,175 | |
| (11.52%) | |
Non-revolving consumer loans | |
| 1,663 | | |
| 2,574 | |
| 54.78% | |
Total | | Ps. | 22,653 | | | Ps. | 21,203 | |
| (6.40%) | |
(1) | See Note 2.g to our audited financial statements included elsewhere in this Report for more details on the classification of credit-impaired or non-performing loans. |
Commercial, financial and industrial
Our impairment losses in our commercial, financial and industrial loans portfolio decreased by 100.1% to Ps.7 million in 2022 from Ps.6,131 million in 2021. The decrease in impairment losses in this portfolio was mostly as a result of the release of provisions mentioned above.
Non-performing loans in our commercial, financial and industrial loan portfolio, which as of December 31, 2022 represented 26.4% of our total non-performing loans, decreased by Ps.4,350 million, or 43.8%, from December 31, 2021 to December 31, 2022, mainly due to the reclassification of a certain large corporate customer that was assessed as stage 3 during the COVID-19 pandemic, due to an imminent risk of default, but subsequently upgraded to stage 1 due to its subsequent sustained performance under its loans.This also resulted in a NPL ratio for our commercial, financial and industrial loan portfolio of 1.52% as of December 31, 2022, that decreased from the 2.80% reported as of December 31, 2021.
Mortgage loans
Our impairment losses in our mortgage loan portfolio increased by 32.0% to Ps.2,271 million in 2022 from Ps.1,721 million in 2021. The increase in impairment losses in our mortgage portfolio in 2022 was mainly due to higher provisions that accompany the growth of 8.3% in this portfolio.
Meanwhile, non-performing loans in our mortgage loan portfolio, which as of December 31, 2022 represented 56.0% of our total non-performing loans, increased by Ps.2,142 million, or 22.0% from December 31, 2021 to December 31, 2022, resulting in a ratio of 5.47%, as compared to 4.87% in 2021. The increase in non-performing in our mortgage portfolio in 2022 is mainly a result of a better performance in the mortgage loan portfolio.
Installment loans to individuals
Our impairment losses in our installment loans to individuals portfolio increased by 29.3% to Ps.13,626 million in 2022 from Ps.10,535 million in 2021.
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Impairment losses in our non-revolving consumer loan portfolio increased by 38.9% to Ps.7,125 million from Ps.5,128 million in 2021, while impairment losses in our revolving consumer credit card portfolio increased by 20.2% to Ps.6,501 from Ps.5,407 million in 2021.
Non-performing loans in our installment loans to individuals portfolio, which as of December 31, 2022 represented 17.7% of our total non-performing loans, increased Ps.758 million, or 25.3%, from December 31, 2021 to December 31, 2022. This volume was related to a increase of non-performing loans in our non-revolving consumer loan portfolio of Ps.911 million, partially offset by a decrease of non-performing loans in our revolving credit card loan portfolio of Ps.153 million.
Our NPL ratio with respect to our installment loans to individuals portfolio in the non-revolving consumer loan portfolio increased from 2.40% as of December 31, 2021 to 2.99% as of December 31, 2022, while our NPL ratio with respect to our installment loans to individuals portfolio in the revolving credit card loan portfolio decreased from 2.49% as of December 31, 2021 to 1.81% as of December 31, 2022.
Non-performing loan coverage ratio
The following table shows our non-performing loan coverage ratio by type of loan as of December 31, 2021 and 2022:
| | | | | | | |
| | | As of December 31, |
| |||
|
|
| 2021 |
|
| 2022 |
|
| | | (Percentages) |
| |||
Commercial, financial and industrial | |
| 83.06% | | | 99.68% | |
Mortgage | |
| 46.31% | | | 35.68% | |
Installment loans to individuals | |
| 276.73% | | | 316.06% | |
Revolving consumer credit card loans | |
| 290.06% | | | 413.62% | |
Non-revolving consumer loans | |
| 266.09% | | | 271.52% | |
Total | |
| 92.86% | | | 102.12% | |
The non-performing loan coverage ratio increased from 92.86% to 102.12%, mainly reflecting an increase in impairment losses, combined with a decrease in impaired assets in the total loan portfolio, mostly as a result of lower impairment losses on financial assets (net) in 2022, due to the release of provisions mentioned above.
The non-performing loan coverage ratio of our commercial loan portfolio increased from 83.06% in 2021 to 99.68% in 2022, mainly due to the combined effect of a decrease in impairment losses and lower credit-impaired assets.
With respect to our installment loans to individuals portfolio, the non-performing loan coverage ratio for the non-revolving consumer loans increased from 266.09% in 2021 to 271.52% in 2022, reflecting a 54.8% increase in credit-impaired assets and a 57.9% increase in impairment losses.
Meanwhile, the non-performing loan coverage ratio for the revolving consumer credit card loans increased from 290.06% to 413.62%, reflecting a 11.5% decrease in credit-impaired assets and a 26.2% increase in impairment losses.
Finally, regarding our mortgage loan portfolio, the non-performing loan coverage ratio stood at 35.68%, decreasing from 46.31% in 2021, reflecting a 22.0% increase in impaired assets and a 6.0% decrease in impairment losses.
Provisions (Net)
Our provisions consist mainly of provisions for pensions and other retirement obligations, provisions for off-balance sheet risk and provisions for legal and tax matters. Off-balance sheet risks include undrawn lines
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of credit cards, guarantees and loan commitments of commercial and public sector loans and guarantees and loan commitments of commercial loans to SMEs.
Provisions in 2022 registered a net loss of Ps.2,521 million, which compares to a net loss of Ps.386 million in 2021 reflecting a Ps.2,135 million increase. This variation to provisions mainly resulted from higher requirements for tax provision and legal matters, as well, an increase in provisions for off-balance sheet risk.
For additional information on provisions, see Note 24 to our audited financial statements included elsewhere in this Report.
Income Tax
Income tax in 2022 was Ps.8,164 million, a Ps.3,198 million, or 64.4% increase from Ps.4,966 million in 2021.
Our effective tax rates in 2021 and 2022 were 19.27% and 25.30%, respectively. The variation in income tax paid is primarily explained by an increase in profit before tax and additionally some reserves, among others, relating to the amortization of non-recoverable shares. Our effective tax rate increased 603 basis points in 2022 compared to 2021.
For additional information on tax matters, see Note 26 to our audited financial statements included elsewhere in this Report.
Results by Segment for the Year Ended December 31, 2022 Compared to the Year Ended December 31, 2021
The following table presents an overview of certain consolidated income statement data for each of our segments for 2021 and 2022.
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Retail Banking(1) | | | Corporate and Investment Banking(2) | | | Corporate Activities(3) |
| |||||||||||||||
| | For the Year Ended December 31, |
| |||||||||||||||||||||
|
| 2021 |
|
| 2022 |
|
| 2021 |
|
| 2022 |
|
| 2021 |
|
| 2022 |
| ||||||
| | (Millions of pesos) |
| |||||||||||||||||||||
Net interest income | | Ps. | 58,045 | | | Ps. | 65,477 | | | Ps. | 4,295 | | | Ps. | 9,216 | | | Ps. | 1,092 | | | Ps. | 419 | |
Dividend income | |
| — | | |
| — | | |
| 29 | | |
| 13 | | |
| 198 | | |
| 173 | |
Income from entities accounted for using the equity method | | | — | | | | — | | | | — | | | | — | | | | 200 | | | | 182 | |
Net fee and commission income | |
| 15,729 | | |
| 17,639 | | |
| 1,594 | | |
| 1,615 | | |
| (117) | | |
| (22) | |
Gains/(losses) on financial assets and liabilities | |
| 1,493 | | |
| 1,255 | | |
| 3,228 | | |
| (138) | | |
| 162 | | |
| (93) | |
Exchange differences (net) | | | — | | | | — | | | | — | | | | (7) | | | | (35) | | | | — | |
Other operating income (expenses) (net) | |
| (2,967) | | |
| (2,785) | | |
| (508) | | |
| (557) | | |
| 9 | | |
| (1,134) | |
Total income | | Ps. | 72,300 | | | Ps. | 81,586 | | | Ps. | 8,638 | | | Ps. | 10,142 | | | Ps. | 1,509 | | | Ps. | (475) | |
Administrative expenses | |
| (26,525) | | |
| (29,151) | | |
| (3,810) | | |
| (3,846) | | |
| (537) | | |
| (768) | |
Depreciation and amortization | |
| (5,849) | | |
| (6,293) | | |
| (364) | | |
| (372) | | |
| (30) | | |
| (21) | |
Impairment losses on financial assets not at fair value through profit or loss (net) | |
| (18,115) | | |
| (17,323) | | |
| (1,114) | | |
| 1,240 | | |
| — | | |
| — | |
Financial assets at fair value through other comprehensive income | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | |
Gains/(losses) on modification of financial assets (net) | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | |
Impairment losses on other assets (net) | |
| (27) | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | |
Provisions (net) | |
| 200 | | |
| (230) | | |
| — | | |
| (33) | | |
| (586) | | |
| (2,258) | |
Gain/(losses) on disposal of assets not classified as non-current assets held for sale | |
| — | | |
| — | | |
| — | | |
| — | | |
| 57 | | |
| 4 | |
Gain/(losses) on disposal of non-current assets held for sale not classified as discontinued operations | |
| — | | |
| — | | |
| — | | |
| — | | |
| 20 | | |
| 70 | |
Operating profit before tax | | Ps. | 21,984 | | | Ps. | 28,589 | | | Ps. | 3,350 | | | Ps. | 7,131 | | | Ps. | 433 | | | Ps. | (3,448) | |
(1) | The Retail Banking segment encompasses the entire commercial banking and asset management business. Our Retail Banking segment’s activities include products and services for individuals, private banking customers, SMEs, middle-market corporations and government institutions. |
(2) | The Corporate and Investment Banking segment reflects the returns on the corporate banking business, including managed treasury departments and the equities business. Our Corporate and Investment Banking segment provides comprehensive products and services relating to finance, guarantees, mergers and acquisitions, equity and fixed income, structured finance, international trade finance, cash |
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management services, collection services and e-banking, including structured loans, syndicated loans, acquisition financing and financing of investment plans, among others. |
(3) | The Corporate Activities segment is comprised of all operational and administrative activities that are not assigned to a specific segment or product mentioned above. The Corporate Activities segment includes the financial management area, which manages structural financial risks arising from our commercial activities, mainly liquidity risk and interest rate risk, provides short- and long-term funding for our lending activities and calculates and controls transfer prices for loans and deposits in local and foreign currencies. The financial management area also oversees the use of our resources in compliance with internal and regulatory limits regarding liquidity and regulatory capital requirements. |
The following table presents an overview of certain consolidated balance sheet data for each of our segments as of December 31, 2021 and 2022.
| | | | | | | | | | | | | | | | | | | | | | | |
| | Retail Banking | | | Corporate and Investment Banking | | | Corporate Activities | |||||||||||||||
| | As of December 31, | |||||||||||||||||||||
|
| 2021 |
|
| 2022 |
|
| 2021 |
|
| 2022 |
|
| 2021 |
|
| 2022 | ||||||
| | (Millions of pesos) | |||||||||||||||||||||
Cash and balances with the Central Bank | | Ps. | 46,650 | | | Ps. | 55,512 | | | Ps. | 5,843 | | | Ps. | 7,184 | | | Ps. | 10,580 | | | Ps. | 10,119 |
Financial assets at fair value through profit or loss | | | — | | | | — | | | | 361,615 | | | | 484,987 | | | | — | | | | — |
Other financial assets at fair value through profit or loss | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — |
Financial assets at fair value through other comprehensive income | | | — | | | | 946 | | | | 4,056 | | | | — | | | | 391,773 | | | | 314,603 |
Financial assets at amortized cost | | | 613,948 | | | | 669,837 | | | | 151,389 | | | | 160,755 | | | | 19,771 | | | | 29,765 |
Hedging derivatives | |
| — | | |
| — | | |
| — | | |
| — | | |
| 11,248 | | |
| 10,181 |
Non-current assets held for sale | |
| 745 | | |
| 1,394 | | |
| 28 | | |
| 35 | | |
| — | | |
| 1,586 |
Investments in associated entities | | | — | | | | — | | | | — | | | | — | | | | 1,380 | | | | — |
Tangible assets | |
| 10,615 | | |
| 11,531 | | |
| 1,791 | | |
| 1,945 | | |
| 214 | | |
| 231 |
Right-of-Use assets | | | 4,953 | | | | 5,542 | | | | 198 | | | | 577 | | | | 24 | | | | 145 |
Intangible assets | |
| 6,625 | | |
| 7,519 | | |
| 756 | | |
| 858 | | |
| 2,030 | | |
| 2,304 |
Tax assets | |
| — | | |
| — | | |
| — | | |
| — | | |
| 21,855 | | |
| 24,684 |
Other assets | |
| 2,054 | | |
| 2,267 | | |
| 46 | | |
| 51 | | |
| 8,026 | | |
| 8,863 |
Total assets | | Ps. | 685,590 | | | Ps. | 754,548 | | | Ps. | 525,722 | | | Ps. | 656,392 | | | Ps. | 466,901 | | | Ps. | 402,481 |
Financial liabilities at fair value through profit or loss | | Ps. | 8,206 | | | Ps. | 9,581 | | | Ps. | 343,211 | | | Ps. | 424,531 | | | Ps. | — | | | Ps. | — |
Financial liabilities at amortized cost | |
| 707,135 | | |
| 725,965 | | |
| 260,180 | | |
| 281,143 | | |
| 150,830 | | |
| 158,781 |
Hedging derivatives | |
| — | | |
| — | | |
| — | | |
| — | | |
| 8,162 | | |
| 4,461 |
Provisions | |
| 1,352 | | |
| 1,621 | | |
| 418 | | |
| 501 | | |
| 9,019 | | |
| 10,809 |
Lease liabilities | | | 5,469 | | | | 6,161 | | | | 221 | | | | 643 | | | | 26 | | | | 161 |
Tax liabilities | |
| — | | |
| — | | |
| — | | |
| — | | |
| 518 | | |
| 934 |
Other liabilities | |
| 4,464 | | |
| 5,576 | | |
| 728 | | |
| 910 | | |
| 14,686 | | |
| 18,189 |
Total liabilities | | Ps. | 726,626 | | | Ps. | 748,904 | | | Ps. | 604,758 | | | Ps. | 707,728 | | | Ps. | 183,241 | | | Ps. | 193,335 |
Total equity | | Ps. | 70,735 | | | Ps. | 76,778 | | | Ps. | 25,133 | | | Ps. | 23,887 | | | Ps. | 67,720 | | | Ps. | 62,789 |
Total liabilities and equity | | Ps. | 797,361 | | | Ps. | 825,682 | | | Ps. | 629,891 | | | Ps. | 731,615 | | | Ps. | 250,961 | | | Ps. | 256,124 |
Retail Banking Segment
Our Retail Banking segment’s activities include the provision of products and services for individuals, private banking customers, SMEs, middle-market corporations and government institutions. We provide commercial banking services to individual customers of all income levels and offer a wide range of products and services to our individual customers, including demand and term deposits, credit and debit cards, mortgage loans, payroll and personal loans. Our Retail Banking segment also serves the middle market and local corporates that are not within the global corporate customers served by our Santander Corporate
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and Investment Banking segment. We offer SMEs a variety of services and products including commercial loans, transactional collections and payment services, insurance, hedging and foreign trade services.
Operating profit before taxes attributable to the Retail Banking segment in 2022 was Ps.28,589 million, a 30.0% or Ps.6,605 million increase from Ps.21,984 million in 2021. This increase was mainly due to:
● | a 12.8%, or Ps.7,432 million increase in net interest income, due to increases of Ps.13,667 million, Ps.13,374 million, Ps.13,080 and Ps.6,564 million, in the average balance of the commercial, consumer, mortgage and credit card loan portfolios, respectively; |
● | a 12.1%, or Ps.1,910 million increase in net fees and commissions income, from Ps.15,729 million in 2021 to Ps.17,639 million in 2022, due mainly to an increase in fees and commissions from sale of insurance products, credit and debit card services, service charges on deposits accounts, fund management and collection and payment services; |
● | a 4.4%, or Ps.792 million, decrease in impairment losses on financial assets (net), mostly resulting from lower expenses paid to recovery agencies; |
● | a 6.1%, or Ps.182 million, decrease in other expenses (net), mainly due to the decrease of Ps.511 million, or 51.7%, in write-offs and bankruptcies, partly offset by an increase of Ps.183 million in IPAB contributions; and |
● | a Ps.27 million decrease in impairment losses on other assets (net), due to the recognition of an impairment loss of foreclosed assets during 2021, which did not recur during 2022. |
These positive effects were partially offset by:
● | a 9.9%, or Ps.2,626 million increase in administrative expenses, from Ps.26,525 million in 2021 to Ps.29,151 million in 2022, mainly due to an increase in personnel expenses of Ps.2,161 million, or 15.1%, resulting from increases of Ps.1,050 million, or 31.0% in bonuses, Ps.825 million, or 11.4% in wages and salaries and Ps.286 million, or 7.8% in other staff costs. Additionally, increases in information technology and systems expenses, taxes other than income tax and surveillance and cash courier services also contributed; |
● | a 7.6%, or Ps.444 million increase in depreciation and amortization due to costs related to our continous investment program; |
● | A Ps.430 million, increase in provisions (net), from a gain of Ps.200 million in 2021 to a loss of Ps.230 million in 2022; and |
● | a 15.9%, or Ps.238 million decrease in gains on financial assets and liabilities and exchange differences (net), from a gain of Ps.1,493 million in 2021 to a gain of Ps.1,255 million in 2022 due to increased volatility in the foreign exchange rate during 2022 as compared to 2021. |
Corporate and Investment Banking Segment
Our Corporate and Investment Banking segment provides comprehensive products and services, including corporate banking, global transactional banking and investment banking services, relating to finance, guarantees, mergers and acquisitions, equity and fixed income, structured finance, international trade finance, cash management services, collection services and e-banking, including structured loans, syndicated loans, acquisition financing and financing of investment plans, among others, to our Corporate and Investment Banking segment customers. This segment also includes our proprietary trading operations.
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Operating profit before taxes attributable to the Corporate and Investment Banking segment in 2022 was Ps.7,131 million, representing a Ps.3,781 million, or 112.9% increase from Ps.3,350 million in 2021. This increase was mainly due to:
● | a 114.6%, or Ps.4,921 million increase in net interest income, mainly due to an increase of Ps.2,226 million in interest income, combined with a Ps.7,147 million increase in interest expenses, due to an increase in the average balance of commercial and credit institutions loans and an increase in the average interest rate of deposits from Mexican Central Bank, demand deposits and time deposits; and |
● | a Ps.2,354 million decrease in impairment losses on financial assets (net), due to the release of provisions related to certain large corporates during 2022, as mentioned above. |
These positive results were partially offset by:
● | a 104.3%, or Ps.3,366 million decrease in gains/(losses) on financial assets and liabilities and exchange differences (net), from a gain of Ps.3,228 million in 2021 to a loss of Ps.138 million in 2022, primarily due to a decrease of Ps.3,445 million in market-making and sale activities and Ps.128 million in proprietary trading. |
Corporate Activities Segment
Our Corporate Activities segment is comprised of those operational and administrative activities that are not assigned to a specific segment or product mentioned above. The Corporate Activities segment includes the financial management area, which manages structural financial risks that arise from our commercial activities, mainly liquidity risk, interest rate risk and exchange rate risk, provides short- and long-term funding for our activities and calculates and controls transfer prices for loans and deposits in local and foreign currencies. The financial management area also oversees the use of our resources in compliance with internal and regulatory limits regarding liquidity and regulatory capital requirements.
Through the assignment of a transfer price to each loan or deposit, interest income is divided between our operating segments (Retail Banking and Corporate and Investment Banking) and the Corporate Activities segment as follows:
● | the difference between the interest rate charged to customers for the loans granted by our operating segments and the transfer price assigned to these loans is assigned as interest income to the respective operating segment; |
● | the difference between the interest rate paid to customers for the deposits received by our operating segments and the transfer price assigned to these deposits is assigned as interest income to the respective operating segment; and |
● | finally, the difference between the transfer price charged to the loans and the transfer price paid for the deposits is assigned to Corporate Activities as net interest income. |
The financial management area determines transfer prices based on interest rates currently prevailing in the market for different durations, which are estimated from the yield of the most representative and liquid short and medium term corporate, government and Mexican Central Bank debt securities, and from the Mexican Central Bank’s reference interest rates for long term securities.
The ALCO manages the risks associated with financial margin and net worth of the banking book, as well as liquidity risk for the entire balance sheet. We hedge the interest rate risk of the balance sheet using strategies that can address specific operations or modify the risk profile as a whole. In recent years, the ALCO portfolio was comprised of fixed rate positions, mainly Mexican sovereign bonds, in addition to interest rate swaps, to protect the interest rate margin against a lower interest rate environment. As the
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scenario of interest rate cuts is very likely, we have increased the volume of activity in the ALCO portfolio, mainly fixed rate Mexican sovereign bonds.
Operating profit before taxes attributed to Corporate Activities in 2022 was a loss of Ps.3,448 million, a Ps.3,881 million decrease from a gain of Ps.433 million in 2021. This decrease was mainly due to a Ps.1,672 million increase in provisions (net), mainly resulted from higher requirements for tax provision and legal matters, as well as an increase in provisions for off-balance sheet risk, a Ps.1,143 million increase in other expenses (net) and a Ps.673 million decrease in net interest income.
B. | Liquidity and Capital Resources |
Our control and management functions involve planning our funding requirements, structuring the sources of financing to achieve optimal diversification in terms of maturities, instruments and markets and setting forth contingency plans.
Overall, we have a strong liquidity position with total loans, net of allowance for impairment losses, as a percentage of our deposits, representing approximately 69.7% of our total deposits, 86.0% of our customer deposits and 105.5% of our demand and time deposits as of December 31, 2022. We constantly review our liquidity position and the forecasted growth of our business lines relative to our loan/deposit ratio.
Banco Santander Parent and its subsidiaries follow a global model in which each unit is responsible for its own capital and funding. We are autonomous in the management of our liquidity and capital requirements, with no structural support needed from Grupo Financiero Santander México or any other unit of the Santander Group.
Pursuant to the Mexican Capitalization Requirements, we may be restricted from paying dividends to Grupo Financiero Santander México, if we do not meet our required regulatory capital ratios, do not have sufficient retained earnings or do not maintain legal reserves at required levels. Payment of dividends, distributions and advances will be contingent upon our earnings and business considerations and is or may be limited by legal, regulatory and contractual restrictions. Additionally, our right to receive any assets of any of our subsidiaries as an equity holder of such subsidiaries, upon their liquidation or reorganization, will be effectively subordinated to the claims of our subsidiaries’ creditors, including trade creditors.
For information about our use of financial instruments for hedging purposes, see Note 12 to our audited financial statements included elsewhere in this Report and “Item 11. Quantitative and Qualitative Disclosures About Market Risk—Market Risk.”
Risk-Weighted Assets and Regulatory Capital
Pursuant to Mexican Capitalization Requirements, we are required to maintain specified levels of net capital on an unconsolidated basis as a percentage of risk-weighted assets, including credit, market and operational risks. The minimum Capital Ratio currently required by the Mexican Capitalization Requirements in order not to be required to cancel interest payments or principal payments (including the
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forced conversion of certain securities into shares) is 11.70%. As of December 31, 2022, our Capital Ratio was 19.38%.
The table below presents our risk-weighted assets and Capital Ratios as of December 31, 2020, 2021 and 2022, calculated in accordance with Mexican Banking GAAP:
| | | | | | | | | | | | |
| | Mexican Banking GAAP |
| |||||||||
| | As of December 31, |
| |||||||||
|
| 2020 |
|
| 2021 |
|
| 2022 |
| |||
| | (Thousands of pesos, except percentages) |
| |||||||||
Capital: | | | | | | | | | | | | |
Perpetual subordinated non-preferred contingent convertible additional Tier 1 capital notes (AT1 Notes) | | Ps. | 114,306,256 | | | Ps. | 116,079,559 | | | Ps. | 103,348,238 | |
Tier 1 | |
| 124,254,615 | | |
| 140,688,559 | | |
| 117,004,468 | |
Tier 2 | |
| 27,203,299 | | |
| 27,927,832 | | |
| 26,827,202 | |
Total capital | |
| 151,457,914 | | |
| 168,616,391 | | |
| 143,831,670 | |
Risk-Weighted Assets: | |
| | | |
| | | |
| | |
Credit risk | |
| 540,191,094 | | |
| 517,697,725 | | |
| 476,538,248 | |
Market risk | |
| 192,479,300 | | |
| 191,925,633 | | |
| 186,813,652 | |
Operational risk | |
| 64,166,021 | | |
| 72,426,554 | | |
| 78,726,754 | |
Total risk-weighted assets | |
| 796,836,415 | | |
| 782,049,912 | | |
| 742,078,654 | |
Required Regulatory Capital: | |
| | | |
| | | |
| | |
Credit risk | |
| 43,215,287 | | |
| 41,415,818 | | |
| 38,123,060 | |
Market risk | |
| 15,398,344 | | |
| 15,354,051 | | |
| 14,945,092 | |
Operational risk | |
| 5,133,282 | | |
| 5,794,124 | | |
| 6,298,140 | |
Total risk-weighted assets | | Ps. | 63,746,913 | | | Ps. | 62,563,993 | | | Ps. | 59,366,292 | |
Capital Ratios (credit, market and operational risk)(*): | |
|
| | |
|
| | |
|
| |
CET 1 capital to risk-weighted assets | |
| 14.35% | | |
| 14.84% | | |
| 13.93% | |
Tier 1 capital to risk-weighted assets | |
| 15.59% | | |
| 17.99% | | |
| 15.77% | |
Tier 2 capital to risk-weighted assets | |
| 3.41% | | |
| 3.57% | | |
| 3.61% | |
Total capital to risk-weighted assets(1) | |
| 19.01% | | |
| 21.56% | | |
| 19.38% | |
(*) | The capital ratios included in this table are in accordance to the data published by the CNBV. |
(1) | Our Capitalization Index as of December 31, 2022 decreased by 218 basis points from 21.56% on December 31, 2021 to 19.38% on December 31, 2022, mainly due to decreases of 14.7% (Ps.24,784,721 million) in total capital, 8.0% (Ps.3,292,758 million) in regulatory capital required for credit risk and 2.7% (Ps.408,959 million) in regulatory capital required for market risk, and an increase of 8.7% (Ps.504,016 million) in regulatory capital required for operational risk. |
The Mexican government was one of the first to adopt Basel III international standards. Basel III is a package of capital and liquidity reforms for internationally active banking organizations worldwide that includes, among other things, the definition of capital, capital requirements, the treatment of counterparty risk, the leverage ratio and the global liquidity standard. The regulations require Mexican banks to maintain a minimum of 4.5% Common Equity Tier 1 (CET1), and 6% Tier 1 RWA capital. In addition, a mandatory capital conservation buffer of 2.5% of RWA is also required, resulting in a minimum total capital of 10.5% (including the capital conservation buffer), plus a supplement per systemically important bank of such percentage as determined by the CNBV, Due to the Bank’s Grade III classification the CNBV imposed a supplementary capital conservation percentage of 1.20% and a countercyclical capital supplement currently at 0.0% and which on an aggregate basis add up to a minimum requirement of 11.70%. We have been in compliance with these regulations since their establishment and remained in compliance as of December 31, 2022.
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In addition, and in accordance with the regulatory requirement by the CNBV published on June 22, 2016, banking institutions must publish their leverage ratios beginning in September 2016 (and include quarters beginning on December 2015) in the case of systemically important banks. Our leverage ratio as of December 31, 2022 was 7.13%, as of November 30, 2022, was 6.82%, as of October 31, 2022 was 6.86%, as of September 30, 2022 was 6.85%, as of June 30, 2022 was 7.13%, as of March 31, 2022 was 7.97%, and as of December 31, 2021 was 8.92%.
This ratio is calculated as Tier 1 capital divided by leverage exposure.
Liquidity Management
Liquidity management seeks to ensure that, even under adverse conditions, we have access to the necessary funds to cover client needs, maturing liabilities and working capital requirements. Our primary sources of liquidity are cash flows from operating activities. We generate cash flows from operating activities primarily through deposits. Liquidity risk arises as a consequence of our financing, trading and investment activities. It includes the risk of being unable to liquidate a position in a timely manner at a reasonable price and the risk that we are required to repay liabilities earlier than anticipated.
Our primary cash requirements are to honor withdrawals of deposits when requested by our clients. Our general policy is to maintain adequate liquidity levels to ensure our ability to honor withdrawals of deposits in amounts and at times consistent with historical data, make repayment of other liabilities at maturity, extend loans and meet our own working capital needs in compliance with the applicable internal and regulatory reserve requirements and liquidity coefficients in all material respects. See “Item 4. Information on the Company—B. Business Overview—Supervision and Regulation—Classification of Loans and Allowance for Impairment Losses—Liquidity Requirements for Foreign Currency—Denominated Liabilities” and “Item 11. Quantitative and Qualitative Disclosures About Market Risk—Liquidity Risk.”
Additionally, the Basel III framework has implemented a liquidity coverage ratio, or LCR, and a Net Stable Funding Ratio, or NSFR. The LCR requires banks to maintain sufficient high-quality liquid assets to cover the net cash outflows that could be encountered under a stress scenario during a thirty-day period. The NSFR establishes a minimum amount of stable funding a bank will be required to maintain based on the liquidity of our assets and activities over a one-year period.
We are also required to comply with the General Liquidity Requirements, which were first published by the CNBV and the Mexican Central Bank in 2014 and subsequently amended in 2016. We are currently in compliance with these requirements.
On August 23, 2021, the CNBV published in the Federal Official Gazette a resolution containing the rules aimed to provide new liquidity requirements for banks (“las nuevas Disposiciones de carácter general sobre los requerimientos de liquidez para las Instituciones de Banca Múltiple”) which will start taking effect on March 1, 2022. Among the principal changes is to require a new funding ratio for local purposes, the CFEN, as well as to change the method in which we account for deposits for local purposes. Our calculation of the LCR and NSFR will not be affected by these changes.
During 2020 and 2021, the economic impacts of the COVID-19 pandemic led several of our customers to draw on committed credit facilities and we anticipate that our customers will continue to do so in 2022. We took several defensive measures to protect our liquidity in the face of the COVID-19 pandemic, such as strategically accessing wholesale markets for short and long-term funding and moderately using assets as security for structural balance sheet funding sources. In addition, the Mexican Central Bank took certain extraordinary measures to increase liquidity in the financial markets as a direct response to the COVID-19 pandemic, certain of which we took advantage of to bolster our liquidity. For instance, the Mexican Central Bank granted credit lines to domestic banks in 2020, including us. These credit lines remained in place during 2021, and we drew approximately U.S.$200 million on such lines until August 2021, when we repaid
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the credit lines in full. We were able to maintain our liquidity position throughout 2022 and our liquidity position remains strong as of the date of this annual report.
The following table presents information relating to our liquid assets, total loans and deposits as of December 31, 2020, 2021 and 2022:
| | | | | | | | | | | | |
| | As of December 31, |
| |||||||||
|
| 2020 |
|
| 2021 |
|
| 2022 |
| |||
Liquid assets as a percentage of deposits (1) | | | 45.18% | | | | 36.27% | | | | 37.38% | |
Total Loans, net of allowances, as a percentage of deposits (2) | | | 60.31% | | | | 67.20% | | | | 69.67% | |
Total loans as a percentage of total funding (3) | |
| 54.50% | | | | 69.22% | | | | 71.55% | |
Deposits as a percentage of total funding (2)(3) | |
| 87.13% | | | | 87.79% | | | | 86.80% | |
(1) | For the purpose of calculating this ratio, the amount of deposits includes the sum of demand deposits and time deposits. See “—Composition of Deposits.” |
Liquid assets include cash due from banks and government securities recorded at market prices. We believe we could obtain cash for our liquid assets immediately, although under systemic stress scenarios, we would likely be subject to a discount to the face value of these assets. As of December 31, 2020, 2021 and 2022 we had a total amount of liquid assets of Ps.514,960 million, Ps.399,945 million and Ps.428,473 million, respectively. For the years ended December 31, 2020, 2021 and 2022, the average amounts outstanding were Ps.446,667 million, Ps.497,673 million and Ps.497,427 million, respectively.
As of December 31, 2020, liquid assets were composed of the following: 13.8% cash and balances with the Mexican Central Bank (cash at our branches and ATMs and the Depósito de Regulación Monetaria (Compulsory Deposits)); 78.6% debt instruments issued by the Mexican Government; and 7.5% debt instruments issued by the Mexican Central Bank.
As of December 31, 2021, liquid assets were composed of the following: 15.7% cash and balances with the Mexican Central Bank (cash at our branches and ATMs and the Depósito de Regulación Monetaria (Compulsory Deposits)); 75.8% debt instruments issued by the Mexican Government; and 8.5% debt instruments issued by the Mexican Central Bank.
As of December 31, 2022, liquid assets were composed of the following: 17.0% cash and balances with the Mexican Central Bank (cash at our branches and ATMs and the Depósito de Regulación Monetaria (Compulsory Deposits)); 76.2% debt instruments issued by the Mexican Government; and 6.8% debt instruments issued by the Mexican Central Bank.
(2) | For the purpose of calculating this ratio, the amount of deposits includes the sum of demand deposits and time deposits. See “—Composition of Deposits.” |
(3) | For the purpose of calculating this ratio, the amount of total funding comprises the total of our deposits and repurchase agreements, our total marketable debt securities and the amount of our subordinated liabilities. |
For December 31, 2020, 2021 and 2022 our deposits and repurchase agreements amounted to Ps.1,139,855 million, Ps.1,102,767 million and Ps.1,146,281 million, respectively, and our marketable debt securities amounted to Ps.132,117 million, Ps.101,682 million and Ps.134,913 million, respectively. For December 31, 2020, 2021 and 2022, our subordinated liabilities amounted to Ps.36,182 million, Ps.51,643 million and Ps.39,384 million, respectively.
We have three principal sources of short-term funding: (i) demand deposits, comprised by both interest-bearing and non-interest-bearing demand deposits, (ii) time deposits, which include short-term promissory
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notes with interests payable at maturity (pagarés bancarios), fixed-term deposits and foreign currency time deposits and (iii) repurchase agreements.
The following table shows the composition of our short-term funding described above:
| | | | | | | | | | | |
| | As of December 31, | |||||||||
|
| 2020 |
|
| 2021 |
|
| 2022 | |||
| | (Millions of pesos) | |||||||||
Demand deposits: |
| |
| |
| |
| |
| |
|
Interest-bearing deposits | | Ps. | 100,532 | | | Ps. | 105,095 | | | Ps. | 113,351 |
Non-interest-bearing deposits | |
| 398,926 | | |
| 436,162 | | |
| 425,058 |
Subtotal | | Ps. | 499,458 | | | Ps. | 541,257 | | | Ps. | 538,409 |
Time deposits: | |
| | | |
| | | |
| |
Notes with interest payable at maturity | | Ps. | 175,702 | | | Ps. | 185,312 | | | Ps. | 208,582 |
Fixed-term deposits | |
| 1,931 | | |
| 1,345 | | |
| 976 |
Foreign currency time deposits | |
| 12,053 | | |
| 8,774 | | |
| 8,758 |
Subtotal | | Ps. | 189,686 | | | Ps. | 195,431 | | | Ps. | 218,316 |
Repurchase agreements | |
| 138,616 | | |
| 131,639 | | |
| 146,691 |
Accrued interest (1) | |
| 873 | | |
| 877 | | |
| 1,910 |
Other deposits | |
| 43,860 | | |
| 22,760 | | |
| 22,972 |
Total customer deposits | | Ps. | 872,493 | | | Ps. | 891,964 | | | Ps. | 928,298 |
Deposits from the Mexican Central Bank and credit institutions (2) | |
| 267,362 | | |
| 210,803 | | |
| 217,983 |
Total deposits (3) | | Ps. | 1,139,855 | | | Ps. | 1,102,767 | | | Ps. | 1,146,281 |
(1) | Mainly from time deposits. |
(2) | Includes Ps.79,859 million, Ps.40,848 million and Ps.53,873 million of repurchase agreements with the Mexican Central Bank and with credit institutions as of December 31, 2020, 2021 and 2022, respectively. |
(3) | As of December 31, 2020, we had deposits of Ps.864,169 million from customers, Ps.116,096 million from credit institutions and Ps.151,266 million from the Mexican Central Bank. As of December 31, 2021, we had deposits of Ps.745,365 million from customers, Ps.110,988 million from credit institutions and Ps.109,618 million from the Mexican Central Bank. As of December 31, 2022, we had deposits of Ps.928,298 million from customers, Ps.97,175 million from credit institutions and Ps.120,808 million from the Mexican Central Bank. See “Item 4. Information on the Company—B. Business Overview—Selected Statistical Information—Liabilities—Deposits.” |
Demand deposits are our most important funding source and are also less expensive relative to other sources of funding. Our funding strategy focuses on increasing the source of low-cost funding through new banking products and commercial campaigns oriented to grow the volume of demand deposits from our existing customers and expand our customer base. Consistent with our funding strategy, we were able to decrease our non-interest-bearing demand deposits by approximately 2.5%, from Ps.436,162 million at December 31, 2021 to Ps.425,058 million at December 31, 2022 as a result of tailored marketing efforts based on the extensive knowledge of our customers that we have developed using information technology and leveraged using CRM strategies.
Short-term promissory notes with interest payable at maturity (pagarés bancarios) are generally issued to meet short-term funding needs and are generally issued with maturities ranging from one through 364 days.
Repurchase agreements are another important instrument in México’s money market as they provide short-term investments to banking customers, mainly with Mexican government-issued paper and to a lesser extent securities issued by other Mexican banks and corporations. We have used repurchase agreements to achieve cost efficiencies and as an additional source of short-term funding.
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The following tables show our short-term borrowings that we sold under repurchase agreements for funding our operations as well as short positions from financial liabilities arising from the outright sale or from pledging of financial assets acquired under reverse repurchase agreements. Short-term borrowings at year-end from 2020 to 2022 remain stable. See “Item 4. Information on the Company—B. Business Overview—Liabilities—Short-term Borrowings.”
| | | | | | | | | | | | | | | | | | | | | |
| | IFRS for the year ended December 31, |
| ||||||||||||||||||
| | 2020 | | | 2021 | | | 2022 |
| ||||||||||||
|
| Amount |
|
| Average rate |
|
| Amount |
|
| Average rate |
|
| Amount |
|
| Average rate |
| |||
| | (Millions of pesos, except percentages) |
| ||||||||||||||||||
Short-Term Borrowings | | | | | | | | | | | | | | | | | | | | | |
Repurchase agreements: | | | | | | | | | | | | | | | | | | | | | |
At December 31 (1) | | Ps. | 210,151 | |
| 3.53% | | | Ps. | 154,926 | |
| 4.44% | | | Ps. | 173,642 | |
| 8.63% | |
Average during year | |
| 176,320 | |
| 4.69% | | |
| 184,935 | |
| 3.73% | | |
| 185,271 | |
| 6.48% | |
Maximum month-end balance | |
| 224,931 | |
| 6.57% | | |
| 222,630 | |
| 4.44% | | |
| 220,199 | |
| 8.63% | |
Short positions: | |
| | |
| | | |
| | |
| | | |
| | |
| | |
At December 31 (1) | | Ps. | 15,364 | |
| 4.05% | | | Ps. | 19,554 | |
| 6.29% | | | Ps. | 28,762 | |
| 7.98% | |
Average during year | |
| 14,222 | |
| 5.06% | | |
| 20,668 | |
| 5.25% | | |
| 23,492 | |
| 7.73% | |
Maximum month-end balance | |
| 19,341 | |
| 6.23% | | |
| 27,770 | |
| 6.29% | | |
| 26,792 | |
| 8.77% | |
Total short-term borrowings at year end | | Ps. | 225,515 | |
| 3.79% | | | Ps. | 174,480 | |
| 5.37% | | | Ps. | 202,404 | |
| 8.31% | |
(1) | This amount forms part of the outstanding balance of “Short positions” in our consolidated balance sheet. For more information on short positions, see Note 10.b to our audited financial statements included elsewhere in this Report. |
In the future, we expect to continue using the funding sources described above in accordance with their availability, their cost, and our asset and liability management needs. The short-term nature of these funding sources, however, increases our liquidity risk and could cause liquidity stress for us in the future if deposits are not made in the volumes we expect or are not renewed. For example, we are aware of the risk that a substantial number of our depositors may withdraw their demand deposits or not roll over their time deposits upon maturity; however, we believe we can respond to a liquidity problem by increasing the interest rates we pay on time deposits, altering our mix of funding sources and by liquidating our short-term assets. We review our pricing policy daily and we believe we can reflect our cost of funding in the pricing of loans effectively, reducing the impact on net income.
We also have access to short- and long-term funding through the issuance of unsecured bonds (certificados bursátiles bancarios), certificates of deposits (certificados de depósito bancario de dinero), promissory notes in the form of zero-coupon instruments (pagarés con rendimiento liquidable al vencimiento) and international funding through U.S. dollar-denominated issuances with longer maturities. As of December 31, 2022, the balance of our debt securities outstanding totaled Ps.134,913 million. See “—Debt Securities Outstanding.”
For debt financing, we rely in part on local, peso-denominated issuances with long-term maturities, and we continue to be rated Aaa.mx and AAA(mex) by Moody’s and Fitch Ratings, respectively. However, a downgrade in the sovereign debt ratings of Spain or México, the global rating of Santander Spain, and/or our related ratings could adversely affect our financing costs in the international capital markets.
We do not rely in any material respect on funding from Banco Santander Parent, and Banco Santander Parent does not rely in any material respect on funding from us. As such, the elimination of funding to us from Banco Santander Parent or any deterioration of Banco Santander Parent’s financial condition or increase in its funding costs would not have an impact on us except to the limited extent disclosed under “Item 3. Key Information—D. Risk Factors—Risks Associated with Our Business” Credit, market and liquidity risk may have an adverse effect on our credit ratings and our cost of funds. Any downgrade in our credit rating would likely increase our cost of funding, require us to post additional collateral or take other
189
actions under some of our derivative and other contracts and adversely affect our interest margins and results of operations.
Our management expects that our cash flows from operations will be sufficient to meet our liquidity requirements and working capital needs over the next 12 months, including our expected 2023 capital expenditures. For 2023, we have a capital expenditures budget of Ps.10,466 million (U.S.$536 million), 74.1% of which (Ps.7,752 million) will be spent on information technology and the rest of which will be spent on furniture, fixtures and equipment (Ps.2,714 million). In 2022, our capital expenditures were Ps.7,191 million (U.S.$369 million), 68.8% of which (Ps.4,948 million) was spent in information technology and the rest was spent on furniture, fixtures and equipment (Ps.2,243 million).
As of December 31, 2022, total interest-bearing liabilities denominated in dollars amounted to Ps.115,667 million, or U.S.$5,929 million, representing 10.1% of our total deposits and 12.5% of our customer deposits. The sources of such funding as of December 31, 2020, 2021 and 2022 were as follows:
| | | | | | | | | | | | | | | |
| | IFRS | |||||||||||||
| | As of December 31, | |||||||||||||
|
| 2020 |
|
| 2021 |
|
| 2022 |
|
| 2022 | ||||
| | (Millions of pesos) | | | (Millions of U.S.$)(1) | ||||||||||
| | | | | | | | | | | | | | | |
Demand deposits | | Ps. | 57,990 | | | Ps. | 69,992 | | | Ps. | 65,174 | | | U.S.$ | 3,341 |
Time deposits | |
| 17,453 | | |
| 13,932 | | |
| 12,275 | | |
| 629 |
Bank and other loans | |
| 39,029 | | |
| 42,779 | | |
| 38,218 | | |
| 1,959 |
Total | | Ps. | 114,472 | | | Ps. | 126,703 | | | Ps. | 115,667 | | | U.S.$ | 5,929 |
(1) | Translated at the rate of Ps.19.5089 per U.S.$1.00 as calculated on December 31, 2022 and reported by the Mexican Central Bank on December 31, 2022 as the closing exchange rate. The Mexican Central Bank publishes the closing exchange rate at 2:10 p.m. every bank business day. These translations should not be interpreted as representations that the peso amounts represent, have been or could have been converted into, U.S. dollars at such or at any other exchange rate. |
Foreign Currency Position
Our foreign currency-denominated assets, most of which are U.S. dollar denominated, are funded from a number of sources, including: (i) savings accounts and time deposits from private banking customers and medium and large Mexican companies, primarily in the export sector; (ii) issuance of U.S. dollar-denominated certificates of deposit in the Mexican market; (iii) interbank deposits; (iv) trade and working capital financing facilities from Mexican development banks and from foreign export-import banks; and (v) issuance of securities in the international capital markets. We can also fund our assets through the combination of financial debt and foreign currency derivatives (foreign currency swaps and cross-currency swaps) with certain local and foreign counterparties.
Mexican Central Bank regulations require that a bank maintain open positions in foreign currencies no higher than a specified level with respect to its total Tier 1 capital. As of December 31, 2022, our foreign currency-denominated assets, including derivative transactions, totaled U.S.$66,689 (Ps.1,301,029) and our foreign currency-denominated liabilities, including derivative transactions, totaled U.S.$66,486 (Ps.1,297,069). As part of our asset and liability management strategy, we monitor closely our exposure to foreign currencies, with a view to minimizing the effect of exchange rate movements on our income.
As of December 31, 2022, we are also in compliance with the limits established for us by the Mexican Central Bank for foreign currency-denominated liabilities, which was U.S.$10,452 (Ps.203,907). As of such date, our foreign currency-denominated liabilities were U.S.$5,288 (Ps.103,163). For a discussion of the components of Tier 1 and Tier 2 capital, see “Item 4. Information on the Company—B. Business Overview—Supervision and Regulation.”
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For the years ended December 31, 2020, 2021 and 2022, we were in compliance with all regulatory requirements relating to the ratio of U.S. dollar-denominated liabilities to total liabilities.
Deposits and Other Borrowings
The following tables set forth our average daily balance of liabilities for each of the periods presented, in each case together with the related average nominal interest rates paid thereon.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | IFRS |
| |||||||||||||||||||||||||||
| | For the year ended December 31, |
| |||||||||||||||||||||||||||
| | 2020 | | | 2021 | | | 2022 |
| |||||||||||||||||||||
| | | | | | % of | | | | | | | | | | % of | | | | | | | | | | % of | | | | |
|
|
| |
|
| Total Average |
|
| Average |
|
| | |
|
| Total Average |
|
| Average |
|
| | |
|
| Total Average |
|
| Average |
|
| | Average | | | Liabilities and | | | Nominal | | | Average | | | Liabilities and | | | Nominal | | | Average | | | Liabilities and | | | Nominal |
| |||
| | Balance | | | Equity | | | Rate | | | Balance | | | Equity | | | Rate | | | Balance | | | Equity | | | Rate |
| |||
| | (Millions of pesos, except percentages) |
| |||||||||||||||||||||||||||
Demand accounts | | Ps. | 466,949 | |
| 27.86% | | | 1.94% | | | Ps. | 521,480 | |
| 32.64% | | | 1.53% | | | Ps. | 535,385 | |
| 27.32% | | | 2.12% | |
Time deposits | |
| 264,670 | |
| 15.79% | | | 6.40% | | |
| 223,596 | |
| 13.99% | | | 4.34% | | |
| 235,695 | |
| 12.03% | | | 7.52% | |
Deposits from the Mexican Central Bank and credit institutions | |
| 183,586 | |
| 10.95% | | | 6.76% | | |
| 216,214 | |
| 13.53% | | | 5.07% | | |
| 210,836 | |
| 10.76% | | | 9.19% | |
Repurchase agreements | |
| 152,173 | |
| 9.08% | | | 1.48% | | |
| 128,534 | |
| 8.04% | | | 1.21% | | |
| 129,895 | |
| 6.63% | | | 2.41% | |
Marketable debt securities and other financial liabilities | |
| 139,312 | |
| 8.31% | | | 4.13% | | |
| 116,233 | |
| 7.27% | | | 4.57% | | |
| 132,987 | |
| 6.79% | | | 5.74% | |
Other liabilities(1) | |
| 16,778 | |
| 1.00% | | | 4.19% | | |
| 22,039 | |
| 1.38% | | | 4.95% | | |
| 26,470 | |
| 1.35% | | | 6.82% | |
Subordinated liabilities | |
| 39,035 | |
| 2.33% | | | 4.53% | | |
| 41,125 | |
| 2.57% | | | 4.06% | | |
| 41,058 | |
| 2.10% | | | 4.01% | |
Subtotal interest-bearing liabilities | |
| 1,262,423 | |
| 75.32% | | | 3.97% | | |
| 1,269,221 | |
| 79.44% | | | 3.13% | | |
| 1,312,326 | |
| 66.96% | | | 4.87% | |
Non-interest-bearing liabilities | |
| 272,070 | |
| 16.24% | | |
| | |
| 171,103 | |
| 10.71% | | |
| | |
| 491,125 | |
| 25.06% | | |
| |
Total equity | |
| 141,364 | |
| 10.20% | | |
| | |
| 157,459 | |
| 9.85% | | |
| | |
| 156,321 | |
| 7.98% | | |
| |
Subtotal non-interest-bearing liabilities and equity | |
| 413,434 | |
| 26.44% | | |
| | |
| 328,562 | |
| 20.56% | | |
| | |
| 647,446 | |
| 33.04% | | |
| |
Total liabilities and equity | | Ps. | 1,675,857 | |
| 101.76% | | |
| | | Ps. | 1,597,783 | |
| 100.00% | | |
| | | Ps. | 1,959,772 | |
| 100.00% | | |
| |
(1) | This line includes the amount of financial liabilities arising from the outright sale or from pledging of financial assets acquired under reverse repurchase agreements, securities loans and sales of borrowed securities. |
Average time deposits as a share of average total liabilities and equity decreased from 13.99% as of December 31, 2021 to 12.03% as of December 31, 2022, while the ratio of average demand accounts to average total liabilities and equity decreased from 32.64% to 27.32% over the same period.
Average non-interest-bearing liabilities as a share of average total liabilities and equity increased from 10.72% as of December 31, 2021 to 25.06% as of December 31, 2022.
Composition of Deposits
The following table sets forth the composition of our demand and time deposits as of December 31, 2020, 2021 and 2022.
| | | | | | | | | | | |
| | IFRS | |||||||||
| | As of December 31, | |||||||||
|
| 2020 |
|
| 2021 |
|
| 2022 | |||
| | (Millions of pesos) | |||||||||
Demand deposits | | | | | | | | | | | |
Interest-bearing deposits | | Ps. | 100,532 | | | Ps. | 105,095 | | | Ps. | 113,351 |
Non-interest-bearing deposits | |
| 398,926 | | |
| 436,162 | | |
| 425,058 |
Subtotal | | Ps. | 499,458 | | | Ps. | 541,257 | | | Ps. | 538,409 |
Time deposits | |
| | | |
| | | |
| |
Notes with interest payable at maturity | | Ps. | 175,702 | | | Ps. | 185,312 | | | Ps. | 208,582 |
Fixed-term deposits(1) | |
| 1,931 | | |
| 1,345 | | |
| 976 |
Foreign currency time deposits(2) | | | 12,053 | | | | 8,774 | | | | 8,758 |
Subtotal | | Ps. | 189,686 | | | Ps. | 195,431 | | | Ps. | 218,316 |
Total | | Ps. | 689,144 | | | Ps. | 736,688 | | | Ps. | 756,725 |
191
(1) | As of December 31, 2020, 2021 and 2022 we had not received any fixed-term deposits from the Mexican Central Bank nor other credit institutions. |
(2) | As of December 31, 2020, includes Ps.5,400 million of foreign currency time deposits from other credit institutions. As of December 31, 2021, includes Ps.5,158 million of foreign currency time deposits from other credit institutions. As of December 31, 2022, includes Ps.3,517 million of foreign currency time deposits from other credit institutions. |
Debt Securities Outstanding
The following table sets forth the composition, term and rate of our outstanding debt securities as of December 31, 2022.
Instrument |
| Amount |
|
| Maturity Date |
|
| Rate |
|
---|---|---|---|---|---|---|---|---|---|
|
| (Millions of pesos) | | | | | | | |
| | | | | | | | | |
Certificates of deposit (unsecured) | | 2,500 | | | 11/13/2023 | | | 10.82% | |
Certificates of deposit (unsecured) | | 2,500 | | | 10/13/2023 | | | 10.33% | |
Certificates of deposit (unsecured) | | 1,100 | | | 09/14/2023 | | | 10.79% | |
Certificates of deposit (unsecured) | | 3,000 | | | 08/17/2023 | | | 10.28% | |
Certificates of deposit (unsecured) | | 1,500 | | | 08/17/2023 | | | 10.69% | |
Certificates of deposit (unsecured) | | 50 | | | 07/20/2023 | | | 10.23% | |
Certificates of deposit (unsecured) | | 300 | | | 06/22/2023 | | | 10.79% | |
Certificates of deposit (unsecured) | | 1,100 | | | 06/14/2023 | | | 10.71% | |
Certificates of deposit (unsecured) | | 1,000 | | | 08/06/2023 | | | 10.74% | |
Certificates of deposit (unsecured) | | 1,000 | | | 07/06/2023 | | | 10.67% | |
Certificates of deposit (unsecured) | | 3,000 | | | 02/06/2023 | | | 10.32% | |
Certificates of deposit (unsecured) | | 2,000 | | | 05/16/2023 | | | 9.98% | |
Certificates of deposit (unsecured) | | 2,000 | | | 05/16/2023 | | | 10.30% | |
Certificates of deposit (unsecured) | | 3,000 | | | 05/05/2023 | | | 10.32% | |
Certificates of deposit (unsecured) | | 2,000 | | | 03/22/2023 | | | 10.71% | |
Certificates of deposit (unsecured) | | 1,000 | | | 01/03/2023 | | | 10.27% | |
Certificates of deposit (unsecured) | | 2,000 | | | 02/16/2023 | | | 10.71% | |
Certificates of deposit (unsecured) | | 2,000 | | | 02/02/2023 | | | 10.30% | |
Certificates of deposit (unsecured) | | 850 | | | 03/02/2023 | | | 10.30% | |
Certificates of deposit (unsecured) | | 1,000 | | | 01/18/2023 | | | 10.69% | |
Certificates of deposit (unsecured) | | 1,000 | | | 01/13/2023 | | | 10.73% | |
Certificates of deposit (unsecured) | | 2,000 | | | 05/01/2023 | | | 10.28% | |
Certificates of deposit (unsecured) | | 43 | | | 03/31/2023 | | | 2.00% | |
Certificates of deposit (unsecured) | | 3 | | | 08/03/2023 | | | 2.20% | |
Certificates of deposit (unsecured) | | 312 | | | 10/04/2023 | | | 0.10% | |
Certificates of deposit (unsecured) | | 11 | | | 02/16/2023 | | | 2.20% | |
Senior Unsecured Notes | | 34,141 | | | 04/17/2025 | | | 5.38% | |
Structured bank bonds | | 86 | | | 01/18/24 | | | Guaranteed rate subject to foreign exchange rate | |
Structured bank bonds | | 190 | | | 03/10/2023 | | | Guaranteed rate subject to foreign exchange rate | |
Structured bank bonds | | 10 | | | 09/21/23 | | | Guaranteed rate subject to foreign exchange rate | |
Structured bank bonds | | 15 | | | 09/14/23 | | | Guaranteed rate subject to foreign exchange rate | |
Structured bank bonds | | 46 | | | 12/09/2023 | | | Guaranteed rate subject to foreign exchange rate | |
Structured bank bonds | | 151 | | | 01/08/2023 | | | Guaranteed rate subject to foreign exchange rate | |
Structured bank bonds | | 15 | | | 07/26/23 | | | Guaranteed rate subject to foreign exchange rate | |
Structured bank bonds | | 24 | | | 07/17/23 | | | Guaranteed rate subject to foreign exchange rate | |
Structured bank bonds | | 201 | | | 03/07/2023 | | | Guaranteed rate subject to foreign exchange rate | |
Structured bank bonds | | 16 | | | 05/23/23 | | | Guaranteed rate subject to foreign exchange rate | |
Structured bank bonds | | 52 | | | 02/05/2023 | | | Guaranteed rate subject to foreign exchange rate | |
Structured bank bonds | | 35 | | | 04/24/23 | | | Guaranteed rate subject to foreign exchange rate | |
Structured bank bonds | | 12 | | | 10/04/2023 | | | Guaranteed rate subject to foreign exchange rate | |
Structured bank bonds | | 126 | | | 03/04/2023 | | | Guaranteed rate subject to foreign exchange rate | |
Structured bank bonds | | 93 | | | 03/27/23 | | | Guaranteed rate subject to foreign exchange rate | |
Structured bank bonds | | 9 | | | 06/19/23 | | | Guaranteed rate subject to foreign exchange rate | |
Structured bank bonds | | 52 | | | 03/13/23 | | | Guaranteed rate subject to foreign exchange rate | |
Structured bank bonds | | 86 | | | 01/03/2023 | | | Guaranteed rate subject to foreign exchange rate | |
Structured bank bonds | | 16 | | | 02/27/23 | | | Guaranteed rate subject to foreign exchange rate | |
Structured bank bonds | | 67 | | | 08/02/2023 | | | Guaranteed rate subject to foreign exchange rate | |
Structured bank bonds | | 10 | | | 01/13/23 | | | 16.00% | |
Structured bank bonds | | 78 | | | 07/02/2023 | | | Guaranteed rate subject to foreign exchange rate | |
Structured bank bonds | | 39 | | | 01/30/23 | | | Guaranteed rate subject to foreign exchange rate | |
Structured bank bonds | | 10 | | | 06/01/2023 | | | 14.00% | |
Structured bank bonds | | 10 | | | 09/03/2023 | | | 8.00% | |
Structured bank bonds | | 88 | | | 07/02/2023 | | | 11.20% | |
Structured bank bonds | | 137 | | | 10/02/2023 | | | 10.50% | |
Structured bank bonds | | 38 | | | 01/18/23 | | | 5.50% | |
Structured bank bonds | | 40 | | | 01/17/23 | | | 12.40% | |
192
Instrument |
| Amount |
|
| Maturity Date |
|
| Rate |
|
---|---|---|---|---|---|---|---|---|---|
|
| (Millions of pesos) | | | | | | | |
Structured bank bonds | | 10 | | | 04/01/2023 | | | 8.00% | |
Structured bank bonds | | 68 | | | 01/02/2023 | | | 10.20% | |
Structured bank bonds | | 29 | | | 05/01/2023 | | | 8.90% | |
Structured bank bonds | | 88 | | | 01/13/23 | | | 12.10% | |
Structured bank bonds | | 12 | | | 06/01/2023 | | | 14.50% | |
Structured bank bonds | | 5 | | | 11/01/2023 | | | 9.60% | |
Structured bank bonds | | 10 | | | 06/01/2023 | | | 19.40% | |
Structured bank bonds | | 20 | | | 06/01/2023 | | | 10.00% | |
Structured bank bonds | | 88 | | | 06/01/2023 | | | 10.85% | |
Structured bank bonds | | 10 | | | 12/01/2023 | | | 14.00% | |
Structured bank bonds | | 10 | | | 01/17/23 | | | 10.95% | |
Structured bank bonds | | 27 | | | 01/13/23 | | | 16.60% | |
Structured bank bonds | | 10 | | | 06/01/2023 | | | 11.45% | |
Structured bank bonds | | 10 | | | 01/13/23 | | | 13.70% | |
Structured bank bonds | | 20 | | | 05/01/2023 | | | 9.00% | |
Structured bank bonds | | 10 | | | 01/17/23 | | | 8.00% | |
Structured bank bonds | | 26 | | | 01/13/23 | | | 13.00% | |
Structured bank bonds | | 10 | | | 12/01/2023 | | | 11.70% | |
Structured bank bonds | | 10 | | | 05/01/2023 | | | 11.45% | |
Structured bank bonds | | 20 | | | 06/01/2023 | | | 18.45% | |
Structured bank bonds | | 19 | | | 06/01/2023 | | | 16.90% | |
Structured bank bonds | | 10 | | | 01/17/23 | | | 12.40% | |
Structured bank bonds | | 20 | | | 05/01/2023 | | | 33.80% | |
Structured bank bonds | | 5 | | | 03/01/2023 | | | 13.00% | |
Structured bank bonds | | 10 | | | 01/13/23 | | | 12.25% | |
Structured bank bonds | | 10 | | | 03/01/2023 | | | 5.20% | |
Structured bank bonds | | 17 | | | 01/21/26 | | | TIIE | |
Structured bank bonds | | 58 | | | 01/21/26 | | | TIIE | |
Structured bank bonds | | 23 | | | 02/21/25 | | | Invesco QQQ Trust Series 1 (QQQ) | |
Structured bank bonds | | 62 | | | 08/27/24 | | | Guaranteed rate subject to S&P 500 | |
Structured bank bonds | | 32 | | | 12/14/23 | | | Guaranteed rate subject to S&P 500 | |
Structured bank bonds | | 16 | | | 12/20/23 | | | Guaranteed rate subject to S&P 500 | |
Structured bank bonds | | 12 | | | 09/29/23 | | | Guaranteed rate subject to S&P 500 | |
Structured bank bonds | | 200 | | | 05/31/23 | | | TIIE | |
Structured bank bonds | | 114 | | | 07/03/2023 | | | TIIE | |
Structured bank bonds | | 10 | | | 03/01/2023 | | | Guaranteed rate subject to S&P 500 | |
Promissory notes | | 4,266 | | | 05/31/2023 | | | 10.91% | |
Promissory notes | | 129 | | | 03/31/2023 | | | 8.37% | |
Promissory notes | | 1,860 | | | 02/22/2023 | | | 7.44% | |
Promissory notes | | 465 | | | 02/23/2023 | | | 7.44% | |
Promissory notes | | 281 | | | 01/20/2023 | | | 7.40% | |
Promissory notes | | 3,800 | | | 01/13/2023 | | | 10.50% | |
Promissory notes | | 4,000 | | | 01/13/2023 | | | 10.50% | |
Promissory notes | | 2,900 | | | 01/13/2023 | | | 10.50% | |
Promissory notes | | 4,000 | | | 01/13/2023 | | | 10.50% | |
Promissory notes | | 4,000 | | | 01/13/2023 | | | 10.50% | |
Promissory notes | | 82 | | | 02/01/2023 | | | 10.40% | |
Unsecured bonds | | 5,000 | | | 09/07/2026 | | | TIIE + 29 basis points | |
Unsecured bonds | | 4,600 | | | 03/30/2026 | | | 8.95% | |
Unsecured bonds | | 6,500 | | | 11/21/2028 | | | 8.08% | |
Unsecured bonds | | 3,000 | | | 01/09/2026 | | | 7.19% | |
Unsecured bonds | | 2,550 | | | 03/30/2026 | | | 8.95% | |
Unsecured bonds | | 2,790 | | | 03/26/2029 | | | 8.72% | |
Unsecured bonds | | 7,100 | | | 03/29/2027 | | | TIIE + 7 basis points | |
Unsecured bonds | | 3,500 | | | 11/25/2025 | | | TIIE + 5 basis points | |
| | 134,096 | | | | | | | |
Transaction costs and accrued interest | | 817 | | | | | | | |
Total issuances | | 134,913 | | | | | | | |
(*) Marketable debt securities classified as financial liabilities at fair value through profit or loss.
The 2016 Additional Tier 1 Capital Notes
On December 29, 2016, we issued perpetual subordinated non-preferred contingent convertible additional Tier 1 capital notes (the “Back-to-Back notes”) in an aggregate principal amount of U.S.$500,000,000, under an indenture dated as of December 27, 2016, as supplemented by a first supplemental indenture on the same date (the “Back-to-Back Indenture”), at an issue price of 100%. The Former Holding Company purchased 100% of the aggregate principal amount of the Back-to-Back notes. At the same time, the Former Holding Company issued perpetual subordinated non-preferred contingent convertible additional Tier 1 capital notes (the “2016 AT1 Notes”) in the same principal amount as the aggregate principal amount of the Back-to-Back notes and with substantially the same terms and conditions as the Back-to-Back notes,
193
issued pursuant to an indenture that is substantially the same as the Back-to-Back Indenture (the “2016 Tier 1 indenture”). We used the net proceeds of the offering of the Back-to-Back notes for general corporate purposes and the Former Holding Company used the proceeds of the offering of the 2016 AT1 Notes to purchase the Back-to-Back notes. In connection with the Merger, the Back-to-Back notes were cancelled and we assumed all of the payment and other obligations of the Former Holding Company under the 2016 AT1 Notes and the 2016 Tier 1 indenture by executing a supplemental indenture to the 2016 Tier 1 indenture (the “Second Supplemental Indenture”) with the Former Holding Company and The Bank of New York Mellon.
Coupon payments on the 2016 AT1 Notes were due and payable only at our sole discretion and we had sole and absolute discretion at all times and for any reason to cancel any interest payment in whole or in part that would otherwise be payable on any interest payment date. In addition, interest due on the 2016 AT1 Notes was automatically canceled upon occurrence of certain capital events. Such canceled interest did not accumulate nor was due and payable at any time thereafter. The 2016 AT1 Notes had no fixed maturity or fixed redemption date, and bore interest at a rate equal to 8.5% per annum. Interest on the 2016 AT1 Notes was paid quarterly on January 20, April 20, July 20 and October 20 of each year, commencing on April 20, 2017.
The 2016 AT1 Notes were redeemed at 100% of their principal amount plus accrued but unpaid (and not canceled) interest, to but excluding the date fixed for redemption, in whole on January 20, 2022.
The 2021 Additional Tier 1 Capital Notes
On September 15, 2021, we issued perpetual subordinated non-preferred contingent convertible additional Tier 1 capital notes (the “2021 AT1 Notes”) in an aggregate principal amount of U.S.$700,000,000, under an indenture dated as of September 15, 2021, as supplemented by a first supplemental indenture on the same date, at an issue price of 100%. Banco Santander Parent purchased 100% of the aggregate principal amount of the 2021 AT1 Notes. We used the net proceeds of the offering of the 2021 AT1 Notes for general corporate purposes.
Coupon payments on the 2021 AT1 Notes are due and payable only at our sole discretion and we have sole and absolute discretion at all times and for any reason to cancel any interest payment in whole or in part that would otherwise be payable on any interest payment date. In addition, interest due on the 2021 AT1 Notes will be automatically canceled upon occurrence of certain capital events. Such canceled interest shall not accumulate or be due and payable at any time thereafter. The 2021 AT1 Notes have no fixed maturity or fixed redemption date, and bear interest at a rate equal to 4.625% per annum. Interest on the 2021 AT1 Notes is paid quarterly on March 15, June 15, September 15 and December 15 of each year, commencing on December 15, 2021.
Subject to a prior redemption or one or more automatic conversions, from and including the date on which the 2021 AT1 Notes were initially issued, to but excluding September 15, 2026 (the “2021 AT1First Call Date”), interest will accrue on the then current principal amount of notes at an initial rate equal to 4.625% per annum. The 2021 AT1 First Call Date and every fifth anniversary thereafter shall each be a “2021 AT1 Reset Date”. Subject to a prior redemption or one or more automatic conversions, from and including each 2021 AT1 Reset Date, including the 2021 AT1 First Call Date, to but excluding the next succeeding 2021 AT1 Reset Date, interest will accrue on the then current principal amount at a rate per annum equal to the sum of the then-prevailing Treasury Yield on the relevant Reset Determination Date and 384.30 basis points (rounded to two decimal places, with 0.005 being rounded down).
We may redeem the 2021 AT1 Notes at 100% of their principal amount plus accrued but unpaid (and not canceled) interest, plus additional interest, if any, to but excluding the date fixed for redemption, (i) in whole or in part, on the 2021 AT1 First Call Date and on any interest payment date thereafter, (ii) in whole but not in part upon the occurrence of certain tax events affecting the withholding taxes payable on the 2021 AT1 Notes, or (iii) in whole but not in part upon the occurrence of certain special events, subject, in each case,
194
to certain conditions. Any such redemption shall be subject to certain regulatory requirements, including obtaining prior authorization from the Mexican Central Bank.
Upon the occurrence of certain conversion trigger events (including when our Fundamental Capital Ratio, as calculated pursuant to the applicable Mexican Capitalization Requirements, is equal to or below 5.125%), on the conversion date, the then current principal amount of the 2021 AT1 Notes will be automatically reduced in one or more automatic conversions and the converted principal amount relating to such automatic conversions shall be converted exclusively into (i) if the holder of the 2021 AT1 Notes is Banco Santander Parent, our Series F shares and (ii) if the holder of the 2021 AT1 Notes is not Banco Santander Parent, our Series B shares at the Conversion Price. The 2021 AT1 Notes are not convertible at the option of the holders at any time.
The conversion price shall be, if the ordinary shares are: (i) then admitted to trading on the Mexican Stock Exchange, the higher of: (a) the volume weighted average of the Ordinary Shares closing price on the Mexican Stock Exchange for the 30 consecutive business days immediately preceding the conversion date, with each closing price for the 30 consecutive Business Days being converted from Mexican pesos into U.S. dollars at the then-prevailing exchange rate; or (b) floor price of Ps.13.33 converted into U.S. dollars at the then-prevailing exchange rate; (ii) not then admitted to trading on the Mexican Stock Exchange, the floor price of Ps.13.33 converted into U.S. dollars at the then-prevailing exchange rate.
The 2021 AT1 Notes are subordinated obligations and rank (i) subordinate and junior in right of payment and in liquidation to all of our present and future senior indebtedness and subordinated preferred indebtedness, (ii) pari passu without preference among themselves and with all of our present and future other unsecured subordinated non-preferred indebtedness and (iii) senior only to all classes of our capital stock.
The 2022 Notes
In November 2012, we issued senior notes in an aggregate principal amount of U.S.$1.0 billion under an indenture dated as of November 9, 2012, which we refer to as the 2022 notes. The 2022 notes were issued at an issue price of 98.183%. Interest was paid semi-annually on May 9 and November 9 of each year. The 2022 notes matured on November 9, 2022, bearing interests at a rate per annum equal to 4.125%.
The 2028 Notes
In October 2018, we issued Basel III-compliant Tier 2 Subordinated Preferred Capital Notes due 2028 in an aggregate principal amount of U.S.$1.3 billion under an indenture dated September 27, 2018, which we refer to as the 2028 notes. Banco Santander Parent purchased 75% or U.S.$975 million of the aggregate principal amount of the 2028 notes. The 2028 notes were issued at an issue price of 100%. The 2028 notes mature on October 1, 2028 and bear interest at an interest rate per annum equal to 5.95%. Interest is paid semi-annually on April 1 and October 1 of each year. The net proceeds from this issuance were used to repurchase U.S.$1.2 billion, or 94.07%, of the outstanding 2024 notes pursuant to a concurrent cash tender offer.
The 2028 notes are redeemable at our option on October 1, 2023 only, or at any time if there are certain specified changes in (i) the Mexican laws affecting the withholding tax applicable to payments of interest under the 2028 notes, (ii) the Mexican laws that would change the capital treatment of the 2028 notes or (iii) the applicable tax laws that result in interest on the 2028 notes not being deductible by us.
Principal and interest on the 2028 notes will be deferred and will not be paid under certain circumstances. The indenture governing the 2028 notes provides us with the ability to automatically write down the current principal amount of the 2028 notes upon the occurrence of a trigger event and such write-down will not constitute an event of default.
195
The 2028 notes are not secured or guaranteed, or otherwise eligible for reimbursement, by the IPAB or any other Mexican governmental agency, or any of our subsidiaries or affiliates and the 2028 notes are not convertible, by their terms, into any debt securities, shares or equity capital of any of our subsidiaries or affiliates. The 2028 notes constitute subordinated indebtedness and rank (i) subordinate and junior in right of payment and in liquidation to all of our present and future senior indebtedness, (ii) pari passu without preference among themselves and with all other unsecured subordinated preferred indebtedness and (iii) senior only to all of our present and future subordinated non-preferred indebtedness and all classes of our equity or capital stock.
The indenture governing the 2028 notes imposes certain restrictions on our ability to consolidate with or merge into any other corporation or convey or transfer our properties and assets substantially as an entirety to any person. In addition, if the payment of principal and interest has been deferred at any point, we will not be permitted to declare or pay dividends or make other distributions. The indenture does not otherwise limit our ability to incur senior, secured or other additional indebtedness (including additional 2028 notes), our ability to grant liens on its assets and properties, its payment of dividends or require us to create or maintain any reserves.
The indenture governing the 2028 notes also provides for events of default, which would permit or require, as applicable, the principal and interest on all then outstanding 2028 notes to be due and payable immediately.
The 2025 Notes
In April 2020, we issued senior notes in an aggregate principal amount of U.S.$1.75 billion under an indenture dated as of April 17, 2020, which we refer to as the 2025 notes. The 2025 notes were issued at par. The 2025 notes mature on April 17, 2025 and bear interest at an interest rate per annum equal to 5.375%. Interest is paid semi-annually on April 17 and October 17 of each year. The net proceeds from this issuance were used for general corporate purposes.
The 2025 notes are redeemable at our option at any time prior to maturity, in whole but not in part, at par plus accrued and unpaid interest upon the occurrence of certain specified changes in Mexican laws affecting the withholding tax applicable to payments under the 2025 notes. We may also redeem the 2025 notes, in whole or in part, at the greater of 100% of their principal amount outstanding and a make-whole amount defined as the sum of the present values of the remaining scheduled payments of principal and interest thereon (exclusive of interest accrued to the date of redemption) discounted to the redemption date on a semiannual basis (assuming a 360-day year consisting of twelve 30-day months) at the Treasury Rate plus 50 basis points, plus, in each case, accrued interest thereon to the date of redemption and any additional amounts payable with respect thereto.
The 2025 notes are not secured or guaranteed by any of our affiliated companies, by the IPAB or any other Mexican governmental agency, or by any other entity, and the 2025 notes are not convertible, by their terms, into our shares or equity capital. The 2025 notes, other than as set forth below, rank pari passu in right of payment with all of our other unsecured obligations other than obligations that are, by their terms, expressly subordinated in right of payment to the 2025 notes. The notes are effectively subordinated to (i) all of our secured indebtedness with respect and up to the value of our assets securing that indebtedness, (ii) certain direct, unconditional and unsecured general obligations that in case of our insolvency are granted preferential treatment pursuant to Mexican law (including tax, social security and labor claims) and (iii) all of the existing and future liabilities of our subsidiaries, including trade payables.
The indenture governing the 2025 notes imposes certain restrictions on our ability to consolidate with or merge into any other corporation or convey or transfer our properties and assets substantially as an entirety to any person. However, the indenture does not limit our ability to incur senior, secured or other additional indebtedness (including additional 2025 notes), our ability to grant liens on its assets and properties, its payment of dividends or require us to create or maintain any reserves.
196
The indenture governing the 2025 notes also provides for events of default, which, if any of them occurs, would permit or require, as applicable, the principal and interest on all then outstanding 2025 notes to be due and payable immediately.
We may issue additional notes from time to time pursuant to the indenture governing the 2025 notes.
Contractual Obligations
The table below presents our contractual obligations at December 31, 2022.
| | | | | | | | | | | | | | | | | | | |
|
| Payment due by period | |||||||||||||||||
| | | | | | More than 1 year | | | More than 3 years | | | | | | | | | ||
| | | | | | but less than 3 | | | but less than | | | More than | | | | | |||
|
| Less than 1 year |
|
| years |
|
| 5 years |
| | 5 years |
|
| Total | |||||
| | (Millions of pesos) | |||||||||||||||||
Demand deposits | | Ps. | 538,409 | | | Ps. | — | | | Ps. | — | | | Ps. | — | | | Ps. | 538,409 |
Time deposits | |
| 218,316 | | |
| — | | |
| — | | |
| — | | |
| 218,316 |
Bank and other loans(1) | |
| 165,623 | | |
| 9,047 | | |
| 3,394 | | |
| 1,925 | | |
| 179,989 |
Marketable debt securities(1) | |
| 65,723 | | |
| 37,759 | | |
| 22,350 | | |
| 9,081 | | |
| 134,913 |
Subordinated liabilities | |
| 366 | | |
| — | | |
| — | | |
| 39,018 | | |
| 39,384 |
Repurchase agreements | |
| 299,320 | | |
| — | | |
| — | | |
| — | | |
| 299,320 |
Short positions | |
| 28,762 | | |
| — | | |
| — | | |
| — | | |
| 28,762 |
Sundry creditors and other payables | |
| 57,079 | | |
| — | | |
| — | | |
| — | | |
| 57,079 |
Contractual interest payments(2) | |
| 47,011 | | |
| 2,998 | | |
| 1,595 | | |
| 2,262 | | |
| 53,866 |
Total | | Ps. | 1,420,609 | | | Ps. | 49,804 | | | Ps. | 27,339 | | | Ps. | 52,286 | | | Ps. | 1,550,038 |
(1) | Includes interest payments that are calculated by applying the interest rate in effect at December 31, 2022. |
(2) | Calculated for demand deposits, time deposits, Bank and other loans, marketable debt securities and subordinated liabilities assuming a constant interest rate as of December 31, 2022 over time for all maturities. |
The table above does not reflect amounts that we may have to pay on derivative contracts, as the amounts ultimately payable will depend upon movements in financial markets.
Off-Balance Sheet Arrangements
In the ordinary course of our business, we are a party of certain activities to manage credit, market and operational risk. These activities include commitments to extend credit not otherwise accounted for as contingent loans, such as overdrafts and credit card lines of credit. We record our off-balance sheet arrangements as memorandum accounts, which are described more fully in Note 31 to our audited financial statements included elsewhere in this Report.
We provide customers with off-balance sheet credit support through loan commitments. Such commitments are agreements to lend to a customer at a future date, subject to compliance with the contractual terms. Since substantial portions of these commitments are expected to expire without our granting of any loans, total commitment amounts do not necessarily represent our actual future cash requirements. These loan commitments totaled Ps.249,138 million, Ps.262,925 million and Ps.320,318 million, as of December 31, 2020, 2021 and 2022, respectively.
The credit risk of both on- and off-balance sheet financial instruments varies based on many factors, including the value of collateral held and other security arrangements. To mitigate credit risk, we generally determine the need for specific covenant, guarantee and collateral requirements on a case-by-case basis depending on the nature of the financial instrument and the customer’s creditworthiness. The amount and type of collateral held to reduce credit risk varies, but may include real estate, machinery, equipment, inventory and accounts receivable as well as deposits, stocks, bonds and other tradable securities that are generally held in our possession or at another appropriate custodian or depository. The collateral is valued
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and inspected on a regular basis to ensure both its existence and adequacy. Additional collateral is required when it is considered necessary by us.
The following table presents our outstanding contingent loans and other off-balance sheet assets as of December 31, 2020, 2021 and 2022:
| | | | | | | | | | | |
| | As of December 31, | |||||||||
|
| 2020 |
|
| 2021 |
|
| 2022 | |||
| | (Millions of pesos) | |||||||||
Proprietary record accounts: | | | | | | | | | | | |
Credit commitments | | Ps. | 249,138 | | | Ps. | 262,925 | | | Ps. | 320,318 |
Assets in trust or mandate: | |
| | | |
| | | |
| |
Trusts | |
| 203,223 | | |
| 192,625 | | |
| 190,185 |
Mandates(1) | |
| 996 | | |
| 1,025 | | |
| 3,002 |
Assets in custody or under administration(2) | |
| 1,730,422 | | |
| 1,812,966 | | |
| 1,751,075 |
Subtotal | | Ps. | 2,183,779 | | | Ps. | 2,269,541 | | | Ps. | 2,264,580 |
Collateral received | | | 92,349 | | | | 91,971 | | | | 154,833 |
Collateral received and sold or pledged as guarantee(3) | |
| 9,508 | | |
| 67,450 | | |
| 93,143 |
Investment banking transaction on behalf of third parties (net)(4) | |
| 99,277 | | |
| 138,110 | | |
| 367,298 |
Subtotal | |
| 201,134 | | |
| 297,531 | | |
| 615,274 |
Total | | Ps. | 2,384,913 | | | Ps. | 2,567,072 | | | Ps. | 2,879,854 |
(1) | Assets received are managed under independent management trusts. Mandates include the declared value of the assets subject to mandate contracts entered into by us. |
(2) | This item includes the activity of third-party assets and securities received in custody or to be managed by us. |
(3) | Collateral received and sold or pledged as guarantee is composed of all collateral received in reverse repurchase agreements in which we are the buying party that in turn is sold by us as a selling party. This balance also includes the obligation of the borrower (or lender) to return to the lender (or borrower) the assets subject to the loan transaction carried out by us. |
(4) | Cash and securities owned by customers and held in custody, pledged as collateral and managed by us. |
C. Research and Development, Patents and Licenses, etc.
In México, ownership of trademarks can be acquired only through a validly approved registration with the IMPI, the agency responsible for registering trademarks and patents in México. After registration, the owner has exclusive use of the trademark in México for ten years. Trademarks registrations can be renewed indefinitely for additional ten-year periods, if the registrant proves that it has used such trademark within the last three years.
We have several trademarks, most of which are brand names of our products or services. All our material trademarks are registered or have been submitted to IMPI for registration by the Santander Group or us.
We or one of our affiliates owns the principal domain names used in our business, which include www.santander.com.mx. None of the information contained on our websites is incorporated by reference into, or forms part of, this Report.
We do not currently conduct any significant research and development activities.
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D. Trend Information
The Mexican financial services sector is likely to remain competitive with many financial services providers and alternative distribution channels. Additionally, further consolidation in the sector (through mergers, acquisitions or alliances) is likely to occur as other major banks look to increase their market share, combine with complementary businesses or strengthen their balance sheets. In addition, regulatory changes will take place in the future, and we expect they will increase the overall level of regulation in the sector.
The following are the most important trends, uncertainties and events that are reasonably likely to have a material adverse effect on us or that would cause the disclosed financial information not to be indicative of our future results or our financial condition:
● | uncertainties relating to the evolution of economic activity, monetary policy and financial markets in the U.S., all of which could have a high impact on the Mexican economy; |
● | uncertainties relating to economic growth expectations and interest rate cycles in México and the rest of the world, and continued instability and volatility in the financial markets, and the impact they may have over the yield curve and exchange rates; |
● | the resulting effect of changes in U.S. monetary policy and its effect on global financial markets and on local interest and exchange rates; |
● | uncertainties relating to the future evolution of the COVID-19 pandemic, and other possible pandemics, and their impact on local and global economic activity; |
● | possible changes in the behavioral patterns of the general population, including consumption, savings, and/or the use of digital financial services, among others, after the COVID-19 pandemic; |
● | changes in the credit quality of our loan portfolio because of inorganic or organic growth; |
● | increases in our cost of funding could adversely affect our net interest margin as a consequence of timing differences in the repricing of our assets and liabilities; |
● | increased competition that may lead to tightening of our margins; |
● | inflationary pressures that may lead to increases in interest rates and decreases in growth; |
● | acquisitions or restructurings of businesses that do not perform in accordance with our expectations or that subject us to previously unknown risks; and |
● | increased regulation, government intervention and new laws prompted by the global financial crisis which could change our industry and require us to modify our businesses or operations. |
The Mexican economy continues to be significantly influenced by the U.S. economy, and therefore, any changes in U.S. economic conditions may impact the economy of México. In particular, movements of monetary policy in the U.S., the evolution of industrial production in the U.S., and any change to the United States’ trade and immigration policies with respect to México could negatively impact the Mexican economy and affect the volatility of its financial markets, interest rates and credit demand, thus having a material adverse effect on our financial condition and results.
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ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
A. Directors and Senior Management
Board of Directors
Our Board of Directors currently comprises of nine directors and eleven alternate directors. The directors and alternate directors are elected for one-year terms at our special series F or B shareholders’ meetings and may be reelected. Pursuant to Mexican law, members of our Board of Directors continue to be members of the Board despite the expiration of their term until new Board members are appointed and assumed office.
Under our bylaws and in accordance with the Mexican Banking Law, at least 25% of the members of our Board of Directors must be independent. Independence is determined in accordance with Article 22 of the Mexican Banking Law and our bylaws. The CNBV may contest the determination made by our shareholders as to the independence of our directors. We have not determined whether any of our directors or any of the members of our committees other than the Audit Committee would be considered independent as defined in the U.S. securities laws or the rules of any U.S. securities exchange.
For each director, an alternate director may be appointed, provided the alternate director corresponding to an independent director is also independent. All members of the Board of Directors, whether they are directors or alternate directors, are called to attend the meetings of the Board of Directors. If both a director and an alternate director attend the same meeting, only the vote of the director shall be taken into account.
There are two different categories of directors depending on the type of shareholder appointing each such director: Series B and Series F. Series B shares can be freely subscribed. Series F shares can be acquired directly or indirectly only by Grupo Financiero Santander México and Banco Santander Parent and can be sold only with the previous authorization of the CNBV, unless such shares must be transferred to the IPAB as collateral or as property. Both categories of directors have the same rights and obligations.
In accordance with our bylaws, holders of Series F shares representing 51% of our capital stock shall have the right to appoint 50% plus 1 of our directors and their respective alternates, and to appoint an extra director for each additional 10% of our capital stock above such percentage. Series B shareholders have the right to appoint the remaining directors and their alternates.
The following table sets forth information about the directors and alternate directors of our Board of Directors. Members of our Board of Directors serve for one-year terms from their date of election. Unless otherwise noted below, directors elected by our Series B and Series F shareholders were elected on October 24, 2022 at our special series F and B shareholders’ meetings. The business address of our
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directors is Avenida Prolongación Paseo de la Reforma 500, Colonia Lomas de Santa Fe, Alcaldía Álvaro Obregón, 01219, Mexico City, México.
| | | | | | | | |
Name |
| Position |
|
| Series |
|
| Director Since |
Laura Renee Diez Barroso Azcárraga |
| Chairwoman (Independent) | |
| Series F | |
| 2020 |
Felipe Francisco García Ascencio | | Director | | | Series F | | | 2022 |
César Augusto Montemayor Zambrano | | Independent Director | | | Series F | | | 2020 |
Héctor Blas Grisi Checa (1) |
| Director | |
| Series F | |
| 2015 |
Magdalena Sofía Salarich Férnandez de Valderrama |
| Director | |
| Series F | |
| 2019 |
Daniel Barriuso Rojo | | Director | | | Series F | | | 2022 |
Ángel Rivera Congosto |
| Director | |
| Series F | |
| 2015 |
Juan Ignacio Gallardo Thurlow | | Independent Alternate Director | | | Series F | | | 2013 |
Didier Mena Campos | | Alternate Director | | | Series F | | | 2018 |
Ángel Alverde Losada | | Independent Alternate Director | | | Series F | | | 2022 |
Rodrigo Brand de Lara | | Alternate Director | | | Series F | | | 2018 |
Alberto Torrado Martínez | | Independent Alternate Director | | | Series F | | | 2009 |
Pablo Fernando Quesada Gómez | | Alternate Director | | | Series F | | | 2022 |
José Antonio Pérez Antón | | Independent Alternate Director | | | Series F | | | 2022 |
Antonio Purón Mier y Terán |
| Independent Director | |
| Series B | |
| 2009 |
Guillermo Jorge Quiroz Abed | | Independent Director | | | Series B | | | 2018 |
María de Lourdes Melgar Palacios | | Independent Director | | | Series B | | | 2018 |
Bárbara Garza Laguera Gonda (2) | | Independent Director | | | Series B | | | 2019 |
Melanie Elizabeth Devlyn Gómez | | Independent Alternate Director | | | Series B | | | 2022 |
Rogelio Zambrano Lozano | | Independent Alternate Director | | | Series B | | | 2018 |
Guillermo Francisco Vogel Hinojosa | | Independent Alternate Director | | | Series B | | | 2016 |
Joaquín Vargas Guajardo | | Independent Alternate Director | | | Series B | | | 2009 |
(1) | Mr. Grisi resigned from the Board of Directors on December 31, 2022. |
(2) | Ms. Garza resigned from the Board of Directors on January 25, 2023. |
The Secretary of the Board of Directors is Fernando Borja Mujica, and the Alternate Secretary is Rocío Erika Bulhosen Aracil.
Set forth below are the biographies of the members of our Board of Directors.
Laura Renee Diez Barrozo Azcárraga is the Chairwoman of our Board of Directors and of the boards of directors of Grupo Financiero Santander México and Casa de Bolsa Santander. Since 2015, she has been the President of the Board of Directors of Grupo Aeroportuario del Pacifico (NYSE PAC), and is part of the Board of Directors of Telmex, the Roberto Garza Sada Center, Chapultepec Forest Trust and the San Idelfonso Museum, where she served as President of the Board of Trustees for 10 years. She is also the co-founder of LCA Capital, a family office dedicated to investing in public and private entities. In 2006, together with a group of investors, she acquired a controlling stake in the Grupo Aeroportuario del Pacifico (NYSE PAC), which operates 12 airports in México, including Guadalajara, Puerto Vallarta, Los Cabos and Tijuana, as well as Montego Bay in Jamaica. In 2002 she participated as a shareholder with Carlos Slim in a company whose objective was the rescue of the Historic Center of Mexico City. In 1979, she served as director of the magazine “TU”. In 1988 Laura founded Editorial Eres and in 1995, Editorial Eres merged with Editorial Televisa, resulting in the appointment of Laura as President of the Board and General Manager. In late 2000, Laura sold her stake in the company and became involved in various philanthropic work in México, including Pro Mujer, micro credits to women, El mexicanito, and the Museo San Idelfonso, among others. She is currently the president of the Gap Foundation, which aims to improve education, and currently works with 3 elementary and secondary schools. In addition, she was a member of the Board of Directors of Royal Caribbean International (NYSE RCCL) for 14 years and of Grupo Financiero Inbursa for 15 years.
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Felipe Francisco García Ascencio is a member of our Board of Directors and of the boards of directors of Grupo Financiero Santander México and Casa de Bolsa Santander. He currently serves as Chief Executive Officer of Grupo Financiero Santander México and Banco Santander México. He also served as Deputy General Manager of Corporate & Investment Banking (Santander Corporate & Investment Banking -SCIB) since August 2021. He joined Banco Santander México in 2020 as Head of Banking & Corporate Finance México. Previously, he worked at Credit Suisse for 18 years, holding different positions as Head of Corporate & Sovereign Latam Coverage as part of the Global Markets Division from 2012 to 2020, Head of DCIM and Fixed Income Sales from 2007 to 2012 and Head of Debt Capital Markets for México & Andean Coutries from 2002 to 2007. He joined Goldman Sachs as Vice President of Debt Capital Markets - Emerging Markets in New York from 2000 to 2002. He held the position of Head of Latin America Research & Sales at IDEAglobal.com - Independent Economic Analysis from 1997 to 2000 and served as Advisor to the Director of Public Credit at the SHCP. He holds a master's degree in economics from the London School of Economics and Political Science (LSE) and a bachelor's degree in economics from the Instituto Tecnológico Autónomo de México (ITAM).
César A. Montemayor Zambrano is a member of our Board of Directors and of the boards of directors of Grupo Financiero Santander México and Casa de Bolsa Santander. He is a private investor and entrepeneur. He worked at JP Morgan for 14 years in global investments in New York, and later managed his own company. In Monterrey, Nuevo León he founded InverCap Afore which he presided for more than 20 years. Today he is a shareholder, member of the board, founder and honorary president of InverCap. He was Chairman of COPARMEX, Nuevo León from 2015 to 2017, and he continues to serve as a member of the board. He serves as a member of the Board of Directors of the Escuela Superior de Música y Danza, Universidad de Monterrey, Museo MARCO y Universidad Tec Milenio. He is also a member of the Board and presides the Audit Committee of Tecnológico de Monterrey. He is one of the founders of Hagámoslo Bien, and presides the Comisión de Finanzas Públicas del Consejo Nuevo León. He holds a degree in chemical engineering and systems from Instituto Tecnológico y de Estudios Superiores de Monterrey and has a master’s degree in chemical engineering and business administration by Columbia University in New York where he obtained his degree of master in science.
Magdalena Sofía Salarich Fernández de Valderrama is a member of our Board of Directors and of the boards of directors of Grupo Financiero Santander México and Casa de Bolsa Santander. In 1979 she started working as Head of the Internal Information department in Citroën (Hispania), on 1980 she was designated head of the Training-Information department in Citroën, in 1986 she was named Head of the Press and Public Relations department in Citroën Hispania and Director of Marketing in Citroën Hispania, in 1983 she was designated Deputy to the European Commercial Director in Citroën Automobiles charge that combined with the Director of Marketing in Citroën Hispania until 1994, when she was named European Commercial Marketing Director in Citroën Automobiles, in 1996 she was designated Executive Vice-President of Citroën Hispania as well as European Commercial Marketing Director in Citroën Automobiles, in 2001 she was designated European Commercial Director and Commercial Marketing Director in Citroën Automobiles (27 countries) and Chief Executive Officer and Senior Executive Vice-President of Citroën Spain. She is currently the Senior Executive Vice-President of Banco Santander, S.A as well as Head of Santander Consumer Finance, Vice President of the Board and member of the Executive Committee of Santander Consumer Finance, S.A, Member of the Supervisory Board of Santander Consumer Bank AG, Member of the Supervisory Board of Santander Consumer Holding GmbH and Member of the board of directors of Financiera El Corte Inglés, E.F.C. S.A. She has obtained several awards such as: The Gold Cross of the Spanish Association for European Development (AEFE) in 2007, Légion d’Honneur of the French Republic in 2001, Best Manager of the Year awarded by the Spanish Association for Company Financiers and Treasurers (ASSET) in 2006. She holds a degree in engineering from ICAI (Instituto Católico de Artes e Industrias), a master’s in commercial and marketing management from Instituto de Empresa and a master’s in general management studies from Instituto de Estudios Superiores de la EmpresariaI (IESE).
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Daniel Barriuso Rojo is a member of our Board of Directors and of the boards of directors of Grupo Financiero Santander México and Casa de Bolsa Santander. He currently holds the position of Global Chief Information Security Officer at Banco Santander Parent since 2017, being responsible for Santander's global cybersecurity vision, strategy, roadmap and operations. Previously, he held the position of Chief Information Security Officer and Vice President of Digital Security and Risk at BP based in London. He also held leadership positions in cybersecurity and risk management at Credit Suisse and ABN AMRO. He has coordinated multiple cyber security initiatives in the financial services and oil & gas sectors. He was Chairman of the Oil & Gas Cybersecurity Network (OGCSN) and Chairman of the Investment Banking Information Security Group. He holds a degree in computer engineering from the Polytechnic University of Madrid and was awarded the Secure Computing Magazine Europe CISO of the Year award in 2015.
Ángel Rivera Congosto is a member of our Board of Directors and of the boards of directors of Grupo Financiero Santander México and Casa de Bolsa Santander. He currently serves as Head of Retail Europe at Banco Santander Matriz. From 2017 to 2020 he was Executive Vice President of Commercial Banking at Banco Santander México. He previously served as General Manager for the Commercial Banking Division and as a member of the Management Committee of Banco Santander Parent. He has served as a board member of Banco Santander Parent, Banco Santander Totta in Portugal, Banco Santander Uruguay, Banco Santander Perú and Banco Santander Internacional (United States of America). He began working at the Santander Parent Group in April 2013 as General Manager of the Business, Pymes and Institutions group within the Commercial Banking Division. Previously, he worked for Banco Popular for 24 years, where he worked in retail branches for 6 years and lead the Presidency Cabinet, the International Banking area, the Strategy and Corporate Development area, the Human Resources Rights division, the General Media directory and the Commercial Network groups. He also served as General Business Director of Banco Popular. He has a diploma in business and tourism activities from the Official School of Tourism of Spain, and has completed the senior business management program (PADE) at IESE (University of Navarra) and the development program in corporate finance at the Institute Madrid Company. He has also conducted various financial programs in the United States and Australia and is a member of the Australian Institute of Banking & Finance. He has also been a member of the Board of Trustees of the College of Financial Studies (CUNEF), a member of the Board of Trustees of the Spanish Foundation for Banking in Financial Studies, a professor in the master of portfolio management and financial markets of the School of Finance of La Coruña and co-author of the books "Experts in People," "In Search of Commitment," and "31 Keys to Risk Management in Banking Entities". He has also published several articles in Spanish economic journals and newspapers.
Juan Ignacio Gallardo Thurlow is an alternate independent member of our Board of Directors and of the boards of directors of Grupo Financiero Santander México and Casa de Bolsa Santander. He is the Chairman of the board of directors of Grupo GEPP (Grupo de Embotelladoras de Pepsicola and its brands in México) and Grupo Azucarero México, S.A. de C.V. He serves on the boards of directors of Caterpillar, Inc. and Lafarge, S.A. He is also a member of the International Advisory Board of Bombardier Inc. He is a member of the Consejo Mexicano de Hombres de Negocio, A.C. (CMHN) and the Consejo de Negocios de América Latina (CEAL). He is a General Coordinator on COECE (Coordinadora de Organismos Empresariales de Comercio Exterior for negotiations under the Free Trade Agreements of México). From 1978 to 1989, he was Chairman of the board of directors of Babcock de México, S.A. de C.V. From 1974 to 1988, he was Chairman of the board of directors of Clevite de México, S.A. de C.V. From 1981 to 1983, he was Deputy General Director of Grupo Industrial Minera México, S.A. From 1976 to 1980, he was Chief Executive Officer of the International Division and Investment Bank of Multibanco Comermex, S.A. Institución de Banca Múltiple. He has a law degree from the Escuela Libre de Derecho and studied business management at the Instituto Panamericano de Alta Dirección Empresarial (IPADE).
Didier Mena Campos is an alternate member of our Board of Directors and of the boards of directors of Grupo Financiero Santander México and Casa de Bolsa Santander. He is the Chairman of Santander Inclusion Financiera. He is the Vice-presidency of Administration and Finance since 2022 and the Chief Financial Officer from 2016. Before joining the Santander Group, Mr. Mena worked in several financial institutions as: (i) Execution Finance, a boutique investment bank, where he was partner from 2014 to 2016, (ii) Navix, a finance company focused on the Mexican energy sector, where he was Chief Executive Officer
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from 2013 to 2014, (iii) Credit Suisse, where his last responsibility was as Managing Director of the group of financial institutions in Latin America between 2010 and 2012, (iv) during 2008 to 2010 was Chief Financial Officer of Financiera Independencia, (v) between 2001 and 2008 he worked at Credit Suisse in the investment banking and fixed income divisions and (vi) worked for Grupo Financiero BBVA Bancomer from 1994 to 2000, where he participated in strategic transactions such as the merger with BBVA, the acquisition of Banca Promex, the acquisition of the 49% stake that Aetna had in their joint venture in the pension fund, annuities, and insurance business units. Outside the financial sector, he worked in Oro Negro, a Mexican drilling company, from 2012 to 2013 as Chief Financial Officer and Chief Investment Officer. He studied economics at ITAM and received his master's degree in business administration from Boston University.
Ángel Alverde Losada is an alternate independent member of our Board of Directors and of the boards of directors of Grupo Financiero Santander México and Casa de Bolsa Santander. He was Founding Partner and Chief Executive Officer of Alverde Tiendas S.A. de C.V. From 1994 to 1996 he served as Director of Operations and Advertising of Office Depot de México S.A. de C.V., he was also President of Office Depot de México S.A. de C.V. He has been actively involved in altruistic activities, focusing mainly on education, health and inclusion. He has been a member of the Executive Board of several non-profit organizations, including Fundación Prepárate and Fundación Gigante, which seek to provide assistance in education, health and in the event of natural disasters. He has had an executive role in Olimpiadas Especiales, which is the largest sports program for people with intellectual disabilities in México. He holds a Bachelor's degree in business administration from Universidad Iberoamericana and a master's degree in management from the Kellogg Graduate School of Management.
Rodrigo Brand de Lara is an alternate member of our Board of Directors and of the boards of directors of Grupo Financiero Santander México and Casa de Bolsa Santander. He has been the Deputy General Director of Research, Strategy, Public Affairs and Chief of Staff of the Chief Executive Officer for Banco Santander México since 2016. From 2011 to 2016, he was Deputy General Director of Research, Public Affairs and Marketing. In 2010, he was the Director General for the Social Communication Division of the Mexican Ministry of Foreign Affairs (Secretaría de Relaciones Exteriores). From 2006 to 2010, he was the head of the Social Communication Unit and the spokesperson for the SHCP. From 2004 to 2006, he served as Director General of Social Communication and Institutional Link for IPAB. Mr. Brand de Lara has previously held the following positions at the Mexican Ministry of Treasury (Secretaría de Hacienda y Crédito Público): Deputy General Director of Economic and Financial Analysis from 2003 to 2004, Senior Advisor to the Subsecretary of Finance and Public Credit from 2000 to 2001, Subdirector of Internal Credit from 1999 to 2000. From 1996 to 1999, he was an economist in México for Deutsche Morgan Grenfel, and during 1996 he was also an advisor to the Deputy Director of Financial Engineering of BANOBRAS. Mr. Brand de Lara has a degree in economics from Instituto Tecnológico Autónomo de México.
Alberto Torrado Martínez is an alternate independent member of our Board of Directors and of the boards of directors of Grupo Financiero Santander México and Casa de Bolsa Santander. He is a member of the board of directors of the Mexican Stock Exchange, Fideicomiso ProBosque de Chapultepec and a member of the Mexican Business Counsel. He is founder and Chief Executive Officer of Alsea, S.A.B. de C.V. He has been President of the National Association of Fast Food and member of the National Chamber of the Restaurant Industry and Condimented Food. He is one of the founders of Torrquin, S.A. de C.V. (Domino’s franchise), and is its Chief Executive Officer. Mr. Torrado holds a degree in accounting from the Instituto Tecnológico Autónomo de México. He also completed graduate studies at the Instituto Panamericano de Alta Dirección Empresarial and participated in other seminars, and completed studies at Harvard University and the Wharton School of the University of Pennsylvania.
Pablo Fernando Quesada Gómez is an alternate member of our Board of Directors and of the boards of directors of Grupo Financiero Santander México and Casa de Bolsa Santander. He currently serves as Vice President Commercial Network Deputy General Manager of Corporate and Institutional Banking. Since 1993, he has held the following positions at Grupo Financiero Santander México: Deputy General Manager of Private Banking from 2010 to 2012, Western Regional Executive Director of Corporate and Institutional Banking from 2008 to 2010, Executive Director of Corporate and Institutional Banking from
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2006 to 2008, Regional Director from 1998 to 2006, Area Director of Corporate Banking from 1997 to 1998, Regional Commercial Director from 1995 to 1997, and Director of Corporate Banking from 1993 to 1995. Mr. Quesada was also Deputy Director of Corporate Banking at Banco Mercantil Probursa (México) from 1989 to 1993 and Corporate Banking Account Executive at Banca Cremi (México) from 1984 to 1989. He holds a degree in business administration from Universidad del Valle de Atemajac, Guadalajara.
José Antonio Pérez Antón is an alternate independent member of our Board of Directors and of the boards of directors of Grupo Financiero Santander México and Casa de Bolsa Santander. He joined Grupo ADO in 1996, as part of an Executive Development Program, and subsequently served as Chief Operating Officer and Operations Manager of the Northern Transportation Region. In 2004, he was appointed Deputy Chief Executive Officer of Grupo ADO and became a member of the executive committee of the board. In 2006, he was appointed Chief Executive Officer of Grupo ADO, a position he has held to date. He is a member of the National Board of Directors of CANAPAT, participates in the Mexican Business Council, is also a member of the Board of Directors of ASUR and recently joined the Board of MEEP in Spain. He holds a degree in industrial engineering from Universidad Anáhuac and holds a master's degree in intermodal transportation from the University of Denver. Additionally, he has studies at IPADE, such as the AD2 and ADIT programs, and participated in the social formation course of the USEM (CUFOSO).
Antonio Purón Mier y Terán is an independent member of our Board of Directors and of the boards of directors of Grupo Financiero Santander México and Casa de Bolsa Santander. He is also a member of the board of directors of Zurich Santander Seguros México, S.A. He served as an associate of the Centro de Investigación y Análisis Económico (Economic Research and Analysis Center, or CIDAC) and was a member of the Instituto de Fomento e Investigación Educativa (Institute for the Promotion of Educational Research, or IFIE) and of Metrópoli 2025. He advised public and private institutions with respect to strategy, transactions and organization in collaboration with the Centro de Investigación y Docencia Económicas (Center for Economic Research and Training, or CIDE) and with other specialists. He served as a director partner in the Mexican office of McKinsey & Company, Inc. for over 26 years. He was professor of training courses to McKinsey’s partners and was in charge of the partners “coaching” program at a worldwide level. He is a member of the board of directors of Nadro, S.A., and of the Patronato del Museo Nacional de Arte (the Patronage of the National Art Museum) of Banco Santander Parent and of the Patronato of the Universidad Iberoamericana. Mr. Purón Mier y Terán holds a master’s in business administration from Stanford University and a degree in chemical engineering from the Universidad Iberoamericana. Before starting at McKinsey, he was a full time professor at the Universidad Iberoamericana and worked at the Mexican Petroleum Institute, Ingeniería Panamericana and Polioles, S.A.
Guillermo Jorge Quiroz Abed is a member of our Board of Directors and of the boards of directors of Grupo Financiero Santander México and Casa de Bolsa Santander. He served as the Corporate Director of Administration and Finance at Grupo Bimbo for the last 18 years. From 1997 to 1999 he was in charge of the Finance Department in Santander Serfin Group, involved in the restructuring of the bank and subsequent sale to Santander Financial Group. He began his professional career as Director of Finance at Grupo Condumex, from 1978 to 1992, and later held the same role at AeroMéxico, Mexicana de Aviación and Cintra until 1997. He was a full-time professor in finance area at IPADE. Mr. Quiroz holds a degree in actuary from the Anahuac University and from the National Autonomous University of México (UNAM) and a master's in business administration from the IPADE.
María de Lourdes Melgar Palacios is an independent member of our Board of Directors and of the boards of directors of Grupo Financiero Santander México and Casa de Bolsa Santander. She is a professor at the Tecnológico de Monterrey and the Instituto Tecnológico Autónomo de México and a founding director of the Sustainability and Business Center at EGADE Business School of Tecnológico de Monterrey. Dr. Melgar is also a National Researcher on the National Council of Sciences and Technology. In addition to her work in academia, Dr. Melgar worked at the Ministry of Energy as Undersecretary of Hydrocarbons from 2014 to 2016 and Undersecretary of Electricity from 2012 to 2014. Since 2014, she has also chaired the Technical Group of Energy Reform. Dr. Melgar also previously served as a member of the Governing Board of the Federal Electricity Commission, as Principal Counselor of Petróleos Mexicanos and the National Center for Natural Gas Control and as an alternate member of the boards of the Mexican
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Petroleum Fund, Nacional Financiera and Bancomext. She is also a member of the Mexican Council of International Affairs and the Trilateral Commission and has held several other positions within Mexican diplomacy. Dr. Melgar holds a bachelor’s degree in international relations and comparative literature from Mount Holyoke College and a doctorate degree in political science from the Massachusetts Institute of Technology.
Melanie Elizabeth Devlyn Gómez is an alternate independent member of our Board of Directors and of the boards of directors of Grupo Financiero Santander México and Casa de Bolsa Santander. She has always performed within the framework of Opticas Devlyn, a family business, occupying various roles until being appointed Chairman of the Board of Directors in 2015 and Chief Executive Officer in 2019. She is a former president and current member of the board of Grupo ACE (Asociación de Comerciantes Especializados de México). She is also a member of the CitiBanamex Advisory Board, the Forbes Women Advisory Board, the Advisory Board of the School of Economics and Business of the Universidad Anáhuac, the Board of CIMAD (Research Center for Women in Senior Management) and the CONALEP CDMX Linkage Board. She is a member of Women Corporate Directors, World Organization of Women Directors. She has been on the lists of the 100 Most Influential Women in Business in México according to Forbes since 2016 and Expansión since 2020. She has been a panelist at the Women's Forum México and the Transition Family Business Conference, EY’s Strategic Growth Forum, Foro Mujeres Poderosas Forbes, Foro Expansión, among others. She has also served as President of the Devlyn Family Council from 2009 to 2019. She holds degrees in business administration from Universidad Anáhuac and the senior management program at IPADE Business School.
Rogelio Zambrano Lozano is an alternate member of our Board of Directors and of the boards of directors of Grupo Financiero Santander México and Casa de Bolsa Santander. Since 1977, he has occupied different positions in CEMEX, in areas related to production, distribution, marketing and strategic planning. In 1983, he founded CARZA S.A. de C.V., dedicated to the development of real estate projects in México, which he directed until May 15, 2014, when he was designated as Chairman of the board of directors of CEMEX. He has also chaired the financial committee of CEMEX since 1997. In 1985, he began teaching in the entrepreneurial development division of Instituto Tecnológico y de Estudios Superiores de Monterrey. He also became a member of the corporate executive committee of its business incubator and Chair of the Corporate Board of Business Incubator Campus Monterrey. Among others. Mr. Zambrano holds a degree in industrial and systems engineering from Instituto Tecnológico y de Estudios Superiores de Monterrey and a master’s degree in business administration (1980) from Wharton Business School of the University of Pennsylvania.
Guillermo Francisco Vogel Hinojosa is an alternate independent member of our Board of Directors and of the boards of directors of Grupo Financiero Santander México and Casa de Bolsa Santander. He is Chairman of the Cámara Nacional de la Industria del Hierro y el Acero (CANACERO). Previously, he held the same position from 1987 to 1989 and from 2001 until 2003. He is vice president of the board of directors of Iron & Steel Institute (AISI) and President of the North American Steel Council. He is also a member of the board of directors of Tenaris, Techint México, Corporación ALFA, Universidad Panamericana-IPADE, Rassini, Corporación Mexicana de Inversiones de Capital, Innovare, Grupo Assa y American Iron and Steel Institute among others. He is also President of the board of directors of Grupo Collado y de Exportaciones IM Promoción and member of the Comisión Trilateral, the Consejo Internacional and of the Manhattan School of Music. In 1987 he held the Executive Vice presidency and Chief Executive Officer of TAMSA. In June 1997 he was promoted as vice president of the board of directors. Since 2002 he has been Director and vice president of the board of directors of TENARIS. Mr. Vogel started his career in the Corporate Bank branch of Bank of America in Los Angeles, California in which he achieved the vice presidency position in 1976. In 1979 he worked at Banamex in the Corporate Bank branch, and in 1983 he entered the company Tamsa as a CFO. He holds a degree in business administration from the Universidad Nacional Autónoma de México (UNAM) and a master's in business administration from the University of Texas in Austin.
Joaquín Vargas Guajardo is an alternate independent member of our Board of Directors and of the boards of directors of Grupo Financiero Santander México and Casa de Bolsa Santander. He is the Chairman of
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the board of directors of Corporación Mexicana de Restaurantes, S.A.B. de C.V. and was previously president of the board of directors of Grupo MVS Comunicaciones, the Cámara Nacional de la Industria de Radio y Televisión and the Asociación de Directores de Cadenas de Restaurantes. He is also a member of the boards of directors of several companies including Vitro, S.A.B. de C.V., Grupo Posadas, S.A.B de C.V., Médica Sur, S.A.B. de C.V., Grupo Aeroportuario del Pacífico, S.A.B. de C.V., Periódico el Universal and Grupo Costamex, among others. From April 1997 to April 2005 and from April 2008 to April 2012, he was a member of the board of directors of the Mexican Stock Exchange. He is a member of the Compensation Committee of Grupo Aeroportuario del Pacífico, S.A.B. de C.V. He holds a degree in business administration from the Instituto Tecnológico y de Estudios Superiores de Monterrey and studied business management at the Instituto Panamericano de Alta Dirección Empresarial.
Executive Officers
Our executive officers are responsible for the management and representation of the Bank. The following table presents the names and positions of our executive officers as of December 31, 2022. The business address of our officers is Avenida Prolongación Paseo de la Reforma 500, Colonia Lomas de Santa Fe, 01219, Mexico City, México. Certain of our executive officers are also members of the Board of Directors and of the boards of directors of our subsidiaries.
| | | | | | | | |
Executive Officers |
| Position |
|
| Gender* |
|
| Year of appointment |
| | | | | | | | to position |
Felipe Francisco García Ascencio |
| Chief Executive Officer | |
| Male | |
| 2022 |
Didier Mena Campos |
| Vice President of Administration and Finance | |
| Male | |
| 2022 |
Pablo Fernando Quesada Gómez | | Vice President of Retail and Banking of Companies and Institutions | | | Male | | | 2022 |
Fernando Borja Mujica |
| Deputy General Legal | |
| Male | |
| 2014 |
Emilio de Eusebio Saiz |
| Deputy General Director of Intervention and Control Management | |
| Male | |
| 2010 |
Ricardo Alonso Férnandez |
| Deputy General Director of Risks | |
| Male | |
| 2018 |
Rodrigo Brand de Lara |
| Deputy General Director of Research, Strategy, Public Affairs and Chief of Staff of the Chief Executive Officer | |
| Male | |
| 2011 |
Silvina Criado | | Chief Financial Officer | | | Female | | | 2022 |
Juan Villafuerte Torres | | Head of Retail and Banking | | | Male | | | 2021 |
Alejandro Capote Garza | | Deputy General Director of Corporate and Investment Banking | | | Male | | | 2022 |
Alejandro Diego Cecchi González |
| Deputy General Director of Management and Business Strategy | |
| Male | |
| 2017 |
Oziel Sandoval Macías | | Executive Director of Corporate Resources and Recoveries | | | Male | | | 2022 |
Matías Nuñez Castro | | Deputy General Director of Digital Banking and Innovation | | | Male | | | 2022 |
Daniel Concepción Pérez | | Deputy Head of Technology | | | Male | | | 2020 |
Ana Felisa López Escobar | | Executive Director Human Resources | | | Female | | | 2022 |
Oscar Hernando Moliner | | Executive Director of Operations and Processes | | | Male | | | 2021 |
Pablo Agote Alique | | Chief Audit Executive | | | Male | | | 2022 |
Norma Angélica Castro Reyes | | Executive Director Financial Inclusion | | | Female | | | 2016 |
Banco Santander México supports opportunities equality and human rights respect, underlining non-discrimination by means of the General Code of Conduct, the Labor Internal Regulations and the Equality and Diversity Policy (17.14.02.03) contained in the General Manual of Policy and Procedures.
Set forth below are the biographies of our executive officers that are not members of our Board of Directors.
Fernando Borja Mujica has served as Deputy General Legal Director of Banco Santander México since 2014. From 2004 to 2014, he was general counsel for Banco Nacional de México. From 1988 to 1998 he held several positions in the SHCP, including General Director of Banking Institutions. From 1998 to 2004 he was a partner at the law firm of Mijares, Angoitia, Cortés y Fuentes, S.C. Mr. Borja Mujica has held various Mexican government banking and finance positions. He was also a member of the Governor’s Board of the National Banking and Securities Commission and of the Insurance and Surety National
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Commission and served as a member of several financial institutions, including Shares and Securities, Afore Banamex (member of the investment committee) and Impulsora de Fondos Banamex. He was the secretary of the boards of directors of Grupo Financiero CitiBanamex and Banco Nacional de México, S.A. He holds a law degree from Escuela Libre de Derecho and a master’s degree in comparative law from Georgetown University.
Emilio de Eusebio Saiz has been Deputy General Manager of Management Intervention and Control at Banco Santander México since 2010. He began his career in the Human Resources Department of the Santander Group, where he worked from 1989 to 1990. He worked in the Financial Division of Santander Group from 1990 to 1992 and in the General Intervention and Control Administration division at Santander Group from 1992 to 2008. He became Deputy General Director of Intervention and Control at Grupo Financiero Santander México in December 2010 after having served as Director of Corporate Administration Control of Expenses in Grupo Financiero Santander México between March 2008 and November 2010. He has a degree in economics from the Complutense University of Madrid and a master's in business administration from the Instituto de Empresas de Madrid.
Ricardo Alonso Fernández was appointed Deputy General Manager of Risk (CRO) in June 2018. During his 25 years of experience at Santander Group, he has worked in the following positions: Risk Analysis Team from 1994 to 1996,Global Account Officer and Executive Director in the Wholesale Banking Division from 1996 to 2005, Managing Director in the Global Transaction area from 2005 to 2007, Director of the Institutional Banking area, in the Commercial Banking division of Spain from 2007 to 2011, Risk Director of Spain, Risk Division from 2011 to 2013, Chief Risk Officer (CRO) of the Recoveries and Asset Restructuring Division of Spain, from 2013 to 2015, Global Head of Collections and Recoveries starting in 2015 and Global Deputy Chief Credit Officer, both in the Risk Division until 2017. Mr. Alonso Fernández has a degree in law and economics from the University of Deusto (Bilbao) and a degree in political science from the National University of Distance Education University (Madrid).
Silvina Criado has been Chief Financial Officer since December 2022. Silvina joined Banco Santander México in 2013 as deputy director responsible for capital measurement using internal models. A year later, she was transferred to the Capital Measurement Department, and in 2016, she became the Executive Director of Capital within the Finance DGA, where he played a key role in managing the Bank's capital and profitability. Ms. Criado holds an actuary degree in economics from the University of Buenos Aires in Argentina.
Juan Villafuerte Torres has been the Head of Retail and Banking of Banco Santander México since May 2021. He has more than 34 years of experience in Santander, beginning his career within the branch structure as Cashier, Assistant Manager and finally as Branch Manager. Subsequently, he held the positions of Area Subdirector, Subdirector of Individuals and SMEs, Consumer Credit and Credit Cards and Commercial Director of Credit Cards, Director of Individuals and Executive Director for Network Coordination. Mr. Villafuerte has also served in the roles Executive Director for the Northwest Region and Executive Director of Business Strategy. He has a degree in finance and banking from Universidad del Valle de México, he has a second bachelor's degree in administration from DGAIR SEP, as well as certifications in strategic planning from the UAM, management training by IPADE and training in talent management by ITESM.
Alejandro Capote Garza was appointed Deputy General Director of Corporate and Investment Banking (Santander Corporate & Investment Banking –SCIB) in July 2022. Mr. Capote joined Santander CIB in 2021 as Executive Director of Banking & Corporate Finance México and has a track record of 22 years of experience in Investment Banking. Prior to joining the Santander Group, Mr. Capote collaborated with various international financial institutions such as UBS and Credit Suisse, holding various positions in México and the United States. Alejandro's most recent collaboration was as head of Lazard in México. He has a degree in industrial and systems engineering from the Tecnológico de Monterrey and a master's in business administration from the Kellogg School of Management.
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Alejandro Diego Cecchi González is currently Deputy General Director of Management and Business Strategy since 2017. Prior to this appointment he served as Deputy General Director of Customers from 2016 to 2017. Prior to this position, Mr. Cecchi acted as the Executive Director of the Individual Segment in 2016, Executive Director of High Income Segment from 2015 to 2016, was Executive Director of SME Segment from 2010 to 2015, Executive Director of SME Segment for Latin America in Banco Santander España from 2008 to 2010, Zonal Director of Individual Segments from 2005 to 2008, Director of SME Segment from 2002 to 2005, he was the head of corporate risk in Uruguay from 1998 to 2000. He studied economics at The National University of Uruguay and later studied high management at IPADE.
Oziel Sandoval Macías has been the Executive Director of Corporate Resources and Recoveries since November 2022. He began his professional career at Banco Santander México in 1993 as a Risk Analyst and later became Branch Director, Director of the Individual and SME Banking Zone, as well as SME Commercial Director. He has a degree in financial administration from Universidad Autónoma de Aguascalientes.
Matías Núñez Castro has been Deputy General Director of Digital, Innovation and Remote Channels since July 2022. He has more than 25 years of experience in the Santander Group collaborating in different geographies and businesses. He has worked in various front-end roles with clients in his early years, then in the business transformation of companies and SMEs, leading the SME segment in Argentina, Spain and México and was responsible for the means of payment business and the acquiring business. He has a degree in business administration from the University of Buenos Aires and certifications from EGADE, Strategic Finance in Banking from Wharton, Project Management from ITBA, the PDD Executive Program at IAE and Microfinance at Boulder Institute, among others.
Daniel Concepción Pérez is Deputy Head of Technology since April 2020. He began his professional career in the Santander Group at Produban Madrid in 2005 as IT Manager, later, he was promoted to IT Director and in 2015, he joined Banco Santander Spain as Global Head of Platform Engineering. In 2016, he collaborated with Banco Santander in Boston as Head of IT Engineering and in 2019, he joined Banco Santander México as CIO within the Finance DGA, where he played a key role in managing the Bank's capital and profitability. He completed his studies in Computer Science at the University of Las Palmas in Gran Canaria, and he has a master's in business administration from Alfonso X El Sabio University.
Ana Felisa López Escobar is Executive Director of Human Resources since July 2022. She joined Banco Santander México as head of Talent Attraction and Development in 2018 and has an extensive career of more than 25 years in various roles within the human resources departments of different multinational companies in the non-financial sector, including in connection with talent attraction, development, diversity and inclusion activities, among others. She completed her studies in business administration at CESA University in Bogotá and has a master's degree in international management from Capilano University in Vancouver.
Oscar Hernando Moliner has been Executive Director of Operations and Processes since November 2021. He began his professional career within Santander Spain, holding positions such as Risk Analyst and Internal Auditor. He has also managed national and international audits in the United Kingdom, USA, Brazil, Argentina, Uruguay, Germany, Italy, Poland, the Czech Republic and Russia. Since 2012, he joined Banco Santander México team as Director of Audit for Credit Risks, covering the regions of México, Colombia and Panama. Later, he was appointed Executive Director for Non-Financial Risks and Internal Control. He has a degree in business management and administration from the Zaragoza University in Spain specializing in fnance and statistics and a master's degree in auditing and public accounting from the same university.
Pablo Agote Alique has been Chief Audit Executive since December 2022. He has a 26-year career at the Santander Group, where he began his career as an internal auditor in Brazil, Chile , Germany, México, Portugal, Switzerland, the United Kingdom, the United States and Venezuela. In 2009 he became a chief audit executive at Banco Santander Río (Argentina), and in 2012, he continued his career as chief audit executive at Santander Consumer in Germany. In 2017, he collaborated as chief audit executive of Banco Popular, an entity acquired that same year by the Santander Group, and in 2019, he became the Director
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of Internal Control for Banco Santander Spain. He has a degree in economic and business Sciences from the Complutense University of Madrid.
Norma Angélica Castro Reyes has been Executive Director of Financial Inclusion since September 2016. She has 30 years of experience in the financial sector, covering areas such as regulation, risks, business development and growth, and financial inclusion. She has also collaborated with other financial institutions such as INVEX, NAVIX AND FINSOL. She has a degree in public accounting from La Salle University.
B. Compensation
The Bank considers as key management personnel the directors, the executive officers and the members of our audit committee, the corporate practices, nominating and compensation committee, the comprehensive risk management committee and the remuneration committee.
Our shareholders establish the compensation of our directors at the annual shareholders’ meeting. The aggregate amount of compensation and benefits to our executive officers during fiscal year 2022 was Ps.504 million. For the same period, the independent directors who were members of the Audit Committee, the Corporate Practices, the Nominating and Compensation Committee, the Comprehensive Risk Management Committee, the Remuneration Committee and our Board of Directors during fiscal year 2022 as listed in the table in Section A of this Item 6 received an aggregate compensation of Ps.37 million. Only independent directors receive compensation for their duties.
We are not required under Mexican law to disclose on an individual basis the compensation of our executive officers, directors or committee members, and we do not otherwise publicly disclose such information.
The main benefits paid to the executive officers are salary, Christmas bonus, vacation bonus, holidays, performance bonus and share-based payments.
The criteria for granting and paying bonus compensation vary according to the activities performed by the executive officer and, therefore, payment of the bonuses may vary depending on the department and activities performed by each executive officer.
Our executive officers may participate in the same pension and medical expenses plan that is available to our employees, but at contribution percentages that are different from those of the rest of our employees.
The total post-employment benefits (including pension plan, medical expenses and life insurance policies) to our executive officers amounted to Ps.572 million as of December 31, 2022.
Long-term compensation plan 2015
Since September 2016, the Bank began to participate in a corporate share-based variable compensation plan denominated “Long-term incentive plan 2015” applicable only to a certain group of executive officers. This plan provides a variable compensation linked to the growth of the earnings per share ratio and of the return on tangible equity of Banco Santander Parent.
During 2021 and 2022, the Bank recognized Ps.4.5 million and Ps.2.1 million, respectively, in the consolidated income statement with respect to this plan.
For more information on personnel expenses relating to the Long-term incentive plan 2015, see Note 42.b to our audited financial statements included elsewhere in this Report.
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Bonus payment policies
As a result of an internal policy of Banco Santander Parent, a portion of the annual variable remuneration plan applicable only to a certain group of executive officers is deferred for a period of three or five years, with one-third or one-fifth vesting each year.
Both the deferred and non-deferred portions are paid equally in cash and in shares of the Bank for the corresponding payment periods. Once delivered, beneficiaries are obligated to keep the shares for a one-year period.
In 2021 and 2022, the Bank recognized in the consolidated income statement an amount of Ps.448 million and Ps.862.3 million, respectively, for the bonus of the beneficiaries.
See Note 42.c to our audited financial statements included elsewhere in this Report for more details regarding the payment policies for the bonus of the beneficiaries.
C. Board Practices
Our directors and alternate directors are elected for one-year terms at our special Series F and Series B shareholders’ meetings and may be reelected. Pursuant to Mexican law, members of our Board of Directors continue to be members of the Board of Directors despite the expiration of their term until new members of the Board of Directors have been appointed and assume office. For each director, an alternate director may be appointed, provided that the alternate director corresponding to an independent director must also be independent. All members of the Board of Directors, whether they are directors or alternate directors, are called to attend the meetings of the Board of Directors. If both a director and an alternate director attend the same meeting, only the vote of the director shall be considered.
The period during which the members of our Board of Directors have served in their offices is shown in the table under Section A of this Item 6. Each of the members of the Board of Directors listed in the table under Section A of this Item 6 were elected at our special shareholders’ meetings Series F and B, held on April 29, 2022 and October 24, 2022 for a period of one year.
The members of our Board of Directors are not entitled to benefits upon termination of employment.
Committees
Pursuant to our bylaws, our Board of Directors has created the following committees, which report to the Board of Directors:
● | Audit Committee; |
● | Corporate Practices, Nominating and Compensation Committee; |
● | Comprehensive Risk Management Committee; and |
● | Remuneration Committee. |
Audit Committee
The purpose, composition, authority and responsibilities of our Audit Committee (Comité de Auditoría), which reports to our Board of Directors, derive from Mexican law and the rules of the NYSE applicable to foreign private issuers. The principal functions of our Audit Committee are to (i) evaluate the performance of our external auditors, including the review of their annual audit and recommendation of their approval to the Board of Directors, (ii) review and approve financial statements, and recommend their approval to the
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Board of Directors, (iii) review our internal controls and inform the board of directors of any irregularities, (iv) review and advise the Board of Directors regarding the financial statements and other matters related to the audit, which includes opinions in respect of (a) whether accounting policies and criteria are adequate and sufficient, and (b) whether financial information fairly reflects our financial condition and results, and (v) ensure that related party transactions and transactions required to be approved by the Board of Directors or the shareholders are approved.
The Audit Committee may generally review our financial information and its preparation and for that purpose may undertake investigations, require opinions of third parties and require explanations and information from our officers. The Audit Committee is responsible, subject to the approval of the Board of Directors, as required under the Mexican Securities Market Law, for the appointment, compensation, retention and oversight of the work (including resolution of any disagreements between management and the auditor regarding financial reporting) of any registered public accounting firm engaged for the purpose of preparing or issuing an audit report or performing other audit, review or attest services, and each such registered public accounting firm must report directly to the Audit Committee. In addition, the Audit Committee has established procedures for (i) the receipt, retention and treatment of complaints we may receive regarding accounting, internal accounting controls or auditing matters, and (ii) the confidential, anonymous submission by our employees of concerns regarding any questionable accounting or auditing matters. The Audit Committee has the authority to engage independent counsel and other advisers, as it determines necessary to carry out its duties. We are required to provide for appropriate funding, as determined by the Audit Committee, for payment of (i) compensation to any registered public accounting firm engaged for the purpose of preparing or issuing an audit report or performing other audit, review or attest services, (ii) compensation to any advisers employed by the Audit Committee, and (iii) ordinary administrative expenses of the Audit Committee that are necessary or appropriate in carrying out is duties.
Pursuant to Mexican law, the members of the Audit Committee must be appointed for their professional qualifications, expertise and reputation. At least one of the members must have broad experience in the financial, auditing and/or internal control sectors. The executives or employees of Banco Santander México cannot be members of the Audit Committee. The Audit Committee must have at least three members and no more than five members, all of whom must be independent members of the Board of Directors, as determined in accordance with the Article 25 of the Mexican Securities Market Law and our bylaws.
Pursuant to Mexican law and our bylaws, the President of the Audit Committee is elected and removed at the general shareholders’ meeting. Such President cannot be the chairman of the Board of Directors. The rest of the members of the Audit Committee are elected and/or removed by the Board of Directors. The Audit Committee’s members remain in office until they are removed or resign, provided they continue to be members of the board of Directors.
The current members of our Audit Committee are:
| | | | | |
Name |
| Position |
|
| Status |
Guillermo Quiroz Abed |
| President of the Audit Committee and Independent Director* | |
| Independent* |
Antonio Purón Mier y Terán | | Independent Director* | | | Independent* |
Ma. Lourdes Melgar Palacios |
| Independent Director* | |
| Independent* |
* | As determined in accordance with Article 25 of the Mexican Securities Market Law, our bylaws and the NYSE rules applicable to foreign private issuers. |
The Secretary of the Audit Committee is Fernando Borja Mujica and the Assistant Secretary of our Audit Committee is Rocío Erika Bulhosen Aracil.
All of the directors on our Audit Committee are considered independent, as determined in accordance with Articles 25 of the Mexican Securities Market Law and 22 of the Mexican Banking Law. Likewise, all of the members of our Audit Committee are considered independent in accordance with Rule 10A-3 under the
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Exchange Act, in compliance with the rules of the NYSE applicable to foreign private issuers. Our Board of Directors has determined that Fernando Ruiz Sahagún is also an “Audit Committee Financial Expert” as defined by the SEC.
Corporate Practices, Nominating and Compensation Committee
The primary functions of our Corporate Practices, Nominating and Compensation Committee (Comité de Prácticas Societarias, Nominaciones y Compensaciones) are to call shareholder meetings, to aid the Board of Directors in the preparation of reports to be presented at shareholder meetings and to propose and provide advice to the Board of Directors on the following subjects:
● | Policies and guidelines for the use or enjoyment of the assets that make up the Company's property and acts with related parties; |
● | Compliance of the Company with the established corporate practices, and the applicable laws and regulations; |
● | Unusual or non-recurring transactions; |
● | Organization and strategic succession of Human Resources; |
● | Waivers to directors, executive officers or other persons to take advantage of our business opportunities for themselves or on behalf of third parties; |
● | The correct management, conduct and execution of the strategies of the Group and its Financial Entities; |
● | The establishment of the elaboration of reports that are presented to the Shareholders' Meeting; |
● | The establishment of Policies that promote that the Company's actions take place within the legal framework, and have adequate legal defense; |
● | Compensation of members of the Board and Committees; |
● | Appointment, and dismissal of the Chief Executive Officer; |
● | Policies of appointment and contribution of the relevant Directors; |
● | Policies that set limits on the authority of the Chief Executive Officer and executive officers; |
● | A report to the Board of Directors, based on reports of the activities of the Chief Executive Officer and the internal committees; |
● | Appropriate legal actions against our officers who do not comply with the principles of loyalty and diligence. |
● | Organization of human resources; |
● | Policies to promote activities in compliance with the relevant legal framework and access to adequate legal defense; |
● | Proposed compensation to directors and members of committees; |
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● | Compliance of established corporate practices and compliance with all applicable laws or regulations; |
● | The internal criteria and procedures to be followed to determine the composition of the Board of Directors and select those people who intend to serve as directors; |
● | The internal criteria and procedures for the selection and continuous evaluation of the CEO, Senior Executive Vice President or similar key officials and other employees responsible for internal control functions or who occupy key positions for the daily conduct of banking activity and who report on your nomination and removal from office and your ongoing evaluation; |
● | An evaluation process of the Board and its Directors annually; and |
● | Compliance with the corporate practices established in all applicable Laws or regulations aligned with the Government. |
The current members of our Corporate Practices, Nominating and Compensation Committee are:
| | |
Members |
| Position |
Antonio Purón Mier y Terán |
| Independent Director and President |
Guillermo Jorge Quiroz Abed | | Independent Director |
Ángel Alverde Losada | | Independent Director |
Alberto Torrado Martínez |
| Independent Director |
The Secretary of the Corporate Practices Committee is Fernando Borja Mujica and the Assistant Secretary of the Corporate Practices, Nominating and Compensation Committee is Rocío Erika Bulhosen Aracil.
The Corporate Practices, Nominating and Compensation Committee must include at least three members of the Board of Directors, which may be acting members or alternate members, all of whom must be independent, as determined in accordance with Article 25 of the Mexican Securities Market Law and our bylaws. Pursuant to Mexican law and our bylaws, the President of the Corporate Practices Committee is elected and removed by the general shareholders’ meeting. Such President cannot be the Chairman of the Board of Directors and shall be elected on the basis of his expertise, competence and professional reputation. The Corporate Practices Committee’s members remain in office until they are removed or resign, provided they continue to be members of the board of Directors.
Comprehensive Risk Management Committee
Our Comprehensive Risk Management Committee (Comité de Administración Integral de Riesgos) reports to the Board of Directors as required by local law. This committee proposes objectives, policies and procedures for the management of risk as well as risk exposure limits to the Board of Directors. In addition, our Comprehensive Risk Management Committee approves the methodologies that we use to measure the various types of risks to which we are subject, as well as the models, parameters and scenarios for risk measurement, and monitors market, liquidity, credit, counterparty, legal and operational risks. See “Item 11. Quantitative and Qualitative Disclosures About Market Risk—Organizational Structure” for additional information about the committee’s activities. The members of the Comprehensive Risk Management Committee shall be members of the Board of Directors, and they remain in office until they are removed or resign.
The current members of our Comprehensive Risk Management Committee are:
| | |
Members |
| Position |
César Augusto Montemayor Zambrano |
| Independent Director and President of the Comprehensive Risk Management Committee |
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Felipe Francisco García Ascensio |
| Chief Executive Officer |
Alberto Torrado Martínez |
| Independent Director |
Joaquín Vargas Guajardo |
| Independent Director |
María de Lourdes Melgar Palacios | | Independent Director |
Ricardo Alonso Fernández | | Deputy General Director of Risk |
Didier Mena Campos* |
| Chief Financial Officer |
Fernando Borja Mujica* |
| Deputy General Legal and Compliance Director |
Emilio de Eusebio Saiz | | Deputy General Director of Intervention and Control Management |
Pablo Agote Alique* |
| Chief Audit Executive |
* | No voting rights. |
Remuneration Committee
The purpose, composition, authority and responsibilities of our Remuneration Committee (Comité de Remuneraciones), which reports to our Board of Directors, have been established in a charter approved by our Board of Directors in accordance with Mexican law.
The Remuneration Committee’s primary purpose is to assist our Board of Directors in developing norms and policies relating to the administration and evaluation of the compensation plans, that together form our compensation system and to promulgate compensation plan criteria and policies to some of our employees. The Remuneration Committee prepares biannual reports about the administration of our compensation plans and informs the CNBV about modifications to our compensation system.
The Remuneration Committee is responsible for implementing and maintaining our compensation system and informs the Board of Directors twice a year regarding the operation of the compensation system. Additionally, the Remuneration Committee proposes compensation policies and procedures, recommends employees or personnel for inclusion in the compensation system and brings special cases and circumstances to the attention of the Board of Directors for its approval.
Our Remuneration Committee charter provides that:
● | it must include at least two members of the Board of Directors, one of whom must be independent, who shall be the one presiding; |
● | at least one member must have knowledge and experience in risk management or internal controls; |
● | the person responsible for the Comprehensive Risk Management Unit shall be a member; |
● | a representative from the Human Resources division shall be a member; |
● | a representative from the Financial Planning or Budget Division shall be a member; and |
● | the internal auditor may participate without voting rights. |
The Remuneration Committee must meet every quarter, and at least a majority of its members must be present; provided, that an independent director shall at all times be present. The meetings and resolutions adopted at Remuneration Committee meetings must be documented in minutes signed by all of the members who are present.
The current members of our Remuneration Committee are:
| | |
Name |
| Position |
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Antonio Purón Mier y Terán |
| Independent Director |
Guillermo Jorge Quiroz Abed | | Independent Director |
Ángel Alverde Losada | | Independent Director |
Ana Felisa López Escobar | | Director of Human Resources |
Emilio de Eusebio Saiz |
| Deputy General Director of Intervention and Control Management |
Pablo Agote Alique* | | Chief Audit Executive |
Ricardo Alonso Fernández |
| Deputy General Director of Risk |
* | No voting rights. |
The Secretary of the Remuneration Committee is Fernando Borja Mujica, and the Assistant Secretary is Rocío Erika Bulhosen Aracil.
The members of the Remuneration Committee shall be members of the Board of Directors, and they remain in office until they are removed or resign.
D. Employees
As of December 31, 2022, we had 25,990 employees, an approximately 2.8% increase since December 31, 2021. We classify our employees as executives, professionals and administrative employees. Executives include the top management. Professionals are middle-management personnel. The remainder of the employees are administrative employees.
We have traditionally enjoyed good relations with our employees and their union. Of the total number of our employees, 8,049 or 31.0%, were members of the Banco Santander México labor union, which is affiliated with the National Federation of Bank Unions (Federación Nacional de Sindicatos Bancarios), as of December 31, 2022. We negotiate salaries with our union on an annual basis and benefits every two years, as required under Mexican law. In 2022 the collective bargaining agreement relating to salaries and benefits was renewed (benefits are reviewed every 2 years). The terms of employment are generally the same for unionized and non-unionized employees. As of December 31, 2022, the Bank had 667 temporary employees, which represented 2.6% of our total employees.
The following chart summarizes the number and type of our employees as of December 31, 2020, 2021 and 2022.
| | | | | | | | |
| | As of December 31, | ||||||
Employees |
| 2020 |
|
| 2021 |
|
| 2022 |
Executives |
| 118 | |
| 116 | |
| 117 |
Professionals |
| 8,570 | |
| 9,076 | |
| 9,712 |
Administrative |
| 12,495 | |
| 16,084 | |
| 16,161 |
Total |
| 21,183 | |
| 25,276 | |
| 25,990 |
With the goal of mitigating and controlling the potential spread of COVID-19 pandemic, the Bank established guidelines and strategies to prevent and reduce transmission among employees, provide a safe return to the office and allow labor activities to continue, including the following:
● | Providing additional protection to employees at higher risk for severe illness through supportive policies and practices, such as working from home; |
● | Providing disposable facemasks and hand sanitizer; |
● | Encouraging social distancing to workers; |
● | Establishing protocol for preventive home isolation for employees suspected or confirmed to have COVID-19 pandemic; and |
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● | Encouraging employees to speak up though the whistleblower channel, in order to identify and mitigate non-compliance with COVID-19 pandemic protocols. |
E. Share Ownership
As of December 31, 2022, none of our directors, executive officers and members of our management committees named in Section A and Section B of this Item 6 beneficially owned any shares (including ADSs) of Banco Santander México.
For a description of our equity compensation plan, see “Item 6. Directors, Senior Management and Employees ––B. Compensation.”
ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
A. Major Shareholders
As of the date of this Report, our holding company, Grupo Financiero Santander México, directly owns approximately 74.96% of our total capital stock. Banco Santander Parent owns 99.99% of the capital stock of Grupo Financiero Santander México. Banco Santander Parent also directly owns 21.19%, and as a result is our controlling shareholder with a total aggregate ownership of 96.15% of our share capital. The Santander Group, through its standalone subsidiaries, was one of the largest foreign bank groups in Latin America in terms of assets as of December 31, 2022, based on publicly available annual reports. The Santander Group had a gross margin of €52,117 million, CET1 fully loaded capital ratio of 12.04% and a market capitalization of €47,066 million as of December 31, 2022, and net income attributable to shareholders of €9,605 million in 2022. As of December 31, 2022, the Santander Group had 9,019 branches and a presence in 10 core markets. As a result of its voting control over us, the Santander Group is in a position to cause the election of a majority of the members of our management and to determine substantially all matters to be decided by a vote of shareholders.
Our relationship with the Santander Group has provided us with access to the expertise of the Santander Group in areas such as technology, product innovation, human resources and internal audit control systems. In addition, the Santander Group requires us to follow its banking policies, procedures and standards, especially with respect to credit approval and risk management. Such policies and expertise have been successfully used by the Santander Group in the Spanish and other banking markets, and we believe that such policies and expertise have had and will continue to have a beneficial effect upon our operations. For information about our relationship with Banco Santander Parent, see “Item 7. Major Shareholders and Related Party Transactions—B. Related Party Transactions.”
The following table presents the beneficial ownership of our capital stock as of the date of this Report.
| | | | | | | | | | | | | | | | | | |
|
| |
|
| Percentage of |
|
| |
|
| Percentage of | |
| |
|
| Percentage of | |
| | Series | | | Outstanding Series | | | Series B | | | Outstanding Series | | | Total Number | | | Total Capital | |
Name | | F Shares | | | F Shares | | | Shares | | B Shares | | | of Shares | | | Stock | | |
Grupo Financiero Santander México, S.A. de C.V. |
| 3,464,309,145 | |
| 100.00% | |
| 1,623,491,117 | |
| 48.86% | |
| 5,087,800,262 | | | 74.96% | |
Banco Santander, S.A. | | — | | | 0.00% | | | 1,438,256,710 | | | 43.28% | | | 1,438,256,710 | | | 21.19% | |
Gesban México Servicios Administrativos Globales, S.A. de C.V. |
| — | |
| — | |
| 1,340 | |
| 0.01% | |
| 1,340 | | | 0.01% | |
Treasury | | — | | | — | | | 5,671,453 | | | 0.17% | | | 5,671,453 | | | 0.08% | |
Minority shareholders |
| — | |
| — | |
| 255,264,592 | |
| 7.68% | |
| 255,264,592 | | | 3.76% | |
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Total Capital Stock |
| 3,464,309,145 | |
| 100.00% | |
| 3,322,685,212 | |
| 100.00% | |
| 6,786,994,357 | | | 100.00% | |
(1) | Based on par value of Ps.3.780782962 per share. |
According to our depository bank, as of the date of this annual report, we had one holder registered in México in addition to Citibank, N.A. as depositary of the ADRs evidencing ADSs. As of December 31, 2022 there were a total of 36 ADR holders of record and as of February 27, 2023 there were 149,375,733 ADRs outstanding, representing 746,878,665 Series B shares or 22.5% of outstanding Series B shares. Since some of these ADRs are held by nominees, the number of record holders may not be representative of the number of beneficial holders.
Significant Changes in Percentage Ownership of Principal Shareholders
On March 26, 2021, Banco Santander Parent launched the Tender Offer for all of our issued and outstanding Series B Shares. Beginning in March 2021, Banco Santander Parent announced a mandatory delisting tender offer in order to repurchase the outstanding shares of the Bank that it did not own (8.3%). On June 8, 2021, Banco Santander Parent changed the terms of the tender offer to be a voluntary tender offer, instead of a mandatory delisting tender offer. On November 3, 2021, Banco Santander Parent announced an exchange offer for the outstanding shares of the Bank at a price of Ps.26.50 for each share of the Bank and the equivalent in US dollars of Ps.132.50 for each outstanding American Depositary Share (ADS). Consequently, Banco Santander Parent increased its participation in the Bank to 96.15% from 91.64%.
On June 15, 2020, Santander Global Facilities, as vendor, and Gesban México Servicios Administrativos Globales, S.A. de C.V., as purchaser, signed the Purchase Agreements, by which the former transferred to the latter ownership of the shares it held in Banco Santander México.
In addition, in October 2022, Banco Santander Parent announced that it intends to make concurrent cash tender offers in México and the United States to acquire all of the issued and outstanding Series B shares, subject to receipt of regulatory approvals. In November 2022, our shareholders approved the deregistration of our shares from the Mexican National Securities Registry and the delisting of the ADSs from the NYSE, subject to completion of the tender offers. The offers commenced on February 7, 2023 and will expire on March 8, 2023 (date that may be extended in case such term is increased), except that such term is extended in accordance with the applicable law.
Voting Rights of Principal Shareholders
Our principal shareholders do not have voting rights distinct from those of our other shareholders. See “Item 10. Additional Information—B. Memorandum and Articles of Association—Voting Rights.”
B. Related Party Transactions
Loans to Related Parties
Articles 73, 73 Bis and 73 Bis 1 of the Mexican Banking Law (Ley de Instituciones de Crédito) regulates and limits loans and other transactions pursuant to which related parties may be liable to a bank. Transactions covered under the Articles are deposits, any type of loans, restructurings and amendments to such loans, net derivatives positions and investments in securities other than equity securities. For purposes of these provisions, the term “related parties” refers to (1) holders, either directly or indirectly, of 2% or more of our or any of our subsidiaries’ shares; (2) our or any of our subsidiaries’ principal and alternate Board members; (3) relatives of a Board member or of any person specified in (1) and (2) above; (4) any person not our officer or employee who, nevertheless, is empowered to contractually bind us; (5) any corporation (or its directors or executive employees) in which we or any of our subsidiaries owns, directly or indirectly, 10% or more of its equity stock; (6) any corporation who has a director or officer in common with us or any of our subsidiaries; or (7) any of our directors or officers holds 10% or more of the
218
outstanding capital stock. The majority of our Board of Directors must approve such loans. Before approval, however, the loan must undergo our customary review procedures for loans, which will vary depending on the nature and amount of the loan, except that such loans must always be reviewed and recommended by the highest loan review committee at the management level, and must be recommended by a special committee of directors responsible for reviewing our largest loans and all loans falling within the scope of Articles 73, 73 Bis and 73 Bis 1 of the Mexican Banking Law. In addition, certain filings must be made with the CNBV with respect to such loans. Loans to individuals in amounts less than the greater of (1) two million UDIs (Unidades de inversión, a peso-equivalent unit of account indexed for Mexican inflation) or (2) 1% of a bank’s Tier 1 net capital are exempt from such provisions. Loans to related parties may not exceed 35% of a bank’s Tier 1 capital. The CNBV may, upon request, grant exemptions from these provisions. In our case, all loans to individuals who are related parties, regardless of the amount, are approved by our Board of Directors.
The SHCP has adopted rules which exclude from the category of loans to related parties loans granted to the Mexican government, provided that the recipient does not make a loan to a related party, and loans to our directors or officers if they fall within the minimum thresholds set forth above. The SHCP rules also exclude from the category of loans to related parties loans to companies that provide ancillary services to us, meaning our affiliates that provide the necessary auxiliary services we need in order to carry out our operations, such as administrative, accounting, finance, legal, IT and other services, provided that such companies do not make a loan to a related party. These three categories of loans are not considered for purposes of determining the 35% of Tier 1 Capital limit of our loan portfolio that may consist of loans to related parties, and do not require the prior approval of our Board of Directors.
As of December 31, 2022, our loans granted to related parties per Article 73, 73 Bis and 73 Bis 1 of the Mexican Banking Law totaled Ps.88,950 million (U.S.$4,559 million), respectively, which included loans granted to our subsidiaries Santander Consumo and Santander Inclusión Financiera for Ps.69,785 million (U.S.$3,577 million) and Ps.485 million (U.S.$25 million), respectively, which were eliminated from the balance sheet on consolidation. These loans with related parties were approved by the Board of Directors. According to Mexican Banking Law, loans with subsidiaries that form part of our financial group are not considered to be related party transactions and therefore do not count against the 35% of Tier 1 Capital limit. Pursuant to the methodology to classify the loan portfolio set forth under the loan classification and rating rules, all of the loans granted to related parties have a credit quality of A1. Our loans to related parties are made on terms and conditions comparable to other loans of like quality and risk.
Additionally, pursuant to the Mexican Banking Law, no loans may be made to any bank officers or employees, except in connection with certain employment benefits. As permitted by the Mexican Banking Law, we currently provide loans to our employees at favorable rates.
Loans to Our Directors and Executive Officers
We have granted loans to our directors (excluding directors who are also executive officers) of Ps.1.7 million, Ps.16.5 million and Ps.12 million as of December 31, 2020, 2021 and 2022, respectively. None of these loans is disclosed as non-accrual, past due, restructured or potential problems in the “Item 4. Information on the Company—B. Business Overview—Selected Statistical Information” section. All loans were made in the ordinary course of business, were made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with other persons not related to Banco Santander México, and did not involve more than the normal risk of collectability or present other unfavorable features.
In addition, we have granted loans to our executive officers (including directors who are also executive officers) of Ps.124 million, Ps.165 million and Ps.197 as of December 31, 2020, 2021 and 2022, respectively. None of these loans is disclosed as non-accrual, past due, restructured or potential problems in the “Item 4. Information on the Company—B. Business Overview—Selected Statistical Information” section. As of December 31, 2020, 2021 and 2022, 92%, 90% and 95% of the total amount of these loans, respectively, were made pursuant to an employee benefit plan that makes standardized loans available to
219
all of our employees without preferential terms or conditions for any of the executive officers, as permitted by the Mexican Banking Law. The rest of these loans were made in the ordinary course of business, were made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with other persons not related to Banco Santander México, and did not involve more than the normal risk of collectability or present other unfavorable features.
Under applicable Mexican privacy laws, we are not permitted to disclose the identity of our loan recipients. The following table sets forth unnamed members of our senior management who are the recipients of loans pursuant to an employee benefit plan granted by us to which Instruction 2 of Item 7.B.2. of Form 20-F does not apply. The recipients of such loans have not waived the application of these privacy laws.
The material terms that differentiate these loans to unnamed members of our senior management listed below from those made in the ordinary course of business in transactions with unrelated persons are the following:
● | The applicable interest rate for each of these loans is the 28-day Mexican benchmark interbank money market rate (Tasa de Interés Interbancaria de Equilibrio, or TIIE) capped at 7%, which is less than the interest rate that would be charged to unrelated persons. The average TIIE rate from January to December 2022 was 7.88%. |
● | We do not charge any commissions for these loans, whereas we would normally charge commissions on loans made to unrelated persons. |
| | | | | | | | | | | | | | | | | | | |
| | As of December 31, 2022 | |||||||||||||||||
Nature of loan and transaction | | Mortgage (1) | | | Credit lines (2) | | | | |||||||||||
in which incurred | | Largest amount | | | Amount | | | Largest amount | | | Amount | | | Total amount | |||||
|
| outstanding (3) |
|
| outstanding |
|
| outstanding (3) |
| | outstanding |
|
| outstanding | |||||
|
| (Millions of pesos) | |||||||||||||||||
Officer 1 | | Ps. | 20.00 | | | Ps. | 18.98 | | | Ps. | — | | | Ps. | — | | | Ps. | 18.98 |
Officer 2 | |
| 25.00 | | |
| 24.28 | | |
| — | | |
| — | | |
| 24.28 |
Officer 3 | |
| 18.00 | | |
| 17.06 | | |
| — | | |
| — | | |
| 17.06 |
Officer 4 | |
| — | | |
| — | | |
| 1.50 | | |
| 1.28 | | |
| 1.28 |
Officer 5 | |
| 10.00 | | |
| 9.19 | | |
| 1.50 | | |
| 1.25 | | |
| 10.44 |
Officer 6 | |
| 18.60 | | |
| 17.86 | | |
| — | | |
| — | | |
| 17.86 |
Officer 7 | |
| 14.72 | | |
| 11.14 | | |
| 1.50 | | |
| 1.18 | | |
| 12.32 |
Officer 8 | |
| 10.00 | | |
| 9.69 | | |
| 1.50 | | |
| 0.86 | | |
| 10.56 |
Officer 9 | |
| 8.00 | | |
| 7.73 | | |
| — | | |
| — | | |
| 7.73 |
Officer 10 | | | 17.71 | | | | 16.40 | | | | — | | | | — | | | �� | 16.40 |
Officer 11 | | | 4.47 | | | | 4.08 | | | | — | | | | — | | | | 4.08 |
Officer 12 | | | 12.00 | | | | 11.96 | | | | — | | | | — | | | | 11.96 |
Officer 13 | | | — | | | | — | | | | 1.20 | | | | 1.16 | | | | 1.16 |
Officer 14 | | | 7.25 | | | | 6.65 | | | | 1.70 | | | | 1.39 | | | | 8.03 |
Officer 15 | | | 11.50 | | | | 6.20 | | | | 0.20 | | | | 0.18 | | | | 6.37 |
Officer 16 | | | — | | | | — | | | | 0.75 | | | | 0.35 | | | | 0.35 |
Total | | Ps. | 177.25 | | | Ps. | 161.21 | | | Ps. | 9.85 | | | Ps. | 7.64 | | | Ps. | 168.86 |
(1) | Under our employee benefit plan, each officer can be granted up to a maximum of three mortgage loans. The amount outstanding column includes all the loans outstanding as of December 31, 2022. |
(2) | Under our employee benefit plan, each officer can be granted up to a maximum of two credit lines (these are consumer loans without guarantees). The amount outstanding column includes all the loans outstanding as of December 31, 2022. |
(3) | The largest outstanding amount is equal to the aggregate initial amounts of all loans. |
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Affiliate Transactions
From time to time, we enter into agreements, including service agreements, with Banco Santander Parent, our subsidiaries and affiliates such as SAM Asset Management, S.A. de C.V., Sociedad Operadora de Sociedades de Inversión (formerly Gestión Santander), Santander Tecnología, Gesban México Servicios Administrativos Globales, S.A. de C.V., Santander Global Property, S.A. de C.V., Santander Global Facilities, S.A. de C.V., Geoban, S.A., Santander Capital Structuring, S.A. de C.V., Zurich Santander Seguros México, S.A. and Servicios de Cobranza, Recuperación y Seguimiento, S.A. de C.V.
We have entered into service agreements pursuant to which we render services, such as administrative, accounting, finance, treasury, legal services and others. We believe that these transactions with our affiliates have been made on terms that are not less favorable to us than those that could be obtained from unrelated third parties.
We have agreements with the following service providers, which are also affiliates of the Santander Group:
● | Santander Global Technology, S.L.; |
● | Sociedad Unipersonal (formerly, Produban Servicios Informáticos Generales, S.L.), for the provision of IT services such as data processing, administration of IT services, project development, consulting, software quality management and project development support; |
● | Santander Capital Structuring, S.A. de C.V. for a commercial loan portfolio granted and its related fee commissions; |
● | Gesban México Servicios Administrativos Globales, S.A. de C.V., or Gesban, for the provision of accounting services, fiscal management, budget control, support services and inspections and audits; |
● | Santander Global Operations, S.A. (formerly, Geoban, S.A.), for the provision of operational and back-office retail services, such as the execution of management tasks related to fundraising and loan products; and |
● | Santander Global Facilities, S.A. de C.V., or SGF, for the leasing of space and positions for our contact center operators. |
The following table sets forth our assets and liabilities held in connection with related parties as of December 31, 2020, 2021 and 2022:
| | As of | |||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | December 31, 2020 | | | December 31, 2021 | | | December 31, 2022 | |||||||||||||||
| | Ultimate Parent | | | Other Related | | | Ultimate Parent | | | Other Related | | | Ultimate Parent | | | Other Related | ||||||
|
| Company |
|
| Party |
|
| Company | |
| Party |
|
| Company |
|
| Party | ||||||
ASSETS | | | | | | | | | | | | | | | | | | | | | | | |
Financial assets held for trading - | | |
| | | |
| | | |
| | | |
| | | |
| | | |
|
Financial assets at fair value through profit or loss - | | | | | | | | | | | | | | | | | | | | | | | |
Trading derivatives - | | | | | | | | | | | | | | | | | | | | | | | |
Of which - | | | | | | | | | | | | | | | | | | | | | | | |
Banco Santander, S.A. (Spain) | | | 109,651 | | | | — | | | | 79,660 | | | | — | | | | 99,291 | | | | — |
Banco Santander – Chile | | | — | | | | 154 | | | | — | | | | 654 | | | | — | | | | 372 |
Other | | | — | | | | — | | | | — | | | | — | | | | — | | | | — |
Other financial assets at fair value through profit or loss - | | | | | | | | | | | | | | | | | | | | | | | |
Loans and advances to credit institutions – | | | | | | | | | | | | | | | | | | | | | | | |
Of which - | | | | | | | | | | | | | | | | | | | | | | | |
Banco Santander, S.A. (Spain) | | | — | | | | — | | | | — | | | | — | | | | — | | | | — |
Loans and advances to customers - | | | | | | | | | | | | | | | | | | | | | | | |
Of which - | | | | | | | | | | | | | | | | | | | | | | | |
Casa de Bolsa Santander, S.A. de C.V.,. | | | — | | | | 1,458 | | | | — | | | | — | | | | — | | | | 508 |
Financial assets at amortized cost - | | | | | | | | | | | | | | | | | | | | | | | |
Loans and advances to credit institutions - | | | | | | | | | | | | | | | | | | | | | | | |
Of which - | | | | | | | | | | | | | | | | | | | | | | | |
Banco Santander, S.A. (Spain) | | | 26,415 | | | | — | | | | 5,147 | | | | — | | | | 5,845 | | | | — |
Banco Santander (Brasil) S.A. | | | | | | | | | | | | | | | | | | | | | | | 907 |
Loans and advances to customers - | | | | | | | | | | | | | | | | | | | | | | | |
Of which - | | | | | | | | | | | | | | | | | | | | | | | |
Santander Capital Structuring, S.A. de C.V. | | | — | | | | 2,337 | | | | — | | | | — | | | | — | | | | 224 |
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| | As of | |||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | December 31, 2020 | | | December 31, 2021 | | | December 31, 2022 | |||||||||||||||
| | Ultimate Parent | | | Other Related | | | Ultimate Parent | | | Other Related | | | Ultimate Parent | | | Other Related | ||||||
|
| Company |
|
| Party |
|
| Company | |
| Party |
|
| Company |
|
| Party | ||||||
Santander Global Technology, S.L., Sociedad Unipersonal (formerly Produban Servicios Informáticos Generales, S.L.) | | | — | | | | 882 | | | | — | | | | 908 | | | | — | | | | — |
SMPS Merchant Platform Solutions México S.A. de C.V. | | | | | | | | | | | | | | | | | | | | | | | 84 |
Key management personnel * | | | — | | | | 5,507 | | | | — | | | | 4,178 | | | | — | | | | 4,351 |
Other Intangible assets - | | | | | | | | | | | | | | | | | | | | | | | |
Of which - | | | | | | | | | | | | | | | | | | | | | | | |
Santander Global Technology, S.L., Sociedad Unipersonal (formerly Produban Servicios Informáticos Generales, S.L.) | | | — | | | | 701 | | | | — | | | | 469 | | | | — | | | | 143 |
Santander Back-Offices Globales Mayoristas, S.A. | | | — | | | | 78 | | | | — | | | | 4 | | | | — | | | | 9 |
Santander Brasil Tecnología, S.A (formerly Isban Brasil, S.A.) | | | — | | | | 11 | | | | — | | | | — | | | | — | | | | — |
Santander Global Facilities, S.A. de C.V. | | | — | | | | — | | | | — | | | | 36 | | | | — | | | | 112 |
Other | | | — | | | | — | | | | — | | | | 8 | | | | — | | | | 10 |
OTHER ASSETS | | | | | | | | | | | | | | | | | | | | | | | |
Of which - | | | | | | | | | | | | | | | | | | | | | | | |
Banco Santander, S.A. | | | — | | | | — | | | | 8 | | | | — | | | | — | | | | — |
Santander Digital Assets, SL | | | | | | | — | | | | — | | | | — | | | | — | | | | — |
Zurich Santander Seguros México, S.A. | | | — | | | | 1,285 | | | | — | | | | 1,177 | | | | — | | | | 1,239 |
Santander Global Technology, S.L., Sociedad Unipersonal (formerly Produban Servicios Informáticos Generales, S.L.) | | | — | | | | 310 | | | | — | | | | 268 | | | | — | | | | — |
SAM Asset Management, S.A. de C.V., Sociedad Operadora de Fondos de Inversión | | | — | | | | 171 | | | | — | | | | 184 | | | | — | | | | 190 |
SMPS Merchant Platform Solutions México S.A. de C.V. | | | — | | | | — | | | | — | | | | 42 | | | | — | | | | 15 |
Other | | | — | | | | 94 | | | | — | | | | 30 | | | | — | | | | 19 |
| | | | | | | | | | | | | | | | | | | | | | | |
LIABILITIES AND EQUITY | | | | | | | | | | | | | | | | | | | | | | | |
Financial liabilities at fair value through profit or loss - | | | | | | | | | | | | | | | | | | | | | | | |
Trading derivatives - | | | | | | | | | | | | | | | | | | | | | | | |
Of which - | | | | | | | | | | | | | | | | | | | | | | | |
Banco Santander, S.A. (Spain) | | | 111,873 | | | | — | | | | 64,582 | | | | — | | | | 83,133 | | | | — |
Banco Santander International | | | — | | | | — | | | | — | | | | — | | | | — | | | | — |
Other | | | — | | | | — | | | | — | | | | — | | | | — | | | | — |
Other financial liabilities at fair value through profit or loss- | | | | | | | | | | | | | | | | | | | | | | | |
Of which - | | | | | | | | | | | | | | | | | | | | | | | |
Customer deposits - Repurchase agreements | | | | | | | | | | | | | | | | | | | | | | | |
Casa de Bolsa Santander, S.A. de C.V. | | | — | | | | 4,065 | | | | — | | | | 2,773 | | | | — | | | | 3,214 |
Other | | | — | | | | 53 | | | | — | | | | — | | | | — | | | | 4 |
Financial liabilities at amortized cost - | | | | | | | | | | | | | | | | | | | | | | | |
Deposits from credit institutions - | | | | | | | | | | | | | | | | | | | | | | | |
Of which - | | | | | | | | | | | | | | | | | | | | | | | |
Banco Santander, S.A. (Spain) | | | 1,447 | | | | — | | | | 15,535 | | | | — | | | | 16,896 | | | | — |
Banco S3 México, S.A., Institución de Banca Múltiple | | | — | | | | 394 | | | | — | | | | 7 | | | | — | | | | 6 |
Santander Bank, National Association | | | — | | | | 63 | | | | — | | | | — | | | | — | | | | — |
Banco Santander (Brazil) | | | — | | | | 107 | | | | — | | | | 82 | | | | — | | | | — |
Other | | | — | | | | 16 | | | | — | | | | — | | | | — | | | | — |
Subordinated liabilities - | | | | | | | | | | | | | | | | | | | | | | | |
Of which - | | | | | | | | | | | | | | | | | | | | | | | |
Banco Santander, S.A. (Spain) | | | 28,481 | | | | — | | | | 43,693 | | | | — | | | | 32,960 | | | | — |
Grupo Financiero Santander México, S.A. de C.V. | | | — | | | | — | | | | — | | | | — | | | | — | | | | — |
Customer deposits - | | | | | | | | | | | | | | | | | | | | | | | |
Of which - | | | | | | | | | | | | | | | | | | | | | | | |
Operadora de Carteras Gamma, S.A.P.I. de C.V. | | | — | | | | 99 | | | | — | | | | 148 | | | | — | | | | 174 |
Grupo Financiero Santander México, S.A. de C.V. | | | — | | | | 55 | | | | — | | | | — | | | | — | | | | — |
Decarome, S.A.P.I. de C.V. | | | — | | | | — | | | | — | | | | 70 | | | | — | | | | 57 |
Santander Global Facilities, S.A. de C.V. | | | — | | | | 1,475 | | | | — | | | | 1,780 | | | | — | | | | 1,819 |
Servicios de Cobranza, Recuperación y Seguimiento, S.A. de C.V. | | | — | | | | 26 | | | | — | | | | 110 | | | | — | | | | 193 |
Santander Global Technology, S.L., Sociedad Unipersonal (formerly Produban Servicios Informáticos Generales, S.L.) | | | — | | | | 323 | | | | — | | | | 517 | | | | — | | | | 112 |
SMPS Merchant Platform Solutions México S.A. de C.V. | | | | | | | | | | | | | | | | | | | | | | | 887 |
Santander Capital Structuring | | | — | | | | 632 | | | | — | | | | 238 | | | | — | | | | 223 |
Mercadotecnia, Ideas y Tecnología, S.A. de C.V. | | | | | | | | | | | | | | | | | | | | | | | 92 |
Gesban México Servicios Administrativos Globales, S.A. de C.V. | | | — | | | | — | | | | — | | | | 56 | | | | — | | | | 47 |
Other (*) | | | — | | | | 6,187 | | | | — | | | | 5,383 | | | | — | | | | 2,630 |
Marketable Debt Securities - | | | | | | | | | | | | | | | | | | | | | | | |
Of which - | | | | | | | | | | | | | | | | | | | | | | | |
Banco Santander, S.A. (Spain) | | | 978 | | | | — | | | | 1,011 | | | | — | | | | — | | | | — |
Other | | | — | | | | 73 | | | | — | | | | 27 | | | | — | | | | 25 |
Other financial liabilities - | | | | | | | | | | | | | | | | | | | | | | | |
Banco Santander, S.A. (Spain) | | | 717 | | | | — | | | | 1,924 | | | | — | | | | 1,642 | | | | — |
Casa de Bolsa Santander, S.A. de C.V. | | | — | | | | 39 | | | | — | | | | — | | | | — | | | | — |
Santander Investment Securities Inc. | | | — | | | | — | | | | — | | | | — | | | | — | | | | — |
Santander Global Facilities, S.A. de C.V. | | | — | | | | 542 | | | | — | | | | 335 | | | | — | | | | — |
Other | | | — | | | | 46 | | | | — | | | | 13 | | | | — | | | | 6 |
OTHER LIABILITIES | | | | | | | | | | | | | | | | | | | | | | | |
Banco S3 México, S.A., Institución de Banca Múltiple | | | — | | | | 1 | | | | — | | | | — | | | | — | | | | — |
Santander Back-offices Globales Mayorista, S.A. | | | — | | | | 13 | | | | — | | | | 35 | | | | — | | | | 80 |
Banco Santander (Brazil) | | | — | | | | — | | | | — | | | | 77 | | | | — | | | | 69 |
Santander Global Facilities, S.A. de C.V. | | | — | | | | — | | | | — | | | | 18 | | | | — | | | | 368 |
Santander Global Technology, S.L., Sociedad Unipersonal (formerly Produban Servicios Informáticos Generales, S.L.) | | | — | | | | 1,185 | | | | — | | | | 972 | | | | — | | | | 1,130 |
Other | | | — | | | | 82 | | | | — | | | | 50 | | | | — | | | | 114 |
(1) | Does not include loans to our directors or executive officers, which are described separately in “—Loans to Related Parties—Loans to Our Directors and Executive Officers” above. |
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(*) | As of December 31, 2021 and 2022, includes Ps.5,093 million and Ps.2,267 million, respectively, related to key management personnel transactions. |
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The following table set forth our income and expense from related parties for the years ended December 31, 2020, 2021 and 2022:
| | | | | | | | | | | | | | | | | | | | | | | |
| | For the year ended December 31, | |||||||||||||||||||||
| | 2020 | | | 2021 | | | 2022 | |||||||||||||||
| | Ultimate Parent | | | Other Related | | | Ultimate Parent | | | Other Related | | | Ultimate Parent | | | Other Related | ||||||
|
| Company |
|
| Party |
|
| Company | |
| Party |
|
| Company |
|
| Party | ||||||
| | (Millions of pesos) | |||||||||||||||||||||
INCOME STATEMENT: | | |
| | | |
| | | | | | | |
| | | | | | | |
|
Interest income - | | |
| | | |
| | | |
| | | |
| | | |
| | | |
|
Of which - | | | | | | | | | | | | | | | | | | | | | | | |
Banco Santander, S.A. (Spain) | | Ps. | 1 | | | Ps. | — | | | Ps. | 2 | | | Ps. | — | | | Ps. | 2 | | | Ps. | — |
Santander Global Technology, S.L., Sociedad Unipersonal (formerly Produban Servicios Informáticos Generales, S.L.) | | | — | | | | 84 | | | | — | | | | 19 | | | | — | | | | — |
Banco Santander (Brasil) S.A. | | | | | | | | | | | | | | | | | | | | | | | — |
Casa de Bolsa Santander, S.A. de C.V. | | | — | | | | 41 | | | | — | | | | 21 | | | | — | | | | 22 |
Santander Capital Structuring, S.A. de C.V. | | | — | | | | 176 | | | | — | | | | 123 | | | | — | | | | 58 |
Other | | | — | | | | 2 | | | | — | | | | — | | | | — | | | | 10 |
Interest expenses and similar charges - | | | | | | | | | | | | | | | | | | | | | | | |
Of which - | | | | | | | | | | | | | | | | | | | | | | | |
Banco Santander, S.A. (Spain) | | | 1,310 | | | | — | | | | 1,230 | | | | — | | | | 1,516 | | | | — |
Casa de Bolsa Santander, S.A. de C.V. | | | — | | | | 304 | | | | — | | | | 146 | | | | — | | | | 212 |
Banco Santander International SA | | | — | | | | — | | | | — | | | | 26 | | | | — | | | | — |
Santander Capital Structuring, S.A. de C.V. | | | — | | | | — | | | | — | | | | 6 | | | | — | | | | — |
Santander Global Technology, S.L. | | | — | | | | — | | | | — | | | | 3 | | | | — | | | | — |
Operadora de Carteras Gamma, S.A.P.I. de C.V. | | | — | | | | — | | | | — | | | | 3 | | | | — | | | | 10 |
Banco S3 México, S.A., Institución de Banca Múltiple | | | — | | | | 41 | | | | — | | | | 21 | | | | — | | | | 25 |
Santander Global Facilities, S.A. de C.V. | | | — | | | | 52 | | | | — | | | | 70 | | | | — | | | | 113 |
Other | | | — | | | | 30 | | | | — | | | | 10 | | | | — | | | | 54 |
Fee and commission income - | | | | | | | | | | | | | | | | | | | | | | | |
Of which - | | | | | | | | | | | | | | | | | | | | | | | |
Banco Santander, S.A. (Spain) | | | 8 | | | | — | | | | — | | | | — | | | | — | | | | — |
Banco S3 México, S.A., Institución de Banca Múltiple | | | — | | | | — | | | | — | | | | 24 | | | | — | | | | 18 |
Casa de Bolsa Santander, S.A. de C.V. | | | — | | | | 55 | | | | — | | | | 142 | | | | — | | | | 180 |
Zurich Santander Seguros México, S.A. | | | — | | | | 4,031 | | | | — | | | | 4,284 | | | | — | | | | 4,612 |
SAM Asset Management, S.A. de C.V., Sociedad Operadora de Fondos de Inversión | | | — | | | | 1,608 | | | | — | | | | 1,742 | | | | — | | | | 1,895 |
Other | | | — | | | | 25 | | | | — | | | | 1 | | | | — | | | | 10 |
Fee and commission expense- | | | | | | | | | | | | | | | | | | | | | | | |
Of which - | | | | | | | | | | | | | | | | | | | | | | | |
Banco Santander, S.A. (Spain) | | | 2 | | | | — | | | | 2 | | | | — | | | | 2 | | | | — |
Santander Global Facilities, S.A. de C.V. | | | — | | | | 135 | | | | — | | | | 55 | | | | — | | | | — |
Servicios de Cobranza, Recuperación y Seguimiento, S.A. de C.V. | | | — | | | | 110 | | | | — | | | | — | | | | — | | | | — |
Casa de Bolsa Santander, S.A. de C.V. | | | — | | | | 34 | | | | — | | | | 43 | | | | — | | | | 57 |
SAM Asset Management, S.A. de C.V., Sociedad Operadora de Fondos de Inversión | | | — | | | | 17 | | | | — | | | | 18 | | | | — | | | | 21 |
Other | | | — | | | | — | | | | — | | | | 1 | | | | — | | | | 7 |
Gains/(losses) on financial assets and liabilities (net) - | | | | | | | | | | | | | | | | | | | | | | | |
Of which - | | | | | | | | | | | | | | | | | | | | | | | |
Banco Santander, S.A. (Spain) | | | (24,086) | | | | — | | | | 18,441 | | | | — | | | | 8,610 | | | | — |
Banco Santander – Chile | | | — | | | | (26) | | | | — | | | | 494 | | | | — | | | | (274) |
Banco Santander International, S.A. | | | — | | | | — | | | | — | | | | (4) | | | | — | | | | (2) |
Other | | | — | | | | (20) | | | | — | | | | — | | | | — | | | | — |
Other operating income | | | | | | | | | | | | | | | | | | | | | | | |
Of which - | | | | | | | | | | | | | | | | | | | | | | | |
Santander Global Facilities, S.A. de C.V. | | | — | | | | 20 | | | | — | | | | 7 | | | | — | | | | — |
SMPS Merchant Platform Solutions México S.A. de C.V. | | | — | | | | — | | | | — | | | | 42 | | | | — | | | | 105 |
Banco S3 México, S.A., Institución de Banca Múltiple | | | — | | | | — | | | | — | | | | 13 | | | | — | | | | 17 |
Santander Digital Assets, S.L. | | | — | | | | 22 | | | | — | | | | — | | | | — | | | | — |
Casa de Bolsa Santander, S.A. de C.V. | | | — | | | | 55 | | | | — | | | | 56 | | | | — | | | | — |
Santander Global Technology, S.L., Sociedad Unipersonal (formerly Produban Servicios Informáticos Generales, S.L.) | | | — | | | | 79 | | | | — | | | | 71 | | | | — | | | | 78 |
Other | | | — | | | | 37 | | | | — | | | | 7 | | | | — | | | | 12 |
| | | | | | | | | | | | | | | | | | | | | | | |
Administrative expenses - | | | | | | | | | | | | | | | | | | | | | | | |
Of which - | | | | | | | | | | | | | | | | | | | | | | | |
Banco Santander, S.A. (Spain) | | | 464 | | | | — | | | | 524 | | | | — | | | | 476 | | | | — |
Santander Global Technology, S.L., Sociedad Unipersonal (formerly, Produban Servicios Informáticos Generales, S.L.) | | | — | | | | 2,875 | | | | — | | | | 3,328 | | | | — | | | | 3,307 |
Santander Global Facilities, S.A. de C.V. | | | — | | | | 446 | | | | — | | | | 470 | | | | — | | | | 369 |
Gesban México Servicios Administrativos Globales, S.A. de C.V. | | | — | | | | 55 | | | | — | | | | 58 | | | | — | | | | 54 |
Santander Back-offices Globales Mayorista, S.A. | | | — | | | | 71 | | | | — | | | | 101 | | | | — | | | | 109 |
Universia México, S.A. de C.V. | | | — | | | | — | | | | — | | | | — | | | | — | | | | — |
Santander Global Technology Chile Limitada | | | — | | | | — | | | | — | | | | 5 | | | | — | | | | — |
Geoban, S.A. | | | — | | | | — | | | | — | | | | | | | | — | | | | |
Aquanima México, S. de R.L. de C.V. | | | — | | | | 74 | | | | — | | | | 72 | | | | — | | | | 77 |
Santander Global Facilities, S-L | | | — | | | | — | | | | — | | | | 23 | | | | — | | | | 31 |
Other | | | — | | | | 143 | | | | — | | | | 14 | | | | — | | | | 87 |
C. Interests of Experts and Counsel
Not applicable.
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ITEM 8. FINANCIAL INFORMATION
A. Consolidated Statements and Other Financial Information
Financial statements
See “Item 18. Financial Statements,” which contains our audited financial statements prepared in accordance with IFRS.
Legal Proceedings
We are subject to certain claims and are party to certain legal proceedings in the normal course of our business. We do not believe that the liabilities related to such claims and proceedings are likely to have, in the aggregate, a material adverse effect on our financial condition or results. There are no material proceedings in which any of our directors, any members of our senior management, or any of our affiliates is either a party adverse to us or to our affiliates or subsidiaries or has a material interest adverse to us or to our affiliates or subsidiaries.
We estimate that our aggregate liability, if all legal proceedings were determined adversely to us, could result in significant losses not estimated by us. As of December 31, 2022, we have recognized Ps.3,009 million (U.S.$154 million) as provisions for these legal actions (including tax-related litigation). See Note 24.e to our financial statements included elsewhere in this Report.
We estimate and provide for potential losses that may arise out of litigation, regulatory proceedings and uncertain income tax matters, to the extent that a current obligation exists, the losses are probable and can be reasonably estimated. Significant judgment is required in making these estimates and our final liabilities may ultimately be materially different. Our actual losses may differ materially from recognized amounts.
Garza Sada
During 2012 the daughters of Mr. Roberto Garza Sada, María del Carmen, Gabriela and Viviana Garza Delgado (Mrs. Garza Delgado), filed a lawsuit against Banco Santander México, Banco Santander Parent and others (the defendants) arguing that the defendants acted negligently as trustee of a trust. The trust assets consisted of shares of Alfa, S.A.B. de C.V. (Alfa), the same ones that were delivered during 1999 in accordance with the instructions established by Mr. Roberto Garza in the trust agreement. Mrs. Garza Delgado believe that their rights were violated, alleging that the transfer of Alfa's shares was not valid.
In March 2017, the defendants obtained a favorable first instance resolution, acquitting them of any obligation, which was confirmed by judgment in April 2018. However, a legal support was granted in favor of Mrs. Garza Delgado, ordering Banco Santander México to deliver the Alfa shares as well as pay damages, dividends and other losses. The Bank has filed various constitutional review and complaint appeals against the previously mentioned writ of legal support, which have been dismissed and inadmissible by the National Supreme Court of Justice. As of today, a review presented by the Bank is pending in the Collegiate Courts based in the state of Nuevo León.
Due to the current situation of the judicial procedure, Bank’s management has recognized a provision to cover the risk originated by this claim in its consolidated financial statements as of December 31, 2022, the foregoing in accordance with the provisions of IAS 37. However, the amount of cash outflows and their settlement date is uncertain and any provision recognized does not constitute an admission of wrongdoing or legal liability on the part of the Bank. Banco Santander México will continue to vigorously defend its case with additional legal actions and resources before all the corresponding instances.
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Dividends and Dividend Policy
In 2020, due to the effects of the COVID-19 pandemic and by recommendation of the CNBV, the Bank refrained from approving the payment of dividends derived from the fiscal year 2019 and the previous fiscal years. On June 18, 2021, we paid a dividend of Ps.3,054 million, equal to Ps.0.4500 per share. On November 5, 2021, we paid a dividend of Ps.1,867 million equal to Ps.0.2751 per share. On June 28, 2022, we paid a dividend of Ps.9,040 million, equal to Ps.1.33 per share. On July 28, 2022, we paid a dividend of Ps.8,838 million, equal to Ps.1.30 per share.Our common stock dividend payout ratio was 74.16% for 2022, 23.66% for 2021 and 0% for 2020.
Our current dividend policy was approved by our Board of Directors on October 31, 2019, and seeks to define the criteria for the Bank's distributable benefits and is an element to consider in setting the capital objectives and capital planning of Banco Santander México, which must be consistent with the Santander Group's capital planning. The declaration and payment of dividends in respect of any period is subject to a number of factors, including our debt service requirements, capital expenditure and investment plans, other cash requirements, our shareholders having approved our financial statements and the payment of dividends, and such other factors as may be deemed relevant at the time. We cannot assure that we will pay any dividends in the future.
The declaration, payment and amount of any dividend are considered and proposed by our Board of Directors and approved at the general shareholders’ meeting by the affirmative vote of a majority of our shareholders in accordance with the applicable regulatory, corporate, tax and accounting rules and are subject to the statutory limitations set forth below.
Under Mexican law, dividends may only be paid from retained earnings resulting from the relevant year or prior years’ results if (i) the legal reserve has been created or maintained, by annually segregating 5% of net earnings, until the legal reserve equals at least 20% of the fully paid-in capital, (ii) shareholders, at a duly called meeting, have approved the results reflecting the earnings and the payment of dividends, and (iii) losses for prior fiscal years have been repaid or absorbed. The Mexican income tax law also sets forth an additional 10% tax over dividends paid when they are distributed to Mexican individuals or to companies or individuals based abroad, applicable to payments in connection with dividends generated since 2014 (for dividends related to years prior to 2014, the tax is not applicable). This additional tax is paid through its withholding and constitutes a definitive payment in charge of the shareholders. Treaties to avoid double taxation may be applied to foreigners.
All shares of our capital stock rank pari passu with respect to the payment of dividends. The reserve fund is required to be funded on a stand-alone basis for each company, rather than on a consolidated basis. The level of earnings available for the payment of dividends is determined by Mexican Banking GAAP. As of December 31, 2022, Banco Santander México (on an individual basis) had set aside Ps.28,200 million in legal reserves compared to paid-in capital of Ps.29,799 million, and thus was in compliance with the regulations pertaining to its legal reserve.
B. Significant Changes
None.
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ITEM 9. THE OFFER AND LISTING
A. Offering and Listing Details
Our ADSs are currently traded on the NYSE, under the symbol “BSMX”. Our Series B shares are currently traded on the Mexican Stock Exchange under the symbol “BSMX”.
B. Plan of Distribution
Not applicable.
C. Markets
Before de Merger, the Former Holding Company’s Series B shares were traded on the BMV under the symbol “SANMEX”. The listing of the Former Holding Company’s Series B shares on the BMV was cancelled on January 26, 2018.
On January 29, 2018 upon consummation of the Merger, our ADSs representing Series B shares began to trade on the NYSE. Our ADSs are listed on the NYSE under the symbol “BSMX”. Our Series B shares currently trade on the Mexican Stock Exchange under the symbol “BSMX”. For information regarding the price history of our ADSs and Series B shares, see “—A. Offering and Listing Details.”
The Mexican Securities Market
We have prepared the information concerning the Mexican securities market set forth below based on materials obtained from public sources, including the CNBV, the Mexican Stock Exchange, the Mexican Central Bank and publications by market participants. The following summary does not purport to be a comprehensive description of all of the material aspects related to the Mexican securities market.
We cannot predict the liquidity of the Mexican Stock Exchange. If the trading volume of our Series B shares in such market is such that fewer than 100 unrelated investors hold our Series B shares or less than 12% of our aggregate outstanding shares are held by the public, our Series B shares could be delisted from the Mexican Stock Exchange or deregistered from the RNV.
Trading on the Mexican Stock Exchange
The Mexican Stock Exchange (BMV), located in Mexico City, is one of two stock exchanges in México (the other stock exchange being BIVA). Operating continuously since 1907, the Mexican Stock Exchange is organized as a publicly traded variable capital corporation. Securities trading on the Mexican Stock Exchange occurs each business day from 8:30 a.m. to 3:00 p.m., Mexico City time subject to adjustments to operate uniformly with certain U.S. markets.
Trading on the Mexican Stock Exchange is effected electronically. The Mexican Stock Exchange may impose a number of measures to promote an orderly and transparent trading price of securities, including the operation of a system of automatic suspension of trading in shares of a particular issuer when price fluctuation exceeds certain limits.
Settlement on the Mexican Stock Exchange is effected three business days after a share transaction. Deferred settlement is not permitted without the approval of the Mexican Stock Exchange, even where mutually agreed. Most securities traded on the Mexican Stock Exchange are on deposit with Indeval, a privately owned securities depositary that acts as a clearinghouse, depositary, and custodian, as well as a settlement, transfer, and registration agent for Mexican Stock Exchange transactions, eliminating the need for physical transfer of securities. Transactions must be settled in pesos except under limited circumstances in which settlement in foreign currencies may be permitted.
227
Market Regulation
In 1925, the Mexican National Banking Commission (Comisión Nacional Bancaria) was established to regulate banking activity and in 1946, the Mexican Securities Commission (Comisión Nacional de Valores) was established to regulate stock market activity. In 1995, these two entities merged to form the CNBV.
Among other activities, the CNBV regulates the public offering and trading of securities and participants in the Mexican securities market, and imposes sanctions for the illegal use of insider information and other violations of the Mexican Securities Market Law. The CNBV regulates the Mexican securities market, the Mexican Stock Exchange, and brokerage firms through its staff and a Board of governors comprised of thirteen members.
Mexican Securities Market Law
The current Mexican Securities Market Law was enacted on December 5, 2005, and published in the Federal Official Gazette, and became effective on June 30, 2006. The Mexican Securities Market Law changed Mexican securities laws in various material respects to further align Mexican laws with the securities and corporate governance standards laws in effect in other jurisdictions.
In particular, the Mexican Securities Market Law:
● | establishes the publicly traded variable stock corporation (sociedad anónima bursátil), a corporate form of organization that is subject to the general requirements of the Mexican Corporations Law, but is subject to specific requirements for issuers with stock registered with the CNBV and listed in the Mexican Stock Exchange; |
● | includes private placement exemptions and specifies the requirements that need to be satisfied for an issuer or underwriter to fall within the exemption when offering securities in México; |
● | includes improved rules for tender offers, classifying such tender offers as either voluntary or mandatory; |
● | establishes standards for disclosure of holdings applicable to shareholders, including directors, of public companies; |
● | expands and strengthens the role of the board of directors of public companies; |
● | defines the standards applicable to the Board of Directors and the duties and potential liabilities and penalties applicable to each director, the chief executive officer (director general) and other executive officer (introducing concepts such as the duty of care, duty of loyalty and safe harbors); |
● | generally replaces the statutory auditor (comisario) with the audit committee and establishes the corporate practices committee with clearly defined responsibilities; |
● | improves the rights of minority shareholders and sets forth the requirements for shareholders’ derivative suits; |
● | defines applicable sanctions for violations under the Mexican Securities Market Law; |
● | regulates certain Mexican securities traded in the Mexican securities market, including certificados bursátiles; and |
228
● | fully regulates broker-dealers, stock exchanges, depository institutions and other securities market participants. |
Registration and Listing Standards
To offer securities to the public in México, an issuer must meet specific qualitative and quantitative requirements. Securities that have been registered with the RNV, pursuant to CNBV approval, may be listed on the Mexican Stock Exchange.
The general regulations applicable to issuers and other securities market participants (Disposiciones de carácter general aplicables a las emisoras de valores y a otros participantes del Mercado de Valores, or the General Regulations) issued by the CNBV require the Mexican Stock Exchange to adopt minimum requirements for issuers that seek to list their securities in México. These requirements relate to operating history, financial and capital structure, and minimum public floats applicable to shares of public companies, among other things. The General Regulations also require the Mexican Stock Exchange to implement minimum requirements (including minimum public floats) for issuers to maintain their listing in México. These requirements relate to the issuer’s financial condition and capital structure, among others. The CNBV may waive some of these requirements in certain circumstances.
The CNBV’s approval for registration does not imply any kind of certification or assurance related to the investment quality of the securities, the solvency of the issuer, or the accuracy or completeness of any information delivered to the CNBV.
The Mexican Stock Exchange may review compliance with the foregoing requirements and other requirements at any time, but will normally do so on an annual, semiannual and quarterly basis. The Mexican Stock Exchange must inform the CNBV of the results of its review, and this information must, in turn, be disclosed to investors. If an issuer fails to comply with any of these minimum requirements, the Mexican Stock Exchange has the authority to request that the issuer propose a plan to cure the violation. If the issuer fails to propose a plan, if the plan is not satisfactory to the Mexican Stock Exchange, or if an issuer does not make substantial progress with respect to the implementation of the corrective plan, trading of the relevant series of shares on the Mexican Stock Exchange may be temporarily suspended. In addition, if an issuer fails to implement the plan in full, the CNBV may suspend or cancel the registration of the shares with the RNV, in which case the majority shareholder or any controlling group will be required to carry out a tender offer to acquire all of the outstanding shares of the issuer in accordance with the tender offer provisions set forth in the Mexican Securities Market Law.
Reporting Obligations
Issuers of listed securities are required to file unaudited quarterly financial statements and audited annual financial statements and to provide periodic reports, in particular reports dealing with material events, with the CNBV and the Mexican Stock Exchange. Mexican issuers must file the following reports with the CNBV:
● | a comprehensive annual report prepared in accordance with the General Regulations, by no later than April 30 or June 30 (depending on the listed security) of each year; |
● | quarterly reports, within 20 days following the end of each of the first three quarters and 40 days following the end of the fourth quarter; |
● | monthly reports, only with respect to certain securities and under certain circumstances, within 15 days following the end of each month; |
● | reports disclosing material information promptly; |
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● | reports and disclosure memoranda revealing corporate restructurings such as mergers, spin-offs or acquisitions or sales of assets, approved or to be approved by a shareholders’ meeting or the Board of Directors; and |
● | reports regarding the policies and guidelines with respect to the use of the company’s (or its subsidiaries’) assets by related persons. |
The General Regulations and the rules of the Mexican Stock Exchange require issuers of listed securities to publicly disclose information that relates to any event or circumstance that could influence the issuers’ share price. If listed securities experience unusual price volatility, the Mexican Stock Exchange must immediately request that the relevant issuer inform the public of the causes of the volatility or, if the issuer is unaware of the causes, that it make a statement to that effect. In addition, the Mexican Stock Exchange must immediately request that issuers disclose any information relating to material events when it deems the available public information to be insufficient, as well as instruct issuers to clarify the information when necessary. The Mexican Stock Exchange may request that issuers confirm or deny any material event that has been disclosed to the public by third parties when it deems that the material event may affect or influence the price of the listed securities. The Mexican Stock Exchange must immediately inform the CNBV of any such request. In addition, the CNBV may also make any of these requests directly to issuers. An issuer may delay the disclosure of material events if:
● | the issuer implements adequate confidentiality measures (including maintaining a log with information relating to parties in possession of the confidential information); |
● | the information is related to incomplete transactions; |
● | there is no misleading public information relating to the material event; and |
● | no unusual price or volume fluctuation occurs. |
Similarly, if an issuer’s securities are traded on both the Mexican Stock Exchange and a foreign securities exchange, the issuer must simultaneously file the information that it is required to file pursuant to the laws and regulations of the foreign jurisdiction with the CNBV and the Mexican Stock Exchange.
Suspension of Trading
In addition to the authority of the Mexican Stock Exchange under its internal regulations as described above, under the Mexican Securities Market Law and the General Regulations, the Mexican Stock Exchange may suspend trading in an issuer’s securities:
● | if the issuer does not disclose a material event; |
● | if the issuer provides incomplete or confusing information with respect to the securities or if such information does not comply with the requirements set forth in the General Provisions; |
● | to prevent disorderly conditions or transactions that jeopardize sound market uses, customs and practices (sanos usos y prácticas del mercado) with respect to the securities; or |
● | if the issuer ceases to comply with the requirements to maintain the trading of the securities. |
The Mexican Stock Exchange must immediately inform the CNBV and the general public of any suspension. An issuer may request that the CNBV or the Mexican Stock Exchange permit trading to resume if it demonstrates that the causes triggering the suspension have been resolved and that it is in full compliance with periodic reporting requirements. If an issuer’s request has been granted, the Mexican Stock Exchange will determine the appropriate mechanism to resume trading. If trading in an issuer’s
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securities is suspended for more than 20 business days and the issuer is authorized to resume trading without conducting a public offering, the issuer must disclose before trading may resume a description of the causes that resulted in the suspension and the reasons why it has been authorized to resume trading.
Furthermore, the CNBV may request that the Mexican Stock Exchange suspends the trading of the issuer’s securities for 60 business days, in order to prevent disorderly conditions or transactions that jeopardize sound market uses, customs and practices (sanos usos y prácticas del mercado) or when the issuer fails to comply with the provisions of the Mexican Securities Market Law or the General Provisions.
Certain Disclosures
Pursuant to the Mexican Securities Market Law, the following persons must notify the CNBV of any transactions undertaken by them with respect to a listed issuer’s securities:
● | members of a listed issuer’s Board of Directors; |
● | shareholders controlling 10% or more of a listed issuer’s outstanding capital stock; |
● | certain advisors; |
● | groups controlling 25% or more of a listed issuer’s outstanding capital stock; and |
● | other insiders. |
These persons must also inform the CNBV of the effect of the transactions within three days following their completion, or, alternatively, that the transactions have not been consummated. In addition, insiders must abstain from purchasing or selling securities of the issuer within three months from the last sale or purchase, respectively.
Subject to certain exceptions, any acquisition of a public company’s shares that results in the acquirer owning 10.0% or more, but less than 30.0%, of an issuer’s outstanding capital stock must be publicly disclosed to the CNBV and the Mexican Stock Exchange by no later than one business day following the acquisition.
Any acquisition by an insider that results in the insider holding an additional 5% or more of a public company’s outstanding capital stock must also be publicly disclosed to the CNBV and the Mexican Stock Exchange no later than one business day following the acquisition. Some insiders must also notify the CNBV of share purchases or sales that occur within any calendar quarter or five-day period and that exceed certain value thresholds. Shareholders and Board members and officers as well as individuals owning, respectively, 5% or 1% of our outstanding shares are required to report to the issuer, on a yearly basis, their shareholdings. The Mexican Securities Market Law requires that convertible securities, warrants and derivatives to be settled in kind be taken into account in the calculation of share ownership percentages.
Tender Offers
The Mexican Securities Market Law contains provisions relating to public tender offers and certain other share acquisitions occurring in México. Under the law, tender offers may be voluntary or mandatory. Voluntary tender offers, or offers where there is no requirement that they be initiated or completed, are required to be made to all shareholders on a pro rata basis, without differentiating between classes of shares. Any intended acquisition of a public company’s shares that results in the acquirer owning 30% or more, but less than a percentage that would result in the acquirer obtaining control, of a company’s voting shares requires the acquirer, with the prior approval of the CNBV, to make a mandatory public tender offer for the greater of (a) the percentage of the capital stock intended to be acquired or (b) 10% of the company’s outstanding capital stock. Finally, any intended acquisition of a public company’s shares that is
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aimed at obtaining control requires the potential acquirer to make a mandatory tender offer for 100% of the company’s outstanding capital stock (however, under certain circumstances the CNBV may permit an offer for less than 100%). The tender offer must be made at the same price to all shareholders and classes of shares. The Board of Directors, with the advice of the corporate practices committee, must issue its opinion of any tender offer resulting in a change of control, which opinion must take into account minority shareholder rights and which may be accompanied by an independent fairness opinion. Directors and principal officers are required to disclose whether they will participate in the tender.
Under the Mexican Securities Market Law, all tender offers must be open for at least 20 business days and purchases thereunder are required to be made pro rata to all tendering shareholders. The Mexican Securities Market Law only permits the payment of certain amounts to controlling shareholders over and above the offering price if these amounts are fully disclosed, approved by the Board of Directors and paid solely in connection with non-compete or similar obligations. The law also provides exceptions to the mandatory tender offer requirements and specifically sets forth remedies for non-compliance with these tender offer rules (e.g., suspension of voting rights, possible annulment of purchases, etc.) and other rights available to prior shareholders of the issuer.
Joint Trading of Common Shares and Limited or Non-voting Shares
The Mexican Securities Market Law does not permit issuers to implement mechanisms for common shares and limited or non-voting shares to be jointly traded or offered to public investors, unless the limited or non-voting shares are convertible into common shares within a period of up to five years, or when, because of the nationality of the holder, the shares or the securities representing the shares limit the right to vote to comply with foreign investment laws. In addition, the aggregate amount of shares with limited or non-voting rights may not exceed 25% of the aggregate amount of publicly held shares. The CNBV may increase this 25% limit by an additional 25%, provided that the limited or non-voting shares exceeding 25% of the aggregate amount of publicly held shares are convertible into common shares within five years of their issuance.
Anti-Takeover Protections
The Mexican Securities Market Law provides that publicly traded companies may include anti-takeover provisions in their bylaws if such provisions (i) are approved by a majority of the shareholders, without shareholders representing 5% or more of the capital stock present at the meeting voting against the approval of such provision, (ii) do not exclude any shareholders or group of shareholders, (iii) do not restrict, in an absolute manner, a change of control, and (iv) do not contravene legal provisions related to tender offers or have the effect of disregarding the economic rights related to the shares held by the acquiring party. Our bylaws do not include any such provisions.
Board of Directors and Committees
Under the Mexican Securities Market Law, public companies must have a Board of Directors composed of no more than 21 members, of which at least 25% must be independent. Independent members must be selected based on their experience, ability and reputation at the issuer’s shareholders’ meeting; whether a director is independent must be determined by the issuer’s shareholders and such determination may be challenged by the CNBV. As a departure from legislative precedents, the Mexican Securities Market Law permits then acting members of the Board of Directors to select, under certain circumstances and on a temporary basis, new members of the Board of Directors.
Boards of directors of public companies are required to meet at least four times during each calendar year and have the following principal duties:
● | determine general strategies applicable to the issuer; |
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● | approve guidelines for the use of corporate assets; |
● | approve, on an individual basis, transactions with related parties, subject to certain limited exceptions; |
● | approve unusual or non-recurrent transactions and any transactions that imply the acquisition or sale of assets with a value equal to or exceeding 5% of the issuer’s consolidated assets or that imply the provision of collateral or guarantees or the assumption of liabilities equal to or exceeding 5% of the issuer’s consolidated assets; |
● | approve the appointment or removal of the chief executive officer; |
● | approve accounting and internal control policies; and |
● | approve policies for disclosure of information. |
Directors have the general duty to act for the benefit of the issuer, without favoring a shareholder or group of shareholders.
The Mexican Securities Market Law requires the creation of one or more committees that perform audit and corporate practices functions, each of which must maintain at least three members appointed by the Board of Directors and which members must all be independent (except for corporations controlled by a person or group maintaining 50% or more of the outstanding capital stock like us, where solely the majority must be independent). The audit committee (together with the Board of Directors, which has added duties) replaces the statutory auditor (comisario) that previously had been required by the Mexican Corporations Law.
The committee that performs corporate practices functions is required to, among other activities, provide opinions to the Board of Directors, request and obtain opinions from independent third-party experts, call shareholders’ meetings, provide assistance to the Board of Directors in the preparation of annual reports and provide a report to the Board of Directors.
The audit committee’s principal role is to supervise the external auditors of the issuer, analyze the external auditor’s reports, inform the Board of Directors in respect of existing internal controls, supervise the execution of related-party transactions, require the issuer’s executive to prepare reports when deemed necessary, inform the Board of any irregularities that it encounters, supervise the activities of the issuer’s chief executive officer and provide an annual report to the Board of Directors.
Duty of Care and Loyalty of Directors
The Mexican Securities Market Law also imposes duties of care and of loyalty on directors.
The duty of care requires that directors obtain sufficient information and be sufficiently prepared to support their decisions and to act in the best interest of the issuer. The duty of care is discharged, principally, by obtaining and requesting from the issuer and its officers all the information required to participate in discussions, obtaining information from third parties, attending Board meetings and disclosing material information in possession of the relevant director. Failure to act with care by one or more directors subjects the relevant directors to joint liability for damages and losses caused to the issuer and its subsidiaries, which may be limited (except in the instances of bad faith, illegal acts or willful misconduct).
The duty of loyalty primarily consists of acting for the benefit of the issuer and includes a duty to maintain the confidentiality of information received in connection with the performance of a director’s duties and to abstain from discussing or voting on matters where the director has a conflict of interest. In addition, the duty of loyalty is breached if a shareholder or group of shareholders is knowingly favored or if, without the express approval of the Board of Directors, a director takes advantage of a corporate opportunity. The duty
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of loyalty is breached if the director discloses false or misleading information or fails to register (or cause the registration of) any transaction in the issuer’s records that could affect its financial statements or if the director uses corporate assets or approves the use of corporate assets in violation of an issuer’s policies, discloses false or misleading information, orders or causes material information not to be disclosed or to be modified. The violation of the duty of loyalty subjects the offending director to joint liability for damages and losses caused to the issuer and its subsidiaries. Liability for breach of the duty of loyalty may not be limited by the company’s bylaws, by resolution of a shareholders’ meeting or otherwise.
Claims for breach of the duty of care or the duty of loyalty may be brought solely for the benefit of the issuer (as a derivative suit) and may only be brought by the issuer or by shareholders representing at least 5% of any outstanding shares.
As a safe harbor for directors, the liabilities specified above will not be applicable if the director acted in good faith and (i) complies with applicable law and the bylaws, (ii) facts based upon information are provided by officers or third-party experts, the capacity and credibility of which may not be the subject of reasonable doubt, (iii) selects the more adequate alternative in good faith or in a case where the negative effects of such decision may not have been foreseeable and (iv) actions were taken in compliance with resolutions adopted at the shareholders’ meeting.
Under the Mexican Securities Market Law, the issuer’s chief executive officer and principal executives are also required to act for the benefit of the company and not of a shareholder or group of shareholders. These executives are required to submit to the Board of Directors for approval the principal strategies for the business, to submit to the audit committee proposals relating to internal control systems, to disclose all material information to the public and to maintain adequate accounting and registration systems and internal control mechanisms.
Disclosure of Shareholders’ Agreements
Any shareholders’ agreements containing non-compete clauses, any agreements related to the sale, transfer or exercise of preemptive rights, any agreements which allow for the sale and purchase of shares, voting rights, and sale of shares in a public offering, must be notified to the company within five business days following their execution in order to allow the company to disclose such agreements to investors through the stock exchanges on which its securities are being traded to the public through an annual report prepared by the company. These agreements (i) will be available for the public to review at the company’s offices, (ii) will not be enforceable against the company, and a breach of such agreements will not affect the validity of the vote at a shareholders’ meeting, and (iii) will only be effective between the parties once they have been disclosed to the public.
Miscellaneous
The Mexican Securities Market Law also specifies that any transaction or series of transactions that, during any fiscal year, represent 20% or more of the consolidated assets of the issuer, must be considered and approved by a meeting of shareholders of any public company.
In addition to the right granted to minority shareholders of a public company representing 5% or more of the outstanding shares to initiate a shareholder derivative suit against directors for a breach of the duty of care or the duty of loyalty, the Mexican Securities Market Law recognizes the right of shareholders representing 10% of the outstanding shares entitled to appoint a director, call a shareholder’s meeting and request that voting on resolutions in respect of which they were not sufficiently informed, be postponed. Also, holders of 20% of the outstanding voting shares may judicially oppose resolutions that were passed by a shareholders’ meeting and file a petition for a court order to suspend the resolution, if the claim is filed within 15 days following the adjournment of the meeting at which the action was taken, provided that (i) the challenged resolution violates Mexican law or the company’s bylaws, (ii) the opposing stockholders either did not attend the meeting or voted against the challenged resolution, and (iii) the opposing stockholders
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deliver a bond to the court to secure payment of any damages that we may suffer as a result of suspending the resolution in the event that the court ultimately rules against the opposing stockholder. These provisions have seldom been invoked in México and, as a result, how a competent court may interpret these provisions is uncertain.
D. Selling Shareholders
Not applicable.
E. Dilution
Not applicable.
F. Expenses of the Issue
Not applicable.
ITEM 10. ADDITIONAL INFORMATION
A. Share Capital
Not applicable.
B. Memorandum and Articles of Association
General
Set forth below is certain information relating to our capital stock, including the material provisions of our bylaws, Mexican corporate and securities laws and certain related laws and regulations of México, including those of the CNBV, all as in effect as at the date of this Report. The following summary description of our capital stock does not purport to be complete and is qualified in its entirety by reference to our bylaws, which are an exhibit to this Report.
We are currently organized as a corporation (sociedad anónima) under the laws of México. A copy of our draft bylaws has been filed with the CNBV and with the Mexican Stock Exchange and is available for inspection at the Mexican Stock Exchange’s website: www.bmv.com.mx, and an English translation thereof is an exhibit to this Report. Our corporate domicile is Mexico City, and our headquarters are located at Avenida Prolongación Paseo de la Reforma 500, Colonia Lomas de Santa Fe, 01219, Alcaldía Alvaro Obregón, Ciudad de México, México. Our telephone number is +55 5257-8000.
Issued Share Capital
Our capital stock is divided into two series of shares, Series F shares and Series B shares. Series F shares may only be transferred with the prior approval of the CNBV. Series B shares may be purchased by Mexican or non-Mexican individuals or entities, subject to certain transfer restrictions. Series B shares may only represent up to 49% of our issued and outstanding capital stock. Since January 29, 2018,our Series B shares have been registered with the RNV and listed on the Mexican Stock Exchange.
As of the date of this Report, our capital stock consists of 6,786,994,357 shares issued and outstanding, represented by 3,322,685,212 Series B shares (one vote per share) and 3,464,309,145 Series F shares (one vote per share), all of which are book-entry shares, fully paid and of a par value of Ps.3.780782962 each. In addition, we have 921,514,867 Series F shares and 883,785,133 Series B shares authorized, unsubscribed and held in treasury.
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Corporate Purpose
Our bylaws provide that our corporate purpose includes, the provision of banking services provided for in the Mexican Banking Law, thus, we can provide all of the services listed in article 46 of such law and other applicable legal and administrative rules and in compliance with the best banking and corporate practices.
Registration and Transfer of Shares
As of January 29, 2018, our Series B shares have been registered with the RNV maintained by the CNBV. If we wish to cancel our registration, or if it is cancelled by the CNBV, we will be required to make a public offer to purchase all outstanding Series B shares, prior to the cancellation.
Our shares are evidenced by share certificates in registered form. The certificates evidencing our shares are and will continue to be deposited with the Mexican depository institution, S.D. Indeval Institución para el Depósito de Valores, S.A. de C.V., or Indeval, and maintained in book-entry form with institutions which have accounts with Indeval. Indeval is the holder of record in respect of all of the shares of our capital stock. Accounts may be maintained at Indeval by brokers, banks and other financial institutions and entities authorized for this purpose. Ownership of our shares is evidenced by certificates issued by Indeval, together with certificates issued by Indeval’s account holders. We maintain a stock registry and only those persons listed in such stock registry and holding certificates issued in their name as registered holders, or persons holding shares through institutions that maintain accounts with Indeval, will be recognized as our shareholders. Pursuant to Mexican law, any transfer of shares must be registered in our stock registry or through book entries that may be traced back from our stock registry to the records of Indeval.
In accordance with the LIC, LMV and our by-laws, any person or entity, or group of persons or entities, may directly or indirectly, in one or a series of related transactions, acquire our Series B shares, in terms of article 17 of the LIC. In case any person(s) or entity(ies) intend to acquire directly or indirectly more than 5% (five percent) of our Series B shares or grant a guarantee on the shares representing such percentage, the prior authorization of the CNBV is required. In case a person or a group of persons (shareholders or not) intend to purchase 20% (twenty percent) or more of our Series B shares or to obtain the Bank’s control, the prior authorization of the CNBV is required.
Additionally, the persons who acquire or transfer Series B shares for more than 2% (two percent) shall give notice to CNBV within 3 (three) business days following the purchase or the transfer.
Foreign governments shall not participate, directly or indirectly, in the Bank’s capital stock, save in cases provided for by article 13 of the LIC.
In addition, our Series F shares may only be transferred with the prior approval of the CNBV.
Voting Rights
Holders of Series F or Series B shares are entitled to one vote per share and such shares shall, within each series, confer its holders with the same rights. Holders of our shares do not have cumulative voting rights, which generally are not available under Mexican law.
Repurchase Fund
The Board of Directors of Banco Santander México at its meeting held on January 25, 2018, approved the “Shares Acquisition and Placement Policy”, and by means of the Ordinary Shareholders Meeting dated February 21, 2018, the Bank’s Repurchase Fund was approved with an amount of approximately Ps.12,800 million pesos. The Repurchase Fund was established on May 22, 2018. As of December 31, 2022, 5,671,453 shares had been repurchased pursuant to this fund. During 2022, the Company did not repurchase any shares under the Repurchase Program.
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Conflicts of Interest
A member of our Board of Directors with a conflict of interest must disclose such conflict and abstain from any deliberation or vote in connection therewith. A breach by any member of our Board of Directors of any such obligations may result in such member being liable for damages and losses. Further, any member of our Audit Committee or our Corporate Practices Committee who votes on a transaction in which he or she has a conflict of interest with us may be liable for damages.
Pursuant to the Mexican Banking Law, our Corporate Practices Committees must issue an opinion with regard to, among others, transactions and arrangements with related parties, and these transactions and arrangements must be approved by our Board of Directors.
Shareholders’ Meetings
Calls
Under Mexican law and our bylaws, shareholders’ meetings may be called by:
● | our Board of Directors; |
● | shareholders representing at least 10% of our outstanding capital stock who request that the Chairman of our Board of Directors or the Chairman of either our Corporate Practices Committee or Audit Committee call a shareholder meeting; |
● | a Mexican court of competent jurisdiction, in the event the Board of Directors does not comply with a valid request of the shareholders described immediately above; |
● | the Audit Committee and the Corporate Practices Committee; and |
● | any shareholder, provided that no annual ordinary meeting has been held for two consecutive years or the annual shareholders’ meeting did not address the matters required to be addressed in annual shareholders’ meetings. |
Calls for shareholders’ meetings will be required to be made in the electronic system managed by the Ministry of Economy, at least 15 days before the scheduled date of the shareholders’ meeting in the case of first call. If the shareholders’ meeting is not held on the scheduled date, then a second call explaining the circumstances shall be made within a period not greater than 15 business days from the date established in the first call. The second call shall be published at least 5 business days in advance of the rescheduled shareholders’ meeting. Calls need to specify the place, date and time as well as the matters to be addressed at the meeting. From the date on which a call is made until the date of the corresponding meeting, all relevant information will have to be made available to the shareholders at our executive offices. To attend a shareholders’ meeting, shareholders will have to be either registered in the stock registry or present evidence of the deposit of their shares with Indeval or other authorized securities depositary, coupled with a certificate issued by a participant of Indeval or such depositary.
Shareholders’ Meetings
General shareholders’ meetings may be general ordinary shareholders’ meetings or general extraordinary shareholders’ meetings. Shareholders may also hold special meetings of a given series (as for example, meetings of Series B shareholders, as a means to exercise their rights or discuss any matters that may affect such series).
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General ordinary shareholders’ meetings will be those called to discuss any issues not reserved for extraordinary meetings. General ordinary shareholders’ meetings will have to be held at least once a year during the first four months following the end of each fiscal year to:
● | approve financial statements for the preceding fiscal year prepared by our chief executive officer and the report of the Board of Directors; |
● | elect or ratify directors; |
● | appoint or ratify the Chairmen of the Audit Committee and the Corporate Practices Committee; |
● | discuss and approve the Audit Committee’s and the Corporate Practices Committee’s annual report; |
● | determine how to allocate net profits for the preceding year (including, if applicable, the payment of dividends); and |
● | determine the maximum amount of funds allocated to share repurchases; |
General extraordinary shareholders’ meetings will be those called to consider:
● | an extension of our duration or voluntary dissolution; |
● | an increase or decrease in our capital stock; |
● | any change in our corporate purpose or nationality; |
● | any merger, spin-off or transformation into another type of company; |
● | any issuance of preferred stock; |
● | the redemption of shares with retained earnings; |
● | any amendment to our bylaws; |
● | any amendment to our Statutory Responsibilities Agreement; |
● | the cancellation of the registration of shares at the RNV or any stock exchange (except for automated quotation systems); or |
● | the issuance of treasury shares for its further issuance in the stock markets. |
A special shareholders’ meeting, comprising a single class of shares (such as our Series B shares), may be called if an action is proposed to be taken that may only affect such class. The quorum for a special meeting of shareholders and the vote required to pass a resolution at such meeting are identical to those required for extraordinary meetings of shareholders, except that the calculations are based upon the number of outstanding shares of the series that is the subject of the special meeting of shareholders.
The attendance quorum for a general ordinary shareholders’ meeting will be 50% of the outstanding capital stock; and resolutions may be taken by a majority of the capital stock represented therein. If the attendance quorum is not met upon the first call, a subsequent meeting may be called during which resolutions may be approved by the majority of the capital stock present, regardless of the percentage of outstanding capital stock represented at such meeting. The attendance quorum for general extraordinary shareholders’ meetings will be at least 75% of our outstanding capital stock. If an attendance quorum is not met upon the
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first call, a subsequent meeting may be called, at which at least 50% of the capital stock must be represented. In either case, resolutions must be taken by the vote of at least 50% of our outstanding capital stock, except for resolutions in respect of the cancellation of the registration of shares at the RNV or any stock exchange which require that at least 95% of the outstanding capital stock vote in favor of such resolution.
Dividends
Our Board of Directors must submit our financial statements for the previous fiscal year, proposed by our chief executive officer and supplemented by a report of our Board of Directors, for approval at our ordinary shareholders’ meeting. Once our shareholders approve our financial statements, they are required to allocate net profits for the previous fiscal year. Under Mexican law and our bylaws, prior to any distribution of dividends, 5% of our earnings must be allocated to a legal reserve fund until such legal reserve fund is equal to at least 20% of our paid-in capital stock. Additional amounts may be allocated to other reserve funds as the shareholders may determine, including the amount allocated for the repurchase of shares. The remaining balance, if any, may be distributed as dividends.
Changes to Capital Stock
Our capital stock may be increased or decreased by a resolution adopted at a general extraordinary shareholders’ meeting and upon amendment of our bylaws, which amendment shall be previously approved by the CNBV. Increases or decreases in our capital stock must be recorded in our capital variations register. New shares cannot be issued unless the then-issued and outstanding shares have been paid in full.
Our bylaws provide that we may issue treasury shares that may be offered for subscription and payment by the public, provided that:
● | the general extraordinary shareholders’ meeting approves the maximum amount of the increase of our capital stock, and the terms and conditions for the issuance of the non-subscribed shares; |
● | subscription of the shares representing the increase in the capital stock is made through a public offering, and such shares must be registered in the Mexican National Securities Registry, in accordance with the Mexican Securities Market Law; and |
● | the subscribed and paid amount of our capital stock must be disclosed when our authorized capital, including any issued and unsubscribed shares, is made public. |
Election of Directors
Our Board of Directors may consist of up to 15 members and currently consists of nine directors and eleven alternate directors. At least 25% of the members of our Board of Directors (and their respective alternates) must be independent, pursuant to the Mexican Securities Market Law and the Mexican Banking Law. In accordance with our bylaws, holders of Series F shares representing 51% of our capital stock shall have the right to appoint 50% plus 1 of our directors and their respective alternates, and to appoint an extra director for each additional 10% of our capital stock above such percentage. Series B shareholders have the right to appoint the remaining directors and their alternates.
For each director, an alternate director may be appointed, provided that the alternate director corresponding to an independent director must also be independent. All members of the Board of Directors, whether they are directors or alternate directors, are called to attend the meetings of the Board of Directors. If both a director and an alternate director attend the same meeting, only the vote of the director shall be considered.
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Pursuant to the Mexican Banking Law, none of the following persons may be appointed as a member of our Board: (i) our officers or officers of other entities of our group, except for our chief executive officer and officers of the first two levels of management immediately below the chief executive officer, who may be appointed as long as they do not represent more than one third of our appointed directors; (ii) the spouse of any director, or any relatives of up to the second degree of more than two directors; (iii) persons who have a pending claim against our company or any other member of our financial group; (iv) persons who have been declared bankrupt or in concurso mercantil, condemned by a court for any patrimonial crime or disqualified to engage in commercial or financial activities; (v) persons involved in supervisory and regulatory activities and of those of our subsidiaries; and (vi) persons who participate in the board of directors of any financial entity that belongs to a different financial group, or to such group’s holding company.
A determination in respect of whether a director may be deemed independent must be made by our shareholders (at the general shareholders’ meeting where the director is elected). Such a determination may be challenged by the CNBV within 30 days from the date the appointment of the director is notified to the CNBV. The CNBV may only challenge the appointment after holding a hearing with us and the affected director. Under the Mexican Securities Market Law, none of the following persons may be deemed as independent directors: (i) our officers or officers of our subsidiaries, who have being in office during the prior 12-month period; (ii) individuals who have a significant influence or authority on our company or in any member of our group; (iii) persons that are part of our group of controlling shareholders; (iv) customers, service providers, suppliers, debtors, creditors (or employees of any of them) that have material commercial relationships with us (i.e., sales to us or our subsidiaries that exceed 10% of the aggregate sales of any such person, during the prior 12-month period); (v) relatives of any of the foregoing; (vi) officers or employees of any charity or non-profit organization that receives significant contributions from us; (vii) general directors and first-level officers of any company at which our general director or any first-level member of our management team is an elected director; or (viii) persons who have occupied any management office in our company or any of the members of our financial group.
Under the Mexican Securities Market Law, our Board of Directors may appoint temporary directors, without the vote of our shareholders, in case existing directors have resigned or their appointment has been revoked.
Directors must be elected at a special shareholders’ meeting held by each series of shares. Holders of at least 10% of our outstanding share capital are entitled to appoint one director and his or her respective alternate. Such an appointment may only be revoked by the shareholders when appointment of all directors designated by the same series of shares is revoked. Any director whose appointment is so revoked may not be reelected during the 12-month period immediately following the revocation. The ordinary shareholders’ meeting acknowledges the appointment of the members of the Board of Directors designated for each series of shares.
The chairman of the Board of Directors will be elected from the members appointed by the Series F shareholders.
Board of Directors
Our management is entrusted to our Board of Directors and our General Director. The Board of Directors sets forth the guidelines and general strategy for the conduct of our business and supervises the execution of such strategy.
Meetings of the Board of Directors are deemed as validly convened and held if 51% of its members are present, including at least one independent director. Resolutions passed at these meetings will be valid if approved by a majority of the members of the Board of Directors that do not have a conflict of interest. If required, the chairman of the Board of Directors may cast a tie-breaking vote.
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Meetings of our Board of Directors may be called by (i) 25% of our Board members; (ii) the chairman of the Board of Directors; or (iii) any of the statutory auditors (comisarios). Notice of such meetings must be provided to the members of our Board of Directors at least five days prior to the relevant meeting.
The Mexican Securities Market Law imposes duties of care and loyalty on directors. The duty of care generally requires that directors obtain sufficient information and be sufficiently prepared to act in our best interest. The duty of care is discharged, principally, by requesting and obtaining from us all information that may be necessary to take decisions, attending Board meetings and disclosing to the Board of Directors material information in possession of the relevant director. Failure to act with due care by a director subjects the relevant director to joint and several liability, together with other guilty directors, for damages and losses caused to us and our subsidiaries.
The duty of loyalty consists, primarily, of a duty to act for the benefit of the issuer and includes a duty to maintain the confidentiality of information received in connection with the performance of a director’s duties and to abstain from discussing or voting on matters where the director has a conflict of interest. In addition, the duty of loyalty is breached if a shareholder or group of shareholders is knowingly favored or if, without the express approval of the Board of Directors, a director takes advantage of a corporate opportunity belonging to us or our subsidiaries.
The duty of loyalty is also breached if the director uses corporate assets or approves the use of corporate assets in violation of our policies, discloses false or misleading information, orders not to, or causes the failure to, register any transaction in our records, that could affect our financial statements, or causes material information not to be disclosed or to be modified.
The violation of the duty of loyalty subjects the breaching director to joint and several liability with all breaching directors, for damages and losses caused to us and to the persons we control. Liability may also arise if damages and losses result from benefits obtained by the directors or third parties, as a result of activities carried out by such directors.
Claims for breach of the duty of care and the duty of loyalty may be brought solely for our benefit (as a derivative suit) and may only be brought by us or by shareholders representing at least 5% of any outstanding shares.
As a safe harbor for the benefit of directors, in respect of perceived violations of the duty of care or the duty of loyalty, the Mexican Securities Market Law provides that liabilities arising from a breach of the duty of care or the duty of loyalty will not be applicable, if the director acted in good faith and (a) complied with applicable law and our bylaws, (b) decided based upon facts and information provided by officers, external auditors or third-party experts, the capacity and credibility of which may not be the subject of reasonable doubt, and (c) selected the more adequate alternative in good faith, or the negative effects of the director’s decision could not have been reasonably foreseeable, based upon the then-available information. Mexican courts have not yet interpreted the meaning of this provision and, as a result, the extent and meaning of it are uncertain.
Under the Mexican Securities Market Law and our bylaws, our chief executive officer and our principal executives are also required to act for our benefit and not for the benefit of a shareholder or group of shareholders. Principally, these executives are required to submit to the Board of Directors for approval the principal strategies for our business and the business of the companies we control, to execute the resolutions of the Board of Directors, to comply with the provisions related to repurchase and offering of our shares, verify the effectiveness of capital contributions, comply with any provisions relating to declaration and payment of dividends, to submit to the audit committee proposals relating to internal control systems, to prepare all material information related to our activities and the activities of the companies we control, to disclose all material information to the public, to maintain adequate accounting and registration systems and internal control mechanisms, and to prepare and submit to the Board the yearly financial statements.
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Committees of the Board of Directors
We maintain several committees of the Board of Directors that are required under the Mexican Securities Market Law, the Mexican Banking Law or necessary to discharge our specialized duties and limit conflicts of interest. Our Audit Committee is required to consist only of independent Board members and it must comprise at least three directors. Our Corporate Practices Committee is required to consist of a majority of independent Board members and it must comprise at least three directors.
Statutory Auditor (Comisario)
Our internal controls and compliance are supervised by a statutory auditor (comisario) appointed by the Series F shareholders and a statutory auditor (comisario) appointed by the Series B shareholders, in each case, by a majority vote at special shareholders’ meeting of each series. The statutory auditors (comisarios) have the obligations and responsibilities set forth in article 166 of the General Corporation Law and other applicable statutes and which are generally consistent with the responsibilities of an audit committee.
Preemptive Rights
Under Mexican law, our shareholders have preemptive rights for all share issuances or increases except in the cases noted below. Generally, if we issue additional shares of capital stock, our shareholders will have the right to subscribe and pay the number of shares necessary to maintain their existing ownership percentage and avoid dilution. Shareholders must exercise their preemptive rights within the time period set forth by our shareholders at the general meeting approving the relevant issuance of additional shares. This period must be at least 15 days following the notice of the issuance made in the electronics system of the Ministry of Economy.
The preemptive rights specified in the prior paragraph will not apply (i) in the case of shares issued in connection with mergers, (ii) in the case of resale of shares held in our treasury, as a result of repurchases of shares conducted on the Mexican Stock Exchange, (iii) in the event of an issuance for purposes of a public offering, see “—Changes to Capital Stock” above, and (iv) in respect of shares issued in connection with the conversion of any convertible securities.
We may not be able to offer shares to U.S. shareholders pursuant to preemptive rights granted to our shareholders in connection with any future issuance of shares unless certain conditions are met. See “Item 3. Key Information—D. Risk Factors—Risks Relating to the ADSs and Our Series B Shares— Preemptive rights may be unavailable to non-Mexican holders of our Series B shares and ADSs and, as a result, they may suffer dilution.”
Dissolution or Liquidation
Banks may only be dissolved and liquidated if the CNBV has issued a resolution to that effect. Prior to such dissolution and liquidation, the IPAB may provide temporary financial assistance to banks with liquidity problems.
The Mexican Banking Law sets forth a special judicial liquidation process, accordingly, banks will not be subject to the general insolvency proceedings applicable to other entities in México. Pursuant to the Mexican Banking Law, a bank is considered insolvent when its assets are not enough to cover its liabilities, which is grounds for revocation of its authorization to operate as a bank, and will trigger its liquidation process, under which the IPAB will act as liquidator and will conduct the process of satisfying liabilities in order to protect the interests of a bank’s creditors and depositors and the public in general. In addition, to the liquidation process, banks may be declared bankrupt pursuant to a special proceeding contemplated in México’s Insolvency Law (Ley de Concursos Mercantiles).
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Certain Minority Protections
Pursuant to the Mexican Securities Market Law and the Mexican Corporations Law, our bylaws include a number of minority shareholder protections. These minority protections will include provisions that permit:
● | holders of at least 10% of our outstanding capital stock: |
● | to vote (including in a limited or restricted manner) to request a call for a shareholders’ meeting, |
● | to request that resolutions with respect to any matter on which they were not sufficiently informed be postponed, and |
● | to appoint one member of our Board of Directors and one alternate member of our Board of Directors; |
● | holders of 20% of our outstanding capital stock to oppose any resolution adopted at a shareholders’ meeting and file a petition for a court order to suspend the resolution temporarily, within 15 days following the adjournment of the meeting at which the action was taken, provided that (i) the challenged resolution violates Mexican law or our bylaws, (ii) the opposing shareholders neither attended the meeting nor voted in favor of the challenged resolution, and (iii) the opposing shareholders deliver a bond to the court to secure payment of any damages that we may suffer as a result of suspending the resolution, in the event that the court ultimately rules against the opposing shareholders; and |
● | holders of 5% of our outstanding capital stock may initiate a shareholder derivative suit against some or all of our directors, for our benefit, for violations of their duty of care or duty of loyalty, in an amount equal to the damages or losses caused to us. Actions initiated on these grounds have a five-year statute of limitations. |
Other Provisions
Duration
Our corporate existence under our bylaws is indefinite.
Share Repurchases
We can purchase our shares through the Mexican Stock Exchange, at the then-prevailing market prices for the shares at the time of the purchase. The economic and voting rights corresponding to repurchased shares may not be exercised by us during the period the shares are owned by us, and such shares will not be deemed outstanding for purposes of calculating any quorum or vote at any shareholders’ meeting. We are not required to create a special reserve for the repurchase of shares and we do not need the approval of our Board of Directors to effect share repurchases; however, we are required to obtain shareholder approval in respect of the maximum amount that may be used by us for share repurchases (including, subsequent sales of such repurchased shares). In addition, our Board of Directors must appoint an individual or group of individuals responsible for effecting share repurchases.
Share repurchases are required to be made pursuant to the provisions of the Mexican Securities Market Law, and carried out, reported and disclosed in the manner specified by the CNBV. If we intend to repurchase more than 1% of our outstanding shares at a single trading session, we must inform the public of this intention at least ten minutes before submitting our bid. If we intend to repurchase 3% or more of our outstanding shares during a period of 20 trading days, we must conduct a public tender offer for these shares.
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Certain Investment Restrictions
Our shares are subject to certain transfer restrictions that may have the effect of delaying or preventing a change in control. See “—Registration and Transfer of Shares” above.
In addition, foreign governmental authorities may not acquire any of our shares.
Tag-Along Rights
Our bylaws do not grant tag-along rights to our shareholders. Notwithstanding, the Mexican Securities Market Law permits our shareholders to enter into these types of agreements or understandings, in which case the applicable shareholders shall notify us within the five business days following the corresponding agreement or understanding so that such information becomes publicly available. Such information is also to be disclosed in our annual report.
Such agreements and understanding shall not be enforceable against us and any breach thereunder shall not affect the validity of the vote taken pursuant to a shareholders’ meeting. Further, the agreement or understanding shall only become effective among the parties thereto once they are disclosed to the public.
Withdrawal Rights
If our shareholders approve a change in our corporate purpose, jurisdiction of organization or transformation from one type of corporate form to another, any shareholder entitled to vote that voted against the approval of these matters has the right to withdraw and receive book value for its shares, as set forth in the financial statements last approved by our shareholders, provided that the shareholder exercises this withdrawal right within 15 days after the meeting, at which the relevant matter was approved.
Cancellation of Registration in the Mexican National Securities Registry
In accordance with our bylaws, and as set forth in the Mexican Securities Market Law, we will be required to make a public tender offer for the purchase of stock held by minority shareholders, in the event that the listing of our Series B shares on the Mexican Stock Exchange is cancelled, either as a result of our determination or by an order of the CNBV. Our controlling shareholders will be secondarily liable for these obligations. A controlling shareholder will be deemed to be a shareholder that holds a majority of our capital stock, has the ability to control the outcome of decisions made at a shareholders’ or Board of Directors’ meeting, or has the ability to appoint a majority of the members of our Board of Directors. Unless otherwise approved by the CNBV, the price at which the stock must be purchased is the higher of:
● | the average quotation price on the Mexican Stock Exchange for the 30 days prior to the date of the tender offer, or |
● | the book value, as reflected in the report filed with the CNBV and the Mexican Stock Exchange. |
If the tender for cancellation is requested by the CNBV, it must be initiated within 180 days from the date of the request. If initiated by us, under the Mexican Securities Market Law, the cancellation must be approved by 95% of our shareholders.
Our Board of Directors must make a determination with respect to fairness of the tender offer price, taking into consideration the minority shareholders’ interest, and disclose its opinion. The resolution of the Board of Directors may be accompanied by a fairness opinion issued by an expert selected by our Audit Committee. Directors and first level officers are required to disclose whether they will sell their shares in connection with the tender offer.
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Certain Differences between Mexican and U.S. Corporate Law
As an investor, you should be aware that the Mexican Banking Law, the Mexican Securities Market Law and the Mexican Corporations Law, all of which apply to us, differ in certain material respects from laws generally applicable to U.S. corporations and their shareholders.
Mergers, Consolidations and Similar Arrangements
Under Mexican law, mergers, spin-offs, transformations or other similar reorganizations must be approved by the extraordinary general shareholders’ meeting. Pursuant to the Mexican Corporations Law, shareholders are not entitled to appraisal rights.
In contrast, pursuant to Delaware law, with certain exceptions, a merger, consolidation or sale of all or substantially all of the assets of a corporation must be approved by the Board of Directors and a majority of the outstanding shares entitled to vote thereon. Under Delaware law, a shareholder of a corporation participating in certain major corporate transactions may, under specific circumstances, be entitled to appraisal rights pursuant to which the shareholder may receive payment in the amount of the fair market value of the shares held by the shareholder (as determined by a court) in lieu of the consideration the shareholder would otherwise receive in the transaction. Delaware law also provides that a parent corporation, by resolution of its Board of Directors and without any shareholder vote, may merge with any subsidiary of which it owns at least 90% of each class of capital share. Upon any such merger, dissenting shareholders of the subsidiary would have appraisal rights.
Transfer Restrictions
In accordance with the Mexican Banking Law, the Mexican Securities Market Law and our by-laws, any person or entity, or group of persons or entities, may directly or indirectly, in one or a series of related transactions, acquire our Series B shares, in terms of article 17 of the Mexican Banking Law. In case any person(s) or entity(ies) intend to acquire directly or indirectly more than 5% (five percent) of our Series B shares or grant a guarantee on the shares representing such percentage, the prior authorization of the CNBV is required. In case a person or a group of persons (shareholders or not) intend to purchase 20% (twenty percent) or more of our Series B shares or to obtain the Bank’s control, the prior authorization of the CNBV is required.
Additionally, the persons who acquire or transfer Series B shares for more than 2% (two percent) shall give notice to CNBV within 3 (three) business days following the purchase or the transfer.
The Mexican Securities Market Law defines control, for these purposes, as (a) the ability to impose decisions, directly or indirectly, at a shareholders’ meeting (b) the right to vote 50% or more of our shares, or (c) the ability to cause, directly or indirectly, that our management, strategy or policies be pursued in any given fashion. See “—Anti-Takeover Protections” above.
In contrast, under Delaware law, corporations can implement shareholder rights plans and other measures, including staggered terms for directors and super-majority voting requirements, to prevent takeover attempts. Delaware law also prohibits a publicly held Delaware corporation from engaging in a business combination with an interested shareholder for a period of three years after the date of the transaction in which the shareholder became an interested shareholder unless:
● | prior to the date of the transaction in which the shareholder became an interested shareholder, the board of directors of the corporation approves either the business combination or the transaction that resulted in the shareholder becoming an interested shareholder; |
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● | upon consummation of the transaction that resulted in the shareholder becoming an interested shareholder, the interested shareholder owns at least 85% of the voting stock of the corporation, excluding shares held by directors, officers, and employee stock plans; or |
● | at or after the date of the transaction in which the shareholder became an interested shareholder, the business combination is approved by the Board of Directors and authorized at a shareholders’ meeting by at least 662/3% of the voting stock which is not owned by the interested shareholder. |
Class Action Lawsuits
Applicable Mexican law has been modified to permit the initiation of class actions; however, rules implementing applicable law have not fully developed the relevant procedural requirements. In México, the law concerning fiduciary duties of directors and executive officers has been in existence for a relatively short period. Actions against directors for breach of fiduciary duties may not be initiated as a direct action, but as a shareholder derivative suit (that is for the benefit of our company). The grounds for shareholder derivative actions under Mexican law are limited. See “—Certain Minority Protections” above.
In contrast, under Delaware law, class actions and derivative actions are generally available to shareholders for purposes of, among other things, breaches of fiduciary duty, corporate waste and other actions or omissions that conflict with applicable law. In these kinds of actions, the court generally has discretion to permit the winning party to recover attorneys’ fees incurred in connection with the action.
Shareholder Proposals
Under Mexican law and our bylaws, holders of at least 10% of our outstanding capital stock may (i) vote to request a call for a shareholders’ meeting; (ii) request that resolutions with respect to any matter on which they were not sufficiently informed be postponed; and (iii) appoint one member of our Board of Directors and its respective alternate.
In contrast, Delaware law does not include a provision restricting the manner in which nominations for directors may be made by shareholders or the manner in which business may be brought before a meeting.
Calling of Shareholders’ Meetings
Under Mexican law and our bylaws, general shareholders’ meetings may be called by (i) our Board of Directors; (ii) shareholders representing at least 10% of our outstanding capital stock; (iii) a Mexican court of competent jurisdiction; (iv) the audit committee and the corporate practices committee; and (v) a shareholder, in limited cases. See “—Shareholders’ Meetings” above.
Delaware law permits the Board of Directors or any person who is authorized under a corporation’s certificate of incorporation or bylaws to call an extraordinary meeting of shareholders.
Cumulative Voting
Cumulative voting rights generally are not available under Mexican law.
Under Delaware law, cumulative voting for the election of directors is permitted only if expressly authorized in the certificate of incorporation.
Approval of Corporate Matters by Written Consent
Under Mexican law and our bylaws, our shareholders may take action by written consent of the holders of all of the outstanding shares of capital stock.
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Delaware law permits shareholders to take action by written consent of holders of outstanding shares having more than the minimum number of votes necessary to take the action at a shareholders’ meeting at which all voting shares were present and voted.
Amendment of Bylaws
Under Mexican law, any amendment to our bylaws may only be resolved by our shareholders at a general extraordinary shareholders’ meeting. In addition, the CNBV must previously approve any amendment to our bylaws.
Under Delaware law, holders of a majority of the voting power of a corporation and, if so provided in the certificate of incorporation, the directors of the corporation, have the power to adopt, amend and repeal the bylaws of a corporation.
C. Material Contracts
Collaboration Agreement.- Immediately following the Merger, we sold all of the shares we held in the Former Holding Company’s brokerage subsidiary, Casa de Bolsa as a result of the Merger to our holding company, Grupo Financiero Santander México, S.A. de C.V. In connection with the sale, we entered into a collaboration agreement on January 2, 2018 with Casa de Bolsa pursuant to which Casa de Bolsa has agreed to perform certain brokerage transactions on our behalf that we are not legally able to provide or perform as a commercial bank and we have agreed to pay Casa de Bolsa commissions for the performance of such transactions. The agreement has an indefinite term and can be cancelled by either party upon 30 days’ notice. The collaboration agreement is included as Exhibit 4.1 to this Annual Report.
D. Exchange Controls
None.
E. Taxation
The following summary contains a description of material Mexican and U.S. federal income tax consequences of the acquisition, ownership and disposition of ADSs or Series B shares, but it does not purport to be a comprehensive description of all the tax considerations that may be relevant to a decision to hold ADSs or Series B shares. The summary is based upon the tax laws of México and regulations thereunder, the tax laws of the United States and regulations thereunder and the income tax treaty between México and the United States, all as of the date hereof, which are subject to change, possibly with retroactive effect, and to differing interpretations.
Mexican Taxation
The following summary contains a general description of certain tax consequences, under the Mexican Income Tax Law (Ley del Impuesto Sobre la Renta) and regulations thereunder, of the acquisition, ownership and disposition of ADSs or Series B shares by a holder that is a non-Mexican holder (as described below), and it does not purport to be a comprehensive description of all the Mexican federal tax considerations that may be relevant to a decision to purchase, hold or dispose of ADSs or Series B shares. In addition, this summary does not address any non-Mexican or Mexican state or municipal tax considerations, which may be relevant to a non-Mexican holder of ADSs or Series B shares.
This summary is intended to be for general information purposes only, and is based upon the Mexican Income Tax Law and regulations thereunder, as in effect on the date of this Report, all of which are subject to change.
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Prospective investors in and holders of ADSs or Series B shares should consult their own tax advisors as to the Mexican or other tax consequences of the purchase, ownership and disposition of ADSs or Series B shares including, in particular, the effect of any foreign, state or local tax laws, and their entitlement to the benefits, if any, afforded by the Convention for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion and a protocol thereto between México and the United States, as amended (the “Tax Treaty”), and other tax treaties to which México is a party and which are in effect.
For purposes of this summary, the term “non-Mexican holder” shall mean a holder that is not a resident of México for tax purposes, and that will not hold ADSs or Series B shares, or a beneficial interest therein, in connection with the conduct of a trade or business, through a permanent establishment for tax purposes, in México.
For purposes of Mexican taxation:
● | an individual is a resident of México for tax purposes, if such individual has established his or her primary residence in México. In the event such individual has a home or domicile in another country, then the individual will be considered a resident of México for tax purposes if his or her center of vital interests (centro de intereses vitales) is located within the territory of México. This will be deemed to occur if (i) more than 50.0% of his or her aggregate annual income derives from Mexican sources, or (ii) the main center of his or her professional activities is located in México. Mexican nationals who filed a change of tax residence to a country or jurisdiction that does not have a comprehensive exchange of information agreement with México, in which their income is subject to a preferred tax regime pursuant to the provisions of the Mexican Income Tax Law, will be considered Mexican residents for tax purposes during the year of filing of the notice of such residence change and during the following five years; |
● | unless otherwise evidenced, a Mexican national individual shall be deemed a Mexican resident for tax purposes. An individual will also be considered a resident of México for tax purposes if such individual is a state employee, regardless of the location of the individual’s core of vital interests; and |
● | a legal entity (including foreign legal arrangements treated as legal entities for Mexican tax purposes) qualifies as a resident of México for tax purposes if it maintains the principal administration of its business, or the place of its effective management, in México. If a legal entity (including foreign legal arrangements treated as legal entities for Mexican tax purposes) or an individual has a permanent establishment in México, any and all income attributable to that permanent establishment of such resident should be subject to Mexican income tax, in accordance with applicable tax provisions. |
Non-residents of México (whether individuals or corporate entities) who are deemed to have a permanent establishment in México for tax purposes shall be subject to the Mexican income tax laws, and all income attributable to such permanent establishment will be subject to Mexican taxes in accordance with the Mexican Income Tax Law.
Taxation on Dividends
Pursuant to the provisions of the Mexican Income Tax Law, dividends, either in cash or in kind, paid to non-Mexican holders of ADSs or Series B shares are subject to withholding tax, as follows:
a) | Non-Mexican holders who receive any dividends or profits that were generated as from 2014 must pay a 10% additional tax through a withholding made by the financial intermediary. |
b) | Tax treaties could limit or reduce the withholding rate to the extent all requisites set forth in the Mexican Income Tax Law and the applicable tax treaty are met. The non-Mexican holders could possibly claim a tax credit for tax withheld if allowed by the domestic law of the recipient’s country of residence. |
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c) | Profits earned until 2013, and supported with the net after-tax profit account 2013 (CUFIN for its Spanish acronym), would not be subject to 10% withholding tax. |
Taxation on Capital Gains
Gains on the sale of ADSs or Series B shares by a non-Mexican holder are subject to a 10% Mexican withholding tax if the transaction is carried out through a recognized securities market such as the Mexican Stock Exchange, to be withheld by the financial intermediary through which the sale is effected. The Mexican Income Tax Law provides that no withholding tax will apply if the holder is a resident of a country with which México has in force a treaty for the avoidance of double taxation. For that purpose, the non-Mexican holder must provide a statement under oath to that effect to the financial intermediary, which statement must include the non-Mexican tax identification number of the non-Mexican holder. Additionally, to be eligible for the 10% Mexican withholding tax or the exemption, the holder (i) must have purchased and sold Series B shares in a recognized securities market, (ii) must not hold 10% or more of our Series B shares nor transfer 10% or more of our Series B shares in one or several transactions within a 24-month period, (iii) must not transfer control over us by transferring our Series B shares, and (iv) must not transfer the Series B shares in any transaction that restricts the seller from accepting a more competitive offer.
If the non-Mexican holder is ineligible for the 10% Mexican withholding tax on the gain or the treaty exemption set forth in the Mexican Income Tax Law referred to above (e.g., because the transaction is not carried out through a recognized market, such as the Mexican Stock Exchange), then the proceeds from the sale of our Series B shares by the non-Mexican holder would be subject to the general 25% tax rate applicable to the gross sales price or, alternatively, to a 35% tax rate applicable to the gain arising from the sale of our Series B shares, if certain requirements set forth under applicable law are met (including appointing an agent in México for tax purposes and filing an ad-hoc tax return).
Under the Tax Treaty, a non-Mexican holder that is eligible to claim the benefits under the Tax Treaty may be exempt from Mexican income tax gains realized from a sale or other disposition of Series B shares (directly or through ADSs) that is or is not carried out through the Mexican Stock Exchange or such other approved securities market, to the extent such non-Mexican holder owned, directly or indirectly, less than 25% of our outstanding shares during the 12-month period preceding the date of the sale or other disposition, and provided that certain formal requirements set forth in the Mexican Income Tax Law are also complied with.
Other Mexican Taxes
There is currently no Mexican estate, gift, inheritance or value-added tax applicable to the purchase, ownership or disposition of ADSs or Series B shares by a non-Mexican holder, provided, however, that gratuitous transfers of our shares may, in certain circumstances, result in the imposition of Mexican federal income tax on the recipient.
There is currently no Mexican stamp, issue, registration or similar tax or duty payable by a non-Mexican holder with respect to the purchase, ownership or disposition of ADSs or Series B shares.
Material U.S. Federal Income Tax Consequences
The following is a description of the material U.S. federal income tax consequences to the U.S. Holders described below of owning and disposing of ADSs or Series B shares. This discussion is not a comprehensive description of all tax considerations that may be relevant to a particular person’s decision to hold the securities. This discussion applies only to a U.S. Holder that holds ADSs or Series B shares as capital assets for tax purposes (generally property held for investment). In addition, it does not describe all of the tax consequences that may be relevant to you in light of your particular circumstances, including alternative minimum tax consequences, the potential application of the provisions of the Internal Revenue
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Code of 1986, as amended (the “Code”) known as the Medicare contribution tax, and differing tax consequences applicable to you if you are, for instance:
● | a financial institution; |
● | a dealer or trader in securities; |
● | holding ADSs or Series B shares as part of a straddle, wash sale, conversion transaction or integrated transaction or entering into a constructive sale with respect to the ADSs or Series B shares; |
● | a person whose functional currency is not the U.S. dollar; |
● | a partnership for U.S. federal income tax purposes; |
● | a tax-exempt entity, including an “individual retirement account” or “Roth IRA”; |
● | a person that owns or is deemed to own ten percent or more of our stock by vote or value; |
● | a person who acquired our ADSs or Series B shares pursuant to the exercise of an employee stock option or otherwise as compensation; or |
● | holding ADSs or Series B shares in connection with a trade or business conducted outside of the United States. |
If an entity that is classified as a partnership for U.S. federal income tax purposes holds ADSs or Series B shares, the U.S. federal income tax treatment of a partner will generally depend on the status of the partner and upon the activities of the partnership. Partnerships holding ADSs or Series B shares and partners in such partnerships should consult their tax advisers as to the particular U.S. federal income tax consequences of holding and disposing of the ADSs or Series B shares.
This discussion is based on the Code, administrative pronouncements, judicial decisions, final, temporary and proposed U.S. Treasury regulations and the Tax Treaty, all as of the date hereof, any of which is subject to change, possibly with retroactive effect.
A “U.S. Holder” is a holder who, for U.S. federal income tax purposes, is a beneficial owner of ADSs or Series B shares who is eligible for the benefits of the Tax Treaty and is:
● | a citizen or individual resident of the United States; |
● | a corporation, or other entity taxable as a corporation, created or organized in or under the laws of the United States, any state therein or the District of Columbia; or |
● | an estate or trust, the income of which is subject to U.S. federal income taxation regardless of its source. |
In general, a U.S. Holder who owns ADSs will be treated as the owner of the underlying shares represented by those ADSs for U.S. federal income tax purposes. Accordingly, no gain or loss will be recognized if a U.S. Holder exchanges ADSs for the underlying shares represented by those ADSs.
U.S. Holders should consult their tax advisers concerning the U.S. federal, state, local and foreign tax consequences of owning and disposing of ADSs or Series B shares in their particular circumstances.
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Treasury regulations that apply to taxable years beginning on or after December 28, 2021 may in some circumstances prohibit a U.S. person from claiming a foreign tax credit with respect to certain non-U.S. taxes that are not creditable under applicable income tax treaties. Accordingly, U.S. investors that are not eligible for Treaty benefits should consult their tax advisers regarding the creditability or deductibility of any non-U.S. taxes imposed on them. This discussion does not apply to investors in this special situation. U.S. Holders should consult their tax advisers concerning the U.S. federal, state, local and non-U.S. tax consequences of owning and disposing of ADSs or Series B shares in their particular circumstances.
This discussion assumes we are not a passive foreign investment company, as described below.
Taxation of Distributions
Distributions paid on ADSs or Series B shares, other than certain pro rata distributions of Series B shares, will generally be treated as dividends to the extent paid out of our current or accumulated earnings and profits (as determined under U.S. federal income tax principles). Because we do not maintain calculations of our earnings and profits under U.S. federal income tax principles, it is expected that distributions will generally be reported to U.S. Holders as dividends. Dividends paid by qualified foreign corporations to certain non-corporate U.S. Holders (including individuals) may be eligible for taxation as "qualified dividend income" and therefore may be taxable at rates applicable to long-term capital gains. A foreign corporation is treated as a qualified foreign corporation with respect to dividends paid on stock that is readily tradable on a securities market in the United States, such as the NYSE, where our ADSs are traded. Non-corporate U.S. Holders should consult their tax advisers to determine whether the favorable rates will apply to dividends they receive and whether they are subject to any special rules that limit their ability to be taxed at these favorable rates.
The amount of a dividend will include any amounts withheld in respect of Mexican taxes. The amount of the dividend will be treated as foreign-source dividend income to U.S. Holders and will not be eligible for the dividends-received deduction generally available to U.S. corporations under the Code. Dividends will be included in a U.S. Holder’s income on the date of the U.S. Holder’s (or in the case of ADSs, the Depositary’s) receipt of the dividend. The amount of any dividend income paid in pesos will be the U.S. dollar amount calculated by reference to the exchange rate in effect on the date of receipt regardless of whether the payment is in fact converted into U.S. dollars. If the dividend is converted into U.S. dollars on the date of receipt, U.S. Holders should not be required to recognize foreign currency gain or loss in respect of the dividend income. A U.S. Holder may have foreign currency gain or loss if the dividend is converted into U.S. dollars after the date of receipt.
Subject to applicable limitations, some of which vary depending upon the U.S. Holder’s circumstances, any Mexican income taxes withheld from dividends on ADSs or Series B shares at a rate not exceeding the rate provided by the Tax Treaty generally will be creditable against the U.S. Holder’s U.S. federal income tax liability. Instead of claiming a credit, the U.S. Holder may elect to deduct such Mexican income taxes in computing the U.S. Holder’s taxable income, subject to generally applicable limitations under U.S. law. An election to deduct creditable foreign taxes instead of claiming foreign tax credits applies to all creditable taxes paid or accrued in the taxable year to foreign countries and possessions of the United States. The rules governing foreign tax credits are complex, and U.S. Holders should consult their tax advisers regarding the creditability of foreign taxes in their particular circumstances.
Sale or Other Taxable Disposition of ADSs or Series B Shares
Gain or loss realized on the sale or other taxable disposition of ADSs or Series B shares will be capital gain or loss, and will be long-term capital gain or loss if the U.S. Holder held the ADSs or Series B shares for more than one year. Long-term capital gain of a non-corporate U.S. Holder is generally taxed at preferential rates. The deductibility of capital losses is subject to limitations. The amount of the gain or loss will equal the difference between the U.S. Holder’s tax basis in the ADSs or Series B shares disposed of and the amount realized on the disposition, in each case as determined in U.S. dollars. If a Mexican tax is withheld
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on the sale or disposition of Series B shares or ADSs, a U.S. Holder’s amount realized will include the gross amount of the proceeds of the sale or disposition before deduction of the Mexican tax. See “—Mexican Taxation —Taxation on Capital Gains” for a description of when a disposition may be subject to taxation by México. This gain or loss will generally be U.S.-source gain or loss for foreign tax credit purposes. A U.S. Holder may elect to treat disposition gain that is subject to Mexican taxation as foreign-source gain for purposes of claiming a credit in respect of the tax. U.S. Holders should consult their tax advisers regarding the creditability of foreign taxes in their particular circumstances.
Passive Foreign Investment Company Rules
Based on proposed U.S. Treasury regulations, including those which are proposed to be effective for taxable years beginning after December 31, 1994, we believe that we were not a “passive foreign investment company” (a “PFIC”) for U.S. federal income tax purposes for 2022. However, because the proposed U.S. Treasury regulations may not be finalized in their current form, because the application of the proposed regulations is not entirely clear and because the composition of our income and assets will vary over time, there can be no assurance that we will not be a PFIC for any taxable year. The determination of whether we are a PFIC is made annually and is based upon the composition of our income and assets (including, among others, entities in which we hold at least a 25% interest), and the nature of our activities.
If we were a PFIC for any taxable year during which a U.S. Holder held ADSs or Series B shares, gain recognized by a U.S. Holder on a sale or other taxable disposition (including certain pledges) of the ADSs or Series B shares would generally be allocated ratably over the U.S. Holder’s holding period for the ADSs or Series B shares. The amounts allocated to the taxable year of the sale or other taxable disposition and to any year before we became a PFIC would be taxed as ordinary income. The amount allocated to each other taxable year would be subject to tax at the highest rate in effect for individuals or corporations for that year, as appropriate, and an interest charge would be imposed. Further, to the extent that any distribution received by a U.S. Holder on its ADSs or Series B shares exceeds 125 percent of the average of the annual distributions on the ADSs or Series B shares received during the preceding three years or the U.S. Holder’s holding period, whichever is shorter, that distribution would be subject to taxation in the same manner as gain, as described immediately above. Certain elections may be available that would result in alternative treatments (such as mark-to-market treatment) of the ADSs or Series B shares. U.S. Holders should consult their tax advisers to determine whether any of these elections would be available and, if so, what the consequences of the alternative treatments would be in their particular circumstances.
Furthermore, if we were a PFIC or, with respect to a particular U.S. Holder, were treated as a PFIC for the taxable year in which we paid a dividend or for the prior taxable year, the preferential dividend rates discussed above with respect to dividends paid to certain non-corporate U.S. Holders would not apply.
If a U.S. Holder owns ADSs or Series B shares during any year in which we are a PFIC, the holder generally must file annual reports containing such information as the U.S. Treasury may require on IRS Form 8621 (or any successor form) with respect to us, generally with the holder’s federal income tax return for that year.
Information Reporting and Backup Withholding
Payments of dividends and sales proceeds that are made within the United States or through certain U.S.-related financial intermediaries generally are subject to information reporting and may be subject to backup withholding unless (i) the U.S. Holder is a corporation or other exempt recipient or (ii) in the case of backup withholding, the U.S. Holder provides a correct taxpayer identification number and certifies that it is not subject to backup withholding. The amount of any backup withholding from a payment to a U.S. Holder will be allowed as a credit against the holder’s U.S. federal income tax liability and may entitle it to a refund, provided that the required information is timely furnished to the Internal Revenue Service.
Certain U.S. Holders who are individuals (and under Treasury Regulations, specified entities that are formed or availed of for purposes of holding certain foreign financial assets) may be required to report
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information relating to their ownership of securities of a non-U.S. person, subject to certain exceptions (including an exception for securities held in certain accounts maintained by U.S. financial institutions, such as our ADSs). U.S. Holders should consult their tax advisers regarding the effect, if any, of these rules on their ownership and disposition of ADSs or Series B shares.
F. Dividends and Paying Agents
Not applicable.
G. Statement by Experts
Not applicable.
H. Documents on Display
We are subject to the informational requirements of the Exchange Act. Accordingly, we are required to file reports and other information with the SEC, including annual reports on Form 20-F and reports on Form 6-K. The SEC maintains an Internet website that contains our reports and other information that we file electronically with the SEC. The address of that website is www.sec.gov.
As a foreign private issuer, we are exempt under the Exchange Act from, among other things, the rules prescribing the furnishing and content of proxy statements, and our executive officers, directors and principal shareholders are exempt from the reporting and short-swing profit recovery provisions contained in Section 16 of the Exchange Act. In addition, we will not be required under the Exchange Act to file periodic reports and financial statements with the SEC as frequently or as promptly as U.S. companies whose securities are registered under the Exchange Act.
I. Subsidiary Information
Not applicable.
ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Risk Management
The principal types of risk inherent in our business are market, liquidity, credit and operational risks. The effectiveness with which we are able to manage the balance between risk and reward is a significant factor in our ability to generate long-term, stable earnings growth. Toward that end, our senior management places great emphasis on risk management. For further information on market risk and risk management, see Note 48 to our audited financial statements included elsewhere in this Report.
Organizational Structure
We regard risk management as a competitive element of a strategic nature, the ultimate goal of which is to maximize shareholder value. Risk management is defined, both conceptually and organizationally, as the comprehensive treatment of the different risks (market, liquidity, credit, counterparty, operating, legal and technological risks) that are quantifiable and are assumed by us in the normal course of business. The way we manage the risks inherent in our business is essential to understanding and determining our financial position and creating value in the long term.
The CNBV has issued regulations governing risk management applicable to credit institutions. Our Board of Directors has formed and maintains a Comprehensive Risk Management Committee (Comité de Administración Integral de Riesgos) based on the guidelines set forth in these regulations. The Comprehensive Risk Management Committee must comprise at least five members, including the head of
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the Comprehensive Risk Management Unit, our Chief Executive Officer, two of our Board members (one of whom is the committee president) and our internal auditor. The Comprehensive Risk Management Committee meets monthly and seeks to ensure that our operations adhere to the objectives, policies and procedures approved by the Board of Directors for risk management, which are set forth in our Comprehensive Risk Management Manual.
The Comprehensive Risk Management Committee proposes to the Board of Directors, for their approval:
● | objectives, policies and procedures for the general management of risks; |
● | risk exposure limits (on a consolidated basis, for each business unit and for each type of risk); and |
● | strategies for assigning resources related to the execution of operations. |
In addition, the Comprehensive Risk Management Committee approves:
● | methodologies to identify, measure, monitor, limit, control, inform and disclose the different types of risks to which we are exposed; |
● | models, parameters and scenarios used to measure and control risk; and |
● | Execution of new transactions and services that involve risks. |
The Comprehensive Risk Management Committee also monitors compliance with the risk limits established by the Board of Directors.
The Comprehensive Risk Management Committee reports existing risk exposure to the senior management and the Board of Directors, at least on a quarterly basis. In particular, it reports our risk levels, as well as any deviation from the risk limits imposed by the risk policies and the corrective measures that have been implemented. When a risk limit is breached, as determined by the credit or market risk department, as applicable, the excess is reported immediately, regardless of the severity of such breach, to the Comprehensive Risk Management Unit, which reports to the Comprehensive Risk Management Committee. The Comprehensive Risk Management Committee, in turn, reports to senior management and the Board of Directors. The relevant business unit must then report to the credit or market risk department, as applicable, regarding the corrective measures that are being implemented to reduce risk below the risk limit. The credit or market risk department, as applicable, monitors the risk until it is reduced below the risk limit.
The Comprehensive Risk Management Committee has delegated to the Comprehensive Risk Management Unit (Unidad de Administración Integral de Riesgos) the responsibility for implementing the procedures for the measurement, management and control of risks, in accordance with established policies. The Comprehensive Risk Management Committee appoints one person responsible for the management of the Comprehensive Risk Management Unit. This person, on behalf of the Comprehensive Risk Management Unit, reports any breaches of the risk limits and the corrective measures that have been implemented monthly to our Comprehensive Risk Management Committee and to the Board of Directors. This person is also responsible for, among other things, presenting to the Board of Directors the Comprehensive Risk Management Committee’s reports, approvals and the risk exposures.
The Comprehensive Risk Management Committee has the power to authorize deviations above the established risk limits, but any deviations must be reported to the board of directors of Banco Santander México on at least a quarterly basis. Generally any breaches of the risk limits are low in severity and last for a few days. Nevertheless, in the infrequent event that a breach is high in severity, the relevant business unit may request authorization from the Comprehensive Risk Management Committee, through the Comprehensive Risk Management Unit, for a specific and temporary deviation during which it will act to
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reduce the risk. If the authorization is denied, then the business unit must reduce the risk as soon as possible by reducing the open risk position or hedging it, even if such action results in a loss.
The Comprehensive Risk Management Committee may also create any subcommittees necessary to exercise its functions. The Credit Risk Committee, Market Risk Committee, Legal Risk Subcommittee and Operational Risk Subcommittee are subcommittees of the Comprehensive Risk Management Unit. See “Item 6. Directors, Senior Management and Employees—C. Board Practices—Committees—Comprehensive Risk Management Committee” for additional information about our Comprehensive Risk Management Committee.
Regulatory Review Process
We are subject to the CNBV’s ordinary regulatory review process, specified in regulations that govern the CNBV’s supervisory activities, which includes the annual evaluation of our risk models and risk management. This annual review comprises the following steps:
● | The CNBV sends us an official notice stating the date on which its inspection visit will take place, the purpose of the inspection and the initial documents that will be subject to review. |
● | The CNBV sends us an official notice confirming the date on which the inspection visit will take place. |
● | The inspection visit takes place on the scheduled date at our offices. The visit includes review of information, interviews with officers and additional requests for information. The visit is generally conducted in a fashion that permits dialogue between us and those officers of the CNBV conducting the review. |
● | Once the inspection visit is completed, the CNBV prepares an official report, which includes observations arising from the inspection visit regarding regulations or internal processes. These observations may require answers to specific questions and may result in additional information requests. In addition, the official report may require us to take corrective actions and provide a timetable for their implementation. |
● | We are entitled to respond to the observations set forth in the CNBV’s official report, including by expressing our disagreement with conclusions reached by the CNBV. |
● | After receipt of our responses, the CNBV issues a final report, setting forth its agreement or disagreement with the responses and the information provided. This final report confirms the conclusion of the termination of the annual inspection process. If we disagree with the CNBV’s conclusions, we are entitled to initiate an administrative or judicial action against any such conclusions. |
Market Risk
General
We are exposed to market risk mainly as a result of the following activities:
● | trading in financial instruments, which involves interest rate, foreign exchange rate, volatility and equity price risks; |
● | engaging in retail banking activities, which involves interest rate risk because a change in interest rates affects interest income, interest expense and customer behavior; |
● | investing in assets or instruments, the returns or accounts of which are denominated in currencies other than the peso, which involves foreign exchange rate risk; and |
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● | all trading and non-trading activities, which involve liquidity risk. |
Primary Market Risks and How They Arise
The primary market risks to which we are exposed are interest rate risk, foreign exchange rate risk, equity price risk and liquidity risk. We are exposed to interest rate risk whenever there is a mismatch between interest rate-sensitive assets and liabilities. Interest rate risk arises in connection with both our trading and non-trading activities. Interest rate risk related to our trading activities primarily results from our investments in short-term Mexican Central Bank bills and notes, cross-currency swaps and sovereign bonds.
We are exposed to foreign exchange rate risk as a result of mismatches between assets and liabilities and off-balance sheet items denominated in different currencies, either as a result of trading or in the normal course of business. Our principal non-trading currency exposure is the U.S. dollar, which, as mandated by our policies, is hedged to the Mexican peso within established limits. Our exposure to trading-related foreign exchange risk is based on our positions in bonds and currency swaps.
We are also exposed to liquidity risk. Market depth is the main liquidity driver in our trading portfolio, even though our policy is to trade the most liquid assets. Our liquidity risk also arises in non-trading activities, due to the maturity gap between assets and liabilities mostly in our retail banking business.
We use derivatives for both trading and non-trading activities. Trading derivatives are used to eliminate, reduce or modify risk in trading portfolios (primarily interest rate and foreign exchange risk) and to provide financial services to customers. Our principal counterparties (in addition to customers) for this activity are financial institutions and clearinghouses, such as the Mexican Derivatives Exchange. Our principal derivative instruments include foreign exchange forwards, cross-currency swaps and interest rate swaps. We also use derivatives in non-trading activity in order to manage the interest rate risk and foreign exchange risk arising from asset and liability management activity.
Market Risk Management Policies
The Market Risk Management Department within the Comprehensive Risk Management Unit is responsible for recommending the market risk management policies to be implemented by us, by establishing the parameters for measuring risks and delivering reports, analyses and evaluations to senior management, to the Comprehensive Risk Management Committee and to the Board of Directors of Banco Santander México.
The measurement of market risk quantifies the potential change in the value of our positions as a result of changes in market risk factors.
When significant risks are identified, they are measured and assigned limits with the aim of ensuring adequate control. The risk is measured from a comprehensive perspective through a combination of the methodology applied to trading portfolios and the methodology applied to the management of assets and liabilities.
Trading Portfolios
To measure risks using a comprehensive approach, we follow the VaR method, which is defined as the statistical estimate of the potential loss of value of a specific position in a specific period of time and with a specific level of confidence. VaR is a universal measure of the exposure levels of the various risk portfolios. It helps compare the risk levels among different instruments and markets by expressing the exposure level of each portfolio through a unique figure in economic units.
VaR is calculated using the historical simulation method, based on full valuation with 521 scenarios, a one-day horizon and a confidence level of 99%.
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Furthermore, we perform monthly simulations of the losses or gains from the portfolios through revaluations under different scenarios (Stress Tests). These simulations are generated in two ways:
● | by applying to the risk factors percentage changes observed in a given historical period that includes significant market turbulence; and |
● | by applying to the risk factors changes that depend on the volatility of each risk factor. |
We perform back-testing every month to compare the daily losses and gains that would have occurred if the same positions had been maintained, considering only the change in value due to market movements, against the calculation of VaR, which enables our models to be calibrated. Although they are prepared monthly, these reports include tests for all of the days.
For further information about our methodologies, see Note 48 to our audited financial statements included elsewhere in this Report.
The table below presents our portfolios as of December 31, 2021 and 2022:
| | | | | | | | | | | | | | |
| | At December 31, |
| |||||||||||
| | 2021 | | 2022 |
| |||||||||
| | VaR | | | Percentage of net | | | VaR | | | Percentage of net |
| ||
|
| (thousands of pesos) |
|
| capital (%) |
|
| (thousands of pesos) |
|
| capital (%) |
| ||
Trading desks |
| Ps. | 41,174.20 | | | 0.02% | | | Ps. | 41,463.36 | | | 0.03% | |
Market Making |
|
| 38,812.15 | |
| 0.02% | | |
| 37,197.15 | |
| 0.03% | |
Proprietary Trading |
|
| 8,603.44 | |
| 0.01% | | |
| 22,007.12 | |
| 0.02% | |
Risk factor |
|
|
| |
|
| | |
|
| |
|
| |
Interest Rate |
|
| 40,192.43 | |
| 0.02% | | |
| 38,589.74 | |
| 0.03% | |
Foreign Exchange |
|
| 13,116.96 | |
| 0.01% | | |
| 18,623.17 | |
| 0.01% | |
Equity |
|
| 429.17 | |
| 0.00% | | |
| 1,326.94 | |
| 0.00% | |
The average VaR (based on month-end amounts) in 2022 was:
| | | | | | | |
| | VaR | | | Percentage of |
| |
|
| (thousands of pesos) |
|
| net capital (%) |
| |
Trading desks | | Ps. | 41,429.48 | |
| 0.03% | |
Market Making | |
| 41,325.21 | |
| 0.03% | |
Proprietary Trading | |
| 15,064.11 | |
| 0.01% | |
Risk factor | |
|
| |
|
| |
Interest Rate | |
| 38,622.78 | |
| 0.03% | |
Foreign Exchange | |
| 14,705.12 | |
| 0.01% | |
Equity | |
| 1,177.83 | |
| 0.00% | |
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The risk performance of our trading portfolio with regard to trading activity in financial markets during 2022, measured by daily VaR in millions of pesos, is shown in the following graph.
The above graph shows daily VaR during 2022, the levels of VaR for the majority of 2022 remained below the limit of U.S.$10 million (approximately Ps.208 million).
In 2022, the average daily VaR of the Bank’s market trading operations was Ps.41 million, as compared to Ps.50 million in 2021. In 2022, the changes in VaR were mainly due to changes in the interest rate risk factor and foreign exchange risk factor as a result of our trading book’s strategy. VaR modeling did not change during 2022. At the end of December 2022, VaR was Ps.41 million.
During the first half of 2022, the average daily total VaR was Ps.43 million, the VaR stayed in levels between Ps.26 million and Ps.103 million as a result of the interest rate increase expectations and foreign exchange volatility. The aforementioned VaR volatility is mainly a result of the Russia-Ukraine conflict. Furthermore, during the second semester of 2022, the Mexican Central Bank aggressively increased the interest rates to target the high inflation levels and did not lower the interest rates levels for the remainder of 2022. As a result, the average daily total of VaR was Ps.38 million, whilst the VaR stayed at levels between Ps.25 million and Ps.57 million.
The histogram below compares the distribution of risk in terms of daily VaR between 2021 and 2022. In 2021, the levels of VaR remained between Ps.24 million and Ps.60 million on 81% of the days for which they were calculated. Higher values greater than Ps.60 million represented 19% of the period. In 2022, the levels of VaR remained between Ps.25 million and Ps.60 million on 97% of the days for which they were calculated. Higher values greater than Ps.60 million represented 3% of the period.
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Risk Histogram
Stress Tests
Below we present the different stress test scenarios based on different hypotheticals calculated for our trading book.
Probable Scenario
This scenario was defined based on movements derived from a standard deviation, with respect to risk factors that have an influence on the valuation of financial instruments included in our trading book for each period. In summary, the movements applied to each risk factor were as follows:
● | Interest rate (IR), volatility (Vol) and Exchange rate (FX) risk factors were increased by one standard deviation. |
● | Equity risk factors (EQ) were decreased by one standard deviation. |
The following table displays the possible gains (losses) for our trading book at the end of each quarter in 2022, 2021 and 2020, in millions of pesos, according to this stress scenario:
| | | | | | | | | | | | | | | | |
|
| As of |
|
| As of |
|
| As of |
|
| As of |
| ||||
| | March 31 | | | June 30 | | | September 30 | | | December 31 |
| ||||
| | (Millions of pesos) |
| |||||||||||||
2022 | | Ps. | 20 | | | Ps. | (9) | | | Ps. | 1 | | | Ps. | (14) | |
2021 | |
| (13) | | | | 16 | | | | (6) | | | | (6) | |
2020 | |
| (29) | | | | (41) | | | | (53) | | | | (5) | |
Possible Scenario
Under this scenario, risk factors were modified by 25%. In summary, the movements applied to each risk factor were as follows:
● | Risk factors: IR, Vol and FX were multiplied by 1.25 (they were increased by 25%). |
● | Risk factors EQ were multiplied by 0.75 (they were decreased by 25%). |
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The following table shows the possible profits (losses) for Banco Santander México’s trading book at the end of each quarter in the years presented, in millions of pesos, under this stress scenario:
| | | | | | | | | | | | | | | | |
|
| As of |
|
| As of |
|
| As of |
|
| As of |
| ||||
| | March 31 | | | June 30 | | | September 30 | | | December 31 |
| ||||
| | (Millions of pesos) |
| |||||||||||||
2022 | | Ps. | 1,656 | | | Ps. | (415) | | | Ps. | 568 | | | Ps. | (223) | |
2021 | |
| (145) | | | | 459 | | | | 88 | | | | (734) | |
2020 | |
| (141) | | | | (545) | | | | (1,303) | | | | (154) | |
Remote Scenario
Under this scenario, risk factors were modified by 50%. In summary, the modifications applied to each risk factor were as follows:
● | Risk factors IR, Vol and FX were multiplied by 1.50 (i.e., they were increased by 50%). |
● | Risk factors EQ were multiplied by 0.5 (i.e., they were decreased by 50%). |
The following table shows the possible profits (losses) for our trading book at the end of each quarter in the years presented, in millions of pesos, pursuant to this stress scenario:
| | | | | | | | | | | | | | | | |
|
| As of |
|
| As of |
|
| As of |
|
| As of |
| ||||
| | March 31 | | | June 30 | | | September 30 | | | December 31 |
| ||||
| | (Millions of pesos) |
| |||||||||||||
2022 | | Ps. | 3,522 | | | Ps. | (841) | | | Ps. | 1,854 | | | Ps. | (404) | |
2021 | |
| 281 | | | | 1,722 | | | | 1,210 | | | | (1,185) | |
2020 | |
| (160) | | | | (883) | | | | (2,707) | | | | (46) | |
Assets and Liabilities Management (Banking Books)
Our retail banking activities generate significant balance sheet amounts. Our ALCO is responsible for determining guidelines for managing risk with respect to financial margin, net worth and long-term liquidity, which must be monitored in the different retail portfolios. The ALCO reports to our senior management. Under this approach, our finance senior management is responsible for executing the strategies and policies established by ALCO in order to modify the risk profile of the commercial balance sheet.
The ALCO adopts investment strategies and hedges to keep these sensitivities within the target range and is responsible for the management of interest rate risk, long-term liquidity risk and capital structure. As of the date of this Report, the foreign exchange risk in our banking books is managed and we intend to maintain the foreign exchange risk in the banking books below established levels. Interest rate risk is the possibility of suffering losses as a consequence of the impact on the asset and liability structure from fluctuations in market interest rates. When quantified, interest rate risk is our exposure to movements in the interest rate curves.
As part of corporate activities, we analyze the interest rate sensitivity of the net interest margin, or NIM, and market value of equity, or MVE, of the different balance sheet headings against interest rate variations. This sensitivity derives from the maturity and interest rate repricing gaps for every asset and liability. The analysis is based on the classification of each balance line sensitive to interest rates over time, as a function of their amortization dates, maturity or contractual modification of the applicable interest rate.
The MVE is the net present value of the projected future flows of the financial assets and liabilities in the banking book. We monitor the exposure of MVE to changes in interest rates by measuring the 1% MVE sensitivity, which is an estimate of the impact on MVE from a parallel movement of 100 basis points in market interest rates.
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The NIM is the difference between the return on assets and the financial cost of financial liabilities in the banking book in a one-year period. We monitor the exposure of NIM to changes in interest rates by measuring the 1% NIM sensitivity, which is an estimate of the impact on NIM, in a one-year period, from a parallel movement of 100 basis points in market interest rates. The impact on NIM from changes in interest rates is reflected in profit and loss accounts and balance sheet quality.
The 1% NIM sensitivity and 1% MVE sensitivity measures are complementary: while the 1% MVE sensitivity measure estimates the exposure of our assets and liabilities to fixed rates, the 1% NIM sensitivity measure estimates the exposure of the assets and liabilities to variable rates. As a result, if a financial instrument has a high 1% MVE sensitivity, it would have a low 1% NIM sensitivity, and if a financial instrument has a low 1% MVE sensitivity, it would have a high 1% NIM sensitivity.
We use a sensitivity analysis to measure the interest rate risk of local and foreign currency (not included in the trading portfolios). We perform a simulation of scenarios, which are calculated as the difference between the present value of the flows in the chosen scenario (a curve with a parallel movement of 100 basis points for high volatility currencies, and 25 basis points for low volatility currencies, considering both an increase and a decrease in rates) and their value in the base scenario (current market).
We have also established limits in regard to the maximum loss which these interest rate movements could impose on the economic value, MVE sensitivity, (Ps.4,250 million in local currency and U.S.$150 million in foreign currency) and net financial income, NIM sensitivity (Ps.1,500 million in local currency and U.S.$50 million in foreign currency) in one year. The Comprehensive Risk Management Committee approves the NIM and MVE sensitivity limits on an annual basis. These limits are consistent with our risk policies and with our financial planning. MVE and NIM limit consumption represents the amount of interest rate risk present in the banking books at any given time relative to the above mentioned sensitivity limits.
Although the limit consumption metrics are complementary, they are not directly correlated. A change in interest rates has opposite directional impacts on market consumption levels of these metrics, but the amount of the impact may differ. For this reason, the consumption of limits could be similar. Although having similar limit consumption on both measures does not necessarily imply that interest rate risk management is optimized or balanced, setting limits on both sensitivities does help ensure that management does not create interest rate exposure which could compromise the MVE or NIM.
261
The following chart shows our NIM and MVE limit consumption for 2019 to 2022 at year-end as well as for each month in 2022.
In 2022, MVE sensitivity had a maximum of 58% in December and a minimum of 18% in July. While NIM sensitivity had a maximum of 33% in April and a minimum of 17% in March. Both metrics were affected by interest rates conditions and balance composition.
The internal risk units propose risk methodology and risk model changes to the Comprehensive Risk Management Committee. The Comprehensive Risk Management Committee is responsible for approving, among other things, (i) methodologies to identify, measure, monitor, limit, control, inform and disclose the different types of risks to which we are exposed; (ii) models, parameters and scenarios used to measure and control risks and (iii) new transactions and services that involve risks. This Committee holds monthly meetings and monitors that transactions are in line with the objectives, policies and procedures approved by the CNBV’s guidelines.
On an annual basis, the CNBV and Mexican Central Bank carry out an inspection visit to verify that we have complied with prudential rules established by CNBV regarding the comprehensive management of risk for credit institutions. The agenda of the inspection visit includes a review of the functions of the Comprehensive Risk Management Committee. Risk methodology and risk model validations and approvals are also reviewed as part of this inspection.
Liquidity Gap
The following table shows the liquidity gap of our assets and liabilities of different maturities as of December 31, 2022. The reported amounts include cash flows from interest on fixed and variable rate instruments.
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The interest on variable rate instruments is determined using the forward interest rates for each period presented:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
|
| Total |
|
| 0-1 months |
|
| 1-3 months |
|
| 3-6 months |
|
| 6-12 months |
|
| 1-3 years |
|
| 3-5 years |
|
| >5 years |
|
| Not Sensitive |
| |||||||||
| | (Millions of pesos) |
| |||||||||||||||||||||||||||||||||
Money Market | | Ps. | 134,410 | | | Ps. | 51,335 | | | Ps. | - | | | Ps. | - | | | Ps. | - | | | Ps. | - | | | Ps. | - | | | Ps. | - | | | Ps. | 83,075 | |
Loans | | | 1,156,553 | | | | 75,674 | | | | 118,921 | | | | 99,078 | | | | 140,331 | | | | 310,763 | | | | 145,584 | | | | 232,864 | | | | 33,338 | |
Trade Finance | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
Intragroup | | | 4,287 | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 4,287 | |
Securities | | | 606,595 | | | | 10,347 | | | | 69,040 | | | | 1,550 | | | | 16,256 | | | | 137,928 | | | | 149,530 | | | | 42,434 | | | | 179,510 | |
Permanent | | | 12,794 | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 12,794 | |
Other Balance Sheet Assets | | | 2,830,134 | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 2,830,134 | |
Total Balance Sheet Assets | | | 4,744,773 | | | | 137,356 | | | | 187,961 | | | | 100,628 | | | | 156,587 | | | | 448,691 | | | | 295,114 | | | | 275,298 | | | | 3,143,136 | |
Money Market | | | (235,631) | | | | (126,156) | | | | (667) | | | | (1,199) | | | | (1,322) | | | | (467) | | | | - | | | | - | | | | (105,819) | |
Deposits | | | (852,726) | | | | (255,400) | | | | (38,223) | | | | (41,931) | | | | (24,700) | | | | (69,164) | | | | (53,900) | | | | (369,408) | | | | - | |
Trade Finance | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
Intragroup | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
Long-Term Funding | | | (234,698) | | | | (7,557) | | | | (16,327) | | | | (27,461) | | | | (44,947) | | | | (59,249) | | | | (38,701) | | | | (11,091) | | | | (29,365) | |
Equity | | | (166,838) | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | (166,838) | |
Other Balance Sheet Liabilities | | | (2,794,488) | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | (2,794,488) | |
Total Balance Sheet Liabilities | | | (4,284,381) | | | | (389,113) | | | | (55,217) | | | | (70,591) | | | | (70,969) | | | | (128,880) | | | | (92,601) | | | | (380,499) | | | | (3,096,510) | |
Total Balance Sheet Gap | | | 460,392 | | | | (251,757) | | | | 132,744 | | | | 30,037 | | | | 85,618 | | | | 319,811 | | | | 202,513 | | | | (105,201) | | | | 46,627 | |
Total Off-Balance Sheet Gap | | | 104,840 | | | | (20,129) | | | | (987) | | | | 2,642 | | | | 2,943 | | | | 4,516 | | | | 224 | | | | 3,639 | | | | 111,991 | |
Total Structural Gap | | | - | | | | (271,886) | | | | 131,757 | | | | 32,679 | | | | 88,561 | | | | 324,327 | | | | 202,737 | | | | (101,562) | | | | 158,618 | |
Accumulated Gap | | | - | | | | (271,886) | | | | (140,129) | | | | (107,450) | | | | (18,889) | | | | 305,438 | | | | 508,175 | | | | 406,613 | | | | 565,231 | |
Interest Rate Risk Profile
The table below shows the distribution of interest rate risk by maturity as of December 31, 2022. The reported amounts include estimated interest on fixed and variable rate instruments. Interest on variable rate instruments is determined using the rate in effect as of the balance sheet date for the first scheduled interest payment and amounts determined based on the contractual spread for each period thereafter:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
|
| Total |
|
| 0-1 months |
|
| 1-3 months |
|
| 3-6 months |
|
| 6-12 months |
|
| 1-3 years |
|
| 3-5 years |
|
| >5 years |
|
| Not Sensitive |
| |||||||||
| | (Millions of pesos) |
| |||||||||||||||||||||||||||||||||
Money Market | | Ps. | 130,928 | | | Ps. | 47,853 | | | Ps. | - | | | Ps. | - | | | Ps. | - | | | Ps. | - | | | Ps | - | | | Ps. | - | | | Ps. | 83,075 | |
Loans | | | 1,156,553 | | | | 457,396 | | | | 62,232 | | | | 47,152 | | | | 72,844 | | | | 191,785 | | | | 105,972 | | | | 185,834 | | | | 33,336 | |
Trade Finance | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
Intragroup | | | 4,287 | �� | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 4,287 | |
Securities | | | 606,595 | | | | 20,336 | | | | 74,919 | | | | 13,451 | | | | 16,256 | | | | 130,150 | | | | 146,119 | | | | 25,853 | | | | 179,511 | |
Permanent | | | 12,794 | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 12,794 | |
Other Balance Sheet Assets | | | 2,830,134 | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 2,830,134 | |
Total Balance Sheet Assets | | | 4,741,291 | | | | 525,585 | | | | 137,151 | | | | 60,603 | | | | 89,100 | | | | 321,935 | | | | 252,091 | | | | 211,687 | | | | 3,143,137 | |
Money Market | | | (232,149) | | | | (126,156) | | | | (70) | | | | (33) | | | | (52) | | | | (18) | | | | - | | | | - | | | | (105,819) | |
Deposits | | | (852,716) | | | | (282,371) | | | | (30,164) | | | | (30,052) | | | | (103,999) | | | | (203,423) | | | | - | | | | (202,705) | | | | - | |
Trade Finance | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
Intragroup | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
Long-Term Funding | | | (234,698) | | | | (75,556) | | | | (6,376) | | | | (11,100) | | | | (32,087) | | | | (45,344) | | | | (24,593) | | | | (10,276) | | | | (29,365) | |
Equity | | | (166,838) | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | (166,838) | |
Other Balance Sheet Liabilities | | | (2,794,488) | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | (2,794,488) | |
Total Balance Sheet Liabilities | | | (4,280,889) | | | | (484,083) | | | | (36,610) | | | | (41,185) | | | | (136,138) | | | | (248,785) | | | | (24,593) | | | | (212,981) | | | | (3,096,510) | |
Total Balance Sheet Gap | | | 460,404 | | | | 41,502 | | | | 100,541 | | | | 19,418 | | | | (47,038) | | | | 73,150 | | | | 227,498 | | | | (1,294) | | | | 46,627 | |
Total Off-Balance Sheet Gap | | | 111,813 | | | | 134,000 | | | | 1,336 | | | | 2,524 | | | | 9,324 | | | | (2,520) | | | | (117,351) | | | | (11,824) | | | | 96,324 | |
Total Structural Gap | | | - | | | | 175,502 | | | | 101,877 | | | | 21,942 | | | | (37,714) | | | | 70,630 | | | | 110,147 | | | | (13,118) | | | | 142,951 | |
Accumulated Gap | | | - | | | | 175,502 | | | | 277,379 | | | | 299,321 | | | | 261,607 | | | | 332,237 | | | | 442,384 | | | | 429,266 | | | | 572,217 | |
Market Risk Limits
The Comprehensive Risk Management Committee establishes market risk limits annually to accommodate senior management’s appetite for risk and to comply with the desired risk/return ratio (on a consolidated basis, for each business unit and for each type of risk). The business units must request any subsequent limit modification from the Comprehensive Risk Management Committee through the Comprehensive Risk Management Unit. This level includes trading and investment portfolio activities, balance sheet management and strategic positions (classified in accordance with business intentions).
Our market risk limits are based on each of our portfolios and books. The limits structure is applied to control exposure and establish the total risk applicable to the business units.
We establish market risk limits for:
Trading Books:
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VaR
Loss Trigger
Stop Loss
Interest Rate equivalent amount
Equity Delta
Fx Open positions
Banking Books: Interest Rate Sensitivity Net Interest Margin (NIM)
Market Value of Equity (MVE)
For further information about the market risk limits established for our trading and banking books, see Note 48 to our audited financial statements included elsewhere in this Report.
Liquidity Risk
Liquidity risk is associated with our capacity to finance the commitments we undertake at reasonable market prices, and it is important to our ability to carry out our business plans with stable financing sources. Factors that influence liquidity risk may be external, such as a liquidity crisis, or internal, such as an excessive concentration of expirations.
The measures used to control liquidity risk in balance sheet management are the liquidity gap, liquidity ratios, stress scenarios, liquidity horizons and contingency plans. We manage expirations of assets and liabilities, performing oversight of maximum profiles for time lags. This oversight is based on analyses of asset and liability expirations, both contractual and related to management. Liquidity risk is measured in terms of liquidity horizons, periods of time for which a survival horizon is established. A survival horizon is a term of days for which liquid assets are sufficient to fulfill our commitments under different stress scenarios. We target a 90-day survival horizon for local currency and all currency consolidated balance, and a 30-day survival horizon for foreign currency. During 2022, the balance remained above the established limits, and therefore we maintained a sufficient liquidity buffer. The financial management area within our Corporate Activities segment is in charge of executing the actions recommended by ALCO.
Our liquidity risk, including our liquidity management framework and our current liquidity position, is fully described in Note 48 to our audited financial statements included elsewhere in this Report.
Credit Risk
General
Our Credit Committees are internal management committees required by Mexican law that have powers to assist our Board of Directors in fulfilling its oversight responsibilities relating to:
● | Any emerging risks associated with our loan portfolio; |
● | Investments in our portfolio; and |
● | Resolving issues with respect to any of our credit operations. |
In addition to the responsibilities mentioned above, and others expressly delegated by our Board of Directors, our Credit Committees also performs the following functions and duties with full authority to act on behalf of our Board of Directors in these matters:
● | Review and approve any and all amendments or modifications to the requirements, conditions or other provisions relating to the Board of Director’s general authorization of our lending activities; |
264
● | Review memoranda or other reports provided by our senior management concerning our loan portfolio and investment activities; |
● | Periodically review and assess underwriting policies and guidelines; |
● | Periodically review and assess surveillance and loss remediation policies and guidelines, including those relating to insured credits on the “Watch List;” |
● | Periodically review, assess and recommend to our Board of Directors investment policies, criteria, guidelines and strategy for its approval; and |
● | Evaluate our performance on an annual basis and report the results of the evaluation to our Board of Directors. |
The management of credit risk covers the identification, measurement, composition and valuation of aggregated risk and the determination of profitability adjusted to such risk, the purpose of which is to oversee the levels of risk concentration and adjust them to established limits and objectives. We have implemented a policy of selective growth of credit risk and strict treatment of late payments and provisions.
As required under applicable provisions of the Mexican Banking Law and General Rules Applicable to Mexican Banks and pursuant to our internal policies, in connection with each loan (including mortgage and other consumer loans), we apply credit assessment and approval processes undertaken by trained officers and, when applicable, committees that comprise experienced bankers. Furthermore, we maintain systems and personnel that continuously monitor loans, that we believe permit us to react promptly if delinquent conditions are present. Our credit and monitoring personnel is subject to periodic training. Furthermore, we periodically conduct benchmarking against similar systems used by our affiliates.
We manage our credit risk differently for each of our customer segments throughout the three phases of the credit process: admission, follow-up and recovery, as explained below.
Admission
The loans that receive individual treatment (companies, financial institutions and entities) are identified and differentiated from those handled in standardized fashion (consumer and mortgage loans of private individuals and loans to businesses and micro-companies).
In the case of loans to which we apply individual treatment, we have a solvency classification or “rating” system that calculates the probability of non-performance, which enables us to measure the risk associated with each customer from the start of the respective transaction. The customer valuation obtained after analyzing the relevant risk factors in different areas is subsequently adjusted based on the specific characteristics of the transaction (such as guarantee or term).
Standardized risks, given their special characteristics (a large number of transactions involving relatively small amounts) require a different approach that ensures effective treatment and efficient allocation of resources, for which we use automatic decision-making tools, such as expert and credit scoring systems.
Follow-up
Business loans (Corporates, Institutions & SCIB) are subject to our Santander Customer Assessment Note (SCAN). This system determines the policy to be followed in handling risk with companies or groups classified in such category. There are five levels: Do Not Serve, Specialised, Intensive, Proactive and Ordinary. These levels are dynamic and updated periodically. When a company and its loans are being evaluated, the risk analyst must decide whether to classify the company in any of these five levels and to begin monitoring strategy until the relevant objective is accomplished. The SCAN level may be determined
265
either by alert signals, systematic reviews or special initiatives promoted by the Risk Division or Internal Audit Areas. Our Risk Division is divided into nine territories, each of which has a group of risk analysts that are responsible for the follow-up of their portfolios according to the policies described above.
Recovery
Risks that we classify as past due loans based mainly on non-compliance with the relevant payment schedule are assigned to our Recovery Units. Our Recovery Units are fundamental to our management of past due loans and are intended to minimize the final losses we incur. The Recovery Unit performs specialized risk management activities such as restructuring of loans, rescheduling payments or reaching a settlement agreement when the client is sued. We have different risk management activities with respect to (i) business installment loans (principally commercial loans), (ii) revolving SME loans, (iii) mortgage loans, and (iv) credit card and consumer loans.
With respect to business installment loans, we do not have prequalified restructuring programs or schemes. Instead, we negotiate with each debtor, review its capacity to make payments and the possibility of obtaining new guarantees, and seek partial upfront payments as a sign of commitment. Based on this information, we decide whether the debtor qualifies for restructuring. Our success rate with respect to restructured business installment loans is approximately 41%. This percentage is calculated based on the amount of the loans. The time period that this success rate covers is 12 months. This percentage is based on the total amount of renegotiated loans at the time of renegotiation. Restructured business installment loans refer mainly to our renegotiated commercial loans. For additional information on renegotiated loans, see Note 11.f to our audited financial statements included elsewhere in this Report.
With respect to revolving SME loans, restructuring consists of eliminating the revolving characteristic of the credit and transforming it into an installment loan.
We do not have any prequalified restructuring programs or schemes for mortgage loans that have been classified as past due loans mainly due to the notarial and registration costs that such prequalified programs or schemes would entail. Our recovery activities with respect to mortgage loans have resulted in average recoveries of approximately 40% of the principal amount due plus 90 days of accrued interest.
In relation to credit cards and consumer loans that are past due loans based on non-compliance with the relevant payment schedule, we offer restructuring plans that allow us to adjust the payments of our customers to their capacity to make payments and to address their reasons for missing previous payments. These adjustments include reducing the rate and/or extending the period of payment for up to 60 months. The credit card and consumer restructured loans are classified as non-performing when the loan subject to restructuring is either past due or non-performing. Once the loan is classified as non-performing we must see evidence of sustained payment in order to reclassify the loan as performing. Restructuring plans offered to our credit card holders have a recovery rate average of 45%. Six months after restructuring, approximately 19% of consumer loans are current in terms of repayment.
The following table shows the average during the last 60 months (renegotiation vintages from January 2018 to December 2022) of the accumulated amount of restructured loans (performing and non-performing
266
loans) that were classified as non-performing or written-off, as a percentage of the total amount of loans that was renegotiated at different points in time after the renegotiation:
| | | | | | | | | |
| | NPLs and written-off loans |
| ||||||
| | As a % of total renegotiated amount at indicated points in time |
| ||||||
|
| at 6 months |
|
| at 12 months |
|
| at 18 months |
|
Consumer Loans(1) |
|
| |
|
| |
|
| |
Performing at the time of the renegotiation |
| 30% | |
| 41% | |
| 46% | |
Non-performing at the time of the renegotiation |
| 80% | |
| 65% | |
| 59% | |
Total Consumer Loans |
| 40% | |
| 46% | |
| 49% | |
Commercial Loans(2) |
|
| |
|
| |
|
| |
Performing at the time of the renegotiation |
| 21% | |
| 20% | |
| 17% | |
Non-performing at the time of the renegotiation |
| 89% | |
| 85% | |
| 61% | |
Total Commercial Loans |
| 61% | |
| 59% | |
| 43% | |
(1) | Includes credit card and consumer loans. |
(2) | Includes business installment and SME loans. |
Based on the table above, the success rates for renegotiation vintages from January 2018 to December 2022 are as follows:
| | | | | | | | | |
| | Success Rates |
| ||||||
|
| at 6 months |
|
| at 12 months |
|
| at 18 months |
|
Consumer Loans(1) |
|
|
|
|
| |
|
| |
Performing at the time of the renegotiation |
| 70% | |
| 59% | |
| 54% | |
Non-performing at the time of the renegotiation |
| 20% | |
| 35% | |
| 41% | |
Total Consumer Loans |
| 60% | |
| 54% | |
| 51% | |
Commercial Loans(2) |
|
| |
|
| |
|
| |
Performing at the time of the renegotiation |
| 79% | |
| 80% | |
| 83% | |
Non-performing at the time of the renegotiation |
| 11% | |
| 15% | |
| 39% | |
Total Commercial Loans |
| 39% | |
| 41% | |
| 57% | |
(1) | Includes credit card and consumer loans. |
(2) | Includes business installment and SME loans. |
The success rate for mortgages is not presented because renegotiations of mortgage loans are immaterial.
The following table shows point-in-time estimates of the success rates segmented by type of renegotiation, using the 2021 vintage and 2022 vintage performance as of December 31, 2022, to illustrate the different
267
trends in our success rates for loans renegotiated due to concerns about credit (including impaired loans) and loans renegotiated due to factors other than concerns about credit.
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | For the year ended 12/31/2021 | | | For the year ended 12/31/2022 | ||||||||||||||||||
| | | Performing Loans | | | | | | | | | Performing Loans | | | | | | | ||||||
| | | Renegotiated due to | | | | | | | | | | | | Renegotiated due to | | | | | | | | | |
| | | concerns about | | | | | | | | | | | | concerns about | | | | | | | | | |
| | | current or potential | | | Renegotiated due to | | | Impaired | | | | | | current or potential | | | Renegotiated due to | | | Impaired | | | |
|
|
| credit deterioration |
|
| other factors |
|
| Loans |
|
| Total |
|
| credit deterioration |
|
| other factors |
|
| Loans |
|
| Total |
| | | (Millions of pesos) | |||||||||||||||||||||
Commercial | | | 4,889 | | | — | | | 14,041 | | | 18,931 | | | 3,592 | | | — | | | 983 | | | 4,576 |
Mortgages | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — |
Consumer | | | 1,235 | | | — | | | 266 | | | 1,501 | | | 827 | | | | | | 445 | | | 1,272 |
Total | | | 6,125 | | | — | | | 14,307 | | | 20,432 | | | 4,420 | | | — | | | 1,428 | | | 5,848 |
| | | | | | | | | | | | | | | | | | | | | | | | |
NPLs and charge offs | | | at December 31, 2021 (12 months)* | | | at December 31, 2022 (12 months)* | ||||||||||||||||||
Commercial | |
| 20% |
| | — |
| | 91% | | | 73% | | | 2% |
| | — | |
| 9% | |
| 3% |
Consumer | |
| 49% |
| | — |
| | 86% | | | 55% | | | 10% |
| | — | |
| 15% | |
| 12% |
Total | |
| 26% |
| | — |
| | 91% | | | 72% | | | 3% |
| | — | |
| 11% | |
| 5% |
| | | | | | | | | | | | | | | | | | | | | | | | |
Success Rate | |
| at December 31, 2021 (12 months)* |
| | at December 31, 2022 (12 months)* | ||||||||||||||||||
Commercial | |
| 80% |
| | — |
| | 9% | | | 27% | | | 98% |
| | — | |
| 91% | |
| 97% |
Consumer | |
| 51% |
| | — |
| | 14% | | | 45% | | | 90% |
| | — | |
| 85% | |
| 88% |
Total | |
| 74% |
| | — |
| | 9% | | | 28% | | | 97% |
| | — | |
| 89% | |
| 95% |
Success rates of renegotiated loans are reflected in the probability of default of the total portfolio, which includes performing, non-performing and renegotiated loans. In accordance with our allowance for impairment losses methodology, the probability of default is calculated based on observed default frequencies in the consumer and mortgage loan portfolios, and based on ratings in the commercial portfolio.
Renegotiated loans have decreased from 1.4% of the total consumer loan portfolio as of December 31, 2021, to 1.1% as of December 31, 2022. Our probability of default estimates reflect the behavior of our customer mix, which includes renegotiated and non-renegotiated loans, as well as performing and non-performing loans. The net decrease in the percentage of renegotiated loans between December 31, 2021, and December 31, 2022, is attributed to the movements set forth in the table below:
| | | |
|
| % of Total |
|
| | Consumer |
|
| | Loans |
|
Renegotiated Loans at December 31, 2021* |
| 1.4% | |
Collections/repayments on renegotiated loans |
| 0.4% | |
Written-off loans |
| 0.3% | |
Change in consumer loan portfolio |
| 0.0% | |
New renegotiations |
| 0.7% | |
Renegotiated Loans at December 31, 2022 |
| 1.1% | |
* | Our loan renegotiation policy limits renegotiations to once per year up to a maximum of three every five years. |
Counterparty Risk
Within the credit risk, there is a concept that, due to its specific characteristics, it requires a special management: the Counterparty Credit Risk.
Counterparty Credit Risk (CCR) is defined as the risk that may arise from total or partial breach of the financial obligations contracted with the entity. It is a bilateral credit risk, as it may affect both parties of the transaction, and it is uncertain, since it is conditioned by the behavior of markets, which are volatile.
The financial securities that generate this exposure are financial derivatives, repurchase agreements (REPOs) and security lending. The management and control of this type of credit risk is carried out by a specific team with an organizational structure independent from the business teams.
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For the control of the counterparty credit lines, the Equivalent Credit Risk (REC) is used. The REC is the metric that represents the peak exposure or the highest potential future exposure value at a specific time interval and it can be obtained in the following ways:
● | Gross REC: it measures the exposure without considering netting and collateral agreements. It´s obtained at a transaction level and at other levels of aggregation. |
● | Net REC: it measures the exposure considering netting and collateral agreements and personal or financial guarantees. It´s calculated at a netting agreement level and at other levels of aggregation. |
In addition to the Counterparty Risk, there is issuing risk, which is generated by the acquisition and / or direct disposal of public and private instruments of authorized securities and Settlement Risk, also known Herstatt risk for FX trading, which is the risk that is generated in the exchange of securities when one of the parties fails to deliver the securities, committed by contract, having received the amount from the other party.
The control of Counterparty Risk is performed on a daily basis using the Credit Risk Exposure Advanced Management (CREAM), which allows the Bank to know the credit line availability for all counterparties, for any such instruments and their term.
For the process of control for this risk, the Financial Risk Division oversees on a daily basis the compliance with the limits on counterparty credit risks by product, term and other conditions stipulated in the authorization for financial markets. Likewise, it is the responsible for communicating on a daily bases, the limits, consumptions and any incurred deviation or excess.
On a monthly basis, a report is presented to the Risk Management Committee, with respect to the limits for Counterparty Credit Risks, Issuer Risks and current risk levels. In addition, on a monthly basis, a report is presented to the Global Banking Credit Committee and Retail Credit Committee with respect to incurred excesses and transactions with non-authorized customers. Also, on a monthly basis, the Risk Management Committee in presented with the present value of the expected loss for the actual portfolio of derivatives and repos in a base scenario and two other stressed scenarios (LGD and PD).
Currently, Banco Santander México has lines of counterparty credit risk with the following segments: Mexican Sovereign Risk and Domestic Development Banking, Foreign Financial Institutions, Mexican Financial Institutions, Corporations, Companies Banking-SGC, Institutional Banking, Large Enterprises Unit and Project Finance.
Equivalent Net Credit Risk of the lines of Counterparty Credit Risk and Issuer Risk of Banco Santander México as of December 31, 2022, and the fourth quarter average of 2022:
| | | | | |
| | Equivalent Net Credit Risk | |||
| | Fourth quarter 2022 | | | As of December 31, |
| | Average | | | 2022 |
| | (Millions of dollars) | |||
Risk Lines | | | |
|
|
Sovereign Risk, Development Banking and Financial Institutions | | 1,475 | | | 1,250 |
Corporates | | 617 | | | 601 |
Project Finance | | 163 | | | 173 |
Companies | | 171 | | | 173 |
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| | | | | |
| | Mark to Market | |||
| | Fourth quarter 2022 | | | As of December 31, |
| | Average | | | 2022 |
| | (Millions of dollars) | |||
Risk Lines | | | |
|
|
Sovereign Risk, Development Banking and Financial Institutions | | 543 | | | 720 |
Corporates | | (217) | | | (159) |
Project Finance | | (91) | | | (87) |
Companies | | (173) | | | (179) |
| | | | | |
| | Weighted Rating | |||
| | Fourth quarter 2022 | | | As of December 31, |
| | Average | | | 2022 |
Risk Lines | | | |
|
|
Sovereign Risk, Development Banking and Financial Institutions | | 6.7 | | | 6.6 |
Corporates | | 6.7 | | | 6.7 |
Project Finance | | 5.6 | | | 5.6 |
Companies | | 5.7 | | | 5.4 |
The average rating was calculated by weighting internal rating by exposure.
Equivalent Net Credit Risk of the lines of Issuer Risk of the Bank as of December 31, 2022, and the fourth quarter average of 2022:
| | | | | |
| | Equivalent Net Credit Risk | |||
| | Fourth quarter 2022 | | | As of December 31, |
| | Average | | | 2022 |
| | (Millions of dollars) | |||
Risk Lines | | | |
|
|
Sovereign Risk, Development Banking and Financial Institutions | | 22,398 | | | 23,467 |
Corporates | | 12 | | | 12 |
Project Finance | | — | | | — |
Companies | | — | | | — |
The equivalent credit risk lines maximum gross counterparty risk of the Bank as of December 31, 2022, which corresponds to derivative transactions, is distributed depending on the type of derivative:
| | |
|
| Gross REC distribution |
| | As of December 31, 2022 |
Type of Derivative | | |
Rate Derivatives |
| 47.86% |
Exchange Rate Derivatives |
| 51.85% |
Derivatives on bonds |
| 0.00% |
Equity Derivatives |
| 0.29% |
TOTAL |
| 100.00% |
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The expected loss of Banco Santander México as of December 31, 2022, and the fourth quarter average of 2022, of the expected loss of the lines of Counterparty risk are:
| | | | | | ||
| | Expected Loss | |||||
| | Fourth quarter 2022 | | | As of December 31, | ||
| | Average | | | 2022 | ||
| | (Millions of dollars) | |
| | ||
Risk Lines | | | |
|
| ||
Sovereign Risk, Development Banking and Financial Institutions | | 5.10 | | | 4.50 | ||
Corporates | | 6.37 | | | 4.55 | ||
Project Finance | | 1.49 | | | 1.61 | ||
Companies | | 2.28 | | | 2.28 |
The segments of Mexican Financial Institutions and Foreign Financial Institutions are very active counterparties with whom the Bank has current positions of financial instruments with Counterparty Credit Risk. Equivalent Credit Risk is mitigated by netting agreements (ISDA-CMOF) and, in some cases, by collateral agreements (CSA-CGAR) or revaluation agreements with counterparties.
The total collateral received for derivatives transactions as of the end of the fourth quarter of 2022 is as follows:
| | | |
Cash |
| 72.29% | |
Debt issued by the Mexican Government | | 12.48% | |
Debt issued by Sovereigns other than México |
| 15.24% | |
In the event that the credit rating of the Bank is lowered, there would be no impact on the amount of real guarantees that the Bank would have to provide, because the guarantee contracts with a threshold greater than 0 are unilateral in favor of the Institution.
In respect to collateral management in derivatives transactions, counterparty’s positions are valuated according to the frequency established at each collateral agreement. In addition, all credit risk parameters, established at each collateral agreement are considered to obtain the amount of collateral to be delivered or to be received from the counterparty. These amounts, margin calls, will be requested from the counterparty which has the right to receive the collateral, according to the frequency established at the collateral agreement. The counterparty which receives the margin call, has the right to analyze the valuation and it could result on discrepancies to solve. There are two types of margins for derivatives:
● | Variation Margin: refers to collateral delivered by a counterparty to another counterparty in order to meet its obligations under one or more transactions between the parties, as a result of a change in the value of such obligations since the last time such collateral was delivered. |
● | Initial Margin: refers to the collateral received by a counterparty to cover its current and future exposure in the interval between the last receipt of margin and the settlement of positions or the coverage of market risk after a default by the other counterparty. |
The control of wrong-way risk is also performed by the counterparty credit risk team. This risk occurs when the "exposure to a counterparty is adversely correlated with the credit quality of that counterparty", in short it arises when default risk and credit exposure increase together. At Banco Santander México, deals with wrong-way risk receive a special treatment, they are not included in the netting set and must have an independent CSA, so the exposure is limited.
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Operational Risk
Operational risk is defined as the risk of loss due to inadequate or failed internal processes, personnel or internal systems or due to external events. This definition includes events that may occur as a result of legal or regulatory risk, but excludes those that occur as a result of strategic risks and reputational risks.
The operational risk management has as its main goal to contain or reduce the impact of operational risks through the identification, oversight and control of factors that could trigger loss events.
We have a non-financial risk management unit that is responsible for coordinating and supervise the proper implementation of policies and procedures according to the corporate model defined in Spain, aligned to the regulatory requirements in México by the CNBV. This unit is responsible to submit proposals to the Operational Risk Committee and/or the Comprehensive Risk Management Committee for its approval of the methodologies, models and parameters used to identify measure, limit, report and disclose the operational risk to which we are exposed and the results of embedding under the risk profile. Our non-financial risk unit reports directly to the Deputy General Risk Director in México and to the corporate responsible for operational risk in Spain.
The key processes involved in the model for the management and control of the Operational Risk are summarized as follows:
● | strategic planning and budget; |
● | identification, measurement and assessment of operational risk; |
● | continuous monitoring of Operational Risk profile; |
● | determination of the framework to identify the need of mitigation and risk transfer; and |
● | communication and governance. |
Anti-Money Laundering and Anti-Terrorist Financing
Our AML/CFT Committee (Comité de Comunicación y Control) approves, modifies and ensures the compliance of internal guidelines regarding the prevention, detection and reporting of money-laundering transactions, among the following functions:
● | Approves the Bank's risk assessment methodology and notifies the results of said assessment to the Board of Directors. |
● | Is aware of the results obtained by the Internal Audit area. |
● | Establishes and disseminates the criteria for classifying clients according to their degree of risk. |
● | Identifies those clients who, due to their characteristics, are classified as high risk grade. |
● | Establishes and submits for approval the amendments to our internal policies to prevent and detect acts or transactions that may be of illicit origin and may fall within the threshold of Articles 139 quarter and 400 bis of the Mexican Federal Criminal Code (Código Penal Federal) and rules thereunder; |
● | Oversees compliance with our applicable AML/FT policies; |
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● | Evaluates the effectiveness of our policies based on the observed results and determines the necessary remedial measures; |
● | Decides on certain transactions that may fall within the category of unusual transactions, or internal operations and determines if we should report to the authorities; and |
● | Approves anti-money and anti-terrorism laundering training program for Institution’s personnel. |
The AML/CFT Committee is integrated by the Bank’s main control areas, as well as its business segments.
Legal Risk
Legal risk is defined as the potential loss from non-compliance with applicable legal and administrative provisions, the issuance of adverse administrative and court rulings, the imposition of fines and the application of penalties in relation to our transactions.
The following activities are performed in compliance with our Comprehensive Risk Management guidelines:
● | establishment of policies and procedures to analyze legal validity and ensure the proper instrumentation of the legal acts performed; |
● | estimation of the amount of potential losses derived from unfavorable legal or administrative rulings and the possible application of penalties; |
● | analysis of legal acts governed by foreign legal systems; |
● | publication among managerial personnel and employees of legal and administrative provisions applicable to transactions; |
● | performance, at least annually, of internal legal audits; and |
● | maintenance of a historical database relating to judicial and administrative decisions, and their causes and costs, ensuring that those judicial and administrative decisions that result in a loss are registered systematically along with their different types of loss and costs, in accordance with accounting records, and are properly identified with the line or business unit of origin. |
Technological Risk
Technological risk is defined as the potential loss from damages, interruption, alteration or failures derived from the use of or dependence on hardware, software, systems, applications, networks and any other information technology services provided to our customers.
We have developed a model in accordance with the corporate model created by Banco Santander Parent to deal with technological risk. This model is currently integrated into the service and support processes of our corporate technology locations in order to identify, oversee, control and report on the technology risks to which our operations are exposed. This model is intended to prioritize the establishment of control measures that will reduce the probability of risks materializing.
ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
A. Debt Securities
Not applicable.
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B. Warrants and Rights
Not applicable.
C. Other Securities
Not applicable.
D. American Depositary Shares
Fees and Expenses
The holders, the beneficial owners, persons depositing shares or withdrawing deposited securities in connection with the issuance and cancellation of ADSs, and persons receiving ADSs upon issuance or whose ADSs are being canceled, are required to pay the following depositary fees and related charges:
● | a fee of to U.S. $5.00 per 100 ADSs (or fraction thereof) by any person for whom ADSs are issued, including an issuance upon a deposit of shares or a change in the ADS-to-share ratio, or for any other reason, and excluding issuances as a result of a distribution of stock dividends or other free stock or an exercise of rights to purchase additional ADSs; |
● | a fee up to U.S. $5.00 per 100 ADSs (or fraction thereof) by any person for whom ADSs are canceled upon cancellation of such ADSs, including a cancellation of ADs for delivery of deposited shares, upon a change in the ADS-to-share ratio, or for any other reason; |
● | a fee up to U.S. $5.00 per 100 ADSs (or fraction thereof) by any person to whom a distribution of cash dividends or other cash distribution is made, including upon sale of rights and other entitlements; |
● | a fee up to U.S. $5.00 per 100 ADSs (or fraction thereof) by any person to whom a distribution of ADSs is made pursuant to stock dividends or other free stock, or an exercise of rights to purchase additional ADSs; |
● | a fee up to U.S. $5.00 per 100 ADSs (or fraction thereof) by any holder of ADS to whom a distribution of securities other than ADSs or rights to purchase additional ADSs is made, including distribution for spin-off shares; |
● | a fee up to U.S. $5.00 per 100 ADSs (or fraction thereof) by any holder of ADS for depositary services on the applicable record date; |
● | a fee up to U.S. $5.00 per 100 ADSs (or fraction thereof) by any holder of ADS being transferred or by any person to whom ADS are transferred, including upon a registration of the transfer of registered ownership of ADSs, upon a transfer of ADSs into DTC and vice versa, or for any other reason; and |
● | a fee up to U.S. $5.00 per 100 ADSs (or fraction thereof) by any person to whom ADS are delivered pursuant to a conversion from one ADS series to another ADS series, including upon conversion of Partial Entitlement ADSs for Full Entitlement ADSs, upon conversion of Restricted ADSs into freely transferrable ADSs, and vice versa. |
● | taxes (including applicable interest and penalties) and other governmental charges; |
● | cable, telex and facsimile transmission and delivery charges; |
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● | in connection with the conversion of foreign currency, the fees, expenses, spreads, taxes and other charges of the depositary charged by the depositary or its agent, so appointed in connection with such conversion; |
● | any reasonable and customary out-of-pocket expenses incurred in such conversion and/or on behalf of the holders and beneficial owners in complying with currency exchange control or other governmental requirements; and |
● | the fees, charges, costs and expenses incurred by the depositary, the custodian, or any nominee in connection with the ADR program. |
All ADS fees and charges so payable may be waived by the depositary in full or in part and amended from time to time by agreement between the depositary and us. We must pay to the depositary all other fees and charges, and reimburse the depositary for such out-of-pocket expenses, as the depositary and we may agree from time to time.
Direct and Indirect Payments
Our depositary may reimburse us for certain expenses incurred by us in respect of the ADR program established pursuant to our deposit agreement, by making available a portion of the ADS fees charged in respect of the ADR program or otherwise, upon such terms and conditions as the depositary and we agree from time to time. The depositary collects its fees for issuance and cancellation of ADSs directly from investors depositing shares or withdrawing deposited securities in connection with the issuance and cancellation of ADSs, and persons receiving ADSs upon issuance or whose ADSs are being canceled, or for making distributions to investors by deducting those fees from the amounts distributed. The depositary may collect such fee for depositary services by deduction from distributions or by directly billing investors. The depositary may generally refuse to provide services to any holder until the fees and expenses owing by such holder for those services or otherwise are paid.
For the year ended December 31, 2022, we received approximately U.S.$1.2 million in reimbursements from J.P. Morgan Chase Bank, N.A. We did not receive any reimbursements from Citibank, N.A., whom we appointed as depositary effective October 1, 2022.
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PART II
ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
A. Defaults
No matters to report.
B. Arrearages and Delinquencies
No matters to report.
ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS
A. Material Modifications to Instruments
None.
B. Material Modifications to Rights
None.
C. Withdrawal or Substitution of Assets
None.
D. Change in Trustees or Paying Agents
None.
E. Use of Proceeds
Not applicable.
ITEM 15. CONTROLS AND PROCEDURES
A. Disclosure Controls and Procedures
As of December 31, 2022, under the supervision and with the participation of our management, including our disclosure committee, our Chief Executive Officer (CEO) and our Chief Financial Officer (CFO), we performed an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act). There are inherent limitations to the effectiveness of any control system, including disclosure controls and procedures. Accordingly, even effective disclosure controls and procedures can only provide reasonable assurance of achieving their control objectives.
Based on this evaluation, our CEO and CFO concluded that our disclosure controls and procedures were effective as of December 31, 2022 to provide reasonable assurance that the information we are required to disclose in the reports that we file or submit under the Exchange Act is (1) recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms and (2) accumulated and communicated to our management, including our disclosure committee, our CEO and CFO, as appropriate, to allow timely decisions regarding required disclosure.
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B. Management’s Annual Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rule 13a-15(f) under the Exchange Act. Our internal control over financial reporting is a process designed by, or under the supervision of, our CEO and CFO and effected by our Board of Directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Our internal control over financial reporting includes those policies and procedures that:
● | pertain to the maintenance of records that, in reasonable detail, fairly and accurately reflect the transactions and disposition of our assets; |
● | provide reasonable assurance that transactions are recorded as necessary to permit the preparation of financial statements in accordance with generally accepted accounting principles and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and |
● | provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on our financial statements. |
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. In addition, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions or because the degree of compliance with policies or procedures may deteriorate.
Management assessed the effectiveness of our internal control over financial reporting as of December 31, 2022, based on the criteria established in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this assessment, our management concluded that, as of December 31, 2022, our internal control over financial reporting was effective.
The effectiveness of our internal control over financial reporting as of December 31, 2022, has been audited by PricewaterhouseCoopers, S.C., an independent registered public accounting firm, as stated in its report, included with our audited financial statements filed as part of this annual report.
C. Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting that occurred during the period covered by this annual report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
ITEM 16. [RESERVED]
ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT
Our Audit Committee has four members, all of whom are nonexecutive independent directors, as determined in accordance with Article 25 of the Mexican Securities Market Law and our bylaws. All of the members of our Audit Committee also meet the independence criteria set by the NYSE, for foreign private issuers. Our Board of Directors has determined that Fernando Ruiz Sahagún is also an “Audit Committee Financial Expert” as defined by the SEC.
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ITEM 16B. CODE OF ETHICS
Our Board of Directors has approved and adopted our General Code of Conduct, which are a code of ethics that applies to all of our employees, including executive officers, and to our Board members. The current version of our General Code of Conduct is posted and maintained on our website at www.santander.com.mx under the heading “Regulacion / Transparencia /Código de Conducta”. The information contained on our website is not a part of this annual report.
On July 21, 2022, our Board of Directors approved amendments to the General Code of Conduct to incorporate a catalog of ethical principles and corporate rules of conduct that govern the performance of all Bank employees in our General Code of Conduct.
ITEM 16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The following table describes the amounts billed to us by PricewaterhouseCoopers, S.C. for audit and other services performed in fiscal years 2021 and 2022, respectively.
| | | | | | | |
|
| 2021 |
|
| 2022 | ||
| | | (Millions of pesos) | ||||
Audit fees | | Ps. | 82 | | | Ps. | 95 |
Audit-related fees | |
| 17 | | |
| 10 |
Tax fees | |
| — | | |
| — |
Audit Fees
Audit fees correspond to fees for professional services rendered by the principal accountant for the audit of the registrant’s annual financial statements or services that are normally provided by the accountant in connection with statutory and regulatory filings or engagements for those fiscal years. It includes the audit of our annual consolidated financial statements and other services that generally only the independent accountant reasonably can provide, such as comfort letters, statutory audits, consents and assistance with and review of documents filed with the Securities and Exchange Commission.
Audit-Related Fees
Audit-related fees correspond to fees for assurance and related services that are reasonably related to the performance of the audit or review of our consolidated financial statements for fiscal years 2021 and 2022 and not reported under the previous category. These services would include, among others: due diligence related to mergers and acquisitions, accounting consultations and audits in connection with acquisitions, internal control reviews, attest services that are not required by statute or regulation and consultation concerning financial accounting and reporting standards.
Tax Fees
Tax fees are fees billed for professional services for tax compliance and tax advice.
No amounts were billed to us by PricewaterhouseCoopers, S.C. in 2021 or 2022, respectively for services other than audit, audit-related and tax services.
Preapproval Policies and Procedures
The Audit Committee is required to preapprove the audit and non-audit services performed by the Company’s auditors in order to assure that the provision of such services does not impair the audit firm’s independence.
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Each year, the Audit Committee proposes the appointment of the independent auditor to the Board. At that time, the Audit Committee preapproves the audit and audit-related services that the appointed auditors will be required to carry out during the year to comply with the applicable regulation. These services are included in the correspondent audit contracts of the Company with its principal auditing firm.
In addition, all non-audit services provided by the Company’s principal auditing firm or other auditing firms are subject to case-by-case preapproval by the Audit Committee.
All of the audit fees, audit-related fees and tax fees described in this item 16C have been preapproved by the Audit Committee in accordance with these preapproval policies and procedures.
ITEM 16D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES
All of the members of our Audit Committee satisfy the independence requirements of the NYSE applicable to foreign private issuers.
ITEM 16E. PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS
On January 25, 2018, our Board of Directors approved the adoption of a share repurchase program our Share Acquisition and Placement Policy, which was subsequently approved by our shareholders on February 21, 2018. Pursuant to this policy, the Company may repurchase from time to time up to Ps.12,800 million of issued and outstanding Series B shares of the Company (the "Repurchase Program"). The Repurchase Program’s maximum amount is approved on a yearly basis by the Bank’s Shareholders Meeting and has no expiration date. As of December 31, 2022, the Company had repurchased 5,671,453 Series B shares amounting to Ps.130 million (calculated using a price of Ps.22.99 per share, the closing price of our shares on the BMV as of December 30, 2022). During 2022 the Company did not repurchase any shares under the Repurchase Program.
ITEM 16F. CHANGE IN REGISTRANT’S CERTIFYING ACCOUNTANT
None.
ITEM 16G. CORPORATE GOVERNANCE
Our corporate practices are governed by our bylaws (estatutos), the Mexican Securities Market Law, the Mexican Banking Law and the regulations issued by the CNBV and the Mexican Stock Exchange. In addition, our corporate governance practices reflect the Banco Santander Parent corporate governance framework described below.
In December 2012, primarily in response to the requirements of the European Banking Authority, our controlling shareholder, Banco Santander Parent, adopted a corporate governance framework (Marco de Gobierno Interno del Grupo Financiero Santander México). The purpose of the framework is to organize and standardize the corporate governance practices of Banco Santander Parent and its most significant subsidiaries, including us, in order to enhance the ability of Banco Santander Parent to manage the risks arising from its operations around the world.
The three pillars of the framework are (i) an organizational model based on functions subject to internal governance, (ii) terms of reference according to which Banco Santander Parent exercises control and oversight over its subsidiaries and participates in specific decisions at the subsidiary level and (iii) corporate models establishing common guidelines for the management and control of Banco Santander Parent’s subsidiaries, subject to local autonomy considerations. In general, the framework purports to implement organizational and procedural changes rather than mandating particular substantive outcomes. However, in some cases, and subject to the limitations set forth in the framework, the framework states that Banco Santander Parent may require that its subsidiaries make substantive changes or take specific actions. The
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framework enables Banco Santander Parent to participate in the decision-making processes of its subsidiaries by requiring its approval of certain decisions that may have a significant impact on the Santander Group as a whole due to their significance or potential risk, such as decisions relating to mergers and acquisitions, capital structure, dividends and risk appetite, among other things. The framework also requires that a single person at each subsidiary be in charge of each function subject to internal governance and gives Banco Santander Parent the authority to participate in the appointment, evaluation and compensation of each such person.
By its own terms, the framework as a whole is premised on the legal and financial autonomy of the subsidiaries and does not empower Banco Santander Parent to supplant its subsidiaries’ decision-making processes. Moreover, each of the three pillars of the framework is explicitly made subject to local legal requirements. The Board of Directors of our Former Holding Company approved the adoption of this corporate governance framework in July 2013, subject to certain overarching principles:
● | the precedence of applicable laws and regulations and orders of competent authorities over the framework to the extent they are in conflict; |
● | the subordination of the framework to its directors’ duty of loyalty and their obligation to create value for all of our shareholders rather than any particular shareholder or group of shareholders; and |
● | the disclosure of the adoption of the corporate governance framework to the public and to its employees and subsidiaries. |
As a result of the precedence given to local legal requirements in the framework itself and in its Board of Directors’ adopting resolutions, it did not expect that the adoption of the corporate governance framework will affect its ability to comply with applicable corporate governance regulations, including SEC and NYSE rules applicable to foreign private issuers. For example, although one provision of the framework states that it must obtain Banco Santander Parent’s approval for its audit plan and that Banco Santander Parent may request additional audits at its discretion, to the extent that this provision of the framework would prevent our Former Holding Company’s audit committee from fulfilling any of the requirements of applicable SEC or NYSE rules (including, for example, the audit committee’s obligation to be directly responsible for the appointment, compensation, retention and oversight of the work of any registered public accounting firm engaged for the purpose of preparing an audit report), we understand that this provision would be limited so as not to conflict with such requirements due to the precedence given to local legal requirements in the framework and our Former Holding Company adopting resolutions. Similarly, we understand that the authority given to Banco Santander Parent under the framework to approve certain decisions by our Former Holding Company and to approve the compensation of certain persons in charge of functions subject to internal governance are limited by the framework and the adopting resolutions so as not to limit the ability of members of its audit committee to make independent decisions or take independent actions as required by the audit committee independence requirements of applicable SEC and NYSE rules.
In 2015, as a result of the new requirements of the European Central Bank, the Bank of Spain and the regulators in different jurisdictions, Banco Santander Parent established a new corporate governance model for its subsidiaries. Banco Santander México approved the new corporate governance model in January 2016. Such policies were updated, simplified and approved by Banco Santander México’s Board of Directors on October 31, 2019, April 23, 2020, January 28, 2021, April 22, 2021, October 28, 2021, and October 27, 2022, subject to certain overarching principles, such as precedence of applicable laws and regulations over the framework to the extent they are in conflict.
On July 26, 2018 following our merger with the Former Holding Company, our Board of Directors approved the new corporate governance. Banco Santander Parent published an updated and simplified corporate governance model and guidelines for its subsidiaries in 2019, which our Board of Directors approved on October 31, 2019.
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Pursuant to Section 303A.11 of the Listed Company Manual of the NYSE we are required to provide a summary of the significant ways in which our corporate governance practices differ from those required for United States resident companies under the NYSE listing standards. Section 303A of the NYSE Listed Company Manual sets forth certain corporate governance requirements that a company must satisfy to be listed on the NYSE. However, exemptions from many of the requirements are available to foreign private issuers such as us. As a foreign private issuer, we are permitted to, and we will, follow home country practice in lieu of the NYSE corporate governance standards from which we are exempt.
A discussion of the significant differences between the Mexican corporate governance standards that govern our practices and the NYSE standards applicable to U.S. companies follows below. It includes only a brief summary description of our corporate governance practices.
Majority of Independent Directors
Under NYSE Rules, listed companies must have a majority of independent directors. “Controlled companies,” which would include our company if we were a United States issuer, are exempt from this requirement under NYSE Rule §303A.00. Under our bylaws and in accordance with the Mexican Securities Market Law, at least 25% of the members of our Board of Directors must be independent; independence is determined in accordance with Article 22 of the Mexican Banking Law and our bylaws, rather than NYSE standards.
The independence standards in Article 22 of the Mexican Banking Law and our bylaws may not necessarily be consistent with the director independence standards prescribed by the NYSE. Moreover, the definition of “independence” under the Mexican Securities Market Law also differs in some aspects from the NYSE standard and prohibits, among other things, an independent director from being an employee or officer of the company or a stockholder that may have influence over our officers, relevant customers and contractors, as well as certain relationships between the independent director and family members of the independent director.
In accordance with the Mexican Securities Market Law, our shareholders’ meeting is required to make a determination as to the independence of our directors, though such determination may be challenged by the Mexican Banking and Securities Commission. There is no exemption from the independence requirement for controlled companies under Mexican law.
Executive Sessions
Under NYSE Rule §303A.03, non-management directors must meet in regularly scheduled executive sessions without management’s presence. In addition, independent directors should meet alone in an executive session at least once a year. We are exempt from this NYSE requirement. Our non-management directors have not held executive sessions without management in the past, and under our bylaws and applicable Mexican law, they are not required to do so.
Nominating/Corporate Governance Committee
Under NYSE Rule §303A.04, a nominating/corporate governance committee composed entirely of independent directors is required. The committee must have a charter specifying the purpose, duties and evaluation procedures of such committee. NYSE Rule §303A.00 exempts “controlled companies” such as us from these requirements. However, the Mexican Securities Market Law requires the creation of one or more committees that perform audit and corporate practices functions, and each committee must maintain at least three members appointed by the Board of Directors. Each such appointed member must be independent under Mexican law, except solely in respect of the corporate governance committee, where, for corporations controlled by a person or group maintaining 50% or more of the outstanding capital stock like us, the majority of committee members must be independent under Mexican law. Notwithstanding the foregoing, all of the members of our Corporate Governance Committee are independent, as determined in
281
accordance with Mexican law. Mexican law does not require and we do not have a committee charged with nominating directors for election to the Board.
Under our bylaws, the committee that performs corporate practices functions is required to, among other activities, provide opinions to the Board of Directors, request and obtain opinions from independent third-party experts, call shareholders’ meetings, provide assistance to the Board of Directors in the preparation of annual reports and provide an annual report to the Board of Directors.
Compensation Committee
Under NYSE Rule §303A.05, a compensation committee composed entirely of independent directors is required, and it must evaluate and approve the Chief Executive Officer’s compensation and make recommendations to the Board of Directors with respect to non-Chief Executive Officer compensation and incentive-compensation and equity-based plans that are subject to the approval of the Board of Directors and prepare the compensation committee report required by Item 407(e)(5) of Regulation S-K. The committee must have a charter specifying the purpose, duties and evaluation procedures of the committee. NYSE Rule §303A.00 exempts “controlled companies” such as us from these requirements.
The General Rules Applicable to Mexican Banks require Mexican banks (whether listed or not) to have a remuneration committee, which must include at least two members of the board of directors of such bank, one of whom must be independent, as determined in accordance with Mexican law. The purpose, composition, authority and responsibilities of our Remuneration Committee, which reports to the Board of Directors of Banco Santander México, have been established in a set of policies approved by the Board of Directors of Banco Santander México, in accordance with Mexican law.
Audit Committee
Under NYSE Rule §303A.06, listed companies must have an audit committee that satisfies the independence and other requirements of Exchange Act Rule 10A-3. NYSE Rule §303A.07 specifies that the audit committee must have a minimum of three members, all of whom must meet additional NYSE independence standards, and it must have a charter specifying the purpose, duties and evaluation procedures of the committee. Foreign private issuers like us are subject to the basic audit committee requirements in §303A.06, but are exempt from the additional independence and charter requirements in §303A.07. Our audit committee has three members. In order to comply with Rule 10A-3 under the Exchange Act, all of the directors on our Audit Committee are independent, as determined in accordance with Rule 10A-3.
Mexican law requires that listed companies have an audit committee and that all of its members must be “independent” as defined under Mexican law.
Equity Compensation Plans
Under NYSE Rules §3303A.08 and 312.00, equity compensation plans and all material revisions thereto require shareholder approval, subject to limited exemptions. We are exempt from such NYSE requirements. However, under Mexican rules, the adoption and amendment of an equity compensation plan requires shareholder approval, as a means to be permitted to engage in transactions with the issuer without having to conduct public offerings.
Corporate Governance Guidelines
Under NYSE Rule §303A.09, listed companies are required to adopt and maintain corporate governance guidelines addressing, among other things, director qualification standards, director responsibilities, director access to management and independent advisors, management succession and annual performance evaluations of the Board of Directors. Under Mexican rules, corporate governance guidelines
282
are established by the Corporate Governance Committee in accordance with the applicable Mexican legislation, which imposes, among other things, qualification standards for the members of the Board of Directors and of the executive officers, independence of directors and directors’ responsibilities.
Code of Business Conduct and Ethics
Under NYSE Rule §303A.10, a code of business conduct and ethics is required and any waiver for directors or executive officers must be disclosed. Moreover, such code must contain compliance standards and procedures that will facilitate its effective operation. We are exempt from such NYSE requirements. However, we have adopted a code of conduct and ethics, which has been accepted by all of our directors, executive officers and other personnel.
The Bank has a General Code of Conduct that provides policies and procedures to ensure (i) that all employees receive the same opportunities regarding job access and professional promotion and (ii) the absence of discrimination by reason of sex, sexual orientation, race, religion, origin, civil status or social condition. Such Code was authorized by the Board of Directors and the Compliance Committee.
ITEM 16H. MINE SAFETY DISCLOSURE
Not applicable.
ITEM 16I. DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS
Not applicable.
PART III
ITEM 17. FINANCIAL STATEMENTS
We have responded to Item 18 in lieu of this item.
ITEM 18. FINANCIAL STATEMENTS
Financial Statements are filed as part of this annual report. See page F-1.
ITEM 19. EXHIBITS
(a)Index to Audited Financial Statements
| |
Consolidated Financial Statements of Banco Santander México, S.A., Institución de Banca Múltiple, Grupo Financiero Santander México and Subsidiaries | |
Report of PricewaterhouseCoopers, S.C. (PCAOB ID: 1128) | F-2 |
Consolidated Balance Sheets as of December 31, 2021 and 2022 | F-5 |
Consolidated Income Statements for the Years Ended December 31, 2020, 2021 and 2022 | F-6 |
Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2020, 2021 and 2022 | F-7 |
Consolidated Statements of Changes in Total Equity for the Years Ended December 31, 2020, 2021 and 2022 | F-8 |
Consolidated Statements of Cash Flow for the Years Ended December 31, 2020, 2021 and 2022 | F-9 |
Notes to the Consolidated Financial Statements as of December 31, 2021 and 2022 and for each of the three years in the period ended December 31, 2022 | F-10 |
283
(b)List of Exhibits
| ||
Exhibit |
| Description |
1.1 | | |
| | |
2.1 | | |
| | |
2.2 | | |
| | |
2.3 | | |
| | |
4.1 | | |
| | |
8.1* | | |
| | |
12.1* | | |
| | |
12.2* | | |
| | |
13.1* | | |
| | |
13.2* | | |
| | |
14.1* | | |
| | |
101.INS* | | Inline XBRL Instance Document |
| | |
101.SCH* | | Inline XBRL Schema Document |
| | |
101.CAL* | | Inline XBRL Calculation Document |
| | |
101.DEF* | | Inline XBRL Definition Document |
| | |
101.LAB* | | Inline XBRL Labels Document |
| | |
284
101.PRE* | | Inline XBRL Presentation Document |
| | |
104* | | Cover Page Interactive Data File (formatted as Inline XBRL with applicable taxonomy extension information contained in Exhibits 101). |
*Filed with this Report.
We will furnish to the SEC, upon request, copies of any unfiled instruments that define the rights of holders of long-term debt of the Registrant or any of its consolidated subsidiaries.
285
SIGNATURES
The registrant hereby certifies that it meets all of the requirements for filing on Form 20-F and that it has duly caused and authorized the undersigned to sign this Report on its behalf.
| | ||
| BANCO SANTANDER MÉXICO, S.A., INSTITUCIÓN DE BANCA MÚLTIPLE, GRUPO FINANCIERO SANTANDER MÉXICO | ||
| By: | /s/ Felipe FRANCISCO García Ascencio | |
| | Name: | Felipe Francisco García Ascencio |
| | Title: | Chief Executive Officer |
Date: February 28, 2023
286
| | |
Consolidated Financial Statements of Banco Santander México, S.A., Institución de Banca Múltiple, Grupo Financiero Santander México and Subsidiaries |
| |
Report of PricewaterhouseCoopers, S.C. (PCAOB ID 1128) | | F-2 |
Consolidated Balance Sheets as of December 31, 2021 and 2022 | | F-5 |
Consolidated Income Statements for the Years Ended December 31, 2020, 2021 and 2022 | | F-6 |
Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2020, 2021 and 2022 | | F-7 |
| F-8 | |
Consolidated Statements of Cash Flows for the Years Ended December 31, 2020, 2021 and 2022 | | F-9 |
| F-10 |
F-1
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of
Banco Santander México, S. A., Institución de Banca Múltiple,
Grupo Financiero Santander México
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated balance sheets of Banco Santander México, S. A., Institución de Banca Múltiple, Grupo Financiero Santander México and its subsidiaries (the “Company”) as of December 31, 2022 and 2021, and the related consolidated statements of income, of comprehensive income, of changes in total equity and of cash flows for each of the three years in the period ended December 31, 2022, including the related notes (collectively referred to as the “consolidated financial statements”). We also have audited the Company’s internal control over financial reporting as of December 31, 2022, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2022 and 2021, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2022 in conformity with International Financial Reporting Standards as issued by the International Accounting Standards Board. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2022, based on criteria established in Internal Control - Integrated Framework (2013) issued by the COSO.
Basis for Opinions
The Company’s management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in Management’s Annual Report on Internal Control over Financial Reporting appearing under Item 15. Our responsibility is to express opinions on the Company’s consolidated financial statements and on the Company’s internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
F-2
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Critical Audit Matters
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that (i) relates to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Allowance for Impairment Losses – Macroeconomic Factors Impacting the Downside Scenario of the Forward-Looking Analysis
As described in Notes 1, 2 and 11 to the consolidated financial statements, as of December 31, 2022, the Company’s allowance for impairment losses was $21,652 million on total loans and advances to customers held at amortized cost of $819,368 million. Management assesses on a forward-looking basis the expected credit losses (ECL) associated with the Company’s financial assets carried at amortized cost and at fair value recognized through other comprehensive income. The impairment methodology applied depends on whether there has been a significant increase in credit risk. Management considers a financial asset to have experienced a significant increase in credit risk since initial recognition, taking into account different quantitative, qualitative or backstop criteria. If it is determined that a significant change in credit risk has occurred, the ECL is re-evaluated and the credit losses are quantified. Management’s methodology considers statistical models that incorporate numerous estimates and judgments (for example, probability of default, loss given default and segmentation of loans in groups with similar credit risk characteristics, etc.). In determining the probability of default and loss given default, management has performed historical analysis and identified the key macroeconomic factors affecting credit risk and ECL for each financial asset portfolio. The most significant factors that could substantially change the estimated expected credit losses include, (i) Peso / USD exchange rate, given its substantial influence on operations and profitability; (ii) Stock Markets, given it’s considered critical to economic development as it gives companies the ability to quickly access capital from the public; (iii) Investment funds, as an indicator of the country's socio-economic development and therefore in the investors’ confidence; (iv) Consumer Price Index, given its overall relevance for entities’ performance, customers’ purchasing power and economic stability; (v) Loans – Consumer, given its relation to personal income and saving as a source of consumer purchasing power; (vi) Unemployment rates, given its significant effect on customers’ ability to meet contractual obligations; (vii) Gross Domestic Product growth rates, given their significant effect on borrowers’ performance; (viii) Loans - Mortgage, given that change in the real estate market
F-3
have broader economic implications and vice versa; and (ix) Real estate housing prices, given its importance as the measure of the rate at which the prices of residential properties purchased by households are changing over time. The associated impact of these macroeconomic factors on the probability of default and loss given default vary by type of financial asset. Forecasts of these factors (the “base economic scenario”) are provided by the Company’s Research and Public Policy area on a periodic basis. In addition to the base economic scenario, the Company’s Research and Public Policy area also provide other possible scenarios (“upside” and “downside”) along with scenario weightings.
The principal considerations for our determination that performing procedures relating to the macroeconomic factors impacting the downside scenario of the forward-looking analysis of the allowance for impairment losses is a critical audit matter are (i) the significant judgment and estimation by management in determining the macroeconomic factors impacting the downside scenario, (ii) a high degree of auditor judgment, subjectivity, and effort in performing procedures and evaluating management’s estimation of the macroeconomic factors impacting the downside scenario, and (iii) the audit effort involved the use of professionals with specialized skill and knowledge.
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to the Company’s expected credit loss process and the estimation of the allowance for impairment losses, which included controls over the determination of the macroeconomic factors impacting the downside scenario of the forward-looking analysis, and controls over the completeness and accuracy of the data used. These procedures also included, among others, testing management’s process for estimating the allowance for impairment losses by (i) evaluating the appropriateness of the methodology and statistical models used by management to determine the macroeconomic factors impacting the downside scenario of the forward-looking analysis, (ii) evaluating the reasonableness of the macroeconomic factors within the downside scenario of the forward-looking analysis, and (iii) testing the mathematical accuracy of the calculations and the completeness and accuracy of the data used in developing the macroeconomic factors impacting the downside scenario of the forward-looking analysis. Professionals with specialized skill and knowledge were used to assist in evaluating (i) the appropriateness of the methodology and statistical models used, and (ii) the reasonableness of the macroeconomic factors impacting the downside scenario of the forward-looking analysis, which involved considering whether certain macroeconomic factors were consistent with evidence obtained in other areas of the audit, and whether the macroeconomic factors were consistent with historical data.
PricewaterhouseCoopers, S.C.
/s/ Gustavo Vilchis Hernández
Gustavo Vilchis Hernández
Mexico City, Mexico
February 28, 2023
We have served as the Company’s auditor since 2016.
F-4
BANCO SANTANDER MÉXICO, S.A., INSTITUCIÓN DE BANCA MÚLTIPLE, GRUPO FINANCIERO SANTANDER MÉXICO AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 2021 AND 2022
(Millions of Pesos)
| | | | | | | | | | | | | | | | | | | | | |
ASSETS | | | Note | | | 12/31/2021 | | | 12/31/2022 | | | LIABILITIES AND EQUITY | | | Note | | | 12/31/2021 | | | 12/31/2022 |
| | | | | | | | | | | | | | | | | | | | | |
CASH AND BALANCES WITH THE CENTRAL BANK | | | 6 | | | 63,073 | | | 72,815 | | | FINANCIAL LIABILITIES AT FAIR VALUE THROUGH PROFIT OR LOSS: | | | | | | 351,417 | | | 434,112 |
| | | | | | | | | | | | Trading derivatives | | | 10 and 32 | | | 176,678 | | | 231,188 |
| | | | | | | | | | | | Short positions | | | 10 | | | 19,554 | | | 28,762 |
FINANCIAL ASSETS AT FAIR VALUE THROUGH PROFIT OR LOSS: | | | | | | 361,615 | | | 484,987 | | | Deposits from the Central Bank – Repurchase agreements | | | 19 | | | 23,002 | | | 31,055 |
Debt instruments | | | 8 | | | 110,975 | | | 130,249 | | | Deposits from credit institutions – Repurchase agreements | | | 19 | | | 17,846 | | | 22,818 |
Equity instruments | | | 9 | | | 2,764 | | | 4,063 | | | Customer deposits – Repurchase agreements | | | 20 | | | 114,078 | | | 119,769 |
Trading derivatives | | | 10 and 32 | | | 179,390 | | | 228,816 | | | Marketable debt securities | | | 21 | | | 259 | | | 520 |
Loans and advances to credit institutions – Reverse repurchase agreements | | | 7 | | | 58,486 | | | 102,652 | | | | | | | | | | | | |
Loans and advances to customers – Reverse repurchase agreements | | | 11 | | | 10,000 | | | 19,207 | | | | | | | | | | | | |
| | | | | | | | | | | | FINANCIAL LIABILITIES AT AMORTIZED COST: | | | | | | 1,118,145 | | | 1,165,889 |
| | | | | | | | | | | | Deposits from the Central Bank - Repurchase agreements | | | 19 | | | 86,616 | | | 89,753 |
FINANCIAL ASSETS AT FAIR VALUE THROUGH OTHER | | | | | | | | | | | | Deposits from credit institutions | | | 19 | | | 78,182 | | | 65,354 |
COMPREHENSIVE INCOME: | | | | | | 395,829 | | | 315,549 | | | Deposits from credit institutions - Repurchase agreements | | | 19 | | | 5,157 | | | 9,003 |
Loans and advances to customers | | | 11 | | | 4,056 | | | 946 | | | Customer deposits | | | 20 | | | 760,325 | | | 781,607 |
Debt instruments | | | 8 | | | 390,974 | | | 313,906 | | | Customer deposits - Repurchase agreements | | | 20 | | | 17,561 | | | 26,922 |
Equity instruments | | | 9 | | | 799 | | | 697 | | | Marketable debt securities | | | 21 | | | 101,423 | | | 134,393 |
| | | | | | | | | | | | Subordinated liabilities | | | 22 | | | 51,643 | | | 39,384 |
| | | | | | | | | | | | Other financial liabilities | | | 23 | | | 17,238 | | | 19,473 |
FINANCIAL ASSETS AT AMORTIZED COST: | | | | | | 785,108 | | | 860,357 | | | | | | | | | | | | |
Loans and advances to credit institutions | | | 7 | | | 36,492 | | | 40,400 | | | | | | | | | | | | |
Loans and advances to customers | | | 11 | | | 736,997 | | | 797,716 | | | HEDGING DERIVATIVES | | | 12 and 32 | | | 8,162 | | | 4,461 |
Debt instruments | | | 8 | | | 11,619 | | | 22,241 | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | PROVISIONS: | | | 24 | | | 10,789 | | | 12,931 |
HEDGING DERIVATIVES | | | 12 and 32 | | | 11,248 | | | 10,181 | | | Provisions for pensions and similar obligations | | | | | | 7,499 | | | 8,158 |
| | | | | | | | | | | | Provisions for tax and legal matters | | | | | | 2,141 | | | 3,009 |
| | | | | | | | | | | | Provisions for off-balance sheet risk | | | | | | 1,108 | | | 1,539 |
NON-CURRENT ASSETS HELD FOR SALE | | | 13 | | | 773 | | | 3,015 | | | Other provisions | | | | | | 41 | | | 225 |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
INVESTMENTS IN ASSOCIATED ENTITIES | | | 49 | | | 1,380 | | | — | | | LEASE LIABILITIES | | | 15 | | | 5,716 | | | 6,965 |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
TANGIBLE ASSETS | | | 14 | | | 12,620 | | | 13,707 | | | TAX LIABILITIES: | | | | | | 518 | | | 934 |
| | | | | | | | | | | | Current | | | | | | 12 | | | 721 |
| | | | | | | | | | | | Deferred | | | 26 | | | 506 | | | 213 |
RIGHT-OF-USE ASSETS | | | 15 | | | 5,175 | | | 6,264 | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | OTHER LIABILITIES | | | 25 | | | 19,878 | | | 24,675 |
INTANGIBLE ASSETS: | | | | | | 9,411 | | | 10,681 | | | | | | | | | | | | |
Goodwill | | | 16 | | | 1,734 | | | 1,734 | | | | | | | | | | | | |
Other intangible assets | | | 17 | | | 7,677 | | | 8,947 | | | TOTAL LIABILITIES | | | | | | 1,514,625 | | | 1,649,967 |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | SHAREHOLDERS' EQUITY: | | | 29 | | | 165,209 | | | 170,466 |
TAX ASSETS: | | | | | | 21,855 | | | 24,684 | | | Share capital | | | | | | 25,660 | | | 25,660 |
Current | | | | | | 3,744 | | | 22 | | | Accumulated reserves | | | | | | 118,748 | | | 120,698 |
Deferred | | | 26 | | | 18,111 | | | 24,662 | | | Profit for the year attributable to the Parent | | | | | | 20,801 | | | 24,108 |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | VALUATION ADJUSTMENTS: | | | 28 | | | (1,669) | | | (7,074) |
OTHER ASSETS | | | 18 | | | 10,126 | | | 11,181 | | | Financial assets at fair value through other comprehensive income | | | | | | (2,083) | | | (6,637) |
| | | | | | | | | | | | Cash flow hedges | | | | | | 414 | | | (437) |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | TOTAL SHAREHOLDERS’ EQUITY ATTRIBUTABLE TO THE PARENT | | | | | | 163,540 | | | 163,392 |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | NON-CONTROLLING INTERESTS | | | 27 | | | 48 | | | 62 |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | TOTAL EQUITY | | | | | | 163,588 | | | 163,454 |
TOTAL ASSETS | | | | | | 1,678,213 | | | 1,813,421 | | | TOTAL LIABILITIES AND EQUITY | | | | | | 1,678,213 | | | 1,813,421 |
The accompanying notes are an integral part of these consolidated financial statements.
F-5
BANCO SANTANDER MÉXICO, S.A., INSTITUCIÓN DE BANCA MÚLTIPLE, GRUPO FINANCIERO SANTANDER MÉXICO AND SUBSIDIARIES
CONSOLIDATED INCOME STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2020, 2021 and 2022
(Millions of Pesos)
| | | | | | | | | | | | | |
| |
|
| | | Year Ended | | ||||||
|
|
| Note |
|
| 2020 |
|
| 2021 |
|
| 2022 |
|
| | | | | | | | | | | | | |
Interest income calculated using the effective interest method | |
| 33 | |
| 103,977 | |
| 94,045 | |
| 124,096 | |
Other interest and similar income | | | 34 | | | 12,008 | | | 9,067 | | | 14,900 | |
Interest expense and similar charges | |
| 35 | |
| (50,175) | |
| (39,680) | |
| (63,884) | |
NET INTEREST INCOME | | | | |
| 65,810 | |
| 63,432 | |
| 75,112 | |
Dividend income | |
| 36 | |
| 246 | |
| 227 | |
| 186 | |
Income from entities accounted for using the equity method | | | 49 | | | 178 | | | 200 | | | 182 | |
Fee and commission income | |
| 37 | |
| 23,756 | |
| 25,355 | |
| 28,495 | |
Fee and commission expenses | |
| 38 | |
| (6,733) | |
| (8,149) | |
| (9,263) | |
Gains/(losses) on financial assets and liabilities (net) | |
| 39 | |
| 5,984 | |
| 4,883 | |
| 1,024 | |
Exchange differences (net) | | | | | | 19 | | | (35) | | | (7) | |
Other operating income | |
| 41 | |
| 1,651 | |
| 1,740 | |
| 810 | |
Other operating expenses | |
| 41 | |
| (5,213) | |
| (5,206) | |
| (5,286) | |
TOTAL INCOME | | | | |
| 85,698 | |
| 82,447 | |
| 91,253 | |
Administrative expenses: | | | | |
| (30,135) | |
| (30,872) | |
| (33,765) | |
Personnel expenses | |
| 42 | |
| (14,876) | |
| (16,485) | |
| (18,915) | |
Other general administrative expenses | |
| 43 | |
| (15,259) | |
| (14,387) | |
| (14,850) | |
Depreciation and amortization | |
| 14 and 17 | |
| (5,743) | |
| (6,243) | |
| (6,686) | |
Impairment losses on financial assets not at fair value through profit or loss (net): | | | | |
| (21,799) | |
| (19,229) | |
| (16,083) | |
Financial assets at amortized cost | |
| 11 | |
| (21,731) | |
| (19,229) | |
| (16,100) | |
Financial assets at fair value through other comprehensive income | |
| 8 and 11 | |
| (68) | |
| — | |
| 17 | |
Gains/(losses) on modification of financial assets (net) | | | 11 | | | (1,743) | | | — | | | — | |
Impairment losses on other assets (net): | | | | | | | | | | | | | |
Non-current assets held for sale | | | 13 | | | (119) | | | (27) | | | — | |
Provisions (net) | |
| 24 | |
| (974) | |
| (386) | |
| (2,521) | |
Gains/(losses) on disposal of assets not classified as non-current assets held for sale (net) | |
| 44 | |
| 6 | |
| 57 | |
| 4 | |
Gains/(losses) on disposal of non-current assets held for sale not classified as discontinued operations (net) | |
| 13 | |
| 9 | |
| 20 | |
| 70 | |
OPERATING PROFIT BEFORE TAX | | | | |
| 25,200 | |
| 25,767 | |
| 32,272 | |
Income tax | |
| 26 | |
| (6,226) | |
| (4,966) | |
| (8,164) | |
PROFIT FOR THE YEAR | | | | |
| 18,974 | |
| 20,801 | |
| 24,108 | |
Profit attributable to the Parent | | | | |
| 18,974 | |
| 20,801 | |
| 24,108 | |
Profit attributable to non-controlling interests | |
| 27 | |
| — | |
| — | |
| — | |
| | | | | | | | | | | | | |
EARNINGS PER SHARE (pesos) | | | | | | | | | | | | | |
Basic earnings per share | |
| 4 | |
| 2.80 | |
| 3.07 | |
| 3.56 | |
Diluted earnings per share | |
| 4 | |
| 2.80 | |
| 3.06 | |
| 3.55 | |
The accompanying notes are an integral part of these consolidated financial statements.
F-6
BANCO SANTANDER MÉXICO, S.A., INSTITUCIÓN DE BANCA MÚLTIPLE, GRUPO FINANCIERO SANTANDER MÉXICO AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME FOR THE YEARS ENDED DECEMBER 31, 2020, 2021 and 2022
(Millions of Pesos)
| | | | | | | | | | | | | |
| | | Note | | | 2020 | | | 2021 | | | 2022 |
|
| | | | | | | | | | | | | |
PROFIT FOR THE YEAR | | | | |
| 18,974 | |
| 20,801 | |
| 24,108 | |
| | | | | | | | | | | | | |
OTHER COMPREHENSIVE INCOME/(LOSS): | | | | | | | | | | | | | |
| | | | | | | | | | | | | |
Items that will not be reclassified subsequently to the consolidated income statement: | | | | | | | | | | | | | |
Remeasurement of defined benefit obligation for the year | | | 24 | |
| (995) | |
| 25 | |
| (481) | |
Changes in the fair value of equity instruments at fair value through other comprehensive income | | | 28 | | | 126 | | | (76) | | | (18) | |
Changes in the fair value attributable to change in the credit risk of financial liabilities designated at fair value through profit or loss | | | | | | (8) | | | — | | | 3 | |
Income tax | | | 26 | |
| 264 | |
| 16 | |
| 149 | |
| | | | |
| (613) | |
| (35) | |
| (347) | |
| | | | | | | | | | | | | |
Items that may be reclassified subsequently to the consolidated income statement: | | | | | | | | | | | | | |
Financial assets at fair value through other comprehensive income: | | | | | | | | | | | | | |
Valuation adjustments | |
| 28 | |
| 3,565 | |
| (6,724) | |
| (6,705) | |
Amounts reclassified to the consolidated income statement | |
| 28 | |
| (843) | |
| (781) | |
| (41) | |
Income tax | |
| 28 | |
| (1,056) | |
| 1,402 | |
| 2,210 | |
| | | | | | | | | | | | | |
Cash flow hedges: | | | | | | | | | | | | | |
Valuation adjustments | |
| 12 | |
| (376) | |
| 1,394 | |
| (1,224) | |
Amounts reclassified to the consolidated income statement | |
| 12 | |
| (43) | |
| 11 | |
| 8 | |
Income tax | |
| 26 | |
| 126 | |
| (422) | |
| 365 | |
| | | | |
| 1,373 | |
| (5,120) | |
| (5,387) | |
| | | | | | | | | | | | | |
Other comprehensive income/(loss) for the year, net of income tax | | | | |
| 760 | |
| (5,155) | |
| (5,734) | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
TOTAL COMPREHENSIVE INCOME FOR THE YEAR | | | | |
| 19,734 | |
| 15,646 | |
| 18,374 | |
| | | | | | | | | | | | | |
Attributable to the Parent | | | | |
| 19,734 | |
| 15,646 | |
| 18,374 | |
Attributable to non-controlling interests | | | | |
| — | |
| — | |
| — | |
The accompanying notes are an integral part of these consolidated financial statements.
F-7
BANCO SANTANDER MÉXICO, S.A., INSTITUCIÓN DE BANCA MÚLTIPLE, GRUPO FINANCIERO SANTANDER MÉXICO AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN TOTAL EQUITY FOR THE YEARS ENDED DECEMBER 31, 2020, 2021 and 2022
(Millions of Pesos)
| | | | | | | | | | | | | | | | | | | | | | |
|
|
| |
|
| |
|
| Profit |
|
| |
|
| Total Shareholders’ |
|
| |
|
| |
|
| | | Share | | | Accumulated | | | Attributable | | | Valuation | | | Equity Attributable | |
| Non-Controlling | | | Total | |
| | | Capital | | | Reserves | | | to the Parent | | | Adjustments | | | to the Parent | |
| Interests | | | Equity |
|
| | | | | | | | | | | | | | | | | | | | | | |
BALANCES AT January 1, 2020 | |
| 25,660 | |
| 86,674 | |
| 20,381 | |
| 2,043 | |
| 134,758 | |
| 40 | |
| 134,798 | |
| | | | | | | | | | | | | | | | | | | | | | |
Profit for the year | |
| — | |
| — | |
| 18,974 | |
| — | |
| 18,974 | |
| — | |
| 18,974 | |
Other changes in equity: | | | | | | | | | | | | | | | | | | | | | | |
Transfer to Accumulated reserves | |
| — | |
| 20,381 | |
| (20,381) | |
| — | |
| — | |
| — | |
| — | |
Treasury shares | |
| — | |
| (58) | |
| — | |
| — | |
| (58) | |
| — | |
| (58) | |
Paid interests on Subordinated Additional Tier I Capital Notes | |
| — | |
| (676) | |
| — | |
| — | |
| (676) | |
| — | |
| (676) | |
Recognition of equity-settled share-based payments | |
| — | |
| 39 | |
| — | |
| — | |
| 39 | |
| — | |
| 39 | |
Other changes in non-controlling interest | | | — | | | — | | | — | | | — | | | — | | | (3) | | | (3) | |
Other comprehensive income/(loss) for the year, net of income tax | | | — | | | (701) | | | — | | | 1,461 | | | 760 | | | — | | | 760 | |
BALANCES AT December 31, 2020 | |
| 25,660 | |
| 105,659 | |
| 18,974 | |
| 3,504 | |
| 153,797 | |
| 37 | |
| 153,834 | |
| | | | | | | | | | | | | | | | | | | | | | |
Profit for the year | |
| — | |
| — | |
| 20,801 | |
| — | |
| 20,801 | |
| — | |
| 20,801 | |
Other changes in equity: | | | | | | | | | | | | | | | | | | | | | | |
Transfer to Accumulated reserves | |
| — | |
| 18,974 | |
| (18,974) | |
| — | |
| — | |
| — | |
| — | |
Dividends declared | | | — | | | (4,921) | | | — | | | — | | | (4,921) | | | — | |
| (4,921) | |
Treasury shares | |
| — | |
| 138 | |
| — | |
| — | |
| 138 | |
| — | |
| 138 | |
Paid interests on Subordinated Additional Tier I Capital Notes | |
| — | |
| (751) | |
| — | |
| — | |
| (751) | |
| — | |
| (751) | |
Recognition of equity-settled share-based payments | |
| — | |
| (369) | |
| — | |
| — | |
| (369) | |
| — | |
| (369) | |
Other changes in non-controlling interest | | | — | | | — | | | — | | | — | | | — | | | 11 | | | 11 | |
Other comprehensive income/(loss) for the year, net of income tax | | | — | | | 18 | | | — | | | (5,173) | | | (5,155) | | | — | | | (5,155) | |
BALANCES AT December 31, 2021 | |
| 25,660 | |
| 118,748 | |
| 20,801 | |
| (1,669) | |
| 163,540 | |
| 48 | |
| 163,588 | |
| | | | | | | | | | | | | | | | | | | | | | |
Profit for the year | |
| — | |
| — | |
| 24,108 | |
| — | |
| 24,108 | |
| — | |
| 24,108 | |
Other changes in equity: | | | | | | | | | | | | | | | | | | | | | | |
Transfer to Accumulated reserves | |
| — | |
| 20,801 | |
| (20,801) | |
| — | |
| — | |
| — | |
| — | |
Dividends declared | | | — | | | (17,878) | | | — | | | — | | | (17,878) | | | — | | | (17,878) | |
Paid interests on Subordinated Additional Tier I Capital Notes | |
| — | |
| (644) | |
| — | |
| — | |
| (644) | |
| — | |
| (644) | |
Other changes in non-controlling interest | | | — | | | — | | | — | | | — | | | — | | | 14 | | | 14 | |
Other comprehensive income/(loss) for the year, net of income tax | | | — | | | (329) | | | — | | | (5,405) | | | (5,734) | | | — | | | (5,734) | |
BALANCES AT December 31, 2022 | |
| 25,660 | |
| 120,698 | |
| 24,108 | |
| (7,074) | |
| 163,392 | |
| 62 | |
| 163,454 | |
The accompanying notes are an integral part of these consolidated financial statements.
F-8
BANCO SANTANDER MÉXICO, S.A., INSTITUCIÓN DE BANCA MÚLTIPLE, GRUPO FINANCIERO SANTANDER MÉXICO AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 2020, 2021 and 2022
(Millions of Pesos)
| | | | | | | | | | |
|
|
| 2020 |
|
| 2021 |
|
| 2022 |
|
A. CASH FLOWS FROM OPERATING ACTIVITIES: | |
| 13,213 | | | (9,255) | |
| 47,278 |
|
Profit for the year | |
| 18,974 | | | 20,801 | |
| 24,108 | |
Adjustments made to obtain the cash flows from operating activities- | |
| 11,208 | | | 10,229 | |
| 14,481 | |
Depreciation and amortization | |
| 5,743 | | | 6,243 | |
| 6,686 | |
Impairment losses on other assets (net) | | | 119 | | | 27 | | | — | |
(Gains)/losses on disposal of non-current assets held for sale not classified as discontinued operations | |
| (9) | | | (20) | |
| (70) | |
(Gains)/losses on disposal of assets not classified as non-current assets held for sale | |
| (6) | | | (57) | |
| (4) | |
Income tax expense recognized in consolidated income statement | |
| 6,226 | | | 4,966 | |
| 8,164 | |
Income from entities accounted for using the equity method | | | (178) | | | (200) | | | (182) | |
Expense recognized with respect to share-based payments | |
| 84 | | | (54) | |
| 305 | |
Effect of foreign exchange rate changes on Subordinated Additional Tier I Capital Notes | | | (522) | | | 299 | | | 3 | |
Effect of foreign exchange rate changes on cash deposits | |
| (249) | | | (159) | |
| (421) | |
(Gain) on sale of acquisition contracts | | | — | | | (816) | | | — | |
Net (increase)/decrease in operating assets- | |
| (362,106) | | | 144,307 | |
| (132,132) | |
Financial assets at fair value through profit or loss | |
| (226,696) | | | 213,067 | |
| (123,385) | |
Financial assets at fair value through other comprehensive income | |
| (116,184) | | | (47,190) | |
| 72,444 | |
Financial assets at amortized cost | |
| (14,653) | | | (21,842) | |
| (75,359) | |
Other operating assets | |
| (4,573) | | | 272 | |
| (5,832) | |
Net increase/(decrease) in operating liabilities- | |
| 348,847 | | | (181,145) | |
| 147,094 | |
Financial liabilities at fair value through profit or loss | |
| 85,665 | | | (161,573) | |
| 82,695 | |
Financial liabilities at amortized cost | |
| 244,685 | | | (9,596) | |
| 58,622 | |
Other operating liabilities | |
| 18,497 | | | (9,976) | |
| 5,777 | |
Income tax paid | |
| (3,956) | | | (3,674) | |
| (6,459) | |
Dividend income | |
| 246 | | | 227 | |
| 186 | |
| | | | | | | | | | |
B. CASH FLOWS FROM INVESTING ACTIVITIES: | |
| (4,734) | | | (4,705) | |
| (6,763) | |
Payments- | |
| (4,734) | | | (5,288) | |
| (6,763) | |
Tangible assets | |
| (1,663) | | | (2,261) | |
| (2,823) | |
Intangible assets | |
| (2,248) | | | (3,027) | |
| (3,940) | |
Investments in associated entities | | | (823) | | | — | | | — | |
Proceeds- | |
| — | | | 583 | |
| — | |
Sale of acquisition contracts | | | — | | | 583 | | | — | |
| | | | | | | | | | |
C. CASH FLOWS FROM FINANCING ACTIVITIES: | |
| (2,882) | | | 5,821 | |
| (31,194) | |
Payments- | |
| (2,882) | | | (8,089) | |
| (31,194) | |
Dividends paid | |
| — | | | (4,921) | |
| (17,878) | |
Paid principal on Subordinated Additional Tier I Capital Notes | | | — | | | — | | | (10,251) | |
Paid interests on Subordinated Additional Tier I Capital Notes | |
| (917) | | | (1,073) | |
| (919) | |
Purchase of own shares (treasury shares) | | | (58) | | | 135 | | | — | |
Principal and interest paid on lease liabilities | | | (1,907) | | | (2,230) | | | (2,146) | |
Proceeds- | |
| — | | | 13,910 | |
| — | |
Subordinated Additional Tier I Capital Notes | | | — | | | 13,910 | | | — | |
| | | | | | | | | | |
D. EFFECT OF FOREIGN EXCHANGE RATE CHANGES ON FOREIGN CURRENCY CASH DEPOSITS | |
| 249 | | | 159 | |
| 421 | |
E. NET INCREASE/(DECREASE) IN CASH AND BALANCES WITH THE CENTRAL BANK | |
| 5,846 | | | (7,980) | |
| 9,742 | |
F. CASH AND BALANCES WITH THE CENTRAL BANK AT THE BEGINNING OF YEAR | |
| 65,207 | | | 71,053 | |
| 63,073 | |
G. CASH AND BALANCES WITH THE CENTRAL BANK AT THE END OF YEAR | |
| 71,053 | | | 63,073 | |
| 72,815 | |
The accompanying notes are an integral part of these consolidated financial statements.
F-9
BANCO SANTANDER MÉXICO, S.A., INSTITUCIÓN DE BANCA MÚLTIPLE, GRUPO FINANCIERO SANTANDER MÉXICO AND SUBSIDIARIES
Notes to the Consolidated Financial Statements as of
December 31, 2021 and 2022 and for each of the three years
in the period ended December 31, 2022
(in millions of Mexican pesos)
1. Introduction, basis of presentation of the consolidated financial statements and other information
a) Introduction
Banco Santander México, S.A., Institución de Banca Múltiple, Grupo Financiero Santander México (hereinafter, “Banco Santander México”) together with its subsidiaries (hereinafter, the “Bank”) is a subsidiary of Grupo Financiero Santander México, S.A. de C.V. (hereinafter, “the Group”, “Parent” or “Parent company”), which is a subsidiary of Banco Santander, S.A. in Spain (hereinafter, “Banco Santander (Spain)” or “Ultimate Parent”) and holds 96.16% (see Note 3) of its common stock and is regulated by, among others, the Credit Institutions Law (Ley de Instituciones de Crédito), the General Provisions Applicable to Credit Institutions (Disposiciones de Carácter General Aplicables a las Instituciones de Crédito), Regulated Multiple Purpose Finance Entities and Market Participants in Relation to Derivatives Contracts Listed on the Mexican Market issued by the Mexican National Banking and Securities Commission (hereinafter, “CNBV” by its Spanish acronym) and the Mexican Central Bank (hereinafter, “Central Bank”, “Mexican Central Bank” or “Banco de México”).
The shares of the Bank are listed on the Mexican Stock Exchange and on the New York Stock Exchange as American Depositary Shares. The Bank is subject to the supervision and oversight of the CNBV, the Mexican Central Bank and the United States Securities and Exchange Commission (SEC).
The Bank’s main activity is to render banking and credit services under the terms of applicable laws, which services include, among others, reception of deposits, granting of loans, trading of securities and the execution of trust contracts.
Per legal requirements, Banco Santander México has unlimited liability for the obligations assumed and losses incurred by each of its subsidiaries.
The Bank conducts its business through branches and offices located throughout Mexico. The Bank is one of the largest private-sector banks in Mexico. The main office of the Bank is located at Prolongacion Paseo de la Reforma 500, Lomas de Santa Fe, Alvaro Obregon, Ciudad de Mexico, Mexico.
The issuance of the consolidated financial statements was authorized by Felipe García Ascencio, Executive President and Chief Executive Officer (CEO) and Director of the Bank on February 28, 2023. These consolidated financial statements are pending the approval of the Board of Directors and of the ordinary shareholders’ meeting, where they may be modified, based on provisions set forth in the Mexican Corporations Law (Ley General de Sociedades Mercantiles).
COVID-19 pandemic
Near the end of 2019, a new strain of coronavirus denominated SARS-CoV-2 (hereinafter, “COVID-19”) was first reported. In that period, clusters of cases showing the symptoms of a ‘pneumonia of unknown cause’ were identified in Wuhan, the capital of Central China’s Hubei province.
On December 31, 2019, China alerted the World Health Organization (“WHO”) of this new virus and on January 31, 2020, the International Health Regulations Emergency Committee of the WHO declared the outbreak a ‘Public Health Emergency of International Concern’. Since then, COVID-19 progressively
F-10
spread around the world, initially in parts of Asia, from where it then moved to Europe, the United States of America and Latin America, among others. On March 11, 2020, the WHO declared the COVID-19 outbreak to be a pandemic.
In the United States of America and Latin America, the health crisis began later than in Europe, so its impact was greatest at the end of the first quarter of 2020 and there were no clear signs of recovery during 2020.
On November 26, 2021, the WHO declared the "Omicron" variant as a virus of concern, following the advice of the WHO Technical Advisory Group on the Evolution of the Virus. This decision was based on the evidence presented that this variant has several mutations that can have an impact on its behavior, for example, how easily it spreads or the severity of the disease it causes.
COVID-19 has significantly affected the world economy. Countries all over the world responded to the COVID-19 pandemic by imposing a variety of measures trying to contain its expansion and impact, including lockdowns on millions of people, the implementation of mass quarantines and other containment measures, travel restrictions, limiting public gatherings and the temporary suspension of most economic activity. The measures adopted led to a notable decrease in global economic activity, disruption of supply chains, falls in production and demand, which resulted in significant Gross Domestic Product (GDP) falls in the most relevant countries, exchange rate volatility, sharp declines and high volatility in the financial and commodities markets worldwide, among others.
During the COVID-19 pandemic, the Bank’s priority was to protect the health of its employees, customers and shareholders but also to help mitigate the economic and financial impact cause by the health crisis. In this respect, several work streams were activated to find the best possible outcome for customers as well as to preserve the Bank’s strength and solvency while safeguarding the health and safety of its employees.
In 2021, the Bank began a program for the return of its employees to the corporate offices, with the objective of achieving a 50% attendance once the COVID-19 pandemic ended. This program was suspended due to the arrival of the Omicron variant in Mexico in December 2021 and by virtue of safeguarding the health of its employees and business continuity, the Bank reduced attendance in central areas to 25% and canceled face-to-face meetings.
During 2022, the Bank reactivated the program for the return of its employees to the corporate offices, with the objective of a total attendance of 70%, having as a priority to maintain the safeguarding the health of its employees and business continuity. The Bank redesigned the physical space to guarantee the recommended social distance, combined with strict personal hygiene measures.
b) Basis of presentation of the consolidated financial statements
Bank’s Management has a reasonable expectation that the Bank has adequate resources to continue in operational existence for the near future. Thus, the Bank continues preparing the consolidated financial statements on a going concern basis of accounting.
The consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (hereinafter, “IFRS”) as issued by the International Accounting Standards Board (hereinafter, “IASB”) and IFRIC interpretations, which are developed by the IFRS Interpretations Committee (previously the International Financial Reporting Interpretations Committee or IFRIC) and issued after approval by the IASB.
The consolidated financial statements have been prepared on a historical cost basis, except for financial assets and liabilities at fair value through profit or loss (including trading financial derivative instruments), financial assets at fair value through other comprehensive income, hedging financial derivative instruments, non-current assets held for sale and plan assets of defined benefit pension plans, that have been measured
F-11
at fair value at the end of each reporting period, as explained in the accounting policies below (see Note 2).
Historical cost is based on the fair value of the consideration given in exchange for goods and services.
The carrying values of recognized assets and liabilities that are designated as hedged items in fair value hedges that would otherwise be carried at amortized cost are adjusted to recognize changes in the fair values attributable to the risks that are being hedged in effective hedge relationships.
The consolidated financial statements are presented in Mexican pesos. As used in these consolidated financial statements, the term “billion” means one thousand million (1,000,000,000).
The consolidated financial statements filed for Mexican statutory purposes are prepared in accordance with accounting rules and regulations prescribed by the CNBV, as amended, which are hereinafter referred to as Mexican Banking GAAP. Mexican Banking GAAP is composed of Mexican Financial Reporting Standards (“NIF” by its Spanish acronym) as issued by the Mexican Board of Financial Reporting Standards (“CINIF” by its Spanish acronym), which, in turn, are supplemented and modified by specific rules mandated by the CNBV.
Resolutions issued by the CNBV
As of January 1, 2022, new accounting standards issued by the CNBV came into force. The main changes performed to the Mexican Banking GAAP are intended to standardize accounting principles with Mexican Financial Reporting Standards (which in turn have a high level of consistency with IFRS). These changes now allow financial institutions to have comparable financial information in respect with other countries.
As of December 31, 2022, the most significant differences between Mexican Banking GAAP and IFRS are:
a) Allowance for impairment losses
For Mexican Banking GAAP purposes, allowance for impairment losses and provisions for off-balance sheet risk are determined using prescribed formulas that are based primarily on an expected credit loss model. The expected credit loss model is developed by the CNBV using information compiled from the Mexican lending market as a whole, which may differ from the Bank’s expected credit loss model.
In some cases, CNBV can approve the use of internal models to determine the allowance for impairment losses under Mexican Banking GAAP, as an alternative to the regulatory expected credit loss model.
b) Effects of inflation
Mexican Banking GAAP requires the recognition of the comprehensive effects of inflation when an economic environment becomes inflationary, which, for purposes of Mexican Banking GAAP, is indicated by a three-year cumulative inflation rate of approximately 26% or more.
c) Deferred employee profit sharing
Mexican Banking GAAP requires the recognition of the deferred compulsory employee profit sharing effect based on the temporary differences arising between book and tax value of the assets and liabilities.
F-12
d) Consolidation of special purpose entities
Mexican Banking GAAP does not require the consolidation of those special purpose entities created before January 1, 2009 over which control is exercised.
The notes to the consolidated financial statements contain supplementary information to that presented in the consolidated balance sheets, consolidated income statements, consolidated statements of comprehensive income, consolidated statements of changes in total equity and consolidated statements of cash flows. The notes provide, in a clear, relevant, reliable and comparable manner, narrative descriptions and breakdowns of these consolidated financial statements.
New and amended IFRS that are effective for the current year
The following amendments and improvements to IFRS and International Accounting Standards (hereinafter, “IAS”) issued by the IASB are mandatorily effective for the accounting period beginning on January 1, 2022. The adoption of these amendments and improvements have not had any material impact on the disclosures or amounts reported in the consolidated financial statements.
● | Amendments to IAS 16 – Property, Plant and Equipment: Proceeds before Intended Use |
● | Amendments to IAS 37 – Onerous Contracts – Cost of Fulfilling a Contract |
● | Annual Improvements to IFRS Standards 2018-2020 |
● | Amendments to IFRS 3 – Business Combinations |
Amendments to IAS 16 – Property, Plant and Equipment: Proceeds before Intended Use
The amendment to IAS 16 prohibits an entity from deducting from the cost of an item of property, plant and equipment any proceeds received from selling items produced while the entity is preparing the asset for its intended use. It also clarifies that an entity is ‘testing whether the asset is functioning properly’ when it assesses technical and physical performance of the asset. The financial performance of the asset is not relevant to this assessment.
Amendments to IAS 37 – Onerous Contracts – Cost of Fulfilling a Contract
The amendment to IAS 37 Provisions, Contingent Liabilities and Contingent Assets clarifies that the direct costs of fulfilling a contract include both the incremental costs of fulfilling the contract and an allocation of other costs directly related to fulfilling contracts. Before recognizing a separate provision for an onerous contract, the entity recognizes any impairment loss that has occurred on assets used in fulfilling the contract
Annual Improvements to IFRS Standards 2018-2020
● | IFRS 1 First-time Adoption of International Financial Reporting Standards. The amendment provides additional relief to a subsidiary which becomes a first-time adopter later than its parent in respect of accounting for cumulative translation differences. |
● | IFRS 9 Financial Instruments. The amendment clarifies that in applying the 10 per cent test to assess whether to derecognize a financial liability, an entity includes only fees paid or received between the entity (the borrower) and the lender, including fees paid or received by either the entity or the lender on the other’s behalf. |
● | IFRS 16 Leases. The amendment removes the illustration of the reimbursement of leasehold improvements. |
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● | IAS 41 Agriculture. The amendment removes the requirement in IAS 41 for entities to exclude cash flows for taxation when measuring fair value. |
Amendments to IFRS 3 – Business Combinations
The amendment to IFRS 3 updates the references to the Conceptual Framework for Financial Reporting and add an exception for the recognition of liabilities and contingent liabilities within the scope of IAS 37 and Interpretation 21 Levies. The amendments also confirm that contingent assets should not be recognized at the acquisition date.
New and revised IFRS in issue but not yet effective
At the date of authorization of these consolidated financial statements, the following amendments to IFRS had been issued but were not mandatory for annual reporting periods ending on December 31, 2022.
● | Amendments to IAS 1 – Classification of Liabilities as Current or Non-current |
● | Amendments to IAS 1 and IFRS Practice Statement 2 – Disclosure of Accounting Policies |
● | Amendments to IAS 8 – Definition of Accounting Estimates |
● | Amendments to IAS 12 – Deferred Tax related to Assets and Liabilities arising from a Single Transaction |
● | Amendments to IFRS 10 and IAS 28 – Sale or Contribution of Assets between an Investor and its Associate or Joint Venture |
Bank’s Management does not expect any material impact from the adoption of these Amendments.
c) Critical accounting estimates and judgments
IFRS requires that Bank’s Management make certain estimates and utilize certain assumptions to determine the valuation of items included in the consolidated financial statements and to make required disclosures.
As a result of the impact of COVID-19, during 2021 and 2020 the Bank was required to apply a greater degree of judgment in critical estimates due to the evolving nature of the pandemic and limited recent experience of the economic and financial impacts of said event. Bank's Management, using the best information available, has evaluated the potential impacts of the COVID-19 pandemic on the estimates made during 2022, as a result, concluded that the effect of COVID-19 was not significant to the critical accounting estimates.
Although the actual results may differ, Bank’s Management believes that the estimates, assumptions and judgments utilized in preparing the consolidated financial statements and related disclosures were appropriate under the circumstances.
The critical accounting estimates applied are as follows:
- Fair value measurement of financial instruments (see Note 2.d.iii and Note 45.d).
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction in the principal (or most advantageous) market at the measurement date under current market conditions. The most objective and common reference for the fair value of a financial instrument is the price that would be paid for it on an active, liquid and deep market (quoted price or market price). Fair
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value under IFRS is an exit price regardless of whether that price is directly observable or estimated using another valuation technique.
When there is no market price for a given financial instrument, its fair value is estimated on the basis of the price established in recent transactions involving similar instruments and, in the absence thereof, of valuation techniques commonly used by the international financial community, taking into account the specific features of the instrument to be measured and, particularly, the various types of risk associated with it.
In estimating the fair value of an asset or a liability, the Bank takes into account the characteristics of the asset or liability if market participants would consider those characteristics when pricing the asset or liability at the measurement date. Fair value for measurement and/or disclosure purposes in the consolidated financial statements for certain financial instruments is determined on such a basis, except for share-based payment transactions that are within the scope of IFRS 2 Share-based Payment and measurements that have some similarities to fair value but are not fair value, such as value in use defined in IAS 36 Impairment of Assets.
When there is no market price available for an identical instrument, the Bank measures fair value using other valuation techniques that are commonly used by the financial markets that maximize the use of relevant observable inputs and minimize the use of unobservable inputs as explained in Note 2.d.
The availability of observable prices or inputs varies by product and market, and may change over time. The level of judgment from Bank’s Management required in establishing fair value of financial instruments for which there is a quoted price in an active market is minimal. Similarly, there is little subjectivity or judgment required for instruments valued using valuation models that are standard across the industry and where all parameter inputs are quoted in active markets. The level of subjectivity and degree of judgment from Bank’s Management required are more significant for those instruments valued using specialized and sophisticated models and those where some or all of the parameter inputs are not observable.
In making appropriate valuation adjustments, the Bank follows methodologies that consider factors such as liquidity and credit risk (both counterparty credit risk in relation to financial assets and its own credit risk in relation to financial liabilities, which are at fair value through profit or loss).
As of December 31, 2022, no significant reduction exists in observable prices from sources used for the valuation of financial instruments. Given the low market complexity as a rule for the Bank’s portfolios, there have been no significant reclassifications between levels. The Bank monitors the evolution of the financial markets, their liquidity, and the observability conditions of the valuation inputs in order to apply the criteria established in the Bank for the levelling of assets and liabilities measured at fair value.
- Fair value estimates used in disclosures (see Note 2.d.iii and Note 45.d).
For financial reporting purposes, fair value measurements are categorized into Level 1, 2 or 3 according to IFRS 13 Fair Value Measurement based on the degree to which the inputs to the fair value measurements are observable and the significance of the inputs to the fair value measurement in its entirety, which are described as follows:
● | Level 1: inputs that are quoted market prices (unadjusted) in active markets for identical instruments; |
● | Level 2: inputs other than quoted prices included within Level 1 that are observable either directly (i.e., as prices) or indirectly (i.e., derived from prices). This category includes instruments valued using: quoted market prices in active markets for similar instruments; quoted prices for identical or similar instruments in markets that are considered less than active; or other valuation techniques in which all significant inputs are directly or indirectly observable from market data; and |
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● | Level 3: inputs that are unobservable. This category includes all instruments for which the valuation technique includes inputs not based on observable data and the unobservable inputs have a significant effect on the instrument’s valuation. This category includes instruments that are valued based on quoted prices for similar instruments for which significant unobservable adjustments or assumptions are required to reflect differences between the instruments. |
This disclosure is provided in Note 2.d.iii.
For financial instruments measured at amortized cost (which includes, balances with the Central Bank, loans and advances to customers, debt instruments, deposits and short-term and long-term debt issued), the Bank discloses the fair value. This disclosure is provided in Note 45.d; generally, there is no trading activity in these instruments and the fair value determination requires significant judgment from Bank’s Management.
- | Allowance for impairment losses and provisions for off-balance sheet risk (see Note 2.g, Note 8.c, Note 9.c, Note 11.c and Note 24.f). |
The Bank assesses on a forward-looking basis the expected credit losses associated with its financial assets carried at amortized cost and at fair value through other comprehensive income. The impairment methodology applied depends on whether there has been a significant increase in credit risk. The Bank considers a financial asset to have experienced a significant increase in credit risk, since initial recognition, taking into account different quantitative, qualitative or backstop criteria. If it is determined that a significant change in credit risk has occurred, the expected credit losses are re-evaluated and the credit losses are quantified.
The Bank uses the concept of expected credit loss methodology according to IFRS 9 Financial Instruments to quantify the credit losses as further discussed in Note 2.g.
The accounting estimates and judgments related to the allowance for impairment losses and provisions for off-balance sheet risk are a critical accounting estimate for the Bank because the underlying assumptions used to assess the impairment can change from period to period and may significantly affect the Bank’s profit, particularly in circumstances of economic and financial uncertainty. Further, the statistical models incorporate numerous estimates and judgments (for example, Probability of Default, Loss Given Default and segmentation of loans in groups with similar credit risk characteristics, etc.).
Further details about expected credit loss measurement are given in Note 2.g.
As discussed in Note 2.v, deferred tax assets and liabilities include temporary differences, which are identified as the amounts expected to be payable or recoverable on differences between the carrying amounts of assets and liabilities and their related tax bases, tax losses and tax credit carryforwards. These amounts are measured at the tax rates that are expected to apply in the period when the asset is realized or the liability is settled.
During 2020 and 2021, the Bank reassessed its ability to generate future taxable income in relation to the recoverability of deferred tax assets recognized in the consolidated balance sheet. The COVID-19 pandemic introduced new uncertainties, that the Bank considered in its analysis of the recoverability of deferred tax assets, such as depth, severity and duration of the COVID-19 pandemic.
In determining the amount of deferred tax assets to be recognized, the Bank used updated expectations and estimates on projections of future events and trends, which may affect the consolidated financial statements, including a review of the eligible carryforward periods, available tax planning opportunities and other relevant considerations.
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Bank’s Management considers that the recovery period of these assets would not be significantly affected and that it was not necessary to adjust the deferred tax assets recognized based on the results of the analyses performed.
The Bank believes that the accounting estimate related to the deferred tax assets is a critical accounting estimate because it requires significant judgment of the Bank’s Management and the underlying assumptions used in the estimate can change from period to period (for example, future projected operating performance of the Bank).
Goodwill and intangible assets include the cost of acquired subsidiaries in excess of the fair value of the tangible net assets recognized in connection with acquisitions as well as acquired intangible assets. Accounting for goodwill and acquired intangible assets requires estimates from Bank’s Management regarding: (1) the fair value of the acquired intangible assets and the initial amount of goodwill to be recognized, (2) the amortization period (for identified intangible assets other than those with indefinite lives or goodwill) and (3) the recoverability of the carrying value of acquired intangible assets.
The useful lives of acquired intangible assets are estimated based on the period over which the assets are expected to contribute directly or indirectly to the future cash flows of the Bank.
To determine the initial amount of goodwill to be recognized on an acquisition, the Bank determines the fair value of the consideration and the fair value of the net assets acquired. The Bank uses internal analysis, generally based on discounted cash flow techniques, to determine the fair value of the net assets acquired and non-cash components of the consideration paid. The actual fair value of net assets acquired could differ from the fair value determined, resulting in an under- or over-statement of goodwill.
Goodwill arising on an acquisition of a business is carried at cost as established at the date of acquisition of the business less accumulated impairment losses, if any.
IAS 36 requires that a cash-generating unit (CGU) to which goodwill has been allocated is tested for impairment annually, or more frequently when there is an indication that the CGU may be impaired. IAS 36 establishes a minimum of indicators in assessing whether there is any impairment indication. A CGU to which goodwill has been allocated is tested for impairment annually, or more frequently when there is an indication that the CGU may be impaired.
The Bank concluded that as of December 31, 2022 there are no impairment indications.
Determining whether goodwill is impaired requires an estimation of the value in use of the CGU to which goodwill has been allocated. The value in use calculation requires estimating the future cash flows expected to arise from the CGU and a suitable discount rate in order to calculate present value.
The estimated future cash flows are based on updated financial budgets and business plans that reflect the most recent developments, such as GDP, interest rates and inflation.
Where the actual future cash flows are less than expected, an impairment loss may arise. The impairment loss is allocated first to reduce the carrying amount of any goodwill allocated to the CGU and then to the other assets of the CGU pro rata based on the carrying amount of each asset in the CGU. Any impairment loss for goodwill is recognized directly in the consolidated income statement. An impairment loss recognized for goodwill is not reversed in subsequent periods.
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On disposal of the relevant CGU, the attributable amount of goodwill is included in the determination of the profit or loss on disposal.
Details of the impairment of goodwill calculation are set out in Note 16.
The net cost of the defined benefit pension plan and other post-employment medical benefits and the present value of the pension obligation are determined using the projected unit credit method, with actuarial valuations being carried out at the end of each annual reporting period. An actuarial valuation involves making various assumptions that may differ from actual developments in the future. These assumptions include the determination of the discount rate. Any changes in these assumptions will affect the carrying amount of pension obligations.
The Bank determines the appropriate discount rate at the end of each year. This interest rate should be used to determine the present value of estimated future cash outflows expected to be required to settle the pension obligations. The Bank’s defined benefit obligation is discounted at a rate set by reference to market yields on Mexican government bonds at the end of the reporting period.
Further details about pension obligations are given in Note 24.c.
- Recognition and measurement of certain provisions and contingencies.
Provisions are recognized when the Bank has a present obligation (legal or constructive) as a result of a past event; it is probable that an outflow of cash or other economic resources will be required to settle the obligation, and a reliable estimate can be made of the amount of the obligation. If an outflow is not probable, the item is treated as a contingent liability.
The amount recognized as a provision is the best estimate of the consideration required to settle the present obligation at the end of the reporting period, taking into account the risks and uncertainties surrounding the obligation. When a provision is measured using the cash flows estimated to settle the present obligation, its carrying amount is the present value of those cash flows (when the effect of the time value of money is material).
The Bank estimates and provides for probable losses that may arise out of litigation, regulatory proceedings and uncertain income tax matters to the extent that a current obligation exists, the losses are probable and can be reasonably estimated. Significant judgment is required in making these estimates and the Bank’s final liabilities may ultimately be materially different. The Bank’s actual losses may differ materially from recognized amounts.
Further details about recognition and measurement of certain provisions and contingencies are given in Note 24.
- Lease term
In determining the lease term, Bank’s Management considers all facts and circumstances that create an economic incentive to exercise an extension option, or not exercise a termination option. Extension options (or periods after termination options) are only included in the lease term if the lease is reasonably certain to be extended (or not terminated).
Further details about lease term are given in Note 2.k and Note 15.
- Discount rate for leases as a lessee
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To determine the incremental borrowing rate, the Bank applies the Cross Section methodology, which consists of estimating the credit spread of the Bank based on the Credit Default Swaps information available from different entities. Under the Cross Section methodology, the following factors are considered to obtain the credit spread:
● | Economic sector, |
● | Geographical area, |
● | Rating, and |
● | An assumption to represent that at least one factor described above, match with the factors related to the Bank. |
Further details about discount rate for leases as a lessee are given in Note 2.k and Note 15.
d) Environmental impact
In view of the business activities carried on by the Bank, the Bank does not have any environmental liability, expenses, assets, provisions or contingencies that might be material with respect to its consolidated equity, financial position or results.
e) Interbank Offered Rates Reform
Following the financial crisis, the replacement of benchmark interest rates such as the London Inter-bank Offered Rate (LIBOR) and other Interbank Offered Rates (IBOR), hereinafter the “IBOR Reform”, became a priority for global regulators. Given the pervasive nature of IBOR-based contracts, there are impacts of these changes on financial reporting under IFRS.
The IASB has issued two-phase amendments to provide reliefs from the effects of the IBOR Reform.
- | Phase 1 - amendments to IFRS 9, IAS 39 Financial Instruments: Recognition and Measurement and IFRS 7 Financial Instruments: Disclosures (IBOR Reform Phase 1) provided temporary reliefs to enable hedge accounting to continue during the period of uncertainty before the replacement of an IBOR with an alternative nearly risk-free interest rate (“RFR”). The IBOR Reform Phase 1 amendments were effective for periods beginning on or after January 1, 2020. |
- | Phase 2 - amendments to IFRS 9, IAS 39, IFRS 7, IFRS 4 Insurance Contracts and IFRS 16 Leases (IBOR Reform Phase 2) provides temporary reliefs to address the accounting issues, which arise upon the replacement of an IBOR with an RFR. These amendments were published by the IASB on August 27, 2021 and were effective for annual periods beginning on or after January 1, 2021. |
The Phase 2 amendments provide the following reliefs:
When changing the basis for determining contractual cash flows for financial assets and liabilities (including lease liabilities), the reliefs have the effect that the changes, that are necessary as a direct consequence of IBOR reform and which are considered economically equivalent, will not result in an immediate gain or loss in the income statement.
The hedge accounting reliefs will allow most IAS 39 hedge relationships that are directly affected by IBOR reform to continue.
The objective of IBOR Reform Phase 2 amendments was to assist entities in providing useful information about the effects of the transition to an RFR and support preparers in applying the requirements of IFRS
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when changes are made to contractual cash flows or hedging relationships because of the transition to an RFR. The IBOR Reform Phase 2 amendments affected the following key areas: changes in the basis for determining the contractual cash flows because of IBOR Reform, hedge accounting and disclosures.
IBOR Reform Phase 2 amendments provided specific guidance on how to treat financial assets and financial liabilities where the basis for determining the contractual cash flows changes because of IBOR Reform. This can include cases where the contractual terms are amended, cases where the contractual terms are not amended but for example, where the method for calculating the interest rate benchmark is altered, and cases where an existing contractual term is activated such as when a fallback clause is triggered.
As a practical expedient, the IBOR Reform Phase 2 amendments require an entity to apply IFRS 9, such that the change in the basis for determining the contractual cash flows is applied prospectively by revising the effective interest rate. This practical expedient only applies when the change in the basis for determining the contractual cash flows is necessary as a direct consequence of IBOR Reform and the new basis for determining the contractual cash flows is economically equivalent to the previous basis (i.e. the basis immediately preceding the change).
The IBOR Reform Phase 2 amendments provide a non-exhaustive list of examples of changes that give rise to a new basis for determining the contractual cash flows that is economically equivalent to the previous basis:
a) | The replacement of an existing interest rate benchmark used to determine the contractual cash flows of a financial asset or financial liability with an RFR or implementation of a reform of an interest rate benchmark by changing the method used to calculate the interest rate benchmark, with the addition of a fixed spread necessary to compensate for the basis difference between the existing interest rate benchmark and the RFR; |
b) | Changes to the reset period, reset dates or the number of days between coupon payment dates in order to implement the reform of an interest rate benchmark; and |
c) | The addition of a fallback provision to the contractual terms of a financial asset or financial liability to enable any of the changes described in a) and b) above to be implemented. |
Given the similarity of financial liabilities in IFRS 9 and lease liabilities in IFRS 16, the IASB has provided a similar practical expedient in IFRS 16. The practical expedient applies when the interest rate benchmark on which lease payments are based is changed as a direct consequence of IBOR Reform and the change is done on an economically equivalent basis. Like the practical expedient in IFRS 9, the change in the contractual cash flows is applied prospectively. If additional modifications are made to lease contracts that are not required by IBOR Reform, a lessee shall apply the applicable requirements in IFRS 16 to account for all lease modifications made at the same time, including those required by IBOR Reform.
The amendments to IAS 39 introduce an exception to the existing requirements so that changes in the formal designation and documentation of a hedge accounting relationship, that are needed to reflect the changes required by IBOR Reform, do not result in the discontinuation of hedge accounting or the designation of a new hedging relationship. These changes to the hedge relationship must be made by the end of the reporting period during which a change required by IBOR Reform occurs.
The exception applies to the changes to the hedge designation that are limited to one or more of the following changes:
a) | Designating an RFR (contractually or non-contractually specified) as a hedged risk; |
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b) | Amending the description of the hedged item, including the description of the designated portion of the cash flows or fair value being hedged; or |
c) | Amending the description of the hedging instrument; and |
d) | For those applying IAS 39, amending the description of how the entity will assess hedge effectiveness. |
For the purpose of assessing the retrospective effectiveness of a hedging relationship on a cumulative basis according to IAS 39, an entity may elect to reset the cumulative fair value changes of the hedged item and hedging instrument to zero. This election is made separately for each hedging relationship (i.e. on an individual hedging relationship basis). This election was introduced to minimize the risk that entities would fail the retrospective effectiveness assessment of a hedging relationship when they transition to an RFR.
The amendments to IFRS 7 require that an entity provide disclosures that enable a user to understand the nature and extent of risks arising from the IBOR Reform, how the entity is managing those risks, its progress in completing the transition from interest rate benchmarks to RFR and how it is managing the transition. To achieve this objective, an entity is required to disclose:
- | How it is managing the transition to RFR, its progress at the reporting date and the risks to which it is exposed arising from financial instruments because of the transition; |
- | Disaggregated by significant interest rate benchmark subject to IBOR Reform, quantitative information about financial instruments that have yet to transition to an RFR as at the end of the reporting period, showing separately: non-derivative financial assets, non-derivative financial liabilities and financial derivatives; and |
- | If the IBOR Reform has resulted in changes to an entity’s risk management strategy, a description of those changes. |
The main risks to which the Bank has been exposed as a result of the IBOR Reform are:
- | Legal risks arising from potential changes required to documentation for new and existing transactions; |
- | Financial and accounting risks derived from market risk models and from valuation, coverage, cancellation, hedging, discontinuation and recognition of financial instruments linked to benchmark interest rates; |
- | Business risk of a decrease in revenues of products linked to benchmark interest rates that will be replaced or declined; |
- | Pricing risks arising from how changes to benchmark interest rates could impact pricing mechanisms on some instruments; |
- | Operational risks arising from the potential requirement to adapt Information Technology (IT) systems, trade reporting infrastructure and operational processes; |
- | Conduct risks arising from the potential impact of communication with customers and engagement during the transition period, and |
- | Litigation risks regarding our existing products and services, which could adversely impact our profitability. |
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In order to monitor the risks and address the challenges of the transition, Banco Santander (Spain) launched the Santander's global IBOR Transition Program in 2019 with the involvement of Bank’s Management. This program has a group wide scope and reports on a regular basis to Executive Management involving statutory committees. Its main objective is to ensure a smooth operational transition and address any potential customer and conduct related issues that could arise from the IBOR transition. It also aims to ensure that all impacted areas and business units understand the risks associated with the transition in a homogeneous way and can take appropriate measures to mitigate them. Besides, the Bank has its own IBOR Transition Program managed by well-trained local professionals.
The IBOR Transition Program is aligned with the recommendations, guidance and milestones defined by regulators and working groups of different jurisdictions and is structured around the following areas: Technology and Operations, Legal, Client Outreach, Risk Management and Models, Conduct and Communications and Accounting and Finance. During 2022 and 2021, the program focused on handling the transition away from LIBOR rates. The program will continue to address next steps in the transition related to legacy contracts, the LIBOR dollar termination milestone in June 2023 with the subsequent migration of operations to systems and the Central Counterparty’s transition during the second quarter of 2023.
The Bank has also closely monitored the financial markets and the output from the various industry working groups managing the transition to new benchmark interest rates. This includes announcements made by LIBOR regulators, such as the United Kingdom Financial Conduct Authority (FCA), Alternative Reference Rates Committee (ARRC) and the United States Commodity Futures Trading Commission (CFTC) regarding the transition from LIBOR including British pound sterling (GBP) to the Sterling Overnight Index Average rate (SONIA), United States dollar (USD) LIBOR to the Secured Overnight Financing Rate (SOFR) and EONIA to the Euro short-term rate (€STR).
On March 5, 2021, the FCA announced the final dates for the cessation of LIBORs:
– | On December 31, 2021, the publication of some LIBORs ceased, such as USD LIBOR (1-week and 2-month terms), CHF LIBOR (all terms), GBP LIBOR (overnight, 1-week, 2-month and 12-month terms), JPY LIBOR (overnight, 1-week, 2-month, and 12-month terms) and EUR LIBOR (all terms). |
– | On June 30, 2023, the publication of USD LIBOR (overnight and 12-month maturities) will cease and the calculation methodology for USD LIBOR (1-month, 3-month and 6-month maturities) will be reformed and become non-representative. |
The breakdown by type of financial asset as of December 31, 2022 of the total contracts affected by the IBOR Reform whose maturity date will be after June 30, 2023 is as follows:
| | | | | | | |
Referenced to | | | Derivatives at | |
| Loans at | |
USD LIBOR | | | fair value (1) | | | amortized cost (2) | |
| | | | | | | |
Total affected contracts by the USD LIBOR Reform | | | 3,719 | | | 763 | |
Total gross carrying amount of affected contracts | | | 2,946 | | | 33,488 | |
| | | | | | | |
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(1) The notional amount of financial derivatives assets and liabilities as of December 31, 2022 was 718,980 and 730,886, respectively.
Most of the contracts affected by the USD LIBOR Reform are adhered to the International Swaps and Derivatives Association (ISDA) Protocol and will transition automatically to the new reference rates.
(2) The amount of loans at amortized cost excludes 233 million pesos of the allowance for impairment losses.
For total loans impacted by the transition, 87% of the Bank’s customers have already been contacted at least once and the Bank’s management is in renegotiation process, as of December 31, 2022 31% of the loan portfolio referenced to USD LIBOR have already been transitioned.
The operational transition in systems will take place after the interest period or after the cessation of USD LIBOR.
As of December 31, 2022, the Bank has other financial instruments, including financial derivatives, loans and other assets referenced to the USD LIBOR with a maturity date prior to June 30, 2023. The Bank has no plans to modify these contracts prior to their contractual maturity; therefore, the Bank does not expect a significant impact arising from IBOR Reform relating to these contracts.
As of December 31, 2022, the Bank has no contractual exposure to EONIA rate.
In October 2020, the ISDA launched the fallbacks Protocol and Supplement for IBORs (effective 25 January 2021), and provided market participants with of new financial derivatives fallbacks of LIBORs (among others IBOR, such as EURIBOR) for current financial derivative contracts and for new contracts. Additionally, on 19 August 2021, ISDA launched a new protocol that allowed entities to incorporate a fallback to the EONIA as the rate applicable to collateral in ISDA collateral agreements (known as CSAs). The Bank has adhered to the protocol and intends to monitor whether its counterparties will also adhere. If this plan changes or there are counterparties who will not adhere to the protocol, the Bank will negotiate with them bilaterally about including new fallback clauses.
f) Russian invasion of Ukraine and Russian sanctions
During 2022, Russia launched a large-scale military action against Ukraine. The Russian military action has caused an ongoing humanitarian crisis as well as volatility in financial markets globally, heightened inflation, shortages and increases in the prices of energy, oil, gas and other commodities, as well as a new landscape in relation to international sanctions.
In response to the Russian military action against Ukraine, several countries have imposed severe sanctions on Russia and Belarus, including freezing/blocking assets, targeting major Russian banks, the Russian Central Bank, and certain Russian companies and individuals, imposing export controls against Russia and Russian interests, as well as the disconnection of certain Russian banks from the SWIFT (Society for Worldwide Interbank Financial Telecommunication) system.
The extent to which the conflict could ultimately impact the Bank's results will depend on future developments, including subsequent sanctions that could eventually affect negatively to some Bank’ customers (those more closely related to Russia or Ukraine). The Bank's Management has assessed the uncertainties caused by the current situation (high inflation, rise in interest rates, supply chain disruptions in more sensitive sectors, etc.) taking into account the best information available in order to anticipate the impact on the most relevant portfolios.
As of December 31, 2022, the Bank has assessed that there are no relevant financial impacts from the Russian military action.
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g) Events after the reporting period
The following significant events occurred from January 1, 2023 to the date on which these consolidated financial statements were authorized for issue:
Merger of Banco Santander Mexico with Santander Consumo, S. A. de C. V. and Santander Servicios Especializados, S.A. de C.V.
On December 22, 2021, Banco Santander México obtained the authorization from Banco Santander (Spain) to carry out a merger through absorption of Santander Consumo and Santander Servicios Especializados. Banco Santander México was the surviving entity, and the latter were the merged entities.
On December 15, 2022, the Mexican Ministry of Finance and Public Credit (hereinafter, “SHCP” by its Spanish acronym) authorized the aforementioned merger with an effective date of January 1, 2023.
Exchange Offers
In February 2023, Banco Santander (Spain) began the process of simultaneous exchange offer in Mexico and the United States of America for all the Bank's shares listed in both countries. The objective of Banco Santander (Spain) is to repurchase all of the Bank's Series "B" shares and American Depositary Shares (ADSs) that are not already in its possession.
Once the exchange offers are concluded, Banco Santander (Spain) intends to cancel the registration of the Series "B" shares in the CNBV and starts the delisting on the Mexican Stock Exchange, as well as withdraw the ADS from the listing on the New York Stock Exchange and withdraw the Series "B" shares and ADSs filed with the SEC.
2. Accounting policies
The accounting policies and measurement bases applied in preparing the consolidated financial statements were as follows:
a) Foreign currency transactions
i. Functional currency
The functional currency of all entities comprising the Bank is the Mexican Peso (hereinafter, peso or $). Therefore, all balances and transactions denominated in currencies other than the peso are deemed to be denominated in foreign currency.
ii. Foreign currency
In preparing the consolidated financial statements, transactions in currencies other than the Bank’s functional currency (foreign currencies) are recognized at the exchange rates prevailing at the dates of the transactions. Monetary items denominated in foreign currencies are retranslated to the functional currency at the rates prevailing at the consolidated balance sheet date. Non-monetary items carried at fair value in foreign currencies are retranslated to the functional currency at the rates prevailing at the date when the fair value was determined. Non-monetary items that are measured in terms of historical cost in a foreign currency are not retranslated.
The Bank performs a large number of foreign currency transactions, mainly in USD. The transactions, assets and liabilities denominated in foreign currencies are translated to pesos based on the exchange rates published by the Mexican Central Bank.
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The “day-end” exchange rate used was $20.5075 per one USD and $19.5089 per one USD as of December 31, 2021 and 2022, respectively.
iii. Recognition of exchange differences
The exchange differences arising on the translation of foreign currency balances to the functional currency are recognized at their net amount under Exchange differences (net) in the consolidated income statement, except for exchange differences arising on financial instruments at fair value through profit or loss, which are recognized under Gains/(losses) on financial assets and liabilities (net) in the consolidated income statement without distinguishing them from other changes in fair value and for exchange differences arising on non-monetary items measured at fair value through other comprehensive income, which are recognized under Valuation adjustments in other comprehensive income.
b) Basis of consolidation
i. Subsidiaries
The consolidated financial statements incorporate the financial statements of Banco Santander México and entities (including structured entities) controlled by Banco Santander México together with its subsidiaries. Control is achieved when Banco Santander México has all of the following:
● | has power over the investee; |
● | is exposed, or has rights, to variable returns from its involvement with the investee; and |
● | has the ability to use its power to affect its returns. |
Banco Santander México reassesses whether or not it controls an investee if facts and circumstances indicate that there are changes to one or more of the three elements of control listed above.
When Banco Santander México has less than a majority of the voting rights of an investee, it has power over the investee when the voting rights are sufficient to give it the practical ability to direct the relevant activities of the investee unilaterally. Banco Santander México considers all relevant facts and circumstances in assessing whether or not Banco Santander México’s voting rights in an investee are sufficient to give it power, including:
● | the size of Banco Santander México’s holding of voting rights relative to the size and dispersion of holdings of the other vote holders; |
● | potential voting rights held by Banco Santander México, other vote holders or other parties; |
● | rights arising from other contractual arrangements; and |
● | any additional facts and circumstances that indicate that Banco Santander México has, or does not have, the current ability to direct the relevant activities at the time that decisions need to be made, including voting patterns at previous shareholders’ meetings. |
Consolidation of a subsidiary begins when Banco Santander México obtains control over the subsidiary and ceases when Banco Santander México loses control of the subsidiary. Specifically, the results of a subsidiary acquired or disposed of during the year are included in the consolidated income statement and other comprehensive income from the date Banco Santander México gains control until the date when Banco Santander México ceases to control the subsidiary.
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Where necessary, adjustments are made to the financial statements of subsidiaries to bring the accounting policies used into line with Banco Santander México’s accounting policies.
The financial statements of the subsidiaries are fully consolidated with those of Banco Santander México. Accordingly, all intragroup assets and liabilities, equity, income, expenses and cash flows relating to transactions between the members of the Bank are eliminated on consolidation.
Non-controlling interests in subsidiaries are identified separately from the Bank’s equity therein. Those interests of non-controlling shareholders that are present ownership interests entitling their holders to a proportionate share of net assets upon liquidation may initially be measured at fair value or at the non-controlling interests’ proportionate share of the fair value of the acquiree’s identifiable net assets. The choice of measurement is made on an acquisition-by-acquisition basis. Other non-controlling interests are initially measured at fair value. Subsequent to acquisition, the carrying amount of non-controlling interests is the amount of those interests at initial recognition plus the non-controlling interests’ share of subsequent changes in consolidated total equity.
The consolidated income statement and each component of other comprehensive income are attributed to the owners of the Bank and to the non-controlling interests. Total comprehensive income of subsidiaries is attributed to the owners of the Bank and to the non-controlling interests even if these results in the non-controlling interests having a deficit balance (see Note 27).
The share of third parties of the consolidated total equity is presented under Non-controlling interests in the consolidated balance sheet (see Note 27). Their share of the profit for the year is presented under Profit attributable to non-controlling interests in the consolidated income statement.
On acquisition of control of a subsidiary that meets the definition of a business, its assets, liabilities and contingent liabilities are recognized at their acquisition date fair value. Any excess of the acquisition cost, the amount recognized for non-controlling interests of the acquiree and the fair value of the acquirer’s previous held equity interest in the acquiree over the fair values of the identifiable net assets acquired are recognized as goodwill (see Note 16). Negative differences are recognized in the consolidated income statement on the date of acquisition.
The results of subsidiaries acquired during the year are included in the consolidated income statement from the date of acquisition to year-end. Similarly, the results of subsidiaries for which control is lost during the year are included in the consolidated income statement from the beginning of the year to the date of disposal.
A listing of the subsidiaries included in the consolidated financial statements as of December 31, 2021 and 2022 is shown in Note 49.
ii. Investments in associated entities
An associate is an entity over which the Bank has significant influence and that is neither a subsidiary nor an interest in a joint venture. Significant influence is the power to participate in the financial and operating policy decisions of the investee but is not control or joint control over those policies.
The results, assets and liabilities of associated entities are incorporated in the consolidated financial statements using the equity method of accounting, except when the investment, or a portion thereof, is classified as held for sale, in which case it is accounted for in accordance with IFRS 5 Non-current Assets Held for Sale and Discontinued Operations. Under the equity method, an investment in an associate is initially recognized in the consolidated balance sheet at cost and adjusted thereafter to recognize the Bank’s share of the consolidated income statement and other comprehensive income of the associate. When the Bank’s share of losses of an associate exceeds the Bank’s interest in that associate (which includes any long-term interests that, in substance, form part of the Bank’s net
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investment in the associate), the Bank discontinues recognizing its share of further losses. Additional losses are recognized only to the extent that the Bank has incurred legal or constructive obligations or made payments on behalf of the associate.
An investment in an associate is accounted for using the equity method from the date on which the investee becomes an associate. On acquisition of the investment in an associate, any excess of the cost of the investment over the Bank’s share of the net fair value of the identifiable assets and liabilities of the investee is recognized as goodwill, which is included within the carrying amount of the investment. Any excess of the Bank’s share of the net fair value of the identifiable assets and liabilities over the cost of the investment, after reassessment, is recognized immediately in the consolidated income statement in the period in which the investment is acquired.
The requirements of IAS 36 are applied to determine whether it is necessary to recognize any impairment loss with respect to the Bank’s investment in an associate. When necessary, the entire carrying amount of the investment (including goodwill) is tested for impairment in accordance with IAS 36 as a single asset by comparing its recoverable amount (higher of value in use and fair value less costs of disposal) with its carrying amount. Any impairment loss recognized forms part of the carrying amount of the investment. Any reversal of that impairment loss is recognized in accordance with IAS 36 to the extent that the recoverable amount of the investment subsequently increases.
The Bank discontinues the use of the equity method from the date when the investment ceases to be an associate, or when the investment is classified as held for sale. When the Bank retains an interest in the former associate and the retained interest is a financial asset, the Bank measures the retained interest at fair value at that date and the fair value is regarded as its fair value on initial recognition in accordance with IFRS 9. The difference between the carrying amount of the associate at the date the equity method was discontinued, and the fair value of any retained interest and any proceeds from disposing of a part interest in the associate is included in the determination of the gain or loss on disposal of the associate. In addition, the Bank accounts for all amounts previously recognized in other comprehensive income in relation to that associate on the same basis as would be required if that associate had directly disposed of the related assets or liabilities. Therefore, if a gain or loss previously recognized in other comprehensive income by that associate would be reclassified to the consolidated income statement on the disposal of the related assets or liabilities, the Bank reclassifies the gain or loss from consolidated total equity to the consolidated income statement (as a reclassification adjustment) when the associate is disposed of.
When the Bank reduces its ownership interest in an associate but the Bank continues to use the equity method, the Bank reclassifies to the consolidated income statement the proportion of the gain or loss that had previously been recognized in other comprehensive income relating to that reduction in ownership interest if that gain or loss would be reclassified to the consolidated income statement on the disposal of the related assets or liabilities.
When a Bank’s subsidiary transacts with an associate or a joint venture of the Bank, profits and losses resulting from the transactions with the associate are recognized in the consolidated financial statements only to the extent of interests in the associate that are not related to the Bank.
The Bank applies IFRS 9, including the impairment requirements, to long-term interests in an associate to which the equity method is not applied and which form part of the net investment in the investee.
Furthermore, in applying IFRS 9 to long-term interests, the Bank does not take into account adjustments to their carrying amount required by IAS 28 Investments in Associates and Joint Ventures (i.e. adjustments to the carrying amount of long-term interests arising from the allocation of losses of the investee or assessment of impairment in accordance with IAS 28).
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As of December 31, 2021 and also for 6 months during 2022, the Bank maintained an investment in an associated entity as detailed in Note 49.a.
An investor measures an associate that is classified as held for sale at the lower of its carrying amount at the date of classification as held for sale and fair value less costs to sell. Equity accounting ceases once an associate is classified as held for sale.
iii. Structured entities
When the Bank incorporates entities, or holds ownership interests therein, to enable its customers to access certain investments, or for the transfer of risks or other purposes (also called structured entities since the voting or similar power is not a key factor in deciding who controls the entity), the Bank determines, using internal criteria and procedures and taking into consideration the applicable legislation, whether control (as defined above) exists and, therefore, whether these entities should be consolidated.
These structured entities include securitization special purpose vehicles (SPV) and employee benefit trusts (EBT) established for employee share-based plans, which are consolidated as it is considered that the Bank exercise control over these structured entities.
Share-based payments are discussed in Note 42.b, 42.c, 42.d. and 43.b
iv. Business combinations
Acquisitions of businesses are accounted for using the acquisition method. The consideration transferred in a business combination is measured at fair value, which is calculated as the sum of the acquisition-date fair values of the assets transferred by Banco Santander México, liabilities incurred by Banco Santander México to the former owners of the acquiree and the equity interests issued by the Bank in exchange for control of the acquiree. Acquisition-related costs are recognized in the consolidated income statement as incurred.
At the acquisition date, the identifiable assets acquired and the liabilities assumed are recognized at their fair value, except that:
● | deferred tax assets or liabilities, and assets or liabilities related to employee benefit arrangements are recognized and measured in accordance with IAS 12 Income Taxes and IAS 19 Employee Benefits, respectively; |
● | liabilities or equity instruments related to share-based payment arrangements of the acquiree or share-based payment arrangements of Banco Santander México entered into to replace share-based payment arrangements of the acquiree are measured in accordance with IFRS 2 at the acquisition date; and |
● | assets (or disposal groups) that are classified as held for sale in accordance with IFRS 5 are measured in accordance with that Standard. |
Goodwill is measured as the excess of the sum of the consideration transferred, the amount of any non-controlling interests in the acquiree, and the fair value of the acquirer’s previously held equity interest in the acquiree (if any) over the net of the acquisition-date amounts of the identifiable assets acquired and the liabilities assumed. If, after reassessment, the net of the acquisition-date amounts of the identifiable assets acquired and liabilities assumed exceeds the sum of the consideration transferred, the amount of any non-controlling interests in the acquiree and the fair value of the acquirer’s previously held interest in the acquiree (if any), the excess is recognized immediately in the consolidated income statement as a bargain purchase gain.
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When the consideration transferred by Banco Santander México in a business combination includes a contingent consideration arrangement, the contingent consideration is measured at its acquisition-date fair value and included as part of the consideration transferred in a business combination. Changes in fair value of the contingent consideration that qualify as measurement period adjustments are adjusted retrospectively, with corresponding adjustments against goodwill. Measurement period adjustments are adjustments that arise from additional information obtained during the ‘measurement period’ (which cannot exceed one year from the acquisition date) about facts and circumstances that existed at the acquisition date.
The subsequent accounting for changes in the fair value of the contingent consideration that do not qualify as ‘measurement period’ adjustments depends on how the contingent consideration is classified. Contingent consideration that is classified as equity is not remeasured at subsequent reporting dates and its subsequent settlement is accounted for within equity. Other contingent consideration is remeasured to fair value at subsequent reporting dates with changes in fair value recognized in the consolidated income statement.
When a business combination is achieved in stages, the Bank’s interests previously held in the acquired entity are remeasured to its acquisition-date fair value and the resulting gain or loss, if any, is recognized in the consolidated income statement. Amounts arising from interests in the acquiree prior to the acquisition date that have previously been recognized in other comprehensive income are reclassified to the consolidated income statement, where such treatment would be appropriate if that interest were disposed of.
If the initial accounting for a business combination is incomplete by the end of the reporting period in which the combination occurs, Banco Santander México reports provisional amounts for the items for which the accounting is incomplete. Those provisional amounts are adjusted during the measurement period, or additional assets or liabilities are recognized, to reflect new information obtained about facts and circumstances that existed as of the acquisition date that, if known, would have affected the amounts recognized at that date.
v. Business combinations under common control
A common control transaction is a transfer of net assets or an exchange of equity interests between entities under the control of the same parent. A common-control transaction has no effect on the Ultimate Parent’s consolidated financial statements. The net assets are derecognized by the transferring entity and recognized by the receiving entity at their historical carrying amounts. Any difference between the consideration paid or received and the carrying amounts of the net assets is recognized in Accumulated reserves within Shareholders’ equity in the consolidated balance sheet.
vi. Changes in Banco Santander México’s ownership interests in existing subsidiaries
Changes in Banco Santander México’s ownership interests in subsidiaries that do not result in Banco Santander México losing control over the subsidiaries are accounted for as equity transactions, no gain or loss is recognized in the consolidated income statement and the initially recognized goodwill is not remeasured. The carrying amounts of Banco Santander México’s interests and the non-controlling interests are adjusted to reflect the changes in their relative interests in the subsidiaries. Any difference between the amount by which the non-controlling interests are adjusted and the fair value of the consideration paid or received is recognized directly in Accumulated reserves within Shareholders’ equity in the consolidated balance sheet and attributed to owners of Banco Santander México.
When Banco Santander México loses control of a subsidiary, a gain or loss is recognized in the consolidated income statement and is calculated as the difference between (i) the aggregate of the fair value of the consideration received and the fair value of any retained interest and (ii) the previous carrying amount of the assets (including goodwill), and liabilities of the subsidiary and any non-
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controlling interests. All amounts previously recognized in other comprehensive income in relation to that subsidiary are accounted for as if Banco Santander México had directly disposed of the related assets or liabilities of the subsidiary (i.e., reclassified to the consolidated income statement or transferred to another category of equity as specified/permitted by applicable IFRS). The fair value of any investment retained in the former subsidiary at the date when control is lost is regarded as the fair value on initial recognition for subsequent accounting under IFRS 9, when applicable, the cost on initial recognition of an investment in an associate or a joint venture.
c) Definitions and classification of financial instruments
i. Definitions
A financial instrument is any contract that gives rise to a financial asset of one entity and a financial liability or equity instrument of another entity. Financial assets and financial liabilities are recognized when the Bank becomes a party to the contractual provisions of the financial instruments.
An equity instrument is a contract that evidences a residual interest in the assets of the issuing entity after deducting all of its liabilities.
A financial derivative is a financial instrument or other contract within the scope of IFRS with all three of the following characteristics:
● | its value changes in response to the change in a specified interest rate, financial instrument price, commodity price, foreign exchange rate, index of prices or rates, credit rating or credit index, or other variable, provided in the case of a non-financial variable that the variable is not specific to a party to the contract (sometimes called the “underlying”); |
● | it requires no initial net investment or an initial net investment that is smaller than would be required for other types of contracts that would be expected to have a similar response to changes in market factors; and |
● | it is settled at a future date. |
Hybrid financial instruments are contracts that simultaneously include a non-derivative host contract together with a financial derivative, known as an embedded derivative, that is not separately transferable and has the effect that some of the cash flows of the hybrid contract vary in a way similar to a stand-alone financial derivative.
Compound financial instruments are contracts that simultaneously create for their issuer a financial liability and an equity instrument (such as convertible bonds, which entitle their holders to convert them into equity instruments of the issuer).
The following transactions are not treated for accounting purposes as financial instruments:
● | Investments in associated entities (see Note 49) |
● | Rights and obligations under employee benefit plans (see Note 24.c). |
● | Contracts and obligations relating to employee remuneration based on own equity instruments. |
ii. Classification of financial assets for measurement purposes
Financial assets are initially classified into the various categories used for management and measurement purposes, unless they have to be presented as Non-current assets held for sale or they
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relate to Cash and balances with the Central Bank or Hedging financial derivatives, which are reported separately.
The classification criteria depends on the Bank’s business model for managing the financial assets and the contractual terms of its cash flows.
The Bank reclassifies financial assets when, and only when, its business model for managing those financial assets changes.
The business model reflects how the Bank manages the financial assets in order to generate cash flows. That is, whether the Bank’s objective is to collect the contractual cash flows from financial assets on specified dates that are solely payments of principal and interest (SPPI), or is to collect both the contractual cash flows and cash flows arising from the sale of financial assets.
In determining the appropriate business models for a group of financial assets and assessing the SPPI requirements, the Bank takes into account the following factors:
● | How key management personnel are assessed and are reported on the performance of the business model and the financial assets held in the business model. |
● | The risks that affect the performance of the business model (and the financial assets held in the business model) and, specifically, the way in which these risks are managed. |
● | How business managers are remunerated. |
● | The evaluation of the experience on how the cash flows of financial assets were collected. |
● | The frequency and volume of sales in previous years, as well as expectations of future sales. |
● | How certain contractual features are considered (i.e., interest rate reset frequency, prepayment commissions, among others) that significantly affect future cash flows. |
● | The assessment of a compensation paid or received on early termination that could result in cash flows that are not SPPI. |
Where the business model is to hold financial assets to collect contractual cash flows or to collect both the contractual cash flows and cash flows arising from the sale of financial assets, the Bank assesses whether the financial assets’ cash flows represent SPPI. In making this assessment (SPPI test), the Bank considers whether the contractual cash flows are consistent with a basic lending arrangement.
Depending on these factors, the financial asset can be measured at amortized cost, at fair value through other comprehensive income (FVTOCI), or at fair value through profit or loss (FVTPL). IFRS 9 also establishes an option to designate a financial instrument at FVTPL, under certain conditions.
Where the contractual terms of the cash flows introduce exposures to risk or volatility that are inconsistent with a basic lending arrangement, the related financial assets are classified and measured at FVTPL.
Financial assets that do not meet the criteria for being classified and measured at amortized cost or FVTOCI are classified and measured at FVTPL.
Financial assets with embedded derivatives are considered in their entirety when determining whether their cash flows are SPPI.
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iii. Classification of financial assets for presentation purposes
Financial assets are classified by nature into the following items in the consolidated balance sheet:
- | Cash and balances with the Central Bank: cash balances and balances receivable including the compulsory deposits with the Central Bank. |
- | Loans and advances to credit institutions: loans of any nature, including deposits and money market transactions, provided to credit institutions. |
- | Loans and advances to customers: debit balances of all loans granted to customers by the Bank. |
- | Debt instruments: bonds and other debt securities that represent a debt obligation for their issuer and that bear interest. |
- | Equity instruments: financial instruments issued by other entities, such as shares, which have the nature of equity instruments for the issuer, other than investments in subsidiaries, associates or jointly controlled entities. |
- | Trading derivatives: fair value in favor of the Bank of financial derivatives, which do not form part of hedge accounting, including embedded derivatives separated from hybrid financial instruments. |
- | Hedging derivatives: fair value of financial derivatives in favor of the Bank, including embedded derivatives separated from hybrid financial instruments, designated as hedging instruments in hedge accounting. |
iv. Classification of financial liabilities for measurement purposes
Financial liabilities are initially classified into the various categories used for management and measurement purposes, unless they relate to hedging financial derivatives, which are reported separately.
Financial liabilities are classified for measurement purposes into one of the following categories:
- | Financial liabilities at fair value through profit or loss: financial liabilities incurred for the purpose of generating a profit in the near term from fluctuations in their prices, financial derivatives not designated as hedging instruments and financial liabilities arising from the outright sale of financial assets acquired under reverse repurchase agreements, securities loans and sales of borrowed securities (short positions). |
Additionally, financial liabilities are included in this category when such classification provides more relevant information regarding the financial liability, either because this eliminates or significantly reduces recognition or measurement inconsistencies (accounting mismatches) that would otherwise arise from measuring the liabilities or recognizing the gains or losses on them on different bases, or because a group of financial liabilities or financial assets and liabilities is managed and its performance is evaluated on a fair value basis, in accordance with a documented risk management or investment strategy, and information about the group is provided on that basis to the Bank’s key management personnel.
- | Financial liabilities at amortized cost: financial liabilities, irrespective of their instrumentation and maturity, not included in any of the above-mentioned categories, which arise from the ordinary borrowing activities or financing received. |
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v. Classification of financial liabilities for presentation purposes
Financial liabilities are classified by nature into the following items in the consolidated balance sheet:
- | Deposits: all repayable balances received in cash by the Bank, other than those classified as marketable debt securities and those having the substance of subordinated liabilities. This item also includes cash bonds and cash consignments received, amount of which may be invested without restriction. |
Deposits are classified based on the type of depositor as follows:
- | Deposits from the Central Bank: deposits and repurchase agreements of any nature with the Central Bank. |
- | Deposits from credit institutions: deposits of any nature, including credit received, money market transactions and repurchase agreements in the name of credit institutions. |
- | Customer deposits: deposits and repurchase agreements. |
- | Marketable debt securities: bonds and other debt represented by marketable securities, other than those having the substance of subordinated liabilities. |
- | Trading derivatives: fair value of financial derivatives with a liability balance, including embedded derivatives separated from the host contract, which do not form part of hedge accounting. |
- | Short positions: financial liabilities arising from the outright sale of financial assets acquired under reverse repurchase agreements, securities loans and sales of borrowed securities. |
- | Subordinated liabilities: financing received which, for the purposes of payment priority, ranks behind ordinary debt. This category also includes the component that has the consideration of financial liability of compound financial instruments issued by the Bank, which form part of the Bank’s capital management for regulatory purposes, but do not meet the requirements for classification as equity for accounting purposes. |
- | Hedging derivatives: fair value of the Bank’s liability in respect of financial derivatives, including embedded derivatives separated from hybrid financial instruments, designated as qualified hedging instruments in hedge accounting. |
d) Measurement of financial assets and liabilities and recognition of fair value changes
In general, financial assets and liabilities are initially recognized at fair value, which, in the absence of evidence to the contrary, is deemed to be the transaction price. The amount initially recognized for financial instruments not measured at FVTPL is adjusted for transaction costs that are directly attributable to the acquisition of the financial asset. Transaction costs of financial assets carried at FVTPL are recognized in the consolidated income statement.
If the fair value of a financial instrument at initial recognition differs from the transaction price, that financial instrument shall be accounted for at that date as follows:
- | if that fair value is evidenced by a quoted price in an active market for an identical asset or liability (i.e., a Level 1 input) or based on a valuation technique that uses only data from observable markets, the difference between the fair value at initial recognition and the transaction price shall be recognized as a gain or loss. |
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- | in all other cases, adjusted to defer the difference between the fair value at initial recognition and the transaction price. After initial recognition, that deferred difference shall be recognized as a gain or loss only to the extent that it arises from a change in a factor (including time) that market participants would take into account when pricing the asset or liability. |
Financial assets and liabilities are subsequently measured at each period-end as follows:
i. Measurement of financial assets
Financial assets measured at fair value
The fair value of a financial instrument on a given date is taken to be the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. The most objective and common reference for the fair value of a financial instrument is the price that would be paid for it on an active and transparent active market (quoted price or market price).
If there is no market price for a given financial instrument, its fair value is estimated on the basis of the price established in recent transactions involving similar instruments and, in the absence thereof, of valuation techniques commonly used by the international financial community, taking into account the specific features of the instrument to be measured and, particularly, the various types of risk associated with it.
All financial assets are accounted for at the trade date.
All regular way purchases or sales of financial assets are recognized and derecognized on a trade date basis. Regular way purchases or sales are purchases or sales of financial assets that require delivery of assets within the time frame established by regulation or convention in the marketplace.
Subsequent measurement of financial assets depends on the Bank’s business model for managing the financial assets and the cash flows characteristics of the financial asset. The Bank classifies its financial assets into three measurement categories:
- | Amortized cost: financial instruments under a business model whose objective is to collect principal and interest cash flows, over which there is no significant unjustified sales, fair value is not a key element in the management of these financial assets and contractual conditions give rise to cash flows on specific dates, which are SPPI. In this sense, unjustified sales are considered those other than those related to an increase in the credit risk of the asset; unanticipated funding needs (stress case scenarios). Additionally, the characteristics of its contractual cash flows represent substantially a “basic financing agreement”. Interest income from these financial assets is included in Interest income in the consolidated income statement using the effective interest rate method. Any gain or loss arising on derecognition is recognized directly in the consolidated income statement. Foreign exchange gains and losses are presented in Exchange differences (net) and impairment losses are presented within Impairment losses on financial (net) in the consolidated income statement. |
- | FVTOCI: financial instruments held in a business model whose objective is to collect principal and interest cash flows and the sale of these financial assets, where fair value is a key factor in their management. Additionally, the contractual cash flow characteristics substantially represent a “basic financing agreement”. Changes in the fair value are taken through other comprehensive income, except for the recognition of impairment gains and losses, interest income and foreign exchange gains and losses on the financial assets’ amortized cost, which are recognized in the consolidated income statement. |
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When the financial assets are derecognized, the cumulative gain or loss previously recognized in other comprehensive income is reclassified to profit or loss and recognized in Gains/(losses) on financial assets and liabilities (net) in the consolidated income statement. Interest income from these financial assets is included in Interest income calculated using the effective interest method in the consolidated income statement using the effective interest rate method. Foreign exchange gains and losses are presented in Exchange differences (net) and impairment losses are presented within Impairment losses on financial assets on financial assets not at fair value through profit or loss (net) in the consolidated income statement.
- | FVTPL: financial instruments included in a business model whose objective is not obtained through the above-mentioned models, where fair value is a key factor in managing of these financial assets, and financial instruments whose contractual cash flow characteristics do not substantially represent a “basic financing agreement”. Changes in the fair value of financial assets at FVTPL are recognized in profit or loss and presented net within Gains/(losses) on financial assets and liabilities (net) in the consolidated income statement in the period in which it arises. Interest income from these financial assets is included as a separate line item within the consolidated income statement in Other interest and similar income using the effective interest rate method. |
Loans with different components
The Bank originates loans to hold to maturity and to collect and sell or sub-participate to other lenders, resulting in a transfer of substantially all the risk and rewards and derecognition of the loan or portion of it. The Bank considers the activities of lending to hold and lending to collect and sell or sub-participate as two separate business models. Financial assets considered to be within a business model that has an objective to hold the financial assets to collect contractual cash flows are accounted for at amortized cost. Financial assets considered to be within a business model that has an objective to collect contractual cash flows and to sell or sub-participate to other lenders are accounted for at FVTOCI.
Amortized cost and effective interest method
The amortized cost is the amount at which the financial asset is measured at initial recognition minus the principal repayments, plus the cumulative amortization using the effective interest method of any difference between that initial amount and the maturity amount, adjusted for any allowance for impairment losses. The gross carrying amount of a financial asset is the amortized cost of a financial asset before adjusting for any allowance for impairment losses.
The effective interest method is a method of calculating the amortized cost of a financial instrument and of allocating interest income over the relevant period.
The effective interest rate is the rate that exactly discounts estimated future cash payments or receipts through the expected life of the financial asset or financial liability to the gross carrying amount of a financial asset or to the amortized cost of a financial liability. The calculation does not consider expected credit losses and includes transaction costs, premiums or discounts and fees and basis points paid or received that are integral to the effective interest rate, such as origination fees.
For purchased or originated credit-impaired (POCI) financial assets, the Bank calculates the credit-adjusted effective interest rate, which is calculated based on the amortized cost of the financial asset instead of its gross carrying amount and incorporates the impact of expected credit losses in estimated future cash flows.
Modification of contractual cash flows
When the contractual cash flows of a financial asset are renegotiated or otherwise modified and the renegotiation or modification does not result in cash flows that are substantially different, the
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modification does not result in derecognition. In which case, the Bank recalculates the gross carrying amount of the financial asset and recognizes a modification gain or loss in profit or loss. The gross carrying amount of the financial asset shall be recalculated as the present value of the renegotiated or modified contractual cash flows that are discounted at the financial asset’s original effective interest rate or credit-adjusted effective interest rate for POCI financial assets.
Modification of loans and advances to customers
The Bank sometimes renegotiates, refinances or otherwise modifies the contractual cash flows of loans and advances to customers. When this happens, the Bank assesses whether or not the new terms are substantially different to the original terms. The Bank does this by considering, among others, the following factors:
● | When the borrower is in financial difficulty, whether the modification merely reduces the contractual cash flows to amounts the borrower is expected to be able to pay. |
● | Whether any substantial new terms are introduced that affects the risk profile of the loan. |
● | Significant extension of the loan term when the borrower is not in financial difficulty. |
● | Significant change in the interest rate. |
● | Change in the currency the loan is denominated in. |
● | Insertion of collateral, other security or credit enhancement that significantly affect the credit risk associated with the loan. |
● | The modification is such that the loan would no longer meet the SPPI test. |
Derecognition due to substantial modification of terms and conditions
The Bank derecognizes a financial asset, such as a loan to a customer, when the terms and conditions have been changed or renegotiated to the extent that, substantially, it becomes a new loan, with the difference recognized in profit or loss, to the extent that an impairment loss has not already been recognized. The new financial asset is initially recognized at fair value.
There is limited guidance in IFRS 9 with respect to determining whether a modification of a financial asset results in derecognition, hence this assessment is based on qualitative factors and may be subject to judgment.
Interest income
Interest income is calculated by applying the effective interest rate to the gross carrying amount of financial assets measured at FVTPL, at FVTOCI and at amortized cost, except for:
- | POCI financial assets, for which the original credit-adjusted effective interest rate is applied to the amortized cost of the financial asset. |
- | Financial assets that are not POCI but have subsequently become credit-impaired (or Stage 3), for which interest income is calculated by applying the effective interest rate to their amortized cost. |
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Debt instruments
The Bank classifies financial debt instruments as follows:
- | Fair value through other comprehensive income: Financial instruments classified as at FVTOCI are initially measured at fair value plus transaction costs. Subsequently, changes in the carrying amount of these financial assets as a result of foreign exchange gains and losses, impairment losses and interest income calculated using the effective interest method are recognized in the consolidated income statement. The amounts that are recognized in the consolidated income statement are the same as the amounts that would have been recognized in the consolidated income statement, if these financial assets had been measured at amortized cost. All other changes in the carrying amount of these financial assets are recognized in other comprehensive income and accumulated under Valuation adjustments - Financial assets at fair value through other comprehensive income. When these financial assets are derecognized, the cumulative gains or losses previously recognized in other comprehensive income are reclassified to the consolidated income statement. |
- | Fair value through profit or loss: Financial instruments classified as at FVTPL are measured at fair value at the end of each reporting period. Changes in the fair value of debt instruments at FVTPL are recognized in profit or loss and presented net within Gains/(losses) on financial assets and liabilities (net) in the consolidated income statement in the period in which it arises. |
Equity instruments
The Bank designates at initial recognition and subsequently measures all equity instruments as at FVTPL, unless the Bank elects to present irrevocably fair value gains and losses on equity instruments in other comprehensive income. Designation of equity instruments as at FVTOCI is not permitted if the equity investment is held for trading or if it is contingent consideration recognized by an acquirer in a business combination.
A financial asset is held for trading if:
● | it has been acquired principally for the purpose of selling it in the near term; or |
● | on initial recognition it is part of a portfolio of identified financial instruments that the Bank manages together and has evidence of a recent actual pattern of short-term profit-taking; or |
● | it is a financial derivative instrument (except for a financial derivative that is a financial guarantee contract or a designated and effective hedging instrument). |
Investments in equity instruments at FVTOCI are initially measured at fair value plus transaction costs. Subsequently, they are measured at fair value with gains and losses arising from changes in fair value recognized in other comprehensive income under Valuation adjustments - Financial assets at fair value through other comprehensive income. The cumulative gain or loss is not reclassified to profit or loss following the derecognition of the equity instrument including on disposal; fair value gains and losses on equity instruments are reclassified on derecognition to Accumulated reserves within Shareholders’ equity in the consolidated balance sheet. The fair value gains and losses on equity instruments presented in other comprehensive income includes any related foreign exchange component.
Dividends on these investments in equity instruments are recognized in profit or loss in accordance with IFRS 9, unless the dividends clearly represent a recovery of part of the cost of the investment. Dividends are included in Income from equity instruments in the consolidated income statement.
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As of December 31, 2021 and 2022, there were no significant investments in quoted financial instruments that had ceased to be recognized at their quoted price because their market could not be deemed to be active.
Financial derivatives
All financial derivatives are recognized in the consolidated balance sheet at fair value from the trade date. If the fair value is positive, they are recognized as an asset and if the fair value is negative, they are recognized as a liability. In the absence of evidence to the contrary, the fair value on the trade date is deemed to be the transaction price. The changes in the fair value of financial derivatives from the trade date are recognized in Gains/(losses) on financial assets and liabilities (net) in the consolidated income statement. Specifically, the fair value of financial derivatives traded in organized markets included in the portfolios of financial assets or liabilities held for trading is deemed to be their daily quoted price. If for exceptional reasons the quoted price cannot be determined on a given date, these financial derivatives are measured using methods similar to those used to measure “over-the-counter” (OTC) financial derivatives.
The fair value of OTC financial derivatives is determined using the most appropriate valuation techniques commonly used by the financial markets based on the characteristics of each financial instrument such as net present value, option pricing models and other methods.
ii. Measurement of financial liabilities
In general, financial liabilities are measured at amortized cost using the effective interest method, except for those included under Financial liabilities at fair value through profit or loss and financial liabilities designated as hedged items (or hedging instruments) in fair value hedges, which are measured at fair value.
The effective interest method is a method of calculating the amortized cost of a financial liability and of allocating interest expense over the relevant period. The effective interest rate is the rate that exactly discounts estimated future cash payments (including all fees and basis points paid or received that form an integral part of the effective interest rate, transaction costs and other premiums or discounts) through the expected life of the financial liability, or (where appropriate) a shorter period, to the amortized cost of a financial liability.
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iii. Valuation techniques
The following table shows a summary of the fair values as of December 31, 2021 and 2022 of the financial assets and liabilities indicated below, classified based on the various measurement methods used by the Bank to determine their fair value:
| | | | | | | | | | | | | | | | | | | |
| | | 12/31/2021 | | | 12/31/2022 | | ||||||||||||
|
|
| Published |
|
| |
|
| |
|
| Published |
|
| |
|
| | |
| | | Price | | | | | | | | | Price | | | | | | | |
| | | Quotations | | | |
| | |
| | Quotations |
| | |
| | | |
| | | in Active | | | | | | | | | in Active | | | | | | | |
| | | Markets – | | | Internal | | | | | | Markets – | | | Internal | | | | |
| | | Level 1 | | | Models | | | Total | | | Level 1 | | | Models | | | Total |
|
| | | | | | | | | | | | | | | | | | | |
ASSETS: | | | | | | | | | | | | | | | | | | | |
Financial assets at fair value through profit or loss | | | 106,073 | | | 255,542 | | | 361,615 | | | 110,273 | | | 374,714 | | | 484,987 | |
Financial assets at fair value through other comprehensive income | | | 250,631 | | | 145,198 | | | 395,829 | | | 303,319 | | | 12,230 | | | 315,549 | |
Hedging derivatives | | | — | | | 11,248 | | | 11,248 | | | — | | | 10,181 | | | 10,181 | |
| | | 356,704 | | | 411,988 | | | 768,692 | | | 413,592 | | | 397,125 | | | 810,717 | |
LIABILITIES: | | | | | | | | | | | | | | | | | | | |
Financial liabilities at fair value through profit or loss | | | 62,570 | | | 288,847 | | | 351,417 | | | 28,762 | | | 405,350 | | | 434,112 | |
Hedging derivatives | | | — | | | 8,162 | | | 8,162 | | | — | | | 4,461 | | | 4,461 | |
| | | 62,570 | | | 297,009 | | | 359,579 | | | 28,762 | | | 409,811 | | | 438,573 | |
The financial instruments at fair value determined based on published price quotations in active markets (Level 1) include government debt securities, private-sector debt securities, financial derivatives traded in organized markets, securitized assets, equity shares, short positions and fixed-income securities issued.
In cases where price quotations cannot be observed, Bank’s Management makes its best estimate of the price that the market would set using its own internal models (valuation techniques). These internal models use data, based on observable market parameters as significant inputs (Level 2) and, in very specific cases, they use significant inputs not observable in market data (Level 3). The use of observable market data assumes that markets are efficient and therefore the data that is derived therefrom is representative.
The best evidence of the fair value of a financial instrument on initial recognition is the transaction price, unless the fair value of the instrument can be obtained from other market transactions performed with the same or similar instruments, or can be measured by using a valuation technique in which the variables used include only observable market data, mainly interest rates.
The objective of valuation techniques is to arrive at a fair value measurement that reflects the price that would be received to sell the financial asset or paid to transfer the financial liability in an orderly transaction between market participants at the measurement date.
Still, other internal models use unobservable data as inputs. Examples of such unobservable inputs and assumptions are as follows:
- | Correlation: Historical correlation between equity prices and foreign exchange rates is assumed for valuing quanto and composite options. |
- | Dividends: The estimation for the dividend used as inputs in the internal models is based on the dividend payments expected from the issuer companies. |
- | Volatility of equity instruments: There is no liquid option market for certain long-term financial assets. For most Mexican underlying assets, the option market is for up to one year. |
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- | Interest rate curve for estimating the interest rate index known as the 91-day TIIE (Tasa de Interés Interbancaria de Equilibrio): There is no liquid market for interest rate swaps with 91-day payment terms. For these fair value measurements, the 28-day interest rate swaps curve is used instead. |
- | Long-term Mexican rate curve: There is no liquid market for estimating and discounting financial instruments with maturities equal or higher than 20 years. |
- | Market credit spreads: For some counterparties there is no credit default swaps (CDS) market quotes from which it is possible to infer a credit spread curve, this aspect is common for most of the Mexican counterparties. When there is no credit default swaps quote, generic credit curves are used instead. These curves are inferred from a proxy of quoted market credit default swaps considering geography, sector and rating. |
Whenever unobservable market data is used in valuation techniques, the valuation is adjusted considering unobservable assumptions that market participants would use when pricing the asset or liability, including assumptions about risk.
The Bank also adjusts the value of some financial assets when they have very low market trading volume, even when prices are available.
Fair value measurements that incorporate significant unobservable inputs are classified as Level 3. Significant unobservable inputs are defined as inputs for which observable market data are not available and that are significant to the fair value measurement. Such inputs are developed using the best information available about assumptions that market participants would use when pricing the asset or liability.
iv. Valuation of financial instruments
General measurement bases
The Bank has implemented a formal process for systematic valuation and management of financial instruments. The governance scheme for this process distributes responsibilities between two independent areas inside the Bank: Treasury (development, marketing and daily management of financial products and market data) and Risks (on a periodic basis, validation of pricing and valuation models and market data, computation of risk metrics, new transactions approval policies, management of market risk and implementation of fair value adjustment policies).
The approval of new products follows a sequence of steps (request, development, validation, integration in systems and quality assurance) before the product is ready to be placed on the market. This process ensures that pricing systems have been properly reviewed and are stable before they are used.
The related valuation techniques and inputs by asset class are as follows:
a. | Financial assets at FVTPL and at FVTOCI |
The estimated fair value of these financial assets is determined using quoted prices or yield curves provided by the Bank´s pricing vendor.
b. | Loans and advances to credit institutions and customers – reverse repurchase agreements |
The fair value is estimated by using the discounted cash flow (forward estimation) technique making use of the interest rates that are currently offered for loans and advances with terms similar to those of borrowers having a similar credit quality.
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c. | Loans and advances to customers at fair value through other comprehensive income |
The estimated fair value of these financial assets is calculated by a default estimation method. This method consists of: a) estimating the default probabilities through a bootstrapping method from market credit spreads to incorporate the credit risk in the risk interest rate and b) discounting the expected cash flow at risk interest rate through the applicable discount factor. Both steps use observable market data (yield curves and market credit spreads) which are provided by a price vendor. The model assumes a deterministic approximation for modelling the cancellation prepayment; it is assumed that the obligor has a rational behavior and will exercise at the best moment, and then it assumes that the cancellation will be total.
d. | Short positions, deposits from the Central Bank and deposits from credit institutions and customers – repurchase agreements |
The fair value of these financial instruments is calculated by using the discounted cash flow (forward estimation) technique based on the current incremental lending rates for similar types of deposits having similar maturities.
e. | Financial derivatives (assets and liabilities) |
The estimated fair value of futures contracts is calculated using the prices quoted on the Derivatives Exchange Markets (Mercado Mexicano de Derivados and Chicago Mercantile Exchange) of identical instruments.
If there are no quoted prices on the market (either direct or indirect) for a financial derivative instrument, the respective fair value estimates are calculated by using one of the following models and valuation techniques:
In the valuation of financial instruments permitting static hedging (such as loans and advances to customers, deposits, forwards and swaps), the present value method (forward estimation) is used. This method consists of a) calculating the expected cash flows and b) discounting the expected cash flows at the risk interest rate through the applicable discount factor. Both steps use observable market data (yield curves, foreign exchange spot rates and so forth) which are provided by a market data supplier (price vendor).
- | The Black-Scholes model and Black model are used for the valuation of plain vanilla options, the first for foreign exchange and securities and the latter for interest rates. These models assume that the underlying price follows a lognormal distribution. |
- | The Montecarlo method with the local volatility model is the market proxy or reference model to price a wider range of exotic equity products. |
- | The partial differential equation method with the local volatility model is particularly appropriate to price and manage callable products and products including barrier features on a single underlying. This method is quicker, more stable and more precise than the standard Montecarlo method, but the latter is needed when the underlying is a basket. The local volatility models assume that share and index prices are log normally distributed and volatility is a deterministic function of time and the market price. |
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- | The trinomial trees method is intended for American foreign exchange products, which can be canceled at any time throughout the life of the option. It assumes deterministic interest rates and represents the evolution of the underlying foreign exchange using the Black-Scholes model. |
- | The partial differential equation solver using a mixed volatility model is used for pricing barrier products in foreign exchange. The development of a mixed volatility model was motivated by some very sensitive barrier products (double-no-touch options), which were quoted in the market with prices in between those provided by a local volatility model and a pure stochastic volatility model. The mixed volatility model is a combination of both models, which provides a price between them. |
f. | Marketable debt securities |
The fair value of these financial instruments is calculated by using the discounted cash flow (forward estimation) technique, based on the current incremental lending rates for similar types of deposits having similar maturities, for the debt obligation component and one of the financial derivatives valuation techniques for the embedded derivative component, which depends on the payoff.
Valuation adjustment for counterparty risk or default risk
The Credit Valuation Adjustment (CVA) is a valuation adjustment to OTC financial derivatives because of the risk associated with the credit exposure assumed with each counterparty.
The CVA is calculated taking into account potential exposure with each counterparty in each future period. The CVA for a specific counterparty is equal to the sum of the CVA for all the periods.
The following inputs are used to calculate the CVA:
● | Expected exposure: mark-to-market (MtM) value for each transaction plus an add-on for the potential future exposure for each period. Mitigating factors such as collateral and netting agreements are taken into account, as well as a temporary impairment factor for financial derivatives with interim payments. |
● | Loss Given Default: percentage of final loss assumed in a counterparty credit event /default. |
● | Probability of Default: for cases where there is no market information, such as the CDS quoted spread curve, proxies based on companies holding exchange-listed CDS, in the same industry and with the same external ratings as the counterparty, are used. |
● | Discount factor curve. |
The Debt Valuation Adjustment (DVA) is a valuation adjustment similar to the CVA but, in this case, it arises because of the Bank’s own credit risk assumed by its counterparties in OTC financial derivatives.
The CVA and DVA recognized as of December 31, 2021 amounted to 146 million pesos and 933 million pesos, respectively. The CVA and DVA recognized as of December 31, 2022 amounted to 252 million pesos and 856 million pesos, respectively.
All financial instruments fair values are calculated on a daily basis.
F-42
Set forth below are the financial instruments at fair value which measurement was based on internal models (Level 2 and Level 3) as of December 31, 2021 and 2022.
| | | | | | | | | |
|
| Fair | Fair | | | ||||
| | Values | Values | | | ||||
| | Calculated | Calculated | | | ||||
| | Using Internal | Using Internal | Valuation Techniques | Key Inputs | ||||
| | Models as of | Models as of | | | ||||
| | 12/31/2021 | 12/31/2022 | | | ||||
|
| Level 2 | Level 3 | Total | Level 2 | Level 3 | Total | | |
| | | | | | | | | |
ASSETS: | | | | | | | | | |
Financial assets at fair value through profit or loss: |
| 255,403 | 139 | 255,542 | 374,644 | 70 | 374,714 | | |
| | | | | | | | | |
Loans and advances to credit institutions – Reverse repurchase agreements | | 58,486 | — | 58,486 | 102,652 | — | 102,652 | Forward estimation (non-closed formula) | Interest rate yield curve |
| | | | | | | | | |
Loans and advances to customers – Reverse repurchase agreements | | 10,000 | — | 10,000 | 19,207 | — | 19,207 | Forward estimation (non-closed formula) | Interest rate yield curve |
| | | | | | | | | |
Debt and equity instruments |
| 49,404 | — | 49,404 | 24,043 | — | 24,043 | Price vendor | Financial instruments with low trading volume or minimum marketability |
Trading derivatives: | | | | | | | | | |
| | | | | | | | | |
Interest rate options |
| 711 | — | 711 | 1,277 | — | 1,277 | Black model (closed-formula solution) | Interest rate yield curve and implied volatility surface |
| | | | | | | | | |
Market index options: |
| 130 | — | 130 | 170 | — | 170 | | |
| | | | | | | | | |
European options |
| 11 | — | 11 | — | — | — | Black model (closed-formula solution) | Interest rate yield curves, quoted equity prices and index levels, implied volatility surface and dividend estimate |
| | | | | | | | | |
Quanto options |
| 115 | — | 115 | 152 | — | 152 | Local volatility model with partial differential equation method | Interest rate yield curves, quoted equity prices and index levels, implied volatility surface, historical correlations and dividend estimate |
| | | | | | | | | |
Auto-callable |
| 4 | — | 4 | 1 | — | 1 | Local volatility model with partial differential equation method | Interest rate yield curves, quoted equity prices and index levels, implied volatility surface, historical correlations and dividend estimate |
| | | | | | | | | |
Asian quanto | | — | — | — | 17 | — | 17 | Local volatility model with partial differential equation method | Interest rate yield curves, quoted equity prices and index levels, implied volatility surface, historical correlations and dividend estimate |
| | | | | | | | | |
Exchange rate options: |
| 1,874 | — | 1,874 | 2,321 | — | 2,321 | | |
| | | | | | | | | |
European barrier |
| — | — | — | 5 | — | 5 | Black model (closed-formula solution) | Interest rate yield curves, quoted exchange rates and implied volatility surface |
| | | | | | | | | |
Barrier options | | — | — | — | 3 | — | 3 | Logarithmic stochastic local volatility with partial differential equation method | Interest rate yield curves, quoted exchange rates and implied volatility surface |
| | | | | | | | | |
European options |
| 1,874 | — | 1,874 | 2,313 | — | 2,313 | Black model (closed-formula solution) | Interest rate yield curves, quoted exchange rates and implied volatility surface |
| | | | | | | | | |
Swaps |
| 129,668 | 139 | 129,807 | 218,036 | 70 | 218,106 | Forward estimation (non-closed formula) | Interest rate yield curve and quoted exchange rates |
| | | | | | | | | |
Index and securities futures |
| — | — | — | — | — | — | Forward estimation (non-closed formula) | Interest rate yield curve and quoted exchange rates |
| | | | | | | | | |
Exchange rate futures |
| 5,130 | — | 5,130 | 6,938 | — | 6,938 | Forward estimation (non-closed formula) | Interest rate yield curve and quoted exchange rates |
| | | | | | | | | |
Financial assets at fair value through other comprehensive income: |
| 141,088 | 4,110 | 145,198 | 11,230 | 1,000 | 12,230 | | |
| | | | | | | | | |
Debt instruments |
| 141,088 | — | 141,088 | 11,230 | — | 11,230 | Price vendor | Financial instruments with low trading volume or minimum marketability. |
| | | | | | | | | |
Loans and advances to customers | | — | 4,056 | 4,056 | — | 946 | 946 | Forward estimation (non-closed formula) | Interest rate yield curve |
| | | | | | | | | |
Equity instruments |
| — | 54 | 54 | — | 54 | 54 | Other | Value of shareholders’ equity |
| | | | | | | | | |
Hedging derivatives: |
| 11,248 | — | 11,248 | 10,181 | — | 10,181 | | |
| | | | | | | | | |
Swaps |
| 6,015 | — | 6,015 | 5,112 | — | 5,112 | Forward estimation (non-closed formula) | Interest rate yield curve and quoted exchange rates |
| | | | | | | | | |
Exchange rate forwards |
| 5,233 | — | 5,233 | 5,069 | — | 5,069 | Forward estimation (non-closed formula) | Interest rate yield curve and quoted exchange rates |
| | | | | | | | | |
|
| 407,739 | 4,249 | 411,988 | 396,055 | 1,070 | 397,125 | | |
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| | | | | | | | | |
| | Fair | Fair | | | ||||
| | Values | Values | | | ||||
| | Calculated | Calculated | | | ||||
| | Using Internal | Using Internal | | | ||||
| | Models as of | Models as of | Valuation | | ||||
| | 12/31/2021 | 12/31/2022 | Techniques | Key Inputs | ||||
|
| Level 2 | Level 3 | Total | Level 2 | Level 3 | Total | | |
| | | | | | | | | |
LIABILITIES: | | | | | | | | | |
Financial liabilities at fair value through profit or loss: | | 288,741 | 106 | 288,847 | 405,296 | 54 | 405,350 | | |
| | | | | | | | | |
Deposits from the Central Bank – Repurchase agreements | | 23,002 | — | 23,002 | 31,055 | — | 31,055 | Forward estimation (non- closed formula solution) | Interest rate yield curve |
| | | | | | | | | |
Deposits from credit institutions – Repurchase agreements | | 17,846 | — | 17,846 | 22,818 | — | 22,818 | Forward estimation (non- closed formula solution) | Interest rate yield curve |
| | | | | | | | | |
Customer deposits – Repurchase agreements | | 114,078 | — | 114,078 | 119,769 | — | 119,769 | Forward estimation (non- closed formula solution) | Interest rate yield curve |
| | | | | | | | | |
Trading derivatives: | | | | | | | | | |
| | | | | | | | | |
Interest rate options |
| 915 | — | 915 | 1,921 | — | 1,921 | Black model (closed-formula solution) | Interest rate yield curve and implied volatility surface |
| | | | | | | | | |
Market index options: |
| 264 | — | 264 | 1,744 | — | 1,744 | | |
| | | | | | | | | |
European |
| 29 | — | 29 | — | — | — | Black-Scholes model (closed-formula solution) | Interest rate yield curves, quoted equity prices, index levels, implied volatility surface and dividend estimate |
| | | | | | | | | |
Auto-callable |
| 149 | — | 149 | 61 | — | 61 | Local volatility model with partial differential equation method | Interest rate yield curves, quoted equity prices and index levels, implied volatility surface, historical correlations and dividend estimate |
| | | | | | | | | |
Asian quanto | | — | — | — | 9 | — | 9 | Local volatility model with partial differential equation method | Interest rate yield curves, quoted equity prices and index levels, implied volatility surface, historical correlations and dividend estimate |
| | | | | | | | | |
Quanto options |
| 86 | — | 86 | 1,674 | — | 1,674 | Local volatility model with partial differential equation method | Interest rate yield curves, quoted equity prices and index levels, implied volatility surface, historical correlations and dividend estimate |
| | | | | | | | | |
Exchange rate options: |
| 2,063 | — | 2,063 | 2,278 | — | 2,278 | | |
| | | | | | | | | |
European barrier |
| 5 | — | 5 | 32 | — | 32 | Black model (closed-formula solution) | Interest rate yield curves, quoted exchange rates and implied volatility surface |
| | | | | | | | | |
European options |
| 2,051 | — | 2,051 | 2,242 | — | 2,242 | Black model (closed-formula solution) | Interest rate yield curves, quoted exchange rates and implied volatility surface |
| | | | | | | | | |
American barrier and touch options |
| 7 | — | 7 | 4 | — | 4 | Mixed volatility model with partial differential equation method | Interest rate yield curves, quoted exchange rates and implied volatility surface |
| | | | | | | | | |
Swaps |
| 126,796 | 106 | 126,902 | 220,071 | 54 | 220,125 | Forward estimation (non- closed formula solution) | Interest rate yield curves and quoted exchange rates |
| | | | | | | | | |
Exchange rate futures |
| 3,491 | — | 3,491 | 5,120 | — | 5,120 | Forward estimation (non- closed formula solution) | Interest rate yield curve and quoted exchange rates |
| | | | | | | | | |
Short positions: | | | | | | | | | |
| | | | | | | | | |
Debt instruments |
| 27 | — | 27 | — | — | — | Forward estimation (non- closed formula solution) | Interest rate yield curve |
| | | | | | | | | |
Marketable debt securities | | 259 | — | 259 | 520 | — | 520 | Present value (non-closed formula solution) and Black-Scholes model with closed-formula solution | Interest rate yield curve, quoted |
| | | | | | | | | |
Hedging derivatives: | | 8,162 | — | 8,162 | 4,461 | — | 4,461 | | |
| | | | | | | | | |
Swaps | | 7,924 | — | 7,924 | 3,576 | — | 3,576 | Forward estimation (non- closed formula solution) | Interest rate yield curve and quoted exchange rates |
| | | | | | | | | |
Exchange rate forwards | | 238 | — | 238 | 885 | — | 885 | Forward estimation (non- closed formula solution) | Interest rate yield curve and quoted exchange rates |
| | 296,903 | 106 | 297,009 | 409,757 | 54 | 409,811 | | |
Some of the financial instruments of the fair-value hierarchy have identical or similar offsetting exposures to certain inputs, but in accordance with IFRS, are presented as gross assets and liabilities in the consolidated balance sheet.
F-44
The measurements calculated through valuation techniques, might have other methods or assumptions than those related to interest rate risk, credit risk and foreign currency risk spreads, or their related correlations and volatilities. Nevertheless, Bank’s Management believes that the fair value of the financial assets and liabilities recognized in the consolidated balance sheet and the gains and losses arising from these financial instruments are reasonably stated.
Financial instruments categorized in Level 3
Set forth below are the Bank’s financial instruments measured using unobservable market data as significant inputs of the internal models (Level 3):
As of December 31, 2022, the financial instruments at FVTPL categorized in Level 3 hierarchy are the following:
- | Twelve cross currency swaps (CCS) USD/Peso (Nominal USD 55 million) and four interest rate swaps (IRS) over TIIE-28 (Nominal 620 million pesos) with a maturity above twenty years. Since there is no Mexican rates liquid market for estimating and discounting financial instruments with maturities equal or higher than twenty years, these CCS and IRS are categorized as Level 3 hierarchy. |
- | One IRS 91-day TIIE (Nominal 20 million pesos). Since there is not a 91-day TIIE interest rate curve, these financial instruments are classified into a Level 3 hierarchy. |
- | Six loan (Nominal 889 million pesos) classified as part of the “Held to collect and sell” business model. In order to calculate the fair value of these loans, market credit spreads per counterparty are needed; but given that none counterparty granted with the loans have a market credit spread quote (CDS), a generic credit curve is used as a proxy to represent its credit risk. Therefore, these loans are categorized into a Level 3 hierarchy. |
As of December 31, 2021, the financial instruments at FVTPL categorized in Level 3 hierarchy are the following:
- | Six CCS USD/Peso (Nominal USD 38 million) and four IRS (Nominal 619 million pesos) with a maturity above twenty years. Since there is no Mexican rates liquid market for estimating and discounting financial instruments with maturities equal or higher than twenty years, these CCS and IRS are classified into a Level 3 hierarchy. |
- | One IRS 91-day TIIE (Nominal 20 million). Since there is not a 91-day TIIE interest rate curve, these financial instruments are classified into a Level 3 hierarchy. |
- | One loan (Nominal 4,056 million pesos) classified as part of the “Held to collect and sell” business model was granted to a small-medium size customer. In order to calculate the fair value of this loan, market credit spreads per counterparty are needed; but given that this counterparty does not have a market credit spread quote (CDS), a generic credit curve is used as a proxy to represent its credit risk. Therefore, this loan is categorized into a Level 3 hierarchy. |
- | The structure denominated as “Swaps Lock-In” that is composed of three IRS, which are fully hedged in prepayment and market risk (Nominal 7,500 million pesos). In case that any of the IRS involved in this structure presents an un-wind event at any time (lock-in), the rest of them will be also un-winded; these terms are submitted in a contractual basis. The significant |
F-45
materiality of this structure to the unobservable significant input (prepayment rate) leads to a Level 3 hierarchy.
The following table provides a reconciliation of the movement between opening and closing balances of Level 3 financial instruments, measured at fair value using a valuation technique with significant unobservable inputs:
| | | | | | | | | | | | | |
| | | | | | | | | Assets | | | | |
| | | Trading | | | Equity | | | Loans and advances | | | | |
|
| | derivatives | | | instruments | | | to customers | | | Total | |
| | | | | | | | | | | | | |
Balance at January 1, 2020 | | | 938 | | | — | | | 2,875 | | | 3,813 | |
Total gains/losses recognized in the consolidated income statement: | | | | | | | | | | | | | |
Gains/(losses) on financial assets and liabilities (net) | | | (265) | | | — | | | — | | | (265) | |
Purchases | | | 6 | | | — | | | — | | | 6 | |
Transfers out | | | — | | | — | | | — | | | — | |
New issuances | | | — | | | — | | | — | | | — | |
Settlements | | | (57) | | | — | | | (2,875) | | | (2,932) | |
Balance at December 31, 2020 | | | 622 | | | — | | | — | | | 622 | |
Total gains/losses recognized in the consolidated income statement: | | | | | | | | | | | | | |
Gains/(losses) on financial assets and liabilities (net) | | | (305) | | | — | | | — | | | (305) | |
Purchases | | | — | | | — | | | — | | | — | |
Transfers out | | | — | | | — | | | — | | | — | |
New issuances | | | — | | | 54 | | | 4,056 | | | 4,110 | |
Settlements | | | (178) | | | — | | | — | | | (178) | |
Balance at December 31, 2021 | | | 139 | | | 54 | | | 4,056 | | | 4,249 | |
Total gains/losses recognized in the consolidated income statement: | | | | | | | | | | | | | |
Gains/(losses) on financial assets and liabilities (net) | | | (1) | | | — | | | — | | | (1) | |
Purchases | | | — | | | — | | | 2,544 | | | 2,544 | |
Transfers out | | | — | | | — | | | (1,598) | | | (1,598) | |
New issuances | | | — | | | — | | | — | | | — | |
Settlements | | | (68) | | | — | | | (4,056) | | | (4,124) | |
Balance at December 31, 2022 | | | 70 | | | 54 | | | 946 | | | 1,070 | |
F-46
| | | | |
| | | Liabilities | |
| | | Trading | |
|
| | derivatives | |
| | | | |
Balance at January 1, 2020 | | | (791) | |
Total gains/losses recognized in the consolidated income statement: | | | | |
Gains/(losses) on financial assets and liabilities (net) | | | (8) | |
Purchases | | | (369) | |
Transfer out | | | 617 | |
New issuances | | | — | |
Settlements | | | 61 | |
Balance at December 31, 2020 | | | (490) | |
Total gains/losses recognized in the consolidated income statement: | | | | |
Gains/(losses) on financial assets and liabilities (net) | | | 277 | |
Purchases | | | — | |
Transfers out | | | 24 | |
New issuances | | | — | |
Settlements | | | 83 | |
Balance at December 31, 2021 | | | (106) | |
Total gains/losses recognized in the consolidated income statement: | | | | |
Gains/(losses) on financial assets and liabilities (net) | | | 4 | |
Purchases | | | — | |
Transfers out | | | — | |
New issuances | | | — | |
Settlements | | | 48 | |
Balance at December 31, 2022 | | | (54) | |
F-47
Unobservable inputs used in measuring fair value
The table below shows the effect as of December 31, 2022 on the fair value of the financial instruments classified as Level 3 of a reasonable change in the assumptions used in the valuation.
| | | | | | | | | | | | | | | |
| |
| |
|
| |
|
| Significant |
|
| Range of Estimates |
|
| Fair value Measurement |
| | | | | | Valuation | | | Unobservable | | | (weighted-average) | | | Sensitivity to |
Financial Instrument |
|
| Fair value |
|
| Technique |
|
| Input |
|
| for Unobservable Input |
|
| Unobservable Inputs |
Loan and advances to customers | | | 889 | | | Estimation of credit default probabilities from credit spreads | | | Market credit spread quotes (CDS) | | | Credit spread quote (250 basis points – 1,003 basis points) | | | A significant rating downgrade would result in a lower fair value |
Cross currency swaps | | | 19 | | | Forward estimation (non-closed formula) | | | Long-term peso exchange rate (above 20 years) | | | Bid-offer spread IRS TIIE (6 basis points) CCS USD/Peso (4 basis points) | | | A significant decrease in long-term peso exchange rate would result in a lower fair value |
Interest rate swaps |
| | (4) |
| | Forward estimation (non-closed formula) |
| | Long-term peso exchange rate (above 20 years) |
| | 91-day TIIE interest rate curve = 28-day TIIE interest rate curve + (-5 basis points, 31 basis points) Bid-offer spread IRS TIIE (6 basis points) CCS USD/Peso (4 basis points) |
| | A significant decrease in 91-day TIIE interest rate curve would result in a higher fair value |
This effect was determined by applying the probable valuation ranges of the main unobservable inputs detailed in the following table:
Although Bank’s Management believes that its estimates of fair value are appropriate, the use of different inputs could lead to different measures of fair value. As of December 31, 2022, the potential impact in the consolidated income statement of changing the main inputs used for the measurement of Level 3 financial instruments for other inputs, taking the highest (most favorable input) or lowest (least favorable) value of the range deemed reasonably possible, would be as follows:
| | | | | | | |
| | | Potential Impact on Consolidated | | |||
| | | Income Statement as of | | |||
| | | December 31, 2022 |
| |||
|
|
| Most |
|
| Least | |
|
| | Favorable |
| | Favorable | |
|
| | Input |
| | Input | |
| | | | | | | |
ASSETS: | | | | | | | |
Cross currency swaps | | | 1 | | | (1) | |
Loan and advances to customers | | | — | | | (10) | |
LIABILITIES: | | | | | | | |
Interest rate swaps |
| | 1 |
| | (1) | |
Cross currency swaps
The least favorable scenario assumed the following:
- | The long-term peso interest rate curves (IRS and CCS USD/Peso) used to calculate the fair value were modified to add four basis points. This scenarios were determined by the following: |
F-48
0.95 percentile over a one-year historical period of the difference between the bid-offer quotations of these market rates divided by two. |
The most favorable scenario assumed the following:
- | The long-term peso interest rate curves (IRS TIIE and CCS USD/Peso) used to calculate the fair value were modified to subtract four basis points. |
Interest rate swaps
The least favorable scenario assumed the following:
- | The long-term peso interest rate curves (IRS and 28-day TIIE) used to calculate the fair value were modified to subtract 16 basis points. These scenarios were determined by the following: 0.95 percentile over a one-year historical period of the difference between the bid-offer quotations of these interest rate curves divided by two. Regarding the IRS with an underlying of 91-day TIIE interest rate curve, in absence of an observable market interest rate curve referenced to 91-day TIIE interest rate curve, the corresponding fixing is used; thus, a set of historical spreads between the fixings is applied over the 28-day TIIE interest rate curve in order to estimate the corresponding curve. The least favorable scenario was determined considering the higher spread over a one-year historical window and then applied to the 28-day TIIE interest rate curve. |
The most favorable scenario assumed the following:
- | The long-term peso interest rate curves (IRS and CCS USD/Peso) used to calculate the fair value were modified to add 16 basis points. Regarding the IRS with an underlying of 91-day TIIE interest rate curve, the most favorable scenario was determined considering the lower spread over a one year historical window and then applied to the 28-day TIIE interest rate curve. |
Loans and advances to customers
The least favorable scenario assumed the following:
- | Stress of the credit spread equivalent to a downgrade of three notches to represent the possible volatility of assigning a proxy credit curve to the counterparty. For example, if the original counterparty’s rating is BBB+, then the stress rating results into BB+, employing an internal-external rating equivalency. |
There is no favorable scenario regarding these loans, since the greatest fair value of this financial asset is the total amount granted (value at par).
The most favorable scenario assumed the following:
- | Stress of the credit spread equivalent to an upgrade of three notches to represent the possible volatility of assigning a proxy credit curve to the counterparty. Continuing with the prior example, the upgrade corresponds to an A+ rating. |
v. Sensitivity analysis
As an alternative to the sensitivity analysis, the Bank uses a Value at Risk (VaR) technique. A detailed explanation about VaR technique and the main assumptions incorporated therein are
F-49
described in Note 48. The VaR amounts as of December 31, 2022, including all financial instruments in the trading book position of the Bank are as follows:
| | | | | | | | | | | | | |
|
|
| Average |
|
| High |
|
| Low |
|
| 12/31/2022 |
|
| | | | | | | | | | | | | |
All financial instruments |
| | 41 |
| | 103 |
| | 25 |
| | 41 | |
By category: | | | | | | | | | | | | | |
Instruments sensitive to interest rate |
| | 38 |
| | 104 |
| | 26 |
| | 39 | |
Instruments sensitive to equity market prices |
| | 1 |
| | 3 |
| | 0 |
| | 1 | |
Instruments sensitive to foreign currency exchange rates |
| | 15 |
| | 36 |
| | 2 |
| | 19 | |
Instruments sensitive to volatility movements |
| | 10 |
| | 68 |
| | 3 |
| | 6 | |
The Bank’s VaR should be interpreted in light of the limitations of the methodologies. These limitations include the following:
- | Historical data may not provide the best estimate of the joint distribution of risk factor changes in the future and may fail to capture the risk of possible extreme adverse market movements, which have not occurred in the historical window used in the calculations. |
- | VaR using a one-day time horizon does not fully capture the market risk of positions that cannot be liquidated or hedged within one day. |
- | The Bank computes the VaR of the trading portfolios at the close of business and positions may change substantially during the course of the trading day. |
- | VaR using a 99% confidence level does not reflect the extent of potential losses beyond that percentile. |
These limitations and the nature of the VaR measure mean that the Bank can guarantee neither those losses will not exceed the VaR amounts indicated nor that losses in excess of the VaR amounts will not occur more frequently than once in one hundred business days.
vi. Recognition of fair value changes
Changes in the fair value of financial assets and liabilities are recognized in the consolidated income statement. A distinction is made between the changes resulting from the accrual of interest and similar items, (which are recognized under Interest income calculated using the effective interest method, Other interest and similar income or Interest expense and similar charges, as appropriate), and those arising for other reasons, which are recognized at their net amount under Gains/(losses) on financial assets and liabilities.
The recognition of the adjustments due to changes in fair value arising from financial assets at FVTOCI are described in Note 2.d.i.
vii. Hedging transactions
The Bank uses financial derivatives for the following purposes: (i) to facilitate these instruments to customers who request them in the management of their market and credit risks (trading derivatives); (ii) to use these financial derivatives in the management of the risks of the Bank’s own positions and assets and liabilities (hedging derivatives); and (iii) to obtain gains from changes in the prices of these financial derivatives (trading derivatives).
Financial derivatives that do not qualify for hedge accounting are treated for accounting purposes as trading derivatives.
F-50
A financial derivative qualifies for hedge accounting if all the following conditions are met:
1. | The financial derivative hedges one of the following three types of exposure: |
a. | Changes in the fair value of assets and liabilities due to fluctuations in, among others, the interest rate and/or exchange rate to which the position or balance to be hedged is subject and firm commitments (fair value hedge); |
b. | Changes in the estimated cash flows arising from financial assets and liabilities and highly probable forecasted transactions (cash flow hedge); and |
c. | The net investment in a foreign operation (hedge of a net investment in a foreign operation). |
2. | It is effective in offsetting exposure inherent in the hedged item throughout the expected term of the hedge, which means that: |
a. | At the date of arrangement, the hedge is expected, under normal conditions, to be highly effective (prospective effectiveness). |
b. | There is sufficient evidence that the hedge was effective during the whole life of the hedged item (retrospective effectiveness). To this end, the Bank checks that the results of the hedge were within a range of 80% to 125% of the results of the hedged item. |
3. | There must be adequate documentation evidencing the specific designation of the financial derivative to hedge certain balances or transactions and how this hedge was expected to be achieved and measured, if this is consistent with the Bank’s management of its own risks. |
The changes in value of financial instruments qualifying for hedge accounting are recognized as follows:
a. | In fair value hedges, the gains or losses arising on both the hedging instruments and the hedged items attributable to the type of risk being hedged are recognized directly in the consolidated income statement within Gains/(losses) on financial assets and liabilities (net). |
b. | In cash flow hedges, the effective portion of the change in value of the hedging instrument is recognized temporarily in other comprehensive income under Valuation adjustments - Cash flow hedges until the forecast transactions occur, when it is recognized in the consolidated income statement, unless, if the forecast transactions result in the recognition of non-financial assets or liabilities, it is included in the cost of the non-financial asset or liability. |
c. | In hedges of a net investment in a foreign operation, the gains or losses attributable to the portion of the hedging instruments qualifying as an effective hedge are recognized temporarily in other comprehensive income under Valuation adjustments - Hedges of net investments in foreign operations until the gains or losses on the hedged item are recognized in the consolidated income statement. |
d. | The ineffective portion of the gains or losses on the hedging instruments of cash flow hedges and hedges of a net investment in a foreign operation are recognized directly under Gain/(losses) on financial assets and liabilities in the consolidated income statement. |
F-51
If a financial derivative designated as a hedge no longer meets the requirements described above due to expiration, ineffectiveness or for any other reason, the financial derivative is classified for accounting purposes as a trading financial derivative.
When fair value hedge accounting is discontinued, the adjustments previously recognized on the hedged item are amortized to the consolidated income statement at the effective interest rate recalculated at the date of hedge discontinuation. The adjustments must be fully amortized at maturity.
When cash flow hedge accounting is discontinued, any cumulative gain or loss on the hedging instrument recognized in other comprehensive income under Valuation adjustments - Cash flow hedges (from the period when the hedge was effective) remains in consolidated total equity item until the forecast transaction occurs, at which time it is recognized in the consolidated income statement, unless the transaction is no longer expected to occur, in which case the cumulative gain or loss is recognized immediately in the consolidated income statement.
viii. Derivatives embedded in hybrid financial instruments
Derivatives embedded in other financial instruments or in other host contracts are accounted for separately as financial derivatives if: i) their risks and characteristics are not closely related to those of the host contracts; ii) a separate instrument with the same terms would meet the definition of a financial derivative and iii) the hybrid contract is not measured at fair value through profit or loss.
e) Derecognition of financial assets and liabilities
The accounting treatment of transfers of financial assets depends on the extent to which the risks and rewards associated with the transferred assets are transferred to third parties:
1. | If the Bank transfers substantially all the risks and rewards to third parties – unconditional sale of financial assets, sale of financial assets under an agreement to repurchase them at their fair value at the date of repurchase, sale of financial assets with a purchased call option or written put option that is deeply out of the money, securitization of assets in which the transferor does not retain a subordinated debt or grant any credit enhancement to the new holders, and other similar cases – the transferred financial asset is derecognized and any rights or obligations retained or created in the transfer are recognized simultaneously. |
2. | If the Bank retains substantially all the risks and rewards associated with the transferred financial asset – sale of financial assets under an agreement to repurchase them at a fixed price or at the sale price plus interest, a securities lending agreement in which the borrower undertakes to return the same or similar assets, and other similar cases – the transferred financial asset is not derecognized and continues to be measured by the same criteria as those used before the transfer. However, the following items are recognized: |
a. | An associated financial liability, which is recognized for an amount equal to the consideration received and is subsequently measured at amortized cost. |
b. | The income from the transferred financial asset not derecognized and any expense incurred on the new financial liability, without offsetting. |
3. | If the Bank neither transfers nor retains substantially all the risks and rewards associated with the transferred financial asset – sale of financial assets with a purchased call option or written put option that is not deeply in or out of the money, securitization of assets in which the transferor retains a subordinated debt or other type of credit enhancement for a portion of the transferred asset, and other similar cases – the following distinction is made: |
F-52
a. | If the transferor does not retain control of the transferred financial asset, the asset is derecognized and any rights or obligations retained or created in the transfer are recognized. |
b. | If the transferor retains control of the transferred financial asset, it continues to recognize it for an amount equal to its exposure to changes in value and recognizes a financial liability associated with the transferred financial asset. The net carrying amount of the transferred asset and the associated liability is the amortized cost of the rights and obligations retained, if the transferred asset is measured at amortized cost, or the fair value of the rights and obligations retained, if the transferred asset is measured at fair value. |
Accordingly, financial assets are only derecognized when the rights to the cash flows they generate have expired or when substantially all the inherent risks and rewards have been transferred to third parties.
Financial liabilities are only derecognized when the obligations they generate have been extinguished, that is when the contractual obligations have been paid or cancelled, or have been expired.
The exchange between the Bank and its original lenders of debt instruments with substantially different terms, as well as substantial modifications of the terms of existing financial liabilities, are accounted for as an extinguishment of the original financial liability and the recognition of a new financial liability. The terms are substantially different if the discounted present value of the cash flows under the new terms, including any fees paid net of any fees received and discounted using the original effective interest rate, is at least 10% different from the discounted present value of the remaining cash flows of the original financial liability, both discounted at the original effective interest rate of the original liability. In addition, other qualitative factors, such as the currency that the instrument is denominated in, changes in the type of interest rate, new conversion features attached to the instrument and change in covenants are also taken into consideration. If an exchange of debt instruments or modification of terms is accounted for an extinguishment, any costs of fees incurred are recognized as part of the gain or loss on the extinguishment. If the exchange or modification is not accounted for as an extinguishment, any costs or fees incurred adjust the carrying amount of the liability and are amortized over the remaining term of the modified liability.
f) Offsetting of financial instruments
Financial asset and liability balances are offset, i.e., reported in the consolidated balance sheet at their net amount, only if the Bank currently have a legally enforceable right to set-off the recognized amounts and intend either to settle on a net basis or to realize the asset and settle the liability simultaneously.
The disclosures set out in the tables below include financial assets and financial liabilities that:
● | Are offset in the consolidated balance sheet; or |
● | Are subject to an enforceable master netting arrangement or similar agreement that covers similar financial instruments, irrespective of whether they are offset in the consolidated balance sheet. |
The similar agreements include financial derivative clearing agreements, global master repurchase agreements and global master securities lending agreements. Similar financial instruments include financial derivatives, repurchase agreements, reverse repurchase agreements, securities borrowing and lending agreements. Financial instruments such as loans and advances to customers and deposits are not disclosed in the tables below unless they are offset in the consolidated balance sheet.
Financial derivative transactions are either transacted on an exchange or entered into under ISDA master netting agreements. In general, under ISDA master netting agreements in certain circumstances (e.g. when a credit event such as a default occurs) all outstanding transactions under the agreement are terminated. The termination value is assessed and only a single net amount is due or payable in settlement of all transactions.
F-53
Repurchase agreements, reverse repurchase agreements, securities borrowing and lending agreements are covered by master agreements with netting terms similar to those of ISDA master netting agreements.
The ISDA and similar master netting arrangements do not meet the criteria for offsetting in the consolidated balance sheet. This is because they create for the parties to the agreement a right of set-off of recognized amounts that is enforceable only following an event of default, insolvency or bankruptcy of the Bank or the counterparties or following other predetermined events. In addition, the Bank does not intend to settle on a net basis or to realize the financial assets and settle the financial liabilities simultaneously.
The Bank receives and gives collateral in the form of cash and debt securities in connection with the following transactions:
● | Financial derivatives; |
● | Repurchase agreements and reverse repurchase agreements; and |
● | Securities lending and borrowing agreements. |
Such collateral is subject to standard industry terms including, when appropriate, an ISDA Credit Support Annex (CSA). This means that securities received/given as collateral can be pledged or sold during the term of the transaction but have to be returned on maturity of the transaction. The terms also give each party the right to terminate the related transactions on the counterparty’s failure to post collateral.
F-54
The following financial assets are subject to offsetting, enforceable master netting arrangements and similar agreements:
As of December 31, 2022:
| | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | Amount not offset in the consolidated balance sheet | | | | | ||||||
| | | | | | Gross amount of | | | Net amount of | | | | | | | | | | | | | |
| | | | | | financial liabilities | | | financial assets | | | | | | | | | | | | | |
| | | | | | offset in the | | | presented in the | | | | | | | | | | | | | |
| | | Gross amount of | | | consolidated balance | | | consolidated | | | Impact of master | | | Financial instrument | | | Cash | | | Net | |
|
|
| financial assets |
|
| sheet |
|
| balance sheet |
|
| netting agreements |
|
| collateral |
|
| collateral |
|
| amount |
|
| | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | |
Financial derivatives assets |
| | 238,997 |
| | — |
| | 238,997 |
| | (204,724) |
| | (4,541) |
| | (26,861) |
| | 2,871 | |
| | | | | | | | | | | | | | | | | | | | | | |
Reverse repurchase agreements | | | 121,859 | | | — | | | 121,859 | | | (2,461) | | | (119,398) | | | — | | | — | |
|
| | |
| | |
| | |
| | |
| | |
| | |
| | | |
Equity instruments (*) (see Note 9.a) | | | — | | | — | | | — | | | — | | | (1) | | | — | | | (1) | |
| | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | |
Total |
| | 360,856 |
| | — |
| | 360,856 |
| | (207,185) |
| | (123,940) |
| | (26,861) |
| | 2,870 | |
As of December 31, 2021:
| | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | Amount not offset in the consolidated balance sheet | | | | | ||||||
| | | | | | Gross amount of | | | Net amount of | | | | | | | | | | | | | |
| | | | | | financial liabilities | | | financial assets | | | | | | | | | | | | | |
|
| | | | | offset in the | | | presented in the | | | |
| | | | | | | | | |
| | | Gross amount of | | | consolidated balance | | | consolidated | | | Impact of master | | | Financial instrument |
| | Cash | | | Net | |
|
|
| financial assets |
|
| sheet |
|
| balance sheet |
|
| netting agreements |
|
| collateral |
|
| collateral |
|
| amount |
|
| | | | | | | | | | | | | | | | | | | | | | |
Financial derivatives assets |
| | 190,638 |
| | — |
| | 190,638 |
| | (152,313) |
| | (4,491) |
| | (26,894) |
| | 6,940 | |
| | | | | | | | | | | | | | | | | | | | | | |
Reverse repurchase agreements |
| | 68,486 |
| | — |
| | 68,486 |
| | (4,799) |
| | (63,687) |
| | — |
| | — | |
| | | | | | | | | | | | | | | | | | | | | | |
Equity instruments (*) (see Note 9.a) | | | 9 | | | — | | | 9 | | | — | | | (74) | | | — | | | (65) | |
| | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | |
Total |
| | 259,133 |
| | — |
| | 259,133 |
| | (157,112) |
| | (68,252) |
| | (26,894) |
| | 6,875 | |
(*) As of December 31, 2021 and 2022, the financial instruments received as collateral in lending transactions amount to 74 million pesos and 1 million pesos, respectively, which are limited to the net equities lent under the aforementioned lending transactions.
The following financial liabilities are subject to offsetting, enforceable master netting arrangements and similar agreements:
As of December 31, 2022:
| | | | | | | | | | | | | | | | | | | | | | |
|
| |
|
| |
|
| |
|
| | Amount not offset in the consolidated balance sheet |
| | | | ||||||
| | | | | | Gross amount of | | | Net amount of | | | | | | | | | | | | | |
| | | | | | financial assets | | | financial liabilities | | | | | | | | | | | | | |
| | | | | | offset in the | | | presented in the | | | | | | | | | | | | | |
| | | Gross amount of | | | consolidated balance | | | consolidated | | | Impact of master | | | Financial instrument | | | Cash | | | Net | |
|
|
| financial liabilities |
|
| sheet |
|
| balance sheet |
|
| netting agreements |
|
| collateral |
|
| collateral |
|
| amount |
|
| | | | | | | | | | | | | | | | | | | | | | |
Financial derivatives liabilities |
| | 235,649 | | | — |
| | 235,649 |
| | (204,724) | | | (7,077) | | | (15,676) |
| | 8,172 | |
| | | | | | | | | | | | | | | | | | | | | | |
Repurchase agreements |
| | 299,320 | | | — |
| | 299,320 |
| | (2,461) | | | (300,467) | | | — |
| | (3,608) | |
| | | | | | | | | | | | | | | | | | | | | | |
Short positions |
| | 28,762 | | | — |
| | 28,762 |
| | — | | | (28,932) | | | — |
| | (170) | |
| | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | |
Total |
| | 563,731 |
| | - |
| | 563,731 |
| | (207,185) |
| | (336,476) |
| | (15,676) |
| | 4,394 | |
F-55
As of December 31, 2021:
| | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | Amount not offset in the consolidated balance sheet | | | | | ||||||
|
|
| |
|
| Gross amount of |
|
| Net amount of |
|
| |
|
|
|
|
|
|
|
| | |
| | | | | | financial assets | | | financial liabilities | | | | | | | | | | | | | |
| | | | | | offset in the | | | presented in the | | | | | | | | | | | | | |
| | | Gross amount of | | | consolidated balance | | | consolidated | | | Impact of master | | | Financial instrument | | | Cash | | | Net | |
| | | financial liabilities | | | sheet | | | balance sheet | | | netting agreements | | | collateral | | | collateral | | | amount |
|
| | | | | | | | | | | | | | | | | | | | | | |
Financial derivatives liabilities | | | 184,840 | | | — |
| | 184,840 |
| | (152,313) | | | (6,375) | | | (13,222) |
| | 12,930 | |
| | | | | | | | | | | | | | | | | | | | | | |
Repurchase agreements | | | 264,260 | | | — |
| | 264,260 |
| | (4,799) | | | (265,862) | | | — |
| | (6,401) | |
| | | | | | | | | | | | | | | | | | | | | | |
Short positions | | | 19,554 | | | — |
| | 19,554 |
| | — | | | (19,702) | | | — |
| | (148) | |
| | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | |
Total |
| | 468,654 |
| | — |
| | 468,654 |
| | (157,112) |
| | (291,939) |
| | (13,222) |
| | 6,381 | |
g) Impairment of financial assets
Definition
The Bank associates an impairment in the value to financial assets measured at amortized cost, financial assets at FVTOCI, lease receivables and loan commitments and guarantees granted that are not measured at fair value.
The impairment represents the best estimation of the financial assets expected credit losses at the consolidated balance sheet date.
The impairment for expected credit losses is recognized in the consolidated income statement for the period in which the impairment arises. In the event of occurrence, the recoveries of previously recognized impairment losses are recognized in the consolidated income statement for the period in which the impairment no longer exists or is reduced.
In the case of POCI financial assets, the Bank only recognizes the changes in the expected credit losses during the life of the financial asset since the initial recognition as a credit loss. In the case of financial assets at FVTOCI, the changes in the fair value due to expected credit losses are recognized in the consolidated income statement of the year where the change happened, reflecting the rest of the valuation in other comprehensive income.
The expected credit loss is estimated as the difference between the contractual cash flows to be recovered and the expected cash flows discounted using the original effective interest rate. In the case of POCI financial assets, this difference is discounted using the effective interest rate adjusted by credit rating.
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Allowance for impairment losses
The Bank assesses on a forward-looking basis the expected credit losses associated with its financial assets carried at amortized cost and at FVTOCI. The impairment methodology applied depends on whether there has been a significant increase in credit risk.
The impairment estimation methodology segregates financial assets in three categories, based on the stage of each financial asset with regard to its level of credit risk:
● | Stage 1 (Normal risk): financial assets for which no significant increase in credit risk is identified since their initial recognition. In this case, the allowance for impairment losses reflects credit losses arising from expected defaults over the following twelve months from the reporting date. |
● | Stage 2 (Normal risk under watchlist): if there has been a significant increase in credit risk since the date of initial recognition but the impairment event has not materialized, the financial asset is classified as Stage 2. In this case, the allowance for impairment losses reflects the expected losses from expected defaults over the life of the financial asset. |
● | Stage 3 (Doubtful risk): a financial asset is classified in this stage when it shows effective signs of impairment as a result of one or more credit events that have already occurred resulting in a credit loss. In this case, the amount of the allowance for impairment losses reflects the expected losses for credit risk over the expected life of the financial asset. |
For POCI financial assets, the allowance for impairment losses reflects a deep discount that considers the incurred expected credit risk losses of the financial asset.
Once the Bank has classified its financial assets according to the stage mentioned above, those financial assets are assessed for impairment individually or collectively in order to recognize the allowance for impairment losses arising from credit risk, as follows:
Individual assessment
Financial assets individually assessed for credit impairment are estimated by the following methodologies:
a) | Calculating the present value of expected cash flows discounted at an appropriate discount rate of those individually significant financial assets considering the debtor’s financial situation and any guarantees and collateral in place. The Bank takes into account all available information (external or internal), including expert judgment and reasonable and supportable forecasts of future events, to estimate the present value of expected cash flows, and |
b) | Calculating the expected recovery from available collateral and guarantees, minus the estimated dispositions costs. Subsequently, expected cash flows, discounted at an appropriate rate, are estimated using the expected values from the sale or foreclosure of collateral and guarantees. |
The Bank has defined as an “individually significant financial asset” those financial assets with a total current risk exposure amounting more than 8 million pesos for wholesale and small and medium-sized enterprises (SME) loan portfolio. This threshold is reviewed annually to adapt it to the Bank’s business circumstances.
Collective assessment
Financial assets collectively assessed for credit impairment are estimated by taking into consideration the historical impairment loss experience at the time of assessment adjusted to reflect current economic
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conditions and taking into account the characteristics of the counterparty, reasonable and supportable forecasts of future events, the guarantees and collateral associated with the transaction.
In the estimation of the parameters used for the allowance for impairment losses and for provisions for off-balance sheet risk calculation such as Exposure at Default (EAD), Probability of Default (PD), Loss Given Default (LGD) and discount rate, the Bank leveraged on its experience developing internal models for calculating parameters for regulatory and management purposes. The Bank is aware of the differences between such internal models and IFRS 9 requirements for impairment purposes, as a result, it has focused on adapting to such requirements to the development of its IFRS 9 expected credit loss model.
The Bank performs retrospective and monitoring tests to evaluate the reasonableness of the collective estimate.
Grouping of financial assets for collective assessment
Financial assets assessed collectively are grouped together considering those that have similar credit risk characteristics indicative of the debtors’ ability to pay all principal and interest amounts in accordance with the contractual terms. The credit risk characteristics considered for the purpose of grouping the financial assets are, inter alia, instrument type, debtor’s industry, type of guarantee or collateral, age of past due amounts and any other relevant factor for the estimation of future cash flows.
In performing this grouping, there must be sufficient information for the group to be statistically credible. Where sufficient information is not available internally, the Bank has considered internal/external supplementary data to use for assessing purposes. The characteristics and any supplementary data used to determine groupings are outlined below:
a) Middle-market corporate loans
● | Credit rating band. |
● | Days past due. |
● | Product type. |
● | Vintage. |
● | Maturity. |
● | Guarantee or collateral. |
b) Mortgage loans
● | Credit score. |
● | Time to maturity. |
● | Days past due. |
● | Vintage. |
● | Loan to value ratio band. |
● | Credit conversion from variable to fixed rate. |
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c) Credit card loans
● | Credit score. |
● | Days past due. |
● | Vintage. |
● | Available credit amount. |
● | Credit limit. |
● | Balance. |
d) Personal loans
● | Credit score. |
● | Days past due. |
● | Product type. |
● | Vintage. |
● | Top-up susceptible. |
e) Small and medium-sized enterprises loans
● | Credit score. |
● | Days past due. |
● | Balance. |
● | Vintage. |
● | Product type. |
● | Available credit amount. |
● | Credit limit. |
● | Guarantee from development banks. |
f) Payroll loans
● | Credit score. |
● | Days past due. |
● | Granted amount. |
● | Balance. |
● | Percentage of granted amount. |
● | Vintage. |
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● | Employer activity. |
The appropriateness of grouping is monitored and reviewed on a periodic basis.
Significant increase in credit risk
The Bank considers a financial asset to have experienced a significant increase in credit risk (SICR), since initial recognition, assigning a classification into Stage 2, when one or more of the following quantitative, qualitative or backstop criteria have been met:
Quantitative criteria
For commercial loans to small and medium-sized enterprises, mortgage loans and installment loans to individuals (revolving consumer credit card loans and non-revolving consumer loans), the Bank has established a comparison between the “Lifetime PD” at the reporting date and the “Remaining Lifetime PD Originated” when the financial asset was initially recognized. The financial assets are classified by the “Remaining Lifetime PD Originated” in bands. If the financial asset exceeds the predefined threshold for its band, it is classified as Stage 2 with the corresponding “Lifetime PD” at the reporting date.
Each “Remaining Lifetime PD Originated” band classifies all the financial assets with similar characteristics of Probability of Default within a twelve-month period. In order to determine the applicable thresholds for each band, the Bank has analyzed the distribution of “Observed Default Frequency” within a twelve-month period in order to determine the threshold for each band where the defaults observed are concentrated.
“Observed Default Frequency” is defined as the rate in which loans that were not impaired become credit-impaired in a lifetime period.
The different bands of thresholds for each type of financial asset are shown below.
Commercial loans to large enterprises
| | | | |
“Lifetime PD” band at |
|
| Increase in “Lifetime PD” at reporting date which | |
initial recognition (%) | | | is considered significant (basis points) | |
| | | | |
<= 0.001746 | | | 6 | |
0.001746 - 0.003955 | | | 8 | |
0.003955 - 0.006149 | | | 10 | |
0.006149 - 0.023039 | | | 12 | |
0.023039 - 0.041789 | | | 14 | |
>0.041789 | | | 16 | |
| | | |
Commercial loans to real estate
| | | | |
“Lifetime PD” band at |
|
| Increase in “Lifetime PD” at reporting date which | |
initial recognition (%) | | | is considered significant (basis points) | |
| | | | |
<=0.015438 | | | 4 | |
0.015438 - 0.045128 | | | 9 | |
0.045128 - 0.107460 | | | 11 | |
0.107460 - 0.136594 | | | 17 | |
>0.136594 | | | 20 | |
| | | |
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Commercial loans to small and medium-sized enterprises
| | | | |
“Lifetime PD” band at |
|
| Increase in “Lifetime PD” at reporting date which | |
initial recognition (%) | | | is considered significant (basis points) | |
| | | | |
<=0.022138 | | | 7 | |
0.022138 - 0.037734 | | | 9 | |
0.037734 - 0.062950 | | | 11 | |
0.062950 - 0.099364 | | | 13 | |
0.099364 - 0.131539 | | | 23 | |
0.131539 - 0.175113 | | | 27 | |
0.175113 - 0.198299 | | | 28 | |
0.198299 - 0.281104 | | | 29 | |
>0.281104 | | | 30 | |
| | | |
Mortgage loans
| | | | |
“Lifetime PD” band at |
|
| Increase in “Lifetime PD” at reporting date which | |
initial recognition (%) | | | is considered significant (basis points) | |
| | | | |
<=0.058243 | | | 14 | |
0.058243 - 0.082909 | | | 15 | |
0.082909 - 0.146843 | | | 17 | |
0.146843 - 0.164525 | | | 18 | |
0.164525 - 0.189841 | | | 20 | |
0.189841 - 0.260988 | | | 21 | |
0.260988 - 0.350462 | | | 25 | |
>0.350462 | | | 28 | |
| | | |
Revolving consumer credit card loans
| | | | |
“Lifetime PD” band at |
|
| Increase in “Lifetime PD” at reporting date which | |
initial recognition (%) | | | is considered significant (basis points) | |
| | | | |
<=0.013470 | | | 9 | |
0.013470 - 0.022584 | | | 12 | |
0.022584 - 0.030918 | | | 14 | |
0.030918 - 0.042373 | | | 16 | |
0.042373 - 0.051001 | | | 22 | |
0.051001 - 0.063232 | | | 28 | |
0.063232 - 0.083787 | | | 34 | |
0.083787 - 0.106176 | | | 40 | |
>0.106176 | | | 46 | |
| | | |
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Non-revolving consumer loans (payroll loans)
| | | | |
“Lifetime PD” band at |
|
| Increase in “Lifetime PD” at reporting date which | |
initial recognition (%) | | | is considered significant (basis points) | |
| | | | |
<=0.065107 | | | 12 | |
0.065107 - 0.084679 | | | 15 | |
0.084679 - 0.114538 | | | 17 | |
0.114538 - 0.120289 | | | 18 | |
0.120289 - 0.144679 | | | 19 | |
0.144679 - 0.172172 | | | 22 | |
0.172172 - 0.268165 | | | 26 | |
>0.268165 | | | 30 | |
| | | |
Non-revolving consumer loans (personal loans)
| | | | |
“Lifetime PD” band at |
|
| Increase in “Lifetime PD” at reporting date which | |
initial recognition (%) | | | is considered significant (basis points) | |
| | | | |
<=0.135945 | | | 14 | |
0.135945 - 0.172186 | | | 15 | |
0.172186 - 0.194727 | | | 17 | |
0.194727 - 0.245958 | | | 19 | |
0.245958 - 0.26134 | | | 23 | |
0.26134 - 0.290297 | | | 25 | |
0.290297 - 0.334647 | | | 27 | |
>0.334647 | | | 29 | |
| | | |
The “Lifetime PD” movements on financial assets which do not subsequently become more than thirty days past due have also been assessed to identify the “natural” movement in “Lifetime PD” which is not considered indicative of a significant increase in credit risk.
For Santander Corporate and Investment Banking customers, debt instruments at amortized cost and debt instruments at FVTOCI, the assessment is performed by comparing the current credit rating with the initial credit rating for each financial asset.
Qualitative criteria
For commercial loans to small and medium-sized enterprises, mortgage loans and installment loans to individuals (revolving consumer credit card loans and non-revolving consumer loans), if the borrower meets one or more of the following criteria:
● | In short-term forbearance. |
● | Extension to the terms granted. |
For Santander Corporate and Investment Banking customers, debt instruments at amortized cost and debt instruments at FVTOCI, if the borrower requires closer monitoring and a review of its credit rating and/or the financial asset meets one or more of the following criteria:
● | Significant debt instrument price variation. |
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● | Significant adverse changes in business, financial and/or economic conditions in which the borrower operates. |
● | Actual or expected forbearance or restructuring. |
● | Actual or expected significant adverse change in operating results of the borrower. |
● | Significant change in collateral value, which is expected to increase risk of default. |
● | Early signs of cash flow/ liquidity problems. |
The assessment of significant increase in credit risk incorporates forward-looking information and is performed on a monthly basis at a portfolio level for all retail financial assets held by the Bank. For non-retail financial assets, where a “watchlist” is used to monitor credit risk, this assessment is performed at counterparty level on a periodic basis. The criteria used to identify the significant increase in credit risk are monitored and reviewed periodically for appropriateness by the Bank.
The Bank does not consider the low credit risk as an indicator that a financial asset has not increased significantly in risk since initial recognition.
Backstop criteria
A backstop is applied and the financial asset is considered to have experienced a significant increase in credit risk if the borrower is more than thirty days past due on its contractual payments.
Definition of default and credit-impaired financial assets
The Bank defines a financial asset as in default, when either or both of the following conditions have taken place:
● | The obligor/credit facility is past due more than 90 consecutive days on any material credit obligation (including any amount of principal, interest or fee). |
● | There are indications that the obligor/credit facility is unlikely to pay its credit obligations in full, without recourse to actions such as realizing security. |
The Bank applies the following criteria to classify financial assets as credit-impaired loans:
● | Retail |
In the case of retail exposures, the definition of default may be applied at the level of an obligor for some types of retail exposures and at the level of a credit facility for others (if it is well justified by internal risk management practices such as different business model).
● | Non retail |
Non-retail exposure classes must be considered at the obligor level and where the obligor is considered defaulted, all exposures to that obligor should be considered defaulted.
Materiality of credit obligations past due shall be assessed against a materiality threshold that is composed of both an absolute and a relative components (see below specific cases for retail and non-retail exposures).
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Where both of those components are breached for more than 90 consecutive days a default would be considered to have occurred. The scope of exposures that must be taken into account in the numerator/ denominator when calculating the materiality threshold is different depending on the level of the definition of default:
● | Where the definition of default is applied at the level of an obligor the components of the materiality threshold should also be applied at the level of an obligor. |
● | Where the definition of default is applied at the level of credit facility (retail exposures) the components of the materiality threshold should also be applied at the level of credit facility. |
● | In the case of retail exposures, a joint obligor should be treated as a different obligor from each of the individual obligors and therefore, the components of the materiality threshold should be assessed by applying the materiality threshold to all joint credit obligations granted to this specific set of obligors. |
Measuring expected credit losses
Measurement of expected credit losses (ECL) requires the use of complex models and significant assumptions about future economic conditions and credit behavior (i.e., the likelihood of customers defaulting and the resulting credit losses) and requires significant judgments that must be supported by past, present and future information, such as:
● | Determining criteria for significant increase in credit risk. |
● | Choosing appropriate models and assumptions for the measurement of expected credit losses. |
● | Making assumptions and estimates to incorporate relevant information about past events, current conditions and forecasts of macroeconomic conditions. |
● | Determining the lifetime and point of initial recognition of revolving consumer credit card loans. |
● | Establishing the number and relative weightings of forward-looking scenarios. |
● | Establishing groups of similar financial assets for measuring expected credit losses. |
The methodology for the quantification of expected credit losses is based on an unbiased and weighted consideration of the occurrence of up to three possible future scenarios that could impact the collection of contractual cash flows, taking into account the time-value of money, all available information relevant to past events and current conditions and projections of certain portfolio factors and macroeconomic factors, such as GDP, Consumer Price Index (CPI), or unemployment rates, deemed relevant to the measurement of expected credit losses.
Expected credit losses are recognized for financial assets measured at amortized cost, financial assets measured at FVTOCI, financial guarantees and loan commitments. Expected credit losses are also recognized on the undrawn portion of revolving credit lines, which include credit card limits.
The expected credit losses are measured on either a twelve-month or “Lifetime” basis depending on whether a significant increase in credit risk has occurred since initial recognition or whether a financial asset is considered to be credit-impaired.
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Expected credit losses are the discounted product of the PD, EAD and LGD, defined as follows:
● | The PD is the estimated probability that the counterparty will default on its principal and/or interest payment obligations. The PD has been defined as the probability that an operation accumulates more than ninety days past due or is deemed to be in default as per the criteria mentioned above, either over the next twelve months or over the remaining lifetime (Lifetime PD) of the obligation. |
● | EAD is the amount of estimated risk exposure incurred at the time of the counterparty’s analysis. |
● | LGD is the estimated loss arising in an event of default. It depends mainly on the guarantees and collateral associated with the transaction. LGD is expressed as a percentage loss per unit of exposure at the time of default (EAD). LGD is calculated on a twelve-month or “Lifetime” basis, where twelve-month LGD is the percentage of loss expected to be incurred if the default occurs in the next twelve months and “Lifetime” LGD is the percentage of loss expected to be incurred if the default occurs over the remaining expected lifetime of the loan. |
The expected credit losses are determined by projecting the PD, LGD and EAD for each future year and for each loan. These three components are multiplied together and adjusted for the likelihood of survival (i.e., the exposure has not prepaid or defaulted in an earlier month). This effectively calculates the expected credit losses for each future year, which is then discounted back to the reporting date and added. The discount rate used in the expected credit losses calculation is the original effective interest rate of the exposure or an approximation thereof.
The “Lifetime PD” is developed by applying a maturity profile to the current twelve-month PD. The maturity profile looks at how defaults develop on a financial assets portfolio from the point of initial recognition throughout the lifetime of the financial assets. The maturity profile is based on historical observed data and is assumed to be the same across all financial assets within a portfolio. This is supported by historical analysis.
The twelve-month EAD and “Lifetime” EAD are determined based on the expected payment profile, which varies by loan type.
● | For amortizing products and bullet repayment loans, this is based on the contractual repayments owed by the borrower over a twelve-month or “Lifetime” basis. “Lifetime” EAD will also be adjusted for any expected overpayments made by a borrower. Early repayment/refinance assumptions are also incorporated into the “Lifetime” EAD calculation. |
● | For revolving consumer loans, the EAD is predicted by taking current drawn balance and adding a “Credit Conversion Factor” (CCF) which allows for the expected drawdown of the remaining limit by the time of default. These assumptions vary by loan type and current limit utilization band, based on analysis of the Bank´s recent historical default data. |
The twelve-month LGD and “Lifetime” LGD are determined based on the factors which impact the recoveries made post-default. These vary by loan type.
● | For secured loans, this is primarily based on collateral type and projected collateral values, historical discounts to market/book values due to forced sales, time to repossession and recovery costs observed. |
● | For unsecured loans, LGD is typically set by loan due to the limited differentiation in recoveries archived across different borrowers. The LGD is influenced by collection strategies, including contracted debt sales and price. |
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Forward-looking economic information is also included in determining the twelve-month PD, “Lifetime PD” and LGD. These assumptions vary by loan type.
The assumptions underlying the expected credit losses calculation – such as how the maturity profile of the PD and how collateral values change – are monitored and reviewed on a monthly basis.
The Bank performs a periodic assessment to evaluate if the assumptions and methodology need to be updated.
The assessments performed during the year ended December 31, 2022 have not identified significant changes in facts and circumstances that would require updates on estimation techniques, significant assumptions or methodologies currently employed in the expected credit losses calculation.
Expected life of the financial assets
For the purpose of estimating the expected life of the financial assets, all the contractual terms have been taken into account (i.e., prepayments, duration, purchase options, etc.), being the contractual period (including extension options) the maximum period considered to measure the expected credit losses. In the case of financial assets with an uncertain maturity period and a component of undrawn commitment (i.e., credit cards), the expected life is estimated through quantitative analyses to determine the period during which the entity is exposed to credit risk, also considering the effectiveness of management procedures that mitigate such exposure (e.g. the ability to unilaterally cancel such financial asset, etc.).
Expected credit loss measurement considerations related to COVID-19 pandemic
During 2021 and 2020, expected credit losses measurement according to IFRS 9 was challenging given its determination incorporated the estimation of credit events, and their consequential cash shortfalls, based on a probability-weighted approach. In times of heightened uncertainty and stressed economic conditions, these estimations become more difficult. The assessment of the impact of the COVID-19 pandemic on expected credit losses required significant judgment, especially as it was not directly comparable with any similar events and the impact depended on government measures as much as the spread of the virus and its variants.
Expected credit losses are a discounted probability-weighted measurement of expected cash shortfalls either based on credit events arising in the twelve months from the reporting date or based on credit events arising over the lifetime of the financial asset. Lifetime expected credit losses were recognized when there was a significant increase in credit risk on a financial asset.
The IASB had indicated that entities should not continue to apply their existing ECL methodology mechanically.
IFRS 9 requires the application of judgment and required and allowed entities to adjust their approach to determining expected credit losses in different circumstances. The IASB noted that a number of assumptions and linkages underlying the way expected credit losses have been determined no longer hold due to the COVID-19 pandemic environment.
Measurement of expected credit losses and assessment of a significant increase in credit risk were based on reasonable and supportable information that was available without undue cost or effort. Hence, the Bank developed its estimates based on the best available information about past events, current conditions and forecasts of economic conditions and applied certain key IFRS 9 accounting considerations related to the measurement of expected credit losses with the purpose of capturing the effects of the COVID-19 pandemic.
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The environment was subject to rapid change, so the Bank continuously monitors updated facts and circumstances as new information becomes available.
IFRS 9 is purposefully designed to be forward-looking, reflecting expectations of future credit events (and resulting cash shortfalls) assessed at the reporting date.
The expected credit losses estimated by the Bank as of December 31, 2022 are based on all reasonable and supportable information including that, which is forward-looking.
During 2020 and 2021, the Bank updated the following forward-looking information in the measurement of the expected credit losses due to the COVID-19 pandemic situation:
● | Macroeconomic forecasts including GDP, industry-sector growth rates, unemployment (national and regional), inflation, interest rates and property price indexation. |
● | Customers’ probability of non-payment in response to macroeconomic factors that specifically relate to the customer, noting that customers may prioritize payments of some debt obligations over others and therefore the credit risk of amounts owed to different creditors by the same customer can vary. |
● | Customers’ behavior in respect of timing of prepayment or extension options, or use of undrawn facilities that affect Bank’s exposure. |
● | Valuation of collateral and timing of foreclosure. |
This forward-looking information affects directly the PD, EAD and LGD that are key inputs in IFRS 9 expected credit loss model.
In applying IFRS 9, the Bank defined a number of key terms and made a number of important application decisions when measuring expected credit losses. One such item is the definition of default. The definition of default directly influences the staging of exposures given that staging is based on the probability of default happening.
IFRS 9 required that default definition was applied consistently to all financial instruments unless information becomes available that demonstrates that another default definition was more appropriate for a particular financial instrument to ensure that they reflect current economic conditions of what a default was.
IFRS 9 states that there was a rebuttable presumption that default did not occur later than when a financial asset was ninety days past due unless there was reasonable and supportable information to demonstrate that a more lagging default criterion was more appropriate.
In staging analysis, the Bank did not apply mechanically the identification of a significant increase in credit risk. Assessment of a significant increase in credit risk was based on reasonable and supportable information that is available without undue cost or effort.
The Bank applied a medium-long term approach when assessing the customer’s credit quality and considers if the customer was experiencing temporary financial difficulties in order to determine the correspondent classification (staging). Repayment capacity of the customer in the medium-term was also evaluated.
The Bank monitors the behavior of ratings and in case of atypical movements; implements actions in order to avoid an excessive impact on the expected credit losses.
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As of December 31, 2022, considering the positive evolution of the pandemic effects on financial assets, additional credit loss measurement considerations related to COVID-19 pandemic were not necessary.
Post-model adjustments - overlays
During 2020, the Bank decided to recognize a “macroeconomic overlay”, which was calculated with a long-run vision in order to avoid short-term volatility, which was determined from a softening of the macroeconomic scenario that the Bank uses in its annual planning exercise with a three-year horizon.
This “macroeconomic overlay” was calculated under a bottom-up approach, aligned with the ‘business as usual’ (BAU) process of forward-looking calculation, where the sensitivity resulting from the expected credit losses, at a credit level, is distributed for each of the loan portfolios. During the course of 2020 and 2021, the macroeconomic overlay was reversed as a result of the return to normality of the Mexican economy. Accordingly, there are no post-model adjustments as of December 31, 2022.
Details of post-model adjustments for 2020 – overlays is presented in Note 11.d.
Effective guarantees
The following constitute effective guarantees:
a) | Mortgage guarantees on housing as long as they are first duly constituted and registered in favor of the Bank. The properties include: |
i. Buildings and building elements, distinguishing among:
● | Houses; |
● | Offices, stores and multi-purpose premises; and |
● | Rest of buildings such as non-multi-purpose premises and hotels. |
ii. Urban and developable ordered land.
iii. Rest of properties that classify as: buildings and building elements under construction, such as property development in progress and halted development, and the rest of land types, such as rural lands.
b) | Collateral guarantees on financial instruments in the form of cash deposits and debt securities issued by creditworthy issuers. |
c) | Other types of real guarantees, including properties received in guarantee and second and subsequent mortgages on properties, as long as the entity demonstrates its effectiveness. When assessing the effectiveness of the second and subsequent mortgages on properties the entity will implement particularly restrictive criteria. It will take into account, among others, whether the previous charges are in favor of the entity itself or not and the relationship between the risk guaranteed by them and the property value. |
d) | Personal guarantees, as well as the incorporation of new owners, covering the entire amount of the financial instruments and implying direct and joint liability to the entity of persons or other entities whose solvency is sufficiently proven to ensure the repayment of the loan on the agreed terms. |
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Forward-looking information incorporated in the expected credit losses models
The Bank already uses forward-looking information in internal administration and regulatory processes and has leveraged its experience in the management of such information, maintaining consistency with the information used in the other processes. The assessment of significant increase in credit risk and the calculation of expected credit losses both incorporate forward-looking information.
The Bank has performed historical analysis and identified the key macroeconomic and portfolio factors affecting credit risk and expected credit losses for each financial assets portfolio.
The following represent the most significant factors that could substantially change the estimated expected credit losses:
● | Peso/USD exchange rate, given its substantial influence on operations and profitability. |
● | Stock markets, given its considered critical to economic development as it gives companies the ability to quickly access capital from the public. |
● | Investment funds, as an indicator of the country´s socio-economic development and therefore in the investors’ confidence. |
● | CPI, given its overall relevance for entities’ performance, customers’ purchasing power and economic stability. |
● | Loans – Consumer, given its relation to personal income and saving as a source of consumer purchasing power. |
● | Unemployment rates, given its significant effect on customers’ ability to meet contractual obligations. |
● | GDP growth rates, given their significant effect on borrowers’ performance. |
● | Loans – Mortgage, given that change in the real estate market have broader economic implications and vice versa. |
● | Real estate housing prices, given its importance as the measure of the rate at which the prices of residential properties purchased by households are changing over time. |
The associated impact of these macroeconomic factors and certain portfolio factors on the PD and LGD vary by loan type. Expert judgment has also been applied in this process. Forecasts of these factors (“baseline economic scenario”) are provided by the Bank´s Research and Public Policy area on a periodic basis and offer the best estimate view of the economy over the next three years. After three years, to project these factors out for the full remaining lifetime of each financial asset, a mean reversion approach has been used. With this approach, the projected factors in the long-term will have statistical patterns such as average rate (i.e., for unemployment) or a growth rate (i.e., GDP) over a period of two to five years.
The impact of these factors on the PD, EAD and LGD has been determined by performing statistical regression analysis to understand the impact changes in these factors have had historically on default rates and on the components of LGD and EAD.
In addition to the baseline economic scenario, the Bank´s Research and Public Policy area also provides other possible scenarios along with scenario weightings. The number of other scenarios used is set based on the analysis of each major financial asset type to ensure nonlinearities are considered.
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The number of scenarios and their attributes are reassessed on a quarterly basis. For all financial assets portfolios, the Bank concluded that three scenarios appropriately consider nonlinearities. The scenario weightings are determined by a combination of statistical analysis and expert judgment, taking into account the range of possible outcomes each chosen scenarios is representative. These weightings are presented for approval by the executive risk committee.
The assessment of significant increase in credit risk is performed using the “Lifetime PD” under each of the baseline and the other two scenarios (“upside” and “downside”) multiplied by the associated scenario weighting, along with qualitative and backstop indicators. This determines whether the financial asset is in Stage 1, Stage 2 or Stage 3 and hence whether twelve-month ECL or “Lifetime” ECL should be recognized. Following this assessment, either the Bank measures ECL as a probability weighted twelve-month ECL (Stage 1) or a probability weighted “Lifetime” ECL (Stage 2 and Stage 3). These probability-weighted ECL are determined by running each scenario (“baseline”, “upside” and “downside”), through the relevant ECL model and multiplying it by the appropriate scenario weighting (as opposed to weighting the inputs).
As with any forecast, the projection and likelihoods of occurrence are subject to a high degree of inherent uncertainty and therefore the actual outcomes may be significantly different to those projected. Moreover, applying expert judgment in measuring expected credit losses requires the use of assumptions, which are highly subjective and very sensitive to macroeconomic changes and credit conditions. The Bank considers these forecasts to represent its best estimate of the possible outcomes and has analyzed the nonlinearities and asymmetries within the Bank´s different financial assets portfolios to establish that the chosen scenarios are appropriately representative of the range of possible scenarios.
The factors used for the ECL estimate as of December 31, 2022 are set out below. The “baseline”, “upside” and “downside” scenarios were used for all financial assets portfolios, except for global corporates for which the Bank applies the same global macroeconomic scenarios as Banco Santander
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(Spain). Risk parameters, including a forward-looking add-ons for this portfolio, are provided by Banco Santander (Spain).
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|
| |
| December 31, 2022 | |||||||||||
Factor |
|
| Scenario | |
| December 2022 |
|
| December 2023 |
|
| December 2024 |
|
| December 2025 |
|
| | | Baseline | | | 3.50% | | | 0.18% | | | 1.29% | | | 1.67% | |
GDP | | | Upside | | | 3.50% | | | 2.10% | | | 3.92% | | | 2.94% | |
| | | Downside | | | 3.50% | | | (5.16)% | | | (6.78)% | | | 1.15% | |
| | | Baseline | | | 8.37% | | | 5.33% | | | 4.19% | | | 3.87% | |
CPI | | | Upside | | | 8.37% | | | 3.74% | | | 2.98% | | | 3.00% | |
| | | Downside | | | 8.37% | | | 9.34% | | | 9.77% | | | 6.52% | |
| | | Baseline | | | 3.16% | | | 3.37% | | | 3.49% | | | 3.56% | |
Unemployment rates | | | Upside | | | 3.16% | | | 3.22% | | | 3.18% | | | 3.16% | |
| | | Downside | | | 3.16% | | | 4.89% | | | 5.98% | | | 5.69% | |
| | | Baseline | | | 20.29 | | | 20.86 | | | 21.30 | | | 21.71 | |
Peso/USD | | | Upside | | | 20.29 | | | 19.39 | | | 18.94 | | | 19.13 | |
| | | Downside | | | 20.29 | | | 27.91 | | | 25.27 | | | 24.67 | |
| | | Baseline | | | 10.75% | | | 9.91% | | | 9.53% | | | 9.40% | |
Loans - Mortgage | | | Upside | | | 10.75% | | | 11.89% | | | 11.66% | | | 10.88% | |
| | | Downside | | | 10.75% | | | (3.66)% | | | 0.18% | | | 2.85% | |
| | | Baseline | | | 13.51% | | | 9.67% | | | 8.35% | | | 7.60% | |
Loans - Consumer | | | Upside | | | 13.51% | | | 12.02% | | | 10.90% | | | 10.01% | |
| | | Downside | | | 13.51% | | | (21.23)% | | | 1.06% | | | 4.46% | |
| | | Baseline | | | 5.57% | | | 6.52% | | | 6.12% | | | 5.77% | |
Investment funds | | | Upside | | | 5.57% | | | 13.24% | | | 10.71% | | | 7.44% | |
| | | Downside | | | 5.57% | | | (6.09)% | | | (4.24)% | | | 2.58% | |
| | | Baseline | | | 7.94% | | | 7.55% | | | 7.55% | | | 7.55% | |
Real Estate housing prices | | | Upside | | | 7.94% | | | 10.19% | | | 9.75% | | | 8.64% | |
| | | Downside | | | 7.94% | | | 1.76% | | | 1.31% | | | 3.92% | |
| | | Baseline | | | 45,195.97 | | | 47,546.16 | | | 50,018.56 | | | 52,619.52 | |
Stock markets | | | Upside | | | 45,195.97 | | | 58,245.08 | | | 61,818.33 | | | 65,610.78 | |
| | | Downside | | | 45,195.97 | | | 31,696.64 | | | 39,901.69 | | | 41,811.04 | |
The weightings assigned to each macroeconomic scenario as of December 31, 2021 and 2022 were as follows:
| | | | |
December 31, 2022 | ||||
Scenario | | | Weighting | |
| | | | |
Base | | | 50.0% | |
Upside | | | 15.0% | |
Downside | | | 35.0% | |
| | | |
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| | | | |
December 31, 2021 | ||||
Scenario | | | Weighting | |
| | | | |
Base | | | 55.0% | |
Upside | | | 15.0% | |
Downside | | | 30.0% | |
| | | |
Sensitivity analysis
The ECL recognized in the consolidated balance sheet as of December 31, 2022 reflects the effect on expected credit losses of a range of possible outcomes, calculated on a probability-weighted basis, according to the scenarios described above. Many of the factors and assumptions used to calculate ECL have a high degree of interdependency and there is not a single factor or assumption to which the ECL, as a whole, are sensitive. The ECL determined by using the “base” scenario, which is used to calculate an unbiased expected credit loss, provides an indication of the overall sensitivity of ECL to different macroeconomic assumptions.
Set out below are the changes to the ECL as of December 31, 2022 that would result from reasonably possible changes in the weightings from the actual assumptions used in the Bank’s macroeconomic scenarios, considering a weightings of 100% for the most favorable scenario and a weighting of 100% for the least favorable scenario:
| | | | | | | |
| | | Most Favorable | | | Least Favorable | |
| | | Scenario | | | Scenario | |
| | | | | | | |
Retail loan portfolio | | | (19.7)% | | | 17.7% | |
Non-retail loan portfolio | | | (16.4)% | | | 14.0% | |
| | | | | | | |
Written-off loans
The entire loan balance relating to credit-impaired financial assets continues to be recognized in the consolidated balance sheet for their full amounts, until the recovery of any recognized amount is considered to be unlikely. The recovery of a loan is considered to be unlikely when there is a significant and irreversible deterioration of the borrower’s overall financial condition, resources, value of any guarantees and payment record that would lead a borrower to bankruptcy.
When the recovery of a loan is considered to be unlikely, it is written-off together with the corresponding allowance for impairment losses from the consolidated balance sheet without prejudice to any actions that the Bank may initiate to seek collection until their contractual rights are extinguished due to the expiration of the statute-of-limitations period, forgiveness or any other cause.
Loans and the corresponding allowance for impairment losses are normally written-off considering the following:
● | Commercial, financial and industrial loans are evaluated on a case-by-case basis; as such, write-off will only take place after considering all relevant information such as the occurrence of a significant change in the borrower’s financial position, guarantees and collaterals and payment records. Within this portfolio, small and medium-sized enterprises loans and revolving small and medium-sized enterprises loans are written-off when the loans become 181 and 151 days past due, respectively. |
● | Mortgage loans are written-off when they have been past due for thirty-six months. |
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● | For installment loans to individuals, any portion of the balance that the Bank does not expect to collect is generally written-off at 151 days past due for revolving consumer credit card loans and 181 days past due for other non-revolving consumer loans. |
In the event of bankruptcy or similar proceedings, write-off may occur earlier than at the periods stated above. Collections procedures may continue after write-off.
h) Repurchase agreements and Reverse repurchase agreements
Purchases of financial instruments under a non-optional resale agreement at a fixed price are measured at fair value and recognized as assets in the consolidated balance sheet under Loans and advances to credit institutions – Reverse repurchase agreements or Loans and advances to customers – Reverse repurchase agreements.
The excess of the purchase prices over the resale prices are recognized as interest income over the contract term.
Sales of financial instruments under a non-optional repurchase agreement at a fixed price are measured at amortized cost or at fair value and recognized as liabilities in the consolidated balance sheet under Deposits from the Central Bank – Repurchase agreements, Deposits from credit institutions – Repurchase agreements or Customer deposits – Repurchase agreements.
The excess of the sales prices over the repurchase prices are recognized as interest expense over the contract term.
Repurchase agreements and reverse repurchase agreements are managed and its performance is evaluated on a fair value basis.
i) Non-current assets held for sale
Non-current assets held for sale include the carrying amount of individual items, disposal groups or items forming part of a business unit earmarked for disposal (discontinued operations), whose sale is highly likely to be completed within one year from the reporting date. Therefore, the recovery of the carrying amount of these items will foreseeably be effected through the proceeds from their disposal.
For the sale to be highly probable, the appropriate level of management must be committed to a plan to sell the asset (or disposal group), and an active program to locate a buyer and complete the plan must have been initiated. Further, the asset (or disposal group) must be actively marketed for sale at a price that is reasonable in relation to its current fair value.
In addition, the sale should be expected to qualify for recognition as a completed sale within one year from the date of classification and actions required to complete the plan should indicate that it is unlikely that significant changes to the plan will be made or that the plan will be withdrawn.
Specifically, property or other non-current assets received by the Bank as total or partial settlement of their debtors’ payment obligations to them are deemed to be non-current assets held for sale, unless the Bank has decided to make continuing use of these assets.
Liabilities associated with non-current assets held for sale include the balances payable arising from the assets held for sale or disposal groups and from discontinued operations.
Non-current assets held for sale are measured at the lower of fair value less costs to sell and their carrying amount at the date of classification in this category. Non-current assets held for sale are not depreciated as long as they remain in this category.
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Impairment losses on an asset or disposal group arising from a reduction in its carrying amount to its fair value (less costs to sell) are recognized under Gains/(losses) on disposal of non-current assets held for sale not classified as discontinued operations (net) in the consolidated income statement. The gains on a non-current asset held for sale resulting from subsequent increases in fair value (less costs to sell) increase its carrying amount and are recognized in the consolidated income statement up to an amount equal to the impairment losses previously recognized.
j) Tangible assets
Tangible assets include the amount of buildings for own use, information technology (IT) equipment and fixtures, furniture and vehicles and other fixtures owned by the Bank.
Tangible assets are presented at acquisition cost, less the related accumulated depreciation and any estimated impairment losses (excess of carrying amount over the recoverable amount).
Depreciation is calculated using the straight-line method based on the acquisition cost of the tangible assets less their residual value. The land on which the buildings stand has an indefinite life and therefore is not depreciated.
Depreciation is recognized in the consolidated income statement and is calculated using the following depreciation rates (based on the average years of estimated useful life of the various assets):
| | | | |
|
|
| Average Annual | |
| | | Rate | |
| | | | |
Buildings for own use |
| | 2% to 5% | |
Furniture and vehicles |
| | 10% to 20% | |
Information technology equipment and fixtures |
| | 25% | |
Other fixtures |
| | 5% to 20% | |
The Bank assesses at the reporting date whether there is any indication that a tangible asset may be impaired (i.e., its carrying amount exceeds its recoverable amount). If this is the case, the carrying amount of the tangible asset is reduced to its recoverable amount and future depreciation charges are adjusted in proportion to the revised carrying amount and to the new remaining useful life (if the useful life has to be re-estimated).
Similarly, if there is an indication of a recovery in the value of a tangible asset, the Bank recognizes the reversal of the impairment loss recognized in prior periods and adjusts the future depreciation charges accordingly. In no circumstances may the reversal of an impairment loss on a tangible asset raise its carrying amount above that which it would have if no impairment losses had been recognized in prior years.
The estimated useful lives of the tangible assets are reviewed at least at the end of the reporting period to identify significant changes therein. If changes are identified, the useful lives of the tangible assets are adjusted by correcting the depreciation charge to be recognized in the consolidated income statement in future years based on the new useful lives.
Upkeep and maintenance expenses relating to the tangible assets are recognized as an expense in the period in which they are incurred, since they do not increase the useful lives of the assets.
Tangible assets are derecognized upon disposal or when no future economic benefits are expected to arise from the continued use of the asset. The gain or loss arising on the disposal or retirement of an asset is determined as the difference between the sales proceeds and the carrying amount of the asset and is recognized in the consolidated income statement.
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k) Leases
The Bank as lessee
The Bank assesses whether a contract is or contains a lease, at inception of the contract. The Bank recognizes a right-of-use asset and a corresponding lease liability with respect to all lease arrangements in which it is the lessee. Initially, the right-of-use asset is measured at cost, which comprises the amount of the lease liability, adjusted for any lease payment made in or before the commencement date less any lease incentives received, plus any other initial direct costs incurred by the lessee and an estimate of the costs for dismantling the underlying asset or for restoring the underlying asset or the site of its location.
Right-of-use assets are valued at cost, which includes the following:
Subsequently, the right-of-use asset is depreciated on the straight-line method from the commencement date to the lesser of the end of the useful life of the right-of-use asset or the end of the lease term. The estimate of the useful lives of the right-of-use asset is determined on the same bases as the assets. In addition, right-of-use asset is reduced for impairment, if any, and adjusted for the remeasurement of the lease liability.
The Bank applies IAS 36 to determine whether a right-of-use asset is impaired and accounts for any identified impairment loss.
The right-of-use assets are presented as a separate line in the consolidated balance sheet.
The lease liability is initially measured at the present value of the lease payments that have not been paid as of the commencement date, discounted at the rate implicit in the lease if that can be readily determined. If that rate cannot be readily determined, the lessee shall use the incremental borrowing rate. Subsequently, the lease liability is measured by increasing the carrying amount to reflect interest on the lease liability (using the effective interest method) and by reducing the carrying amount to reflect the lease payments made.
Lease payments included in the measurement of the lease liability comprise the following:
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● | Fixed payments, including in-substance fixed payments, less any lease incentive receivable; |
● | Variable lease payments that depend on an index or a rate, initially measured using the index or rate as at the commencement date. |
● | The amounts expected to be paid by the lessee under residual value guarantees; |
● | The exercise price of purchase options, if the lessee is reasonably certain to exercise that option; and |
● | Lease termination penalty payments, if the term of the lease reflects the lessee's exercise of that option. |
The lease liability is presented as a separate line in the consolidated balance sheet.
The Bank remeasures the lease liability (and makes a corresponding adjustment to the related right-of-use asset) whenever:
● | The lease term has changed or there is a significant event or change in circumstances resulting in a change in the assessment of exercise of a purchase option, in which case the lease liability is remeasured by discounting the revised lease payments using a revised discount rate. |
● | The lease payments change due to changes in an index or rate or a change in expected payment under a guaranteed residual value, in which cases the lease liability is remeasured by discounting the revised lease payments using an unchanged discount rate (unless the lease payments change is due to a change in a floating interest rate, in which case a revised discount rate is used). |
● | A lease contract is modified and the lease modification is not accounted for as a separate lease, in which case the lease liability is remeasured based on the lease term of the modified lease by discounting the revised lease payments using a revised discount rate at the effective date of the modification. |
The lease payments are discounted using the interest rate implicit in the lease. If that rate cannot be readily determined, which is the case for leases in the Bank, the lessee’s incremental borrowing rate is used, being the rate that the Bank would have to pay to borrow the funds necessary to obtain an asset of similar value to the right-of-use asset in a similar economic environment with similar terms, security and conditions.
To determine the incremental borrowing rate, the Bank applies the Cross Section methodology, which consists of estimating the credit spread of the Bank based on the CDS information available from different entities. Under the Cross Section methodology, the following factors are considered to obtain the Bank’s credit spread:
● | Economic sector, |
● | Geographical area, |
● | Rating, and |
● | An assumption to represent that at least one factor described above, match with the factors related to the Bank. |
Lease payments are allocated between principal and finance cost. The finance cost is recognized under Interest expense and other charges in the consolidated income statement over the lease period to produce a constant periodic rate of interest on the remaining balance of the liability for each period.
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Payments associated with short-term leases or low-value assets are recognized on a straight-line basis as an expense under Administrative expenses in the consolidated income statement. Short-term leases are leases with a lease term of twelve months or less. Low-value assets comprise, for example, personal computers, printers, small items of office furniture, telephones and other similar assets.
Whenever the Bank incurs an obligation for costs to dismantle and remove a leased asset, restore the site on which it is located or restore the underlying asset to the condition required by the terms and conditions of the lease, a provision is recognized and measured under IAS 37. To the extent that the costs relate to a right-of-use asset, the costs are included in the related right-of-use assets.
As of December 31, 2021 and 2022, the Bank did not have any lease agreements with purchase options.
The Bank as lessor - Finance leases
A lessor shall classify each of its leases as either an operating lease or a finance lease.
A lease is classified as a finance lease if it transfers substantially all the risks and rewards incidental to ownership of an underlying asset. A lease is classified as an operating lease if it does not transfer substantially all the risks and rewards incidental to ownership of an underlying asset. Whether a lease is a finance lease or an operating lease depends on the substance of the transaction rather than the form of the contract.
At the commencement date of the lease, the assets held by the Bank under a finance lease are recognized as Financial assets at amortized cost in the consolidated balance sheet at an amount equal to the net investment in the lease. The net investment in the lease corresponds to the gross investment in the lease discounted at the interest rate implicit in the lease.
The gross investment in the lease is the sum of:
(a)the lease payments receivable by a lessor under a finance lease; and
(b)any unguaranteed residual value accruing to the lessor.
IFRS 16 defines the interest rate implicit in the lease as the rate of interest that causes the present value of (a) the lease payments and (b) the unguaranteed residual value to equal the sum of (i) the fair value of the underlying asset and (ii) any initial direct costs of the lessor.
The Bank recognizes finance income over the lease term in interest income calculated using the effective interest method in the consolidated income statement, based on a pattern reflecting a constant periodic rate of return on the lessor’s net investment in the lease.
l) Intangible assets
Intangible assets are identifiable non-monetary assets (separable from other assets) without physical substance which arise because of a legal transaction or which are developed internally by the Bank. Only assets whose cost can be estimated reliably and from which the Bank considers it probable that future economic benefits will be generated are recognized.
Intangible assets are recognized initially at acquisition or development cost and are subsequently measured at cost less any accumulated amortization and any accumulated impairment losses.
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i. Goodwill
Any excess of the cost of the investments made by the Bank over the corresponding underlying carrying amounts acquired, adjusted at the acquisition date, is allocated as follows:
- | If it is attributable to specific and identifiable assets and liabilities of the subsidiaries acquired, by increasing the value of the assets (or reducing the value of the liabilities) whose fair values were higher (lower) than the carrying amounts at which they had been recognized in the acquired subsidiaries’ balance sheets. |
- | If it is attributable to specific intangible assets, by recognizing such intangible assets in the consolidated balance sheet if the fair value of these assets within twelve months following the date of acquisition can be measured reliably. |
- | The remaining amount is recognized as goodwill, which is allocated to one or more CGU. A CGU is the smallest identifiable group of assets that, because of continuing operation, generates cash inflows that are largely independent of the cash inflows from other assets or groups of assets. |
Goodwill is only recognized when it has been acquired for a consideration and represents, therefore, a payment made by the acquirer in anticipation of future economic benefits from assets of the acquired subsidiary that are not capable of being individually identified and separately recognized.
At the end of each reporting period, or whenever there is any indication of impairment, goodwill is reviewed for impairment (i.e., a reduction in its recoverable amount to below its carrying amount) and if there is any impairment, the goodwill is written down with a charge to the consolidated income statement.
For the purposes of the impairment analysis, goodwill is allocated to one or more CGU expected to benefit from the synergies arising from business combinations. Each CGU to which goodwill is allocated:
- | is the lowest level at which the entity manages goodwill internally; and |
- | is not larger than an operating segment. |
The CGU to which goodwill has been allocated are tested for impairment by including the allocated goodwill in their carrying amount. This analysis is performed at least annually as of December 31 and more frequently in cases where Bank’s Management notes indicators of impairment.
For determining the impairment of a CGU to which a part of goodwill has been allocated, the carrying amount of that unit is compared with its recoverable amount.
The recoverable amount of a CGU is equal to the higher of the fair value less costs to sell and its value in use. Value in use is calculated as the discounted value of the cash flow projections that the Bank estimates and is based on the latest budgets approved for the next five years. The principal hypotheses are a sustainable growth rate to extrapolate the cash flows indefinitely, and the discount rate used to discount the cash flows is equal to the weighted cost of capital assigned to each CGU.
If the carrying amount of the CGU exceeds the related recoverable amount, the Bank recognizes an impairment loss; the resulting loss is apportioned by reducing, first, the carrying amount of the goodwill allocated to that CGU and, second, if there are still impairment losses remaining to be recognized, the carrying amount of the rest of the assets. This is done by allocating the remaining loss in proportion to the carrying amount of each of the assets in the unit. No impairment of goodwill attributable to the minority interests may be recognized.
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Impairment losses on goodwill are recognized under Impairment losses on other assets (net) - Goodwill and other intangible assets in the consolidated income statement.
An impairment loss recognized for goodwill is not reversed in a subsequent period.
ii. Other intangible assets
Other intangible assets include the amount of identifiable intangible assets.
Other intangible assets can have an indefinite useful life when, based on an analysis of all the relevant factors, it is concluded that there is no foreseeable limit to the period over which the asset is expected to generate net cash inflows for the Bank - or a finite useful life, in all other cases.
Intangible assets with indefinite useful lives are not amortized and are carried at cost less accumulated impairment losses. At the end of each reporting period or whenever there is any indication of impairment, the Bank reviews the remaining useful lives of the assets in order to determine whether they continue to be indefinite and, if this is not the case, to take the appropriate steps.
Intangible assets with finite useful lives are carried at cost less accumulated amortization and accumulated impairment losses. Amortization is recognized on a straight-line basis over their estimated useful lives. The estimated useful lives are reviewed at the end of each reporting period, with the effect of any changes in estimate being accounted for on a prospective basis. The intangible asset amortization charge is recognized under Depreciation and amortization in the consolidated income statement.
Intangible assets acquired in a business combination and recognized separately from goodwill are initially recognized at their fair value at the acquisition date (which is regarded as their cost). Subsequent to initial recognition, intangible assets acquired in a business combination are reported at cost less accumulated amortization and accumulated impairment losses, on the same basis as intangible assets that are acquired separately.
An intangible asset is derecognized on disposal, or when no future economic benefits are expected from use or disposal. Gains or losses arising from derecognition of an intangible asset, measured as the difference between the net disposal proceeds and the carrying amount of the asset, are recognized in the consolidated income statement when the asset is derecognized.
Impairment charges are included in Impairment losses on other assets (net) – Goodwill and other intangible assets in the consolidated income statement. The criteria used to recognize the impairment losses on these assets and, where applicable, the reversal of impairment losses recognized in prior years, are similar to those used for tangible assets (see Note 2.j).
Internally-generated computer software
Expenditure on research activities is recognized as an expense in the period in which it is incurred.
Development costs that are directly attributable to the design and testing of identifiable and unique software products controlled by the Bank are recognized as intangible assets when the following criteria are met:
● | it is technically feasible to complete the software so that it will be available for use, |
● | Bank’s Management intends to complete the software and use or sell it, |
● | there is an ability to use or sell the software, |
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● | it can be demonstrated how the software will generate probable future economic benefits, |
● | adequate technical, financial and other resources to complete the development and to use or sell the software are available, and |
● | the expenditure attributable to the software during its development can be reliably measured. |
Directly attributable costs that are capitalized as part of the software include employee costs and an appropriate portion of relevant overheads.
Capitalized development costs are recognized as intangible assets and amortized from the point at which the asset is ready for use.
Where no internally-generated computer software can be recognized, development expenditure is recognized in the consolidated income statement in the period in which it is incurred and cannot be subsequently capitalized.
Subsequent to initial recognition, internally-generated computer software are reported at cost less accumulated amortization and accumulated impairment losses, on the same basis as intangible assets that are acquired separately.
m) Provisions and contingent assets and liabilities
When preparing the consolidated financial statements, Bank’s Management distinguishes between:
- | Provisions: credit balances covering present obligations at the reporting date arising from past events, which could give rise to a loss for the Bank, which is considered to be likely to occur and certain as to its nature but uncertain as to its amount and/or timing. |
- | Contingent liabilities: possible obligations that arise from past events and whose existence will be confirmed only by the occurrence or non-occurrence of one or more future events not wholly within the control of the Bank. They include the present obligations of the Bank when it is not probable that an outflow of resources embodying economic benefits will be required to settle them. The Bank does not recognize the contingent liability. The Bank will disclose a contingent liability, unless the possibility of an outflow of resources embodying economic benefits is remote. |
- | Contingent assets: possible assets that arise from past events and whose existence is conditional on, and will be confirmed only by, the occurrence or non-occurrence of events beyond the control of the Bank. Contingent assets are not recognized in the consolidated balance sheet or in the consolidated income statement, but rather are disclosed in the notes to the consolidated financial statements, if it is probable that these assets will give rise to an increase in resources embodying economic benefits. |
Provisions
Provisions are recognized when the Bank has a present obligation (legal or constructive) as a result of a past event, it is probable that the Bank will be required to settle that obligation and a reliable estimate can be made of the amount of the obligation.
The amount recognized as a provision is the best estimate of the consideration required to settle the present obligation at the end of the reporting period, taking into account the risks and uncertainties surrounding the obligation. When a provision is measured using the cash flows estimated to settle the present obligation, its carrying amount is the present value of those cash flows (when the effect of the time value of money is material).
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When some or all of the economic benefits required to settle a provision are expected to be recovered from a third party, a receivable is recognized as an asset if it is virtually certain that reimbursement will be received and the amount of the receivable can be measured reliably.
The consolidated financial statements include all provisions with respect to which it is considered that it is more likely than not that the obligation will have to be settled. In accordance with IFRS, contingent liabilities must not be recognized in the consolidated financial statements, but must rather be disclosed in the notes to the consolidated financial statements.
Provisions are reviewed and adjusted at the end of each year. Provisions are used also to cater for the specific obligations for which they were originally recognized. Provisions are reversed fully or partially when such obligations cease to exist or are reduced.
Provisions are classified according to the obligations covered as follows:
- | Provisions for pensions and similar obligations under scope of IAS 19: amount of all the provisions made to cover post-employment benefits, including obligations to pre-retirees and similar obligations (see note 2.s). |
- | Provisions for tax not included in the scope of IAS 12 and legal matters: amount of the provisions recognized to cover tax and legal obligations. |
- | Provisions for off-balance sheet risk: amount of the provisions made to cover obligations arising as the result of those transactions in which the Bank guarantees the obligations of a third party arising as a result of financial guarantees granted or other contracts and unfunded lending commitments such as letters of credit, financial guarantees and available lines of credit cards and non-revolving consumer loans, which are irrevocable commitments that may give rise to the recognition of financial assets. |
- | Other provisions: include the amount of other provisions recognized by the Bank (see Note 24). |
n) Court proceedings and/or claims in process
At the end of 2021 and 2022, certain court proceedings and claims were in process against the Bank arising from the ordinary course of their operations (see Note 24).
o) Share-based payments
Equity-settled shared-based payments to employees and others providing similar services were measured at the fair value of the equity instruments at the grant date. The fair value determined at the grant date of the equity-settled shared-based payments was expensed on a straight-line basis over the vesting period, based on the Bank’s estimate of equity instruments that would eventually vest, with a corresponding increase in consolidated total equity. At the end of each reporting period, the Bank revises its estimate of the number of equity instruments expected to vest. The impact of the revision of the original estimates, if any, is recognized in the consolidated income statement such that the cumulative expense reflects the revised estimate.
Cash-settled share-based payments to employees, the services acquired and the liability incurred are measured at the fair value of the liability. The fair value determined at the grant date of the cash-settled share-based payments is expensed on a straight-line basis over the vesting period, based on the Bank’s estimate of equity instruments that will eventually vest, with a corresponding increase in the liability. At the end of each reporting period, the Bank revises its estimate of the number of equity instruments expected to vest. Until the liability is settled, the fair value of the liability is remeasured at the end of each reporting period and at the date of settlement, with any changes in fair value recognized in the consolidated income
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statement for the year. The services received and the liability to pay for those services are recognized as the employees render service.
Share-based payments are discussed in Note 42.b, 42.c, 42.d and 43.b.
p) Recognition of income and expense
The most significant criteria used by the Bank to recognize its income and expenses are summarized as follows:
i. Interest income and interest expense
Interest income and interest expense are generally recognized on an accrual basis using the effective interest method.
ii. Dividends
Dividends received from equity instruments are recognized as income when the Bank’s right to receive them arises.
iii. Fee and commission income and expense
Fee and commission income and expense are recognized using criteria that vary according to their nature. The main criteria are as follows:
- | Fee and commission income and expense relating to financial assets and financial liabilities measured at FVTPL are recognized when received or paid. |
- | Those arising from transactions or services that are performed over a period are recognized over the life of these transactions or services. |
- | Those relating to services provided in a single act are recognized when the single act is carried out. |
iv. Non-finance income and expense
Non-finance income and expense are recognized when the good is delivered or the non-financial service is rendered. To determine the amount and timing of recognition, IFRS 15 Revenue from Contracts with Customers five-step model is followed: identification of the contract with the customer, identification of the separate obligations of the contract, determination of the transaction price, distribution of the transaction price among the identified obligations and finally recording of income as the obligations are satisfied.
v. Deferred collections and payments
Deferred collections and payments are recognized at the amount resulting from discounting the expected cash flows at market rates.
vi. Loan arrangement fees
Loan arrangement fees that are an integral part of the effective interest rate of a financial instrument, mainly loan origination fees, are accrued and recognized over the term of the loan as a part of the effective interest method.
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q) Financial guarantees
Financial guarantees are defined as contracts whereby an entity undertakes to make specific payments on behalf of a third party if the latter fails to do so, irrespective of the various legal forms they may have, such as guarantees, insurance policies or credit derivatives.
When the Bank purchases a financial guarantee contract in respect of a financial asset and pays the cost of the guarantee, at inception of the guarantee considers the following:
- | If the financial guarantee is an integral part of the guaranteed financial asset, it is treated as an adjustment to the effective interest rate of the guaranteed financial asset as a transaction cost, unless the financial asset is measured at FVTPL, and include the expected cash flows from the financial guarantee when measuring the expected credit losses of the guaranteed financial asset. |
- | If the financial guarantee is not an integral part of the guaranteed financial asset, the cost is recognized as a separate pre-payment asset, and it is amortized over the shorter of the life of the guarantee and the expected life of the guaranteed financial asset. The pre-payment asset is tested for impairment under IAS 36. The expected cash flows from the financial guarantee are not included in the measurement of the expected credit losses of the guaranteed financial asset and a separate reimbursement asset is recognized in the consolidated balance sheet in accordance with IAS 37. |
When the Bank provides financial guarantees, these are initially recognized on the liability side of the consolidated balance sheet at fair value, which is generally the present value of the fees, commissions and interest receivable from these contracts over the term thereof.
Financial guarantee contracts issued by the Bank and, if not designated at FVTPL, are subsequently measured at the higher of:
● | the amount of the obligation under the contract, as determined in accordance with the IFRS 9 expected credit loss model; and |
● | the amount initially recognized less, where appropriate, cumulative amortization recognized in accordance with the revenue recognition policies. |
Financial guarantees provided by the Bank, regardless of the guarantor, instrumentation or other circumstances are reviewed periodically to determine the credit risk to which they are exposed and, if appropriate, to consider whether a provision is required. The credit risk is determined by application of criteria similar to those established for quantifying impairment losses on financial assets carried at amortized cost (described in Note 2.g above).
The provisions made for these transactions are recognized under Provisions – Other provisions in the consolidated balance sheet. These provisions are recognized and reversed with a charge or credit, respectively, to Provisions (net) in the consolidated income statement.
If a specific provision is required for financial guarantees, the related unearned commissions recognized under Financial liabilities at amortized cost in the consolidated balance sheet are reclassified to the appropriate provision.
r) Loan commitments
Loan commitments granted by the Bank are subject to the impairment requirements of IFRS 9 and are accounted for as off-balance sheet risk in memorandum accounts.
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The provisions made for these transactions are recognized under Provisions for off-balance sheet risk in the consolidated balance sheet (see Note 24). These provisions are recognized and reversed with a charge or credit, respectively, to Provisions (net) in the consolidated income statement.
s) Post-employment benefits
The Bank’s post-employment obligations to its employees are deemed to be defined contribution plans when the Bank makes pre-determined contributions to a separate entity and will have no legal or effective obligation to make further contributions if the separate entity cannot pay the employee benefits relating to the service rendered in the current and prior periods. Post-employment obligations that do not meet the aforementioned conditions are classified as defined benefit plans (see Note 24.c).
Defined contribution plans
Payments made in each year related to defined contribution plans are recognized under Personnel expenses in the consolidated income statement. The amounts not yet contributed at each year-end are recognized under Provisions – Provision for pensions and similar obligations on the liability side of the consolidated balance sheet.
Defined benefit plans
The Bank recognizes under Provisions – Provision for pensions and similar obligations on the liability side of the consolidated balance sheet (or under Other assets on the asset side, as appropriate) the present value of its defined benefit post-employment obligations, net of the fair value of the plan assets. The cost of providing retirement benefits is determined using the Projected Unit Credit Method, with actuarial valuations being carried out at the end of each annual reporting period.
Plan assets are defined as those that will be directly used to settle obligations and that meet the following conditions:
- | They are not owned by the Bank, but by a legally separate entity that is not a party related to the Bank. |
- | They are only available to pay or fund post-employment benefits and they cannot be returned to the Bank unless the assets remaining in the plan are sufficient to meet all the benefit obligations of the plan and of the Bank to current and former employees, or they are returned to reimburse employee benefits already paid by the Bank. |
Post-employment benefits are recognized as follows:
- | Service cost is recognized in the consolidated income statement and includes the following items: |
- | Current service cost (the increase in the present value of the obligations resulting from employee service in the current period) is recognized under Personnel expenses. |
- | The past service cost, which arises from changes to existing post-employment benefits or from the introduction of new benefits and includes the cost of reductions, is recognized under Provisions (net). |
- | Any gain or loss arising from plan settlements is recognized under Provisions (net). |
- | Net interest on the net defined benefit liability (asset), i.e., the change during the period in the net defined benefit liability (asset) that arises from the passage of time, is recognized under Interest expense and similar charges (Other interest income and similar income if it constitutes income) in the consolidated income statement. |
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- | The remeasurement of the net defined benefit obligation is recognized in Accumulated reserves within Shareholders’ equity in the consolidated balance sheet and includes: |
- | Actuarial gains and losses generated in the year, arising from the differences between the previous actuarial assumptions and what has actually occurred and from the effects of changes in actuarial assumptions. |
- | The return on plan assets, excluding amounts included in net interest on the net defined benefit liability (asset). |
- | Any change in the effect of the asset ceiling, excluding amounts included in net interest on the net defined benefit liability (asset). |
- | Remeasurements recognized in other comprehensive income are not reclassified to the consolidated income statement. |
Further details about post-employment benefits are given in Note 24.c.
t) Other long-term employee benefits
Other long-term employee benefits, defined as obligations to pre-retirees taken to be those who have ceased to render services at the Bank but who, without being legally retired, continue to have economic rights vis-à-vis the Bank until they acquire the legal status of retiree, are treated for accounting purposes, where applicable, as established above for defined benefit post-employment plans, except that actuarial gains and losses are recognized under Provisions (net) in the consolidated income statement.
u) Termination benefits
Termination benefits are recognized when there is a detailed formal plan identifying the basic changes to be made, if implementation of the plan has begun, its main features have been publicly announced or objective facts concerning its implementation have been disclosed.
v) Income tax
Income tax expense represents the sum of the income tax currently payable and deferred income tax.
Current income tax
The tax currently payable is based on taxable profit for the year. Taxable profit differs from Profit for the year as reported in the consolidated income statement because it excludes items of income or expense that are taxable or deductible in other years and it further excludes items that are never taxable or deductible. The Bank’s liability for current tax is calculated using tax rates that have been enacted or substantively enacted by the end of the reporting period.
Deferred income tax
Deferred income tax is the tax expected to be payable or recoverable on differences between the carrying amounts of assets and liabilities in the consolidated financial statements and the corresponding tax bases used in the computation of taxable profit, tax loss and tax credit carryforwards. Deferred income tax is accounted for using the liability method.
Deferred income tax is calculated at the tax rates that are expected to apply in the period when the liability is settled or the asset is realized based on tax laws and rates that have been enacted or substantively enacted at the reporting date and reflects uncertainty related to income taxes, if there is any.
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Deferred tax assets are only recognized for temporary differences to the extent that it is considered probable that the Bank will have sufficient future taxable profits against which the deferred tax assets can be utilized, and the deferred tax assets do not arise from the initial recognition (except in a business combination) of other assets and liabilities in a transaction that affects neither taxable profit nor accounting profit. Other deferred tax assets (tax loss and tax credit carryforwards) are only recognized if it is considered probable that, the Bank will have sufficient future taxable profits against which they can be utilized.
The carrying amount of deferred tax assets is reviewed at each reporting date and reduced to the extent that it is no longer probable that sufficient taxable profits will be available to allow all or part of the asset to be recovered.
Income and expense recognized directly in consolidated total equity are accounted for as temporary differences.
The measurement of deferred tax liabilities and assets reflects the tax consequences that would follow from the manner in which the Bank expects, at the end of the reporting period, to recover or settle the carrying amount of its assets and liabilities.
Tax assets include the amount of all tax assets, which are broken down into current amounts of tax to be recovered within the next twelve months and deferred amounts of tax to be recovered in future years, including those arising from tax loss or tax credit carryforwards.
Tax liabilities include the amount of all tax liabilities (except provisions for taxes), which are broken down into current the amount payable in respect of the income tax on the taxable profit for the year and other taxes in the next twelve months and deferred the amount of income tax payable in future years.
Current and deferred income tax for the year
The income tax expense is calculated as the sum of the current tax resulting from application of the appropriate tax rate to the taxable profit for the year (net of any deductions allowable for tax purposes), and of the changes in deferred tax assets and liabilities recognized in the consolidated income statement.
Current and deferred income tax are recognized in the consolidated income statement, except when they relate to items that are recognized in other comprehensive income or directly in consolidated total equity, in which case, the current and deferred income tax are also recognized in other comprehensive income or directly in consolidated total equity, respectively.
Where current tax or deferred tax arises from the initial accounting for a business combination, the tax effect is included in the accounting for the business combination.
w) Remaining maturity periods
The analysis of the maturities of the balances of certain items in the consolidated balance sheet at 2021 and 2022 year-end is provided in Note 45.
x) Segment reporting
Operating segments are reported in a manner consistent with the internal reporting provided to the Chief Operating Decision Maker. The Chief Operating Decision Maker (CODM), who is responsible for allocating resources and assessing performance of the operating segments, has been identified as the CEO.
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y) Dividend distribution
Dividend distributions to the Bank’s shareholders are recognized as a liability in the consolidated financial statements in the period in which the dividends are proposed by the Board of Directors and approved by the Bank’s shareholders.
z) Treasury shares
Own equity instruments that are reacquired (treasury shares) are recognized at cost and deducted from consolidated total equity. No gain or loss is recognized in the consolidated income statement on the purchase, sale, issue or cancellation of the Bank’s own equity instruments. Any difference between the carrying amount and the consideration, if reissued, is recognized in Accumulated reserves within Shareholders’ equity in the consolidated balance sheet.
aa) Consolidated income statement and other comprehensive income
This consolidated statement presents the income and expense generated by the Bank as a result of its business activity in the year, and a distinction is made between the income and expenses recognized in the consolidated income statement for the year and the other income and expenses recognized directly in consolidated total equity.
Accordingly, this consolidated statement presents:
a. | Profit for the year. |
b. | The net amount of the income and expenses recognized directly in consolidated total equity that will not be reclassified subsequently to the consolidated income statement. |
c. | The net amount of the income and expenses recognized directly in consolidated total equity that may be reclassified subsequently to the consolidated income statement when certain conditions are met. |
d. | The income tax incurred in respect of the items indicated in b) and c) above, except for the valuation adjustments arising from investments in associated entities accounted for using the equity method, which are presented net. |
e. | Total consolidated comprehensive income, calculated as the sum of a) to d) above, presenting separately the amount attributable to the Parent and the amount relating to non-controlling interests. |
This consolidated statement presents the items separately by nature, grouping together items that, in accordance with the applicable IFRS, will not be reclassified subsequently to the consolidated income statement since the requirements established by the corresponding IFRS are met.
ab) Consolidated statement of changes in total equity
This consolidated statement presents all the changes in consolidated total equity, including the adjustments in the opening balance on Accumulated reserves arising from changes in accounting policies and from the correction of errors.
Accordingly, this consolidated statement presents a reconciliation of the carrying amount at the beginning and end of the year of all the consolidated total equity items and the changes are grouped together based on their nature into the following items:
a. | Adjustments in the opening balance on Accumulated reserves due to changes in accounting policies and from the correction of errors: include those in consolidated total equity arising as a result of the |
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retrospective restatement of the balances in the consolidated financial statements, distinguishing between those resulting from changes in accounting policies and those relating to the correction of errors. |
b. | Income and expense recognized in the year: includes, in aggregate form, the total of the aforementioned items recognized in the consolidated income statement. |
c. | Other changes in consolidated total equity: include the remaining items recognized in consolidated total equity, including, inter alia, increases and decreases in share capital, distribution of profit, transactions involving own equity instruments (treasury shares), transfers between equity items and any other increases or decreases in consolidated total equity. |
ac) Consolidated statement of cash flows
The following terms are used in the consolidated statement of cash flows with the meanings specified:
● | Cash flows: inflows and outflows of cash and cash equivalents, which are short-term, highly liquid investments that are subject to an insignificant risk of changes in value, irrespective of the portfolio in which they are classified. |
The Bank classifies as cash and cash equivalents the balances recognized under Cash and balances with the Central Bank in the consolidated balance sheet.
● | Operating activities: the principal revenue-producing activities of credit institutions and other activities that are not investing or financing activities. |
● | Investing activities: the acquisition and disposal of long-term assets and other investments not included in cash and cash equivalents. |
● | Financing activities: activities that result in changes in the size and composition of the equity and liabilities that are not operating activities. |
3. Significant events
The following is a summary of the significant corporate transactions undertaken by the Bank and other significant events over the last three years:
a) Corporate events
Acquisition of Elavon Mexico Holding Company
On March 13, 2020, the Bank acquired 49% of the shares representing the capital stock of Santander Merchant Platform Solutions México, S.A. de C.V. (formerly, Elavon Mexico Holding Company, S.A. de C.V.). Santander Merchant Platform Solutions, S.L., a subsidiary of Banco Santander (Spain) acquired the remaining 51% of the capital stock. The agreed purchase price for the total equity stock is 1,680 million pesos.
As of December 31, 2021 and also for 6 months during 2022, the Bank measured this investment using the equity method (see Note 49).
As of December 31, 2022, the Bank reclassified this investment as a non-current asset held for sale (see Note 13).
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Senior Unsecured Notes
On April 14, 2020, the Bank issued Senior Unsecured Notes for USD 1,750 million at an annual interest rate of 5.375% and maturity in 2025. The Senior Unsecured Notes were offered in the United States of America through a private placement to qualified institutional buyers, in accordance with Rule 144A under the U.S. Securities Act of 1933 and, outside the United States of America, in accordance with Regulation S under the Securities Act.
Merger of Santander Vivienda, S.A. de C.V.
On October 28, 2019, Banco Santander México obtained the authorization from Banco Santander (Spain) to carry out a merger through absorption between Santander Vivienda, S.A. de C.V. (Santander Vivienda), with the former being the surviving entity, and the latter being the merged entity.
On August 28, 2020, the SHCP authorized the merger of Banco Santander México as the surviving merging entity with Banco Santander México and Santander Vivienda, as the merged entity, which is extinguished.
During the Extraordinary General Meeting of September 30, 2020, it was approved to carry out the merger of Banco Santander México as the merging entity with Santander Vivienda as the merged entity.
The total assets and total liabilities of Santander Vivienda merged by Banco Santander México amounted to 63,703 million pesos and 54,925 million pesos, respectively.
Merchant business
On December 3, 2020, Banco Santander México entered into an assignment agreement with SMPS Merchant Platform Solutions México, S.A. de C.V. (SMPS), subsidiary entity of Santander Merchant Platform Solutions México, S.A. de C.V., in order to sell all the acquisition contracts related to the merchant payment business operated and administered by Banco Santander México, along with their respective economic rights. The agreed sell price amounts to 1,600 million pesos.
On June 1, 2021, as part of Banco Santander’s (Spain) strategy to consolidate the merchant payment business into a global business and, once the SMPS registration was obtained to be able to operate as a Participant in Disposal Networks (Participante en Redes de Medios de Disposición) in its capacity as Acquirer (Adquirente) in accordance with the General Provisions applicable to Disposal Networks (Disposiciones de Carácter general aplicables a las Redes de Medios de Disposición) issued by the CNBV and the Mexican Central Bank, Banco Santander México formalized the sale of all its merchant payment contracts (acquiring business) to SMPS.
For this transaction, the Bank recognized a gain of 816 million pesos within Other operating income in the consolidated income statement.
Merchant business is discussed in Note 49.
2021 - Exchange Offers
On March 23, 2021, Banco Santander (Spain) announced its intention to repurchase the outstanding shares of Banco Santander México that it did not own (8.3%). On June 8, 2021, Banco Santander (Spain) announced a change in the expected structure, instead of a mandatory delisting tender offer, a voluntary tender offer.
On November 3, 2021, Banco Santander, S.A. (Spain) announced an exchange offer for the outstanding shares of Banco Santander México at a price of 26.50 Mexican pesos for each share of the Bank and the equivalent in US dollars of 132.50 Mexican pesos for each outstanding American Deposit Share (ADS).
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Consequently, Banco Santander, S.A. (Spain) increased its participation in the Bank to 96.16% from 91.64%.
As a result of the exchange offer detailed above, the share-based payment plan was modified, from an equity-settled transaction to a cash-settled transaction and as a consequence, 264 million pesos were reclassified from Accumulated reserves within Shareholders’ equity to Other liabilities in the consolidated balance sheet.
Further details about share-based payment plan are given in Note 42.b, 42.c, 42.d and 43.b.
Issue of perpetual subordinated non-preferred contingent convertible additional Tier I Capital Notes
On September 15, 2021, Banco Santander México issued perpetual subordinated non-preferred contingent convertible additional Tier I Capital Notes (Subordinated Additional Tier I Capital Notes) for USD 700 million with no fixed maturity or fixed redemption date, at an annual variable interest rate, which will be recalculated every 5 years based on the yield of the Treasury Notes of the United States of North America (US Treasury Notes) with a term of 5 years that is in force at that time plus the spread defined in the placement supplement.
Initially annual interest rate at the time of issuance was 4.625%
The Subordinated Additional Tier I Capital Notes were placed through an exclusive private offering to Banco Santander (Spain).
Issuance of unsecured notes at a fixed interest rate
On November 30, 2021, Banco Santander México issued through a national primary public offering unsecured notes for 7 years for an amount of 6,500 million pesos at a fixed annual gross interest rate of 8.08% per year and interest payments every 182 days.
Issuance of unsecured notes at a floating interest rate
On November 30, 2021, Banco Santander México issued through a national primary public offering unsecured notes for 4 years for an amount of 3,500 million pesos at a floating annual gross interest equivalent to TIIE for a term of 28 days plus a surcharge of 0.05% and payment of interest every 28 days. The annual gross interest rate applicable to the first interest payment period corresponds to 5.28%
Amortization of the outstanding balance of perpetual subordinated non-preferred contingent convertible additional Tier I Capital Notes issued in 2016
On December 8, 2021, Banco Santander México notified the holders of its decision to pay in full the outstanding balance for an amount 500 million USD corresponding to the Subordinated Additional Tier I Capital Notes, issued on December 29, 2016.
This transaction was settled at par value on January 19, 2022.
Issuance of unsecured notes at a fixed interest rate
On April 4, 2022, Banco Santander México issued through a national primary public offering unsecured notes for 7 years for an amount of 2,790 million pesos at a fixed annual gross interest rate of 8.72% per year and interest payments every 182 days.
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Issuance of unsecured notes at a floating interest rate
On April 4, 2022, Banco Santander México issued through a national primary public offering unsecured notes for 5 years for an amount of 7,100 million pesos at a floating annual gross interest equivalent to TIIE for a term of 28 days plus a surcharge of 0.07% and payment of interest every 28 days.
Issuance of unsecured notes at a floating interest rate
On July 14, 2022, Banco Santander México issued through a national primary public offering unsecured notes for 4 years for an amount of 5,000 million pesos at a floating annual gross interest equivalent to the average one-day funding TIIE plus a surcharge of 0.29% and payment of interest every 28 days.
2022 - Exchange Offers
On October 21, 2022, Banco Santander (Spain) announced its intention to repurchase all of the Serie B shares and American Depositary Shares of Banco Santander México that are not already in its possession.
The Bank expects that the exchange offers will be completed during 2023 and, subsequently, start the delisting of all of the Serie B shares from the Mexican Stock Exchange and of all of the American Depositary Shares from the New York Stock Exchange.
b) Other significant events
COVID-19 pandemic Support Program
On March 26, 2020, the CNBV issued an official letter giving response to the proposal of the Association of Banks of Mexico (ABM by its Spanish acronym) for the implementation of various relief measures (Support Program) in order to support borrowers impacted by the COVID-19 pandemic and with the aim of guaranteeing the stability of the Financial System in Mexico.
The Bank implemented in March 2020 the Support Program, which includes the partial or total deferral of principal and/or interest payments for up to four months, with the possibility of extending it to two additional months, with respect to the total amount due from borrowers, without any interest charge.
The Support Program was applied to commercial loans, mortgage loans, and revolving and non-revolving consumer loans as well as for agricultural loans, as long as the loan was classified as performing according to Mexican Banking GAAP as of February 28, 2020. In the case of microcredits (microloans), the Support Program was only applied as long as the loan was classified as performing according to Mexican Banking GAAP as of March 31, 2020.
Bank’s Management applied its professional judgment in analyzing if the contractual terms and conditions of the loans benefited by the Support Program change substantially with respect to the original granted loan, concluding that the modified contractual cash flows on the financial assets do not result in derecognition as established by IFRS 9.
The Support Program was active during 2020 and 531,636 loans were registered. As of December 31, 2021 and 2022, there are no loans still participating in the Support Program.
Credit restructuring measures
On September 24, 2020, SHCP and CNBV issued an optional package of measures for credit restructuring. These relief measures encourage and allow banks and other financial intermediaries to restructure the loans of customers who request it. These measures consist in various options such as extension of terms,
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reduction of interest rates or eventual reductions and a term of up to five years (sixty months), depending on the customer and institution.
Additionally, on November 9, 2020, the CNBV issued regulatory facilities for credit institutions that implement “Institutional Restructuring Programs”, in order to offer better credit conditions to their customers.
The Bank decided not to apply the optional restructuring measures nor other “Institutional Restructuring Programs”.
Labor reform
On April 23, 2021, a decree (Decree) was published by the Federal Government to regulate labor subcontracting, when a natural or legal person provides its own workers for the benefit of another person.
When the Decree entered into force, various laws were reformed, added and repealed in order to:
i.) | Prohibit the subcontracting of personnel for activities that are part of the corporate purpose and the main activity of the entity, and |
ii.) | Allow the subcontracting of services and specialized works that are not part of the corporate purpose or main activity of the entity, as long as certain requirements are met, such as the contractor is registered in the public register with the Ministry of Labor and Social Security (STPS by its Spanish acronym), which is renewed every three years. |
In compliance with the Decree, Banco Santander México hired 4,891 employees who provided non-specialized services who previously worked in its subsidiaries and 1,044 of its employees were transferred to some of its subsidiaries.
4. Distribution of the Bank’s profit and Earnings per share
4.1 Distribution of the Bank’s profit
The distributions of the Bank’s profit ended December 31, 2020, 2021 and 2022 approved by the Board of Directors during the annual general meetings are as follows:
| | | | | | | | | |
|
|
| |
|
| |
|
| |
| |
| 2020 | |
| 2021 | |
| 2022 |
| | | | | | | | | |
Profit of the year | |
| 18,974 | |
| 20,801 | |
| 24,108 |
Dividends declared | |
| — | |
| 4,921 | |
| 17,878 |
Dividend per share (pesos) | |
| — | |
| 0.73 | |
| 2.64 |
Dates of payment | |
| | |
| 06/18/2021 and | |
| 06/28/2022 and |
| | | | | | 11/05/2021 | | | 07/28/2022 |
During 2020, in order to strengthen banking institutions so they could be in a better position to absorb potentials losses that could arise because of the COVID-19 pandemic and have more resources to support the economic slowdown, the CNBV issued two recommendations, to avoid:
a)The payment of dividends to shareholders, and
b)Carry out share buybacks or any other mechanism aimed at rewarding shareholders.
Considering the effects of the COVID-19 pandemic and on the recommendation received from the CNBV, the Bank decided not to pay dividends or carry out share buybacks in 2020.
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4.2 Earnings per share
According to IAS 33 Earnings per share, the Bank should present and adjust retrospectively, the basic and diluted earnings per share, if the number of ordinary or potential shares outstanding increases as a result of a capitalization, bonus issue or share split, or decreases as a result of a reverse share split.
i. Basic earnings per share
Basic earnings per share are calculated by dividing the profit attributable to the Parent by the weighted average number of shares outstanding during the year, excluding the average number of treasury shares, if any, held in the year (see Note 29.d).
Accordingly, basic earnings per share were determined as follows:
| | | | | | | | | |
|
|
| |
|
|
|
|
| |
| | | 2020 | | | 2021 | | | 2022 |
| | | | | | | | | |
Profit attributable to the Parent | |
| 18,974 | |
| 20,801 | |
| 24,108 |
Profit attributable to the Parent (net of non-controlling interest) | | | 18,974 | | | 20,801 | | | 24,108 |
Weighted average number of shares outstanding | |
| 6,776,640,349 | |
| 6,775,682,106 | |
| 6,781,322,904 |
Basic earnings per share (pesos) | |
| 2.80 | |
| 3.07 | |
| 3.56 |
ii. Diluted earnings per share
In calculating diluted earnings per share, the amount of profit attributable to the Parent and the weighted average number of shares issued, excluding the average number of treasury shares, are adjusted to consider all the dilutive effects inherent to potential shares (see Note 29.d).
Accordingly, diluted earnings per share were determined as follows:
| | | | | | | | | |
|
|
| |
|
| |
|
| |
| | | 2020 | | | 2021 | | | 2022 |
| | | | | | | | | |
Profit attributable to the Parent | |
| 18,974 | |
| 20,801 | |
| 24,108 |
Profit attributable to the Parent (net of non-controlling interest) | | | 18,974 | | | 20,801 | | | 24,108 |
Weighted average number of shares outstanding | |
| 6,776,640,349 | |
| 6,775,682,106 | |
| 6,781,322,904 |
Dilutive effect of rights on shares | |
| 10,354,008 | |
| 11,312,251 | |
| 5,671,453 |
Adjusted number of shares | |
| 6,786,994,357 | |
| 6,786,994,357 | |
| 6,786,994,357 |
Diluted earnings per share (pesos) | |
| 2.80 | |
| 3.06 | |
| 3.55 |
5. Remuneration and other benefit paid to the Bank’s directors, executive officers and other key management personnel
The Bank considers as key management personnel the directors, the executive officers and the members of the audit committee, the corporate practices, the nominating and compensation committee, the comprehensive risk management committee and the remuneration committee.
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During 2021, the Deputy General Director of Global Corporate Banking, the Deputy Director of Retail Commercial Banking and the Deputy Director of Operations decided to step down.
During 2022, a new CEO for Banco Santander México was named, two Vice-presidencies of Finance and Retail & Large Companies Banking were created and named, regarding these changes and some company leavers new Heads for Digital and Innovation, Corporate and Investment Banking, Human Resources, Chief Financial Officer, Chief Audit Executive, Corporate Resources and Recovery were named. The Heads of Retail Commercial Banking and Financial Inclusion were included to the Executive Committee.Other than the aforementioned personnel change, there were no significant changes in the Bank’s main key personnel from December 31, 2022 to the date on which these consolidated financial statements were authorized for issue.
a) Remuneration of directors
Our shareholders establish the compensation of our directors at the annual shareholders’ meeting. Accordingly, only independent directors receive compensation for their duties. Under Mexican law, we are not required to disclose on an individual basis the compensation of our directors, our executive officers and the members of the audit committee, the corporate practices, the nominating and compensation committee, the comprehensive risk management committee and the remuneration committee and we do not otherwise publicly disclose such information.
The aggregate compensation paid to independent directors who were members of the audit committee, the corporate practices, the nominating and compensation committee, the comprehensive risk management committee, the remuneration committee and the Board of Directors of the Bank amounted to 23 million pesos during 2020, 30 million pesos during 2021 and 37 million pesos during 2022, paid as attendance fees.
b) Remuneration of executive officers
The aggregate amount for compensation and benefits to executive officers amounted to 431 million pesos during 2020, 453 million pesos during 2021 and 504 million pesos during 2022. The main benefits paid to the Bank’s executive officers are: salary, Christmas bonus, vacation bonus, holidays, performance bonus and share-based payments.
The criteria for granting and paying bonus compensation vary according to the activities performed by the different areas and, therefore, payment of the bonus may vary depending on the department and activities performed by each member.
c) Post-employment and other long-term benefits
Our executive officers may participate in the same pension and medical expenses plan that is available to the Bank’s employees, but at different contribution percentages to the ones made by the rest of the employees.
The total post-employment benefits (including pension plan, medical expenses and life insurance policies) to executive officers amounted to 522 million pesos as of December 31, 2020, 537 million pesos as of December 31, 2021 and 572 million pesos as of December 31, 2022.
d) Loans to executive officers
The loans granted to executive officers amount to 183 million pesos and 197 million pesos as of December 31, 2021 and 2022, respectively.
F-94
6. Cash and balances with the Central Bank
The breakdown by type of balances of Cash and balances with the Central Bank is as follows:
| | | | | | |
|
|
| |
|
| |
| |
| 12/31/2021 | |
| 12/31/2022 |
| | | | | | |
Cash | |
| 26,361 | |
| 35,143 |
Central Bank compulsory deposits | |
| 23,978 | |
| 23,978 |
Deposits in the Central Bank | |
| 12,705 | |
| 13,623 |
Accrued interest | |
| 29 | |
| 71 |
| |
| 63,073 | |
| 72,815 |
Central Bank compulsory deposits relate to a minimum balance financial institutions are required to maintain with the Central Bank based on a percentage of deposits received from third parties.
As of December 31, 2022 and 2021, the Bank maintained a special deposit in the Central Bank for an amount of 7,700 million pesos based on Circular 9/2020 issued by the Mexican Central Bank on June 13, 2020. Circular 9/2020 allows credit institutions that have Bonos de Regulación Monetaria Reportables (BREMS R) to use these financial instruments to guarantee overdrafts in their account in order to promote the healthy development of the Mexican financial system.
Note 45.a includes a breakdown of the remaining maturity of Cash and balances with the Central Bank. The compulsory deposits required by the Central Bank have an indefinite term. Additionally, Note 45.d includes the fair value amounts of these assets.
7. Loans and advances to credit institutions
The breakdown by classification, type and currency of the balances of Loans and advances to credit institutions in the consolidated balance sheets is as follows:
| | | | | | |
|
|
| |
|
| |
| | | 12/31/2021 | |
| 12/31/2022 |
| | | | | | |
Classification: | | |
| |
|
|
Financial assets at fair value through profit or loss | | | 58,486 | | | 102,652 |
Financial assets at amortized cost | | | 36,492 | | | 40,400 |
| | | 94,978 | |
| 143,052 |
Type: | | |
| |
|
|
Reciprocal accounts | | | 17,820 | |
| 17,583 |
Guarantee deposits - Collateral delivered for OTC financial derivatives transactions (Note 32) | | | 13,234 | |
| 14,585 |
Reverse repurchase agreements | | | 58,486 | |
| 102,652 |
Other accounts | | | 5,438 | |
| 8,232 |
| | | 94,978 | |
| 143,052 |
Currency: | | |
| |
|
|
Peso | | | 83,382 | |
| 103,094 |
USD | | | 11,579 | |
| 39,759 |
Other currencies | | | 17 | |
| 199 |
| | | 94,978 | |
| 143,052 |
As of December 31, 2021 and 2022, 13,234 million pesos and 14,585 million pesos, respectively, of loans and advances to credit institutions, have been pledged in connection with OTC financial derivatives
F-95
transactions, and are classified as restricted assets within Loans and advances to credit institutions – Financial assets at amortized cost (see Note 32).
As of December 31, 2021 and 2022, 58,235 million pesos and 102,431 million pesos, respectively, of debt instruments have been received as collaterals in connection with reverse repurchase agreement transactions within Loans and advances to credit institutions (see Note 31).
Note 45.a includes a breakdown of the remaining maturity of Loans and advances to credit institutions. Additionally, Note 45.d includes the fair value amounts of these assets classified as Loans and advances to credit institutions – Financial assets at amortized cost.
F-96
8. Debt instruments
a) Breakdown
The breakdown by classification, type and currency of the balances of Debt instruments is as follows:
| | | | | | |
|
|
| 12/31/2021 |
|
| 12/31/2022 |
| | | | | | |
Classification: | |
|
| |
|
|
Financial assets at fair value through profit or loss | |
| 110,975 | |
| 130,249 |
Financial assets at fair value through other comprehensive income | | | 390,974 | | | 313,906 |
Financial assets at amortized cost | | | 11,619 | | | 22,241 |
| |
| 513,568 | |
| 466,396 |
Type: | |
|
| |
|
|
Mexican government debt securities | |
| 336,872 | |
| 355,658 |
Of which: | |
| | |
| |
Collateral delivered for OTC financial derivatives transactions (Note 32) | |
| 1,509 | |
| 1,417 |
Foreign government debt securities | |
| 165,955 | |
| 102,005 |
Of which: | |
| | |
| |
Collateral delivered for OTC financial derivatives transactions (Note 32) | | | 4,866 | | | — |
Brazilian Government Notes | |
| 25,744 | |
| 32,715 |
US Government Treasury Bills (T-BILLS) | |
| 113,155 | |
| 69,290 |
US Government Treasury Notes (T-NOTES) | | | 27,056 | | | — |
Debt securities issued by financial institutions | |
| 5,601 | |
| 8,492 |
Other debt securities | |
| 5,140 | |
| 241 |
| |
| 513,568 | |
| 466,396 |
Currency: | |
|
| |
|
|
Peso | |
| 310,871 | |
| 343,790 |
USD | |
| 152,971 | |
| 79,300 |
Brazilian Real (BRL) | |
| 25,744 | |
| 32,715 |
Other currencies | |
| 23,982 | |
| 10,591 |
| |
| 513,568 | |
| 466,396 |
The breakdown of Debt instruments classified as at fair value through profit or loss is as follows:
| | | | | | |
|
|
| 12/31/2021 |
|
| 12/31/2022 |
| | | | | | |
Federal Treasury Securities (CETES) | |
| 10,311 | |
| 9,210 |
United Mexican States Bonds (UMS) | |
| 168 | |
| 62 |
Federal Mexican Government Development Bonds (BONDES) | |
| 26,132 | |
| 51,817 |
M and M10 Mexican Government Bonds (M Bonds) | |
| 16,652 | |
| 15,294 |
Mexican Bank Saving Protection Bonds (BPATS) | |
| 14,161 | |
| 3,463 |
Federal Mexican Government Development Bonds in UDIS(1) (UDIBONDS) | |
| 8,232 | |
| 7,587 |
T-BILLS | |
| 13,328 | |
| 34,324 |
T-NOTES | | | 11,495 | | | — |
Other debt securities | |
| 10,496 | |
| 8,492 |
| |
| 110,975 | |
| 130,249 |
(1) UDIS are Unidades de Inversión, a peso-equivalent unit of account indexed for Mexican inflation. As of December 31, 2021 and 2022, one UDI was equal to 7.10823 pesos and 7.64680 pesos, respectively.
F-97
As of December 31, 2021 and 2022, 6,375 million pesos and 1,417 million pesos, respectively, of debt instruments, have been pledged in connection with OTC financial derivatives transactions, and are classified as restricted assets within Debt instruments – Financial assets at fair value through profit or loss (see Note 32).
As of December 31, 2021, 1,988 million pesos (1,565 million pesos in which the lender was the Central Bank) of Debt instruments, have been pledged in connection with securities loan transactions and are classified as restricted assets within Debt instruments – Financial assets at fair value through profit or loss.
As of December 31, 2022 there were no debt instruments, have been pledged in connection with securities loan transactions.
As of December 31, 2021 and 2022, 87,653 million pesos and 86,052 million pesos, respectively, of Debt instruments, have been pledged in connection with repurchase agreement transactions and are classified as restricted assets within Debt instruments – Financial assets at fair value through profit or loss.
The breakdown of Debt instruments classified as at Financial assets at fair value through other comprehensive income is as follows:
| | | | | | |
|
|
| 12/31/2021 |
|
| 12/31/2022 |
| | | | | | |
UMS | |
| 36,573 | |
| 20,539 |
M, M3 and M5 Mexican Government Bonds (M Bonds) | |
| 197,658 | |
| 211,518 |
BPATS | |
| 12,250 | |
| 18,043 |
UDIBONDS | |
| 3,116 | |
| 3,082 |
T-BILLS | |
| 99,827 | |
| 34,966 |
T-NOTES | | | 15,561 | | | — |
Brazilian Government Notes | |
| 25,744 | |
| 25,517 |
Other debt securities | |
| 245 | |
| 241 |
| |
| 390,974 | |
| 313,906 |
As of December 31, 2021 and 2022, 103,095 million pesos and 119,213 million pesos, respectively, of Mexican government securities (M Bonds, BPATS, UMS and other debt securities) have been pledged in connection with repurchase agreement transactions, and are classified as restricted assets within Debt instruments – Financial assets at fair value through other comprehensive income.
As of December 31, 2021 and 2022, 17,633 (13,999 million pesos in which the lender was the Central Bank) million pesos and 28,932 million pesos (28,353 million pesos in which the lender was the Central Bank), respectively, of Debt instruments, have been pledged in connection with securities loan transactions and are classified as restricted assets within Debt instruments – Financial assets at fair value through other comprehensive income.
F-98
The following is a breakdown of the gross carrying amount of Debt instruments – Financial assets at fair value through other comprehensive income as of December 31, 2021:
| | | | | | | | | | | | | | | |
| | Fair value | |||||||||||||
| | | Stage 1 | | | Stage 2 | | | Subtotal | | | Stage 3 | | | Total |
| | | | | | | | | | | | | | | |
Financial assets at fair value through other comprehensive income | |
| | | | | | | | | | | | | |
Of which: | |
| | | | | | | | | | | | | |
Mexican government debt instruments | |
| 237,347 | | | — | | | 237,347 | | | — | | | 237,347 |
Foreign government debt instruments | |
| 141,132 | | | — | | | 141,132 | | | — | | | 141,132 |
Debt instruments issued by the Central Bank | | | 12,250 | | | — | | | 12,250 | | | — | | | 12,250 |
Other fixed-income interest debt instruments | |
| 245 | | | — | | | 245 | | | — | | | 245 |
| | | | | | | | | | | | | | | |
| |
| 390,974 | | | — | | | 390,974 | | | — | | | 390,974 |
The following is a breakdown of the gross carrying amount of Debt instruments – Financial assets at fair value through other comprehensive income as of December 31, 2022:
| | | | | | | | | | | | | | | |
| | Fair value | |||||||||||||
| | | Stage 1 | | | Stage 2 | | | Subtotal | | | Stage 3 | | | Total |
| | | | | | | | | | | | | | | |
Financial assets at fair value through other comprehensive income | |
| | | | | | | | | | | | | |
Of which: | |
| | | | | | | | | | | | | |
Mexican government debt instruments | |
| 235,139 | | | — | | | 235,139 | | | — | | | 235,139 |
Foreign government debt instruments | |
| 60,483 | | | — | | | 60,483 | | | — | | | 60,483 |
Debt instruments issued by the Central Bank | | | 18,043 | | | — | | | 18,043 | | | — | | | 18,043 |
Other fixed-income interest debt instruments | |
| 241 | | | — | | | 241 | | | — | | | 241 |
| | | | | | | | | | | | | | | |
| |
| 313,906 | | | — | | | 313,906 | | | — | | | 313,906 |
During 2021 and 2022, there were no transfers between levels related to the fair value (neither the corresponding allowance for impairment losses) of Debt instruments – Financial assets at fair value through other comprehensive income.
The breakdown by issuer rating of Debt instruments as of December 31, 2021 is as follows:
| | | | | | | | | | | | | |
|
|
| Private |
|
| |
|
| |
|
| |
|
| | | Debt | | | Sovereign Debt | | | Total | | | % |
|
| | | | | | | | | | | | | |
AAA | |
| — | |
| 140,211 | |
| 140,211 | |
| 27.30 | % |
A | |
| 10,495 | |
| 296,300 | |
| 306,795 | |
| 59.74 | % |
BBB | |
| 245 | |
| 36,741 | |
| 36,986 | |
| 7.20 | % |
BB | |
| — | | | 3,832 | | | 3,832 | | | 0.75 | % |
Below B | | | — | | | 25,744 | | | 25,744 | | | 5.01 | % |
| |
| 10,740 | |
| 502,828 | |
| 513,568 | |
| 100 | % |
F-99
The breakdown by issuer rating of Debt instruments as of December 31, 2022 is as follows:
| | | | | | | | | | | | | |
|
|
| Private |
|
| |
|
| |
|
| |
|
| | | Debt | | | Sovereign Debt | | | Total | | | % |
|
| | | | | | | | | | | | | |
AAA | |
| — | |
| 69,290 | |
| 69,290 | |
| 14.86 | % |
A | |
| 8,492 | |
| 332,845 | |
| 341,337 | |
| 73.19 | % |
BBB | |
| 241 | |
| 20,601 | |
| 20,842 | |
| 4.47 | % |
BB | | | — | | | 2,211 | | | 2,211 | | | 0.47 | % |
Below B | | | — | | | 32,716 | | | 32,716 | | | 7.01 | % |
| |
| 8,733 | |
| 457,663 | |
| 466,396 | |
| 100 | % |
As of December 31, 2021 and 2022, BBB ratings balance includes mainly sovereign exposures in Mexico.
As of December 31, 2021 and 2022, BB ratings balance includes mainly sovereign exposures in Mexico.
As of December 31, 2022, Below B ratings balance includes mainly debt instruments issued by Brazilian Government Notes.
The breakdown of Debt instruments classified as at Financial assets at amortized cost is as follows:
| | | | | | |
|
|
| 12/31/2021 |
|
| 12/31/2022 |
| | | | | | |
Special CETES | |
| 3,831 | |
| 2,211 |
Bonos de Regulación Monetaria Reportables - (BREMS R) | | | 7,788 | | | 7,799 |
MX and MX Mexican Government Bonds (M Bonds) | | | — | | | 1,666 |
CETES | | | — | | | 2,375 |
UDIBONDS | | | — | | | 992 |
Brazilian Government Bonds | | | — | | | 7,198 |
| |
| 11,619 | |
| 22,241 |
| | | | | | |
Type: | |
|
| |
|
|
Unquoted | |
| 3,831 | |
| 2,211 |
Quoted | | | 7,788 | | | 20,030 |
| |
| | |
| |
As of December 31, 2021 and 2022, 7,709 million pesos and 7,720 million pesos, respectively, of BREMS R issued by the Mexican Central Bank have been pledged in connection with repurchase agreement transactions and are classified as restricted assets within Debt instruments – Financial assets at amortized cost.
The following is a breakdown of the gross carrying amount of Debt instruments – Financial assets at amortized cost as of December 31, 2021:
| | | | | | | | | | | | | | | |
| | Gross carrying amount | |||||||||||||
| | | Stage 1 | | | Stage 2 | | | Subtotal | | | Stage 3 | | | Total |
| | | | | | | | | | | | | | | |
Financial assets at amortized cost | |
| | | | | | | | | | | | | |
Of which: | |
| | |
| | |
| | |
| | |
| |
Mexican government debt instruments | |
| 11,619 | |
| — | |
| 11,619 | |
| — | |
| 11,619 |
| |
| | |
| | |
| | | | | | | |
F-100
The following is a breakdown of the gross carrying amount of Debt instruments – Financial assets at amortized cost as of December 31, 2022:
| | | | | | | | | | | | | | | |
| | Gross carrying amount | |||||||||||||
| | | Stage 1 | | | Stage 2 | | | Subtotal | | | Stage 3 | | | Total |
| | | | | | | | | | | | | | | |
Financial assets at amortized cost | |
| | | | | | | | | | | | | |
Of which: | |
| | |
| | |
| | |
| | |
| |
Mexican government debt instruments | |
| 7,244 | |
| — | |
| 7,244 | |
| — | |
| 7,244 |
Foreign government debt instruments | | | 7,198 | | | — | | | 7,198 | | | — | | | 7,198 |
Debt instruments issued by the Mexican Central Bank | | | 7,799 | | | — | | | 7,799 | | | — | | | 7,799 |
| | | | | | | | | | | | | | | |
| |
| 22,241 | |
| — | |
| 22,241 | | | — | | | 22,241 |
During 2021 and 2022, there were no transfers between stages related to the gross carrying amount of Debt instruments – Financial assets at amortized cost.
b) Changes
The changes in Debt instruments – Financial assets at fair value through other comprehensive income, were as follows:
| | | | | | | | | | |
|
|
| 2020 |
|
| 2021 |
|
| 2022 |
|
| | | | | | | | | | |
Beginning balance | |
| 233,463 | |
| 355,321 | |
| 390,974 | |
Net additions/(disposals) | |
| 119,141 | |
| 43,105 | |
| (70,267) | |
Valuation adjustments | |
| 3,560 | |
| (6,724) | |
| (6,705) | |
Amounts reclassified to the consolidated income statement | |
| (843) | |
| (728) | |
| (96) | |
Balance at year-end | |
| 355,321 | |
| 390,974 | |
| 313,906 | |
c) Allowance for impairment losses
The following is a breakdown of the allowance for impairment losses of Debt instruments classified at fair value through other comprehensive income as of December 31, 2021:
| | | | | | | | | | | | | | | |
| | Allowance for impairment losses | |||||||||||||
| | | Stage 1 | | | Stage 2 | | | Stage 3 | | | Total | | | Written-off financial assets |
| | | | | | | | | | | | | | | |
Financial assets at fair value through other comprehensive income | |
| 39 | |
| — | |
| — | |
| 39 | |
| — |
Of which: | |
| | |
| | |
| | |
| | |
| |
Mexican government debt instruments | |
| 38 | |
| — | |
| — | |
| 38 | |
| — |
Other fixed-income interest debt instruments | | | 1 | | | — | | | — | | | 1 | | | — |
| | | | | | | | | | | | | | | |
| | | 39 | | | — | | | — | | | 39 | | | — |
F-101
The following is a breakdown of the allowance for impairment losses of Debt instruments classified at fair value through other comprehensive income as of December 31, 2022:
| | | | | | | | | | | | | | | |
| | Allowance for impairment losses | |||||||||||||
| | | Stage 1 | | | Stage 2 | | | Stage 3 | | | Total | | | Written-off financial assets |
| | | | | | | | | | | | | | | |
Financial assets at fair value through other comprehensive income | |
| 22 | |
| — | |
| — | |
| 22 | |
| — |
Of which: | |
| | |
| | |
| | |
| | |
| |
Mexican government debt instruments | |
| 22 | |
| — | |
| — | |
| 22 | |
| — |
Other fixed-income interest debt instruments | | | 1 | | | — | | | — | | | 1 | | | — |
| | | | | | | | | | | | | | | |
| | | 22 | | | — | | | — | | | 22 | | | — |
The change in the allowance for impairment losses of Debt instruments – Financial assets at fair value through other comprehensive income during 2021 and 2022, amounts to (52) million pesos and (17) million pesos, respectively.
There were no allowance for impairment losses recognized during 2021 and 2022, related to Debt instruments – Financial assets at amortized cost.
d) Other information
Note 45.a contains a breakdown of the remaining maturity periods of Financial assets at fair value through other comprehensive income - Debt Instruments. Additionally, Note 45.d includes the fair value amounts of these assets classified as Debt instruments – Financial assets at amortized cost.
9. Equity instruments
a) Breakdown
The breakdown by classification and type of Equity instruments is as follows:
| | | | | | |
|
|
| 12/31/2021 |
|
| 12/31/2022 |
| | | | | | |
Classification: | |
|
| |
|
|
Financial assets at fair value through profit or loss | |
| 2,764 | |
| 4,063 |
Financial assets at fair value through other comprehensive income | |
| 799 | |
| 697 |
| |
| 3,563 | |
| 4,760 |
Type: | |
|
| |
|
|
Shares of Mexican companies | |
| 3,563 | |
| 4,760 |
| |
| 3,563 | |
| 4,760 |
As of December 31, 2021 and 2022, 74 million pesos and 1 million pesos, respectively, of equity instruments have been received as guarantees and/or collateral in connection with the securities loan transactions within Equity instruments – Financial assets at fair value through profit or loss (see Note 31).
F-102
As of December 31, 2021 and 2022, 81 million pesos and 410 million pesos, respectively, of equity instruments, have been pledged in connection with securities loan transactions and are classified as restricted assets within Equity instruments – Financial assets at fair value through profit or loss.
Note 45.a contains a breakdown of the remaining maturity periods of these assets.
b) Changes
The changes in Equity instruments – Financial assets at fair value through other comprehensive income, were as follows:
| | | | | | | | | | |
|
|
| 2020 |
|
| 2021 |
|
| 2022 |
|
| | | | | | | | | | |
Beginning balance as of January 1 | |
| 642 | |
| 768 | |
| 799 | |
Write-off of equity instruments | |
| — | |
| — | |
| 63 | |
Net additions/(disposals) | |
| — | |
| 148 | |
| (147) | |
Valuation adjustments | |
| 126 | |
| (117) | |
| (18) | |
Balance at year-end | |
| 768 | |
| 799 | |
| 697 | |
Note 28.a includes a breakdown of the valuation adjustments recognized in other comprehensive income under Valuation adjustments – Financial assets at fair value through other comprehensive income.
10. Trading derivatives (assets and liabilities) and Short positions
a) Trading derivatives
The breakdown by type of inherent risk of the fair value of Trading derivatives arranged by the Bank is as follows (see Note 32):
| | | | | | | | | | | | |
| | | 12/31/2021 | | | 12/31/2022 | ||||||
|
|
| |
|
| |
|
| |
|
| |
| | | Assets | | | Liabilities | | | Assets | | | Liabilities |
| | | | | | | | | | | | |
Interest rate risk | |
| 95,607 | |
| 94,515 | |
| 159,830 | |
| 166,198 |
Currency risk | |
| 83,653 | |
| 80,189 | |
| 68,812 | |
| 62,773 |
Market price risk | |
| 130 | |
| 1,974 | |
| 174 | |
| 2,217 |
| |
| 179,390 | |
| 176,678 | |
| 228,816 | |
| 231,188 |
Note 45.a contains a breakdown of the remaining maturity periods of Trading derivatives.
b) Short positions
Following is a breakdown of the carrying amount of Short positions:
| | | | | | |
|
|
| 12/31/2021 |
|
| 12/31/2022 |
| | | | | | |
Securities loans: | |
|
| |
|
|
Debt instruments | |
| 19,109 | |
| 28,345 |
Equity instruments | |
| 14 | |
| 318 |
| |
| 19,123 | |
| 28,663 |
Short sales: | |
|
| |
|
|
Debt instruments | |
| 431 | |
| 99 |
| |
| 19,554 | |
| 28,762 |
Note 45.a contains a breakdown of the remaining maturity periods of these liabilities.
F-103
11. Loans and advances to customers
a) Detail
The detail by classification of Loans and advances to customers in the consolidated balance sheets is as follows:
| | | | | | | |
|
|
| 12/31/2021 |
|
| 12/31/2022 |
|
| | | | | | | |
Financial assets at fair value through profit or loss | | | 10,000 | | | 19,207 | |
Financial assets at fair value through other comprehensive income | | | 4,056 | | | 946 | |
Financial assets at amortized cost | | | 736,997 | | | 797,716 | |
| | | 751,053 | | | 817,869 | |
Of which: | |
|
| |
|
| |
Before allowance for impairment losses | |
| 772,088 | |
| 839,521 | |
Allowance for impairment losses | |
| (21,035) | |
| (21,652) | |
| |
| 751,053 | |
| 817,869 | |
As of December 31, 2021 and 2022, 6,261 million pesos and 6,530 million pesos, respectively, of Loans and advances to customers have been pledged in connection with financial derivatives traded in organized markets, and are classified as restricted assets within Loans and advances to customers (see Note 32).
Note 45.a includes a breakdown of the remaining maturity of Loans and advances to customers. Additionally, Note 45.d includes the fair value amounts of these assets classified as Loans and advances to customers – Financial assets at amortized cost.
F-104
b) Breakdown
The following is a breakdown by loan type, borrower sector, geographical area of residence and interest rate of the Loans and advances to customers. This breakdown reflects the Bank’s exposure to credit risk in its core business, disregarding the allowance for impairment losses:
| | | | | | |
|
|
| 12/31/2021 |
|
| 12/31/2022 |
| | | | | | |
By loan type: | |
|
| |
|
|
Commercial, financial and industrial loans | |
| 344,684 | |
| 362,069 |
Public sector loans | |
| 85,189 | |
| 84,583 |
Mortgage loans | |
| 189,854 | |
| 205,242 |
Reverse repurchase agreements | |
| 10,000 | |
| 19,207 |
Installment loans to individuals - | |
|
| |
|
|
Revolving consumer credit card loans | |
| 52,089 | |
| 63,782 |
Non-revolving consumer loans | |
| 67,619 | |
| 83,435 |
Impaired loans | |
| 22,653 | |
| 21,203 |
| |
| 772,088 | |
| 839,521 |
By borrower sector: | |
|
| |
|
|
Public sector | |
| 85,256 | |
| 84,583 |
Individuals | |
| 326,117 | |
| 374,707 |
Communications and transportation | |
| 35,756 | |
| 34,757 |
Construction | |
| 37,232 | |
| 30,864 |
Manufacturing | |
| 52,176 | |
| 53,302 |
Services | |
| 123,078 | |
| 137,525 |
Tourism | |
| 18,278 | |
| 20,840 |
Other sectors | |
| 94,195 | |
| 102,943 |
| |
| 772,088 | |
| 839,521 |
By geographical area: | |
|
| |
|
|
Mexico | |
| 772,088 | |
| 839,521 |
| |
| 772,088 | |
| 839,521 |
By interest rate: | |
|
| |
|
|
Fixed rate | |
| 359,178 | |
| 332,396 |
Floating rate | |
| 412,910 | |
| 507,125 |
| |
| 772,088 | |
| 839,521 |
F-105
c) Valuation adjustments for impairment of Loans and advances to customers
The following is a breakdown of the gross carrying amount of Loans and advances to customers – Financial assets at amortized cost as of December 31, 2021:
| | | | | | | | | | | | | | | |
| | Fair value/Gross carrying amount | |||||||||||||
| | | Stage 1 | | | Stage 2 | | | Subtotal | | | Stage 3 (*) | | | Total |
| | | | | | | | | | | | | | | |
Financial assets at fair value through other comprehensive income | | | 4,063 | |
| — | |
| 4,063 | |
| — | |
| 4,063 |
Of which: | | | | |
| | |
| | |
| | |
| |
Commercial, financial and industrial loans | | | 4,063 | | | — | | | 4,063 | |
| — | |
| 4,063 |
| | | | | | | | | | | | | | | |
Financial assets at amortized cost | | | 698,089 | | | 37,283 | | | 735,372 | | | 22,653 | | | 758,025 |
Of which: | | | | | | | | | | | | | | | |
Commercial, financial and industrial loans | | | 322,835 | | | 17,786 | | | 340,621 | | | 9,870 | | | 350,491 |
Public sector loans | | | 83,788 | | | 1,401 | | | 85,189 | | | 67 | | | 85,256 |
Mortgage loans | | | 178,822 | | | 11,032 | | | 189,854 | | | 9,725 | | | 199,579 |
Installment loans to individuals - | | | 112,644 | | | 7,064 | | | 119,708 | | | 2,991 | | | 122,699 |
Revolving consumer credit card loans | | | 48,556 | | | 3,533 | | | 52,089 | | | 1,328 | | | 53,417 |
Non-revolving consumer loans | | | 64,088 | | | 3,531 | | | 67,619 | | | 1,663 | | | 69,282 |
| | | | | | | | | | | | | | | |
(*) As of December 31, 2021, there were no POCI financial assets.
The following is a breakdown of the gross carrying amount Loans and advances to customers – Financial assets at amortized cost and Loans and advances to customers – Financial assets at fair value through other comprehensive income as of December 31, 2022:
| | | | | | | | | | | | | | | |
| | Fair value/Gross carrying amount | |||||||||||||
| | | Stage 1 | | | Stage 2 | | | Subtotal | | | Stage 3 (*) | | | Total |
| | | | | | | | | | | | | | | |
Financial assets at fair value through other comprehensive income | | | 946 | |
| — | |
| 946 | |
| — | |
| 946 |
Of which: | | | | |
| | |
| | |
| | |
| |
Commercial, financial and industrial loans | | | 946 | | | — | | | 946 | |
| — | |
| 946 |
| | | | | | | | | | | | | | | |
Financial assets at amortized cost | | | 752,073 | | | 46,092 | | | 798,165 | | | 21,203 | | | 819,368 |
Of which: | | | | | | | | | | | | | | | |
Commercial, financial and industrial loans | | | 339,283 | | | 21,840 | | | 361,123 | | | 5,587 | | | 366,710 |
Public sector loans | | | 84,583 | | | — | | | 84,583 | | | — | | | 84,583 |
Mortgage loans | | | 193,339 | | | 11,903 | | | 205,242 | | | 11,867 | | | 217,109 |
Installment loans to individuals - | | | 134,868 | | | 12,349 | | | 147,217 | | | 3,749 | | | 150,966 |
Revolving consumer credit card loans | | | 58,196 | | | 5,586 | | | 63,782 | | | 1,175 | | | 64,957 |
Non-revolving consumer loans | | | 76,672 | | | 6,763 | | | 83,435 | | | 2,574 | | | 86,009 |
| | | | | | | | | | | | | | | |
(*) As of December 31, 2022, there were no POCI financial assets.
F-106
The following is a breakdown of the transfers of Loans and advances to customers – Financial assets at amortized cost between stages as of December 31, 2021:
| | | | | | | | | | | | |
| | Gross carrying amount | ||||||||||
| | | Stage 1 | | | Stage 2 | | | Stage 3 | | | Total |
| | | | | | | | | | | | |
As of January 1, 2021 | |
| 620,543 | | | 70,531 | | | 21,909 | | | 712,983 |
Transfers: | |
| | |
| | |
| | |
| |
Transfer from Stage 1 to Stage 2 | |
| (13,356) | | | 13,356 | | | — | |
| — |
Transfer from Stage 1 to Stage 3 | |
| (6,050) | | | — | | | 6,050 | |
| — |
Transfer from Stage 2 to Stage 3 | | | — | | | (7,787) | | | 7,787 | | | — |
Transfer from Stage 2 to Stage 1 | | | 20,699 | | | (20,699) | | | — | | | — |
Transfer from Stage 3 to Stage 2 | | | — | | | 2,013 | | | (2,013) | | | — |
Transfer from Stage 3 to Stage 1 | | | 1,102 | | | — | | | (1,102) | | | — |
| | | | | | | | | | | | |
Remaining in same Stage | | | (44,490) | | | (4,783) | | | 19,608 | | | (29,665) |
Financial assets derecognized during the period other than write-offs | | | (274,147) | | | (17,278) | | | (3,311) | | | (294,736) |
Originated financial assets | | | 412,352 | | | — | | | — | | | 412,352 |
Write-offs | | | — | | | — | | | (26,477) | | | (26,477) |
Other movements | | | (18,564) | | | 1,930 | | | 202 | | | (16,432) |
As of December 31, 2021 | | | 698,089 | | | 37,283 | | | 22,653 | | | 758,025 |
The following is a breakdown of the transfers of Loans and advances to customers – Financial assets at amortized cost between stages as of December 31, 2022:
| | | | | | | | | | | | |
| | Gross carrying amount | ||||||||||
| | | Stage 1 | | | Stage 2 | | | Stage 3 | | | Total |
| | | | | | | | | | | | |
As of January 1, 2022 | |
| 698,089 | | | 37,283 | | | 22,653 | | | 758,025 |
Transfers: | |
| | |
| | |
| | |
| |
Transfer from Stage 1 to Stage 2 | |
| (23,492) | | | 23,492 | | | — | |
| — |
Transfer from Stage 1 to Stage 3 | |
| (6,921) | | | | | | 6,921 | |
| — |
Transfer from Stage 2 to Stage 3 | | | — | | | (6,508) | | | 6,508 | | | — |
Transfer from Stage 2 to Stage 1 | | | 6,169 | | | (6,169) | | | — | | | — |
Transfer from Stage 3 to Stage 2 | | | — | | | 5,390 | | | (5,390) | | | — |
Transfer from Stage 3 to Stage 1 | | | 907 | | | — | | | (907) | | | — |
| | | | | | | | | | | �� | |
Remaining in same Stage (*) | | | (48,693) | | | (2,221) | | | 13,515 | | | (37,399) |
Financial assets derecognized during the period other than write-offs | | | (202,136) | | | (5,204) | | | (2,985) | | | (210,325) |
Originated financial assets | | | 327,309 | | | — | | | — | | | 327,309 |
Write-offs | | | — | | | — | | | (19,169) | | | (19,169) |
Other movements | | | 841 | | | 29 | | | 57 | | | 927 |
As of December 31, 2022 | | | 752,073 | | | 46,092 | | | 21,203 | | | 819,368 |
(*) Includes mainly payments of principal and accrued interest.
Transfers between stages
● | The change in the gross carrying amount of Loans and advances to customers – Financial assets at amortized cost that were transferred from Stage 2 to Stage 1 amounting 6,169 million pesos, resulted |
F-107
in a decrease in the allowance for impairment losses of 437 million pesos. The main driver of the change is the increase in the “Lifetime PD” used to determine the allowance for impairment losses. |
● | The change in the gross carrying amount of Loans and advances to customers – Financial assets at amortized cost that were transferred from Stage 3 to Stage 2 amounting 5,390 million pesos, result in a decrease in the allowance for impairment losses of 1,293 million pesos. The change is not significant because “Lifetime PD” is used to determine the allowance for impairment losses for both stages. |
● | The change in the gross carrying amount of Loans and advances to customers – Financial assets at amortized cost that were transferred from Stage 3 to Stage 1 amounting 907 million pesos, result in a decrease in the allowance for impairment losses of 67 million pesos. The main driver of the change is the use of a twelve-month PD instead of a “Lifetime PD”. |
● | The gross carrying amount of financial instruments originated in 2022 that amounts to 327,309 million pesos, results in an increase in the allowance for impairment losses of 3,185 million pesos. |
d) Allowance for impairment losses
The changes in the allowance for impairment losses on Loans and advances to customers were as follows:
| | | | | | | | | | |
|
|
| 2020 |
|
| 2021 |
|
| 2022 |
|
| | | | | | | | | | |
Beginning balance as of January 1 | | | (21,970) | | | (25,551) | | | (21,035) | |
| | | | | | | | | | |
Impairment losses on financial assets at amortized cost (*) | |
| (25,184) | |
| (21,949) | |
| (19,782) | |
Impairment losses on financial assets at fair value through other comprehensive income | | | — | | | (7) | | | — | |
Write-offs | |
| 21,590 | |
| 26,477 | |
| 19,169 | |
Others | |
| 13 | | | (5) | |
| (4) | |
Balance at year-end | |
| (25,551) | |
| (21,035) | |
| (21,652) | |
| | | | | | | | | | |
Of which: | |
|
| |
|
| |
|
| |
By geographical location of risk: | |
|
| |
|
| |
|
| |
Mexico | |
| (25,551) | |
| (21,035) | |
| (21,652) | |
| | | | | | | | | | |
(*) | The amount of Impairment losses on financial assets at amortized cost presented in the consolidated income statement is net of recoveries of loans previously written-off and recovery expenses in the amount of 3,453 million pesos in 2020, 2,720 million pesos in 2021 and 3,699 million pesos in 2022. |
F-108
The post-model adjustments or overlays recognized within the allowance for impairment losses as of December 31, 2020, are as follows:
| | | | | | | | | | | | | | | | |
| | Allowance for impairment losses | ||||||||||||||
|
|
| IFRS 9 Model |
|
| Macroeconomic overlay |
|
| Impairment overlay |
|
| Total |
|
| Total Overlay to IFRS 9 Model |
|
| | | | | | | | | | | | | | | | |
| |
| | |
| | | | | |
| | |
| | |
Financial assets at amortized cost | | | (24,093) | | | (613) | | | (845) | | | (25,551) | | | 6% | |
Of which: | | | | | | | | | | | | | | | | |
Commercial, financial and industrial loans | | | (7,757) | | | (558) | | | (572) | | | (8,887) | | | 15% | |
Public sector loans | | | (14) | | | (1) | | | — | | | (15) | | | 7% | |
Mortgage loans | | | (4,108) | | | 30 | | | — | | | (4,078) | | | (1)% | |
Installment loans to individuals - | | | (12,214) | | | (84) | | | (273) | | | (12,571) | | | 3% | |
Revolving consumer credit card loans | | | (6,010) | | | (67) | | | (273) | | | (6,350) | | | 6% | |
Non-revolving consumer loans | | | (6,204) | | | (17) | | | — | | | (6,221) | | | 0% | |
During 2021, the macroeconomic and impairment overlays were consumed or reversed; accordingly, there are no post-model adjustments or overlays as of December 31, 2021.
F-109
The following is a breakdown of the allowance for impairment losses and the write-offs as of December 31, 2021:
| | | | | | | | | | | | | | | |
| | Allowance for impairment losses | |||||||||||||
| | | Stage 1 | | | Stage 2 | | | Stage 3 | | | Total | | | Write-offs |
| | | | | | | | | | | | | | | |
Financial assets at fair value through other comprehensive income | | | | | | | | | | | | | | | |
Of which: | | | | | | | | | | | | | | | |
Commercial, financial and industrial loans | | | (7) | | | — | | | — | | | (7) | | | — |
| | | | | | | | | | | | | | | |
Financial assets at amortized cost | | | (5,764) | | | (5,149) | | | (10,115) | | | (21,028) | | | (26,477) |
Of which: | | | | | | | | | | | | | | | |
Commercial, financial and industrial loans | | | (1,715) | | | (1,509) | | | (4,899) | | | (8,123) | | | (9,259) |
Public sector loans | | | (66) | | | — | | | (58) | | | (124) | | | — |
Mortgage loans | | | (640) | | | (991) | | | (2,873) | | | (4,504) | | | (1,572) |
Installment loans to individuals - | | | (3,343) | | | (2,649) | | | (2,285) | | | (8,277) | | | (15,646) |
Revolving consumer credit card loans | | | (1,498) | | | (1,338) | | | (1,016) | | | (3,852) | | | (8,396) |
Non-revolving consumer loans | | | (1,845) | | | (1,311) | | | (1,269) | | | (4,425) | | | (7,250) |
| | | | | | | | | | | | | | | |
The following is a breakdown of the allowance for impairment losses and the write-offs as of December 31, 2022:
| | | | | | | | | | | | | | | |
| | Allowance for impairment losses | |||||||||||||
| | | Stage 1 | | | Stage 2 | | | Stage 3 | | | Total | | | Write-offs |
| | | | | | | | | | | | | | | |
Financial assets at amortized cost | | | (7,013) | | | (6,541) | | | (8,098) | | | (21,652) | | | (19,169) |
Of which: | | | | | | | | | | | | | | | |
Commercial, financial and industrial loans | | | (1,377) | | | (1,385) | | | (2,769) | | | (5,531) | | | (5,130) |
Public sector loans | | | (38) | | | — | | | — | | | (38) | | | — |
Mortgage loans | | | (676) | | | (809) | | | (2,749) | | | (4,234) | | | (2,894) |
Installment loans to individuals - | | | (4,922) | | | (4,347) | | | (2,580) | | | (11,849) | | | (11,145) |
Revolving consumer credit card loans | | | (2,020) | | | (2,060) | | | (780) | | | (4,860) | | | (5,670) |
Non-revolving consumer loans | | | (2,902) | | | (2,287) | | | (1,800) | | | (6,989) | | | (5,475) |
| | | | | | | | | | | | | | | |
F-110
The contractual amount outstanding of Loans and advances to customers written-off during 2022 that are still subject to enforcement activities, amounts to 19,169 million pesos.
The following is a breakdown of the transfers of the allowance for impairment losses of Loans and advances to customers between stages as of December 31, 2021:
| | | | | | | | | | | | |
| | Allowance for impairment losses | ||||||||||
| | | Stage 1 | | | Stage 2 | | | Stage 3 | | | Total |
| | | | | | | | | | | | |
Beginning balance as of January 1 | | | 6,215 | | | 8,902 | | | 10,434 | | | 25,551 |
�� | | | | | | | | | | | | |
As of January 1, 2021 | |
| | | | | | | | | | |
Transfers: | |
| | |
| | |
| | |
| |
Transfer from Stage 1 to Stage 2 | | | (346) | | | 2,211 | | | — | | | 1,865 |
Transfer from Stage 1 to Stage 3 | | | (183) | | | — | | | 2,977 | | | 2,794 |
Transfer from Stage 2 to Stage 3 | | | — | | | (712) | | | 2,636 | | | 1,924 |
Transfer from Stage 2 to Stage 1 | |
| 387 | | | (1,976) | | | — | |
| (1,589) |
Transfer from Stage 3 to Stage 2 | | | — | | | 332 | | | (443) | | | (111) |
Transfer from Stage 3 to Stage 1 | |
| 34 | | | — | | | (113) | |
| (79) |
| | | | | | | | | | | | |
Financial assets derecognized during the period other than write-offs | | | (906) | | | 1,087 | | | 2,930 | | | 3,111 |
Contracts remaining at the same stage | | | (1,986) | | | (4,767) | | | 17,921 | | | 11,168 |
Write-offs | | | — | | | — | | | (26,477) | | | (26,477) |
Originated financial assets | | | 2,741 | | | — | | | — | | | 2,741 |
Foreign exchange and other movements | | | (185) | | | 72 | | | 250 | | | 137 |
| | | | | | | | | | | | |
As of December 31, 2021 | | | 5,771 | | | 5,149 | | | 10,115 | | | 21,035 |
The following is a breakdown of the transfers of the allowance for impairment losses of Loans and advances to customers between stages as of December 31, 2022:
| | | | | | | | | | | | |
| | Allowance for impairment losses | ||||||||||
| | | Stage 1 | | | Stage 2 | | | Stage 3 | | | Total |
| | | | | | | | | | | | |
Beginning balance as of January 1 | | | 5,771 | | | 5,149 | | | 10,115 | | | 21,035 |
| | | | | | | | | | | | |
As of January 1, 2022 | |
| | | | | | | | | | |
Transfers: | |
| | |
| | |
| | |
| |
Transfer from Stage 1 to Stage 2 | | | (511) | | | 3,409 | | | — | | | 2,898 |
Transfer from Stage 1 to Stage 3 | | | (257) | | | — | | | 2,800 | | | 2,543 |
Transfer from Stage 2 to Stage 3 | | | — | | | (980) | | | 1,620 | | | 640 |
Transfer from Stage 2 to Stage 1 | |
| 90 | | | (527) | | | — | |
| (437) |
Transfer from Stage 3 to Stage 2 | | | — | | | 277 | | | (1,570) | | | (1,293) |
Transfer from Stage 3 to Stage 1 | |
| 20 | | | — | | | (87) | |
| (67) |
| | | | | | | | | | | | |
Financial assets derecognized during the period other than write-offs | | | (1,203) | | | (534) | | | 9,807 | | | 8,070 |
Contracts remaining at the same stage | | | (121) | | | (282) | | | 4,582 | | | 4,179 |
Write-offs | | | — | | | — | | | (19,169) | | | (19,169) |
Originated financial assets | | | 3,185 | | | — | | | — | | | 3,185 |
Foreign exchange and other movements | | | 39 | | | 29 | | | — | | | 68 |
| | | | | | | | | | | | |
As of December 31, 2022 | | | 7,013 | | | 6,541 | | | 8,098 | | | 21,652 |
F-111
e) Impaired loans
The breakdown of the changes in the balance of Loans and advances to customers – Financial assets at amortized cost that are credit-impaired is as follows:
| | | | | | | | | | |
|
|
| |
|
| |
|
| | |
| |
| 2020 | |
| 2021 | |
| 2022 |
|
| | | | | | | | | | |
Beginning balance | |
| 17,952 | |
| 21,909 | |
| 22,653 | |
Additions | |
| 37,216 | |
| 32,526 | |
| 27,001 | |
Transfers to performing loans | |
| (11,669) | |
| (5,305) | |
| (9,282) | |
Written-off loans | |
| (21,590) | |
| (26,477) | |
| (19,169) | |
Balance at year-end | |
| 21,909 | |
| 22,653 | |
| 21,203 | |
The breakdown between no past due and past due as of December 31, 2021 of the balance of Loans and advances to customers – Financial assets at amortized cost that are considered to be credit-impaired is as follows:
| | | | | | | | | | | | | | | | | | |
| | | | | | With Balances Past Due by | ||||||||||||
| |
| With no Past |
|
| |
|
| |
|
| |
|
| |
|
| |
| | | Due Balances | | | | | | | | | | | | | | | |
| | | or Less than 3 | | | | | | | | | | | | | | | |
| | | Months Past | | | | | | | | | | | | More than 12 | | | |
| | | Due | | | 3 to 6 Months | | | 6 to 9 Months | | | 9 to 12 Months | |
| Months | | | Total |
| | | | | | | | | | | | | | | | | | |
By type of loan: | |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
Commercial, financial and industrial loans | |
| 6,689 | |
| 1,434 | |
| 676 | |
| 808 | |
| 330 | |
| 9,937 |
Mortgage loans | |
| 2,194 | |
| 1,764 | |
| 965 | |
| 751 | |
| 4,051 | |
| 9,725 |
Installment loans to individuals | |
|
| |
| | |
| | |
| | |
| | |
| |
Of which: | |
|
| |
| | |
| | |
| | |
| | |
| |
Revolving consumer credit card loans | |
| 451 | |
| 877 | |
| — | |
| — | |
| — | |
| 1,328 |
Non-revolving consumer loans | |
| 414 | |
| 1,243 | |
| 5 | |
| 1 | |
| — | |
| 1,663 |
| |
| 9,748 | |
| 5,318 | |
| 1,646 | |
| 1,560 | |
| 4,381 | |
| 22,653 |
F-112
The breakdown between no past due and past due as of December 31, 2022 of the balance of Loans and advances to customers – Financial assets at amortized cost that are considered to be credit-impaired, is as follows:
| | | | | | | | | | | | | | | | | | |
| | | | | | With Balances Past Due by | ||||||||||||
| |
| With no Past |
|
| |
|
| |
|
| |
|
| |
|
| |
| | | Due Balances | | | | | | | | | | | | | | | |
| | | or Less than 3 | | | | | | | | | | | | | | | |
| | | Months Past | | | | | | | | | | | | More than 12 | | | |
| | | Due | | | 3 to 6 Months | | | 6 to 9 Months | | | 9 to 12 Months | |
| Months | | | Total |
| | | | | | | | | | | | | | | | | | |
By type of loan: | |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
Commercial, financial and industrial loans | |
| 3,691 | |
| 1,470 | |
| 156 | |
| 46 | |
| 224 | |
| 5,587 |
Mortgage loans | |
| 5,793 | |
| 1,705 | |
| 669 | |
| 581 | |
| 3,119 | |
| 11,867 |
Installment loans to individuals | |
|
| |
| | |
| | |
| | |
| | |
| |
Of which: | |
|
| |
| | |
| | |
| | |
| | |
| |
Revolving consumer credit card loans | |
| 614 | |
| 561 | |
| — | |
| — | |
| — | |
| 1,175 |
Non-revolving consumer loans | |
| 1,086 | |
| 1,487 | |
| 1 | |
| — | |
| — | |
| 2,574 |
| |
| 11,184 | |
| 5,223 | |
| 826 | |
| 627 | |
| 3,343 | |
| 21,203 |
f) Renegotiated loans
The Bank sometimes makes concessions or modifications to the original terms of loans as a response to the customer’s financial difficulties, rather than taking possession or to enforce otherwise collection of collateral.
Renegotiated loans include restructured or refinancing transactions of performing loans and credit-impaired loans, as contractual terms of a loan may be modified due to not only concerns about the customer’s ability to meet contractual payments, but also for customer retention purposes and other factors not related to current or potential credit deterioration of the customer.
A restructured transaction is a transaction with respect to which, for economic or legal reasons relating to current or foreseeable financial difficulties of the customer, the financial terms and conditions are modified in order to facilitate the payment of the debt (principal and interest) because the customer is unable, or might foreseeably become unable, to comply with the aforementioned terms and conditions in due time and form, even if such modification is envisaged in the agreement.
A refinancing transaction is a transaction that is granted or used, for reasons relating to current or foreseeable financial difficulties of the customer, to repay one or more of the transactions granted to it, or through which the payments on such transactions are brought fully or partially up to date, in order to enable the customers of the cancelled or refinanced transactions to repay their debt (principal and interest)
F-113
because they are unable, or might foreseeably become unable, to comply with the conditions thereof in due time and form.
A breakdown of renegotiated loans during the years ended December 31, 2020, 2021 and 2022 is as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | For the Year Ended 12/31/2020 | | | For the Year Ended 12/31/2021 | | | For the Year Ended 12/31/2022 |
| |||||||||||||||||||||||||||
| | | Performing loans | | | | | | | | | Performing loans | | | | | | | | | Performing loans | | | | | | |
| |||||||||
|
|
| Due to |
|
| |
| | |
|
| |
|
| Due to |
|
| |
|
| |
|
| |
|
| Due to |
|
| |
|
| |
|
| | |
| | | Concerns | | | | | | | | | | | | Concerns | | | | | | | | | | | | Concerns | | | | | | | | | | |
| | | About | | | | | | | | | | | | About | | | | | | | | | | | | About | | | | | | | | | | |
| | | Current or | | | | | | | | | | | | Current or | | | | | | | | | | | | Current or | | | | | | | | | |
|
| | | Potential | | | Due to | | | | | | | | | Potential | | | Due to | | | | | | | | | Potential | | | Due to | | | | | | |
|
| | | Credit | | | Other | | | Impaired | | | | | | Credit | | | Other | | | Impaired | | | | | | Credit | | | Other | | | Impaired | | | | |
| | | Deterioration | | | Factors | | | Loans | | | Total | | | Deterioration | | | Factors | | | Loans | | | Total | | | Deterioration | | | Factors | | | Loans | | | Total |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Commercial, financial and industrial loans | |
| 2,158 | |
| — | |
| 912 | |
| 3,070 | |
| 5,918 | |
| — | |
| 4,299 | |
| 10,217 | |
| 7,978 | |
| — | |
| 2,549 | |
| 10,527 | |
Mortgage loans | |
| 356 | |
| — | |
| 329 | |
| 685 | |
| 217 | |
| — | |
| 356 | |
| 573 | |
| 159 | |
| — | |
| 157 | |
| 316 | |
Installment loans to individuals | |
| 1,627 | |
| — | |
| 272 | |
| 1,899 | |
| 380 | |
| — | |
| 1,183 | |
| 1,563 | |
| 977 | |
| — | |
| 510 | |
| 1,487 | |
| |
| 4,141 | |
| — | |
| 1,513 | |
| 5,654 | |
| 6,515 | |
| — | |
| 5,838 | |
| 12,353 | |
| 9,114 | |
| — | |
| 3,216 | |
| 12,330 | |
Percentage | |
| 73 | % |
| — | |
| 27 | % |
| 100 | % |
| 53 | % |
| — | |
| 47 | % |
| 100 | % |
| 74 | % |
| — | |
| 26 | % |
| 100 | % |
Credit-impaired loans that are renegotiated continue to be classified as impaired loans until the sustained payment criteria and other considerations are reached as described in Note 2.g.
The types of terms that are typically renegotiated include: (a) modifications to the contractual terms of loans, such as payment terms, interest rates and currency, or (b) modifications to the guarantees that cover the loans.
See Note 48 b) 1.7 Recovery and collections management for additional information regarding renegotiated loans.
g) Modification on financial instruments in the context of COVID-19 pandemic
During 2020, the relief measures contained in the Support Program resulted in a modification to the contractual terms of the loans subject to the Support Program, that did not result in derecognition of the financial assets under IFRS 9.
The breakdown of Gains/(losses) on modification of financial assets (net) recognized in the consolidated income statement as of December 31, 2020 is as follows:
| | | | |
|
|
| 2020 |
|
| | | | |
Commercial, financial and industrial loans | |
| (605) | |
Mortgage loans | | | (224) | |
Installment loans to individuals - | | | | |
Non-revolving consumer loans | | | (914) | |
| |
| (1,743) | |
h) Maximum exposure to credit risk and credit quality information
Maximum exposure to credit risk
The tables below represent the Bank’s maximum exposure to credit risk by class of financial instrument (except for hedging financial derivatives) and the respective collateral and other credit enhancements mitigating credit risk for these classes of financial instruments. The maximum exposure to credit risk includes the carrying amounts of financial instruments recognized in the consolidated balance sheet subject to credit risk and the nominal amounts for off-balance sheet commitments.
F-114
Where available, collaterals are presented at fair value; for other collaterals, such as real estate and other assets, best estimates of fair value are used. Other credit enhancements such as guarantees are included at their nominal amounts.
Collateral or guarantees are credit enhancements in the form of an asset or third-party obligation that serve to mitigate the inherent risk of credit loss in an exposure, by either substituting the borrower default risk or improving recoveries in the event of a default. The Bank’s collateral or guarantees are contractual and are typically classified as follows:
● | Financial and other collateral, which enables the Bank to recover all or part of the outstanding exposure by liquidating the collateral asset provided in cases where the borrower is unable or unwilling to fulfill its primary obligations. Cash collateral, securities (debt or equity instruments), collection rights, inventory, equipment and real estate are included in this category: |
- | Cash collateral received - cash collateral requested from financial and corporate customers to secure the payments in OTC financial derivatives transactions. |
- | Collateralized by securities - collateral to secure the payments in repurchase agreements and reverse repurchase agreements transactions. |
- | Collection rights - highly liquid and realizable guarantees, which are mainly comprised of standby letters and pledges on funds and securities. |
- | Real estate. |
● | Guarantees, which complement the customer’s ability to fulfill its obligation under the legal contract and, as such, is provided by third parties in the form of individual guarantee by endorsement or co-signers, where individuals or companies act as guarantors of the loan transaction. |
Collaterals and other credit enhancements related to the commercial loan portfolio are subject to at least an annual review. In the case of guarantees, the guarantor’s ability to perform under the guarantee contract is reviewed through an analysis of the financial position of the customer and the guarantor. There are cases where the Bank has attempted to seek recovery through the execution of a third-party guarantee and has been denied such recovery. Please see Note 2.g for an explanation of how the credit ratings of guarantors affect our allowance for impairment losses.
For the retail loan portfolio, a review of its collaterals and other credit enhancements is performed on a periodic basis depending on the history of the payment performance of the borrower.
For the real estate collaterals, appraisals are obtained as of the date of origination of the loans and when the loan is classified as impaired.
See Note 48.b) 4.3 Credit risk mitigation techniques, for additional information regarding credit risk mitigation.
F-115
The breakdown is as follows:
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | 12/31/2021 | ||||||||||||||||||
| | | | | | Maximum Exposure | | | | | | | | | | | | | | | | |||
| | | Maximum | | | to Credit Risk (1) | | | Collaterals | | | Other Credit Enhancements | ||||||||||||
|
|
| Exposure to |
|
| |
|
| |
|
| Cash Collateral |
|
| Collateralized by |
|
| |
|
| |
|
| |
| | | Credit Risk | | | Unsecured | | | Secured | | | Received | | | Securities | | | Collection Rights (3) | | | Real Estate (2) | | | Guarantees |
| | | | | | | | | | | | | | | | | | | | | | | | |
Financial assets at fair value through profit or loss | |
| 290,365 | |
| 195,268 | |
| 95,097 | |
| 26,919 | |
| 68,178 | |
| — | |
| — | |
| — |
Financial assets at fair value through other comprehensive income | |
| 390,974 | |
| 390,974 | |
| — | |
| — | |
| — | |
| — | |
| — | |
| — |
Financial assets at amortized cost: | |
| 758,025 | |
| 222,505 | |
| 535,520 | |
| — | |
| — | |
| 90,584 | |
| 200,815 | |
| 15,039 |
Of which: | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| |
Loans and advances to credit institutions | |
| — | | | — | | | — | | | — | | | — | | | — | | | — | |
| — |
Loans and advances to customers | |
| 758,025 | | | 222,505 | | | 535,520 | | | — | | | — | | | 90,584 | | | 200,815 | |
| 15,039 |
Commercial, financial and industrial loans | |
| 350,491 | | | 88,047 | | | 262,444 | | | — | | | — | | | 53,290 | | | 21,136 | |
| 15,039 |
Public sector loans | |
| 85,256 | | | 27,762 | | | 57,494 | | | — | | | — | | | 34,763 | | | — | |
| — |
Mortgage loans | |
| 199,579 | | | 2,290 | | | 197,289 | | | — | | | — | | | 2,501 | | | 161,422 | |
| — |
Installment loans to individuals: | | | | | | | | | | | | | | | | | | | | | | | | |
Revolving consumer credit card loans | |
| 53,417 | |
| 53,417 | | | — | |
| — | |
| — | |
| — | | | — | |
| — |
Non-revolving consumer loans | |
| 69,282 | |
| 50,989 | | | 18,293 | |
| — | |
| — | |
| 30 | | | 18,257 | |
| — |
Debt instruments | |
| — | |
| — | | | — | |
| — | |
| — | |
| — | |
| — | |
| — |
Guarantees and loan commitments | |
| 91,329 | |
| 91,329 | | | — | |
| — | |
| — | |
| — | |
| — | |
| — |
| |
| 1,530,693 | |
| 900,076 | |
| 630,617 | |
| 26,919 | |
| 68,178 | |
| 90,584 | |
| 200,815 | |
| 15,039 |
(1) | Correspond to loans and advances to customers and available lines of credit cards and non-revolving consumer loans in the first column (Maximum Exposure to Credit Risk) that are secured by collaterals and other credit enhancements disclosed in the table. As such, unsecured amounts are the amounts that are not covered by any collateral or other credit enhancement. The secured amounts may differ from the total collaterals and other credit enhancements as certain loans and advances to customers are secured by multiple credit enhancements. |
(2) | Appraisals to support estimated fair value of the real estate collaterals are obtained at loan origination. |
(3) | Public sector loan rights are guaranteed by Mexican government entities. |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | 12/31/2022 | ||||||||||||||||||
| | | | | | Maximum Exposure | | | | | | | | | | | | | | | | |||
| | | Maximum | | | to Credit Risk (1) | | | Collaterals | | | Other Credit Enhancements | ||||||||||||
|
|
| Exposure to |
|
| |
|
| |
|
| Cash Collateral |
|
| Collateralized by |
|
| |
|
| |
|
| |
| | | Credit Risk | | | Unsecured | | | Secured | | | Received | | | Securities | | | Collection Rights (3) | | | Real Estate (2) | | | Guarantees |
| | | | | | | | | | | | | | | | | | | | | | | | |
Financial assets at fair value through profit or loss | |
| 359,065 | |
| 208,265 | |
| 150,800 | |
| 26,861 | |
| 123,939 | |
| — | |
| — | |
| — |
Financial assets at fair value through other comprehensive income | |
| 313,906 | |
| 313,906 | |
| — | |
| — | |
| — | |
| — | |
| — | |
| — |
Financial assets at amortized cost: | |
| — | |
| — | |
| — | |
| — | |
| — | |
| 15,391 | |
| 319,879 | |
| 3,290 |
Of which: | |
|
| |
| | |
| | |
|
| |
|
| |
| | |
| | |
| |
Loans and advances to credit institutions | |
| — | | | — | | | — | | | — | | | — | | | — | | | — | |
| — |
Loans and advances to customers | |
| — | | | — | | | — | | | — | | | — | | | 15,391 | | | 319,879 | |
| 3,290 |
Commercial, financial and industrial loans | |
| 366,710 | | | 86,996 | | | 279,714 | | | — | | | — | | | 11,617 | | | 86,858 | |
| 3,155 |
Public sector loans | |
| 84,583 | | | 21,785 | | | 62,798 | | | — | | | — | | | — | | | - | |
| — |
Mortgage loans | |
| 217,109 | | | 2,586 | | | 214,523 | | | — | | | — | | | — | | | — | |
| — |
Installment loans to individuals: | | | | | | | | | | | | | | | | | | | | | | | | |
Revolving consumer credit card loans | |
| 64,957 | |
| 64,957 | | | — | |
| — | |
| — | |
| — | | | — | |
| — |
Non-revolving consumer loans | |
| 86,009 | |
| 60,359 | | | 25,650 | |
| — | |
| — | |
| 3,774 | | | 233,021 | |
| 135 |
Debt instruments | |
| — | |
| — | | | — | |
| — | |
| — | |
| — | |
| — | |
| — |
Guarantees and loan commitments | |
| — | |
| — | | | — | |
| — | |
| — | |
| — | |
| — | |
| — |
| |
| 672,971 | |
| 522,171 | |
| 150,800 | |
| 26,861 | |
| 123,939 | |
| 15,391 | |
| 319,879 | |
| 3,290 |
(1) | Correspond to loans and advances to customers and available lines of credit cards and non-revolving consumer loans in the first column (Maximum Exposure to Credit Risk) that are secured by collaterals and other credit enhancements disclosed in the table. As such, unsecured amounts are the amounts that are not covered by any collateral or other credit enhancement. The secured amounts may differ from the total collaterals and other credit enhancements as certain loans and advances to customers are secured by multiple credit enhancements. |
(2) | Appraisals to support estimated fair value of the real estate collaterals are obtained at loan origination. |
F-116
(3) | Public sector loan rights are guaranteed by Mexican government entities. |
Credit quality information
For commercial loans (except small and medium-sized enterprises or SME) and public sector loans, in order to achieve equivalent internal ratings in the different models available and to make them comparable with the external ratings of rating agencies, the Bank has developed a master rating scale. The equivalence is established through the PD associated with each rating. “Internally calibrated PDs” are compared against the default rates associated with the external ratings, which are published periodically by rating agencies. The internal rating scale and mapping with external ratings are as follows:
| | | | | | |
| | | Equivalence with | |||
|
|
| Standard & |
|
| |
Internal Rating | |
| Poor’s | |
| Moody’s |
| | | | | | |
9.3 | |
| Aaa | |
| AAA |
9.2 | |
| Aa1 | |
| AA+ |
9.0 | |
| Aa2 | |
| AA |
8.6 | |
| Aa3 | |
| AA- |
8.1 | |
| A1 | |
| A+ |
7.7 | |
| A2 | |
| A |
7.3 | |
| A3 | |
| A- |
6.7 | |
| Baa1 | |
| BBB+ |
6.1 | |
| Baa2 | |
| BBB |
5.6 | |
| Baa3 | |
| BBB- |
5.0 | |
| Ba1 | |
| BB+ |
4.4 | |
| Ba2 | |
| BB |
3.9 | |
| Ba3 | |
| BB- |
3.3 | |
| B1 | |
| B+ |
2.7 | |
| B2 | |
| B |
2.2 | |
| B3 | |
| B- |
1.6 | |
| Caa1 | |
| CCC |
1.0 | |
| Ca | |
| CC |
For commercial loans to small and medium-sized enterprises (SME), mortgage loans and installment loans to individuals (revolving credit card consumer loans and non-revolving consumer loans), expected credit losses are calculated using statistical methods without considering internal ratings. However, based on criteria set forth by the CNBV and a combination of internal scorecards, customer’s financial information and qualitative criteria, ratings are assigned as follows:
| | | |
| | | |
Rating |
|
| Equivalence |
| | | |
A-1 | |
| Minimum Risk (Solid) |
A-2 | |
| Low Risk (Outstanding) |
B-1 | |
| Normal Risk (Good) |
B-2 | |
| Normal Risk |
B-3 | |
| Satisfactory |
C-1 | |
| Normal Risk (Adequate) |
C-2 | |
| Medium Risk (Weak) |
D | |
| High Risk (Poor) |
E | |
| Probable Loss |
F-117
Credit quality information by rating category
The tables below represent the classification by rating category of commercial loans (except SME) and public sector loans and their related guarantees and loan commitments not recognized in the consolidated balance sheet:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 12/31/2021 | ||||||||||||||||||||||||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Not | | |
Rating Category |
| 9.3 |
| 9.2 |
| 9.0 |
| 8.5 |
| 8.0 |
| 7.5 |
| 7.0 |
| 6.5 |
| 6.0 |
| 5.5 |
| 5.0 |
| 4.5 |
| 4.0 |
| 3.5 |
| 3.0 |
| 2.5 |
| 2.0 |
| 1.5 |
| 1.0 |
| Rated |
| Total |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Commercial loans (except SME) |
| — |
| — |
| — |
| — | | — | | 1,623 |
| 11,593 | | 31,990 |
| 39,440 |
| 72,625 |
| 79,781 |
| 25,216 |
| 8,934 |
| 5,643 |
| 2,361 |
| 386 |
| 1,041 |
| 118 |
| 101 |
| 14,391 |
| 295,243 |
Public sector loans |
| — |
| — |
| — |
| — | | — | | — |
| 9,069 | | 20,912 |
| 4,877 |
| 7,600 |
| 37,876 |
| 4,862 |
| — |
| — |
| 67 |
| — |
| — |
| — | | — |
| — |
| 85,263 |
|
| — |
| — |
| — |
| — | | — | | 1,623 |
| 20,662 | | 52,902 |
| 44,317 |
| 80,225 |
| 117,657 |
| 30,078 |
| 8,934 |
| 5,643 |
| 2,428 |
| 386 |
| 1,041 |
| 118 | | 101 |
| 14,391 |
| 380,506 |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Financial instruments not recognized in the consolidated balance sheet: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Guarantees |
| 518 | | — |
| — |
| 2,940 | | 14,668 | | 3,521 |
| 8,066 | | 13,690 |
| 7,372 |
| 2,621 |
| 1,744 |
| 72 |
| 878 |
| 4 |
| — |
| — |
| — |
| — | | — |
| 829 |
| 56,923 |
Loan commitments |
| — | | — |
| — |
| 1 | | 863 | | 186 |
| 29 | | 297 |
| 3,795 |
| 10,579 |
| 6,352 |
| 826 |
| 3 |
| 1,021 |
| 62 |
| — |
| 23 |
| — |
| — |
| 494 |
| 24,531 |
|
| 518 | | — |
| — |
| 2,941 |
| 15,531 |
| 3,707 |
| 8,095 | | 13,987 |
| 11,167 |
| 13,200 |
| 8,096 |
| 898 |
| 881 |
| 1,025 |
| 62 |
| — |
| 23 |
| — |
| — |
| 1,323 |
| 81,454 |
|
| 518 |
| — |
| — |
| 2,941 |
| 15,531 |
| 5,330 |
| 28,757 | | 66,889 |
| 55,484 |
| 93,425 |
| 125,753 |
| 30,976 |
| 9,815 |
| 6,668 |
| 2,490 |
| 386 |
| 1,064 |
| 118 |
| 101 |
| 15,714 |
| 461,960 |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 12/31/2022 | ||||||||||||||||||||||||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Not | | |
Rating Category |
| 9.3 |
| 9.2 | | 9.0 | | 8.5 |
| 8.0 |
| 7.5 |
| 7.0 |
| 6.5 |
| 6.0 |
| 5.5 |
| 5.0 |
| 4.5 |
| 4.0 |
| 3.5 |
| 3.0 |
| 2.5 |
| 2.0 |
| 1.5 |
| 1.0 |
| Rated |
| Total |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Commercial loans (except SME) | | — | | — | | — | | — | | 17 | | 8,898 | | 46,807 | | 42,193 | | 44,885 | | 69,468 | | 48,240 | | 19,490 | | 7,577 | | 6,688 | | 7,152 | | 1,237 | | 1,079 | | 195 | | 588 | | 9,825 |
| 314,339 |
Public sector loans | | — | | — | | — | | — | | — | | — | | 13,995 | | 18,495 | | 9,296 | | 3,673 | | 34,351 | | 1,761 | | 3,013 | | — | | — | | — | | — | | — | | — | | — |
| 84,584 |
|
| — |
| — | | — | | — |
| 17 |
| 8,898 | | 60,802 | | 60,688 | | 54,181 | | 73,141 | | 82,591 | | 21,251 | | 10,590 | | 6,688 | | 7,152 | | 1,237 | | 1,079 | | 195 | | 588 | | 9,825 |
| 398,923 |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Financial instruments not recognized in the consolidated balance sheet: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Guarantees |
| 493 | | — | | — | | 2,738 | | 16,668 | | 12,789 | | 10,067 | | 16,796 | | 6,529 | | 3,046 | | 1,194 | | 4,020 | | — | | — | | — | | 500 | | 3 | | — | | — | | 475 | | 75,318 |
Loan commitments |
| — | | — | | — | | 38 | | 1,078 | | 415 | | 1,229 | | 8,754 | | 7,488 | | 3,519 | | 1,667 | | 1,430 | | 164 | | 60 | | 674 | | 15 | | — | | 2 | | 623 | | 503 | | 27,659 |
|
| 493 | | — | | — | | 2,776 | | 17,746 | | 13,204 | | 11,296 | | 25,550 | | 14,017 | | 6,565 | | 2,861 | | 5,450 | | 164 | | 60 | | 674 | | 515 | | 3 | | 2 | | 623 | | 978 |
| 102,977 |
|
| 493 |
| — | | — | | 2,776 |
| 17,763 |
| 22,102 | | 72,098 | | 86,238 | | 68,198 | | 79,706 | | 85,452 | | 26,701 | | 10,754 | | 6,748 | | 7,826 | | 1,752 | | 1,082 | | 197 | | 1,211 | | 10,803 |
| 501,900 |
The tables below represent the classification by rating category of commercial loans (SME), mortgage loans, revolving consumer credit card loans and non-revolving consumer loans and their related commitments not recognized in the consolidated balance sheet:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | 12/31/2021 | ||||||||||||||||||||||||||||||
Rating Category |
|
| A-1 |
|
| A-2 |
|
| B-1 |
|
| B-2 |
|
| B-3 |
|
| C-1 |
|
| C-2 |
|
| D |
|
| E |
|
| Not Rated |
|
| Total |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Commercial loans (SME) | |
| 42,503 | |
| 4,625 | |
| 1,280 | |
| 1,216 | |
| 2,216 | |
| 1,140 | |
| 626 | |
| 1,784 | |
| 494 | |
| — | |
| 55,884 |
Mortgage loans | |
| 142,698 | |
| 7,628 | |
| 6,759 | |
| 14,994 | |
| 2,071 | |
| 5,031 | |
| 5,815 | |
| 5,297 | |
| 3,548 | |
| — | |
| 193,841 |
Revolving consumer credit card loans | |
| 15,144 | |
| 19,831 | |
| 6,711 | |
| 1,939 | |
| 1,419 | |
| 2,653 | |
| 2,260 | |
| 2,388 | |
| 1,061 | |
| — | |
| 53,406 |
Non-revolving consumer loans | |
| 25,365 | |
| 5,316 | |
| 18,785 | |
| 7,352 | |
| 3,599 | |
| 2,262 | |
| 2,135 | |
| 889 | |
| 2,701 | |
| — | |
| 68,404 |
| |
| 225,710 | |
| 37,400 | |
| 33,535 | |
| 25,501 | |
| 9,305 | |
| 11,086 | |
| 10,836 | |
| 10,358 | |
| 7,804 | |
| — | |
| 371,535 |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Financial instruments not recognized in the consolidated balance sheet: | |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
Available lines of credit cards and non-revolving consumer loans | |
| 45,805 | |
| 9,709 | |
| 1,938 | |
| 832 | |
| 592 | |
| 656 | |
| 505 | |
| 257 | |
| 134 | |
| — | |
| 60,428 |
Guarantees | |
| 66 | |
| — | |
| — | |
| — | |
| — | |
| — | |
| — | |
| — | |
| — | |
| — | |
| 66 |
Loan commitments | |
| — | |
| — | |
| — | |
| — | |
| — | |
| — | |
| — | |
| — | |
| — | |
| — | |
| — |
| |
| 45,871 | |
| 9,709 | |
| 1,938 | |
| 832 | |
| 592 | |
| 656 | |
| 505 | |
| 257 | |
| 134 | |
| — | |
| 60,494 |
| |
| 271,581 | |
| 47,109 | |
| 35,473 | |
| 26,333 | |
| 9,897 | |
| 11,742 | |
| 11,341 | |
| 10,615 | |
| 7,938 | |
| — | |
| 432,029 |
F-118
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | 12/31/2022 | ||||||||||||||||||||||||||||||
Rating Category |
|
| A-1 |
|
| A-2 |
|
| B-1 |
|
| B-2 |
|
| B-3 |
|
| C-1 |
|
| C-2 |
|
| D |
|
| E |
|
| Not Rated |
|
| Total |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Commercial loans (SME) | |
| 31,683 | |
| 10,255 | |
| 1,668 | |
| 835 | |
| 2,694 | |
| 1,096 | |
| 697 | |
| 1,809 | |
| 506 | |
| — | |
| 51,243 |
Mortgage loans | |
| 173,202 | |
| 10,483 | |
| 5,998 | |
| 3,667 | |
| 1,233 | |
| 3,806 | |
| 6,172 | |
| 4,795 | |
| 1,452 | |
| — | |
| 210,808 |
Revolving consumer credit card loans | |
| 18,487 | |
| 24,566 | |
| 8,026 | |
| 2,325 | |
| 1,691 | |
| 2,890 | |
| 2,643 | |
| 2,817 | |
| 904 | |
| — | |
| 64,349 |
Non-revolving consumer loans | |
| 33,280 | |
| 5,470 | |
| 24,082 | |
| 9,212 | |
| 3,685 | |
| 2,474 | |
| 2,419 | |
| 1,141 | |
| 2,993 | |
| — | |
| 84,756 |
| |
| 256,652 | |
| 50,774 | |
| 39,774 | |
| 16,039 | |
| 9,303 | |
| 10,266 | |
| 11,931 | |
| 10,562 | |
| 5,855 | |
| — | |
| 411,156 |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Financial instruments not recognized in the consolidated balance sheet: | |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
Available lines of credit cards and non-revolving consumer loans | |
| 54,908 | |
| 11,316 | |
| 2,196 | |
| 1,072 | |
| 682 | |
| 738 | |
| 658 | |
| 342 | |
| 177 | |
| — | |
| 72,089 |
Guarantees | |
| — | |
| — | |
| — | |
| — | |
| — | |
| — | |
| — | |
| — | |
| — | |
| — | |
| — |
Loan commitments | |
| 64 | |
| 32 | |
| 4 | |
| — | |
| — | |
| — | |
| 7 | |
| — | |
| — | |
| — | |
| 107 |
| |
| 54,972 | |
| 11,348 | |
| 2,200 | |
| 1,072 | |
| 682 | |
| 738 | |
| 665 | |
| 342 | |
| 177 | |
| — | |
| 72,196 |
| |
| 311,624 | |
| 62,122 | |
| 41,974 | |
| 17,111 | |
| 9,985 | |
| 11,004 | |
| 12,596 | |
| 10,904 | |
| 6,032 | |
| — | |
| 483,352 |
i) Securitization
Loans and advances to customers includes the securitized loans transferred to third parties on which the Bank has retained the risks and rewards, albeit partially, and which therefore, in accordance with the applicable IFRS, cannot be derecognized. As of December 31, 2021 and 2022, there were no securitized loans retained in the consolidated balance sheet related to securitized mortgage assets.
Securitization is used as a tool for diversifying the Bank’s liquidity sources. The Bank had not performed any securitization in 2020, 2021 and 2022. This securitization corresponds to a transaction performed by the merged entity Santander Vivienda in 2006.
12. Hedging derivatives
The Bank, as part of its financial risk management strategy and for reducing mismatches in the accounting treatment of its transactions, enters into interest rate and foreign currency hedging financial derivatives, depending on the nature of the hedged risk.
In line with its objective, the Bank classifies its hedges into the following categories:
- | Cash flow hedges: hedging the exposure to variability in cash flows associated with an asset, liability or highly probable forecast transaction. |
- | Fair value hedges: hedging the exposure to changes in the fair value of assets or liabilities attributable to an identified hedged risk. |
a) Breakdown
The breakdown by type of hedge of the financial derivatives qualifying for hedge accounting is as follows:
| | | | | | | | | | | | |
| | | 12/31/2021 | | | 12/31/2022 | ||||||
|
|
| Assets |
|
| Liabilities |
|
| Assets |
|
| Liabilities |
| | | | | | | | | | | | |
Fair value hedges |
| | 1,468 |
| | 7,018 |
| | 4,923 |
| | 3,205 |
Cash flow hedges |
| | 9,780 |
| | 1,144 |
| | 5,258 |
| | 1,256 |
|
| | 11,248 |
| | 8,162 |
| | 10,181 |
| | 4,461 |
F-119
b) Quantitative information
Fair value hedges
As of December 31, 2021, the hedging financial derivative positions are as follows:
| | | | | | | | | | | | |
|
|
| |
|
| Nominal |
|
| |
|
| |
| | | | | | (Million in | | | | | | |
| | | Nominal | | | Transaction | | | Transaction | | | |
| | | (Million Pesos) | | | Currency) | | | Currency | | | Hedged Item and Risk Hedged |
| | | | | | | | | | | | |
IRS |
| | 1,867 |
| | 1,867 |
| | Peso |
| | Loans - Interest rate risk |
| | | | | | | | | | | | |
IRS |
| | 47,047 |
| | 47,047 |
| | Peso |
| | M Bonds - Interest rate risk |
| | | | | | | | | | | | |
CCS |
| | 4 |
| | 1 |
| | USD |
| | Loans - Interest rate and foreign exchange risk |
| | | | | | | | | | | | |
CCS |
| | 17,744 |
| | 819 |
| | Euro |
| | UMS - Interest rate and foreign exchange risk |
| | | | | | | | | | | | |
CCS |
| | 7,824 |
| | 398 |
| | USD |
| | UMS - Interest rate and foreign exchange risk |
| | | | | | | | | | | | |
CCS |
| | 1,492 |
| | 58 |
| | Pound sterling |
| | UMS - Interest rate and foreign exchange risk |
| | | | | | | | | | | | |
CCS |
| | 1,895 |
| | 405 |
| | UDI |
| | UDIBONDS - Interest rate and inflation risk |
| | | | | | | | | | | | |
As of December 31, 2022, the hedging financial derivative positions are as follows:
| | | | | | | | | | | | |
|
|
| |
|
| Nominal |
|
| |
|
| |
| | | | | | (Million in | | | | | | |
| | | Nominal | | | Transaction | | | Transaction | | | |
| | | (Million Pesos) | | | Currency) | | | Currency | | | Hedged Item and Risk Hedged |
| | | | | | | | | | | | |
IRS |
| | 1,600 |
| | 1,600 |
| | Peso |
| | Loans - Interest rate risk |
| | | | | | | | | | | | |
IRS | | | 6,500 |
| | 6,500 |
| | Peso |
| | Unsecured notes - Interest rate risk |
| | | | | | | | | | | | |
IRS |
| | 2,731 |
| | 2,731 |
| | Peso |
| | Promissory notes - Interest rate risk |
| | | | | | | | | | | | |
IRS | | | 117,701 | | | 117,701 | | | Peso | | | M Bonds - Interest rate risk |
| | | | | | | | | | | | |
CCS |
| | 9,887 |
| | 447 |
| | Euro |
| | UMS - Interest rate and foreign exchange risk |
| | | | | | | | | | | | |
CCS |
| | 7,824 |
| | 398 |
| | USD |
| | UMS - Interest rate and foreign exchange risk |
| | | | | | | | | | | | |
CCS |
| | 1,492 |
| | 58 |
| | Pound sterling |
| | UMS - Interest rate and foreign exchange risk |
| | | | | | | | | | | | |
CCS |
| | 1,895 |
| | 405 |
| | UDI |
| | UDIBONDS - Interest rate and inflation risk |
| | | | | | | | | | | | |
The fair value hedges carried out by the Bank are extended in certain cases up to the year 2034.
For 2020, 2021 and 2022, the effect of valuation for the period of the financial derivative instruments for fair value hedging purposes recognized in the consolidated income statement is included under Gains/(losses) on financial assets and liabilities (net) of (6,884) million pesos, 8,746 million pesos and 5,225 million pesos, respectively (see Note 39).
For 2020, 2021 and 2022, the effect of valuation arising from the risk being hedged of the hedged items for fair value hedging purposes recognized in the consolidated income statement is included Gains/(losses) on financial assets and liabilities (net) of 6,427 million pesos, (9,278) million pesos and (4,903) million pesos, respectively (see Note 39).
F-120
Each of these hedging financial derivative instruments is presented in the consolidated balance sheet under Hedging derivatives.
Cash flow hedges
As of December 31, 2021, the positions in financial derivatives for cash flow hedging purposes are as follows:
| | | | | | | | | | | | |
|
|
| |
|
| Nominal |
|
| |
|
| |
| | | | | | (Million in | | | | | | |
| | | Nominal | | | Transaction | | | Transaction | | | |
| | | (Million Pesos) | | | Currency) | | | Currency | | | Hedged Item and Risk Hedged |
| | | | | | | | | | | | |
IRS |
| | 7,311 |
| | 7,311 |
| | Peso |
| | Unsecured notes - Interest rate risk |
| | | | | | | | | | | | |
CCS |
| | 523 |
| | 41 |
| | USD |
| | Loans - Foreign exchange risk |
| | | | | | | | | | | | |
CCS |
| | 491 |
| | 29 |
| | Euro |
| | Loans - Foreign exchange risk |
| | | | | | | | | | | | |
CCS |
| | 11,125 |
| | 543 |
| | USD |
| | Senior Unsecured Notes - Foreign exchange risk |
| | | | | | | | | | | | |
CCS |
| | 519 |
| | 25 |
| | Euro |
| | UMS - Foreign exchange risk |
| | | | | | | | | | | | |
CCS |
| | 260 |
| | 10 |
| | Pound sterling |
| | UMS - Foreign exchange risk |
| | | | | | | | | | | | |
CCS |
| | 911 |
| | 50 |
| | USD |
| | UMS - Foreign exchange risk |
| | | | | | | | | | | | |
Forward Fx-BRL |
| | 28,787 |
| | 8,295 |
| | BRL |
| | Brazilian Government Notes - Foreign exchange risk |
| | | | | | | | | | | | |
Forward Fx-USD |
| | 36,171 |
| | 1,466 |
| | USD |
| | Brazilian Government Notes - Foreign exchange risk |
| | | | | | | | | | | | |
As of December 31, 2022, the positions in financial derivatives for cash flow hedging purposes are as follows:
| | | | | | | | | | | | |
|
|
| |
|
| Nominal |
|
| |
|
| |
| | | | | | (Million in | | | | | | |
| | | Nominal | | | Transaction | | | Transaction | | | |
| | | (Million Pesos) | | | Currency) | | | Currency | | | Hedged Item and Risk Hedged |
| | | | | | | | | | | | |
CCS |
| | 174 |
| | 14 |
| | USD |
| | Loans - Foreign exchange risk |
| | | | | | | | | | | | |
CCS |
| | 351 |
| | 21 |
| | Euro |
| | Loans - Foreign exchange risk |
| | | | | | | | | | | | |
CCS |
| | 260 |
| | 10 |
| | Pound sterling |
| | UMS - Foreign exchange risk |
| | | | | | | | | | | | |
CCS |
| | 911 |
| | 50 |
| | USD |
| | UMS - Foreign exchange risk |
| | | | | | | | | | | | |
CCS | | | 7,196 |
| | 1,917 |
| | BRL |
| | Brazilian Government Notes - Foreign exchange risk |
| | | | | | | | | | | | |
Forward Fx-BRL |
| | 16,425 |
| | 5,187 |
| | BRL |
| | Brazilian Government Notes - Foreign exchange risk |
| | | | | | | | | | | | |
Forward Fx-USD |
| | 33,353 |
| | 1,342 |
| | USD |
| | Brazilian Government Notes - Foreign exchange risk |
| | | | | | | | | | | | |
As of December 31, 2021 included in other comprehensive income under Valuation adjustments – Cash flow hedges, were (6) million pesos (see Note 28), which refer to the accumulated unamortized gain (net of the related deferred tax effect) of hedging financial derivatives for which hedge accounting was discontinued. Such balances are being reclassified based on the original terms of the forecast transactions. The term of such reclassifying extends through the year 2022. The remaining amount of Valuation adjustments – Cash flow hedges reflected in other comprehensive income consists of accumulated unrealized gain or loss on effective cash flow hedges currently in effect.
F-121
The cash flow hedges entered into by the Bank are extended in certain cases up to the year 2025 for Brazilian Government Notes and for Loans and advances to customers and up to the year 2026 for UMS.
A reconciliation of Valuation adjustments – Cash flow hedges is as follows:
| | | | | | | | | | |
|
|
| 2020 |
|
| 2021 |
|
| 2022 |
|
| | | | | | | | | | |
Balance at January 1 |
| | (276) |
| | (569) |
| | 414 | |
Valuation adjustments |
| | (376) |
| | 1,394 |
| | (1,224) | |
Amounts reclassified to consolidated income statement |
| | (43) |
| | 11 |
| | 8 | |
Of which: |
| |
|
| |
|
| |
| |
Income from cash flow hedging financial derivatives and discontinued cash flow hedge accounting |
| | (43) |
| | 11 |
| | 8 | |
Cash flow hedges ineffectiveness (Note 39) |
| | — |
| | — |
| | — | |
Income taxes |
| | 126 |
| | (422) |
| | 365 | |
Balance at December 31 |
| | (569) |
| | 414 |
| | (437) | |
As of December 31, 2022, the breakdown of the estimated cash flows of the cash flow hedges that are expected to be reclassified from other comprehensive income to the consolidated income statement is as follows:
| | | | | | | | | | | | | | | | |
|
|
| |
|
| Between 3 Months and |
|
| Between 1 Year and 5 |
|
| |
|
| |
|
| | | Less than 3 Months | | | 1 Year | | | Years | | | More than 5 Years | | | Total | |
| | | | | | | | | | | | | | | | |
Cash flows to be received |
| | 13 |
| | 40 |
| | 21 |
| | — |
| | 74 | |
Cash flows to be paid |
| | (242) |
| | (205) |
| | (234) |
| | (17) |
| | (698) | |
Note 45.a contains a breakdown of the remaining maturity periods of hedging financial derivatives.
13. Non-current assets held for sale
a) Breakdown
The breakdown by type of non-current assets held for sale is as follows:
| | | | | | | |
|
|
| |
|
| |
|
| | | 2021 |
|
| 2022 | |
| | | | | | | |
Foreclosed assets |
| | 773 | | | 1,429 | |
Investment held for sale | | | — | | | 1,586 | |
|
| | 773 | | | 3,015 | |
b) Foreclosed assets
In 2020, 2021 and 2022, the Bank recognized from the sale of foreclosed assets a gain of 9 million pesos, a gain of 20 million pesos and a loss of 70 million pesos, respectively, under Gains/(losses) on disposal of non-current assets held for sale not classified as discontinued operations (net) in the consolidated income statement.
For the year ended December 31, 2020 and 2021 the Bank recognized an impairment loss of 119 million pesos and 27 million pesos respectively, under Impairment losses on other assets (net) in the consolidated income statement.
F-122
During 2022, the Bank has not recognized any impairment loss in the consolidated income statement
The changes in foreclosed assets in the consolidated balance sheet were as follows:
| | | | |
|
|
| Foreclosed Assets |
|
| | | | |
Balances at January 1, 2021 |
| | 551 | |
Additions |
| | 559 | |
Disposals |
| | (310) | |
Impairment losses |
| | (27) | |
Balances at December 31, 2021 |
| | 773 | |
Additions |
| | 812 | |
Disposals |
| | (156) | |
Impairment losses |
| | — | |
Balances at December 31, 2022 |
| | 1,429 | |
c) Investment held for sale
After Santander Merchant Platform Solutions México, S.A. de C.V. (SMPS México) was authorized to operate as a Participant in Disposal Networks (Participante en Redes de Medios de Disposición) in its capacity as Acquirer, Banco Santander México entered into an agreement with PagoNxt Merchant Solutions, S.L. and PagoNxt, S.L. on August 29, 2022 to sell the Bank´s 49% of participation in SMPS México represented by 1,139,735,235 common shares, at a sale price of 1,948 million pesos. This transaction is part of the global strategy of Banco Santander (Spain) to consolidate the acquiring business.
This transaction will take effect once all the necessary regulatory approvals have been obtained, the Bank expects to obtain them during fiscal year 2023.
The amount presented in the consolidated balance sheets represents the net book value of the 49% of participation in SPMS Mexico.
F-123
14. Tangible assets
a) Changes
The changes in Tangible assets in the consolidated balance sheet were as follows:
| | | | |
|
|
| Tangible Assets |
|
| | | | |
Cost: |
| |
| |
Balances at January 1, 2021 |
| | 23,087 | |
Additions |
| | 2,450 | |
Disposals |
| | (187) | |
Balances at December 31, 2021 |
| | 25,350 | |
Additions |
| | 3,314 | |
Disposals |
| | (491) | |
Balances at December 31, 2022 |
| | 28,173 | |
| | | | |
Accumulated depreciation: |
| |
| |
Balances at January 1, 2021 |
| | (10,881) | |
Additions |
| | (2,032) | |
Disposals |
| | 183 | |
Balances at December 31, 2021 |
| | (12,730) | |
Additions |
| | (2,227) | |
Disposals |
| | 491 | |
Balances at December 31, 2022 |
| | (14,466) | |
| | | | |
Balances at December 31, 2021 |
| | 12,620 | |
Balances at December 31, 2022 |
| | 13,707 | |
As of December 31, 2022, there are no restrictions on title and no tangible assets have been pledged as collateral for liabilities.
b) Breakdown by asset class
| | | | | | | | | |
| | | | | | Accumulated | | | |
|
|
| Cost |
|
| Depreciation |
|
| Carrying Amount |
| | |
| | |
| | |
|
Buildings |
| | 14,640 |
| | (7,522) |
| | 7,118 |
IT equipment and fixtures |
| | 6,922 |
| | (3,355) |
| | 3,567 |
Furniture and vehicles |
| | 3,226 |
| | (1,853) |
| | 1,373 |
Other fixtures |
| | 562 |
| | — |
| | 562 |
Balances at December 31, 2021 |
| | 25,350 |
| | (12,730) |
| | 12,620 |
| | | | | | | | | |
Buildings |
| | 15,638 |
| | (8,494) |
| | 7,144 |
IT equipment and fixtures |
| | 7,609 |
| | (4,020) |
| | 3,589 |
Furniture and vehicles |
| | 3,479 |
| | (1,952) |
| | 1,527 |
Other fixtures |
| | 1,447 |
| | — |
| | 1,447 |
Balances at December 31, 2022 |
| | 28,173 |
| | (14,466) |
| | 13,707 |
F-124
15. Leases
a) Right-of-use assets
Lease information with the Bank as lessee is as follows:
| | | | | | | | |
| |
| Branch |
|
| Furniture |
| |
| | | offices | | | and vehicles | | Total |
Balances at January 1, 2021 | | | 5,435 |
| | 208 | | 5,643 |
Remeasurement of right-of-use assets |
| | 551 |
| | — | | 551 |
Additions in right-of-use assets | | | 663 |
| | 63 | | 726 |
Disposals | | | (1,542) | | | (95) | | (1,637) |
Depreciation | | | (108) |
| | — | | (108) |
Balances at December 31, 2021 | | | 4,999 |
| | 176 | | 5,175 |
Remeasurement of right-of-use assets |
| | 669 |
| | — | | 669 |
Additions in right-of-use assets | | | 2,372 |
| | — | | 2,372 |
Depreciation | | | (1,651) |
| | (125) | | (1,776) |
Disposals | | | (176) | | | — | | (176) |
Balances at December 31, 2022 | | | 6,213 |
| | 51 | | 6,264 |
b) Lease liabilities
Following is an analysis of activity in Lease liabilities as of December 31, 2022:
| | | |
| | | Amount |
| | | |
Balances at January 1, 2021 |
|
| 6,131 |
Interest expense | | | 646 |
New contracts | | | 725 |
Remeasurement on leases liabilities | | | 350 |
Disposals | | | (103) |
Payments | | | (2,033) |
Balances at December 31, 2021 | | | 5,716 |
Interest expense | | | 530 |
New contracts | | | 2,372 |
Remeasurement on leases liabilities | | | 679 |
Disposals | | | (57) |
Payments | | | (2,275) |
Balances at December 31, 2022 | | | 6,965 |
The following table sets out a maturity analysis of lease payments:
| | | |
| | | December 31, 2022 |
Maturity analysis - contractual undiscounted cash flows |
|
| |
Less than one year | | | 2,001 |
One to three years | | | 3,086 |
Three to five years | | | 2,038 |
More than five years | | | 1,999 |
Total undiscounted lease liabilities at December 31, 2022 | | | 9,124 |
Lease liabilities at December 31, 2022 | | | 6,965 |
| | | |
Current | | | 1,700 |
Long-term | | | 5,265 |
F-125
c) Leaseback
In the second quarter of 2012, the Bank entered into an agreement with a non-related party, Fibra Uno, S.A. de C.V. (hereinafter, “Fibra Uno”) regarding the sale of 220 properties (branches, offices and parking spaces) and the subsequent leaseback thereof for a term of 20 years.
The corresponding lease contract is non-cancellable and includes an option to renew up to an additional four consecutive periods of five years each with a market rate to be determined on the date of the renewal. The lease agreement includes rent adjustments based on the consumer price index (or INPC) and does not contain volume-based or leveraged contingent rent payment clauses or purchase options, or impose any restrictions on the Bank’s ability to pay dividends, engage in debt financing transactions or enter into further lease agreements. Because this was a sale and operating leaseback under IAS 17 Leases, at the date of initial application of IFRS 16 the Bank accounts for the leaseback in the same way as it accounts for its leases of other operating lease contracts.
d) Additional information
| | | |
| | | December 31, 2022 |
Amounts recognized in the consolidated income statement: | | | |
Interest expense on lease liabilities | | | 530 |
Expense relating to short-term leases | | | 10 |
Expense relating to leases of low-value assets that are not shown above as short-term leases | | | 761 |
Expense relating to variable lease payments not included in lease liabilities | | | — |
Cash flows from lease liabilities: | | | |
Total leases cash flows | | | (771) |
16. Intangible assets – Goodwill
As of December 31, 2021 and 2022, Goodwill amounted to 1,734 million pesos.
a) Impairment test
The main assumptions used in the calculation of the impairment of Goodwill are as follows:
| | | |
|
|
| Hypotheses |
| | | |
Basis of valuation |
| | Value in use: discounted cash flows |
Period of projection of cash flows(1) |
| | 10 years |
Perpetual cash flow |
| | (2) |
Discount rate(6) |
| | 12.39% |
Of which: |
| |
|
Cost of Equity(3) |
| | 17.47% |
Cost of Debt(4) |
| | 10.70% |
Equity Structure(5) |
| | 25% Equity / 75% Debt |
(1) | The period of projections of cash flows are prepared using internal budgets and growth plans of Banks’ Management, based on historical data, market expectations and conditions such as industry growth and inflation. |
F-126
(2) | The perpetual cash flow has been calculated based on the following formula over the last cash flow estimated [D*(1+g)//i-g)]*(1+i)˄-n, where: |
● | D = Last estimated cash flow, |
● | g = Perpetual growth (0%), |
● | i = Discount rate, and |
● | n= Number of year of last estimated cash flow. |
(3) | The Cost of Equity has been calculated based on the following formula Rf+(ß*Pr), where: |
● | Rf = Risk free rate (9.08%), |
● | β = Beta (0.909), and |
● | Pr = Equity Risk Premium (9.23%). |
(4) | The Cost of Debt has been calculated based on the actual pre-tax financing cost of the Bank. |
(5) | The Equity Structure has been calculated based on the following formula: Equity/(Total Liability+Equity). The Debt Structure has been calculated based on the following formula: Debt/(Total Liability+Equity). |
(6) | The Discount rate has been calculated based on the following formula: (Cost of Equity*Equity Structure) + (Cost of Debt*Debt Structure). |
The assumptions used in performing the interim impairment test were updated to reflect the best approximation of market behavior. As of December 2021 and 2022, the recoverable value of the CGU is higher than its book value.
Based on the foregoing, and in accordance with the estimates, projections and measurements available to the Bank’s Management in 2020, 2021 and 2022, the Bank has not recognized any impairment losses on Goodwill.
F-127
17. Intangible assets - Other intangible assets
a) Changes
The changes in Other intangible assets in the consolidated balance sheet were as follows:
| | | | |
|
|
| Intangible Assets |
|
| | | with Finite Useful Life | |
| | | | |
Cost: |
| |
| |
Balances at January 1, 2021 |
| | 19,237 | |
Additions |
| | 3,371 | |
Disposals |
| | (344) | |
Balances at December 31, 2021 |
| | 22,264 | |
Additions |
| | 3,940 | |
Disposals |
| | — | |
Balances at December 31, 2022 |
| | 26,204 | |
| | | | |
Accumulated amortization and impairment: |
| |
| |
Balances at January 1, 2021 |
| | (12,364) | |
Additions |
| | (2,566) | |
Disposals |
| | 343 | |
Balances at December 31, 2021 |
| | (14,587) | |
Additions |
| | (2,670) | |
Disposals |
| | — | |
Balances at December 31, 2022 |
| | (17,257) | |
Balances at December 31, 2021 |
| | 7,677 | |
Balances at December 31, 2022 |
| | 8,947 | |
b) Breakdown
The breakdown of Other intangible assets in the consolidated balance sheet is as follows:
| | | | | | | | | | | | |
|
|
| Estimated |
|
| |
|
| Accumulated |
|
| Carrying |
| | | Useful Life | | | Cost | | | Amortization | | | Amount |
IT developments |
| | 3 years |
| | 22,176 | | | (14,536) |
| | 7,640 |
Others |
| | 10 years |
| | 88 | | | (51) |
| | 37 |
Balances at December 31, 2021 |
| |
|
| | 22,264 |
| | (14,587) |
| | 7,677 |
| | | | | | | | | | | | |
IT developments |
| | 3 years |
| | 26,117 | | | (17,198) | | | 8,919 |
Others |
| | 10 years |
| | 87 | | | (59) | | | 28 |
Balances at December 31, 2022 |
| |
|
| | 26,204 |
| | (17,257) |
| | 8,947 |
As of December 31, 2021 and 2022, there are no intangible assets with restricted title or intangible assets pledged as security for liabilities.
F-128
18. Other assets
The breakdown of Other assets is as follows:
| | | | | | |
|
|
|
|
|
|
|
| | | 12/31/2021 | | | 12/31/2022 |
| | | | | | |
Credit and debit card operating balances |
| | 2,421 |
| | 1,341 |
Insurance commission receivables |
| | 1,436 |
| | 1,682 |
Prepaid expenses |
| | 812 |
| | 681 |
Other |
| | 5,457 |
| | 7,477 |
|
| | 10,126 |
| | 11,181 |
The following is a breakdown by maturity of Other assets as of December 31, 2022:
| | | | | | | | | | | | | | | |
| | | Current | | | More than 30 days less than 60 | | | More than 60 days less than 90 | | | More than 90 days | | | Total |
| | | | | | | | | | | | | | | |
Credit and debit card operating balances |
| | 1,220 |
| | 66 |
| | 39 | | | 16 | | | 1,341 |
Insurance commission receivables |
| | 129 |
| | 60 |
| | 84 |
| | 1,409 | | | 1,682 |
Prepaid expenses |
| | 681 |
| | — |
| | — |
| | — | | | 681 |
Other | | | 5,456 | | | 1,200 | | | 349 | | | 1,644 | | | 8,649 |
| | | | | | | | | | | | | | | |
Expected credit loss rate | | | 4% | | | 0% | | | 7% | | | 28% | | | |
Gross carrying amount | | | 7,486 | | | 1,326 | | | 472 | | | 3,069 | | | 12,353 |
Lifetime expected credit losses | | | (269) | | | (5) | | | (33) | | | (865) | | | (1,172) |
| | | | | | | | | | | | | | | |
Balances at December 31, 2022 | | | 7,217 | | | 1,321 | | | 439 | | | 2,204 | | | 11,181 |
F-129
19. Deposits from the Central Bank and Deposits from credit institutions
The breakdown by classification, type and currency of Deposits from the Central Bank and Deposits from credit institutions is as follows:
| | | | | | |
|
|
|
|
|
|
|
| | | 12/31/2021 | | | 12/31/2022 |
| | | | | | |
Classification: |
| |
|
| |
|
Financial liabilities at fair value through profit or loss | | | 40,848 | | | 53,873 |
Financial liabilities at amortized cost |
| | 169,955 |
| | 164,110 |
|
| | 210,803 |
| | 217,983 |
Type: |
| |
|
| |
|
Reciprocal accounts |
| | 13,373 |
| | 12,870 |
Time deposits |
| | 5,471 |
| | 3,559 |
Overnight deposits |
| | 26,164 |
| | 13,589 |
Repurchase agreements |
| | 132,621 |
| | 152,629 |
Other accounts |
| | 33,072 |
| | 35,258 |
Of which: |
| |
|
| |
|
Collateral received for OTC financial derivatives transactions (Note 32) |
| | 26,919 |
| | 24,720 |
Others |
| | 6,153 |
| | 10,538 |
Accrued interest |
| | 102 |
| | 78 |
|
| | 210,803 |
| | 217,983 |
Currency: |
| |
|
| |
|
Peso |
| | 177,336 |
| | 187,050 |
USD |
| | 33,424 |
| | 30,902 |
Other currencies |
| | 43 |
| | 31 |
|
| | 210,803 |
| | 217,983 |
As of December 31, 2022, Deposits from credit institutions of 24,720 million pesos, have been received in connection with OTC financial derivatives transactions (see Note 32).
Note 45.a includes a breakdown of the remaining maturity periods of Deposits from the Central Bank and Deposits from credit institutions. In addition, Note 45.d contains the fair value amounts of these liabilities classified as Deposits from the Central Bank and Deposits from credit institutions – Financial liabilities at amortized cost.
F-130
20. Customer deposits
The breakdown by classification, type and currency of the balance of Customer deposits is as follows:
| | | | | | |
|
|
|
|
|
|
|
| | | 12/31/2021 | | | 12/31/2022 |
| | | | | | |
Classification: |
| |
|
| |
|
Financial liabilities at fair value through profit or loss | | | 114,078 | | | 119,769 |
Financial liabilities at amortized cost |
| | 777,886 |
| | 808,529 |
|
| | 891,964 |
| | 928,298 |
Type: |
| |
|
| |
|
Repurchase agreements |
| | 131,639 |
| | 146,691 |
Demand deposits: |
| | |
| | |
Current accounts |
| | 541,257 |
| | 538,409 |
Other deposits |
| | 22,760 |
| | 22,972 |
Of which: |
| |
|
| |
|
Collateral received for OTC financial derivatives transactions (Note 32) |
| | — |
| | 2,141 |
Others |
| | 22,760 |
| | 20,831 |
Time deposits: |
| | |
| | |
Fixed-term deposits |
| | 195,431 |
| | 218,316 |
Accrued interest |
| | 877 |
| | 1,910 |
|
| | 891,964 |
| | 928,298 |
Currency: |
| |
|
| |
|
Peso |
| | 798,976 |
| | 833,323 |
USD |
| | 92,987 |
| | 94,975 |
Other currencies |
| | 1 |
| | — |
|
| | 891,964 |
| | 928,298 |
As of December 31, 2022 and 2021, there were no transactions in connection with OTC financial derivatives transactions (see Note 32).
Note 45.a includes a breakdown of the remaining maturity periods of Customer deposits. In addition, Note 45.d contains the fair value amounts of these liabilities classified as Customer deposits – Financial liabilities at amortized cost.
F-131
21. Marketable debt securities
a) Breakdown
The breakdown by classification, type and currency of issue of Marketable debt securities is as follows:
| | | | | | |
|
|
| 12/31/2021 |
|
| 12/31/2022 |
| | | | | | |
Classification: | | | | | | |
Financial liabilities at fair value through profit or loss | |
| 259 | |
| 520 |
Financial liabilities at amortized cost | |
| 101,423 | |
| 134,393 |
| |
| 101,682 | |
| 134,913 |
Type: | | | | | | |
Certificates of deposit (unsecured) | |
| 2,628 | |
| 36,426 |
Senior Unsecured Notes | |
| 56,801 | |
| 34,469 |
Structured bank bonds | |
| 981 | |
| 2,851 |
Promissory notes | |
| 13,543 | |
| 25,988 |
Unsecured bonds | |
| 27,729 | |
| 35,179 |
| |
| 101,682 | |
| 134,913 |
Currency: | | | | | | |
Peso | |
| 44,687 | |
| 99,189 |
USD | |
| 56,995 | |
| 35,724 |
| |
| 101,682 | |
| 134,913 |
Note 45.a includes a breakdown of the remaining maturity periods of Marketable debt securities. In addition, Note 45.d contains the fair value amounts of these liabilities classified as Marketable debt securities – Financial liabilities at amortized cost.
b) Changes in Marketable debt securities classified as Financial liabilities at fair value through profit or loss
The changes in Marketable debt securities classified as Financial liabilities at fair value through profit or loss were as follows:
| | | | | | | |
|
|
| 2021 |
|
| 2022 |
|
| | | | | | | |
Beginning balance | |
| 1,363 | |
| 259 | |
Issues | |
| 197 | |
| 471 | |
Of which: | |
|
| |
|
| |
Structured bank bonds | |
| 197 | |
| 471 | |
Of which: | |
|
| |
|
| |
Banco Santander México | |
| 197 | |
| 471 | |
Redemptions | |
| (1,315) | |
| (169) | |
Of which: | |
|
| |
|
| |
Structured bank bonds | |
| (1,315) | |
| (169) | |
Of which: | |
|
| |
|
| |
Banco Santander México | |
| (1,315) | |
| (169) | |
Changes in fair value | |
| 14 | |
| (41) | |
Balance at year-end | |
| 259 | |
| 520 | |
F-132
c) Changes in Marketable debt securities classified as Financial liabilities at amortized cost
The changes in Marketable debt securities classified as Financial liabilities at amortized cost were as follows:
| | | | | | | |
|
|
| 2021 |
|
| 2022 |
|
| | | | | | | |
Beginning balance | |
| 130,754 | |
| 101,423 | |
Issues | |
| 1,197,521 | |
| 1,601,167 | |
Of which: | |
|
| |
|
| |
Certificates of deposit (unsecured) | |
| 3,347 | |
| 36,475 | |
Structured bank bonds | |
| 20,880 | |
| 26,711 | |
Promissory notes | |
| 1,163,294 | |
| 1,523,091 | |
Unsecured bonds | |
| 10,000 | |
| 14,890 | |
Of which: | |
| | |
| | |
Banco Santander México | |
| 1,197,521 | |
| 1,601,168 | |
Redemptions | |
| (1,228,486) | |
| (1,565,677) | |
Of which: | |
|
| |
|
| |
Certificates of deposit (unsecured) | |
| (35,156) | |
| (2,824) | |
Structured bank bonds | |
| (20,956) | |
| (25,135) | |
Senior Unsecured Notes | | | — | | | (19,603) | |
Promissory notes | |
| (1,166,674) | |
| (1,510,804) | |
Unsecured bonds | | | (5,700) | | | (7,311) | |
Of which: | |
| | |
| | |
Banco Santander México | |
| — | |
| (1,565,677) | |
Santander Vivienda | |
| (1,228,486) | |
| — | |
Accrued interest | |
| (42) | |
| 131 | |
Effect of changes in foreign exchange rates | |
| 1,676 | |
| (2,651) | |
Balance at year-end | |
| 101,423 | |
| 134,393 | |
F-133
d) Other disclosures
As of December 31, 2021, the balance of the issues performed by the Bank is as follows:
| | | | | | | | | | |
|
|
| Amount |
|
| Maturity Date |
|
| Rate | |
| | | | | | | | | | |
Certificates of deposit (unsecured) | |
| 500 | | | 01/21/2022 | | | 5.71 | % |
Certificates of deposit (unsecured) | |
| 2,000 | | | 02/14/2022 | | | 5.22 | % |
Certificates of deposit (unsecured) | |
| 3 | | | 03/31/2022 | | | 5.00 | % |
Certificates of deposit (unsecured) | |
| 21 | | | 04/20/2022 | | | 5.47 | % |
Certificates of deposit (unsecured) | |
| 50 | | | 07/21/2022 | | | 5.19 | % |
Certificates of deposit (unsecured) | |
| 3 | | | 03/09/2022 | | | 0.01 | % |
Certificates of deposit (unsecured) | |
| 19 | | | 03/18/2022 | | | 0.01 | % |
Certificates of deposit (unsecured) | |
| 25 | | | 03/01/2022 | | | 0.01 | % |
| |
| 2,621 | |
|
| |
|
| |
Accrued interest | |
| 7 | |
|
| |
|
| |
| |
| 2,628 | |
|
| |
|
| |
| | | | | | | | | | |
Senior Unsecured Notes | |
| 20,508 | | | 11/09/2022 | | | 4.13 | % |
Senior Unsecured Notes | | | 35,888 | | | 04/17/2025 | | | 5.38 | % |
| |
| 56,396 | | | | | | | |
Accrued interest | |
| 405 | | | | | | | |
| |
| 56,801 | |
|
| |
|
| |
| | |
| | |
| | |
| |
Structured bank bonds(*) | |
| 7 | | | 03/17/2022 | | | TIIE | |
Structured bank bonds(*) | |
| 2 | | | 03/17/2022 | | | TIIE | |
Structured bank bonds(*) | |
| 56 | | | 03/17/2022 | | | TIIE | |
Structured bank bonds(*) | |
| 2 | | | 03/17/2022 | | | TIIE | |
Structured bank bonds(*) | |
| 39 | | | 11/16/2022 | | | TIIE | |
Structured bank bonds(*) | |
| 80 | | | 12/02/2022 | | | TIIE | |
Structured bank bonds(*) | |
| 57 | | | 01/21/2026 | | | TIIE | |
Structured bank bonds(*) | |
| 17 | | | 01/21/2026 | | | TIIE | |
Structured bank bonds | |
| 11 | | | 01/12/2022 | | | 9.69 | % |
Structured bank bonds | |
| 28 | | | 01/10/2022 | | | 8.61 | |
Structured bank bonds | |
| 10 | | | 01/10/2022 | | | 12.10 | % |
Structured bank bonds | |
| 45 | | | 01/12/2022 | | | 9.08 | % |
Structured bank bonds | |
| 45 | | | 01/25/2022 | | | 9.28 | % |
Structured bank bonds | |
| 56 | | | 06/24/2022 | | | Guaranteed rate subject to foreign exchange rate | |
Structured bank bonds | |
| 201 | | | 08/30/2022 | | | Guaranteed rate subject to foreign exchange rate | |
Structured bank bonds | |
| 52 | | | 09/27/2022 | | | Guaranteed rate subject to foreign exchange rate | |
Structured bank bonds | |
| 127 | | | 11/01/2022 | | | Guaranteed rate subject to foreign exchange rate | |
Structured bank bonds | |
| 31 | | | 01/04/2022 | | | 6.70 | % |
Structured bank bonds | |
| 62 | | | 01/06/2022 | | | 3.50 | % |
Structured bank bonds | |
| 31 | | | 01/12/2022 | | | 6.77 | % |
Structured bank bonds | |
| 10 | | | 01/18/2022 | | | 10.00 | % |
Structured bank bonds | |
| 10 | | | 01/21/2022 | | | 4.08 | % |
| |
| 979 | |
|
| |
|
| |
Transaction costs and accrued interest (net) | | | 2 | |
|
| |
|
| |
| |
| 981 | |
|
| |
|
| |
| | | | | | | | | | |
Promissory notes | |
| 76 | | | 01/04/2021 | | | 5.40 | % |
Promissory notes | |
| 6,000 | | | 01/15/2021 | | | 5.50 | % |
Promissory notes | |
| 5,900 | | | 01/15/2021 | | | 5.50 | % |
Promissory notes | |
| 1,000 | | | 01/15/2021 | | | 5.50 | % |
Promissory notes | | | 20 | | | 03/16/2021 | | | 5.50 | % |
Promissory notes | | | 500 | | | 01/13/2021 | | | 4.25 | % |
| |
| 13,496 | |
|
| |
|
| |
Accrued interest | |
| 47 | |
|
| |
|
| |
| |
| 13,543 | |
|
| |
|
| |
| | | | | | | | | | |
Unsecured bonds | |
| 2,850 | | | 04/04/2022 | | | TIIE + 10 basis points | |
Unsecured bonds | | | 4,461 | | | 05/06/2022 | | | TIIE + 15 basis points | |
Unsecured bonds | | | 3,500 | | | 11/25/2025 | | | TIIE + 5 basis points | |
Unsecured bonds | |
| 7,150 | | | 03/30/2026 | | | 8.95 | % |
Unsecured bonds | |
| 3,000 | | | 09/01/2026 | | | 7.19 | % |
Unsecured bonds | |
| 6,500 | | | 11/21/2028 | | | 8.08 | % |
| |
| 27,461 | |
|
| |
|
| |
Accrued interest | |
| 268 | |
|
| |
|
| |
| |
| 27,729 |
|
|
| |
|
| |
(*) | Marketable debt securities classified as financial liabilities at fair value through profit or loss. |
F-134
As of December 31, 2022, the balance of the issues performed by the Bank is as follows:
| | | | | | | | | | |
|
|
| Amount |
|
| Maturity Date |
|
| Rate | |
| | | | | | | | | | |
Certificates of deposit (unsecured) | |
| 2,500 | | | 11/13/2023 | | | 10.82 | % |
Certificates of deposit (unsecured) | |
| 2,500 | | | 10/13/2023 | | | 10.33 | % |
Certificates of deposit (unsecured) | |
| 1,100 | | | 09/14/2023 | | | 10.79 | % |
Certificates of deposit (unsecured) | |
| 3,000 | | | 08/17/2023 | | | 10.28 | % |
Certificates of deposit (unsecured) | |
| 1,500 | | | 08/17/2023 | | | 10.69 | % |
Certificates of deposit (unsecured) | |
| 50 | | | 07/20/2023 | | | 10.23 | % |
Certificates of deposit (unsecured) | |
| 300 | | | 06/22/2023 | | | 10.79 | % |
Certificates of deposit (unsecured) | | | 1,100 | | | 06/14/2023 | | | 10.71 | % |
Certificates of deposit (unsecured) | | | 1,000 | | | 06/08/2023 | | | 10.74 | % |
Certificates of deposit (unsecured) | | | 1,000 | | | 06/07/2023 | | | 10.67 | % |
Certificates of deposit (unsecured) | | | 3,000 | | | 06/02/2023 | | | 10.32 | % |
Certificates of deposit (unsecured) | | | 2,000 | | | 05/16/2023 | | | 9.98 | % |
Certificates of deposit (unsecured) | | | 2,000 | | | 05/16/2023 | | | 10.30 | % |
Certificates of deposit (unsecured) | | | 3,000 | | | 05/05/2023 | | | 10.32 | % |
Certificates of deposit (unsecured) | | | 2,000 | | | 03/22/2023 | | | 10.71 | % |
Certificates of deposit (unsecured) | | | 1,000 | | | 03/01/2023 | | | 10.27 | % |
Certificates of deposit (unsecured) | | | 2,000 | | | 02/16/2023 | | | 10.71 | % |
Certificates of deposit (unsecured) | | | 2,000 | | | 02/02/2023 | | | 10.30 | % |
Certificates of deposit (unsecured) | | | 850 | | | 02/03/2023 | | | 10.30 | % |
Certificates of deposit (unsecured) | | | 1,000 | | | 01/18/2023 | | | 10.69 | % |
Certificates of deposit (unsecured) | | | 1,000 | | | 01/13/2023 | | | 10.73 | % |
Certificates of deposit (unsecured) | | | 2,000 | | | 01/05/2023 | | | 10.28 | % |
Certificates of deposit (unsecured) | | | 43 | | | 03/31/2023 | | | 2.00 | % |
Certificates of deposit (unsecured) | | | 3 | | | 03/08/2023 | | | 2.20 | % |
Certificates of deposit (unsecured) | | | 312 | | | 04/10/2023 | | | 0.10 | % |
Certificates of deposit (unsecured) | |
| 11 | | | 02/16/2023 | | | 2.20 | % |
| |
| 36,269 | |
|
| |
|
| |
Accrued interest | |
| 157 | |
|
| |
|
| |
| |
| 36,426 | |
|
| |
|
| |
| | | | | | | | | | |
Senior Unsecured Notes | |
| 34,141 | | | 04/17/2025 | | | 5.38 | % |
Accrued interest | |
| 328 | | | | | | | |
| |
| 34,469 | |
|
| |
|
| |
F-135
| | | | | | | | | | |
|
|
| Amount |
|
| Maturity Date |
|
| Rate | |
Structured bank bonds | | | 86 | | | 01/18/24 | | | Guaranteed rate subject to foreign exchange rate | |
Structured bank bonds | | | 190 | | | 10/03/23 | | | Guaranteed rate subject to foreign exchange rate | |
Structured bank bonds | | | 10 | | | 09/21/23 | | | Guaranteed rate subject to foreign exchange rate | |
Structured bank bonds | | | 15 | | | 09/14/23 | | | Guaranteed rate subject to foreign exchange rate | |
Structured bank bonds | | | 46 | | | 09/12/23 | | | Guaranteed rate subject to foreign exchange rate | |
Structured bank bonds | | | 151 | | | 08/01/23 | | | Guaranteed rate subject to foreign exchange rate | |
Structured bank bonds | | | 15 | | | 07/26/23 | | | Guaranteed rate subject to foreign exchange rate | |
Structured bank bonds | | | 24 | | | 07/17/23 | | | Guaranteed rate subject to foreign exchange rate | |
Structured bank bonds | | | 201 | | | 07/03/23 | | | Guaranteed rate subject to foreign exchange rate | |
Structured bank bonds | | | 16 | | | 05/23/23 | | | Guaranteed rate subject to foreign exchange rate | |
Structured bank bonds | | | 52 | | | 05/02/23 | | | Guaranteed rate subject to foreign exchange rate | |
Structured bank bonds | | | 35 | | | 04/24/23 | | | Guaranteed rate subject to foreign exchange rate | |
Structured bank bonds | | | 12 | | | 04/10/23 | | | Guaranteed rate subject to foreign exchange rate | |
Structured bank bonds | | | 126 | | | 04/03/23 | | | Guaranteed rate subject to foreign exchange rate | |
Structured bank bonds | | | 93 | | | 03/27/23 | | | Guaranteed rate subject to foreign exchange rate | |
Structured bank bonds | | | 9 | | | 06/19/23 | | | Guaranteed rate subject to foreign exchange rate | |
Structured bank bonds | | | 52 | | | 03/13/23 | | | Guaranteed rate subject to foreign exchange rate | |
Structured bank bonds | | | 86 | | | 03/01/23 | | | Guaranteed rate subject to foreign exchange rate | |
Structured bank bonds | | | 16 | | | 02/27/23 | | | Guaranteed rate subject to foreign exchange rate | |
Structured bank bonds | | | 67 | | | 02/08/23 | | | Guaranteed rate subject to foreign exchange rate | |
Structured bank bonds | | | 10 | | | 01/13/23 | | | 16.00 | % |
Structured bank bonds | | | 78 | | | 02/07/23 | | | Guaranteed rate subject to foreign exchange rate | |
Structured bank bonds | | | 39 | | | 01/30/23 | | | Guaranteed rate subject to foreign exchange rate | |
Structured bank bonds | | | 10 | | | 01/06/23 | | | 14.00 | % |
Structured bank bonds | | | 10 | | | 03/09/23 | | | 8.00 | % |
Structured bank bonds | | | 88 | | | 02/07/23 | | | 11.20 | % |
Structured bank bonds | | | 137 | | | 02/10/23 | | | 10.50 | % |
Structured bank bonds | | | 38 | | | 01/18/23 | | | 5.50 | % |
Structured bank bonds | | | 40 | | | 01/17/23 | | | 12.40 | % |
Structured bank bonds | | | 10 | | | 01/04/23 | | | 8.00 | % |
Structured bank bonds | | | 68 | | | 02/01/23 | | | 10.20 | % |
Structured bank bonds | | | 29 | | | 01/05/23 | | | 8.90 | % |
Structured bank bonds | | | 88 | | | 01/13/23 | | | 12.10 | % |
Structured bank bonds | | | 12 | | | 01/06/23 | | | 14.50 | % |
Structured bank bonds | | | 5 | | | 01/11/23 | | | 9.60 | % |
Structured bank bonds | | | 10 | | | 01/06/23 | | | 19.40 | % |
Structured bank bonds | | | 20 | | | 01/06/23 | | | 10.00 | % |
Structured bank bonds | | | 88 | | | 01/06/23 | | | 10.85 | % |
Structured bank bonds | | | 10 | | | 01/12/23 | | | 14.00 | % |
Structured bank bonds | | | 10 | | | 01/17/23 | | | 10.95 | % |
Structured bank bonds | | | 27 | | | 01/13/23 | | | 16.60 | % |
Structured bank bonds | | | 10 | | | 01/06/23 | | | 11.45 | % |
Structured bank bonds | | | 10 | | | 01/13/23 | | | 13.70 | % |
Structured bank bonds | | | 20 | | | 01/05/23 | | | 9.00 | % |
Structured bank bonds | |
| 10 | | | 01/17/23 | | | 8.00 | % |
Structured bank bonds | |
| 26 | | | 01/13/23 | | | 13.00 | % |
Structured bank bonds | |
| 10 | | | 01/12/23 | | | 11.70 | % |
Structured bank bonds | |
| 10 | | | 01/05/23 | | | 11.45 | % |
Structured bank bonds | |
| 20 | | | 01/06/23 | | | 18.45 | % |
Structured bank bonds | |
| 19 | | | 01/06/23 | | | 16.90 | % |
Structured bank bonds | |
| 10 | | | 01/17/23 | | | 12.40 | % |
Structured bank bonds | |
| 20 | | | 01/05/23 | | | 33.80 | % |
Structured bank bonds | |
| 5 | | | 01/03/23 | | | 13.00 | % |
Structured bank bonds | |
| 10 | | | 01/13/23 | | | 12.25 | % |
Structured bank bonds | |
| 10 | | | 01/03/23 | | | 5.20 | % |
Structured bank bonds | |
| 17 | | | 01/21/26 | | | TIIE | |
Structured bank bonds | |
| 58 | | | 01/21/26 | | | TIIE | |
Structured bank bonds | |
| 23 | | | 02/21/25 | | | Invesco QQQ Trust Series 1 (QQQ) | |
Structured bank bonds | |
| 62 | | | 08/27/24 | | | Guaranteed rate subject to S&P 500 | |
Structured bank bonds | |
| 32 | | | 12/14/23 | | | Guaranteed rate subject to S&P 500 | |
Structured bank bonds | |
| 16 | | | 12/20/23 | | | Guaranteed rate subject to S&P 500 | |
Structured bank bonds | |
| 12 | | | 09/29/23 | | | Guaranteed rate subject to S&P 500 | |
Structured bank bonds | |
| 200 | | | 05/31/23 | | | TIIE | |
Structured bank bonds | |
| 114 | | | 03/07/23 | | | TIIE | |
Structured bank bonds | |
| 10 | | | 01/03/23 | | | Guaranteed rate subject to S&P 500 | |
| |
| 2,863 | |
|
| |
|
| |
Transaction costs and accrued interest (net) | | | (12) | |
|
| |
|
| |
| |
| 2,851 | |
|
| |
|
| |
| | | | | | | | | | |
Promissory notes | |
| 4,266 | | | 05/31/2023 | | | 10.91 | % |
Promissory notes | | | 129 | | | 03/31/2023 | | | 8.37 | % |
Promissory notes | | | 1,860 | | | 02/22/2023 | | | 7.44 | % |
Promissory notes | | | 465 | | | 02/23/2023 | | | 7.44 | % |
Promissory notes | | | 281 | | | 01/20/2023 | | | 7.40 | % |
Promissory notes | | | 3,800 | | | 01/13/2023 | | | 10.50 | % |
Promissory notes | |
| 4,000 | | | 01/13/2023 | | | 10.50 | % |
Promissory notes | |
| 2,900 | | | 01/13/2023 | | | 10.50 | % |
Promissory notes | |
| 4,000 | | | 01/13/2023 | | | 10.50 | % |
Promissory notes | | | 4,000 | | | 01/13/2023 | | | 10.50 | % |
Promissory notes | | | 82 | | | 01/02/2023 | | | 10.40 | % |
| |
| 25,783 | |
|
| |
|
| |
Accrued interest | |
| 205 | |
|
| |
|
| |
| |
| 25,988 | |
|
| |
|
| |
| | | | | | | | | | |
Unsecured bonds | |
| 5,000 | | | 07/09/2026 | | | TIIE + 29 basis points | |
Unsecured bonds | | | 4,600 | | | 03/30/2026 | | | 8.95% | |
Unsecured bonds | | | 6,500 | | | 11/21/2028 | | | 8.08% | |
Unsecured bonds | |
| 3,000 | | | 09/01/2026 | | | 7.19% | |
Unsecured bonds | |
| 2,550 | | | 03/30/2026 | | | 8.95% | |
Unsecured bonds | | | 2,790 | | | 03/26/2029 | | | 8.72% | |
Unsecured bonds | | | 7,100 | | | 03/29/2027 | | | TIIE + 7 basis points | |
Unsecured bonds | |
| 3,500 | | | 11/25/2025 | | | TIIE + 5 basis points | |
| |
| 35,040 | |
|
| |
|
| |
Accrued interest | |
| 139 | |
|
| |
|
| |
| |
| 35,179 |
|
|
| |
|
| |
(*) Marketable debt securities classified as financial liabilities at fair value through profit or loss.
F-136
22. Subordinated liabilities
a) | Breakdown |
The breakdown of the balance of Subordinated liabilities is as follows:
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | 12/31/2022 | |||
|
|
| |
|
| |
|
| |
|
| Outstanding |
|
| |
| | | | | | | | | | | | Issue Amount | | | Annual |
Type | | | Currency of Issue | | | 12/31/2021 | | | 12/31/2022 | |
| in Foreign Currency | | | Interest Rate (%) |
| | | | | | | | | | | | | | | |
Subordinated Additional Tier I Capital Notes - 2021 | | | USD | | | 14,355 | | | 13,656 | | | 700,000,000 | | | 4.63 |
Subordinated Additional Tier I Capital Notes - 2016 | |
| USD | |
| 10,254 | |
| — | |
| — | | | — |
Tier II Subordinated Capital Notes - 2018 | |
| USD | |
| 27,034 | |
| 25,728 | |
| 1,300,000,000 | | | 5.95 |
| |
| Balance at year-end | |
| 51,643 | |
| 39,384 | |
|
| |
|
|
Note 45.a includes a breakdown of the remaining maturity of Subordinated liabilities. Additionally, Note 45.d includes the fair value amounts of these liabilities.
b) Changes
The changes in Subordinated liabilities were as follows:
| | | | | | | |
|
|
| 2021 |
|
| 2022 |
|
Beginning balance (million USD) | |
| 1,817 | |
| 2,518 | |
Issues | |
| 700 | |
| — | |
Redemptions | | | — | | | (500) | |
Transaction costs and accrued interest | |
| 1 | |
| 1 | |
Balance at year-end (million USD) | |
| 2,518 | |
| 2,019 | |
Exchange rate per one USD at December 31 | |
| 20.5075 | |
| 19.5089 | |
Balance at year-end (million pesos) | |
| 51,643 | |
| 39,384 | |
c) Other disclosures
2016 Subordinated Additional Tier I Capital Notes
On December 29, 2016, Banco Santander México issued Subordinated Additional Tier I Capital Notes for an amount of USD 500 million. Subordinated Additional Tier I Capital Notes are convertible into common Series F shares and are callable (either fully or partially) at par in cash at the first call date (January 20, 2022) and subsequently every interest payment date. Interests are non-cumulative and fully discretionary. Some trigger events originate the cancellation of interest payment.
Additional characteristics of the Subordinated Additional Tier I Capital Notes are as follows:
● | Automatically convertible into common shares when the Common Equity Tier I (CET I) or Basic Capital is equal to or below 5.125% (among other trigger events) at Conversion price (defined below). |
● | Conversion price: The conversion price shall be, if the common shares are: |
i. | traded on the Mexican Stock Exchange, the higher of: |
a. | the weighted average volume of the ordinary shares closing price on the Mexican Stock Exchange for the thirty consecutive business days immediately preceding the conversion date, |
F-137
with each closing price for the thirty consecutive business days being converted from pesos into USD at the then prevailing exchange rate; or; |
b. | the floor price of 20.30 pesos converted into USD at the then-prevailing exchange rate. |
ii. | not traded on the Mexican Stock Exchange, the floor price of 20.30 pesos converted into USD at the then-prevailing exchange rate. |
● | Subordinated Additional Tier I Capital Notes will accrue interest on an annual interest rate of 8.5% (subject to not being called in advance at the first call date or if the automatic conversion occurs), which will reset every five years considering the current five-year US Government Treasury Bills interest rate plus the original credit spread. Interest payments will be recognized as a reduction of Accumulated reserves within Shareholders’ equity in the consolidated balance sheet. |
● | Fully callable in advance if the Subordinated Additional Tier I Capital Notes: i) fail to be considered as Fundamental Basic Capital, ii) interest is considered non-deductible for tax purposes, or iii) the applicable withholding tax increases. |
● | Any call in advance must be authorized by the Central Bank. |
These Subordinated Additional Tier I Capital Notes are accounted for as a compound instrument with both liability and equity components (that arises from the contingent settlement provision and from the right of the holders to receive discretional interest payments, respectively). The payment of discretionary interest is recorded in Accumulated reserves within Shareholders’ equity in the consolidated balance sheet.
The liability component is recognized at the par value of the Subordinated Additional Tier I Capital Notes and is then deducted from the fair value of the compound financial instrument as a whole to arrive at the value of the equity component. A zero balance to the equity component is assigned, since there is an obligation to pay the full redemption amount and cannot avoid settlement in cash or another financial asset for the full redemption amount.
In addition, an embedded derivative arises from the call option features on the Subordinated Additional Tier I Capital Notes within five years subsequent to the issuance date and on every interest payment date thereafter. This call option is deemed to be closely related to the Subordinated Additional Tier I Capital Notes and is not accounted for separately.
During 2022, the position of 2016 Subordinated Additional Tier I Capital Notes was settled.
2018 Tier II Subordinated Notes
On October 1, 2018, Banco Santander México issued debt securities denominated as Tier II Subordinated Notes in the amount of USD 1,300 million equivalent to 1,300,000 securities with a nominal value of USD 1,000 each with a ten-year maturity (October 30, 2028) and with an option to be prepaid in year five. The instruments were issued in accordance with Rule 144A and Regulation S of the US Securities Act of 1933. Interest will be paid semiannually, on April 1 and October 1, respectively, beginning April 30, 2020. The instruments bear interest at an initial annual interest rate of 5.95% per year during the first five years.
The main features of this issue are as follows:
a) | If notes are not redeemed in year five, the interest rate for the second five-year period shall be based on the interest rate on US five-year Treasury Notes in effect at that moment plus the spread defined in the offering memorandum. |
b) | Loss absorption mechanism through a write-down of the issue being the trigger event a computation of Banco Santander México’s Basic Capital index of 4.5%. |
F-138
c) | Partial write-down until Banco Santander México achieves a Basic Capital index of 7.0%. |
d) | When Banco Santander México computes a Basic Capital index of 8.0%: |
- | Possible deferral of principal, interest or other remedies determined by the CNBV. |
- | Possible write-down due to breach of remediation. |
- | Possible early prepayment in an event of non-deductibility of interest or by the increase in the applicable withholding tax led by the consideration of the notes issued as Tier II Complementary Capital. |
With the proceeds obtained from the issue of these Tier II Subordinated Notes, Banco Santander México redeemed in advance USD 1,223 million of the Tier II Subordinated Capital Notes issued on December 27, 2013.
2021 Subordinated Additional Tier I Capital Notes
On September 15, 2021, Banco Santander México issued perpetual subordinated non-preferred contingent convertible additional Tier I Capital Notes for USD 700 million with no fixed maturity or fixed redemption date, at an annual variable interest rate, which will be recalculated every 5 years based on the yield of the Treasury Notes of the United States of North America (US Treasury Notes) with a term of 5 years that is in force at that time plus the spread defined in the placement supplement.
Additional characteristics of the Subordinated Additional Tier I Capital Notes are as follows:
● | The initial annual interest rate at the time of issuance was 4.625%. |
● | Conversion price: The conversion price shall be, if the common shares are: |
i.traded on the Mexican Stock Exchange, the higher of:
a.the weighted average volume of the ordinary shares closing price on the Mexican Stock Exchange for the thirty consecutive business days immediately preceding the conversion date, with each closing price for the thirty consecutive business days being converted from pesos into USD at the then prevailing exchange rate; or;
b.the floor price of 13.33 pesos converted into USD at the then-prevailing exchange rate.
ii.not traded on the Mexican Stock Exchange, the floor price of 13.33 pesos converted into USD at the then-prevailing exchange rate.
● | Banco Santander México may prepay the Additional Tier I Capital Notes after five years, prior compliance with the following: |
- | Authorization is obtained from Banco de México to amortize the Subordinated Additional Tier I Capital Notes early; |
- | If Banco Santander México maintains its total capitalization ratio equal to or greater than that required by the CNBV plus the corresponding capital supplements; or if |
- | Replace the instrument with other financial instruments. |
F-139
d) Reconciliation of liabilities arising from financing activities
The table below details changes in the Bank’s liabilities arising from financing activities, including both cash and non-cash changes. Liabilities arising from financing activities are those for which cash flows were, or future cash flows will be, classified in the consolidated statement of cash flows as cash flows from financing activities.
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | Non-cash changes | | | | ||||||
| | | January 1, 2021 | | | Cash flows | | | Accrued | | | Transaction | | | Foreign exchange | | | December 31, 2021 |
Type | | | | | | | |
| interest | | | costs | | | movements | | | |
| | | | | | | | | | | | | | | | | | |
Subordinated Additional Tier I Capital Notes | |
| — | | | 13,930 | |
| — | | | — | | | 425 | | | 14,355 |
Subordinated Additional Tier I Capital Notes | |
| 9,948 | |
| — | |
| — | | | 6 | | | 300 | | | 10,254 |
Tier II Subordinated Capital Notes | |
| 26,234 | |
| (1,586) | |
| 1,576 | | | 10 | | | 800 | |
| 27,034 |
Balances at | |
| 36,182 | |
| 12,344 | |
| 1,576 | | | 16 | | | 1,525 | |
| 51,643 |
As of December 31, 2021, the Bank paid 1,073 million pesos related to interests on the Subordinated Additional Tier I Capital Notes, which were recognized against Accumulated reserves within Shareholders’ equity in the consolidated balance sheet.
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | Non-cash changes | | | | ||||||
| | | January 1, 2022 | | | Cash flows | | | Accrued | | | Transaction | | | Foreign exchange | | | December 31, 2022 |
Type | | | | | | | |
| interest | | | costs | | | movements | | | |
| | | | | | | | | | | | | | | | | | |
Subordinated Additional Tier I Capital Notes | | | 14,355 | | | — | |
| — | | | — | | | (699) | | | 13,656 |
Subordinated Additional Tier I Capital Notes | |
| 10,254 | |
| (10,251) | |
| — | | | — | | | (3) | | | — |
Tier II Subordinated Capital Notes | |
| 27,034 | |
| (1,548) | |
| 1,550 | | | 11 | | | (1,319) | |
| 25,728 |
Balances at | |
| 51,643 | |
| (11,799) | |
| 1,550 | | | 11 | | | (2,021) | |
| 39,384 |
As of December 31, 2022, the Bank paid 919 million pesos related to interests on the Subordinated Additional Tier I Capital Notes, which were recognized against Accumulated reserves within Shareholders’ equity in the consolidated balance sheet.
23. Other financial liabilities
The breakdown of Other financial liabilities is as follows:
| | | | | | |
|
|
| 12/31/2021 |
|
| 12/31/2022 |
| | | | | | |
Trade payables | |
| 1,388 | |
| 966 |
Collection accounts: | |
|
| |
|
|
Taxes payable | |
| 1,210 | |
| 1,367 |
Financial transactions pending settlement | |
| 10,504 | |
| 10,898 |
Other financial liabilities | |
| 4,136 | |
| 6,242 |
| |
| 17,238 | |
| 19,473 |
Note 45.a includes a breakdown of the remaining maturity periods of Other financial liabilities. In addition, Note 45.d contains the fair value amounts of these liabilities.
F-140
The breakdown of Financial transactions pending settlement is as follows:
| | | | | | |
|
|
| 12/31/2021 |
|
| 12/31/2022 |
| | | | | | |
Mexican government securities | |
| 6,217 | |
| 10,280 |
CETES | | | 2,426 | | | 491 |
UDIBONDS | | | 1,861 | | | 102 |
Equity instruments | |
| — | |
| 25 |
| |
| 10,504 | |
| 10,898 |
The breakdown of Other financial liabilities is as follows:
| | | | | | |
|
|
| 12/31/2021 |
|
| 12/31/2022 |
| | | | | | |
Retentions related to loans (*) | |
| 2,479 | |
| 2,385 |
Other payable account | |
| 1,657 | |
| 3,857 |
| |
| 4,136 | |
| 6,242 |
(*) | These amounts correspond to temporary retention accounts for customers that have their payroll deposits with the Bank and to whom the Bank has granted a loan. |
24. Provisions
a) Breakdown
The breakdown of Provisions is as follows:
| | | | | | |
|
|
| 12/31/2021 |
|
| 12/31/2022 |
| | | | | | |
Provisions for pensions and similar obligations | | | 7,499 | | | 8,158 |
Provisions for tax and legal matters | | | 2,141 | | | 3,009 |
Provisions for off-balance sheet risk | |
| 1,108 | |
| 1,539 |
Other provisions | |
| 41 | |
| 225 |
| |
| 10,789 | |
| 12,931 |
F-141
b) Changes
The changes in Provisions were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | 2020 | | | 2021 | | | 2022 |
| ||||||||||||||||||||||||||||||||||||
|
|
| Provisions | |
| |
|
| Provisions | |
| |
|
| |
|
| Provisions | |
| Provisions | |
| Provisions | |
| |
|
| |
|
| Provisions | |
| Provisions | |
| Provisions | |
| |
|
| |
|
| | | for Pensions | | | Provisions | | | for Off- | | | | | | | | | for Pensions | | | for Tax and | | | for Off- | | | | | | | | | for Pensions | | | for Tax and | | | for Off- | | | | | | |
|
| | | and Similar | | | for Tax and | | | Balance- | | | Other | | | | | | and Similar | | | Legal | | | Balance- | | | Other | | | | | | and Similar | | | Legal | | | Balance- | | | Other | | | |
|
| | | Obligations | | | Legal Matters | | | Sheet Risk | | | Provisions | | | Total | | | Obligations | | | Matters | | | Sheet Risk | | | Provisions | | | Total | | | Obligations | | | Matters | | | Sheet Risk | | | Provisions | | | Total |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Balance at the beginning of year | | | 6,406 | | | 1,558 | | | 1,075 | | | 65 | | | 9,104 | | | 7,433 | | | 1,898 | | | 1,232 | | | 41 | | | 10,604 | | | 7,499 | | | 2,141 | | | 1,108 | | | 41 | | | 10,789 | |
Additions charged (credited) to net income: | |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Interest expense and similar charges | |
| 442 | |
| — | |
| — | |
| — | |
| 442 | |
| 475 | |
| — | |
| — | |
| — | |
| 475 | |
| 569 | |
| — | |
| — | |
| — | |
| 569 | |
Personnel expenses – Defined Benefit Plan | |
| 273 | |
| — | |
| — | |
| — | |
| 273 | |
| 260 | |
| — | |
| — | |
| — | |
| 260 | |
| 222 | |
| — | |
| — | |
| — | |
| 222 | |
Personnel expenses – Defined Contribution Plan (Note 42) | |
| 488 | |
| — | |
| — | |
| — | |
| 488 | |
| 483 | |
| — | |
| — | |
| — | |
| 483 | |
| 555 | |
| — | |
| — | |
| — | |
| 555 | |
Other | |
| 256 | |
| — | |
| — | |
| — | |
| 256 | |
| 252 | |
| — | |
| — | |
| — | |
| 252 | |
| 251 | |
| — | |
| — | |
| — | |
| 251 | |
Actuarial (gains)/losses recognized in the year in other comprehensive income | |
| 995 | |
| — | |
| — | |
| — | |
| 995 | |
| 79 | |
| — | |
| — | |
| — | |
| 79 | |
| 483 | |
| — | |
| — | |
| — | |
| 483 | |
Period provisions | |
| — | |
| 586 | | | 157 | | | (20) | |
| 723 | |
| — | |
| 295 | | | (124) | | | — | |
| 171 | |
| — | |
| 1,069 | | | 431 | | | 184 | |
| 1,684 | |
Contributions from the employer | |
| — | |
| — | |
| — | |
| — | |
| — | |
| — | |
| — | |
| — | |
| — | |
| — | |
| — | |
| — | |
| — | |
| — | |
| — | |
Payments to pensioners and pre-retirees with a charge to internal provisions | |
| (881) | |
| — | |
| — | |
| — | |
| (881) | |
| (921) | |
| — | |
| — | |
| — | |
| (921) | |
| (901) | |
| — | |
| — | |
| — | |
| (901) | |
Other payments | |
| — | |
| (246) | |
| — | |
| — | |
| (246) | |
| — | |
| (52) | |
| — | |
| — | |
| (52) | |
| — | |
| (201) | |
| — | |
| — | |
| (201) | |
Payments to Defined Contribution Plan | |
| (475) | |
| — | |
| — | |
| — | |
| (475) | |
| (468) | |
| — | |
| — | |
| — | |
| (468) | |
| (206) | |
| — | |
| — | |
| — | |
| (206) | |
Recognition of pension obligations from acquisition of Santander Tecnología México | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Transfers and other changes | |
| (71) | |
| — | |
| — | |
| (4) | |
| (75) | |
| (94) | |
| — | |
| — | |
| — | |
| (94) | |
| (314) | |
| — | |
| — | |
| — | |
| (314) | |
Balances at the end of year | |
| 7,433 | |
| 1,898 | |
| 1,232 | |
| 41 | |
| 10,604 | |
| 7,499 | |
| 2,141 | |
| 1,108 | |
| 41 | |
| 10,789 | |
| 8,158 | |
| 3,009 | |
| 1,539 | |
| 225 | |
| 12,931 | |
F-142
c) Provisions for pensions and similar obligations
Defined contribution plan
The Bank sponsors a defined contribution retirement benefit plan for all qualifying employees whereby the Bank agrees to contribute pre-established cash amounts to a given investment fund, in which the employee’s benefits consist of the sum of such contributions, plus or minus the gains or losses from the management of such funds of those employees who form part of this defined contribution retirement benefit plan. The qualifying employees are those who began working for the Bank after 2006. The retirement age is 65 years.
The assets of the plan are held separately from those of the Bank in funds under the control of trustees.
The Bank recognized as Administrative expenses – Personnel expenses in the consolidated income statement the amounts of 488 million pesos, 483 million pesos and 555 million pesos in 2020, 2021 and 2022, respectively (see Note 42), related to contributions payable to the defined contribution retirement benefit plan.
Defined benefit plan
According to Mexican Labor Law, the Bank is liable for severance payments for employees who are terminated by the Bank and seniority premiums, which are statutory retirement benefits. In addition, the Bank offers a defined benefit pension plan and other post-retirement benefits agreed under a collective bargaining agreement. The defined benefit plans are administered in a pension fund that is legally separated from the Bank. The trustee of the pension fund is required by law to act in the best interests of the plan participants and is responsible for setting certain policies (e.g. investment, contribution and indexation policies) of the fund.
During the year, the Bank estimates and recognizes the net periodic cost to create a provision that covers the net projected obligation from pensions, medical expenses, seniority premiums and severance payments. These estimates are related to the obligations derived from Mexican Labor Law, as well as the obligations derived from the collective bargaining agreement. Therefore, the liability is accrued at the present value of future cash flows required to settle the obligation from benefits projected to the estimated retirement date of the Bank’s employees calculated based on the projected unit credit method.
The plans typically expose the Bank to actuarial risks such as investment risk, interest rate risk, longevity risk and salary risk.
| |
Investment risk | The present value of the defined benefit plan liability is calculated using a discount rate determined by reference to Mexican government bond yields; if the return on plan asset is below this rate, it will create a plan deficit. Currently the plan has a relatively balanced investment in debt instruments and equity securities. Due to the long-term nature of the plan liabilities, the board of the pension fund considers it appropriate that a reasonable portion of the plan assets should be invested in equity securities to leverage the return generated by the fund. |
Interest risk | A decrease in the bond interest rate will increase the plan liability; however, this will be partially offset by an increase in the return on the plan’s debt investments. |
Longevity risk | The present value of the defined benefit plan liability is calculated by reference to the best estimate of the mortality of plan participants both during and after their employment. An increase in the life expectancy of the plan participants will increase the plan’s liability. |
Salary risk | The present value of the defined benefit plan liability is calculated by reference to the future salaries of plan participants. As such, an increase in the salary of the plan participants will increase the plan’s liability. |
Provisions for defined benefit post-employment plan, which benefits include a pension and medical expenses plan, severance payments and seniority premiums, amounted to 7,393 million pesos and 8,088 million pesos As of December 31, 2021 and 2022, respectively.
F-143
The investment fund of the defined benefit post-employment plan was 1,943 million pesos and 1,680 million pesos as of December 31, 2021 and 2022, respectively. Investments are well diversified, such that the failure of any single investment would not have a material impact on the overall level of assets. Plan assets in 2021 and 2022 consist of debt and equity instruments. The Bank believes that equities offer the best returns over the long-term with an acceptable level of risk.
Prior to January 1, 2006, the Bank offered a defined benefit medical expenses plan to all eligible employees (and their families) that upon retirement provided for the payment of 100% of medical expenses due to illness or accidents. Under this medical expenses plan, the Bank accrues the estimated medical expenses based upon actuarial calculations during the period of employment up to the date of retirement.
Beginning on January 1, 2006, the Bank introduced a new defined contribution medical expenses plan referred to as the “Retirement Medical Coverage Plan”. All individuals employed after January 1, 2006 were automatically enrolled in this plan. Employees with more than six months of service as of January 1, 2006 were given the option of remaining under the defined benefit medical expenses plan or to be transferred to the “Retirement Medical Coverage Plan”. Under the “Retirement Medical Coverage Plan”, the Bank pays pre-established cash amounts to a given investment fund. An employee’s benefit consists of the sum of such contributions, plus or minus the gains or losses from the management of such funds.
As of December 31, 2021 and 2022, approximately 0.5% of the Bank’s employees were enrolled still in the defined benefit pension plan while the rest of the employees were enrolled in the defined contribution pension plan.
As of December 31, 2021 and 2022, approximately 73% and 81% of the Bank’s employees enrolled in the defined contribution pension plan have been included in the “Retirement Medical Coverage Plan”. Employees that start working for the Bank on August 16, 2014 and later, do not have the option to be enrolled in the “Retirement Medical Coverage Plan” because they are registered in the Mexican Institute of Social Security (Instituto Mexicano del Seguro Social, or IMSS by its Spanish acronym) as their medical coverage. In addition, they have a medical insurance provided by the Bank that covers its major medical expenses.
The breakdown of Provisions for pensions and similar obligations is as follows:
| | | | | | |
|
|
| 12/31/2021 |
|
| 12/31/2022 |
| | | | | | |
Provisions for post-employment plans | |
|
| |
|
|
Of which: Defined benefit pension plan | |
| 7,393 | |
| 8,088 |
Provisions for defined contribution pension plan | |
| 106 | |
| 70 |
| |
| 7,499 | |
| 8,158 |
The amount of the defined benefit obligations was determined using the following actuarial techniques:
1. | Valuation method: projected unit credit method, which sees each period of service as giving rise to an additional unit of benefit entitlement and measures each unit separately. |
F-144
2. | Actuarial assumptions used: The most significant actuarial assumptions used in the calculations were as follows: |
| | | | | | | |
| | | Defined Benefit Pension Plan | ||||
|
|
| 12/31/2021 |
|
| 12/31/2022 | |
| | | | | | | |
Annual discount rate | |
| 8.0 | % |
| 9.0 | % |
Mortality tables | |
| EMSSA 2009 (Gen) | |
| EMSSA 2009 (Gen) | |
Expected return on plan assets | |
| 8.0 | % |
| 9.0 | % |
Cumulative annual INPC growth | |
| 3.5 | % |
| 3.5 | % |
Annual salary increase rate | |
| 4.5 | % |
| 4.5 | % |
Annual minimum salary increase rate | |
| 3.5 | % |
| 3.5 | % |
Medical cost trend rates | |
| 6.0 | % |
| 6.0 | % |
The determination of the discount rate considers the term and performance of Mexican government bonds.
3. | The estimated retirement age of each employee is the first year in which the employee is entitled to retire or the agreed-upon age, as appropriate. The retirement age is 65 years. |
The funding status of the defined benefit obligations is as follows:
| | | | | | | |
| | | Defined Benefit | | |||
| | | Pension Plan | | |||
|
|
| 12/31/2021 |
|
| 12/31/2022 |
|
| | | | | | | |
Present value of the obligations: | |
|
| |
|
| |
Pension plan | |
| 2,447 | |
| 2,326 | |
Post-employment benefits | |
| 6,153 | |
| 6,646 | |
Long-term benefits | |
| 736 | |
| 796 | |
| |
| 9,336 | |
| 9,768 | |
Less: | |
|
| |
|
| |
Fair value of plan assets | |
| (1,943) | |
| (1,680) | |
| | | | | | | |
Provisions – Provisions for pensions | |
| 7,393 | |
| 8,088 | |
Of which: | |
|
| |
|
| |
Internal provisions for pensions | |
| 7,393 | |
| 8,088 | |
The amounts recognized in the consolidated income statement in relation to the aforementioned defined benefit obligations are as follows:
| | | | | | | | | | |
| | | Defined Benefit | | ||||||
| | | Pension Plan | | ||||||
|
|
| 2020 |
|
| 2021 |
|
| 2022 |
|
| | | | | | | | | | |
Current service cost | |
| 273 | |
| 260 | |
| 222 | |
Interest cost (net) | |
| 442 | |
| 475 | |
| 569 | |
Other | |
| 256 | |
| 252 | |
| 251 | |
| |
| 971 | |
| 987 | |
| 1,042 | |
F-145
The changes in the present value of the accrued defined benefit obligations were as follows:
| | | | | | | |
| | | Defined Benefit | | |||
| | | Pension Plans | | |||
|
|
| 2021 |
|
| 2022 |
|
| | | | | | | |
Present value of the obligations at the beginning of year | |
| 9,528 | |
| 9,336 | |
Current service cost (Note 42) | |
| 260 | |
| 222 | |
Interest cost | |
| 613 | |
| 713 | |
Benefits paid | |
| (1,116) | |
| (1,107) | |
Actuarial (gains)/losses | |
| 146 | |
| 604 | |
Personnel transfer | | | (95) | | | — | |
Other | |
| — | |
| — | |
Present value of the obligations at the end of year | |
| 9,336 | |
| 9,768 | |
The changes in the fair value of plan assets were as follows:
| | | | | | | |
| | | Defined Benefit | | |||
| | | Pension Plan | | |||
|
|
| 2021 |
|
| 2022 |
|
| | | | | | | |
Fair value of plan assets at the beginning of year | |
| 2,186 | |
| 1,943 | |
Actual return on plan assets | |
| (48) | |
| 14 | |
Transfer of funds to defined contribution plan | |
| — | |
| (71) | |
Benefits paid | |
| (195) | |
| (206) | |
Fair value of plan assets at the end of year | |
| 1,943 | |
| 1,680 | |
The fair value of the plan assets is determined based on quoted market prices in active markets.
The major categories of plan assets as a percentage over the total plan assets are as follows:
| | | | | | | |
| | | Defined Benefit | ||||
| | | Pension Plan | ||||
|
|
| 12/31/2021 |
|
| 12/31/2022 | |
| | | | | | | |
Equity instruments | |
| 35 | % |
| 38 | % |
Cash and debt instruments | |
| 65 | % |
| 62 | % |
The fair value measurement of the financial instruments that comprises the plan assets is categorized as Level 1 since the inputs to the fair value measurement are quoted market prices in active markets.
Sensitivity analysis
Significant actuarial assumptions for the determination of the defined benefit obligation are discount rate, medical cost trend rate, annual salary increase, annual INPC growth and mortality. The sensitivity analyses below have been determined based on reasonably possible changes of the respective assumptions occurring at the end of the reporting period, while holding all other assumptions constant.
● | If the discount rate were fifty basis points higher (lower), the defined benefit obligation would decrease by 430 million pesos (increase by 473 million pesos). |
● | If the medical cost trend rate were fifty basis points higher (lower), the defined benefit obligation would increase by 231 million pesos (decrease by 210 million pesos). |
F-146
● | If the annual salary growth increases (decreases) by 0.50%, the defined benefit obligation would increase by 13 million pesos (decrease by 12 million pesos). |
● | If the annual INPC growth increases (decreases) by 0.50%, the defined benefit obligation would increase by 14 million pesos (decrease by 14 million pesos). |
● | If the mortality increases (decreases) by two years for men and women, the defined benefit obligation would decrease by 61 million pesos (increase by 58 million pesos). |
The sensitivity analysis presented above may not be representative of the actual change in the defined benefit obligation as it is unlikely that the change in assumptions would occur in isolation of one another as some of the assumptions may be correlated.
Furthermore, in presenting the above sensitivity analysis, the present value of the defined benefit obligation has been calculated using the projected unit credit method at the end of the reporting period, which is the same as that applied in calculating the defined benefit obligation recognized in the consolidated balance sheet.
d) Other disclosures
Insurance operation agreement
In July 2001, the Bank entered into a collective lifetime payment insurance operation agreement for certain retirees with Principal México Compañía de Seguros, S.A. de C.V. (Principal). Such agreement establishes that with the payment of the single premium by the Bank, Principal commits to paying insured retirees a lifetime payment until the death of the last insured retiree.
Under such agreement, these insured persons would not affect the Bank’s net worth in the future, since the risks were transferred to Principal. However, in order to recognize the Bank’s legal obligation to its retirees in the consolidated balance sheet, the Bank recognizes the projected benefit obligation of the insured retirees surrendered to Principal under Provisions - Provisions for pensions and similar obligations, and a long-term account receivable with Principal, which is recognized also under Provisions - Provisions for pensions and similar obligations for the funds that it transferred thereto. The amount of the projected benefits obligation was calculated at the close of the year based on the estimates used for labor liabilities and the remaining personnel. As of December 31, 2021 and 2022, such liability was 723 and 696 million pesos, respectively. For presentation purposes, the arrangement has not impact on net assets as the asset and liability are offset.
e) Provisions for tax and legal matters
i. Tax-related proceedings
The Bank is a party to various tax claims for which it has recognized total provisions of 424 million pesos and 239 million pesos as of December 31, 2021 and 2022, respectively.
ii. Other tax issues
The Bank operated until December 31, 2018 a branch in Nassau, Bahamas through which it carried out tax-free operations principally involving financial derivative instruments. The Mexican Tax Administration Service (Servicio de Administración Tributaria) reviewed the operations of the Nassau branch and determined that the Bank is liable for Mexican withholding taxes. During December 2009, the Bank negotiated a settlement with the Mexican Tax Administration Service for cumulative back withholding taxes on transactions carried out from 2004 through 2009. The Bank made settlement payments of 1 million pesos in 2020, 1 million pesos in 2021 and 1 million pesos in 2022.
F-147
iii. Non-tax-related proceedings
As of December 31, 2021 and 2022, the Bank has recognized provisions for the amounts of 1,443 million pesos and 2,557 million pesos, respectively, which are based on the opinion of internal and external legal advisers; Bank’s Management has assessed losses to be probable. Bank’s Management considers such provisions adequate and, based on its best estimates, does not believe that actual losses will vary materially from the recognized provisions.
Additionally, during 2012 the daughters of Mr. Roberto Garza Sada, María del Carmen, Gabriela and Viviana Garza Delgado (Mrs. Garza Delgado), filed a lawsuit against the Bank, the Group and others (the defendants) arguing that the defendants acted negligently as trustee of a trust. The trust assets consisted of shares of Alfa, S.A.B. de C.V. (Alfa), the same ones that were delivered during 1999 in accordance with the instructions established by Mr. Roberto Garza in the trust agreement. Mrs. Garza Delgado believe that their rights were violated, alleging that the transfer of Alfa's shares was not valid.
In March 2017, the defendants obtained a favorable first instance resolution, acquitting them of any obligation, which was confirmed by judgment in April 2018. However, a legal support was granted in favor of Mrs. Garza Delgado, ordering Banco Santander México to deliver the Alfa shares as well as pay damages, dividends and other losses. Banco Santander México has filed various constitutional review and complaint appeals against the previously mentioned writ of legal support, which have been dismissed and inadmissible by the National Supreme Court of Justice. As of today, a review presented by the Bank is pending in the Collegiate Courts based in the state of Nuevo León.
Due to the current situation of the judicial procedure, Bank’s Management has recognized a provision to cover the risk originated by this claim in its consolidated financial statements as of December 31, 2022, the foregoing in accordance with the provisions of IAS 37. However, the amount of cash outflows and their settlement date is uncertain and any provision recognized does not constitute an admission of wrongdoing or legal liability on the part of the Bank. Banco Santander México will continue to vigorously defend its case with additional legal actions and resources before all the corresponding instances.
The total amount of payments made by the Bank arising from litigation in 2020, 2021 and 2022 are not material with respect to the consolidated financial statements.
f) Provisions for off-balance sheet risk
The Provisions for off-balance sheet risk are estimated with the same methodology used for calculating the allowance for impairment of losses. Refer to Note 2.g above for further description.
F-148
The breakdown of the off-balance sheet risks is as follows:
| | | | | | |
|
|
| 12/31/2021 |
|
| 12/31/2022 |
| | | | | | |
Available lines of credit cards and non-revolving consumer loans | |
| 941 | |
| 1,301 |
Guarantees and loan commitments of commercial and public sector loans | |
| 167 | |
| 238 |
| |
| 1,108 | |
| 1,539 |
As of December 31, 2022, the breakdown of the Provisions for off-balance sheet risks by stages is as follows:
| | | | | | | | | | | | |
| | Provision for off-balance sheet risk | ||||||||||
| | | Stage 1 | | | Stage 2 | | | Stage 3 | | | Total |
| | | | | | | | | | | | |
Available lines of credit cards and non-revolving consumer loans | |
| 1,140 | | | 150 | | | 11 | |
| 1,301 |
| | | | | | | | | | | | |
Guarantees, documentary credits and loan commitments of commercial loans of small and medium-sized enterprises | | | 23 | | | 52 | | | 163 | | | 238 |
| | | | | | | | | | | | |
Total | | | 1,163 | | | 202 | | | 174 | | | 1,539 |
As of December 31, 2022, the transfers between stages of the Provisions for off-balance sheet risks is as follows:
| | | | | | | | | | | | |
| | Provision for off-balance sheet risk | ||||||||||
| | | Stage 1 | | | Stage 2 | | | Stage 3 | | | Total |
| | | | | | | | | | | | |
As of January 1, 2022: | | | 921 | | | 109 | | | 78 | | | 1,108 |
| | | | | | | | | | | | |
Financial assets derecognized during the period other than write-offs | | | (91) | | | (13) | | | (62) | | | (166) |
Write-offs | | | (40) | | | (28) | | | (5) | | | (73) |
Originated financial assets | | | 458 | | | 42 | | | 119 | | | 619 |
Foreign exchange and other movements | | | (85) | | | 92 | | | 44 | | | 51 |
| | | | | | | | | | | | |
As of December 31, 2022 | | | 1,163 | | | 202 | | | 174 | | | 1,539 |
25. Other liabilities
The breakdown of Other liabilities is as follows:
| | | | | | |
|
|
| 12/31/2021 |
|
| 12/31/2022 |
| | | | | | |
Sundry creditors | |
| 9,433 | |
| 13,736 |
Cash balances undrawn | |
| 127 | |
| 373 |
Accrued personnel obligations | |
| 4,059 | |
| 4,222 |
Other obligations | |
| 3,421 | |
| 3,077 |
Credit and debit card operation balances | |
| 2,838 | |
| 3,267 |
| |
| 19,878 | |
| 24,675 |
F-149
26. Tax matters
a) Income tax
The components of Income tax expense for 2020, 2021 and 2022 are as follows:
| | | | | | | | | |
|
|
| 2020 |
|
| 2021 |
|
| 2022 |
| | | | | | | | | |
Current income tax expense: | |
|
| |
|
| |
|
|
Tax expense for current year | |
| 7,496 | |
| 3,777 | |
| 12,162 |
Deferred income tax expense (benefit): | |
|
| |
|
| |
|
|
Origination and reversal of temporary difference and usage (accrual) of tax carryforward benefits | |
| (1,270) | |
| 1,189 | |
| (3,998) |
Total Income tax | |
| 6,226 | |
| 4,966 | |
| 8,164 |
b) Income tax reconciliation
The reconciliation of the income tax calculated at the corporate income tax rate of 30% to the income tax recognized and the breakdown of the effective tax rate are as follows:
| | | | | | | | | | |
|
|
| 2020 |
|
| 2021 |
|
| 2022 | |
| | | | | | | | | | |
Profit before tax | |
| 25,200 | |
| 25,767 | |
| 32,272 | |
| | | | | | | | | | |
Income tax at 30% | |
| 7,560 | |
| 7,730 | |
| 9,682 | |
| | | | | | | | | | |
Increase/(Decrease) due to permanent differences | |
|
| |
|
| |
|
| |
Of which: | |
|
| |
|
| |
|
| |
Due to effect of inflation | |
| (1,126) | |
| (2,775) | |
| (3,023) | |
Due to effect of tangible assets | |
| (116) | |
| (243) | |
| (387) | |
Due to effect of non-deductible expenses, non-taxable income and others | |
| (92) | |
| 254 | |
| 1,892 | |
Income Tax | |
| 6,226 | |
| 4,966 | |
| 8,164 | |
| | | | | | | | | | |
Effective tax rate | |
| 24.71 | % |
| 19.27 | % |
| 25.30 | % |
Current tax liability | |
| — | |
| — | |
| — | |
| | | | | | | | | | |
Income tax | |
| 6,226 | |
| 4,966 | |
| 8,164 | |
Of which: | |
|
| |
|
| |
|
| |
Current | |
| 7,496 | |
| 3,777 | |
| 12,162 | |
Deferred | |
| (1,270) | |
| 1,189 | |
| (3,998) | |
The Bank is subject to regular reviews by the Mexican Tax Administration Service (Servicio de Administración Tributaria). As of December 31, 2022, there are no material tax contingencies.
F-150
c) Tax recognized in consolidated total equity
In addition to the income tax recognized in the consolidated income statement, the Bank recognized the following amounts in consolidated total equity:
| | | | | | | | | | |
|
|
| 2020 |
|
| 2021 |
|
| 2022 |
|
| | | | | | | | | | |
Net tax credited/(charged) to consolidated total equity: | |
|
| |
|
| |
|
| |
Remeasurement of defined benefit obligation | |
| 264 | |
| 16 | |
| 149 | |
Measurement of Financial assets at fair value through other comprehensive income – Debt instruments | | | (1,056) | | | 1,402 | | | 2,210 | |
Measurement of financial derivatives (Cash flow hedges) | | | 126 | | | (422) | | | 365 | |
Paid interests on Subordinated Additional Tier I Capital Notes | | | 290 | | | — | | | 276 | |
| |
| (376) | |
| 996 | |
| 3,000 | |
d) Deferred tax assets and liabilities
Main components of the Bank’s gross deferred tax assets and liabilities are as follows:
| | | | | | | |
|
|
| 12/31/2021 |
|
| 12/31/2022 |
|
| | | | | | | |
Total deferred tax assets prior to offsetting | |
| 19,295 | |
| 26,719 | |
Of which: | |
|
| |
|
| |
Tangible assets and deferred charges | |
| 2,288 | |
| 2,902 | |
Provisions | |
| 2,444 | |
| 2,305 | |
Impairment losses on financial assets at amortized cost | | | 8,620 | | | 11,971 | |
Valuation of financial instruments | | | — | | | 2,908 | |
Net operating losses carryforward (*) | | | 1 | | | — | |
Capital losses carryforward (*) | |
| 2,333 | |
| 2,129 | |
Labor provisions | |
| 1,238 | |
| 1,482 | |
Fees and interest collected in advance | |
| 1,299 | |
| 2,703 | |
Foreign exchange rate financial derivatives | |
| 1,072 | |
| 319 | |
Total deferred tax liabilities prior to offsetting | |
| (1,690) | |
| (2,270) | |
Of which: | |
|
| |
|
| |
Unrealized gains on financial instruments | |
| (517) | |
| — | |
Prepayments | |
| (1,022) | |
| (1,188) | |
Labor provisions | | | — | | | (738) | |
Other | |
| (151) | |
| (344) | |
(*) | The net operating losses carryforward and the capital losses carryforward can be deducted during the ten-year period following the fiscal year in which the net operating loss and the capital loss were originated. |
F-151
As of December 31, 2022, the detail of capital losses carryforward is as follows:
| | | | | | | | | |
Year of origination |
|
| Year of expiration |
|
| Amount |
|
| Deferred tax asset |
| | | | | | | | | |
2018 | |
| 2028 | |
| 1,646 | | | 494 |
2019 | | | 2029 | |
| 1,975 | | | 592 |
2020 | | | 2030 | |
| 1,934 | | | 580 |
2021 | | | 2031 | | | 782 | | | 235 |
2022 | | | 2032 | | | 762 | | | 229 |
| |
|
| |
| 7,097 | |
| 2,129 |
The Bank only recognizes deferred tax assets for temporary differences and tax credit carryforward where it is considered probable that the consolidated entities that generated them will have sufficient future taxable profits against which they can be utilized.
After offsetting, deferred tax assets and liabilities are presented in the consolidated balance sheet as follows:
| | | | | | | |
|
|
| 12/31/2021 |
|
| 12/31/2022 |
|
| | | | | | | |
Presented as deferred tax assets | |
| 18,111 | |
| 24,662 | |
Presented as deferred tax liabilities | |
| (506) | |
| (213) | |
Net | |
| 17,605 | |
| 24,449 | |
Deferred tax assets represent the deferred tax asset whose realization is dependent on future taxable profits in excess of the profits arising from the reversal of existing taxable temporary differences. Bank’s Management has concluded that the realization of such assets is probable based on the Bank’s history of generating sufficient taxable income to utilize all available tax benefits.
The change in the balance of deferred tax assets and deferred tax liabilities does not equal the deferred income tax expense/(benefit). This is due to deferred taxes that are recognized directly in consolidated total equity.
The changes in the total deferred tax assets and liabilities, prior to offsetting, in the last two years were as follows:
| | | | | | | | | | | | | | | | |
|
|
| |
|
| |
|
| (Charge)/ |
| |
|
| |
| |
| | | | | | | | | Credit to | | | | | | | |
| | | | | | | | | Consolidated | | | | | | | |
| | | | | | (Charge)/ Credit to | | | Other | | | | | | | |
| | | | | | Consolidated | | | Comprehensive | | Other | | | | | |
| | | 01/01/2021 | | | Income | | | Income | | Movements | | | 12/31/2021 | | |
| | | | | | | | | | | | | | | | |
Deferred tax assets | |
| 21,340 | |
| (1,116) | |
| (602) | |
| (327) | |
| 19,295 | |
Deferred tax liabilities | |
| (3,440) | |
| (73) | |
| 1,598 | |
| 225 | |
| (1,690) | |
| |
| 17,900 | |
| (1,189) | |
| 996 | |
| (102) | |
| 17,605 | |
F-152
| | | | | | | | | | | | | | | | |
|
|
| |
|
| |
|
| (Charge)/ | |
| |
|
| |
|
| | | | | | | | | Credit to | | | | | | | |
| | | | | | | | | Consolidated | | | | | | | |
| | | | | | (Charge)/ Credit to | | | Other | | | | | | | |
| | | | | | Consolidated | | | Comprehensive | | | Other | | | | |
| | | 01/01/2022 | | | Income | | | Income | | | Movements | | | 12/31/2022 | |
| | | | | | | | | | | | | | | | |
Deferred tax assets | |
| 19,295 | |
| 5,229 | |
| 2,399 | |
| (204) | |
| 26,719 | |
Deferred tax liabilities | |
| (1,690) | |
| (1,231) | |
| 601 | |
| 50 | |
| (2,270) | |
| |
| 17,605 | |
| 3,998 | |
| 3,000 | |
| (154) | |
| 24,449 | |
27. Non-controlling interests
Non-controlling interests include the net amount of the equity of subsidiaries attributable to equity instruments that do not belong, directly or indirectly, to the Bank, including the portion attributed to them of profit for the year.
a) Breakdown
The breakdown by subsidiary of Equity - Non-controlling interests is as follows:
| | | | | | |
|
|
| 12/31/2021 |
|
| 12/31/2022 |
| | | | | | |
Equity as of balance-sheet date attributable to non-controlling interests: | |
|
| |
|
|
Of which: | |
|
| |
|
|
Fideicomiso GFSSLPT, Banco Santander México, S.A. | | | 37 | | | 51 |
Other | |
| 11 | |
| 11 |
| |
| 48 | |
| 62 |
Profit for the year attributable to non-controlling interests: | |
|
| |
|
|
Of which: | |
|
| |
|
|
Fideicomiso GFSSLPT, Banco Santander México, S.A. | | | — | | | — |
| |
| | |
| |
b) Changes
The changes in Non-controlling interests are summarized as follows:
| | | | | | |
|
|
| 2021 |
|
| 2022 |
| | | | | | |
Beginning balance | |
| 37 | |
| 48 |
Profit for the year attributable to non-controlling interests | | | — | | | — |
Other | |
| 11 | |
| 14 |
Balance at year-end | |
| 48 | |
| 62 |
The foregoing changes are shown in the consolidated statement of changes in equity.
28. Valuation adjustments
The balance of Valuation adjustments includes the amounts, net of the related deferred income tax effect, of the adjustments to assets and liabilities recognized temporarily in consolidated total equity through other comprehensive income. The amounts arising from subsidiaries are presented, on a line-by-line basis, in the appropriate items according to their nature.
F-153
It should be noted that the consolidated statement of comprehensive income presents items separately according to their nature, grouping together those, which pursuant to the applicable IFRS, will not be subsequently reclassified to the consolidated income statement when the requirements established by the related IFRS are met.
In relation to items that may be reclassified to the consolidated income statement, the consolidated statement of comprehensive income includes changes in Valuation adjustments as follows:
a) Financial assets at fair value through other comprehensive income
Valuation adjustments – Financial assets at fair value through other comprehensive income include the net amount of unrealized gains or losses in the valuation of financial assets at fair value through other comprehensive income (see Notes 8 and 9).
The breakdown by type of financial instrument of Valuation adjustments – Financial assets at fair value through other comprehensive income at December 31, 2021 and 2022 are as follows:
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | 12/31/2021 | | | 12/31/2022 | ||||||||||||||||||
| | | | | | | | | Net | | | | | | | | | | | | Net | | | |
| | | | | | | | | Valuation | | | | | | | | | | | | Valuation | | | |
| | | Valuation | | | Valuation | | | Gains/ | | | Fair | | | Valuation | | | Valuation | | | Gains/ | | | Fair |
|
|
| Gains |
|
| Losses |
|
| (Losses) |
|
| Value |
|
| Gains |
|
| Losses |
|
| (Losses) |
|
| Value |
| | | | | | | | | | | | | | | | | | | | | | | | |
Debt instruments | |
| 1,972 | | | (8,695) | | | (6,724) | |
| 390,974 | |
| 682 | | | (7,387) | | | (6,705) | |
| 313,906 |
Loans and advances to customers | | | — | | | — | | | — | | | 4,056 | | | — | | | — | | | — | | | 946 |
Equity instruments | |
| (76) | | | — | | | (76) | | | 799 | |
| — | | | (18) | | | (18) | | | 697 |
A summary of changes in the cumulative valuation adjustments corresponding to Financial assets at fair value through other comprehensive income is as follows:
| | | | | | | | | | |
|
|
| Debt | |
| Equity | |
| |
|
| | | Instruments | | | Instruments | | | Total | |
| | | | | | | | | | |
Balance at January 1, 2021 | | | 3,925 | | | 148 | | | 4,073 | |
Valuation adjustments | |
| (6,724) | | | (76) | | | (6,800) | |
Amounts reclassified to consolidated income statement | |
| (781) | | | — | | | (781) | |
Income taxes | |
| 1,402 | | | 23 | | | 1,425 | |
Balance at December 31, 2021 | | | (2,178) | | | 95 | | | (2,083) | |
Valuation adjustments | |
| (6,705) | | | (18) | | | (6,723) | |
Amounts reclassified to consolidated income statement | |
| (113) | | | 72 | | | (41) | |
Income taxes | |
| 2,236 | | | (26) | | | 2,210 | |
Balance at December 31, 2022 | |
| (6,760) | |
| 123 | |
| (6,637) | |
b) Cash flow hedges
Valuation adjustments – Cash flow hedges include the gains or losses attributable to hedging financial derivative instruments that qualify as effective hedges. These amounts will remain under this heading until they are reclassified in the consolidated income statement in the periods in which the hedged items affect the consolidated income statement (see Note 12).
F-154
The breakdown of the accumulated gain or loss on the effective portion of the hedging to the cumulative valuation adjustment for cash flow hedges is presented as follows:
| | | | | | |
|
|
| 2021 |
|
| 2022 |
| | | | | | |
Accumulated (loss)/gain on cash flow hedges | |
| 420 | |
| (437) |
Accumulated gain related to discontinued cash flow hedges (Note 12) | |
| (6) | |
| — |
Balance at December 31, | |
| 414 | |
| (437) |
29. Shareholders’ equity
a) Share capital
As of December 31, 2021 and 2022, Share capital, at par value, was as follows:
| | | | | | | | | | | | |
| | | | | | | | | Total Par Value | |||
| | | Number of shares | | | (Millions of Pesos) | ||||||
| | | 12/31/2021 | | | 12/31/2022 | | | 12/31/2021 | | | 12/31/2022 |
| | | | | | | | | | | | |
Fixed capital: | | | | | | | | | | | | |
Series F shares | | | 3,464,309,145 | | | 3,464,309,145 | | | 13,098 | | | 13,098 |
Series B shares | | | 3,322,685,212 | | | 3,322,685,212 | | | 12,562 | | | 12,562 |
| | | 6,786,994,357 | | | 6,786,994,357 | | | 25,660 | | | 25,660 |
| | | | | | | | | | | | |
Authorized unsubscribed capital: | | | | | | | | | | | | |
Series F shares | | | 921,514,867 | | | 921,514,867 | | | — | | | — |
Series B shares | | | 883,785,133 | | | 883,785,133 | | | — | | | — |
| | | 1,805,300,000 | | | 1,805,300,000 | | | — | | | — |
| | | 8,592,294,357 | | | 8,592,294,357 | | | 25,660 | | | 25,660 |
Share capital is comprised of fixed shares, which cannot be increased and variable shares, which may be increased without limit.
Series F shares may only be acquired by the Parent company or, directly or indirectly, by Banco Santander, S.A. (Spain), except when such shares are transferred in guarantee or in ownership to the Mexican Bank Savings Protection Institute (Instituto para la Protección al Ahorro Bancario, hereinafter “IPAB”). These shares can only be sold with the prior authorization of SHCP. No authorization shall be required from such Authority and, corporate bylaws will not have to be amended when the transfer of shares is in either guarantee or ownership to the IPAB.
At all times, Series F share capital shall represent at least 51% of share capital and Series B share capital can represent up to 49% of the share capital.
Foreign governments may not direct or indirectly own any share capital Banco Santander México, except when: i) they do it temporarily as part of financial supporting or bailout; ii) they do it through official entities and iii) they do it indirectly and do not have control on Banco Santander México, pursuant Article 13 of the Credit Institutions Law. All the aforementioned exceptions must be authorized by the CNBV.
Capital reductions will incur taxation on the excess of the amount distributed against the corresponding tax value determined according to the Income Tax Law (Ley del Impuesto sobre la Renta).
F-155
As mentioned in Note 3, Banco Santander (Spain) increased its participation in Banco Santander México; after this transaction, the shareholders’ structure is as follow:
| | | | | | | |
| | Prior to exchange offer | After exchange offer | ||||
| | | | | | | |
Banco Santander (Spain) | | | 91.64% | | | 96.16% | |
Minority shareholders | | | 8.36% | | | 3.84% | |
| | | | | | | |
b) Share premium
Share premium includes the amount paid up by Banco Santander México’s shareholders in capital issues in excess of the par value.
The Mexican Corporation Law (Ley General de Sociedades Mercantiles) expressly permits the use of the share premium account balance to increase capital and does not establish any specific restrictions as to its use.
c) Accumulated reserves
Accumulated reserves include the net amount of the accumulated profit recognized in previous years in the consolidated income statement not distributed to shareholders, the legal reserve, the differences between the selling price of treasury shares and its cost of acquisition thereof and the remeasurement of the defined benefit obligation.
Dividend policy and payment of dividends
Income tax must be paid in the event that payment of dividends from profits is not previously subject to income tax. Accordingly, Banco Santander México must keep track of profits subject to each rate and maintain such accumulated profits in a Net tax profit account (Cuenta de Utilidad Fiscal Neta).
In accordance with amendments to the Income Tax Law, dividends paid from profits earned in fiscal year 2014 and thereafter by Mexican companies to Mexican resident individuals or foreign residents (including foreign corporations) are subject to an additional withholding tax of 10%. International tax treaties may apply to avoid double taxation on dividends paid to overseas shareholders.
Dividends paid by Banco Santander México to Mexican resident individuals and foreign residents in 2020, 2021 and 2022 are not subject to the 10% additional withholding tax as such dividends were paid from profits obtained prior to 2014.
Legal reserve
Banco Santander México is subject to the legal reserve provision whereby at least 10% of net profits each year must be allocated and transferred to a capital reserve fund until reaching the equivalent of 100% of the paid-in share capital. Regarding Banco Santander México’s subsidiaries, the legal reserve provision requires the creation of a legal reserve equal to 5% of net profits until reaching 20% of paid-in share capital. The legal reserve cannot be distributed to the shareholders during the existence of the aforementioned entities, except in the form of a stock dividend.
As of December 31, 2021 and 2022, Banco Santander México and its subsidiaries comply with the percentage of legal reserve required.
F-156
Treasury shares
Transactions involving own equity instruments are recognized directly in consolidated total equity, and no profit or loss may be recognized on these transactions. The costs of any transaction involving own equity instruments are deducted directly from consolidated total equity, net of any related income tax effect.
d) Other disclosures
During the Ordinary General Annual Meeting of April 28, 2020, it was decided to ratify the fund to repurchase own shares by an amount of 12,800 million pesos.
During the Extraordinary General Meeting of June 15, 2020, it was decided to increase the limit for the issuance of securities to USD 10 billion, which may be issued as any of the following:
(i) | debt issued in local or international markets; |
(ii) | senior or subordinated debt, including in both cases preferred or non-preferred financial instruments, and debt instruments that, from a regulatory point of view, are classified as capital; |
(iii) | individual issuances or through one or more programs; and |
(iv) | having a maximum period of fifteen years, or, if appropriate, the maturity determined by the Board of Directors or, where appropriate by a shareholders' meeting. |
During the Extraordinary General Meeting of September 30, 2020, it was approved to carry out the merger of Banco Santander México, as the merging entity, with Santander Vivienda, as the merged entity (see Note 3).
During the Extraordinary General Meeting of April 20, 2021, the following resolutions were adopted:
- | It was decided to issue perpetual subordinated non-preferred contingent convertible additional Tier I Capital Notes up to USD 700 million (see Note 3). |
- | It was decided to increase the share capital of Banco Santander México for 4,368 million pesos, through the issuance of 1,155,300,000 shares, with a nominal value of 3.78 pesos per share, of which 589,703,799 shares correspond to the Series F and 565,596,201 shares correspond to the Series B, which will be kept in the treasury of the Bank as authorized capital to guarantee the possible conversion of obligations into shares of the previous point. |
During the Ordinary General Annual Meeting of April 29, 2021, the following resolutions were adopted:
- | The amount of 1,494 million pesos was allocated from Accumulated reserves for the legal reserve. |
- | It was decided to ratify the fund to repurchase own shares that had been approved during the Ordinary General Annual Meeting of February 21, 2018, amounting to 12,800 million pesos. |
During the Ordinary and Extraordinary General Meeting of June 9, 2021, it was approved the amount of 3,054 million pesos from Accumulated reserves for the payment of dividends. This amount was paid to shareholders on June 18, 2021.
During the Ordinary and Extraordinary General Meeting of October 25, 2021, it was approved the amount of 1,867 million pesos from Accumulated reserves for the payment of dividends. This amount was paid to shareholders on November 5, 2021.
F-157
During the Ordinary General Annual Meeting of April 29, 2022, the following resolutions were adopted:
- | The amount of 1,260 million pesos was allocated from Accumulated reserves for the legal reserve. |
- | It was decided to ratify the fund to repurchase own shares that had been approved during the Ordinary General Annual Meeting of February 21, 2018, amounting to 12,800 million pesos. |
- | It was approved the amount of 9,040 million pesos from Accumulated reserves for the payment of dividends. This amount was paid to shareholders on June 28, 2022. |
During the Ordinary and Extraordinary General Meeting of July 19, 2022, the amount of 8,838 million pesos was allocated from Accumulated reserves for the payment of dividends. This amount was paid to shareholders on July 28, 2022.
During the Extraordinary General Meeting of November 30, 2022, the following resolutions were adopted:
- | Cancel the registration of all the shares representing the capital stock of the Bank in the National Securities Registry maintained by the CNBV and remove from the Mexican Stock Exchange, S.A.B. of C. V. |
- | It was approved the withdrawal of the ADSs from the listing on the New York Stock Exchange and the withdrawal of the Series "B" Shares representing the capital stock of the Bank and such ADSs of registration with the SEC. |
- | It was approved to be carried out the exchange offer in Mexico and the United States of America for all the Series "B" Shares representing the Bank's capital stock and the ADSs, that are issued and in circulation, and that are not owned directly or indirectly, by Banco Santander (Spain). |
30. Minimum capital requirements
Banco Santander México’s risk-weighted assets and capitalization ratios are calculated in accordance with Mexican Banking GAAP. The management of capital is performed at regulatory and economic levels.
The Bank is subject to capital adequacy requirements adopted by the CNBV which provide for a minimum ratio for operations of risk-weighted assets for credit, market and operational risk of 8%, along with: a 2.5% capital conservation buffer, a 1.20% domestic-systemically important bank supplement (in the Grade III category), and a counter-cyclical capital buffer (currently at 0.0%), that combined add up to an 11.70% capital requirement. As of December 31, 2022, the Bank maintains capital indices above regulatory levels.
Such minimum capital is determined based on the sum of the capital requirements stipulated for each aforementioned type of risk.
Net Capital
Net capital is divided into two parts: Basic Capital and Complementary Capital. Additionally, Basic Capital is divided into two portions: Fundamental Basic Capital and Non-Fundamental Basic Capital. Basic Capital (Tier I Capital) is the sum of Fundamental Basic Capital and Non-Fundamental Basic Capital.
- | Fundamental Basic Capital is composed mainly of shareholders’ equity plus other equity instruments, less, among other deductions: stock investments on financial institutions, organizational expenses, other intangibles assets, excess of deferred tax assets derived from tax losses of Tier I Capital and excess of deferred income taxes from temporary differences that exceed the 10% of Tier I Capital. |
F-158
- | Non-Fundamental Basic Capital is composed mainly of a bank’s equity instruments, which are not included as Fundamental Basic Capital according to the current legislation. |
- | Complementary Capital (Tier II Capital) is composed mainly of a bank’s equity instruments, which are not included as Basic Capital according to the current legislation, and the positive difference resulting from subtracting to the total permitted reserves, the total expected losses, up to an amount that does not exceed 0.6% of the assets subject to credit risk. |
Assets Subject to Credit Risk
Deposits, securities, loans and advances, reverse repurchase agreements, swaps, forward contracts, securities loans, options, certain financial derivative instruments and all other bank transactions exposed to credit risk in accordance with established regulations are classified in their respective risk groups and the weight factors stipulated for each group are applied, ranging from zero up to 150%, depending on the counterparty and scores determined by the ratings agencies accredited by the CNBV or by Banco Santander México in the event it is an authorized institution for the use of internal models. Counterparty risk is calculated by incorporating an add-on and calculating a CVA for OTC financial derivatives transactions.
Since September 2021, the CNBV has published new credit risk weights applicable to new loans originated since September 1 that belong to retail (mortgages and consumer) and SMEs portfolios.
Assets Subject to Market Risk
In interest bearing transactions, the capital requirement is calculated by determining the residual term of the financial asset or financial liability and by applying the corresponding Market Risk Charge Coefficient based on the residual term and currency of the financial asset or financial liability.
For those transactions, whose return is based on changes in the price of a share, basket of shares or market index, a 22.23% of General Market Risk Charge Coefficient is applied to the net position, to which additional specific market risk requirements are added for long net positions and short net positions by 8%.
For foreign currency positions, a 12% Market Risk Charge Coefficient is applied on the higher of the sum of the long net position or short net position.
For transactions linked to Mexican inflation and denominated in UDI, a capital requirement is calculated by applying a Market Risk Charge Coefficient of 1.25% over the increase of the INPC (calculated as the average of the previous twelve months) to the absolute value of the total net position.
For options and warrants, a Vega (variations on volatility) and Gamma (variations on the subjacent) capital requirement is calculated by applying the rules defined on Article 2 bis 109 of the General Provisions Applicable to Credit Institutions (Disposiciones de Carácter General Aplicables a las Instituciones de Crédito) issued by the CNBV.
For transactions linked to the annual minimum salary growth, a capital requirement is calculated by applying a Market Risk Charge Coefficient of 1.25% over the increase of the annual minimum salary growth (calculated as the average of the current month and the previous eleven months) to the absolute value of the total net position.
The equivalent assets for market risk are determined by multiplying by 12.5, the sum of the capital requirements of all the transactions described above.
F-159
Assets Subject to Risk
Since November 2016, Banco Santander México uses the Alternative Standardized Approach under Basel II standards to calculate the assets subject to operational risk. This method consists first of dividing the business into eight lines. For six of them, the capital requirement is calculated multiplying a “Beta” factor for the average net revenues for the thirty-six months prior to the month being calculated and for the two remaining (Retail and Commercial), the capital requirement is calculated by determining the average net balance for the thirty-six months prior to the month being calculated multiplied for a “Beta” factor and for 3.5. The equivalent assets for operational risk are determined by multiplying the capital requirement by 12.5.
Business Indicator Method
On November 19, 2020, the CNBV published the methodology of the Business Indicator Method (Método del Indicador de Negocio) for calculating capital requirements for operational risk considering that it is necessary for banks to have a more precise and sensitive method to the risk to which they are exposed in their operation for the purpose of determining their minimum net capital requirements for operational risk, eliminating the other methods currently in force, and at the same time, to maintain the capital framework of the Mexican financial system aligned with the international prudential standards issued by the Basel Committee on Banking Supervision. The Business Indicator Method will enter into force on January 1, 2023.
The minimum capital requirements calculated in accordance with Mexican Banking GAAP for Banco Santander México is as follows:
| | | | | | | |
|
|
| 12/31/2021 |
|
| 12/31/2022 |
|
| | | | | | | |
Computable capital: | |
| 168,616 | |
| 143,832 | |
Core capital | |
| 165,626 | |
| 165,974 | |
Supplementary capital | |
| 27,928 | |
| 26,827 | |
Deductible items | |
| (49,547) | |
| (62,625) | |
Subordinated Additional Tier I Capital Notes (see Note 22.c) | |
| 24,609 | |
| 13,656 | |
| | | | | | | |
Capital requirements: | |
| 62,564 | |
| 59,366 | |
Market risk | |
| 15,354 | |
| 14,945 | |
Credit risk | |
| 41,416 | |
| 38,123 | |
Operational risk | |
| 5,794 | |
| 6,298 | |
| | | | | | | |
Excess of capital requirements | |
| 106,052 | |
| 84,466 | |
Risk-weighted assets | |
| 782,050 | |
| 742,079 | |
As of December 31, 2021 and 2022, in accordance with the capitalization requirements applicable to full service banks, Banco Santander México has the following capitalization ratios, which exceed the minimum legal capital required by the CNBV.
F-160
The capital ratios included in this table are in accordance to the data published by the CNBV.
| | | | | | | |
|
|
| 12/31/2021 |
|
| 12/31/2022 | |
| | | | | | | |
Net Capital / Required Capital | |
| 2.70 | |
| 2.42 | |
Minimum capital requirements | |
| Not applicable | |
| Not applicable | |
| | | | | | | |
Basic Fundamental Capital / Assets subject to Credit, Market and Operating Risk | |
| 14.84 | % |
| 13.93 | % |
Minimum capital requirements | |
| 8.20 | % |
| 8.20 | % |
| | | | | | | |
Basic Capital / Assets subject to Credit, Market and Operating Risk | |
| 17.99 | % |
| 15.77 | % |
Minimum capital requirements | |
| 9.70 | % |
| 9.70 | % |
| | | | | | | |
Net Capital / Assets subject to Credit Risk | |
| 32.57 | % |
| 30.18 | % |
Minimum capital requirements | |
| Not applicable | |
| Not applicable | |
| | | | | | | |
Net Capital / Assets subject to Credit, Market and Operating Risk | |
| 21.56 | % |
| 19.38 | % |
| | | | | | | |
Minimum capital requirements | |
| 11.70 | % |
| 11.70 | % |
On June 18, 2021, the CNBV published the TLAC rule for Mexico.
The TLAC standard issued by the Financial Stability Board requires global systemically important banks (G-SIB) to have financial instruments available during resolution to absorb losses and enable them to be recapitalized to continue performing their critical functions while the resolution process is ongoing. The objective is to have an orderly resolution by making debt/equity holders absorb losses (enabling a ‘bail-in’), instead of using public funds (conducting a ‘bailout’).
The local implementation considers a capital add-on over the total capital ratio of the maximum of 6.5% of RWAs and 3.75% of the leverage ratio denominator. The TLAC requirement can only be met with capital instruments. This requirement will have a phase-in period, which starts on December 2022 with a 25% of the add-on and will increase 25% each year to reach a 100% of the add-on on December 2025.
As of December 31, 2022, the Bank has constituted 25% of the complement required by the TLAC standard issued by the CNBV.
31. Memorandum accounts
Memorandum items relate to balances representing rights, obligations and other legal matters that in the future may have an impact on net assets, as well as any other balances needed to reflect all transactions performed by the Bank, although they may not impact on their net assets, including contingent commitments and financial instruments received as collateral in OTC financial derivatives transactions, reverse repurchase agreements and securities loan transactions in which the lender is the Bank.
a) Contingent commitments
Contingent commitments include those irrevocable commitments that could give rise to the recognition of financial assets.
F-161
The breakdown is as follows:
| | | | | | |
Contingent commitments |
|
| 12/31/2021 |
|
| 12/31/2022 |
| | | | | | |
Available lines of credit cards and non-revolving consumer loans | |
| 171,094 | |
| 205,793 |
Guarantees, documentary credits and loan commitments of commercial and public sector loans | |
| 91,516 | |
| 114,418 |
Guarantees, documentary credits and loan commitments of commercial loans (SME) | |
| 315 | |
| 107 |
| |
| 262,925 | |
| 320,318 |
As of December 31, 2021 and 2022, the Bank had recognized provisions for off-balance sheet risk of 1,108 million pesos and 1,539 million pesos, respectively, to cover contingent liabilities arising from available lines of credit cards and non-revolving consumer loans (see Note 24).
A significant portion of the guarantees and loan commitments will expire without any payment obligation materializing for the Bank and, therefore, the aggregate balance of these commitments cannot be considered an actual future need for financing or liquidity to be provided by the Bank to third parties.
Income from guarantee instruments is recognized under Fee and commission income in the consolidated income statements and is calculated by applying the rate established in the related contract to the nominal amount of the guarantee.
As of December 31, 2022, the breakdown of the carrying amount of the contingent commitments by stages is as follows:
| | | | | | | | | | | | |
| | Carrying amount | ||||||||||
| | | Stage 1 | | | Stage 2 | | | Stage 3 | | | Total |
| |
| | | | | | | | |
| |
Available lines of credit cards and non-revolving consumer loans | | | 204,260 | | | 1,338 | | | 195 | | | 205,793 |
Guarantees, documentary credits and loan commitments of commercial and public sector loans | | | 109,161 | | | 4,822 | | | 435 | | | 114,418 |
Guarantees, documentary credits and loan commitments of commercial loans (SME) | | | 107 | | | — | | | — | | | 107 |
| | | 313,528 | | | 6,160 | | | 630 | | | 320,318 |
b) Financial instruments received as collateral
Financial instruments include those securities received by the Bank in which there is not transfer of the contractual rights or risk and rewards of the financial instruments that could give rise to the recognition of financial assets since the Bank received them to engage in OTC financial derivatives transactions, reverse repurchase agreements and securities loan transactions in which the lender is the Bank.
The breakdown is as follows:
| | | | | | |
Financial instruments received as collateral |
|
| 12/31/2021 |
|
| 12/31/2022 |
| | | | | | |
Debt instruments received in OTC financial derivatives transactions | |
| 4,491 | |
| 4,541 |
Debt instruments received in reverse repurchase agreement transactions | |
| 63,687 | |
| 119,398 |
Equity instruments received in securities loan transactions | |
| 74 | |
| 1 |
| |
| 68,252 | |
| 123,940 |
F-162
32. Financial derivatives - Nominal amounts and fair values of trading and hedging financial derivatives
The breakdown of the fair value and nominal amount of trading financial derivatives asset as of December 31, 2021 and 2022 is as follows:
| | | | | | | | | | | | | |
| | | 12/31/2021 | | | 12/31/2022 | |||||||
Trading |
|
| Nominal |
|
| Fair Value |
|
| Nominal |
|
| Fair Value | |
| | | | | | | | | | | | | |
Futures: | |
|
| |
|
| |
|
| |
| |
|
Foreign Currency Futures | |
| 12,453 | | | — | |
| 48,013 | | | — | |
Market Index Futures | |
| 72 | | | — | |
| — | | | — | |
| | | | | | | | | | | | | |
Forwards: | |
| | |
| | |
| | |
| | |
Foreign Currency Forwards | |
| 261,701 | | | 5,042 | |
| 187,753 | | | 6,723 | |
Foreign Exchange (Spot) | |
| 30,428 | | | 88 | |
| 21,769 | | | 215 | |
Equity Forwards | |
| — | | | — | |
| — | | | — | |
| | | | | | | | | | | | | |
Options: | |
| | |
| | |
| | |
| | |
Foreign Currency Options | |
| 88,639 | | | 1,874 | |
| 117,173 | | | 2,321 | |
Interest Rate Options | |
| 53,370 | | | 712 | |
| 66,342 | | | 1,277 | |
Market Index Options | |
| 281 | | | 45 | |
| 55 | | | 12 | |
Equity Options | |
| 775 | | | 85 | |
| 2,379 | | | 162 | |
| | | | | | | | | | | | | |
Swaps: | |
| | |
| | |
| | |
| | |
IRS | |
| 3,577,417 | | | 94,895 | |
| 3,863,421 | | | 158,553 | |
CCS | |
| 486,767 | | | 76,649 | |
| 523,287 | | | 59,553 | |
Total Trading | |
| 4,511,903 | |
| 179,390 | |
| 4,830,192 | |
| 228,816 | |
As of December 31, 2021 and 2022, 179,390 million pesos and 228,816 million pesos (assets) are OTC financial derivatives of the total amount of the trading financial derivatives asset, respectively.
F-163
The breakdown of the fair value and nominal amount of hedging financial derivatives asset as of December 31, 2021 and 2022 is as follows:
| | | | | | | | | | | | | |
| | | 12/31/2021 | | | 12/31/2022 | |||||||
Hedging |
|
| Nominal |
|
| Fair Value |
|
| Nominal |
|
| Fair Value | |
| | | | | | | | | | | | | |
Cash flow hedge: | |
|
| |
|
| |
|
| |
| |
|
CCS | |
| 11,125 | | | 4,547 | |
| 5,553 | | | 189 | |
Foreign Currency Forwards | |
| 57,669 | | | 5,233 | |
| 41,079 | | | 5,069 | |
| | | | | | | | | | | | | |
Fair value hedge: | |
| | | | | |
| | | | | |
IRS | |
| 47,047 | | | 1,454 | |
| 66,503 | | | 3,680 | |
CCS | |
| 244 | | | 14 | |
| 13,067 | | | 1,243 | |
Total Hedging | |
| 116,085 | |
| 11,248 | |
| 126,202 | | �� | 10,181 | |
Total Financial Derivatives Asset | |
| 4,627,988 | |
| 190,638 | |
| 4,956,394 | | | 238,997 | |
The breakdown of the fair value and nominal amount of trading financial derivatives liability as of December 31, 2021 and 2022 is as follows:
| | | | | | | | | | | | | |
| | | 12/31/2021 | | | 12/31/2022 | |||||||
Trading |
|
| Nominal |
|
| Fair Value |
|
| Nominal |
|
| Fair Value | |
| | | | | | | | | | | | | |
Futures: | |
|
| |
|
| |
|
| |
| |
|
Foreign Currency Futures | |
| 10,827 | | | — | |
| 15,212 | | | 12 | |
Market Index Futures | |
| 612 | | | 1 | |
| 127 | | | — | |
| | | | | | | | | | | | | |
Forwards: | |
| | | | | |
| | | | | |
Foreign Currency Forwards | |
| 214,999 | | | 3,389 | |
| 200,965 | | | 4,985 | |
Foreign Exchange (Spot) | |
| 33,031 | | | 102 | |
| 39,033 | | | 123 | |
| | | | | | | | | | | | | |
Options: | |
| | | | | |
| | | | |
|
Foreign Currency Options | |
| 70,823 | | | 2,064 | |
| 78,285 | | | 2,278 | |
Interest Rate Options | |
| 78,509 | | | 915 | |
| 104,644 | | | 1,921 | |
Market Index Options | |
| 1,904 | | | 1,422 | |
| 1,736 | | | 1,567 | |
Equity Options | |
| 1,934 | | | 209 | |
| 4,228 | | | 177 | |
| | | | | | | | | | | | | |
Swaps: | |
| | | | | |
| | | | | |
IRS | |
| 3,724,129 | | | 93,600 | |
| 3,843,533 | | | 164,277 | |
Equity Swaps | | | 859 | | | 342 | | | 450 | | | 473 | |
CCS | |
| 417,366 | | | 74,634 | |
| 480,136 | | | 55,375 | |
Total Trading | |
| 4,554,993 | |
| 176,678 | |
| 4,768,349 | |
| 231,188 | |
As of December 31, 2021 and 2022, 176,678 million pesos and 231,188 million pesos (liabilities), respectively are OTC financial derivatives of the total amount of the trading portfolio.
F-164
The breakdown of the fair value and nominal amount of hedging financial derivatives liability as of December 31, 2021 and 2022 is as follows:
| | | | | | | | | | | | | |
| | | 12/31/2021 | | | 12/31/2022 | |||||||
Hedging |
|
| Nominal |
|
| Fair Value |
|
| Nominal |
|
| Fair Value | |
| | | | | | | | | | | | | |
Cash flow hedge: | |
|
| |
|
| |
|
| |
| |
|
IRS | |
| 7,311 | |
| 42 | |
| — | | | — | |
CCS | |
| 2,704 | |
| 864 | |
| 3,340 | | | 371 | |
Foreign Currency Forwards | |
| 7,289 | |
| 238 | |
| 12,279 | | | 885 | |
| | | | | | | | | | | | | |
Fair value hedge: | |
|
| ��� |
|
| |
| | | | | |
IRS | |
| 1,867 | |
| 96 | |
| 62,029 | | | 1,109 | |
CCS | |
| 28,715 | |
| 6,922 | |
| 8,031 | | | 2,096 | |
Total Hedging | |
| 47,886 | |
| 8,162 | |
| 85,679 | |
| 4,461 | |
Total Financial Derivatives Liability | |
| 4,602,879 | |
| 184,840 | |
| 4,854,028 | | | 235,649 | |
As of December 31, 2021 and 2022, the collateral provided to engage in financial derivatives transactions in organized markets is as follows:
| | | | | | | | | |
|
|
| |
|
| 12/31/2021 |
|
| 12/31/2022 |
| | | | | | | | | |
Collateral provided: | |
|
| |
|
| |
|
|
Of which: | |
|
| |
|
| |
|
|
Mercado Mexicano de Derivados, S.A. de C.V. | |
| Cash | |
| 4,326 | |
| 5,946 |
Chicago Mercantile Exchange | |
| Cash | |
| 1,934 | |
| 431 |
Foreign financial institutions | |
| Cash | |
| 1 | |
| 153 |
| |
|
| |
| 6,261 | |
| 6,530 |
Deposits of collateral back up positions operated on the Mexican Derivatives Exchange Market (Mercado Mexicano de Derivados), such as futures based on the Indice de Precios y Cotizaciones (IPC) of Mexican Stock Exchange, USD futures, listed option futures, positions operated on the Chicago Mercantile Exchange such as Standard & Poor’s futures, US Treasury Notes futures and equity options, and positions operated through foreign financial institutions.
F-165
The guarantees and/or collateral delivered for the OTC financial derivatives transactions as of December 31, 2021 and 2022 are as follows:
| | | | | | | | | |
|
|
| |
|
| 12/31/2021 |
|
| 12/31/2022 |
| | | | | | | | | |
Financial assets at amortized cost - Loans and advances to credit institutions: | | | | | | | | | |
Of which (Note 7): | | | | | | | | | |
Mexican financial institutions | | | Cash | | | 7,163 | | | 11,697 |
Foreign financial institutions | |
| Cash | | | 6,071 | |
| 2,888 |
| |
|
| |
| 13,234 | |
| 14,585 |
| | | | | | | | | |
Financial assets at amortized cost - Loans and advances to customers: | | | | | | | | | |
Of which (Note 11): | | | | | | | | | |
Mexican institutions | | | Cash | | | — | | | 1,091 |
| |
|
| |
| — | |
| 1,091 |
| | | | | | | | | |
Financial assets at fair value through profit or loss - Debt instruments: | |
|
| |
| | | | |
Of which (Note 8): | |
|
| |
| | | | |
Mexican financial institutions | |
| Bonds | |
| 3,443 | | | 4,906 |
Foreign financial institutions | |
| Bonds | |
| 2,932 | |
| 2,171 |
| |
|
| |
| 6,375 | |
| 7,077 |
The guarantees and/or collateral received for the OTC financial derivatives transactions as of December 31, 2021 and 2022 are as follows:
| | | | | | | | | |
|
|
| |
|
| 12/31/2021 |
|
| 12/31/2022 |
| | | | | | | | | |
Deposits from credit institutions and Customer deposits: | |
|
| |
|
| |
|
|
Of which (Notes 19 and 20): | |
|
| |
|
| |
|
|
Mexican financial institutions | |
| Cash | |
| 9,325 | |
| 5,559 |
Foreign financial institutions | |
| Cash | |
| 17,594 | |
| 21,302 |
| |
|
| |
| 26,919 | |
| 26,861 |
| | | | | | | | | |
|
|
| |
|
| 12/31/2021 |
|
| 12/31/2022 |
| | | | | | | | | |
Memorandum accounts: | |
|
| |
|
| |
|
|
Of which (Note 31): | |
|
| |
|
| |
|
|
Mexican financial institutions | |
| Bonds | |
| 4,491 | |
| 4,541 |
| |
|
| |
| 4,491 | |
| 4,541 |
Upon executing transactions with OTC financial derivatives, the Bank agrees to deliver and/or receive collateral to cover any exposure to market risk and the credit risk of such transactions. Such collateral is contractually agreed to with each of the counterparties.
Currently, debt instruments, mainly government bonds, are posted as collateral for transactions with domestic financial entities. Cash deposits are used for transactions with foreign financial entities and institutional customers.
The nominal and/or contractual amounts of the financial derivatives contracts traded by the Bank do not reflect the actual risk assumed by the Bank since the net position in these financial instruments is the result
F-166
of offsetting and/or combining them. The net position is used by the Bank to hedge interest rates, underlying asset prices or foreign currency risk and to assume directional exposure to risk factors limited by the Bank’s risk appetite. The results of these financial instruments are recognized in Gains/(losses) on financial assets and liabilities (net) in the consolidated income statement. If their purpose is to hedge other exposures, they increase or offset, as appropriate, the gains or losses on the hedged investments (see Note 12).
The Bank manages the credit risk exposure of these contracts through setting credit lines, establishing netting arrangements with its main counterparties and by receiving assets as collateral (see Note 2.f).
The cumulative credit risk exposure is measured in terms of Equivalent Credit Risk (hereinafter, “ECR”). ECR is composed of the Current Exposure of the contract (at fair value in the case of financial derivatives) and the Potential Future Exposure (hereinafter, “PFE”) which is defined as the maximum expected credit risk exposure over a specified period of time calculated at a 97.5% level of confidence and which expresses its potential future exposure. This metric is used internally for management purposes.
ECR by Profiles Methodology introduces the concept of Exposure Profile per deal, where risk exposure may vary depending on the time-band considered. There is not a unique exposure figure per deal. However, many exposures figure as time-bands are affected and each time-band exposure equals the maximum exposure within the time-band.
Deal risk aggregation per counterparty and per time-band requires aggregation of a Potential Future Exposure for each of the time-bands and considering the netting agreement for the Current Exposure and if applicable, collateral mitigation; so, there is an aggregated net exposure per counterparty as time-bands are impacted.
For financial derivatives, where ECR is equal to the Current Exposure plus the nominal amount multiplied by the risk factor, the Profiles Methodology implies that PFE figure is not unique but is calculated for each of the time-bands.
The Counterparty Credit Risk area compares, on a monthly basis, the nominal amounts used to calculate the PFE against the nominal amounts recognized in the accounting records and compares the Current Exposure amounts used for the Current Exposure of the ECR against the Current Exposure amounts also recognized in the accounting records.
As of December 31, 2021 and 2022, the cumulative net credit risk exposure of the Bank was 32,803 million pesos and 42,765 million pesos, respectively. Counterparty credit risk comprises financial derivatives, repurchase agreements and securities lending. Received collateral is included with risk mitigation purposes to estimate exposure.
33. Interest income calculated using the effective interest method
Interest income in the consolidated income statement comprises the interest accrued in the year on all financial assets with an implicit or explicit return, calculated by applying the effective interest method, irrespective of measurement at fair value through other comprehensive income, and the adjustment to interest income as a result of hedge accounting.
F-167
The breakdown of the interest income calculated using the effective interest method items earned in 2020, 2021 and 2022 is as follows:
| | | | | | | | | |
|
|
| 2020 |
|
| 2021 |
|
| 2022 |
| | | | | | | | | |
Cash and balances with the Central Bank | |
| 1,951 | |
| 1,471 | |
| 2,587 |
Loans and advances to credit institutions | |
| 412 | |
| 1,714 | |
| 1,523 |
Loans and advances to customers | |
| 84,290 | |
| 74,695 | |
| 93,594 |
Debt instruments | |
| 14,643 | |
| 15,472 | |
| 19,788 |
Hedging financial derivatives | |
| 2,432 | |
| 340 | |
| 5,370 |
Other interest income | |
| 249 | |
| 353 | |
| 1,234 |
| |
| 103,977 | |
| 94,045 | |
| 124,096 |
34. Other interest and similar income
Other interest and similar income in the consolidated income statement comprises the interest accrued in the year on financial assets at fair value through profit or loss with an implicit or explicit return, calculated by applying the effective interest method.
The breakdown of the main interest income from financial assets at fair value through profit or loss items earned in 2020,2021 and 2022 is as follows:
| | | | | | | | | |
|
|
| 2020 |
|
| 2021 |
|
| 2022 |
| | | | | | | | | |
Loans and advances to credit institutions | |
| 2,997 | |
| 1,543 | |
| 8,002 |
Loans and advances to customers | |
| 804 | |
| 507 | |
| 785 |
Debt instruments | |
| 8,207 | | | 7,017 | |
| 6,113 |
| |
| 12,008 | |
| 9,067 | |
| 14,900 |
35. Interest expense and similar charges
Interest expense and similar charges in the consolidated income statement include the interest accrued during the year on all financial liabilities with an implicit or explicit return, calculated by applying the effective interest method, irrespective of measurement at fair value, the adjustment to interest expense as a result of hedge accounting and the net interest cost attributable to pension plans.
The breakdown of the main items of interest expense and similar charges accrued in 2020, 2021 and 2022 is as follows:
| | | | | | | | | |
|
|
| 2020 |
|
| 2021 |
|
| 2022 |
| | | | | | | | | |
Deposits from credit institutions | |
| 12,400 | |
| 10,967 | |
| 19,373 |
Customer deposits | |
| 28,235 | |
| 19,224 | |
| 32,228 |
Marketable debt securities | |
| 5,756 | |
| 5,308 | |
| 7,632 |
Subordinated liabilities | |
| 1,767 | |
| 1,668 | |
| 1,646 |
Hedging financial derivatives | |
| 193 | |
| 299 | |
| 99 |
Other interest expense | |
| 1,824 | |
| 2,214 | |
| 2,906 |
| |
| 50,175 | |
| 39,680 | |
| 63,884 |
36. Dividend income
Dividend income includes the dividends and payments on equity instruments out of profits generated by investees after the acquisition of the equity interest.
F-168
The breakdown of Dividend income is as follows:
| | | | | | | | | |
|
|
| 2020 |
|
| 2021 |
|
| 2022 |
| | | | | | | | | |
Equity instruments classified as: | |
|
| |
|
| |
|
|
| | | | | | | | | |
Financial assets at fair value through profit or loss | |
| 40 | |
| 28 | |
| 13 |
Of which: | |
|
| |
|
| |
|
|
NAFTRAC (Exchange-traded fund or ETF) | |
| 36 | |
| 9 | |
| 5 |
Grupo México, S.A.B. de C.V. | | | — | | | — | | | 8 |
Grupo Cementos de Chihuahua, S.A.B. de C.V. | | | 3 | | | 1 | | | — |
Fomento Económico Mexicano, S.A.B. de C.V. | | | 1 | | | — | | | — |
Wal-Mart de México, S.A.B. de C.V. | |
| — | |
| 1 | |
| — |
Organización Soriana, S.A.B. de C.V. | | | — | | | 17 | | | — |
| | | | | | | | | |
Financial assets at fair value through other comprehensive income | |
| 206 | |
| 199 | |
| 173 |
Of which: | |
|
| |
|
| |
|
|
Controladora Prosa, S.A. de C.V. | |
| 73 | |
| 64 | |
| — |
Trans Unión de México, S.A. | |
| 88 | |
| 88 | |
| 126 |
Bolsa Mexicana de Valores, S.A.B. de C.V. | | | 25 | | | 29 | | | 31 |
Dun & Bradstreet de México, S.A. de C.V. | |
| 20 | |
| 18 | |
| 16 |
Others | |
| — | |
| — | |
| — |
| |
| 246 | |
| 227 | |
| 186 |
37. Fee and commission income
Fee and commission income comprises the amount of all fees and commissions accruing in favor of the Bank during the year, except those that form part of the effective interest rate on financial instruments.
The breakdown of Fee and commission income is as follows:
| | | | | | | | | |
|
|
| 2020 |
|
| 2021 |
|
| 2022 |
| | | | | | | | | |
Collection and payment services: | | | | | | | | | |
Service charges on deposit accounts | |
| 2,588 | |
| 2,593 | |
| 3,012 |
Credit and debit cards | |
| 7,667 | |
| 8,379 | |
| 9,892 |
Checks and others | |
| 181 | |
| 172 | |
| 157 |
| |
| 10,436 | |
| 11,144 | |
| 13,061 |
Marketing of non-banking financial products: | | | | | | | | | |
Investment funds management | |
| 1,611 | |
| 1,747 | |
| 1,900 |
Capital markets and securities activities | |
| 514 | |
| 523 | |
| 634 |
Collection and payment services | |
| 2,074 | |
| 2,206 | |
| 2,350 |
Insurance | |
| 5,300 | |
| 5,508 | |
| 6,203 |
Financial advisory services | |
| 1,179 | |
| 1,307 | |
| 1,415 |
| |
| 10,678 | |
| 11,291 | |
| 12,502 |
Securities services: | | | | | | | | | |
Administration and custody | |
| 461 | |
| 459 | |
| 394 |
| |
| 461 | |
| 459 | |
| 394 |
Other: | | | | | | | | | |
Foreign currency transactions | |
| 1,380 | |
| 1,510 | |
| 1,539 |
Other fees and commissions | |
| 801 | |
| 951 | |
| 999 |
| |
| 2,181 | |
| 2,461 | |
| 2,538 |
| |
| 23,756 | |
| 25,355 | |
| 28,495 |
F-169
38. Fee and commission expenses
Fee and commission expenses comprises the amount of all fees and commissions paid or payable by the Bank in the year, except those that form part of the effective interest rate on financial instruments.
The breakdown of Fee and commission expenses is as follows:
| | | | | | | | | |
|
|
| 2020 |
|
| 2021 |
|
| 2022 |
| | | | | | | | | |
Credit and debit cards | |
| 2,741 | |
| 3,938 | |
| 4,964 |
Checks and others | |
| 43 | |
| 48 | |
| 68 |
Collections and transactional services | |
| 291 | |
| 305 | |
| 254 |
Fund management | |
| 1 | |
| 1 | |
| 1 |
Capital markets and securities activities | |
| 173 | |
| 202 | |
| 296 |
Financial advisory services | |
| 5 | |
| 6 | |
| 6 |
Correspondent services | | | 791 | | | 802 | | | 674 |
Other fees and commissions | |
| 2,688 | |
| 2,847 | |
| 3,000 |
| |
| 6,733 | |
| 8,149 | |
| 9,263 |
39. Gains/(losses) on financial assets and liabilities (net)
Gains/(losses) on financial assets and liabilities (net) include the amount of the valuation adjustments of financial instruments, except those attributable to interest accrued as a result of application of the effective interest method, impairment losses and the realized gains or losses obtained from the sale and purchase thereof.
The breakdown of Gains/(losses) on financial assets and liabilities (net) by type of instrument is as follows:
| | | | | | | | | | |
|
|
| 2020 | | | 2021 | | | 2022 | |
| | | | | | | | | | |
Financial instruments at fair value through profit or loss | |
| 5,662 | |
| 4,640 | |
| 589 | |
Of which: | | | | | | | | | | |
Debt instruments | |
| 1,221 | |
| 119 | |
| (5,613) | |
Equity instruments | |
| (161) | |
| 398 | |
| 289 | |
Derivatives | |
| 4,458 | |
| 4,096 | |
| 6,021 | |
Others | |
| 144 | |
| 27 | |
| (108) | |
Recognized profit from sale of financial assets at fair value through other comprehensive income | |
| 779 | |
| 781 | |
| 113 | |
Hedging derivatives | |
| (457) | |
| (538) | |
| 322 | |
Of which: | | | | | | | | | | |
Fair value hedge - hedged items (Note 12) | |
| 6,427 | |
| (9,278) | |
| (4,903) | |
Fair value hedge - hedging derivative instruments (Note 12) | |
| (6,884) | |
| 8,746 | |
| 5,225 | |
Cash flow hedge inefficiency (Note 12) | |
| — | |
| (6) | |
| — | |
| |
| 5,984 | |
| 4,883 | |
| 1,024 | |
40. Exchange differences (net)
Exchange differences (net) shows the gains or losses arising on the translation of monetary items in foreign currency to the functional currency as a result of changes in foreign exchange rates.
F-170
41. Other operating income and other operating expenses
Other operating income and other operating expenses in the consolidated income statement include:
| | | | | | | | | | |
|
|
| 2020 |
|
| 2021 |
|
| 2022 |
|
| | | | | | | | | | |
Other operating income: | | | | | | | | | | |
Other operating income | |
| 1,651 | |
| 1,740 | |
| 810 | |
| |
| 1,651 | |
| 1,740 | |
| 810 | |
Other operating expenses: | | | | | | | | | | |
IPAB fund contribution | |
| (3,859) | |
| (3,801) | |
| (3,981) | |
Other operating expenses | |
| (1,354) | |
| (1,405) | |
| (1,305) | |
| |
| (5,213) | |
| (5,206) | |
| (5,286) | |
On January 19, 1999, IPAB was created in order to establish a bank savings protection system in favor of depositors that perform guaranteed banking transactions, and to regulate financial support granted to full service banking institutions in order to protect the interests of depositors.
IPAB’s resources come from the mandatory contributions paid by financial entities, according to the risk to which they are exposed. Such contributions are calculated based on the capitalization level of each financial group and other indicators set forth in IPAB’s bylaws issued by its board of directors. These contributions must be equivalent to one-twelfth of four-thousandths of the monthly average of the daily balances of funding activities of the applicable month.
42. Personnel expenses
a) Breakdown
The breakdown of Personnel expenses is as follows:
| | | | | | | | | |
|
|
| 2020 |
|
| 2021 |
|
| 2022 |
| | | | | | | | | |
Wages and salaries | |
| 7,838 | |
| 8,307 | |
| 9,164 |
Social security costs | |
| 1,494 | |
| 1,703 | |
| 2,010 |
Service expense related to defined contribution pension plan (Note 24) | |
| 488 | |
| 483 | |
| 555 |
Service expense related to defined benefit pension plan | |
| 194 | |
| 260 | |
| 221 |
Share-based payments | |
| 226 | |
| 54 | |
| 305 |
Bonus and benefits granted to employees | |
| 3,052 | |
| 4,111 | |
| 4,983 |
Other staff costs | |
| 1,584 | |
| 1,567 | |
| 1,677 |
| |
| 14,876 | |
| 16,485 | |
| 18,915 |
b) Share-based payments
Banco Santander (Spain) approved an internal policy, among the main benefits are the following:
- | a portion of the variable annual compensation of eligible employees is deferred for a period between four to five years, with a fourth or fifth part granted each year, |
- | deferred and non-deferred portions are payables with shares and cash in equal parts, |
- | once the shares have been delivered to the employees, they must keep them for at least one year. |
F-171
Prior to the 2021 exchange offer mentioned in Note 3, the Bank issued its own shares to compensate eligible employees for the portion payable in shares and classified this portion of the plan as an equity-settled plan. As a consequence of the 2021 exchange offer, the share-based payment plan was modified. The modification requires the Bank to acquire Banco Santander’s (Spain) shares to compensate eligible employees; accordingly, the share-based payment portion of the plan is now classified as a cash-settled plan.
The Board of Directors is responsible for determining the specific amount of deferred compensation to be paid each year. If the objectives are achieved on each anniversary, the beneficiaries will receive cash and shares of Banco Santander (Spain) in fourths or fifths, as applicable, within thirty days after the first, second, third and, if applicable, fourth and fifth anniversary.
At the end of the 2021 exchange offer, 264 million pesos were reclassified from Accumulated reserves within Shareholders’ equity to Other liabilities in the consolidated balance sheet. As of December 31, 2022, the plan has 2,004,800 shares committed of Banco Santander (Spain).
During 2021 and 2022, the Bank recognized compensation expense relating to the share-based payment portion of the plan in the consolidated income statement for an amount of 54 million pesos and 305 million pesos, respectively.
c) Bonus payment policies
As a result of an internal policy of Banco Santander (Spain), a portion of the annual variable remuneration plan for the Identified Staff is deferred for a period of three or five years, with one-third or one-fifth vesting each year.
Both the deferred and non-deferred portions are paid equally in cash and in shares for the corresponding payment periods. Once delivered, beneficiaries are obligated to keep the shares for a one-year period. Consistent with the share-based payments plan above, subsequent to the 2021 exchange offer mentioned in Note 3, the Bank is required to acquire Banco Santander’s (Spain) shares to compensate the Identified Staff.
In 2020, 2021 and 2022, the Bank recognized the bonus of the Identified Staff in the consolidated income statement for an amount of 294 million pesos, 448 million pesos and 862 million pesos, respectively.
F-172
The bonus of the Identified Staff for financial years 2020, 2021 and 2022 are paid according to the following percentages, depending on the time of payment and on the group to which the beneficiary belongs (the “Immediate Payment Percentage” to identify the portion for which payment is not deferred and the “Deferred Percentage” to identify the portion for which payment is deferred):
| | | | | | | | | |
Beneficiaries |
|
| Immediate Payment |
|
| |
|
| |
(Millions of Euros) | |
| Percentage | | | Deferred Percentage | | | Deferred period |
| | | | | | | | | |
Members of the Identified Staff with total variable remuneration ≥ 2.7 | |
| 40 | % |
| 60 | % |
| 5 years |
Members of the Identified Staff with total variable remuneration ≥ 1.7 (< 2.7) | |
| 50 | % |
| 50 | % |
| 5 years |
Other beneficiaries | |
| 60 | % |
| 40 | % |
| 4 years |
Taking the foregoing into account, the bonus for financial years 2020, 2021 and 2022 of the Identified Staff are paid as follows:
● | Each beneficiary will receive in 2020, 2021 and 2022, depending on the group to which such beneficiary belongs, the Immediate Payment Percentage at the Initial Date applicable in each case, in halves and net of income tax (or withholdings), in cash and in shares (the “Initial Date”, meaning the specific date on which the Immediate Payment Percentage is paid). |
● | Payment of the Deferred Percentage of the bonus applicable in each case depending on the group to which the beneficiary belongs will be deferred over a period of three or five years and will be paid in thirds or fifths, as applicable, within thirty days of the anniversaries of the Initial Date, provided that the conditions described below are met. |
● | After deduction of any income taxes (or withholdings) applicable at any time, the net amount of the deferred portion will be paid in thirds or fifths, 50% in cash and the other 50% in shares. |
● | The beneficiaries receiving shares may not transfer them or hedge them directly or indirectly for one year as from each delivery of shares. |
In 2020, 2021 and 2022, the accrual of deferred remuneration is conditioned, in addition to the continued employment of the beneficiary in the Bank, to no assumptions in which there is a poor performance of the Bank as a whole or of a specific division or area of the Bank or of the exposures generated by the personnel, and at least the following factors must be considered: (i) significant failures in risk management committed by the Bank, or by a business unit or risk control unit; (ii) the increase suffered by the Bank or by a business unit of its capital needs, not foreseen at the time of generation of the exposures; (iii) regulatory sanctions or court rulings for events that could be attributable to the Bank or the personnel responsible for those. Also, the breach of internal codes of conduct of the Bank; and (iv) irregular behaviors, whether individual or collective, considering in particular the negative effects derived from the marketing of inappropriate products and the responsibilities of persons or bodies that made those decisions.
If the abovementioned requirements are met on each delivery date, the bonus beneficiaries shall receive cash and shares, in thirds or fifths, as applicable, within thirty days of the first, second, third and, if applicable, fourth and fifth anniversary.
F-173
43. Other general administrative expenses
a) Breakdown
The breakdown of Other general administrative expenses is as follows:
| | | | | | | | | |
|
|
| 2020 |
|
| 2021 |
|
| 2022 |
| | | | | | | | | |
Maintenance, conservation and repair | |
| 825 | |
| 773 | |
| 736 |
Information technology and systems | |
| 5,344 | |
| 5,945 | |
| 6,108 |
Stationery and supplies | |
| 325 | |
| 234 | |
| 156 |
Advertising and communications | |
| 809 | |
| 696 | |
| 753 |
Rents | |
| 683 | |
| 556 | |
| 614 |
Administrative services | |
| 2,202 | |
| 1,603 | |
| 1,424 |
Taxes other than income tax | |
| 2,270 | |
| 1,915 | |
| 2,030 |
Surveillance and cash courier services | |
| 1,263 | |
| 1,237 | |
| 1,341 |
Insurance premiums | |
| 114 | |
| 103 | |
| 100 |
Travel costs | |
| 71 | |
| 62 | |
| 175 |
Other administrative expenses | |
| 1,353 | |
| 1,263 | |
| 1,413 |
| |
| 15,259 | |
| 14,387 | |
| 14,850 |
b) Other information
The fees for audit and tax services to the audit of the consolidated financial statements by the respective auditors are as follows:
| | | | | | | | | |
|
|
| 2020 |
|
| 2021 |
|
| 2022 |
| | | | | | | | | |
Audit fees and audit-related fees (*) | |
| 122 | |
| 99 | |
| 105 |
(*) | The audit-related fees amounted to 26 million pesos in 2020, 32 million pesos in 2021 and 17 million pesos in 2022. |
44. Gains/(losses) on disposal of assets not classified as non-current assets held for sale (net)
The breakdown of Gains/(losses) on disposal of assets not classified as non-current assets held for sale (net) is as follows:
| | | | | | | | | |
|
|
| 2020 |
|
| 2021 |
|
| 2022 |
| | | | | | | | | |
Gains: | | | | | | | | | |
On disposal of tangible assets | |
| 6 | |
| 57 | |
| 4 |
| | | | | | | | | |
| |
| 6 | |
| 57 | |
| 4 |
F-174
45. Other disclosures
a) Remaining maturity periods
The breakdown by maturity of the balances of certain items in the consolidated balance sheets as of December 31, 2021, is as follows:
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | 12/31/2021 | |||||||||||||||||||||
|
|
|
|
|
| Less |
|
|
|
|
|
|
|
|
|
|
|
|
|
| More |
|
|
|
| | | On | | | than 1 | | | 1 to 3 | | | 3 to 12 | | | 1 to 3 | | | 3 to 5 | | | than 5 | | | |
| | | Demand | | | Month | | | Months | | | Months | | | Years | | | Years | | | Years | | | Total |
| | | | | | | | | | | | | | | | | | | | | | | | |
Cash and balances with the Central Bank | |
| 26,360 | | | 12,735 | | | — | | | — | | | — | | | — | | | 23,978 | |
| 63,073 |
Financial assets at fair value through profit or loss | |
| | | | | | | | | | | | | | | | | | | | |
| |
Debt instruments | |
| — | | | 4,197 | | | 31,192 | | | 25,550 | | | 34,552 | | | 8,355 | | | 7,129 | |
| 110,975 |
Equity instruments | |
| — | | | — | | | — | | | — | | | — | | | — | | | 2,764 | |
| 2,764 |
Trading derivatives | |
| 147 | | | 2,989 | | | 6,963 | | | 14,418 | | | 48,131 | | | 36,729 | | | 70,013 | |
| 179,390 |
Loans and advances to credit institutions - Reverse repurchase agreements | |
| — | | | 58,486 | | | — | | | — | | | — | | | — | | | — | |
| 58,486 |
Loans and advances to customers - Reverse repurchase agreements | | | — | | | 10,000 | | | — | | | — | | | — | | | — | | | — | | | 10,000 |
Financial assets at fair value through other comprehensive income | |
| | | | | | | | | | | | | | | | | | | | |
| |
Loans and advances to customers | |
| — | | | 450 | | | 900 | | | 2,706 | | | — | | | — | | | — | |
| 4,056 |
Debt instruments | |
| — | | | 74,851 | | | 40,537 | | | 2,757 | | | 110,173 | | | 110,586 | | | 52,070 | |
| 390,974 |
Equity instruments | |
| — | | | — | | | — | | | — | | | — | | | 192 | | | 607 | |
| 799 |
Financial assets at amortized cost | |
| | | | | | | | | | | | | | | | | | | | |
| |
Loans and advances to credit institutions | |
| 19,403 | | | 17,089 | | | — | | | — | | | — | | | — | | | — | |
| 36,492 |
Loans and advances to customers | |
| 12,538 | | | 50,092 | | | 85,708 | | | 176,794 | | | 173,148 | | | 78,773 | | | 159,944 | |
| 736,997 |
Debt instruments | |
| — | | | — | | | — | | | 1,774 | | | — | | | 7,788 | | | 2,057 | |
| 11,619 |
Hedging derivatives | |
| 125 | | | — | | | — | | | 4,753 | | | 1,803 | | | 4,553 | | | 14 | |
| 11,248 |
| |
| 58,573 | |
| 230,889 | |
| 165,300 | |
| 228,752 | |
| 367,807 | |
| 246,976 | |
| 318,576 | |
| 1,616,873 |
Liabilities: | |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
Financial liabilities at fair value through profit or loss | |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
Trading derivatives | |
| 69 | | | 1,228 | | | 5,944 | | | 15,189 | | | 51,478 | | | 34,068 | | | 68,702 | |
| 176,678 |
Short positions | |
| — | | | 19,554 | | | — | | | — | | | — | | | — | | | — | |
| 19,554 |
Deposits from the Central Bank | |
| — | | | 23,002 | | | — | | | — | | | — | | | — | | | — | |
| 23,002 |
Deposits from credit institutions | |
| — | | | 17,846 | | | — | | | — | | | — | | | — | | | — | |
| 17,846 |
Customer deposits | |
| — | | | 114,078 | | | — | | | — | | | — | | | — | | | — | |
| 114,078 |
Marketable debt securities | |
| — | | | — | | | 66 | | | 119 | | | — | | | 74 | | | — | |
| 259 |
Financial liabilities at amortized cost | |
| | | | | | | | | | | | | | | | | | | | |
| |
Deposits from the Central Bank | |
| — | | | 78,312 | | | 8,203 | | | 101 | | | — | | | — | | | — | |
| 86,616 |
Deposits from credit institutions | |
| 39,213 | | | 38,874 | | | 1,523 | | | 2,406 | | | 15 | | | 22 | | | 1,286 | |
| 83,339 |
Customer deposits | |
| 541,585 | | | 153,372 | | | 20,416 | | | 52,728 | | | 3,669 | | | 4,558 | | | 1,558 | |
| 777,886 |
Marketable debt securities | |
| — | | | 14,355 | | | 2,049 | | | 29,009 | | | | | | 49,510 | | | 6,500 | |
| 101,423 |
Subordinated liabilities | |
| — | | | 10,254 | | | — | | | 397 | | | — | | | — | | | 40,992 | |
| 51,643 |
Other financial liabilities | |
| 10,571 | | | 3,690 | | | 104 | | | 2,692 | | | 177 | | | 4 | | | — | |
| 17,238 |
Hedging derivatives | |
| 1 | | | — | | | — | | | 38 | | | 1,096 | | | 2,700 | | | 4,327 | |
| 8,162 |
| |
| 591,439 | |
| 474,565 | |
| 38,305 | |
| 102,679 | |
| 56,435 | |
| 90,936 | |
| 123,365 | |
| 1,477,724 |
Difference (assets less liabilities) | |
| (532,866) | |
| (243,676) | |
| 126,995 | |
| 126,073 | |
| 311,372 | |
| 156,040 | |
| 195,211 | |
| 139,149 |
F-175
The breakdown by maturity of the balances of certain items in the consolidated balance sheets as of December 31, 2022, is as follows:
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | 12/31/2022 | |||||||||||||||||||||
|
|
|
|
|
| Less |
|
|
|
|
|
|
|
|
|
|
|
|
|
| More |
|
|
|
| | | On | | | than 1 | | | 1 to 3 | | | 3 to 12 | | | 1 to 3 | | | 3 to 5 | | | than 5 | | | |
| | | Demand | | | Month | | | Months | | | Months | | | Years | | | Years | | | Years | | | Total |
| | | | | | | | | | | | | | | | | | | | | | | | |
Assets: | | | | | | | | | | | | | | | | | | | | | | | | |
Cash and balances with the Central Bank | |
| 37,543 | | | 11,294 | | | — | | | — | | | — | | | — | | | 23,978 | |
| 72,815 |
Financial assets at fair value through profit or loss | |
| | | | | | | | | | | | | | | | | | | | |
| |
Debt instruments | |
| — | | | 7,009 | | | 20,031 | | | 34,030 | | | 51,027 | | | 8,255 | | | 9,897 | |
| 130,249 |
Equity instruments | |
| — | | | — | | | — | | | — | | | — | | | — | | | 4,063 | |
| 4,063 |
Trading derivatives | |
| 331 | | | 2,475 | | | 7,417 | | | 27,459 | | | 67,736 | | | 51,662 | | | 71,736 | |
| 228,816 |
Loans and advances to credit institutions - Reverse repurchase agreements | | | — | | | 93,267 | | | — | | | 9,385 | | | — | | | — | | | — | | | 102,652 |
Loans and advances to customers - Reverse repurchase agreements | | | — | | | 19,207 | | | — | | | — | | | — | | | — | | | — | | | 19,207 |
Financial assets at fair value through other comprehensive income | |
| | | | | | | | | | | | | | | | | | | | |
| |
Loans and advances to customers | |
| — | | | 95 | | | 188 | | | 594 | | | 38 | | | 31 | | | — | |
| 946 |
Debt instruments | |
| — | | | 9,443 | | | 65,891 | | | 5,391 | | | 83,423 | | | 117,274 | | | 32,484 | |
| 313,906 |
Equity instruments | |
| — | | | — | | | — | | | — | | | — | | | 110 | | | 587 | |
| 697 |
Financial assets at amortized cost | |
| | | | | | | | | | | | | | | | | | | | |
| |
Loans and advances to credit institutions | |
| — | | | 40,400 | | | — | | | — | | | — | | | — | | | — | |
| 40,400 |
Loans and advances to customers | |
| 4,034 | | | 52,944 | | | 108,526 | | | 186,273 | | | 205,255 | | | 83,851 | | | 156,833 | |
| 797,716 |
Debt instruments | |
| — | | | — | | | — | | | — | | | 16,537 | | | 4,038 | | | 1,666 | |
| 22,241 |
Hedging derivatives | |
| 1,502 | | | 47 | | | 164 | | | 171 | | | 3,584 | | | 3,638 | | | 1,075 | |
| 10,181 |
| |
| 43,410 | |
| 236,181 | |
| 202,217 | |
| 263,303 | |
| 427,600 | |
| 268,859 | |
| 302,319 | |
| 1,743,889 |
Liabilities: | |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
Financial liabilities at fair value through profit or loss | |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
Trading derivatives | |
| 623 | | | 3,488 | | | 7,182 | | | 28,935 | | | 65,112 | | | 51,958 | | | 73,890 | |
| 231,188 |
Short positions | |
| — | | | 28,762 | | | — | | | — | | | — | | | — | | | — | |
| 28,762 |
Deposits from Central Bank – Repurchase agreements | | | — | | | 31,055 | | | — | | | — | | | — | | | — | | | — | | | 31,055 |
Deposits from credit institutions – Repurchase agreements | | | — | | | 22,818 | | | — | | | — | | | — | | | — | | | — | | | 22,818 |
Customer deposits – Repurchase agreements | | | — | | | 114,308 | | | 5,461 | | | — | | | — | | | — | | | — | | | 119,769 |
Marketable debt securities | |
| — | | | 10 | | | 112 | | | 249 | | | 77 | | | 72 | | | — | |
| 520 |
Financial liabilities at amortized cost | |
| | | | | | | | | | | | | | | | | | | | |
| |
Deposits from Central Bank | | | — | | | 89,753 | | | — | | | — | | | — | | | — | | | — | | | 89,753 |
Deposits from credit institutions | |
| 26,523 | | | 29,036 | | | 1,455 | | | 2,159 | | | 5,009 | | | 123 | | | 1,049 | |
| 65,354 |
Deposits from credit institutions - Repurchase agreements | | | — | | | 9,003 | | | — | | | — | | | — | | | — | | | — | | | 9,003 |
Customer deposits | |
| 538,955 | | | 138,171 | | | 21,437 | | | 74,859 | | | 4,038 | | | 3,271 | | | 876 | |
| 781,607 |
Customer deposits - Repurchase agreements | | | — | | | 26,912 | | | 10 | | | — | | | — | | | — | | | — | | | 26,922 |
Marketable debt securities | |
| — | | | 23,933 | | | 11,202 | | | 30,217 | | | 37,682 | | | 22,278 | | | 9,081 | |
| 134,393 |
Subordinated liabilities | |
| — | | | — | | | — | | | 366 | | | — | | | — | | | 39,018 | |
| 39,384 |
Other financial liabilities | |
| — | | | 14,741 | | | 2,507 | | | 2,050 | | | 175 | | | — | | | — | |
| 19,473 |
Hedging derivatives | |
| — | | | — | | | — | | | 306 | | | 2,143 | | | 1,097 | | | 915 | |
| 4,461 |
| |
| 566,101 | |
| 531,990 | |
| 49,366 | |
| 139,141 | |
| 114,236 | |
| 78,799 | |
| 124,829 | |
| 1,604,462 |
Difference (assets less liabilities) | |
| (522,691) | |
| (295,809) | |
| 152,851 | |
| 124,162 | |
| 313,364 | |
| 190,060 | |
| 177,490 | |
| 139,427 |
F-176
b) Undiscounted contractual maturity periods
The detail of the undiscounted contractual maturities of the existing financial liabilities at amortized cost as of December 31, 2021, is as follows:
| | | | | | | | | | | | | | | | | | | | | | | | |
| | 12/31/2021 | ||||||||||||||||||||||
|
|
| |
|
| Less |
|
| |
|
| |
|
| |
|
| |
|
| More |
|
| |
| | | On | | | than 1 | | | 1 to 3 | | | 3 to 12 | | | 1 to 3 | | | 3 to 5 | | | than 5 | | | |
| |
| Demand | | | Month | | | Months | | | Months | | | Years | | | Years | | | Years | | | Total |
| | | | | | | | | | | | | | | | | | | | | | | | |
Financial liabilities at amortized cost: | | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
Deposits from the Central Bank | | | — | | | 78,399 | | | 8,228 | | | 102 | | | — | | | — | | | — | | | 86,729 |
Deposits from credit institutions | | | 39,213 | | | 39,039 | | | 1,589 | | | 2,595 | | | 150 | | | 155 | | | 2,136 | |
| 84,877 |
Customer deposits | | | 541,585 | | | 154,195 | | | 21,356 | | | 55,574 | | | 4,657 | | | 5,178 | | | 2,190 | |
| 784,735 |
Marketable debt securities | | | — | | | 14,742 | | | 3,043 | | | 32,892 | | | 5,116 | | | 54,626 | | | 7,984 | |
| 118,403 |
Subordinated liabilities | | | — | | | 10,463 | | | 417 | | | 2,275 | | | 5,007 | | | 5,007 | | | 55,095 | |
| 78,264 |
Other financial liabilities | | | 10,436 | | | 3,689 | | | 995 | | | 1,753 | | | 365 | | | — | | | — | |
| 17,238 |
| | | 591,234 | |
| 300,527 | |
| 35,628 | |
| 95,191 | |
| 15,295 | |
| 64,966 | |
| 67,405 | |
| 1,170,246 |
The detail of the undiscounted contractual maturities of the existing financial liabilities at amortized cost as of December 31, 2022, is as follows:
| | | | | | | | | | | | | | | | | | | | | | | | |
| | 12/31/2022 | ||||||||||||||||||||||
|
|
| |
|
| Less |
|
| |
|
| |
|
| |
|
| |
|
| More |
|
| |
| | | On | | | than 1 | | | 1 to 3 | | | 3 to 12 | | | 1 to 3 | | | 3 to 5 | | | than 5 | | | |
| |
| Demand | | | Month | | | Months | | | Months | | | Years | | | Years | | | Years | | | Total |
| | | | | | | | | | | | | | | | | | | | | | | | |
Financial liabilities at amortized cost: | | | | | | | | | | | | | | | | | | | | | | | | |
Deposits from the Central Bank | | | — | | | 89,863 | | | — | | | — | | | — | | | — | | | — | |
| 89,863 |
Deposits from credit institutions | | | 26,523 | | | 38,267 | | | 1,621 | | | 2,722 | | | 5,845 | | | 282 | | | 1,970 | |
| 77,230 |
Customer deposits | | | 538,955 | | | 166,428 | | | 23,128 | | | 80,235 | | | 5,140 | | | 3,831 | | | 1,350 | |
| 819,067 |
Marketable debt securities | | | — | | | 24,396 | | | 12,343 | | | 34,317 | | | 43,387 | | | 24,869 | | | 10,957 | |
| 150,269 |
Subordinated liabilities | | | — | | | 191 | | | 382 | | | 2,085 | | | 4,586 | | | 4,586 | | | 51,991 | |
| 63,821 |
Other financial liabilities | | | — | | | 14,741 | | | 2,507 | | | 2,050 | | | 175 | | | — | | | — | |
| 19,473 |
| | | 565,478 | |
| 333,886 | |
| 39,981 | |
| 121,409 | |
| 59,133 | |
| 33,568 | |
| 66,268 | |
| 1,219,723 |
F-177
c) Foreign currency balances
The breakdown of the main foreign currency balances in the consolidated balance sheet based on the nature of the related items is as follows:
| | | | | | | | | | | | |
| | | Equivalent Value in Millions of Pesos | |||||||||
| | | 12/31/2021 | | 12/31/2022 | |||||||
|
|
| Assets |
|
| Liabilities |
|
| Assets |
|
| Liabilities |
| | | | | | | | | | | | |
Cash and balances with the Central Bank | |
| 3,727 | | | — | |
| 3,307 | | | — |
Debt instruments (Note 8) | |
| 202,775 | | | — | |
| 122,692 | | | — |
Loans and advances to credit institutions (Note 7) | |
| 28,594 | | | — | |
| 55,696 | | | — |
Loans and advances to customers | |
| 78,504 | | | — | |
| 81,477 | | | — |
Other assets | |
| 387 | | | — | |
| 159 | | | — |
Marketable debt securities (Note 21) | |
| — | | | 56,995 | |
| — | | | 35,724 |
Subordinated liabilities | |
| — | | | 51,654 | |
| — | | | 39,389 |
Derivatives | |
| — | | | 73,858 | |
| — | | | 52,890 |
Deposits from Central Bank | | | — | | | — | | | — | | | — |
Deposits from credit institutions (Note 19) | |
| — | | | 33,467 | |
| — | | | 30,933 |
Customer deposits (Note 20) | |
| — | | | 92,987 | |
| — | | | 94,975 |
Other financial liabilities | |
| — | | | 1,057 | |
| — | | | 2,543 |
Other liabilities | |
| — | | | 3,184 | |
| — | | | 5,060 |
d) Fair value of financial assets and financial liabilities that are not measured at fair value (but fair value disclosures are required)
i. Financial assets measured at other than fair value
The following table sets out the fair values of financial assets not measured at fair value and analyzes them by the level in the fair value hierarchy into which each fair value measurement is categorized.
Except as detailed in the following table, the Bank considers the carrying amounts of financial assets recognized in the consolidated financial statements approximate their fair values.
F-178
As of December 31, 2021:
| | | | | | | | | | | | | | | |
|
|
| |
|
| |
|
| |
|
| Total fair | |
| Total |
Assets | | | Level 1 | | | Level 2 | | | Level 3 | | | values | | | carrying amount |
| | | | | | | | | | | | | | | |
Financial assets at amortized cost: | | | | | | | | | | | | | | | |
Loans and advances to credit institutions (Note 7) | |
| — | | | 16,551 | | | 19,842 | |
| 36,393 | |
| 36,492 |
Loans and advances to customers (Note 11) | |
| — | | | 191 | | | 738,646 | |
| 738,837 | |
| 736,997 |
Debt instruments (unlisted) (Note 8) | |
| — | | | 11,619 | | | — | |
| 11,619 | |
| 11,619 |
As of December 31, 2022:
| | | | | | | | | | | | | | | |
|
|
| |
|
| |
|
| |
|
| Total fair | | | Total |
Assets | | | Level 1 | | | Level 2 | | | Level 3 | | | values | | | carrying amount |
| | | | | | | | | | | | | | | |
Financial assets at amortized cost: | | | | | | | | | | | | | | | |
Loans and advances to credit institutions (Note 7) | |
| — | | | 17,971 | | | 22,839 | |
| 40,810 | | | 40,400 |
Loans and advances to customers (Note 11) | |
| — | | | 320 | | | 770,130 | |
| 770,450 | | | 797,716 |
Debt instruments (unlisted) (Note 8) | |
| 12,248 | | | 10,010 | | | — | |
| 22,258 | | | 22,241 |
Other financial instruments not carried at fair value are typically short-term in nature and reprise to current market rates frequently and their carrying amount approximates fair value such as Balances with the Central Bank.
ii. Financial liabilities measured at other than fair value
The following table sets out the fair values of financial liabilities not measured at fair value and analyzes them by the level in the fair value hierarchy into which each fair value measurement is categorized.
Except as detailed in the following table, the Bank considers the carrying amounts of financial liabilities recognized in the consolidated financial statements approximate their fair values.
F-179
As of December 31, 2021:
| | | | | | | | | | | | | | | |
|
|
| |
|
| |
|
| |
|
| Total fair |
|
| Total |
Liabilities | | | Level 1 | | | Level 2 | | | Level 3 | | | values | | | carrying amount |
| | | | | | | | | | | | | | | |
Financial liabilities at amortized cost: | | | | | | | | | | | | | | | |
Deposits from the Central Bank - Repurchase agreements (Note 19) | |
| — | | | 86,608 | | | — | |
| 86,608 | |
| 86,616 |
Deposits from credit institutions (Note 19) | |
| — | | | 26,892 | | | 51,337 | |
| 78,229 | |
| 78,182 |
Deposits from credit institutions - Repurchase agreements (Note 19) | | | — | | | 5,156 | | | — | |
| 5,156 | |
| 5,157 |
Customer deposits (Note 20) | |
| — | | | 52,566 | | | 706,455 | |
| 759,021 | |
| 760,325 |
Customer deposits - Repurchase agreements (Note 20) | | | — | | | 17,559 | | | — | |
| 17,559 | |
| 17,561 |
Marketable debt securities (Note 21) | |
| 104,582 | | | — | | | — | |
| 104,582 | |
| 101,423 |
Subordinated liabilities (Note 22) | |
| 38,911 | | | 14,375 | | | — | |
| 53,286 | |
| 51,643 |
Other financial liabilities (Note 23) | |
| — | | | 9,841 | | | 7,359 | |
| 17,200 | |
| 17,238 |
As of December 31, 2022:
| | | | | | | | | | | | | | | |
|
|
| |
|
| |
|
| |
|
| Total fair | |
| Total |
Liabilities | | | Level 1 | | | Level 2 | | | Level 3 | | | values | | | carrying amount |
| | | | | | | | | | | | | | | |
Financial liabilities at amortized cost: | | | | | | | | | | | | | | | |
Deposits from the Central Bank - Repurchase agreements (Note 19) | |
| — | | | 89,751 | | | — | |
| 89,751 | |
| 89,753 |
Deposits from credit institutions (Note 19) | |
| — | | | 24,633 | | | 39,884 | |
| 64,517 | |
| 65,354 |
Deposits from credit institutions - Repurchase agreements (Note 19) | | | — | | | 9,003 | | | — | |
| 9,003 | |
| 9,003 |
Customer deposits (Note 20) | |
| — | | | 62,041 | | | 718,445 | |
| 780,486 | |
| 781,607 |
Customer deposits - Repurchase agreements (Note 20) | | | — | | | 26,922 | | | — | |
| 26,922 | |
| 26,922 |
Marketable debt securities (Note 21) | |
| 133,229 | | | — | | | — | |
| 133,229 | |
| 134,393 |
Subordinated liabilities (Note 22) | |
| 25,655 | | | 13,905 | | | — | |
| 39,560 | |
| 39,384 |
Other financial liabilities (Note 23) | |
| — | | | 10,891 | | | 8,575 | |
| 19,466 | |
| 19,473 |
The methodology and inputs used to calculate the fair value for each financial asset and liability class are as follows:
- | Loans and advances at amortized cost at a variable or fixed interest rate and maturing in less than one year: Their fair value has been estimated to match their book value because there are no material differences. |
- | Loans and advances at amortized cost with maturity greater than one year: Fair value has been obtained using the present value model that discounts future cash flows at the current date using interest rates based on directly or indirectly observable market data to calculate the discount rate, but also using certain non-observable market input, such as the credit risk associated with the loan portfolio for the allowance of future flows and current loan portfolio conditions (net commissions, operating expenses, medium-term, etc.). |
- | Unlisted debt instruments: Their fair value has been estimated to be equal to their amortized cost given that, because they are non-negotiable financial instruments issued by the Mexican Government, this value would be considered to execute a prepayment transaction at fair value. |
- | Financial liabilities at amortized cost at a variable or fixed interest rate and maturing in less than one year: Their fair value has been estimated to match their book value because there are no material differences. |
F-180
- | Financial liabilities at amortized cost with maturity greater than one year: Their fair value has been obtained by using the present value model that discounts future cash flows at the current date using interest rates based on directly or indirectly observable market data to calculate the discount rate. |
- | Marketable debt securities and subordinated liabilities: Fair value has been obtained using quoted market price, if available, or the present value model that discounts future cash flows at the current date using interest rates based on directly or indirectly observable market data to calculate the discount rate. For level 2, the Bank uses quoted prices for similar liabilities in active markets. |
- | Other financial liabilities: Their fair value has been estimated to be equal to their amortized cost since they are mainly composed by short-term balances. |
e) Significant restrictions
See Note 49.d for significant restrictions on the ability to access or use the assets and settle the liabilities of the Bank as of December 31, 2022.
f) Restriction on Accumulated reserves distribution
As of December 31, 2021 and 2022, the Bank did not have any restriction on Accumulated reserves distribution, except for the legal reserve as mentioned in Note 29 (16,365 million pesos in legal reserve that includes 12,710 million pesos in legal reserve of Banco Santander México as of December 31, 2021 and 16,365 million pesos in legal reserve that includes 13,971 million pesos in legal reserve of Banco Santander México as of December 31, 2022) and the remeasurement of defined benefit obligation. In addition, the Bank is restricted from distributing dividends that will result in non-compliance with minimum capitalization requirements established by the CNBV (see Note 30).
46. Operating segments
The Bank has three operating segments, as described below:
- | Retail Banking: this segment encompasses the entire commercial banking business. The retail banking activities include products and services for SME such as personal loans, deposit-taking, employee payroll accounts for corporate customers, credit and debit cards and overdraft facilities. |
- | Corporate and Investment Banking: this segment reflects the Santander Corporate and Investment Banking business in Mexico, including all the managed treasury departments and the equities business. The Santander Corporate and Investment Banking activities include products and services for our corporate customers, such as investment banking and project finance. |
- | Corporate Activities: this segment includes the centralized management business relating to financial and industrial investments, the financial management of the structural currency position and its structural interest rate risk position and the management of liquidity and equity through issues and securitizations and assets and liabilities management. |
The Bank does not have any customers that individually accounted for 10% or more of the Bank’s interest and similar income for 2020, 2021 and 2022.
F-181
The 2020 consolidated income statement and other significant data are as follows:
| | | | | | | | | | | | | |
|
|
|
|
|
| Corporate | |
|
|
|
|
|
|
| | | Retail | | | and Investment | | | Corporate | | | | |
2020 | | | Banking | | | Banking | | | Activities | | | Total | |
| | | | | | | | | | | | | |
Net interest income | |
| 61,444 | | | 5,605 | | | (1,239) | |
| 65,810 | |
Dividend income | | | — | | | 39 | | | 207 | |
| 246 | |
Income from companies accounted for using the equity method | | | — | | | — | | | 178 | | | 178 | |
Net fee and commission income | |
| 15,551 | | | 1,668 | | | (196) | |
| 17,023 | |
Gains/(losses) on financial assets and liabilities (net) | |
| 1,421 | | | 3,888 | | | 675 | |
| 5,984 | |
Exchange differences (net) | | | — | | | — | | | 19 | | | 19 | |
Other operating income/(expenses) | |
| (2,695) | | | (714) | | | (153) | |
| (3,562) | |
Total income | |
| 75,721 | |
| 10,486 | |
| (509) | |
| 85,698 | |
Administrative expenses | |
| (25,649) | | | (3,830) | | | (656) | |
| (30,135) | |
Depreciation and amortization | |
| (5,339) | | | (376) | | | (28) | |
| (5,743) | |
Impairment losses on financial assets not at fair value through profit or loss (net) | |
| (20,772) | | | (1,027) | | | — | |
| (21,799) | |
Gains/(losses) on modification of financial assets (net) | | | (1,743) | | | — | | | — | | | (1,743) | |
Impairment losses on other assets (net) | | | (119) | | | — | | | — | | | (119) | |
Provisions (net) | |
| (143) | | | (10) | | | (821) | |
| (974) | |
Gains/(losses) on disposal of assets not classified as non-current assets held for sale (net) | |
| — | | | — | | | 6 | | | 6 | |
Gains/(losses) on disposal of non-current assets not classified as discontinued operations (net) | |
| — | | | — | | | 9 | |
| 9 | |
Operating profit before tax | |
| 21,956 | |
| 5,243 | |
| (1,999) | |
| 25,200 | |
Income tax | |
| | | | | | | | |
| (6,226) | |
Profit for the year | |
| | | | | | | | |
| 18,974 | |
Profit attributable to the Parent | |
| | | | | | | | |
| 18,974 | |
Profit attributable to non-controlling interest | |
| | | | | | | | |
| — | |
Total assets | |
| 654,572 | | | 760,895 | | | 422,447 | |
| 1,837,914 | |
Total liabilities | |
| 676,529 | | | 783,942 | | | 223,609 | |
| 1,684,080 | |
F-182
The 2021 consolidated income statement and other significant data are as follows:
| | | | | | | | | | | | | |
|
|
|
|
|
| Corporate | |
|
|
|
|
|
|
| | | Retail | | | and Investment | | | Corporate | | | | |
2021 | | | Banking | | | Banking | | | Activities | | | Total | |
| | | | | | | | | | | | | |
Net interest income | |
| 58,045 | | | 4,295 | | | 1,092 | |
| 63,432 | |
Dividend income | |
| — | | | 29 | | | 198 | |
| 227 | |
Income from companies accounted for using the equity method | | | — | | | — | | | 200 | | | 200 | |
Net fee and commission income | |
| 15,729 | | | 1,594 | | | (117) | |
| 17,206 | |
Gains/(losses) on financial assets and liabilities (net) | |
| 1,493 | | | 3,228 | | | 162 | |
| 4,883 | |
Exchange differences (net) | | | — | | | — | | | (35) | | | (35) | |
Other operating income/(expenses) | |
| (2,967) | | | (508) | | | 9 | |
| (3,466) | |
Total income | |
| 72,300 | |
| 8,638 | |
| 1,509 | |
| 82,447 | |
Administrative expenses | |
| (26,525) | | | (3,810) | | | (537) | |
| (30,872) | |
Depreciation and amortization | |
| (5,849) | | | (364) | | | (30) | |
| (6,243) | |
Impairment losses on financial assets not at fair value through profit or loss (net) | |
| (18,115) | | | (1,114) | | | — | |
| (19,229) | |
Impairment losses on other assets (net) | | | (27) | | | — | | | — | |
| (27) | |
Provisions (net) | |
| 200 | | | — | | | (586) | |
| (386) | |
Gains/(losses) on disposal of assets not classified as non-current assets held for sale (net) | |
| — | | | — | | | 57 | |
| 57 | |
Gains/(losses) on disposal of non-current assets not classified as discontinued operations (net) | |
| — | | | — | | | 20 | | | 20 | |
Operating profit before tax | |
| 21,984 | |
| 3,350 | |
| 433 | |
| 25,767 | |
Income tax | | | | | | | | | | |
| (4,966) | |
Profit for the year | | | | | | | | | | |
| 20,801 | |
Profit attributable to the Parent | | | | | | | | | | |
| 20,801 | |
Profit attributable to non-controlling interest | | | | | | | | | | |
| — | |
Total assets | |
| 685,590 | | | 525,722 | | | 466,901 | |
| 1,678,213 | |
Total liabilities | |
| 726,626 | | | 604,758 | | | 183,241 | |
| 1,514,625 | |
F-183
The 2022 consolidated income statement and other significant data are as follows:
| | | | | | | | | | | | | |
|
|
|
|
|
| Global | |
|
|
|
|
|
|
| | | Retail | | | Corporate | | | Corporate | | | | |
2022 | | | Banking | | | Banking | | | Activities | | | Total | |
| | | | | | | | | | | | | |
Net interest income | |
| 65,477 | | | 9,216 | | | 419 | |
| 75,112 | |
Dividend income | |
| — | | | 13 | | | 173 | |
| 186 | |
Income from companies accounted for using the equity method | | | — | | | — | | | 182 | | | 182 | |
Net fee and commission income | |
| 17,639 | | | 1,615 | | | (22) | |
| 19,232 | |
Gains/(losses) on financial assets and liabilities (net) | |
| 1,255 | | | (138) | | | (93) | |
| 1,024 | |
Exchange differences (net) | | | — | | | (7) | | | — | | | (7) | |
Other operating income/(expenses) | |
| (2,785) | | | (557) | | | (1,134) | |
| (4,476) | |
Total income | |
| 81,586 | |
| 10,142 | |
| (475) | |
| 91,253 | |
Administrative expenses | |
| (29,151) | | | (3,846) | | | (768) | |
| (33,765) | |
Depreciation and amortization | |
| (6,293) | | | (372) | | | (21) | |
| (6,686) | |
Impairment losses on financial assets not at fair value through profit or loss (net) | | | (17,323) | | | 1,240 | | | — | | | (16,083) | |
Provisions (net) | |
| (230) | | | (33) | | | (2,258) | |
| (2,521) | |
Gains/(losses) on disposal of assets not classified as non-current assets held for sale (net) | |
| — | | | — | | | 4 | |
| 4 | |
Gains/(losses) on disposal of non-current assets not classified as discontinued operations (net) | |
| — | | | — | | | 70 | |
| 70 | |
Operating profit before tax | |
| 28,589 | |
| 7,131 | |
| (3,448) | |
| 32,272 | |
Income tax | | | | | | | | | | |
| (8,164) | |
Profit for the year | | | | | | | | | | |
| 24,108 | |
Profit attributable to the Parent | | | | | | | | | | |
| 24,108 | |
Profit attributable to non-controlling interest | | | | | | | | | | |
| — | |
Total assets | |
| 754,548 | | | 656,392 | | | 402,481 | |
| 1,813,421 | |
Total liabilities | |
| 748,904 | | | 707,728 | | | 193,335 | |
| 1,649,967 | |
47. Related-party transactions
Transactions with related parties
The parties related to the Bank are deemed to include, in addition to its subsidiaries and associated entity, the Bank’s key management personnel (the member of its Board of Directors, executive officers and other key management personnel, together with their close family members) and the entities over which the key management personnel may exercise significant influence or control.
The Bank also considers the companies that are part of Banco Santander (Spain).
To facilitate comprehension, the information is divided into the following categories:
Ultimate Parent Company
This category includes balances with Banco Santander (Spain).
Santander Group Companies
This category includes all the companies that are controlled by Banco Santander (Spain) around the world, and hence, it includes the companies over which the Bank exercises any degree of control.
F-184
The information related to directors, executive officers and other key management personnel is detailed in Note 5.
| | | | | | | | | | | | | |
| | 12/31/2021 | | 12/31/2022 | |||||||||
|
|
| Ultimate | | | Santander |
| | Ultimate |
|
| Santander | |
| | | Parent | | | Group | | | Parent | | | Group | |
| | | Company | | | Companies | | | Company | | | Companies | |
| | | | | | | | | | | | | |
ASSETS: | | | | | | | | | | | | | |
Financial assets at fair value through profit or loss - | | | | | | | | | | | | | |
Trading derivatives - | | | | | | | | | | | | | |
Of which - | | | | | | | | | | | | | |
Banco Santander, S.A. (Spain) | | | 79,660 | | | — | | | 99,291 | | | — | |
Banco Santander (Chile) | | | — | | | 654 | | | — | | | 372 | |
Loans and advances to customers - | | | | | | | | | | | | | |
Of which - | | | | | | | | | | | | | |
Casa de Bolsa Santander, S.A. de C.V. | | | — | | | — | | | — | | | 508 | |
Financial assets at amortized cost - | | | | | | | | | | | | | |
Loans and advances to credit institutions - | | | | | | | | | | | | | |
Of which - | | | | | | | | | | | | | |
Banco Santander, S.A. (Spain) | | | 5,147 | | | — | | | 5,845 | | | — | |
Banco Santander (Brasil), S.A. | | | — | | | — | | | — | | | 907 | |
Loans and advances to customers - | | | | | | | | | | | | | |
Of which - | | | | | | | | | | | | | |
Santander Capital Structuring, S.A. de C.V. | | | — | | | — | | | — | | | 224 | |
SMPS Merchant Platform Solutions México, S.A de C.V | | | — | | | — | | | — | | | 84 | |
Santander Global Technology, S.L., Sociedad Unipersonal (formerly, Produban Servicios Informáticos Generales, S.L.) | | | — | | | 908 | | | — | | | — | |
Key management personnel | | | — | | | 4,178 | | | — | | | 4,351 | |
Other intangible assets - | | | | | | | | | | | | | |
Of which - | | | | | | | | | | | | | |
Santander Global Technology, S.L., Sociedad Unipersonal (formerly Produban Servicios Informáticos Generales, S.L.) | | | — | | | 469 | | | — | | | 143 | |
Santander Back-Offices Globales Mayoristas, S.A. | | | — | | | 4 | | | — | | | 9 | |
Santander Global Facilities, S.A. de C.V. | | | — | | | 36 | | | — | | | 112 | |
Other | | | — | | | 8 | | | — | | | 10 | |
Other assets - | | | | | | | | | | | | | |
Of which - | | | | | | | | | | | | | |
Banco Santander, S.A. (Spain) | | | 8 | | | — | | | — | | | — | |
Zurich Santander Seguros México, S.A. | | | — | | | 1,177 | | | — | | | 1,239 | |
Santander Global Technology, S.L., Sociedad Unipersonal (formerly, Produban Servicios Informáticos Generales, S.L.) | | | — | | | 268 | | | — | | | — | |
SAM Asset Management, S.A. de C.V., Sociedad Operadora de Fondos de Inversión | | | — | | | 184 | | | — | | | 190 | |
SMPS Merchant Platform Solutions México, S.A de C.V | | | — | | | 42 | | | — | | | 15 | |
Other | | | — | | | 30 | | | — | | | 19 | |
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| | | | | | | | | | | | | |
| | 12/31/2021 | | 12/31/2022 | |||||||||
|
|
| Ultimate | | | Santander |
| | Ultimate | | | Santander | |
| | | Parent | | | Group | | | Parent | | | Group | |
| | | Company | | | Companies | | | Company | | | Companies | |
| | | | | | | | | | | | | |
LIABILITIES AND EQUITY: | | | | | | | | | | | | | |
Financial liabilities at fair value through profit or loss - | | | | | | | | | | | | | |
Trading derivatives - | | | | | | | | | | | | | |
Of which - | | | | | | | | | | | | | |
Banco Santander, S.A. (Spain) | | | 64,582 | | | — | | | 83,133 | | | — | |
Customer deposits - Repurchase agreements | | | | | | | | | | | | | |
Of which - | | | | | | | | | | | | | |
Casa de Bolsa Santander, S.A. de C.V. | | | — | | | 2,773 | | | — | | | 3,214 | |
Other | | | — | | | — | | | — | | | 4 | |
Financial liabilities at amortized cost - | | | | | | | | | | | | | |
Deposits from credit institutions - | | | | | | | | | | | | | |
Of which - | | | | | | | | | | | | | |
Banco Santander, S.A. (Spain) | | | 15,535 | | | — | | | 16,896 | | | — | |
Banco S3 México, S.A., Institución de Banca Múltiple | | | — | | | 7 | | | — | | | 6 | |
Banco Santander (Brasil), S. A. | | | — | | | 82 | | | — | | | — | |
Customer deposits - | | | | | | | | | | | | | |
Of which- | | | | | | | | | | | | | |
SMPS Merchant Platform Solutions México, S.A de C.V | | | — | | | — | | | — | | | 887 | |
Operadora de Carteras Gamma, S.A.P.I. de C.V. | | | — | | | 148 | | | — | | | 174 | |
Mercadotecnia, Ideas y Tecnología, S.A de C.V. | | | — | | | — | | | — | | | 92 | |
Decarome, S.A.P.I. de C.V. | | | — | | | 70 | | | — | | | 57 | |
Santander Global Facilities, S.A. de C.V. | | | — | | | 1,780 | | | — | | | 1,819 | |
Servicios de Cobranza, Recuperación y Seguimiento, S.A. de C.V. | | | — | | | 110 | | | — | | | 193 | |
Santander Global Technology, S.L., Sociedad Unipersonal (formerly, Produban Servicios Informáticos Generales, S.L.) | | | — | | | 517 | | | — | | | 112 | |
Santander Capital Structuring, S.A. de C.V. | | | — | | | 238 | | | — | | | 223 | |
Gesban México Servicios Administrativos Globales, S.A. De C.V. | | | — | | | 56 | | | — | | | 47 | |
Other(*) | | | — | | | 5,383 | | | — | | | 2,630 | |
Marketable debt securities - | | | | | | | | | | | | | |
Of which - | | | | | | | | | | | | | |
Banco Santander, S.A. (Spain) | | | 1,011 | | | — | | | — | | | — | |
Other | | | — | | | 27 | | | — | | | 25 | |
Subordinated liabilities - | | | | | | | | | | | | | |
Of which - | | | | | | | | | | | | | |
Banco Santander, S.A. (Spain) | | | 43,693 | | | — | | | 32,960 | | | — | |
Other financial liabilities - | | | | | | | | | | | | | |
Of which - | | | | | | | | | | | | | |
Banco Santander, S.A. (Spain) | | | 1,924 | | | — | | | 1,642 | | | — | |
Santander Global Facilities, S.A. de C.V. | | | — | | | 335 | | | — | | | — | |
Other | | | — | | | 13 | | | — | | | 6 | |
Other liabilities - | | | | | | | | | | | | | |
Of which - | | | | | | | | | | | | | |
Santander Back-offices Globales Mayorista, S.A. | | | — | | | 35 | | | — | | | 80 | |
Banco Santander (Brasil), S. A. | | | — | | | 77 | | | — | | | 69 | |
Santander Global Facilities, S.A. de C.V. | | | — | | | 18 | | | — | | | 368 | |
Santander Global Technology, S.L., Sociedad Unipersonal (formerly, Produban Servicios Informáticos Generales, S.L.) | | | — | | | 972 | | | — | | | 1,130 | |
Other | | | — | | | 50 | | | — | | | 114 | |
(*) | As of December 31, 2021 and 2022, includes 5,093 million pesos and 2,267 million pesos, respectively, related to key management personnel transactions. |
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| | | | | | | | | | | | | | | | | | | |
| | 2020 | | | 2021 | | | 2022 | | ||||||||||
|
|
| Ultimate |
|
| Santander |
|
| Ultimate |
|
| Santander |
|
| Ultimate |
|
| Santander |
|
| | | Parent | | | Group | | | Parent | | | Group | | | Parent | | | Group | |
| | | Company | | | Companies | | | Company | | | Companies | | | Company | | | Companies | |
| | | | | | | | | | | | | | | | | | | |
INCOME STATEMENT: | | | | | | | | | | | | | | | | | | | |
Interest income - | | | | | | | | | | | | | | | | | | | |
Of which - | | | | | | | | | | | | | | | | | | | |
Banco Santander, S.A. (Spain) | |
| 1 | | | — | |
| 2 | | | — | |
| 2 | | | — | |
Santander Global Technology, S.L., Sociedad Unipersonal (formerly, Produban Servicios Informáticos Generales, S.L.) | |
| — | | | 84 | |
| — | | | — | |
| — | | | — | |
Santander Global Technology, S.L. | | | — | | | — | | | — | | | 19 | | | — | | | — | |
Casa de Bolsa Santander, S.A. de C.V. | | | — | | | 41 | | | — | | | 21 | | | — | | | 22 | |
Santander Capital Structuring, S.A. de C.V. | |
| — | | | 176 | |
| — | | | 123 | |
| — | | | 58 | |
Other | |
| — | | | 2 | |
| — | | | — | |
| — | | | 10 | |
Interest expense and similar charges - | | | | | | | | | | | | | | | | | | | |
Of which - | | | | | | | | | | | | | | | | | | | |
Banco Santander, S.A. (Spain) | |
| 1,310 | | | — | |
| 1,230 | | | — | |
| 1,516 | | | — | |
Casa de Bolsa Santander, S.A. de C.V. | | | — | | | 304 | | | — | | | 146 | | | — | | | 212 | |
Banco Santander International, S.A. | | | — | | | — | | | — | | | 26 | | | — | | | — | |
Santander Capital Structuring, S.A. de C.V. | | | — | | | — | | | — | | | 6 | | | — | | | — | |
Santander Global Technology, S.L. | | | — | | | — | | | — | | | 3 | | | — | | | — | |
Operadora de Carteras Gamma, S.A.P.I. de C.V. | | | — | | | — | | | — | | | 3 | | | — | | | 10 | |
Banco S3 México, S.A., Institución de Banca Múltiple | | | — | | | 41 | | | — | | | 21 | | | — | | | 25 | |
Santander Global Facilities, S.A. de C.V. | |
| — | | | 52 | |
| — | | | 70 | |
| — | | | 113 | |
Other | |
| — | | | 30 | |
| — | | | 10 | |
| — | | | 54 | |
Fee and commission income - | | | | | | | | | | | | | | | | | | | |
Of which - | | | | | | | | | | | | | | | | | | | |
Banco Santander, S.A. (Spain) | |
| 8 | | | — | |
| — | | | — | |
| — | | | — | |
Banco S3 México, S.A., Institución de Banca Múltiple | |
| — | | | — | |
| — | | | 24 | |
| — | | | 18 | |
Casa de Bolsa Santander, S.A. de C.V. | | | — | | | 55 | | | — | | | 142 | | | — | | | 180 | |
Zurich Santander Seguros México, S.A. | |
| — | | | 4,031 | |
| — | | | 4,284 | |
| — | | | 4,612 | |
SAM Asset Management, S.A. de C.V., Sociedad Operadora de Fondos de Inversión | |
| — | | | 1,608 | |
| — | | | 1,742 | |
| — | | | 1,895 | |
Other | |
| — | | | 25 | |
| — | | | 1 | |
| — | | | 10 | |
Fee and commission expense- | | | | | | | | | | | | | | | | | | | |
Of which - | | | | | | | | | | | | | | | | | | | |
Banco Santander, S.A. (Spain) | |
| 2 | | | — | |
| 2 | | | — | |
| 2 | | | — | |
Santander Global Facilities, S.A. de C.V. | |
| — | | | 135 | |
| — | | | 55 | |
| — | | | — | |
Servicios de Cobranza, Recuperación y Seguimiento, S.A. de C.V. | |
| — | | | 110 | |
| — | | | — | |
| — | | | — | |
Casa de Bolsa Santander, S.A. de C.V. | | | — | | | 34 | | | — | | | 43 | | | — | | | 57 | |
SAM Asset Management , S.A. de C.V., Sociedad Operadora de Fondos de Inversión | |
| — | | | 17 | |
| — | | | 18 | |
| — | | | 21 | |
Other | |
| — | | | — | |
| — | | | 1 | |
| — | | | 7 | |
Gains/(losses) on financial assets and liabilities (net) - | | | | | | | | | | | | | | | | | | | |
Of which - | | | | | | | | | | | | | | | | | | | |
Banco Santander, S.A. (Spain) | |
| (24,086) | | | — | |
| 18,441 | | | — | |
| 8,610 | | | — | |
Banco Santander (Chile) | | | — | | | (26) | | | — | | | 494 | | | — | | | (274) | |
Banco Santander International, S. A. | |
| — | | | — | |
| — | | | (4) | |
| — | | | (2) | |
Other | |
| — | | | (20) | |
| — | | | — | |
| — | | | — | |
Other operating income | | | | | | | | | | | | | | | | | | | |
Of which - | | | | | | | | | | | | | | | | | | | |
Santander Global Facilities, S.A. de C.V. | |
| — | | | 20 | |
| — | | | 7 | |
| — | | | — | |
SMPS Merchant Platform Solutions México S.A. de C.V. | | | — | | | — | | | — | | | 42 | | | — | | | 105 | |
Banco S3 México, S.A., Institución de Banca Múltiple | | | — | | | — | | | — | | | 13 | | | — | | | 17 | |
Santander Digital Assets, S.L. | | | — | | | 22 | | | — | | | — | | | — | | | — | |
Casa de Bolsa Santander, S.A. de C.V. | | | — | | | 55 | | | — | | | 56 | | | — | | | — | |
Santander Global Technology, S.L., Sociedad Unipersonal (formerly, Produban Servicios Informáticos Generales, S.L.) | |
| — | | | 79 | |
| — | | | 71 | |
| — | | | 78 | |
Other | |
| — | | | 37 | |
| — | | | 7 | |
| — | | | 12 | |
| | | | | | | | | | | | | | | | | | | |
Administrative expenses - | | | | | | | | | | | | | | | | | | | |
Of which - | | | | | | | | | | | | | | | | | | | |
Banco Santander, S.A. (Spain) | |
| 464 | | | — | |
| 524 | | | — | |
| 476 | | | — | |
Santander Global Technology, S.L., Sociedad Unipersonal (formerly, Produban Servicios Informáticos Generales, S.L.) | |
| — | | | 2,875 | |
| — | | | 3,328 | |
| — | | | 3,307 | |
Santander Global Facilities, S.A. de C.V. | |
| — | | | 446 | |
| — | | | 470 | |
| — | | | 369 | |
Gesban México Servicios Administrativos Globales, S.A. de C.V. | | | — | | | 55 | | | — | | | 58 | | | — | | | 54 | |
Santander Back-offices Globales Mayorista, S.A. | | | — | | | 71 | | | — | | | 101 | | | — | | | 109 | |
Santander Global Technology Chile Limitada | | | — | | | — | | | — | | | 5 | | | — | | | — | |
Aquanima México, S. de R.L. de C.V. | |
| — | | | 74 | |
| — | | | 72 | |
| — | | | 77 | |
Santander Global Facilities, S.L. | |
| — | | | — | |
| — | | | 23 | |
| — | | | 31 | |
Other | |
| — | | | 143 | |
| — | | | 14 | |
| — | | | 87 | |
See Note 5 for significant transactions with related parties.
F-187
48. Risk management
a) Risk principles and culture
The Bank’s risk principles below are compulsory. They comply with regulatory requirements and are inspired by best market practices:
1. | All employees are risk managers who must understand the risks associated with their functions and not assume risks with an impact that exceeds the Bank’s risk appetite or is unknown. |
2. | Involvement of senior managers, with consistent risk management and control through their conduct, actions and communications, as well as oversight of the risk culture and make sure the Bank maintain the risk profile within the defined risk appetite. |
3. | Independent risk management and control functions, according to the three lines of defense model of the Bank. |
4. | A forward-looking, comprehensive approach to risk management and control for all businesses and risk types. |
5. | Complete and timely information to identify, assess, manage and disclose risks to the appropriate level. |
The Bank’s holistic control structure stands on these principles and includes strategic tools and processes set out in the risk appetite statement, such as annual planning and budget planning, scenario analysis, the risk reporting structure and risk identification and assessment.
1. Risk factors
The Bank's risks categorization ensures effective risk management, control and reporting. The risk framework distinguishes these key risk types:
● | Credit risk relates to financial loss arising from the default or credit quality deterioration of a customer or counterparty, to which the Bank has directly provided credit or assumed a contractual obligation. |
● | Market risk results from changes in interest rates, exchange rates, equities, commodities and other market factors, and from their effect on profit or capital. It includes the structural risk relates to market movements or balance sheets behavior will change the value or profit generation of assets or liabilities in the banking book. |
● | Liquidity risk occurs if liquid financial resources are insufficient or too costly to obtain in order to meet liabilities when they fall due. |
● | Capital risk is the risk that arises from the possibility of having an inadequate quantity or quality of capital to meet internal business objectives, regulatory requirements or market expectations in the area of structural risk. |
The Bank also takes into account, on an ongoing basis in its management of the risk function, operational, regulatory compliance, model, reputational and strategic risks.
Additionally, environmental and climate-related risk factors are considered as factors that could impact the existing risks in the medium-to-long-term. These elements include, on the one hand, those derived from the physical effects of climate change, generated by one-off events as well as by chronic changes in the
F-188
environment and, on the other hand, those derived from the process of transition to a development model with lower emissions, including legislative, technological or behavior of economic agents changes.
2. Risk governance
The Bank has a robust risk governance structure, aimed at ensuring the effective control of its risk profile in accordance with the risk appetite defined by the Board of Directors.
The Board of Directors is responsible for approving the general framework for risk management and control, including tax risks.
This governance framework is underpinned by the distribution of roles among the three lines of defense, a robust structure of committees and a strong relationship between Banco Santander México and its subsidiaries. All supported by the Bank-wide risk culture, Risk Pro.
2.1 Lines of defense
The Bank model of three lines of defense effectively manages and controls risks:
•First line: Formed by businesses and functions that take or originate exposure to risk, it recognizes, measures, controls, monitors and reports on risks according to internal risk management regulation. Risk origination must be consistent with the approved risk appetite and related limits.
•Second line: Formed by the Risk and Compliance and Conduct functions, it independently oversees and challenges the first line’s risk management. Its duties include ensuring that risks are managed according to the risk appetite defined by senior management and strengthening the risk culture throughout the Bank.
•Third line: The Internal Audit function, which is independent to ensure the Board of Directors and senior managers with high-quality and efficient internal controls, governance and risk management systems, helping to safeguard our value, solvency and reputation.
The Risk, Compliance and Conduct and Internal Audit functions are separated and independent. Each one has direct access to the Board of Directors and its committees.
2.2 Risk committee structure
The Board of Directors is ultimately responsible for risk and compliance management and control. It revises and approves the Bank's risk frameworks and appetite, while promoting a strong risk culture across the Bank. The Board of Directors relies on its risk supervision, regulation and compliance committee for risk control and on the Bank’s executive committee for risk approval.
The Bank’s Chief Risk Officer (CRO) who decides risk strategy and promotes proper risk culture, is in charge of overseeing all risks and challenging and advising business lines on risk management.
The Bank’s Chief Compliance Officer (CCO) who decides compliance and conduct strategy, is in charge of controlling the risks within their purview and must provide the Bank CRO with a complete overview on the situation of risks being monitored.
Both the Bank´s CRO and CCO have direct access, and report to the risk supervision, regulation and compliance committee and the Board of Directors.
The executive risk, risk control and compliance and conduct committees are executive committees and have been delegated powers by the Board of Directors.
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Risk functions have forums and regular meetings to manage and control the risks under their scope. Their responsibilities include:
• | Reporting to the Bank’s CRO, the Bank’s CCO, the risk control committee and the compliance and conduct committee on risk management according to risk appetite; |
• | Monitoring and ensuring proper management of each risk factor; and |
• | Overseeing measures to comply with supervisors and auditors' expectations. |
In order to establish an appropriate control environment in the management of each of the risk factors, the Risk and Compliance and Conduct functions have effective internal regulations that allow them to carry out adequate risk management and control.
General compliance committee
The committee is responsible for reviewing significant compliance and conduct risk events, and evaluating related measures. It devises and assesses corrective actions for compliance risks owing to shortcomings in management and control or new risks.
This committee is chaired by the CCO and it is composed of senior management from the Compliance & Conduct, Risk, Accounting and Management functions. The committee chair has a casting vote over committee resolutions.
The Bank may set up additional governance for special cases. Amid the COVID-19 pandemic, coordination and communication are essential to making sure the Bank´s actions are effective, underpinned by written communication, meetings, reporting and enhanced governance
The Bank monitored the pandemic intensively through special situation forums such as the credit risk war room, in addition to the Bank´s regular governance framework.
In order to steer and supervise the review process of the IBOR Reform, the Bank established the IBOR steering group. This group is responsible for driving the project's strategic direction and take the required decisions to ensure a correct transition across all the Bank’s business units. The IBOR steering group operates in accordance with the methodology defined by the Bank's Execution Project Office and is chaired by the project's sponsor, the head of Santander Corporate & Investment Banking (SCIB), with the additional support of eight senior executives.
3. Management processes and tools
The Bank has these effective risk management processes and tools:
3.1 Risk appetite and structure of limits
Risk appetite is the volume and type of risks deemed prudent to assume for the business strategy of the Bank, even under unexpected circumstances. It considers adverse scenarios that could have a negative impact on capital and liquidity, profitability and/or the share price.
The risk appetite statement (RAS) is annually set by the Board of Directors for the Bank. The Board of Directors is responsible for approving the respective risk appetite proposals.
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3.1.1 Business model and risk appetite fundamentals
The Bank's risk appetite is consistent with the risk culture and its unique business model built on customer focus, scale and diversification. At the core of the Bank´s risk appetite are:
● | A medium-low and predictable target risk profile that is centered on retail and commercial banking, internationally diversified operations and strong market share; |
● | Stable, recurrent earnings and shareholder remuneration, sustained by sound capital, liquidity and sources of funding; |
● | An independent risk function with active senior management that embeds a strong risk culture and drives a sustainable return on capital; |
● | A global, holistic view through a meticulous control and monitoring of risks, businesses and markets; |
● | A focus on products the Bank knows well; |
● | A conduct model that protects the Bank's customers; and |
● | A remuneration policy that reconciles employees and executives' interests to risk appetite and long-term results. |
3.1.2 Risk appetite principles
The principles informing the Bank´s risk appetite are:
● | The Board of Directors and Bank’s Management responsibility for risk appetite; |
● | An enterprise-wide view of risk, back-testing and challenge of risk profile based on quantitative metrics and qualitative indicators; |
● | Forward-looking view based on plausible assumptions and adverse/stress scenarios to reflect the desired risk profile in the short and medium term; |
● | Strategic and business plans embedded in daily management by polices and limits; |
● | Common standards that align with Banco Santander (Spain); and |
● | Regular reviews, best practice and regulatory requirements with mechanisms in place to keep the risk profile stable and mitigate non-compliance. |
3.1.3 Structure of limits, monitoring and control
Risk appetite is expressed in qualitative terms and limits structured on these five core elements.
● | Earnings volatility: |
- Maximum loss that the Bank can tolerate in an acute stress scenario.
● | Solvency: |
- Minimum capital position that the Bank can tolerate in an acute stress scenario.
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- Maximum leverage that the Bank can tolerate in an acute stress scenario.
● | Liquidity: |
- Minimum structural liquidity position.
- Minimum liquidity horizon position that the Bank is willing to accept under a scenario of acute stress.
- Minimum liquidity coverage position.
● | Concentration: |
- Concentration in single names, sectors and portfolios.
- Concentration in non-investment grade counterparties.
- Concentration in large exposures.
● | Non-financial risks: |
- Maximum operational risk losses.
- Maximum risk profile.
- Non-financial risk indicators:
• Financial crime compliance (FCC).
• Cyber and security risk.
• Model risk.
• Reputational risk.
b) Credit risk
1. Introduction to the credit risk treatment
Credit risk refers to a potential financial loss from the default or credit quality deterioration of a customer or other third party with whom the Bank has a contractual obligation. It is the most important risk, both in terms of exposure and capital consumption. It also includes counterparty risk, country risk and sovereign risk.
Credit risk management
The Bank identifies, analyses, controls and decides on credit risk based on a holistic view of the credit risk cycle, which includes the transaction, the customer and the portfolio.
Credit risk identification is key to managing and controlling the Bank's portfolios effectively. The Bank classifies external and internal risks in each business and adopts corrective and mitigating measures when needed through these processes:
F-192
1.1 Planning
The Bank's planning helps to achieve business objectives and define specific action plans within the Bank's risk appetite framework.
Strategic commercial plans (SCP) are a management and control tool defined by the Business and Risk areas for the Bank's credit portfolios. They determine commercial strategies, risk policies, resources and infrastructure, ensuring a holistic view of the portfolios. They provide managers with an updated view of credit portfolio quality to measure credit risk, run internal controls over the defined strategy coupled with regular monitoring, detect significant deviations in risk and potential impacts, and take corrective actions when necessary. They also align with the Bank's risk appetite capital targets.
1.2. Risk assessment and credit rating
To analyze customers’ ability to meet contractual obligations, the Bank uses valuation and parameter estimation models in each of the segments. The Bank's credit quality valuation models are based on credit rating drivers, which are monitored to calibrate and adjust the decisions and ratings they assign. Depending on each segment, drivers can be:
● | Rating: resulting from the application of mathematical algorithms that have a quantitative model based on balance sheet ratios or macroeconomic variables, and a qualitative module supplemented by the credit analyst’s expert judgment. It is used for Santander Corporate and Investment Banking, corporate, institutional and small and medium-sized enterprises segments (with individualized treatment). |
● | Scoring: an automatic assessment system for credit applications. It automatically assigns an individual score to each credit. A behavior score is also calculated and updated monthly to assess customer’s behavior and therefore, with other variables, determine the credit expected loss, generally in the retail and small and medium-sized enterprises segments. |
The Bank's parameter estimation models follow econometric models built on the Bank's portfolios' historical defaults and losses and uses them to calculate economic and regulatory capital as well as IFRS 9 allowance for impairment losses for each portfolio.
The Bank regularly monitoring and evaluates models' appropriateness, predictive capacity, performance, granularity, compliance with policies and other related factors. The Bank reviews ratings with the latest available financial and economic information. The Bank has also increased the reviews for customers who are under closer observation or have automatic warnings in the risk management systems.
1.3. Credit risk mitigation techniques
Risk approval criteria are generally based on the borrowers’ ability to pay in fulfilment of financial obligations, notwithstanding any additional collateral or personal guarantees the Bank can require from them. To determine this, the Bank analyzes funds or net cash flows from their businesses or income with no guarantors or the assets pledged as collateral. The Bank always considers guarantors and collateral when deciding to approve a loan as a secondary means of recourse if the first channel fails.
In general, a guarantee is as a reinforcement measure added to a credit transaction to mitigate a loss due to a failure to meet a payment obligation.
The Bank has credit risk mitigation techniques for various types of customer and products. Some are for specific transactions (e.g., property) while others apply to a series of transactions (e.g., derivatives netting and collateral).
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1.4. Definition of limits, pre-classifications and pre-approvals
The Bank uses strategic commercial plans to manage credit portfolios, defining limits for each of them and for new originations, in line with the Bank´s credit risk appetite and its target risk profile.
Transposing the Bank´s risk appetite to portfolio management strengthens controls over the Bank´s credit portfolios.
The Bank´s limits, pre-classifications and pre-approvals processes determine the risk that the Bank can assume with each customer. The Business and Risk areas set risk limits that are approved by the executive risk committee (or delegated committees) and should reflect a transaction’s expected risk return.
The Bank applies various limits models to each segment:
● | Large corporate are subject to a pre-classification model based on a system for measuring and monitoring economic capital. Pre-classification models express the level of risk the Bank is willing to assume in transactions with customers/groups in terms of capital at risk, nominal cap and maximum tenors. To manage limits with financial entities, the Bank uses Credit Equivalent Risk (CER), which includes actual and expected risks with customers according to risk appetite and credit policies. |
● | Corporates and institutions that meet certain requirements (strong relationships, rating, etc.): The Bank uses simpler pre-classification model with an internal limit. It establishes a reference point in a customer's level of risk based on repayment capacity, overall indebtedness and a pool of banks. |
Transactions with large corporates, corporates and institutions above certain limits or with special characteristics could require approval from a senior credit analyst or a committee.
● | For individual customers and small and medium-sized enterprises with low turnover, the Bank manages large volumes of credit transactions with automatic decision models to classify customers and transactions. |
1.5. Scenario analysis
Scenario analysis is used in loan portfolio management as an evolution of the portfolio analysis. It enriches the understanding of the portfolio performance under different macroeconomic conditions, and allows management strategies to be anticipated and defined in order to avoid future deviations from the established plans and targets.
The approach taken with regard to scenario analysis consists of simulating the impact of alternative scenarios in the portfolio credit parameters (PD, LGD) and the associated expected credit losses. The results of this analysis are compared with the portfolio’s credit profile indicators to identify the most appropriate measures that could be developed to guide the required management actions.
Scenario analysis is integrated into credit management portfolio activities and in the strategic commercial plans.
1.6. Monitoring
Regularly monitoring business performance and comparing it to pre-defined plans is key to the Bank’s risk management. The Bank holistic monitoring of customers helps early detection of impacts on risk performance and credit quality. The Bank assigns customers a monitoring classification with a pre-defined course of action and ad hoc measures to correct any deviations. Monitoring, which considers transaction
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forecasts and characteristics, in addition to changes in classification, is performed by risk teams supported by the Internal Audit unit and is based on customer segmentation:
● | In the Santander Corporate and Investment Banking segment, monitoring, in the first instance, is a direct function of both the business manager and the risk analyst, who maintain the direct relationship with the customer and manage the portfolio. This guarantees an up-to-date view of the customers’ credit quality is always available and allows the Bank to anticipate situations of concern and take the necessary actions. |
● | For corporates, institutions and small and medium-sized enterprises with a credit analyst assigned, the function consists of identifying and tracking customers that require closer monitoring, reviewing ratings and continuously analyzing relevant indicators. |
● | For Santander Corporate and Investment Banking, corporate and institutions segments, the Bank performs the monitoring process through the Santander Customer Assessment Note (SCAN), which was implemented in the Bank since 2020 |
● | The Bank’s SCAN system aims to establish the level of monitoring, policies and specific actions for all individual customers, based on their credit quality and particular circumstances. Each customer is assigned a level of monitoring, and specific risk management actions, on a dynamic basis, with a specific manager appointed and agreed monitoring frequency. |
● | For individual customers, businesses and smaller small and medium-sized enterprises monitoring is carried out through automatic alerts, in order to detect shifts in the performance of the portfolio. |
In addition to customer credit quality monitoring, the Bank establishes the control procedures needed to analyze portfolios and performance, as well as any possible deviations regarding planning or approved alert levels.
Portfolio analysis systematically controls the evolution of credit risk with regard to budgets, limits and benchmarks, assessing the impacts of future situations, both exogenous and resulting from strategic decisions, to establish actions to keep the risk portfolio profile and volumes within the parameters set by the Bank within its risk appetite.
1.7. Recovery and collections management
The Collections and Recoveries area carries out recoveries, which are important to risk management. It defines an enterprise-wide management strategy with guidelines and general lines of action for the Bank based on the economic environment business model and other recovery conditions. Recovery management follows regulatory requirements set out on the management of non-performing and forborne exposures. In addition, the Bank applies specific policies on recovery management that include the principles of the different strategies.
The Collections and Recoveries areas directly manages customers, where value creation is based on effective and efficient collection management. New digital channels are becoming increasingly important in recovery management.
The diverse features of Bank’s customers make segmentation necessary in order to manage recoveries adequately. Mass management of large groups of customers with similar profiles and products is conducted through processes with a high technological and digital component, while personalized management focuses on customers who, because of their profile, require a specific manager and a more customized management.
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Recovery management is divided into four phases: in arrears, non-performing loans recoveries, write-offs recoveries and management of foreclosed assets.
The management scope for the Recovery function includes non-productive assets (NPA), corresponding to the forborne portfolios, non-performing loans, written-off loans and foreclosed assets, where the Bank may use mechanisms to rapidly reduce the volume of these assets, such as the sale of portfolios or foreclosed assets.
In the written-off loans category, debt instruments are included (past due or otherwise) the recovery of which, after an individualized analysis, is considered remote, due to the severe and unrecoverable impairment of the solvency of the transaction or the customer. Classification in this category involves full cancellation of the gross carrying amount of the loan and its derecognition, which does not mean that the Bank interrupts negotiations and legal proceedings to recover the amounts.
1.8 Forborne loan portfolio
Forbearance is defined as the modification of the payment conditions of a transaction that allow a customer who is experiencing financial difficulties (current or foreseeable), to fulfil their payment obligations.
The Bank follows rigorous criteria for the evaluation, classification and monitoring of such transactions, ensuring the strictest possible care and diligence in their approval and monitoring. Therefore, the forbearance transaction must be focused on recovery of the amounts due and the payment obligations adapted to the customer's current position and, in addition, losses must be recognized as soon as possible if any amounts are deemed irrecoverable.
Forbearance is never used to delay the immediate recognition of losses or to hinder the appropriate recognition of risk of default.
Further, the Bank defines the classification criteria for forborne transactions in order to ensure that any risks are suitably recognized, bearing in mind that they must remain classified as non-performing or watch list for an appropriate period to ensure reasonable certainty that repayment capacity can be recovered.
Certain information regarding the forborne loan portfolio is included in Note 11.f.
1.9 Credit risk metrics
Loans and advances to customers increased 0.9% year-on-year.
Non-performing loans amounted to 21,203 million pesos as of December 31, 2022, a 6% decrease compared to December 31, 2021.
As of December 31, 2022, the non-performing loans ratio was 2.5%, a decrease of 2 basis points compared to December 31, 2021.
As of December 31, 2022, the allowance for loan losses amounted to 21,652 million pesos, 3% higher than at the end of 2021, mainly explained by the recovery in the different loan portfolios.
As of December 31, 2022, the Bank recognized in the consolidated income statement an amount of 16,100 million pesos of impairment losses on financial assets, 16.37% less than in the year 2021.
Regarding credit risks, the main indicators are also continuously monitored and maintain a robust credit quality supported by mitigation measures and volume increases.
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2. Main aggregates and variations
Following are the main aggregates relating to credit risk from the Bank’s activities with customers:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Loans to customers | Non-performing loans | Percentage of non-performing loans by type of customer | ||||||||||||||||||||||||
|
|
| 2020 |
|
| 2021 |
|
| 2022 |
|
| 2020 |
|
| 2021 |
|
| 2022 |
|
| 2020 |
|
| 2021 |
|
| 2022 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
By loan type: | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Public Sector | |
| 73,016 | | | 85,256 | | | 52,094 | | | — | | | — | | | — | | | — | | | — | | | — | |
Commercial, financial and industrial | |
| 346,075 | | | 354,554 | | | 393,612 | | | 6,530 | | | 9,937 | | | 5,587 | | | 1.9% | | | 2.8% | | | 1.4% | |
Mortgage | |
| 177,665 | | | 199,579 | | | 205,242 | | | 9,847 | | | 9,725 | | | 11,867 | | | 5.5% | | | 4.9% | | | 5.8% | |
Installment loans to individuals | |
| 116,227 | | | 122,699 | | | 147,217 | | | 5,532 | | | 2,991 | | | 3,749 | | | 4.8% | | | 2.4% | | | 2.5% | |
Revolving consumer credit card loans | |
| 53,809 | | | 53,417 | | | 63,782 | | | 2,543 | | | 1,328 | | | 1,175 | | | 4.7% | | | 2.5% | | | 1.8% | |
Non revolving consumer loans | |
| 62,418 | | | 69,282 | | | 83,435 | | | 2,989 | | | 1,663 | | | 2,574 | | | 4.8% | | | 2.4% | | | 3.1% | |
| |
| 712,983 | |
| 762,088 | |
| 798,165 | |
| 21,909 | |
| 22,653 | |
| 21,203 | |
| 3.1% | |
| 3.0% | | | 2.7% | |
3. Other credit risk aspects
3.1 Credit risk by activity in the financial markets
This section covers credit risk generated in treasury activities with customers, mainly with credit institutions. Transactions are undertaken through money market financial products with different financial institutions and through counterparty risk products, which serve the needs of the Bank’s customers.
Counterparty credit risk is the risk that the customer in a transaction could default before the definitive settlement of the cash flows of the transaction. It includes the following types of transactions: financial derivative instruments, transactions with repurchase agreement, stock lending, transactions with deferred settlement and financing of guarantees.
There are two methodologies for measuring this exposure: (i) mark-to-market (MtM) methodology (replacement value of financial derivatives) plus potential future exposure (add-on) and (ii) the calculation of exposure using Montecarlo simulation for some products. The capital at risk or unexpected loss is also calculated, i.e., the loss which, once the expected loss has been subtracted, constitutes the economic capital, net of guarantees and recoveries, and expected loss.
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After the markets close, exposures are re-calculated by adjusting all transactions to their new time frame, adjusting the potential future exposure and applying mitigation measures (netting, collateral, etc.), so that the exposures can be controlled directly against the limits approved by the Bank’s Management. Risk control is performed through an integrated system and in real time, enabling the exposure limit available with any counterparty, product and maturity to be known at any time.
3.2 Concentration risk
Concentration risk control is a vital part of management. The Bank continuously monitors the degree of concentration of its credit risk portfolios using various criteria: geographical areas, economic sectors, products and groups of customers.
The Board of Directors, via the risk appetite framework, determines the maximum levels of concentration.
In line with these maximum levels and limits, the executive risk committee establishes the risk policies and reviews the appropriate exposure levels for the effective management of the degree of concentration in the Bank’s credit risk portfolios.
The concentration risk is subject to CNBV regulations on “Large Exposures” as follows:
a) | As of December 31, 2021 and 2022, there is no financing granted to debtors or groups of individuals or entities representing a joint risk in an amount that exceeds 40% of the Bank’s Basic Capital (of the quarter immediately preceding the reporting date). |
b) | As of December 31, 2022, there are two loans granted to debtors (the first of 66,520 million pesos and the second of 25,103 million pesos) representing individually an amount greater than 10% of the Bank’s Basic Capital (of the quarter immediately preceding the reporting date). The first one is granted to Santander Consumo, a subsidiary of the Bank, and it was eliminated for consolidation purposes in these consolidated financial statements. |
c) | As of December 31, 2021, assets and liabilities transactions with the three main debtors or groups of individuals representing a joint risk for the aggregate amount of 44,816 million pesos that represent 31.56% of the Bank’s Basic Capital. |
d) | As of December 31, 2022, assets and liabilities transactions with the three main debtors or groups of individuals representing a joint risk for the aggregate amount of 46,826 million pesos that represent 40.80% of the Bank’s Basic Capital. |
Higher-Risk Loans
The Bank does not have any significant exposure to higher-risk loans. The loan portfolio is focused on retail banking with a medium-low risk profile and with broad diversification by segment. 48% of the Bank´s net customer loans are secured, mostly by real estate collateral.
Mortgages to individuals represent approximately 24% of the Bank´s net customer loans, with a low risk profile, low non-performing loans ratios and an adequate coverage ratio.
Among other factors, this is due to the fact that these loans are mainly first residence mortgages and subject to a rigorous assessment of credit risk and affordability. The admission process assesses both the current and future payment capacity of the customer, evaluating if the customer’s disposable income will most likely be enough to meet the loans’ instalments.
Certain mortgage portfolios that may present higher risks than others (interest only, flexible loans, loans with loan-to-value greater than 100%, buy to let), are subject to even more strict lending policies to mitigate
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their risks. Furthermore, they represent a low percentage of the Bank´s loan portfolio, and their performance is continuously monitored to ensure an adequate control.
3.3 Sovereign risk and exposure to other public sector entities
Sovereign risk is the risk contracted in transactions with the Central Bank (including the regulatory cash reserve requirement – compulsory deposits), issuer risk from public debt portfolio and the risk arising from transactions with public institutions with the following features: their funds only come from the state’s budgeted income and the activities are of a non-commercial nature.
The Bank’s sovereign exposure is mostly in pesos. This exposure is recognized in the consolidated balance sheet and concentrated 46% in short and medium-term maturities.
Over the past few years, total exposure to sovereign risk has remained aligned with the regulatory requirements and strategic reasons that support the management of this portfolio.
Regarding the deterioration measurement of these exposures, the Bank has evaluated methodologies and criteria in accordance with IFRS 9 general criteria, integrating common processes, systems, tools and data that are used both for accounting purposes and for capital adequacy.
In case of sovereign risk, the few default cases existing over the last decades only reflect the possibility of a potential unexpected loss that, due to its scarcity, cannot be modelled. Consequently, for this type of sovereign risk, the expected loss is considered irrelevant in consistency with unexpected loss.
c) Trading market risk, structural and liquidity risk
1. Activities subject to market risk and types of market risk
Activities exposed to market risk encompass transactions where risk is assumed as a consequence of potential changes in interest rates, inflation rates, exchange rates, stock prices, credit spreads, commodity prices, volatility and other market factors; the liquidity risk from the Bank’s products and markets, and the balance-sheet liquidity risk. Therefore, they include trading risks and structural risks:
● | Interest rate risk arises from movements in interest rates that reduce the value of a financial instrument, a portfolio or the Bank as a whole. It can affect loans, deposits, debt securities, most assets and liabilities in the trading books and financial derivatives, among others. |
● | Inflation rate risk arises from movements in inflation that can reduce the value of a financial instrument, a portfolio or the Bank as a whole. It can affect instruments such as loans, debt securities and financial derivatives, where the return is linked to future inflation values or to a change in the current rate. |
● | Exchange rate risk is the possibility of loss because the currency of a long or open position will depreciate against the base currency. |
● | Equity risk is the possibility of loss from open positions in securities if their market price or expected future dividends fall. It affects shares, stock market indices, convertible bonds and derivatives with shares as the underlying asset (put, call, equity swaps, among others.). |
● | Credit spread risk is the possibility of loss from open positions in fixed-income securities or credit derivatives if their yield curve, or the recovery rate of their issuer or type change. A spread is the yield difference between financial instruments against a benchmark (e.g. the internal rate of return (IRR) of government bonds and interbank interest rates). |
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● | Volatility risk is the possibility of loss caused by movements in interest rates, exchange rates, the stock market, credit spreads and other risk factors affecting portfolio value. It is inherent to all financial instruments whose value considers volatility (especially options contracts) |
Financial derivative contracts (such as options, futures, forwards and swaps) can mitigate market risks partially or fully.
Additionally, other more complex hedging market risks are considered, such as correlation risk, market liquidity risk, prepayment or cancellation risk, and underwriting risk.
Balance sheet liquidity risk (unlike market liquidity risk) is the possibility of loss caused by forced disposal of assets or cash flow imbalance if the Bank meets its payment obligations late or at excessive cost. It can cause losses by forced asset sales or impacts on margins due to the mismatch between expected cash inflows and outflows.
Pension and actuarial risks also depend on market variables.
2. Trading market risk management
Management limits and control system
Market risk functions monitor market risk positions on a daily basis to ensure that they remain within the approved management limits. In addition, daily monitoring is performed to assess the performance of market risk metrics and any major changes. Periodic reports are produced and distributed based on this assessment to ensure the proper monitoring of market risk activities within the Bank and to inform the Bank’s Management and other internal and external stakeholders.
Setting the aforementioned trading market risk limits is a dynamic process, which is determined by the Bank’s predefined risk appetite levels. This process is part of the annual limits plan that is fostered by the Bank’s Management.
The market risk limits are established based on different metrics and are intended to cover all activities subject to market risk from many perspectives, applying a prudent approach. The main ones are:
● | Value at Risk (VaR) and Stressed VaR limits. |
● | Limits of equivalent and/or nominal positions. |
● | Interest rate sensitivity limits. |
● | Vega limits. |
● | Delivery risk limits for short positions in securities (fixed income and securities). |
● | Limits to constrain the volume of effective losses or protect results generated during the period: |
- | Loss trigger. |
- | Stop loss. |
● | Credit limits: |
- | Total exposure limit. |
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- | Jump to default by issuer limit. |
- | Others. |
● | Limits for origination transactions. |
These general limits are complemented by other sub-limits to establish a sufficiently granular structure that allows for effective control of the market risk factors to which the Bank is exposed in its trading activities. Positions are monitored on a daily basis at the trading desk level with an exhaustive control of those changes observed in both portfolios and trading desks, to identify any potential events that might need immediate correction, and thus comply with the Section 619 of the Dodd-Frank Act (Volcker Rule).
The limits are established based on the scope of approval and control. The limits are requested by the business executive, considering the particular nature of the business and the established budget targets, seeking consistency between the limits and the risk/return ratio. The limits are approved by the corresponding risk bodies as defined in their governance process.
Business units must comply with the approved limits at all times. In the event of a limit being breached, the business executives have to explain, in writing and on the same day, the reasons for the excess and the action plan to correct the situation, which in general could consist of reducing the position until it reaches the defined limits or setting out the strategy that justifies a limit increase.
Methodologies
a) Value at Risk
The standard methodology applied in the Bank for risk management and control purposes related to its trading activities is Value at Risk (VaR), which measures the maximum expected loss with a certain confidence level and period.
The standard for historic simulation is a confidence level of 99% and a one-day period. Statistical adjustments are applied enabling the most recent developments affecting the levels of risk assumed to be incorporated efficiently and on a timely manner. A period of two years or at least 520 days from the reference date of the VaR calculation is used. Two figures are calculated every day: one applying an exponential decay factor that accords less weight to the observations furthest away in time and another with the same weight for all observations. The higher of the two is reported.
Simultaneously the Value at Earnings (VaE) is calculated, which measures the maximum potential gain with a certain level of confidence and specific period, applying the same methodology as for VaR.
b) Stressed VaR (sVaR)
In addition to standard VaR, Stressed VaR (sVaR) is calculated daily for the main portfolios. The calculation methodology is the same as for VaR, with the two following exceptions:
● | The historical observation period for the factors: when calculating stressed VaR a window of 260 observations is used, rather than 520 for VaR. However, this is not the most recent data: instead, the data used is from a continuous period of stress for the portfolio in question. This is calculated for each major portfolio by analyzing the history of a subset of market risk factors selected based on expert judgment and the most significant positions in the books. |
● | Unlike VaR, stressed VaR is obtained using the percentile with uniform weighting, not the higher of the percentiles with exponential and uniform weightings. |
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c) Gauging and backtesting measures
Regulation establishes that the VaR model should accurately capture all material risks. Given that Value at Risk uses statistical techniques under normal conditions, for a certain confidence level and for a defined time horizon, the maximum potential loss estimated can differ from real losses. Therefore, the Bank regularly analyzes and contrasts the accuracy of the VaR calculation model to confirm its reliability.
Backtesting is designed to assess the general quality or effectiveness of the risk measurement model by comparing the VaR measures with Profit and Loss (P&L) results. The Bank performs a Theoretical P&L backtesting analysis, which is calculated using the market risk calculation engine, without taking into account intra-day results, changes in portfolio positions or the passage of time (Theta). This P&L is used exclusively to test the quality of the VaR model.
Regulatory backtesting is performed on a daily basis at least at the overall portfolio unit level and one portfolio level below. Internal (not regulatory) backtesting exercises are performed daily, weekly or monthly based on its granularity of the portfolio level considered.
The number (or proportion) of over shootings registered is one of the most intuitive indicators in order to establish the goodness of fit of a model. Regulatory backtesting is calculated for a historic period of one year (250 days) and at a VaR confidence level of 99%. Between two and three over shootings per year are expected.
For Theoretical P&L backtesting and for the total portfolio, the results are as follows:
In 2020, there were two exception to 99% VaR (i.e., days when the daily loss exceeded VaR). During 2020, there were one Value at Earnings (VaE) break (i.e., days when the daily gain exceeded VaE).
In 2021, there was one exception to 99% VaR (i.e., days when the daily loss exceeded VaR). During 2021, there were four VaE break (i.e., days when the daily gain exceeded VaE).
In 2022, there was one exception to 99% VaR (i.e., days when the daily loss exceeded VaR). During 2022, there was one VaE breaks (i.e., days when the daily gain exceeded VaE).
The number of exceptions is consistent with the assumptions specified in the VaR calculation model.
d) Credit Valuation Adjustment (CVA) and Debt Valuation Adjustment (DVA)
The Bank incorporates CVA and DVA when calculating the trading portfolio results. The CVA is a valuation adjustment for OTC financial derivatives, resulting from the risk associated with the credit exposure assumed with each counterparty.
It is calculated taking into account the potential exposures with each counterparty at each future maturity. The CVA for a particular counterparty is the sum of the CVA for all its maturities. To calculate this metric, the following inputs are considered: expected exposure, loss given default, probability of default and a discount factor curve.
Debit valuation adjustment (DVA) is a valuation adjustment similar to the CVA, but in this case because of the Bank’s risk that the counterparties assume in OTC financial derivatives.
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3. Trading market risk key metrics
VaR analysis
During the year, the Bank continued its strategy of focusing its trading activity on customer business, minimizing, where possible, exposure to directional risk in net terms and maintaining its diversification by risk factor.
The average daily Total VaR of the Bank’s market trading operations in 2020 stood at 165 million pesos, higher than that for 2019 at 66 million pesos. In 2020, the changes in VaR were due mainly to changes in the interest rate risk factor as a result of the trading book’s strategy. VaR modeling did not change during 2020. At the end of December 2020, VaR stood at 74 million pesos.
Average daily Total VaR increased by 99 million pesos with respect to 2019. This increment was concentrated in interest rate VaR, where the average daily increased from 43 million pesos to 86 million pesos. The average daily equity VaR and exchange rate VaR increased from 3 million pesos to 5 million pesos and 41 million pesos to 127 million pesos, respectively.
The risk assumption profile, in terms of VaR and results, showed that VaR during 2020 remained at levels below the limit of 277 million pesos. During the first semester of 2020, the average daily total VaR was 181 million pesos. VaR stayed in levels between 55 million pesos and 378 million pesos.This was a result of great uncertainty and high volatility in local and global markets due to the COVID-19 pandemic.
During the second semester of 2021, the average daily Total of VaR was 150 million pesos. VaR stayed in levels between 70 million pesos and 207 million pesos in the second semester, as a result of lower volatility observed in the different risk factors (foreign exchange and interest rates). The reduction in volatility was because the participants in the market, reducing the uncertainty and effects that it would cause on different markets, could assimilate the impact of the COVID-19 pandemic.
The average daily Total VaR of the Bank’s market trading operations in 2021 stood at 50 million pesos, lower than that for 2020 at 165 million pesos. In 2021, the changes in VaR were due mainly to changes in the interest rate risk factor and foreign exchange risk factor as a result of the trading book’s strategy. VaR modeling did not change during 2021. At the end of December 2021, VaR stood at 41 million pesos.
Average daily Total VaR decreased by 115 million pesos with respect to 2020. This decrement was concentrated in interest rate VaR, where the average daily decreased from 86 million pesos to 51 million pesos. The average daily equity VaR and exchange rate VaR decreased from 5 million pesos to 2 million pesos, and 127 million pesos to 14 million pesos, respectively.
The risk assumption profile, in terms of VaR and results, showed that the levels of VaR for the majority of 2021 remained at levels below the limit of 239 million pesos. During the first semester of 2021, the average daily total VaR was 54 million pesos and during the second semester of 2021, the average daily Total VaR was 46 million pesos, VaR stayed in levels between 24 million pesos and 85 pesos. in the second semester, as a result of interest rates increase expectation and volatility in the movements at foreign exchange risk factor.
The average daily Total VaR of the Bank’s market trading operations in 2022 stood at 41 million pesos, lower than that for 2021 at 50 million pesos. In 2022, the changes in VaR were due mainly to changes in the interest rate risk factor as a result of the trading book’s strategy. VaR modeling did not change during 2022. At the end of December 2022, VaR stood at 41 million pesos.
Average daily Total VaR decreased by 9 million pesos with respect to 2021. This decrement was concentrated in interest rate VaR, where the average daily decreased from 51 million pesos to 38 million
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pesos. The average daily equity VaR and exchange rate VaR decreased from 2 million pesos to 1 million pesos, and 14 million pesos to 15 million pesos, respectively.
The risk assumption profile, in terms of VaR and results, showed that the levels of VaR for the majority of 2022 remained below at levels below the limit of 208 million pesos. During the first semester of 2022, the average daily total VaR was 43 million pesos. VaR stayed in levels between 26 y 103 million pesos as a result of the interest rates increase expectations and foreign exchange volatility. VaR volatility is derived from the Russian – Ukraine conflict.
During the second semester of 2022, the Mexican Central Bank aggressively increased the interest rates to target the high inflation levels and did not lower the interest rates levels for the remainder of 2022. As a result, the average daily total VaR was 38 million pesos, VaR stayed in levels between 25 million pesos and 57 million pesos.
Financial derivatives risk management
The Bank’s financial derivatives activity is mainly focused on the sale of investment products and hedging risks for customers. Risk management is focused on ensuring that the net open risk is the lowest possible.
These transactions include options on equities, fixed income and exchange rates.
Exposures related to complex structured assets
The Bank does not have exposure to instruments or complex structured assets, a management culture for which prudence in risk management is one of its hallmarks in risk management.
The Bank’s policy for approving new transactions involving complex structures remains very prudent and conservative. It is subject to strict supervision by the Bank’s Management. Before approving a new transaction, product or underlying asset, the CRO verifies:
- | The existence of an appropriate valuation model to monitor the value of each exposure: mark-to-market, mark-to-model or mark-to-liquidity. |
- | The availability in the market of observable data (inputs) needed to be able to apply this valuation model. |
In addition, provided these two conditions be met:
- | The availability of adequate systems, duly adapted to calculate and monitor every day the results, positions and risks of new transactions. |
- | The degree of liquidity of the product or underlying asset, in order to make possible their coverage when deemed appropriate. |
4. Structural balance sheet risk management
Management of structural liquidity
Structural liquidity management aims to finance the Bank’s recurring activity in optimum conditions of maturity and cost and avoid assuming undesired liquidity risks.
Given the retail nature of the Bank, branches have continued taking deposits following the selective financing strategy of the Bank considering their costs.
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Notwithstanding the aforementioned, the Bank has maintained frequent issuance activity in the wholesale funding markets during 2022 in order to continue strengthening their liquidity position and presence in the markets.
All these actions have contributed to strengthen the Bank’s balance sheet and helped to maintain an appropriate liquidity position.
The main aspects in relation to structural management of liquidity during 2022 were:
● | Adequate position of structural liquidity. The Bank is essentially a retail bank. Therefore, customer deposits are the main source of funds in the financing structure. These deposits, together with debt instruments, enable the Bank to address most of its liquidity needs. |
● | High capacity to obtain liquidity on the balance sheet. The reserve includes deposits in the Central Banks and cash, unencumbered sovereign debt, undrawn credit lines granted by the Central Bank, as well as other assets eligible as collateral and other undrawn credit lines in development banks), all of which reinforce the solid liquidity position of the Bank. |
The Bank exhibits both Liquidity Coverage Ratio (LCR) well above the 100% regulatory limit and a Net Stable Funding Ratio (NSFR) also well above 100%.
● | Access to wholesale markets for liquidity based on short and long-term ratings. |
● | Moderate use of assets as security for structural balance-sheet funding sources. |
The Bank performs a continuous internal process to ensure the adequacy of both, its liquidity position and the management, measurement, monitoring and control of its liquidity risk (Internal Liquidity Adequacy and Assessment Process - ILAAP).
All these processes, which are forward-looking and integrated into the decision-making and management process, risk management and risk appetite, liquidity planning and overall strategy, have the ultimate objective of ensuring that the Bank has and will have adequate liquidity resources to meet their obligations under both normal and stressed conditions and over an appropriate set of time horizons, taking into account all material sources of liquidity risk.
Limits management and control systems
The policies of senior management dictate mechanisms to monitor and control structural risk according to regulatory requirements and the Bank’s risk appetite. The mechanisms consider sub-types of structural risk and their implications, contingencies and interrelations.
The Structural Risk function’s role in the second line of defense is to ensure structural risks are understood, controlled and reported to senior management according to established governance:
o | It sets interest rate risk metrics and reviews and challenges structural risk appetite and limits proposed by the first line of defense. |
o | It oversees the first line of defense’s structural risk management and checks compliance with set limits. |
o | It regularly reports on risk profile to senior management and issues guidelines to business lines about measures it deems necessary. |
F-205
o | It evaluates and challenges commercial proposals and gives senior management information to understand the interest rate risk of the Bank’s businesses and operations. |
o | It confirms proper structural risk procedure, in addition to formulating and overseeing models and policies. |
Like market risk, structural risk also has an annual plan framework to set structural balance sheet risk limits according to risk appetite.
The main limits are:
● | Balance sheet structural interest rate risk: |
- | Limit on the sensitivity of net interest income over a one-year horizon. |
- | Limit on the sensitivity of the value of equity. |
- | Limit on the market value of Asset-Liability Committee (ALCO) portfolios under stress scenarios and that given their accounting classification (fair value with changes in equity) could have an impact on shareholders' equity. |
● | Structural exchange rate risk: |
- | Limit on the net permanent position of the core capital ratio. |
- | Limit on individual hedge required for each currency. |
Business lines’ risk managers must prove explanations for potential limit and sub-limit breaches as well as an action plan to correct them.
Methodologies and other key details
a) Structural interest rate risk
As part of structural risk, interest rate risk in the banking book (IRRBB) is the main source of balance sheet risk.
The Bank measures the potential impact of interest rate movements on Economic Value of Equity (EVE) and Net Interest Margin (NIM). Because changing rates may generate impacts, the Bank must manage and control many subtypes of interest rate risk, such as repricing risk, curve risk, basis risk and option risk (e.g. behavioral or automatic). Interest rate risk in the balance sheet and market conditions and outlooks could necessitate certain financial measures to achieve the Bank's desired risk profile. The metrics that the Bank uses to monitor IRRBB include NIM and EVE sensitivity to interest rate movements.
b) Interest rate gap on assets and liabilities
This is the basic concept for identifying the Bank’s interest rate risk profile and it measures the difference between the volume of sensitive assets and liabilities on and off balance sheet that re-price (i.e. that mature or are subject to rate revisions) at certain times (called, buckets). This provides an immediate approximation of the sensitivity of the Bank’s balance sheet and its net interest income and equity value to changes in interest rates.
F-206
c) Net interest income sensitivity
NIM is calculated as the difference between income from interest on assets and the interest cost of liabilities in the banking book over a given time horizon of one year. NIM sensitivity is the difference between the NIM calculated under a selected scenario and the NIM calculated under a base scenario. Therefore, there may be as many NIM sensitivities as there are scenarios considered. This metric allows for the identification of short-term risks, and it is complementary to the EVE sensitivity.
d) Economic value of equity sensitivity
This measures the interest rate risk implicit in equity value, which for the purposes of interest rate risk is defined as the difference between the net current value of assets and the net current value of outstanding liabilities, based on the impact that a change in interest rates would have on those current values. EVE sensitivity is obtained as the difference between the EVE calculated under a selected scenario and the one calculated under a base scenario. Therefore, there may be as many EVE sensitivities as there are scenarios considered. This metric allows for the identification of long-term risks and it is complementary to NIM.
e) Treatment of liabilities with no defined maturity
Under the Bank´s model, the total volume of account balances with no maturity is divided between stable and unstable balances, which are obtained from a model based on the relationship between balances and their own moving averages.
From the methodology described above and, an exponential time decay simplified model for the stable part, the monthly cash flows are obtained and used to calculate NIM and EVE sensitivities.
f) Pre-payment treatment for certain assets
The potential pre-payment risk mainly affects fixed-rate mortgages. This risk is modelled and included in the metrics used to monitor the risk appetite.
g) Value at Risk
For balance sheet activity and investment portfolios, this is defined as the 99% percentile of the distribution function of losses in equity value, calculated based on the current market value of positions and returns over the last two years, at a particular level of statistical confidence over a certain time horizon. As with trading portfolios, a period of two years or at least 520 days from the reference date of the VaR calculation is used.
h) Structural foreign exchange rate risk
These activities are monitored via position measurements and results, on a daily basis.
i) Structural equity risk
These activities are monitored via position measurements, VaR and results, on a monthly basis.
5. Structural balance sheet risks key metrics
The market risk profile inherent to the Bank’s balance sheet, in relation to its asset volumes and shareholders’ equity, as well as the budgeted net interest income, remained moderate in 2022, in line with previous years.
F-207
The interest rate risk originated by commercial banking is transferred for management purposes – through an internal risk transfer system – to the Financial area, which is responsible for Bank’s structural risk management generated by interest rate fluctuations.
The Bank’s usual practice is to measure interest rate risk by using statistical models, relying on mitigation strategies for structural risk using interest rate instruments, such as fixed income bond portfolios and financial derivative instruments to maintain the risk profile at levels that are appropriate to the risk appetite approved by the Board of Directors.
Structural interest rate risk
The interest rate risk in the balance sheet management portfolios, measured in terms of NIM sensitivity at one year to a parallel increase of hundred basis points in the yield curve, remained stable throughout 2020 under 1,000 million pesos, mainly due to the short-term re-pricing of the loan portfolio. At the end of December 2020, the risk consumption measured in terms of hundred basis points MVE sensitivity stood under 3,700 million pesos.
The table below shows in millions of pesos the distribution of interest rate risk by maturity as of December 31, 2020. The reported amounts include estimated interest on fixed and variable rate instruments. Interest on variable rate instruments is determined using the rate in effect as of the balance sheet date for the first scheduled interest payment and amounts are determined based on the contractual spread for each period thereafter.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
|
|
| Total |
|
| 0 - 1 Months |
|
| 1 - 3 Months | |
| 3 - 6 Months |
| 6 - 12 Months |
|
| 1 - 3 Years |
|
| 3 - 5 Years |
|
| > 5 Years |
|
| Not Sensitive |
| |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Money Market | | | 208,892 |
| | 97,682 |
| | 224 |
| | 10 |
| | — |
| | — |
| | — |
| | — |
| | 110,976 | |
Loans | | | 842,579 | |
| 391,465 | |
| 51,416 | |
| 29,398 | |
| 40,954 | |
| 110,704 | |
| 59,480 | |
| 158,690 | |
| 473 | |
Trade Finance | | | — | |
| — | |
| — | |
| — | |
| — | |
| — | |
| — | |
| — | |
| — | |
Intragroup | | | 2,324 | |
| — | |
| — | |
| — | |
| — | |
| — | |
| — | |
| — | |
| 2,324 | |
Securities | | | 612,958 | |
| 92,700 | |
| 10,420 | |
| 18,633 | |
| 12,072 | |
| 120,979 | |
| 50,809 | |
| 93,965 | |
| 213,379 | |
Permanent | | | 17,838 | |
| — | |
| — | |
| — | |
| — | |
| — | |
| — | |
| — | |
| 17,838 | |
Other Assets | | | 2,432,847 | |
| — | |
| — | |
| — | |
| — | |
| — | |
| — | |
| — | |
| 2,432,847 | |
Total Balance Sheet Assets | | | 4,117,438 | |
| 581,847 | |
| 62,060 | |
| 48,041 | |
| 53,026 | |
| 231,683 | |
| 110,289 | |
| 252,655 | |
| 2,777,837 | |
Money Market | | | (415,269) | |
| (136,167) | |
| (25) | |
| — | |
| — | |
| (35) | |
| — | |
| — | |
| (279,042) | |
Deposits | | | (712,440) | |
| (538,576) | |
| (28,189) | |
| (7,546) | |
| (38,605) | |
| (40,318) | |
| — | |
| (59,206) | |
| — | |
Trade Finance | | | — | |
| — | |
| — | |
| — | |
| — | |
| — | |
| — | |
| — | |
| — | |
Intragroup | | | — | |
| — | |
| — | |
| — | |
| — | |
| — | |
| — | |
| — | |
| — | |
Long-Term Funding | | | (234,391) | |
| (71,773) | |
| (13,809) | |
| (8,311) | |
| (5,645) | |
| (65,572) | |
| (39,636) | |
| (8,094) | |
| (21,552) | |
Equity | | | (158,338) | |
| — | |
| — | |
| — | |
| — | |
| — | |
| — | |
| — | |
| (158,338) | |
Other Liabilities | | | (2,421,345) | |
| — | |
| — | |
| — | |
| — | |
| — | |
| — | |
| — | |
| (2,421,345) | |
Total Balance Sheet Liabilities | | | (3,941,783) | |
| (746,516) | |
| (42,023) | |
| (15,857) | |
| (44,250) | |
| (105,925) | |
| (39,636) | |
| (67,300) | |
| (2,880,277) | |
Total Balance Sheet Gap | | | 175,655 | |
| (164,669) | |
| 20,037 | |
| 32,184 | | | 8,776 | |
| 125,758 | |
| 70,653 | |
| 185,355 | |
| (102,440) | |
Total Off-Balance Sheet Gap | | | (27,858) | |
| 96,078 | |
| (518) | |
| (7,124) | |
| (1,257) | |
| (16,773) | |
| (20,744) | |
| (77,053) | |
| (466) | |
Total Structural Gap | | | | |
| (68,591) | |
| 19,519 | |
| 25,060 | |
| 7,519 | |
| 108,985 | |
| 49,909 | |
| 108,302 | |
| (102,906) | |
Accumulated Gap | | | — | |
| (68,591) | |
| (49,072) | |
| (24,012) | |
| (16,493) | |
| 92,492 | |
| 142,401 | |
| 250,703 | |
| 147,797 | |
The interest rate risk in the balance sheet management portfolios, measured in terms of NIM sensitivity at one year to a parallel increase of hundred basis points in the yield curve, remained stable throughout 2021 under 350 million pesos, mainly due to the short-term re-pricing of the loan portfolio. At the end of December 2021, the risk consumption measured in terms of hundred basis points MVE sensitivity stood under 3,000 million pesos.
The table below shows in millions of pesos the distribution of interest rate risk by maturity as of December 31, 2021. The reported amounts include estimated interest on fixed and variable rate instruments. Interest on variable rate instruments is determined using the rate in effect as of the balance sheet date for the first
F-208
scheduled interest payment and amounts are determined based on the contractual spread for each period thereafter.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
|
|
| Total |
|
| 0 - 1 Months |
| | 1 - 3 Months | | | 3 - 6 Months |
|
| 6 - 12 Months |
|
| 1 - 3 Years |
|
| 3 - 5 Years |
|
| > 5 Years |
|
| Not Sensitive |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Money Market |
| | 107,529 |
| | 40,153 |
| | 36 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 67,340 | |
Loans | |
| 1,011,713 | |
| 415,520 | |
| 56,759 | |
| 41,235 | |
| 52,466 | |
| 147,987 | |
| 82,115 | |
| 203,678 | |
| 11,953 | |
Trade Finance | | | — | |
| — | |
| — | |
| — | |
| — | |
| — | |
| — | |
| — | |
| — | |
Intragroup | |
| 4,368 | |
| — | |
| — | |
| — | |
| — | |
| — | |
| — | |
| — | |
| 4,368 | |
Securities | |
| 592,439 | |
| 87,765 | |
| 44,143 | |
| 15,045 | |
| 9,531 | |
| 138,771 | |
| 127,591 | |
| 43,135 | |
| 126,458 | |
Permanent | |
| 18,931 | |
| — | |
| — | |
| — | |
| — | |
| — | |
| — | |
| — | |
| 18,931 | |
Other Assets | |
| 2,550,757 | |
| — | |
| — | |
| — | |
| — | |
| — | |
| — | |
| — | |
| 2,550,757 | |
Total Balance Sheet Assets | |
| 4,285,737 | |
| 543,438 | |
| 100,938 | |
| 56,280 | |
| 61,997 | |
| 286,758 | |
| 209,706 | |
| 246,813 | |
| 2,779,807 | |
Money Market | |
| (237,962) | |
| (136,942) | |
| (203) | |
| (119) | |
| (37) | |
| (6) | |
| — | |
| — | |
| (100,655) | |
Deposits | |
| (773,147) | |
| (316,556) | |
| (25,179) | |
| (8,115) | |
| (104,567) | |
| (152,067) | |
| — | |
| (166,663) | |
| — | |
Trade Finance | |
| — | |
| — | |
| — | |
| — | |
| — | |
| — | |
| — | |
| — | |
| — | |
Intragroup | |
| — | |
| — | |
| — | |
| — | |
| — | |
| — | |
| — | |
| — | |
| — | |
Long-Term Funding | |
| (207,558) | |
| (45,398) | |
| (2,677) | |
| (6,338) | |
| (26,383) | |
| (37,397) | |
| (62,168) | |
| (7,745) | |
| (19,452) | |
Equity | |
| (165,539) | |
| — | |
| — | |
| — | |
| — | |
| — | |
| — | |
| — | |
| (165,539) | |
Other Liabilities | |
| (2,577,883) | |
| — | |
| — | |
| — | |
| — | |
| — | |
| — | |
| — | |
| (2,577,883) | |
Total Balance Sheet Liabilities | |
| (3,962,089) | |
| (498,896) | |
| (28,059) | |
| (14,572) | |
| (130,987) | |
| (189,470) | |
| (62,168) | |
| (174,408) | |
| (2,863,529) | |
Total Balance Sheet Gap | |
| 323,648 | |
| 44,542 | |
| 72,879 | |
| 41,708 | | | (68,990) | |
| 97,288 | |
| 147,538 | |
| 72,405 | |
| (83,722) | |
Total Off-Balance Sheet Gap | |
| 16,348 | |
| 85,733 | |
| (353) | |
| (7,870) | |
| 5,373 | |
| 936 | |
| (52,397) | |
| (15,036) | |
| (38) | |
Total Structural Gap | | | | |
| 130,275 | |
| 72,526 | |
| 33,838 | |
| (63,617) | |
| 98,224 | |
| 95,141 | |
| 57,369 | |
| (83,760) | |
Accumulated Gap | | | — | |
| 130,275 | |
| 202,801 | |
| 236,639 | |
| 173,022 | |
| 271,246 | |
| 366,387 | |
| 423,756 | |
| 339,996 | |
The interest rate risk in the balance sheet management portfolios, measured in terms of NIM sensitivity at one year to a parallel increase of hundred basis points in the yield curve, remained stable throughout 2022 under 500 million pesos, mainly due to the short-term re-pricing of the loan portfolio. At the end of December 2022, the risk consumption measured in terms of hundred basis points MVE sensitivity stood under 2,500 million pesos.
The table below shows in millions of pesos the distribution of interest rate risk by maturity as of December 31, 2022. The reported amounts include estimated interest on fixed and variable rate instruments. Interest on variable rate instruments is determined using the rate in effect as of the balance sheet date for the first scheduled interest payment and amounts are determined based on the contractual spread for each period thereafter.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
|
|
| Total |
|
| 0 - 1 Months |
|
| 1 - 3 Months |
|
| 3 - 6 Months |
|
| 6 - 12 Months |
|
| 1 - 3 Years |
|
| 3 - 5 Years |
|
| > 5 Years |
|
| Not Sensitive |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Money Market |
| | 130,928 |
| | 47,853 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 83,075 | |
Loans |
| | 1,156,551 |
| | 457,396 |
| | 62,232 |
| | 47,152 |
| | 72,844 |
| | 191,785 |
| | 105,972 |
| | 185,834 |
| | 33,336 | |
Trade Finance |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — | |
Intragroup |
| | 4,287 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 4,287 | |
Securities |
| | 606,595 |
| | 20,336 |
| | 74,919 |
| | 13,451 |
| | 16,256 |
| | 130,150 |
| | 146,119 |
| | 25,853 |
| | 179,511 | |
Permanent |
| | 12,794 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 12,794 | |
Other Assets |
| | 2,830,134 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 2,830,134 | |
Total Balance Sheet Assets |
| | 4,741,289 |
| | 525,585 |
| | 137,151 |
| | 60,603 |
| | 89,100 |
| | 321,935 |
| | 252,091 |
| | 211,687 |
| | 3,143,137 | |
Money Market |
| | (232,148) |
| | (126,156) |
| | (70) |
| | (33) |
| | (52) |
| | (18) |
| | — |
| | — |
| | (105,819) | |
Deposits |
| | (852,714) |
| | (282,371) |
| | (30,164) |
| | (30,052) |
| | (103,999) |
| | (203,423) |
| | — |
| | (202,705) |
| | — | |
Trade Finance |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — | |
Intragroup |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — | |
Long-Term Funding |
| | (234,697) |
| | (75,556) |
| | (6,376) |
| | (11,100) |
| | (32,087) |
| | (45,344) |
| | (24,593) |
| | (10,276) |
| | (29,365) | |
Equity |
| | (166,838) |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (166,838) | |
Other Liabilities |
| | (2,794,488) |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (2,794,488) | |
Total Balance Sheet Liabilities |
| | (4,280,885) |
| | (484,083) |
| | (36,610) |
| | (41,185) |
| | (136,138) |
| | (248,785) |
| | (24,593) |
| | (212,981) |
| | (3,096,510) | |
Total Balance Sheet Gap |
| | 460,404 |
| | 41,502 |
| | 100,541 |
| | 19,418 |
| | (47,038) |
| | 73,150 |
| | 227,498 |
| | (1,294) |
| | 46,627 | |
Total Off-Balance Sheet Gap |
| | 111,813 |
| | 134,000 |
| | 1,336 |
| | 2,524 |
| | 9,324 |
| | (2,520) |
| | (117,351) |
| | (11,824) |
| | 96,324 | |
Total Structural Gap |
| |
|
| | 175,502 |
| | 101,877 |
| | 21,942 |
| | (37,714) |
| | 70,630 |
| | 110,147 |
| | (13,118) |
| | 142,951 | |
Accumulated Gap |
| | |
| | 175,502 |
| | 277,379 |
| | 299,321 |
| | 261,607 |
| | 332,237 |
| | 442,384 |
| | 429,266 |
| | 572,217 | |
Structural foreign exchange rate risk
Structural exchange rate risk arises from Bank’s transactions in foreign currencies.
The management of this risk is dynamic and seeks to limit the impact on the core capital ratio of foreign exchange rate movements.
F-209
In 2022, hedging of the core capital ratio for foreign exchange rate risk were kept under established limits. The Bank´s objective is to maintain the structural exchange-rate risk hedged with a management limit established by each foreign currency where the entity is exposed to, aligned with the correspondent positions.
Structural equity risk
The Bank maintains equity positions in its banking book in addition to those of the trading portfolio. These positions are maintained as equity instruments or as equity stakes, depending on the percentage owned or control.
As of December 31, 2022, the Bank does not maintain any equity positions in its banking book.
6. Liquidity risk management
The Liquidity risk function’s role in the second line of defense is to ensure liquidity risks are understood, controlled and reported to senior management and across the Bank according to established governance:
o | It determines liquidity risk and provides detailed measurements of current and emerging risks. |
o | It sets liquidity risk metrics, and reviews and challenges liquidity risk appetite and limits proposed by the first line of defense. |
o | It oversees the first line of defense’s liquidity risk management; measures how long business will remain within risk appetite limits; and checks compliance with liquidity risk limits. |
o | It reports to governing bodies on risk, risk appetite and exceptions. |
o | It evaluates and challenges commercial and business proposals, and gives senior management and business units the information they need to understand the Bank’s liquidity risk. |
o | It provides a comprehensive overview of our liquidity risk exposure and profile. |
o | It makes sure the liquidity risk procedures in place are appropriate to manage business within risk appetite limits. |
Methodologies and key other key details
The Bank measures liquidity risk using a range of tools and metrics that account for the risk factors identified within this risk.
a) Liquidity buffer
The buffer is a portion of the total liquidity available to an entity to deal with potential withdrawals of funds (liquidity outflows) that may arise as a result of periods of stress. Specifically, a buffer consists of a set of unencumbered liquid resources that are available for immediate use and capable of generating liquidity promptly, without incurring any loss or excessive discount. The Bank uses the liquidity buffer as a tool that forms part of the calculation of most liquidity metrics.
b) Liquidity Coverage Ratio
LCR has a regulatory definition and is intended to reinforce the short-term resistance of banks’ liquidity risk profile by ensuring that they have available sufficient high-quality liquid assets to withstand a stress scenario (idiosyncratic stress or market stress) of considerable severity for thirty calendar days.
F-210
The monitoring and surveillance of compliance with this standard is responsibility of the Mexican Central Bank, which, within the scope of its competence, jointly issued with the CNBV on December 31, 2014, the General Provisions on Liquidity Requirements for Banking Institutions (hereinafter, the "Liquidity Requirements") (Disposiciones de carácter general sobre los Requerimientos de Liquidez para las Instituciones de Banca Múltiple) applicable to the calculation, elements and scenarios of the Liquidity Coverage Ratio, in accordance with the guidelines established by the Basel Committee on Banking Supervision in October 2014.
The objectives of the liquidity requirements are as follows:
● | To anticipate that banking institutions in Mexico has available liquid assets with high credit quality to manage their obligations and liquidity necessities along thirty days. |
● | To establish a liquidity coverage ratio as per a methodology in line with the international standards, which must include all foreign currencies. |
● | To include both on and off balance transactions in the liquidity coverage ratio calculation, as long as those transactions represent a liquidity potential risk for banking institutions. |
● | To anticipate that banking institutions in Mexico consolidate their subsidiaries, which core business, relates to financial operations. |
The liquidity coverage ratio is the result of dividing the liquid assets by the net cash flow.
c) Wholesale gap metric
This metric measures the number of days the Bank would survive using its liquid assets to cover the liquidity losses assuming non-renewable wholesale financing outflows for a determined liquidity horizon. In addition, it is also used as an internal short-term liquidity metric helping to reduce the risk of dependence on wholesale funding.
d) Net Stable Funding Ratio (NSFR)
NSFR is one of the metrics used by the Bank to measure long-term liquidity risk. It is a regulatory metric defined as the coefficient of the available amount of stable funding and the required amount of stable funding. This metric requires banks to maintain a solid balance sheet where assets and off-balance sheet activities are funded with stable liabilities.
This ratio seeks to reduce the liquidity risk for a longer time horizon, by requiring the banks that finance their activities through stable sources of financing, in accordance with the liquidity and maturity of its assets, mitigating the risk of episodes of liquidity stress in the future, and also prevents excessive dependence on sources of short-term wholesale financing.
The monitoring and surveillance of compliance with this standard is responsibility of the Mexican Central Bank, which, within the scope of its competence, jointly issued with the CNBV on December 31, 2014, the Liquidity Requirements applicable to the calculation, elements and scenarios of the Net Stable Funding Ratio, in accordance with the guidelines established by the Basel Committee on Banking Supervision in October 2014.
e) Other liquidity indicators
Aside from traditional liquidity risk measurement tools for short-term risk and long-term or funding risk, the Bank has constructed a range of additional liquidity indicators that supplement the conventional tool-set
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and measure other liquidity risk factors not otherwise covered. These indicators include concentration metrics, such as top one and five funding providers, or distribution of funding by maturity date.
f) Liquidity scenario analysis
The Bank uses four standard scenarios as liquidity stress tests:
i. | An idiosyncratic scenario featuring events that adversely affect the Bank alone; |
ii. | A local market scenario, which considers events that have serious adverse effects on the financial system or real economy of the country; |
iii. | A global market scenario, which considers events that have serious adverse effects on the global financial system; and |
iv. | A combined scenario, coupling idiosyncratic events with severe (local and global) market events arising simultaneously and interactively. |
The Bank uses the outcomes of the stress scenarios in combination with other tools to determine risk appetite and support business decision-making.
g) Liquidity early warning indicators (EWI)
The system of liquidity early warning indicators (EWI) comprises quantitative and qualitative indicators that enable the Bank to foresee liquidity stress situations and potential weaknesses in the Bank’s funding and liquidity structure. EWI are both external (environmental) and internal, respectively relating to market financial variables and to the Bank’s own actions.
h) Intraday liquidity metrics
The Bank follows Basel regulation and calculates several metrics and stress scenarios for intraday liquidity risk to maintain a high level of control.
7. Liquidity risk key metrics
The Bank has a strong liquidity and financing position and maintains large buffers of highly liquid assets.
Since the beginning of the COVID-19 pandemic, liquidity has been closely monitored and preventive management measures were carried out to strengthen it.
As of December 31, 2022, the Bank’s LCR ratio was 196.60%, complying with the Bank´s desired risk profile and well above the regulatory minimum established.
The Bank has an effective management of its liquidity buffers to face the challenge of maintaining a proper liquidity profile (regulatory limits) while protecting the profitability of the balance sheet.
Furthermore, the Bank maintains sound balance sheet structures, with a stable financing structure based on a broad customer deposit base, which covers structural needs, with low dependence on short-term funding and liquidity metrics well above regulatory requirements level and within the limits defined on the risk appetite framework.
Hence, for long-term liquidity, the regulatory metric NSFR remained above the regulatory requirement and internal risk appetite.
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In terms of structural assets encumbrance risk, the Bank’s levels are in line with those of its peers, where the main sources of encumbrance are secured lending and collateralized funding facilities provided by the Central Bank.
The soundness of the Bank’s balance sheet is also demonstrated under stress scenarios. The Bank would survive the remote case scenario for at least forty-five days, meeting liquidity requirements with their liquid asset buffers alone.
The table below shows in millions of pesos the distribution of the liquidity risk by maturity as of December 31, 2020. The reported amounts include cash flows from interest on fixed and variable rate instruments. The interest on variable rate instruments is determined using the forward interest rates for each period presented.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
|
|
| Total |
|
| 0 - 1 Months |
|
| 1 - 3 Months |
|
| 3 - 6 Months |
|
| 6 - 12 Months |
|
| 1 - 3 Years |
|
| 3 - 5 Years |
|
| > 5 Years |
|
| Not Sensitive |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Money Market | |
| 210,487 | |
| 99,500 | |
| — | |
| 10 | |
| — | |
| — | |
| — | |
| — | |
| 110,976 | |
Loans | |
| 906,434 | |
| 53,486 | |
| 86,614 | |
| 70,534 | |
| 103,026 | |
| 252,900 | |
| 113,424 | |
| 225,978 | |
| 473 | |
Trade Finance | |
| — | |
| — | |
| — | |
| — | |
| — | |
| — | |
| — | |
| — | |
| — | |
Intragroup | |
| 2,324 | |
| — | |
| — | |
| — | |
| — | |
| — | |
| — | |
| — | |
| 2,324 | |
Securities | |
| 619,308 | |
| 81,245 | |
| 5,776 | |
| 18,753 | |
| 16,306 | |
| 124,401 | |
| 59,352 | |
| 96,046 | |
| 217,429 | |
Permanent | |
| 17,838 | |
| — | |
| — | |
| — | |
| — | |
| — | |
| — | |
| — | |
| 17,838 | |
Other Assets | |
| 2,432,847 | |
| — | |
| — | |
| — | |
| — | |
| — | |
| — | |
| — | |
| 2,432,847 | |
Total Balance Sheet Assets | |
| 4,189,238 | |
| 234,231 | |
| 92,390 | |
| 89,297 | |
| 119,332 | |
| 377,301 | |
| 172,776 | |
| 322,024 | |
| 2,781,887 | |
Money Market | |
| (416,864) | |
| (136,167) | |
| (342) | |
| (397) | |
| (877) | |
| (78) | |
| — | |
| — | |
| (279,004) | |
Deposits | |
| (765,648) | |
| (188,768) | |
| (36,499) | |
| (22,885) | |
| (26,267) | |
| (78,592) | |
| (62,686) | |
| (349,951) | |
| — | |
Trade Finance | |
| — | |
| — | |
| — | |
| — | |
| — | |
| — | |
| — | |
| — | |
| — | |
Intragroup | |
| — | |
| — | |
| — | |
| — | |
| — | |
| — | |
| — | |
| — | |
| — | |
Long-Term Funding | |
| (237,778) | |
| (7,804) | |
| (13,606) | |
| (23,355) | |
| (32,978) | |
| (88,412) | |
| (41,763) | |
| (8,307) | |
| (21,553) | |
Equity | |
| (158,338) | |
| — | |
| — | |
| — | |
| — | |
| — | |
| — | |
| — | |
| (158,338) | |
Other Liabilities | |
| (2,421,345) | |
| — | |
| — | |
| — | |
| — | |
| — | |
| — | |
| — | |
| (2,421,345) | |
Total Balance Sheet Liabilities | |
| (3,999,973) | |
| (332,739) | |
| (50,447) | |
| (46,637) | |
| (60,122) | |
| (167,082) | |
| (104,449) | |
| (358,258) | |
| (2,880,240) | |
Total Balance Sheet Gap | |
| 189,265 | |
| (98,508) | |
| 41,943 | |
| 42,660 | |
| 59,210 | |
| 210,219 | |
| 68,327 | |
| (36,234) | |
| (98,353) | |
Total Off-Balance Sheet Gap | |
| (3,137) | |
| (18,378) | |
| (431) | |
| (337) | |
| 233 | |
| 3,417 | |
| (1,112) | |
| (494) | |
| 13,964 | |
Total Structural Gap | |
| | |
| (116,886) | |
| 41,512 | |
| 42,323 | |
| 59,443 | |
| 213,636 | |
| 67,215 | |
| (36,728) | |
| (84,389) | |
Accumulated Gap | |
| | |
| (116,886) | |
| (75,374) | |
| (33,051) | |
| 26,392 | |
| 240,028 | |
| 307,243 | |
| 270,515 | |
| 186,126 | |
The table below shows in millions of pesos the distribution of the liquidity risk by maturity as of December 31, 2021. The reported amounts include cash flows from interest on fixed and variable rate instruments. The interest on variable rate instruments is determined using the forward interest rates for each period presented.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
|
|
| Total |
|
| 0 - 1 Months |
|
| 1 - 3 Months |
|
| 3 - 6 Months |
|
| 6 - 12 Months |
|
| 1 - 3 Years |
|
| 3 - 5 Years |
|
| > 5 Years |
|
| Not Sensitive |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Money Market | | | 107,493 | | | 40,153 | | | — | | | — | | | — | | | — | | | — | | | — | | | 67,340 | |
Loans | | | 1,016,312 | | | 59,574 | | | 98,867 | | | 85,021 | | | 112,761 | | | 272,326 | | | 122,316 | | | 253,494 | | | 11,953 | |
Trade Finance | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Intragroup | | | 4,368 | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 4,368 | |
Securities | | | 592,439 | | | 76,155 | | | 43,313 | | | 3,745 | | | 12,135 | | | 138,771 | | | 135,369 | | | 56,492 | | | 126,459 | |
Permanent | | | 18,931 | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 18,931 | |
Other Assets | | | 2,548,067 | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 2,548,067 | |
Total Balance Sheet Assets | | | 4,287,610 | | | 175,882 | | | 142,180 | | | 88,766 | | | 124,896 | | | 411,097 | | | 257,685 | | | 309,986 | | | 2,777,118 | |
Money Market | | | (237,926) | | | (134,800) | | | (429) | | | (525) | | | (1,426) | | | (90) | | | — | | | — | | | (100,656) | |
Deposits | | | (773,147) | | | (276,799) | | | (30,673) | | | (14,064) | | | (22,018) | | | (53,199) | | | (43,500) | | | (332,894) | | | — | |
Trade Finance | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Intragroup | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Long-Term Funding | | | (207,558) | | | (14,789) | | | (6,815) | | | (16,950) | | | (28,540) | | | (43,550) | | | (68,411) | | | (9,051) | | | (19,452) | |
Equity | | | (165,539) | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (165,539) | |
Other Liabilities | | | (2,577,883) | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (2,577,883) | |
Total Balance Sheet Liabilities | | | (3,962,053) | | | (426,388) | | | (37,917) | | | (31,539) | | | (51,984) | | | (96,839) | | | (111,911) | | | (341,945) | | | (2,863,530) | |
Total Balance Sheet Gap | | | 325,557 | | | (250,506) | | | 104,263 | | | 57,227 | | | 72,912 | | | 314,258 | | | 145,774 | | | (31,959) | | | (86,412) | |
Total Off-Balance Sheet Gap | | | (5,852) | | | (22,002) | | | (221) | | | 150 | | | 5,385 | | | 5,184 | | | 3,377 | | | 2,276 | | | — | |
Total Structural Gap | | | | | | (272,508) | | | 104,042 | | | 57,377 | | | 78,297 | | | 319,442 | | | 149,151 | | | (29,683) | | | (86,412) | |
Accumulated Gap | | | | | | (272,508) | | | (168,466) | | | (111,089) | | | (32,792) | | | 286,650 | | | 435,801 | | | 406,118 | | | 319,706 | |
The table below shows in millions of pesos the distribution of the liquidity risk by maturity as of December 31, 2022. The reported amounts include cash flows from interest on fixed and variable rate instruments.
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The interest on variable rate instruments is determined using the forward interest rates for each period presented.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
|
|
| Total |
|
| 0 - 1 Months |
|
| 1 - 3 Months |
|
| 3 - 6 Months |
|
| 6 - 12 Months |
|
| 1 - 3 Years |
|
| 3 - 5 Years |
|
| > 5 Years |
|
| Not Sensitive |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
| |
Money Market |
| | 134,410 |
| | 51,335 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 83,075 | |
Loans |
| | 1,156,553 |
| | 75,674 |
| | 118,921 |
| | 99,078 |
| | 140,331 |
| | 310,763 |
| | 145,584 |
| | 232,864 |
| | 33,338 | |
Trade Finance |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — | |
Intragroup |
| | 4,287 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 4,287 | |
Securities |
| | 606,595 |
| | 10,347 |
| | 69,040 |
| | 1,550 |
| | 16,256 |
| | 137,928 |
| | 149,530 |
| | 42,434 |
| | 179,510 | |
Permanent |
| | 12,794 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 12,794 | |
Other Assets |
| | 2,830,134 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 2,830,134 | |
Total Balance Sheet Assets |
| | 4,744,773 |
| | 137,356 |
| | 187,961 |
| | 100,628 |
| | 156,587 |
| | 448,691 |
| | 295,114 |
| | 275,298 |
| | 3,143,138 | |
Money Market |
| | (235,631) |
| | (126,156) |
| | (667) |
| | (1,199) |
| | (1,322) |
| | (467) |
| | — |
| | — |
| | (105,820) | |
Deposits |
| | (852,726) |
| | (255,400) |
| | (38,223) |
| | (41,931) |
| | (24,700) |
| | (69,164) |
| | (53,900) |
| | (369,408) |
| | — | |
Trade Finance |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — | |
Intragroup |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — | |
Long-Term Funding |
| | (234,698) |
| | (7,557) |
| | (16,327) |
| | (27,461) |
| | (44,947) |
| | (59,249) |
| | (38,701) |
| | (11,091) |
| | (29,365) | |
Equity |
| | (166,838) |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (166,838) | |
Other Liabilities |
| | (2,794,488) |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (2,794,488) | |
Total Balance Sheet Liabilities |
| | (4,284,381) |
| | (389,113) |
| | (55,217) |
| | (70,591) |
| | (70,969) |
| | (128,880) |
| | (92,601) |
| | (380,499) |
| | (3,096,511) | |
Total Balance Sheet Gap |
| | 460,392 |
| | (251,757) |
| | 132,744 |
| | 30,037 |
| | 85,618 |
| | 319,811 |
| | 202,513 |
| | (105,201) |
| | 46,627 | |
Total Off-Balance Sheet Gap |
| | 104,840 |
| | (20,129) |
| | (987) |
| | 2,642 |
| | 2,943 |
| | 4,516 |
| | 224 |
| | 3,639 |
| | 111,991 | |
Total Structural Gap |
| |
|
| | (271,886) |
| | 131,757 |
| | 32,679 |
| | 88,561 |
| | 324,327 |
| | 202,737 |
| | (101,562) |
| | 158,618 | |
Accumulated Gap |
| | |
| | (271,886) |
| | (140,129) |
| | (107,450) |
| | (18,889) |
| | 305,438 |
| | 508,175 |
| | 406,613 |
| | 565,231 | |
d) Capital risk
1. Introduction
The Bank defines Capital Risk as the risk of lacking sufficient capital, either quantitatively or qualitatively, to fulfil its business objectives, regulatory requirements, or market expectations.
The second line of defense has to independently challenge business and first-line risk management activities by:
•Supervising capital policies, planning, and adequacy exercises through a review of the main components affecting the capital ratios.
•Defining and monitoring key metrics to calculate the Bank’s regulatory capital, setting tolerance levels and analyzing significant variations, as well as single transactions with impact on capital.
•Reviewing and challenging the execution of capital actions proposed in line with capital planning and risk appetite.
Capital Risk function, which is part of the second line of defense, controls and oversees first-line capital management. It checks that the capital adequacy and coverage match the Bank’s risk profile. It also approves and monitors transactions that could be significant risk transfers.
Capital risk control is part of the general risk framework as well as of the Bank's capital framework and model. It brings together a range of processes, such as capital planning and adequacy, and the subsequent budget execution and monitoring, alongside the ongoing measurement of capital and the reporting and disclosure of capital data.
Supervision of capital planning and adequacy exercises
The Capital Risk function challenges capital planning and adequacy exercises to ensure that capital is consistent with the established risk appetite and risk profile. It has the following fundamental objectives:
•Ensure that the credit, market and operational risks to which the Bank is subject to in the course of its activity, are monitored.
F-214
•Check that the methodologies and assumptions used in these planning processes are within the internal and external regulatory scope.
•Verify that results and outcomes are reasonable and consistent with the business strategy, and the macroeconomic and financial system environment.
•Assess the consistency between the assumptions and outcomes of different exercises.
This function is implemented according to the following phases:
i.Definition of scope
ii.Information requirement and quality check
iii.Qualitative analysis
iv.Quantitative analysis
v.Conclusions and disclosure
If deemed necessary, a discussion of these conclusions will be proposed in the appropriate committee.
Ongoing supervision of capital measurement
Ongoing supervision of the measurement of the Bank’s regulatory capital, ensures an appropriate capital risk appetite.
For this purpose, the second line function conducts a qualitative analysis of the regulatory and supervisory framework and an ongoing review of the Bank’s appetite and specified thresholds.
Moreover, ongoing monitoring of compliance with the capital risk appetite is conducted aiming to maintain capital levels above the regulatory requirements and market expectations.
To fulfil this function, the following phases have been established:
i.Definition of metrics and thresholds
The set of metrics and thresholds that are used in the supervision process are defined to enable adequate capital risk monitoring and control. These are specified on an annual basis.
The metrics consist of:
•Primary metrics: Risk aggregated metrics under Board of Directors’ direct control that express the Bank’s risk profile.
•Secondary metrics: these include a more extensive breakdown of primary metrics and allow more granularity and risk appetite management.
•Monitoring metrics: these provide a more detailed analysis.
Thresholds are set for primary and secondary metrics, which if breached, trigger a more detailed analysis and an explanation of the causes of the breach.
F-215
ii.Preliminary analysis
This analysis comprises the main qualitative issues that may affect the Bank’s solvency, such as process governance and regulatory framework changes. The analysis includes a review of available information, a qualitative assessment of the latest regulatory changes, and a review of pending recommendations given by corresponding committees.
iii.Measurement assessment
Based on the information received (after being deemed as sufficient), the Capital Risk function analyzes the metrics defined in the process, according to the following procedure:
•Determines the scope of the assessment.
•Reviews primary and secondary metrics to detect variations that exceed the defined thresholds, and where they do, perform a detailed analysis of the causes and analyses supplementary metrics.
•If the origin of the breach lies in a specific business unit, more detailed information is requested, in order to find its specific causes.
•Incidents detected must be analyzed in terms of their causes (change in volumes, changes in the profile, one-off events, capital actions, etc.) and discussed with the corresponding function involved.
iv.Conclusions and disclosure
The governance body responsible for capital risk discusses the report containing the conclusions. In addition, the report may be proposed for discussion in the corresponding committees..
3. Key metrics
The Bank has a strong capital position consistent with its business model, balance sheet structure, risk profile and regulatory requirements. The Bank’s strong balance sheet and profitability enables the financial growth and continued accumulation of capital.
The capital metrics of the Bank are stable, with ratios comfortably above the regulatory requirements and at appropriate levels, aligned with the risk appetite statement approved by the Bank’s Management.
Regulatory capital
The Basel III regulatory framework implemented in Mexico since January 2013 establishes minimum capital levels in a very significant manner, both quantitatively (increased minimum requirements for Core Capital and Tier I Basic Capital, plus higher deductions from capital base) and from a qualitative point of view (higher quality of required capital).
From the capital standpoint, Basel III redefines what is considered to be available capital at financial institutions (including new deductions and raising the requirements for eligible equity instruments), increases the minimum capital requirements, requires financial institutions to operate permanently with capital buffers, and adds new requirements in relation to the risks considered.
As of December 31, 2022, the Bank met the minimum capital requirements established by current legislation.
The key regulatory capital figures are shown in Note 30.
F-216
Leverage ratio
To ensure the financial stability of the banking system as a whole, as well as to comply with the agreements of the Basel Committee on Banking Supervision, the CNBV established the methodology to calculate the leverage ratio for banks. This leverage ratio shows if the capital of the banks adequately supports their assets. Such information is helpful for the market participants, as well as for the supervisory work of the CNBV.
This ratio is calculated as Tier I capital divided by leverage exposure. Exposure is calculated as the sum of the following items:
● | Accounting assets, excluding financial derivatives and items treated as deductions from Tier I Capital (for example, the balance of loans is included, but not that of goodwill). |
● | Off-balance sheet items (mainly guarantees, unused credit limits granted and documentary credits) weighted using credit conversion factors. |
● | Inclusion of net value of financial derivatives (gains and losses are netted with the same counterparty minus collaterals if they comply with certain criteria) plus a charge for the future potential exposure. |
● | A charge for the potential risk of securities funding transactions. |
The General Provisions Applicable to Credit Institutions (Disposiciones de Carácter General Aplicables a las Instituciones de Crédito) issued by the CNBV does not establish a minimum percentage of compliance, as it is considered for the baseline reference effect (the minimum of 3%).
As of December 31, 2022, the leverage ratio for the Bank is 7.13%.
Systemic important bank
On April 29, 2016, the Bank was appointed by the CNBV as a systemic important bank, assigning a Grade III of systemic importance. As a result, the Bank should progressively constitute in four years a capital preservation supplement of 1.20%, starting in 2016.
As of December 31, 2022, the Bank constituted 100% of the required capital preservation supplement.
e) Operational risk
Regarding operational risk, the Bank has policies, procedures and methodologies for the identification, control, mitigation, surveillance and disclosure of operational risks.
For the identification and grouping of operational risks, the different categories and lines of business defined by the regulatory entities are used. The methodology is based on the identification and documentation of risks, controls and related processes and uses quantitative and qualitative tools such as self-assessment questionnaires, the development of historical databases and operational risk indicators, etc., both for control and mitigation and disclosure thereof
1. Introduction
Operational risk is defined as the potential loss due to failures or deficiencies in internal controls, due to errors in the processing and storage of operations or in the transmission of information, as well as adverse administrative and judicial resolutions, fraud or theft. It covers other risk categories such as technological risk, cyber-risk and legal or conduct risk.
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a) Technological risk is defined as the potential loss due to damage, interruption, alteration or failure derived from the use of hardware, software, systems, applications, networks and any other information transmission channel in the provision of banking services to customers of the institution.
b) Legal risk is defined as the potential loss due to non-compliance with the applicable legal and administrative provisions, the issuance of unfavorable administrative and judicial resolutions and the application of sanctions, in relation to the Operations that the Institution carries out.
Operational risk is generated in all businesses and support areas and it is inherent in all products to manage and control the operational risks generated by their activities. The operational risk control and management model is based on a continuous process to identify, assess and mitigate sources of risk, regardless of whether they have materialized or not, guaranteeing that risk management priorities are adequately established.
2. Operational risk management
The following items underpin operational risk management:
Framework and tools
The Bank’s operational risk model defines the necessary elements of suitable management and control of operational risk and compliance with advanced regulatory standards and best practices for operational risk management.
The management and control of operational risk must be carried out throughout its cycle, which includes: strategy and planning; risk identification and assessment; risk monitoring; the application and monitoring of mitigation measures; and the availability of information, appropriate reporting and escalation of relevant aspects when necessary.
Policies and procedures have been defined to regulate the management and control of operational risk, as well as the tools in support of these processes.
The most important operational risk tools used by the Bank are the following:
● | Internal events database. The events database provides information to improve operational risk management and control, through root cause analysis, enhancement of risk awareness and events management. Events that are registered in the database can have a financial impact (the Bank records all losses regardless of the amount) or a non-financial impact (such as regulatory, reputational or customer and services). |
The internal database is supplemented by the relevant events escalation process, which allows managing and reporting to the Bank’s Management the occurrence of significant operational risk events arising across the Bank on a timely basis.
● | Operational risk and control self-assessment (RCSA). A qualitative process that seeks, using the criteria and experience of a pool of experts in each function, to determine the main operational risks for each function, the status of the existing control environment and their allocation to the different functions within the Bank. |
The goal of the RCSA is to identify and assess the material operational risks that could prevent business units or support areas from achieving their objectives. Once they are assessed, mitigation actions are identified if the risk levels prove to be above the tolerable levels.
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The Bank also undertakes risk assessments for specific sources of operational risk, enabling a more granular and transversal identification of potential risks. In particular, these are applied to technological risks, fraud, third party risk and factors that could lead to specific regulatory non-compliance, in addition areas that are exposed to money laundering and terrorism financing risks.
● | External event database. The external database provides quantitative and qualitative information, allowing for a more detailed and structured analysis of relevant events that have occurred in the industry, the benchmarking of the losses profile and the appropriate preparation for the RCSA, insurance and scenario analysis exercises. |
● | Operational risk scenarios analysis. The objective of this tool is to identify potential events with a very low probability of occurrence, but which could result in significant losses for the Bank, and to establish appropriate mitigating actions. Expert opinion is obtained from the business lines and risk and control managers. |
● | Key risk indicators. These metrics provide quantitative information on the Bank’s risk exposure and the existing control environment. The most significant indicators associated with the main risk factors are part of the operational risk appetite. |
● | Risk Appetite. Non-financial risks appetite framework is structured as follows: |
- | A general statement setting out that the Bank is, on principle, averse to operational risk events that could lead to financial loss, fraud, operational, technological, legal and regulatory breaches, conduct problems or damage to its reputation. |
- | General metrics of expected losses and stressed losses. |
- | An additional statement, specifically, on the following: internal and external fraud, technological, cyber-risk, anti-money laundering, products commercialization, regulatory compliance and vendor management risk. |
- | Continuous follow up to detect breaches in any of our mainly process, avoiding an impact to the Bank’s risk appetite. |
● | Internal Audit and regulatory recommendations. These provide relevant information on inherent and residual risk due to internal and external factors, enabling the identification of areas of improvement in the existing processes and controls. |
● | Other specific instruments. There are other instruments that enable further analysis and management of operational risk, such as the new products and services assessment, the reporting of key IT and cyber-security events, monthly and annual loss forecasts, business continuity plan (BCP) management, perimeter review and the quality assurance process. |
● | Capital model. A loss distribution approach (LDA) model is used to capture the Bank’s operational risk profile, based on information collected from the internal loss database, external data and scenarios. The main application of the model is to determine operational risk’s economic capital and to estimate expected and stressed losses, which are then used for operational risk appetite. |
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Management
The main activities for effective operational risk management are:
● | Continuous enhancement of the integration of all tools, mentioned above, in order to perform cross- analysis. |
● | Greater harmonization and integration of IT and cyber-risk processes within the Bank’s operational risk methodology framework. |
● | Evolving IT, cyber and vendor management appetite metrics by improving their definition, measurement and by stressing the thresholds. |
● | Processes improvements for the determination, identification and assessment of standard controls that have been aligned with internal policies, with the aim of strengthening and homogenizing the control environment in the Bank. |
● | Establishing independent oversight and evaluation of the Bank’s control environment to challenge adequately the risk and control manager’s views. |
● | Continue improving the integration of operational risk in the Bank’s strategic plan, by including information regarding the potential exposure for the next three years as well as the estimated level of losses. |
● | Fostering mitigation plans for specific risks such as fraud, cybersecurity and vendor management, among others. |
● | Improving the assessment methodology of the cybersecurity transformation plan to identify the risk reduction impact derived from implementation of technical security milestones. |
● | Improvements in the contingency, business continuity and crisis management plans on a coordinated initiative with recovery and resolution plans, also providing coverage to emerging risks. |
● | Fostering technology risk control (control and supervision of the IT systems design, infrastructure management and applications development) by defining reference risks to be assessed during RCSA by business owners and specialized control functions. |
● | Developing a framework for the identification, assessment, aggregation and mitigation of transformation/change risk. |
Operational risk information system
The Bank’s information system for operational risk (Heracles) supports operational risk programs, providing information for management and reporting purposes. Heracles’ main goal is to improve decision-making related to operational risk management throughout the Bank, preventing redundant or duplicated efforts.
This goal is achieved by ensuring that all people responsible for risks throughout the Bank are provided with a fuller and more precise view of their risks in a timely manner, through the integration of several programs, such as risk and control assessment, scenarios, events and metrics with a common set of taxonomies, and methodological standards.
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Mitigation actions
In line with the model, the Bank implements and monitors mitigation actions related to the main risk sources, which are identified through the operating risk management tools and other external information sources.
The most significant mitigation actions are focused on improving the customer security in their usual operations, as well as on continuous improvements in processes and technology, product sales and an adequate and continuous provision of services.
Fraud
The transformation and digitalization of the business imply new threats related to the digital world. To mitigate these risks, new products and control mechanisms are designed and reviewed taking into account potential attacks through digital means.
The use of strong customer authentication processes, the implementation of biometric validation (i.e. facial recognition) in the on-boarding customer process, etc., is becoming increasingly widespread helping mitigate these risks.
About reducing fraud, the Bank deploys specific actions such as the following:
Card fraud:
● | Generalized use of Chip and Personal Identification Number (PIN) (operation with PIN-cards, which require the transaction to be signed-off with a numeric code), both in automated teller machines (ATM) and in physical stores, with advanced authentication mechanisms in the communication between the ATM and the point-of-sale and the Bank’s systems. |
● | Card protection against electronic commerce fraud: |
- | Implementation of a secure e-commerce standard (3DSecure) via two-step authentication based on one-time passwords. |
- | Solutions based on mobile applications that let users deactivate cards for e-commerce use. |
- | Virtual cards issuance using dynamic authentication passwords. |
● | Integration of monitoring and fraud detection tools with other systems, internally and externally, to enhance suspicious activity detection capabilities. |
● | Reinforced ATM security by incorporating physical protection elements and anti-skimming, as well as improvements in the logical security of the devices. |
Online/mobile banking fraud:
● | Validations of online banking transactions through a second security factor based on one-time-use passwords. |
● | Enhanced online banking security by introducing a transaction risk scoring system that requests further authentication when a given security threshold is breached. |
● | Implementation of specific protection measures for mobile banking, such as identification and registration of customer devices (Device ID). |
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● | Monitoring of e-banking platform security to avoid systems attacks. |
Cybersecurity and data security plans
Throughout the year, the Bank continued to focus on cybersecurity risks, which affect all companies and institutions, including those in the financial sector. This situation is a cause of concern for all entities and regulators, prompting the implementation of preventive actions to be prepared for any attack of this kind.
The Bank has continued to mature its cybersecurity controls and regulations in line with the Bank’s cybersecurity framework, and based in international best practices.
The Bank has also made positive progress with its ambitious program to transform cybersecurity in order to strengthen detection, response and protection mechanisms.
At the same time, cyber threats continue to increase in severity and complexity across all industries and geographies. The Bank regularly reviews and evolves its defenses in order to continuously improve, and address existing and emerging cyber threats.
The second line of defense, cybersecurity risk team has evolved the process for assessment of cyber risk to incorporate oversight across all the core cyber risk domains in the information security program. This includes oversight and assessment of risk reduction effectiveness of the cybersecurity transformation plan.
Vendor management
As part of its digitalization strategy, the Bank aims to offer its customers the best solutions and products available in the market, which in many cases entail an increase in outsourcing activities or the employment of third party services. This aspect, together with the intensive use of new technologies such as the cloud, the increase of cyber-related risks and an increase in regulatory pressure in this area, making it necessary to reinforce procedures and controls to ensure that the risks arising from hiring suppliers are known and managed appropriately.
In order to cover new regulatory requirements, the Bank’s efforts have mainly been aimed at:
● | The definition of new criteria for classifying services according to their level of relevance. This level of relevance will determine the different requirements for approval, registration and monitoring of the services. |
● | Methodology improvements to identify and analyze inherent risks. |
● | Controls have been reinforced in the different phases of the vendor management model to ensure that services that involve accessing or processing of sensitive data, including personal data, are correctly identified and classified. |
● | The escalation policy has been revised to ensure that the essential outsourcing functions and the critical and high relevance services are reviewed and approved in the appropriate forums, and that the relevant incidents associated with suppliers that provide these services are escalated in due time and manner for review and adequate decision-making. |
● | Definition and monitoring of indicators and dashboards with regard to the model implementation process. |
● | Reviewing and enhancing the data quality for relevant services and associated suppliers inventories. |
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● | Progress in the implementation of a management system that automates the supplier management cycle different phases to achieve enhanced process control and higher information quality. |
● | Training and raising awareness of risks associated with suppliers and other third parties. |
● | Identification of the main suppliers (watchlist). |
● | Definition of the procedure for ‘Exit Strategy’. |
● | Deployment of the Vendor Risk Assessment Centre (VRAC) function with the aim of making supplier assessments more efficient and standard, ensure that related risks are adequately covered, and execute a certification process before the service is provided. |
Other relevant mitigating actions
With regards to mitigation measures related to customer practices, products and businesses, the Bank works to continuously improve and implement policies on aspects such as products and services selling, management and analysis of customer complaints, prevention of money laundering, terrorism financing and compliance with new regulations.
Analysis and monitoring of controls in Santander Corporate & Investment Banking
Due to the specific nature and complexity of the financial markets, operational control procedures are subject to continuous improvement at Santander Corporate & Investment Banking (business unit which performs the activity related to these markets), which currently focuses on the following aspects:
● | Reporting and monitoring tools have been strengthened, generating a more robust and systematic methodology for periodic measurement of the main risks, ensuring an adequate level of maturity of all the operational risk tools. |
● | Continuous improvement of the control model related to regulatory requirements such as Markets in Financial Instruments Directive (MiFID II), US Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd Frank Act), Regulation EU 648/2012 on OTC financial derivatives, central counterparties and trade repositories (EMIR), IFRS 9 and General Data Protection Regulation (GDPR) among others. |
● | The risk of unauthorized trading continues to be monitored through a specific risk appetite metric. As part of the control environment continued process of improvement, the guidelines and their monitoring have been strengthened. Further, new reports are being defined to produce more granular monitoring of market operations re-enforcing business continuity plans, incorporating new scenarios adapted to new industry risks (i.e. cybersecurity scenarios). |
● | Strengthening business continuity plans, incorporating new scenarios adapted to new industry risks (i.e. cybersecurity scenarios). |
● | Implementation of new tools that reinforce control over communications that occur in the markets trading rooms, among others with a focus on monitoring conduct risk. |
Finally, it should be noted that the business remains immersed in a transformation process that involves the updating of its technological platforms and operational processes, which will, among other objectives, strengthen the control model and reduce the operational risk associated with these activities.
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Insurance’s role in operational risk management
The Bank considers insurance as a key element in the management of operational risk. The own insurance function achieved a greater level of maturity, obtaining greater consistency and ensuring total coordination between the different functions involved in the insurance management cycle.
The following activities should be highlighted:
● | Continuous fostering of the relationship between the own insurance, operational risk and first line areas, to attain the objective of effective insurable risk management, through their active participation in the insurance and other relevant forum established by the Operational Risk function (i.e. fraud forum). |
● | Permanent review of the Bank's risks with respect to contracted hedges, in order to identify all risks that may be subject to insurance coverage, analyzing the suitability of the policies for the risks covered and taking appropriate corrective measures in case it is deemed necessary. |
● | Monitoring insurable losses and events identified in the insurance policies, establishing action protocols and specific monitoring fora. Identification of all risks in the Bank that can be hedged with insurance, including the identification of new insurance coverage for risks already detected in the market. |
Likewise, the own insurance function has continued developing its role of protecting the consolidated income statement, mainly through the following tasks:
● | Establishment and implementation of those criteria to be applied in order to quantify insurable risk, based on the analysis of losses and scenarios, which allow determining the level of exposure of the Bank to each risk. |
● | Analysis of the coverage available in the insurance market, and negotiation with suppliers according to the procedures established for this purpose by the Bank. |
● | Recovery of insured losses, maximizing the efficiency of the hedged through policies. |
● | Participation in various Bank fora/committees related to risk management, increasing their interaction with other Bank functions and ability to properly identify and evaluate insurable risks, as well as their knowledge of existing policies and activation procedures for other Bank areas. |
Business continuity plan
The Bank has a Business Continuity Management System (BCMS), that is a holistic management process which identifies the potential impacts threatening the Bank and sets out the protocols and governance to assure the capacity for effective response, so as to minimize the impact of a possible interruption in business operations, protecting brand reputation, image and safeguarding the interests of the main stakeholders and, in short, making the Bank more resilient against contingency events.
The object of the business continuity management model is to define the principles, functional and governance aspects, in addition to the main associated processes and instruments that can be used to adequately develop and implement a business continuity management system, hereinafter BCMS, aligned with sector best practices and which an cover regulatory requirements established for that purpose.
a) | Business impact analysis |
Business impact analysis (BIA) is a criticality analysis matrix, the analysis is based on a compilation of the processes that form part of the activity of each of the Bank’s business units. A criticality assessment is then performed.
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b) | Continuity strategies |
The Bank has the following Data Centers: CTOS I, CTOS II, Data Center Jurica, Alternate Data Center Cantabria. The Bank has established three buildings for the contingency operation.
c) | Activation of the business continuity plan |
The response protocols for events that cause unexpected or unplanned downtime in critical business operations, must be in alignment with the Bank’s risk escalation policy.
In addition, if the event reach severity levels which could be considered as “Business as Usual (BAU) alert” situation or worst (“Silver” or “Gold” level special situations), as defined within the “Comprehensive Management Model for Special Situations”, the escalation and management procedures established in the Bank’s special situations management policy will be also activated.
d) | Testing and Maintenance |
● | CNBV, the Mexican Central Bank and Internal Audit are informed periodically of the results of the Business continuity plan (BCP) and Data recovery plan (DRP) exercises. |
● | All plans are tested once a year. |
● | Our alternate operations sites (CAT by its Spanish acronym) is tested every year. |
● | High availability tests are performed periodically. |
● | The Bank performs programed maintenance to BCP at least once a year to ensure that the plans are updated. |
● | Continuous updates to BCP and DRP are made in case of changes in the Bank’s organizational structure, technology infrastructure and human resources. |
3. Key metrics
Operational risk profile was stable during 2022.
The COVID-19 pandemic generated to an increase in the inherent operational risk exposure, although the Bank implemented additional controls in order to maintain operational risk levels prior to the COVID-19 health crisis and reinforce the existing ones. The Bank continues monitoring the impact of the COVID-19 pandemic in the risk profile and existing control environment.
The following aspects were considered a management focus during 2022:
● | Business continuity plans were effectively deployed to support all the employees, customers and business units. |
● | IT performance and support, in order to continue ensuring availability and adequate performance of services, especially in online banking and call centers. |
● | Third party risk exposure, as critical providers are being closely watched with focus on business continuity capabilities and service level agreements compliance. |
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● | Fraud and cyber risk threats across the industry and reinforcement of the Bank’s control environment (i.e. patching, browsing control, data protection controls, etc.), as well as heightening monitoring as a preventive measure. |
● | People risk, following the return to offices and/or work from home situation. Measures have been implemented throughout the Bank to ensure a suitable and safe work environment for all employees. |
Regarding external fraud, the majority of the losses are related to forgery and identity theft, and the fraudulent use of debit and credit cards. The forecast for next year is for this trend to continue, with a potential intensification of the fraudsters' activity in payment transactions and electronic commerce. In this regard, the Bank is continuously improving its monitoring and control procedures and tools with the goal of tackling these risks.
f) Compliance and conduct risk
1. Introduction
The Compliance and Conduct function fosters the Bank´s adherence to the rules, supervisory requirements, and the principles and values of good conduct, by setting standards, advising and reporting in the interest of employees, customers, shareholders and the community as a whole.
This function addresses all matters related to:
● | Regulatory compliance. |
● | Financial crime compliance (FCC). |
● | Product governance and consumer protection. |
● | Reputational risk. |
Under the current configuration of the Bank’s three lines of defense, Compliance and Conduct is an independent second line control function organizationally under the CRO, reporting directly and regularly to the Board of Directors and its committees, through the Chief Compliance Officer (CCO).
The Bank’s goal is to minimize the probability of non-compliance events and to identify, evaluate, assess, manage, control and report any potential irregularities that may occur.
The Bank sets out in its risk appetite model its zero tolerance for Compliance and Conduct risks with the goal of minimizing the probability of any economic, regulatory or reputational impact. In order to achieve this goal, Compliance and Conduct risk is managed through a homogeneous process carried out towards a common methodology and taxonomy, fully aligned with the Risk function principles, by establishing a series of risk indicators, assessment matrices and qualitative statements.
The Annual Compliance Program (ACP) is the key management tool for covering a wide scope of around seventy activities related to risk management, governance and culture. The Board of Directors and the management team of each business unit supervise the Annual Compliance Program, and it is validated by the Bank Compliance and Conduct function. It details the main activities to be developed by the function throughout the year, classified into the following categories: i) governance; ii) findings and recommendations; iii) regulatory radar; iv) risk management; v) culture and vi) improvement projects.
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2. Governance
The CCO reports to the Bank’s governing and management bodies. This is independent of other reporting obligations by the Risk function to the governance and management bodies of the Bank’s risk profile, which also includes compliance and conduct risks.
The governance structure is composed of the general compliance committee (include reputational risk and data protection topics) and two supporting governance fora: product governance forum and the anti-money laundering and terrorism-financing forum.
The general compliance committee is the high-level collegiate body of the Compliance and Conduct function. Its main responsibilities are as follows:
● | Proposing updates and modifications to the general compliance and conduct framework and other corporate frameworks sponsored by the Compliance and Conduct function for ultimate approval by the Board of Directors. |
● | Reviewing significant compliance and conduct risk events, measures adopted and their effectiveness. |
● | Setting up and assessing corrective actions when risks of this kind are detected in the Bank, either due to weaknesses in the existing management and control or due to emerging new risks. |
● | Monitoring newly issued or amended regulations and establishing their scope of application in the Bank, and, if necessary, defining adaptation or mitigation actions. |
3. Compliance and conduct risk management
The Compliance and Conduct risk management follows the Bank’s three lines of defense model as an independent second line control function.
One of the Compliance and Conduct function’s cornerstones consists on overseeing the effective implementation and monitoring of the General Code of Conduct (GCC) under the supervision of the compliance committee and, if relevant, of the risk supervision, regulation and compliance committee.
The GCC along with other codes and rules and regulations that implement it, includes oversight of the corporate defense model and promotion of the Bank’s whistleblowing channel model.
The GCC catalogues the ethical principles and rules of conduct by which all activities of the Bank’s employees must be governed. This code must be understood and applied along with the other internal development regulations. The GCC establishes the following:
● | Compliance functions and responsibilities on the application of the General Code of Conduct; |
● | General ethical principles of the Bank; |
● | General standards of conduct; |
● | The consequences in case of breach; |
● | A whistleblowing channel, which allows employees who are aware of allegedly misconducts or that are not aligned with the corporate behaviors, communicate them confidentially and anonymously. |
● | Monitoring of personnel’s accounts dealing and flow of material non-public information. |
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The following paragraphs provide the details on how risk management is conducted for the additional items that are under the Compliance and Conduct function’s scope: regulatory compliance, securities market, product governance and consumer protection, financial crime compliance and reputational risk, among others.
Regulatory Compliance
The Regulatory compliance is responsible for controlling and supervising regulatory risks related to employees and securities markets, developing policies and rules.
The following functions are in place for the adequate control and management of regulatory compliance risks:
● | Application and interpretation of the GCC and other codes and rules and regulations that implement it, including oversight of the corporate defense model and promotion of the Bank’s Whistleblowing channel model. |
● | Development and application of policies and rules aimed at preventing market abuse, paying special attention to the use of common methodologies and corporate tools. |
● | Control and supervision of regulations related to: (i) markets, mainly, Stock Markets Law (Ley del Mercado de Valores) and applicable orders, Regulation EU 648/2012 on OTC financial derivatives, central counterparties and trade repositories (EMIR), US Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd Frank Act) and Section 619 of the Dodd-Frank Act (Volcker Rule) and (ii) data management, Foreign Account Tax Compliance Act (FATCA) and the Common Reporting Standard (CRS) approved by the Organization for Economic Co-operation and Development (OECD) Council on July 15, 2014. |
● | Disclosure of relevant Bank’s information (material facts). |
The most relevant areas of the Regulatory compliance function are described below:
A. Employees
The main objective of this function is to extend the ethical and compliance culture across the Bank, establishing internal standards for the prevention of criminal risks, conflicts of interest or anti-competitive behaviors based on the principles established by the General Code of Conduct, which is the central element of Regulatory Compliance.
The Bank in its firm commitment against any form of corruption, whether in the public or private sectors, has an Anti-Corruption policy whose purpose is to establish the guidelines to be applied, assign the relevant roles and responsibilities and establish certain anti-corruption elements for its governance. This policy, which can be supplemented by any additional stricter controls derived from more demanding local regulations or obligations and their specific training, includes elements aimed at mitigating and preventing corruption and bribery within the Bank, such as:
● | Guidelines regarding gifts and invitations extended to public officials. |
● | Guidelines regarding the conduct of agents, intermediaries, advisors and business partners. |
● | Control and prevention measures regarding third parties (agents, intermediaries, advisors and business partners) with whom the Bank operates; due diligence processes for third parties who are not of renowned prestige; anti-corruption clauses; payment controls; accounting controls. |
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● | Guidelines regarding the acceptance by Bank employees of gifts or invitations. |
The whistleblowing channel’s goals are:
● | Contribute to the Bank´s cultural transformation, since it allows to escalate behaviors that are not aligned with our corporate values, in addition to other more usual compliance related cases, such as unlawful acts or breaches of the GCC. |
● | Create a working environment where employees feel able to “Speak Up” and are “Truly Listened” to, in line with our Responsible Banking strategy and with our aim to be a bank that is Simple, Personal and Fair. |
● | Support financial crime compliance according to the existing regulations and culture objectives. |
B. Market abuse
Regulatory compliance tools for market abuse risk prevention and management comprises:
● | Control room: Monitoring of personal account dealing and flow of material non-public information. |
● | Surveillance: Monitoring of the traders and sales personnel activity at the trading floor and ALCO. |
C. Market regulations
Regulatory compliance carries out the risk management of the main international markets regulations that affect the Bank, such as Stock Markets Law (Ley del Mercado de Valores) and applicable orders, Dodd-Frank and Volcker Rule, among others.
D. Data management
The focal points for Regulatory compliance are:
● | Consolidation of programs and control framework based on three pillars: key compliance indicators (KPI), supervision of compliance with regulatory obligations and annual risk self-assessment. |
● | Publication of guidelines and criteria for the processing of personal data. |
● | Monitoring of corporate and local initiatives to ensure the effectiveness of the compliance program regarding personal data: review of materials and training courses for all Bank employees; reinforcement of key internal processes (supplier management; information transfers, exercise of ARCO rights, security incident management, among others). ARCO rights are defined as right of access, rectification, cancellation and opposition of the holders on their personal data. |
● | Fostering cooperation and best practices sharing among business units. |
Foreign Account Tax Compliance Act and the Common Reporting Standard
● | In terms of the automatic exchange of tax information among countries (FATCA and CRS), the main oversight activities are centered around: (i) reporting obligations according to local provisions; (ii) remedial actions following Internal Audit’s recommendations and (iii) reinforcement of the control framework (KPI and controls). |
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Product governance and consumer protection
The product governance and customer protection mission is to ensure that the Bank acts in the customer´s interest by complying with regulations, the entity’s values and principles. This mission is achieved through the following drivers:
Culture
● | Establish the principles of conduct and risk management throughout the commercialization process and the relationship with retail customers. At the same time, establish and manage a strong governance culture. |
● | Promote an appropriate culture with a Simple, Personal and Fair approach, to act in the customers´ best interest. |
Processes
● | Ensure that products are designed to meet the characteristics and needs of customers, with an appropriate balance of risks, costs and profitability. |
● | Oversee the sale process to the adequate target market, with proper commercial treatment and transparency of information, as well as salesforce training and compensation systems that encourage performance in the best interest of the customer. |
● | Ensure that customer service, post-sale systems and processes facilitate a Simple, Personal and Fair approach to customers, as well as adequate detection and management of any possible deterioration of products and services. |
Management
● | Ensure that decisions are made, action plans are defined and followed when necessary, and that Bank’s Management and statutory bodies are properly informed. |
● | Oversee the design and execution of controls throughout the commercialization and customer relationship process. |
● | Identify risks through customer’s voice, regulatory guidelines, industry practices, supervisor and auditor opinions, and learning from internal/external events. |
● | Apply Bank’s risk assessment methodologies, such as management indicators, thematic evaluations, and self-assessments. |
● | Mitigate conduct risks with customers through solid oversight, reviewing conduct management based on regular reporting, and capacity and maturity model assessment. |
Financial Crime Compliance (FCC)
One of the Bank’s strategic objectives is to maintain advanced and efficient financial crime compliance systems, constantly adapted to international regulations, with the capacity to confront new techniques deployed by criminal organizations.
As a part of the second line of defense, the Financial Crime Compliance (FCC) function ensures that risks are managed in accordance with the risk appetite defined by the Bank and promotes a strong risk culture
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through the organization. The FCC function is ultimately responsible for supervising and coordinating the FCC systems in collaboration with the business units and control areas, requiring the implementation of the necessary programs, measures and enhancements.
The Bank anti-money laundering (AML) and countering terrorism financing (CTF) policy is based on three main pillars: comply with the highest international standards, their adaptation and to establish global policies and technology systems to facilitate such compliance.
Reputational risk
Reputational risk is defined in the Bank as the risk of a current or potential negative economic impact due to damage to the perception of the Bank on the part of employees, customers, shareholders and investors, and the wider community.
Reputational risk may arise from a multitude of sources and in many cases from other risks. In general, these sources may be related to the Bank's business and support activities, the economic, social and political environment and events associated with our competitors. Consequently, the management of this risk requires interaction with both first and second lines of defense functions responsible for the relationship with stakeholders, in order to ensure a consolidated oversight of the risk, efficiently supported on the current control frameworks.
The reputational risk model is based on a prominently preventive approach to risk management and control, and on effective processes for the identification and management of early warnings of events and risks, and subsequent monitoring and management of events and detected risks.
g) Model risk
1. Introduction
A model is defined as a system, approach or quantitative method that applies theories, techniques or statistical, economic, financial or mathematical hypotheses to transform input data into quantitative estimates. The models are simplified representations of real world relationships between characteristics, values and observed assumptions. This simplification allows the Bank to focus attention on specific aspects which are considered most important for applying a given model. The Bank uses models for different purposes such as admission (scoring/rating), capital calculation, behavior, provisions, market and operational risk, compliance, liquidity, among others.
The use of all those models entails model risk, defined as the potential negative consequences arising from decisions based on the results of wrong, inadequate or incorrectly used models.
According to this definition, the sources of model risk are as follows:
● | The model itself, due to the utilization of incorrect or incomplete data, or due to the modelling method used and its implementation in systems. |
● | Incorrect use of the model. |
The materialization of model risk may cause financial loss, erroneous commercial and strategic decision-making or damage to the Bank’s transactions.
The Bank has been working towards the definition, management and control of model risk for several years. In 2015, a specific area was established within the Risk area in order to manage and control this risk.
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To ensure adequate model risk management, the Bank has in place a set of policies and procedures which establish the principles, responsibilities and processes to follow during the model life cycle detailing aspects related to organization, governance, model management and model validation, among others.
The supervision and control of model risk is proportional to the importance of each model. In this sense, a concept of ‘Tiering’ is defined as the main attribute used to synthesize the model’s level of importance or model significance, this criteria defines the intensity of the risk management processes that must be followed.
The model risk management is organized around four pillars:
● | Key elements: Governance, risk appetite, management scope and risk policies. |
● | Processes: Model life cycle. |
● | Communication: Internal and external communication (monitoring, reports, training, among others). |
● | Model Risk Facilitators: Infrastructure, tools and resources. |
2. Model risk management
Model risk management and control is structured around a set of processes regarded as the model life cycle. The definition of the model life cycle phases in the Bank is outlined as follows:
Identification
As soon as a model is identified, it is necessary to ensure that it is included in the model risk control perimeter.
One key feature for a proper model risk management is to have a complete inventory of the models used.
The Bank has a centralized inventory, created based on a uniform taxonomy for all models used at the different business units. The inventory contains all relevant information for each model, which allows them to be monitored properly according to their relevance and the tier criteria.
Planning
This is an internal annual exercise, approved by the Bank’s governance bodies, which aims to establish a strategic action plan for all models included in the scope of management of the Model Risk function. It identifies the needs for resources related to the models that are going to be developed, revised and implemented during the year.
Development
This is the model’s construction phase, based on the needs established in the models plan and with the information provided by the specialists for that purpose.
The development must take place using common standards for the Bank. This ensures the quality of the models used for decision-making purposes.
Internal validation
Independent validation of models is not only a regulatory requirement, but it is also a key feature for proper management and control of the Bank’s model risk.
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Hence, there is a specialized unit, independent from developers and users, which draws up technical opinions on the suitability of internal models, and sets out conclusions concerning their robustness, utility and effectiveness. The validation opinion for each model is expressed through a rating, which summarizes the model risk associated with it.
The internal validation process covers all models within the model risk control scope, ranging from those used in the Risk function (credit, market, structural or operational risk models, capital models, economic and regulatory models, provision models, stress tests, among others) to other models used in different functions that support decision-making.
The validation scope includes not only more theoretical or methodological aspects, but also the IT systems and the data quality that models rely upon for their effective functioning. In general, it includes all relevant aspects related to Risk management (controls, reporting, uses, involvement of senior management, among others).
One of the key tasks related to the internal validation is the consistency analysis process carried out by the different validators, which includes the review of the issued recommendations, their severity and the rating assigned. In this way, it acts as an important point of control of the consistency and comparability of the validation works. The validation works are only concluded once this phase of consistency has been completed.
Approval
Before being deployed and therefore used, each model must be submitted for approval to the corresponding governance bodies.
Deployment and use
This is the phase during which the newly developed model is implemented in the system in which it will be used. As mentioned already, this implementation phase is another possible source of model risk. It is therefore essential that tests be conducted by technical units and the model owners to certify that the model has been implemented pursuant to its methodological definition and that it works and performs as expected.
Monitoring and control
Models have to be regularly reviewed to ensure correct performance and that they are suitable for purpose. Otherwise, they must be adapted or redesigned.
Additionally, control teams have to ensure that the model risk is managed in accordance with the principles and rules set out in the model risk framework and all related internal regulations.
Model Decommissioning
A model decommissioning can be driven by different causes, such as the model is not performing appropriately, the model has been inactive for a considerable amount of time or there is a new model replacing a current one.
h) Strategic risk
1. Introduction
Strategic risk is the risk of loss or damage arising from strategic decisions or their poor implementation, or from the inability to adapt to external developments.
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The Bank’s business model must be considered as key factor that is pivotal to strategic risk. It has to be viable and sustainable; therefore, it must be able to generate results in accordance with the Bank’s targets, every year and at least during the following three years, as well as being consistent with the Bank’s long-term view.
Strategic risk can be split into three main components:
● | Business model risk: the risk associated with the Bank’s business model. This includes, among others, the risk of the model becoming obsolete, irrelevant, and/or that it loses value to generate expected results. |
● | Strategy design risk: the risk related to the strategy set out in the Bank’s long-term strategic plan, including the risk that this plan may not be adequate per se, or due to its assumptions, and thus resulting in the Bank may not be able to deliver expected results. |
● | Strategy execution risk: the risk associated with the execution of the three-year financial plan. Risks considered within this component include potential impacts due to both internal and external factors, the inability to react to changes in the business environment, and risks associated with corporate development transactions. |
2. Strategic risk management
Strategic risk is viewed as a transversal risk and a Bank target-operating model that is used as a reference by the Bank’s business units. This model encompasses the procedures and necessary tools for robust monitoring and control, which can be summarized as follows:
● | Strategic plans: the Strategic risk function, with the support of the different areas within the Risk area, independently monitors and challenges the risk management activities performed by the Bank’s Corporate Development and Strategy function. It is an additional component, albeit independent, that is fully integrated in all the Bank’s strategic plans. |
● | Corporate development transactions: the Strategic risk function, with the support of the different areas in the Risk area, ensures that corporate development transactions are subject to a risk assessment that comprises their potential impact on both Bank’s risk profile and risk appetite. |
● | Top risks: under stressed assumptions, the Bank identifies, evaluates, monitors and proactively manages those risks that may have a significant impact on its results, liquidity or capital affecting its financial health. |
● | New products commercialization: The Strategic risk function participates in the process of assessing and validating any new product or service proposal before it is launched on the market by the Bank ensuring full alignment with the defined strategy. |
● | Strategic risk report: prepared jointly by the Bank’s Corporate Development and Strategic risk function, as a combined tool for the monitoring and assessment of the Bank’s strategy, in addition to associated risks. This report is presented to the Bank’s Management and covers several topics: strategy execution, strategic projects, corporate development transactions, business model performance, top risks and risk profile. |
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i) | Climate change |
Climate change may imply three primary drivers of financial risk that could adversely affect the Bank:
- | Transition risks associated with the move to a low carbon economy, both at idiosyncratic and systemic levels, such as through policy, regulatory and technological changes. |
- | Physical risks related to extreme weather impacts and longer term trends, which could result in financial losses that could impair asset values and the creditworthiness of our customers. |
- | Liability risks derived from parties who may suffer losses from the effects of climate change and may seek compensation from those they hold responsible such as state entities, regulators, investors and lenders. |
These primary drivers could materialize, among others, in the following financial risks:
- | Credit risks: Physical climate change could lead to increased credit exposure and companies with business models that are not aligned with the climate change may face increased risk of reduced corporate earnings and business disruption due to new regulations or changes in the market. |
- | Market risks: Market changes in the most carbon intensive sectors could affect energy and commodity prices, corporate bonds, equities and certain derivatives contracts. Increasing frequency of severe weather events could affect macroeconomic conditions, weakening fundamental factors such as economic growth, employment and inflation. |
- | Operational risks: Severe weather events could directly impact business continuity and operations both of customers and ours. |
- | Reputational risk could also arise from shifting sentiment among customers and increasing attention and scrutiny from other stakeholders (investors, regulators, etc.) on our response to climate change. |
Any of the conditions described above could have a material adverse effect on the Bank´s business, financial condition and results of operations.
Additionally, the Bank has increased focus on the impact of climate risk in relation to market, structural and liquidity risk, which arise from the possibility that changes in climate may adversely affect the value of a financial instrument, a portfolio or the Bank as a whole. This risk may have an impact both on financial instruments fair value or portfolios and on the Bank's liquidity. The Bank measures this risk through stress scenarios for both market and liquidity risk, which arises from the possibility that climate change may adversely affect the value of a financial instrument, a portfolio or the Bank as a whole.
As of December 31, 2022, the Bank has not identified any material impact related to climate change in the consolidated financial statements.
In view of the business activities carried on by the Bank, the Bank does not have any environmental liability, expenses, assets, provisions or contingencies that might be material with respect to its consolidated equity, financial position or results. Therefore, no specific disclosures relating to environmental issues are included in these consolidated financial statements.
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49. Associated entities and consolidated subsidiaries
a) Associated entities
Following is a summary of the balance sheet on the associated entity as of December 31, 2021:
| | | | |
| | | | |
| | | 2021 | |
|
|
| |
|
|
| | |
|
Current assets | | | 5,678 | |
Non-current assets | | | 3,549 | |
Current liabilities | | | (6,119) | |
Non-current liabilities | | | (31) | |
Net assets | | | 3,077 | |
Following is a summary of the income statement on the associated entity as of December 31, 2021:
| | | | |
| | | | |
| | | 2021 | |
|
| | | |
|
| | | |
Revenue | | | 2,399 | |
Expenses | | | (1,728) | |
Operating profit before tax | | | 671 | |
Income tax | | | (178) | |
Profit for the year | | | 493 | |
As of December 31, 2021 and 2022 the income accounted by the equity method recognized in the consolidated income statement was 200 million pesos and 182 million pesos, respectively.
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The table below provides the reconciliation of the carrying amount of the investment in associated entities recognized in the consolidated balance sheet as of December 31, 2021:
| | | | |
| | | | |
| | | 2021 | |
|
|
| |
|
|
| | |
|
Reconciliation to carrying amount: | | | | |
Net assets on investment date | | | 2,584 | |
Profit for the period | | | 493 | |
Closing net assets | | | 3,077 | |
Bank’s share in associated entity (percentage) | | | 49 | % |
Bank’s share in associated entity | | | 1,508 | |
Goodwill | | | 669 | |
Sale of merchant contracts | | | (784) | |
Other adjustments | | | (13) | |
Carrying amount as of December 31 | | | 1,380 | |
As mentioned in Note 3, during 2021 Banco Santander México sold acquisition contracts to SMPS (associated entity) for 1,600 million pesos. In accordance with IAS 28, the Bank recognized in the consolidated income statement a gain on the sale in the amount of 816 million pesos, with a corresponding credit to the investment in associated entity for 784 million.
The Bank received 583 million in cash and a note receivable from SMPS in the amount of 1,017 million as proceeds from the sale of the acquisition contracts. The note receivable was subsequently capitalized as a capital contribution to SMPS.
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b) Composition of the Bank
The subsidiaries of Banco Santander México, all of which have been included in the consolidated financial statements as of December 31, 2022, are as follows:
| | | | | | | | | | |
| | | | | | Proportion of | | | Proportion of | |
| | | | | | ownership interest | | | voting power | |
Name of subsidiary |
|
| Principal activity |
|
| held by the Bank |
|
| held by the Bank |
|
Santander Consumo, S.A. de C.V., Sociedad Financiera de Objeto Múltiple, Entidad Regulada |
| | Credit card loans |
| | 99.99 | % | | 100 | % |
Santander Inclusión Financiera, S.A. de C.V., Sociedad Financiera de Objeto Múltiple, Entidad Regulada | | | Retail loans | | | 99.99 | % | | 100 | % |
Centro de Capacitación Santander, A.C. |
| | Not-for-profit (Educational institute) |
| | 99.99 | % | | 100 | % |
Fideicomiso 100740 Banco Santander, S.A. |
| | Settlement trust |
| | 99.99 | % | | 100 | % |
Fideicomiso GFSSLPT, Banco Santander, S.A. |
| | Settlement trust |
| | 89.14 | % | | 100 | % |
Santander Servicios Corporativos, S.A. de C.V. |
| | Services |
| | 99.99 | % | | 100 | % |
Santander Servicios Especializados, S.A. de C.V. |
| | Services |
| | 99.99 | % | | 100 | % |
Santander Tecnología México, S.A. de C.V. |
| | Technology services |
| | 99.99 | % | | 100 | % |
Openbank Santander México, S.A. de C.V., Sociedad Financiera de Objeto Múltiple, Entidad Regulada |
| | Financial services |
| | 99.99 | % | | 100 | % |
The total non-controlling interest recognized in the consolidated balance sheet as of December 31, 2022, amounts to 62 million pesos.
Information in respect to non-controlling interest is presented in Note 27.
c) Significant restrictions
The Bank has the following significant restrictions on its ability to access or use the consolidated assets and settle the consolidated liabilities as of December 31, 2022:
● | Compulsory deposits with the Central Bank |
Compulsory deposits relate to a minimum balance financial institutions are required to maintain with the Central Bank based on a percentage of deposits received by third parties. The amount of this compulsory deposit is 23,978 million pesos (see Note 6).
● | Reverse repurchase agreements |
121,859 million pesos of debt instruments have been received as collateral in connection with reverse repurchase agreement transactions (see Notes 7 and 11).
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● | Repurchase agreements |
119,213 million pesos of Mexican government securities (M Bonds, BPATS, UMS and other debt securities) classified as financial assets at fair value through other comprehensive income have been pledged in connection with repurchase agreements transactions (see Note 8).
86,052 million pesos of debt instruments classified as financial assets at fair value through profit or loss have been pledged in connection with repurchase agreement transactions (see Note 8).
7,720 million pesos of BREMS R classified as financial assets at amortized cost have been pledged in connection with repurchase agreements transactions (see Note 8).
● | Debt instruments |
2,211 million pesos of Special CETES in connection with the program of credit support and additional benefits to Mexican States and Municipalities and the support program for housing loan debtors, which can only be repurchased by the Central Bank (see Note 8).
7,799 million pesos of BREMS R that can only be acquired by Mexican banks through auctions carried out by the Central Bank as well as through repurchase agreement transactions between them or between Mexican banks as per the provisions established by the Central Bank (see Notes 3.4 and 8).
● | Securities loans |
410 million pesos of equity instruments pledged in connection with securities loans transactions (see Note 9).
1 million pesos of equity instruments have been received in connection with securities loan transactions (see Note 9).
● | Collaterals in financial derivatives transactions traded in organized markets |
6,530 million pesos of loans and advances to customers have been pledged in connection with financial derivatives traded in organized markets (see Note 11).
● | Collaterals in OTC financial derivatives transactions |
14,585 million pesos of loans and advances to credit institutions have been pledged in connection with OTC financial derivatives transactions (see Note 7).
1,417 million pesos of debt instruments classified as financial assets at fair value through profit or loss have been pledged in connection with OTC financial derivatives transactions (see Note 8).
15,676 million pesos of deposits from credit institutions and customer deposits have been received in connection with OTC financial derivatives transactions (see Note 32).
5,660 million pesos of debt instruments have been received in connection with OTC financial derivatives transactions (see Note 32).
● | Earnings distribution |
The Bank has restrictions on earnings distribution related to the legal reserve of 16,365 million pesos that include 13,971 million pesos in legal reserve of Banco Santander México (see Note 45). In addition,
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the Bank is restricted from distributing dividends that will result in non-compliance with minimum capitalization requirements established by the CNBV (see Note 30).
● | Loans to other entities within the Bank |
The Bank granted a loan to Santander Consumo and Santander Inclusion Financiera for 69,785 million pesos and 485 million pesos, respectively, which were eliminated from the consolidated balance sheet for consolidation purposes.
d) Financial support
The Bank did not give any financial support to a consolidated structured entity during 2021 and 2022.
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