What does guidance in Mexican financials looks like? And what should it look like?

We get many questions from companies on what the ideal way to provide guidance to investors and analysts is all the time. This has become an even more prevalent question since the pandemic began as visibility on future macro conditions deteriorated abruptly last year, and companies felt uncomfortable sticking to their usual guidance style, as so many variables were being impacted.

Because of this, we thought it would be interesting to analyze what kind of formal guidance companies in Mexico are providing today, and whether this is equivalent to what global large caps ¾who are likely to face questions from a tougher crowd¾ do. We are going to be doing this by industry as the best guidance strategy for a bank is not the same as for a retailer (and so on), and we are starting today with the financial industry (both banks and non-bank financials).

It is important to note we only consider guidance to be formal guidance if it is properly disclosed, numeric (even if it is a range), and not only broad management comments on a very high-level view of the direction the business is taking. We are also only considering banks whose stocks truly trade in Mexico (and not those who trade in a different country, where their headquarters are located).

Mexican Banks – Current formal guidance strategy

Source: Company materials

* Note: Santander used to provide formal guidance on Total Loans, Total Deposits, Cost of Risk, Expenses, Tax Rate, and Net Income before the pandemic began (4Q19, last reported). Guidance for 2020 was withdrawn due to lack of visibility, but perspectives for 2021 were shared on their website for Loan and Expense growth, and NPL and Cap Ratios.

Mexican Non-bank financials – Current formal guidance strategy

Source: Company materials

* Notes:

– Crédito Real postponed its 2020 guidance from 4Q19 until 3Q20, due to pandemic uncertainties.

– Qualitas used to provide formal guidance before the pandemic began (4Q19, last reported), which included Premium growth, Combined Ratio (acquisition, claims, and operating ratios), Underwriting Margin, ROE, ROI, Invested Assets.

– In 2Q21, Gentera adjusted its 4Q20 Guidance after better-than-expected were reported.

• As can be seen on the tables above, currently 3/7 of banks provide formal guidance and 2/6 of the non-bank financials do.
• For those companies that do provide guidance, banks on average include 9 metrics in their guidance strategy and non-bank financials 6. One bank (BanBajío) goes as high as providing guidance on 14 metrics.
• All the financial companies that do provide guidance include it in the earnings report or earnings presentation and the earnings call, and half of them in addition publish a press release to announce the guidance separately when launched.
• All the guidance strategies are based on ranges rather than point estimates.
• All the companies who provide guidance except for BanBajío do so annually (which of course can be adjusted if something materially alters expectations).

So, what do the 2 largest banks (by market cap) in the world do?

• JPM provides guidance on 3 metrics: NII, adjusted expenses, and Card NCO ratio. All three of them are presented as point estimates on a consolidated basis every quarter. Additionally, long-term targets for ROE, net charge-offs, gross IB, overhead ratio, AUM and revenue growth, and pre-tax margins are given annually during the fourth quarter for their respective business segments (also point estimates). Guidance is included in the earnings presentation and conference call comments.
• BoFA provides guidance annually during first quarter conference calls on NII and expenses (both as point estimates), as well as effective tax rate (range). However, these numbers are not reflected in their quarterly reports, presentations, nor supplements, and are only discussed verbally in the call.

What should we learn from this?

Well, obviously large global companies seem more cautious as to how many metrics they guide on. At the same time, they seem more comfortable with point estimates guidance. Both banks are headquartered in the US, and so there may be a difference in what banks in other geographies may be doing.

We at Miranda IR have always said there are many benefits to having a formal guidance (you can read a bit more about our views on this here or here). We understand in 2020 conditions were tricky and providing guidance was a difficult task. However, as we see with more clarity what lies ahead on many fronts in the world now, we would suggest companies relaunch a guidance strategy (or launch one if they haven’t had it in the past).

We prefer a range-based guidance since it is really difficult to be precise about future earnings and investors may lose confidence on your guidance over time if you don’t hit it. And we think a good place to start is to see what the metrics investors who focus on your sector are more interested in (you can usually see this in meetings with them, or you can infer it from what the global large caps guide on) and define a way to communicate your expectations on these key metrics for the next 12 months.

Publishing guidance once per year is enough, and we recommend updating it when material things change (and not that frequently with slight changes in plans) to anchor expectations well.

And for those companies that decide not to provide a formal guidance, we would suggest being extra careful with forward looking statements to avoid problems of selective disclosure. Whenever you meet with investors or analysts, discussions on financial results, even if done through ranges, should be avoided altogether. If you feel you want to provide estimates, then it is better to do it formally and avoid potential regulatory and reputational risks.

If you need any help defining your guidance strategy, please let us know. We at Miranda IR will be more than happy to help.