Grupo Fin Banorte Ord

Good morning, I'm Tom Adlosano, Head of Corporate Development, Investor Relations, and ESG. Welcome to Grupo Financieros Banorte First Quarter Earnings Call. I would like to start by thanking our investors for their feedback throughout the year, which has helped us to consistently improve our recently launched 2023 Annual Report. This year, we added a supporting document which will help you to measure the group's progress across the main financial and non-financial indicators. We will begin today's presentation with our CEO, Marcos Ramírez, who will provide a brief context of the macroeconomic environment that contributed to the results of the quarter, followed by the main results of the bank and the subsidiaries, including Rappi and Bineo, ending with an update on sustainability. Then Rafael Arana, our COO, will provide details on the NIM evolution, the continued efforts to reduce balance sheet sensitivity, as well as a positive result regarding asset quality and efficiency for the group, among other relevant updates. Please note that today's presentation may include forward-looking statements that are subject to risk and uncertainties, which may cause actual results to differ materially. On page 2 of our conference call deck, you will find our full disclaimer regarding forward-looking statements. Thank you. Marcos, please go ahead.

Thank you, Tomás. Good morning and thank you for joining us today. The first quarter of the year evolved with good overall dynamics in our core businesses and solid performance across all the subsidiaries. Well within the guidance ranges that we announced at the beginning of the video. Despite a more cautious business environment brought by the electoral periods in Mexico and the U.S., we see a good economic momentum driven by domestic demand. Investments are still supported by ongoing government spending and private investment related to mutual investment. whereas high-frequency data for private consumption show a dynamic economy in the first quarter of the year, supported by remittances still at historical highs, better employment figures, and a dynamic lending activity. Under these conditions, we hold a positive view of the Mexican economy, maintaining our GDP growth expectation for the year at 2.4%, with a stronger first half of the year, followed by a softer second semester, with some headwinds, such as lower government spending and potentially weaker external demand from a deceleration in the global economy. Annual headline inflation continues to show a moderate decline, despite a still challenging price outlook. Our durian forecast for inflation stands at 4.3%, still far from the central bank's target of 3%. So, we expect tight monetary conditions for the rest of 2024. As widely anticipated, the Mexican Central Bank carried out its first 25 reference rate cut in March, reaching 11%. We anticipate a pause in rate cuts in the following meeting, resuming with more traction towards the second half of 2024. However, given the Fed's less obstructive narrative and the foreign dynamics of inflation, we are increasing our durian reference rate expectation to 10%, before we had 9.25%. Regarding the Mexican peso, it is expected to remain strong, at least in the first half of 2024, followed by some volatility as we approach the U.S. election in November, reaching close to 17.7 pesos per dollar by durian. Moving to the business operation, slide number three, metrics evolved in line with our expectation for the quarter. Our balance sheet sensitivity continues its downward trend, reaching 375 million pesos in NNI reduction for every 100 basis point change in the reference rate, down from 582 million pesos last quarter. Net fees show a positive evolution, driven by an expanding loan portfolio and strong internal demand, despite the higher seasonal activity during the fourth quarter. Asset quality is consistently evolving ahead of expectations and internal capital integration remains strong, ending the quarter at 21.3%. Profitability, slide number four, shows a solid 9% sequential increase in the net income, amounting to 14.2 billion pesos. ROE improved 134 basis points in the quarter, driven by solid performance across most business lines, especially the insurance company, which had its seasonal premium renewables during the quarter, also supporting a strong return on assets evolution. Analyzing the quarterly results by subsidiary, line number five, we see a solid 26.4% ROE for the bank, despite some seasonal headwinds, which were offset by lower expenses in the quarter. The insurance company had sound business fundamentals along the positive effect of seasonal premiums renewals during the first quarter of the year. The annuity's business decreased in the quarter, leaving higher technical reserves. As for the Afore, the sequential decline is explained by lower yield on financial products. Loan portfolio, slide number six, continues to accelerate with a disciplined focus on asset quality and a diligent balance of lending activity with funding prospects. Loan expansion displayed double-digit annual growth across most of the portfolios. Corporate and commercial loans continue to benefit from near-short and gradual materialization, driving loan demand for small and mid-sized enterprises. Nevertheless, FX variations have impacted the dollar loan book, currently representing around 12% of our loan total portfolio. The government book displayed a mild reduction in the yield. And we are anticipating this portfolio to remain flat for the remainder of 2024. The consumer book on slide number seven remains the fastest growing segment within our portfolio, reflecting our strategic approach to optimize the customer lifetime value of high-value customers. The year-over-year evolution of heavy cars has been driven by good consumption dynamics and further boosted by the adoption of our self-service offerings, despite being sequentially affected by seasonal factors in transaction volumes. Federal loans are performing as expected, with a more prudent approach as we get closer to a new government administration. Lastly, car loans continue to benefit from our commercial alliances, different dealerships, and positive dynamics in the sector overall. Slide number eight. As I have mentioned before, asset quality continues to perform ahead of our expectations, with MPLs slightly improving to 93% in the quarter, despite higher growth in our consumer and commercial books. This is the result of an intensified risk-oriented organization process that started in the second half of 2023 and continues as our top priority. The quarterly increase in the cost of risk is a natural result of our elimination volume and mix, together with the normalization effect from the reserves released from last quarter, as well as the incorporation of Tapetas del Futuro, which is RAPI, into our credit card portfolio, as the intrinsic risk of this product naturally requires higher reserves. On a separate note, I would like to comment on how Banorte is dealing with customer centricity and customer metrics. Our main difference is our culture. We have over 2,000 working sales, which warranty that whenever we acknowledge that our service or products are not complying with our customer's expectations or that one of our competitors is doing something better than us, we can quickly react adapt, and execute. This is not only reflected in our overall MPS, but on the performance of our channel, which continues to have an upward trend. Before moving into a group operation with Grafarana, let me give you an update on the first two months of operation of Bineo, our newly launched digital bank. During this period, we have been working on what you could call friends and family in the upper market mode, focusing or learning more about our customers' labor and profiles, fine-tuning our platform, launching new and improved versions of our app, and stabilizing our production environments as we gradually gain scale. We are working on our product and service deployment strategy for the second half of the year. We expect to bring to the market a rapid rollout of innovative financial products and services and fulfill our aspiration of providing a comprehensive value proposition. A one-stop shop for all our clients' financial needs, including loans, insurance, and wealth management products to improve their safety and financial well-being, among others. During this initial phase, it has been of utmost importance to guarantee the best experience for our customers, taking careful and quick corrective actions before embarking on significant claims and precision costs when we launch our full product offering. Soon we will be shifting our brand campaigns from building awareness to building scale and attracting new customers. Let's recall that we want to deliver on our promise of being profitable within the first three operating years and that requires discipline since day number one. Regarding rapid evolution, we are now operating with the proper risk metrics in place. We are taking us into our design, which are taking us to the desired direction. We are presenting positive unit economics and are getting closer to break even within the following months. Rafa will go into more detail later in this presentation. Finally, on the sustainability front, we are happy to announce the successful issuance of our first sustainable bond in February. a relevant milestone for the bank, which will form important grid and social projects for many of our clients. Moreover, at the end of March, we published our 2023 Integrated Annual Report, which showcases the results of our medium-term strategic plan. And thanks to valuable feedback from our investors and other stakeholders, we incorporated more disclosure regarding environmental, social, and diversity metrics, to name a few. This time, we also published a historical database that will help measure progress across our main financial and non-financial indicators. Now I will leave you with Rafa Arana, who will walk you through our main financial indicators for the quarter, further details in our balance sheet sensitivity reduction, and next steps for our digital strategy for Banorte, Gineo, and Rafa. Thank you.

Thank you very much. Good morning to all. As Marcos mentioned, the first quarter started with good momentum. really anticipated the beginning, a slow beginning of the year. I think we were quite surprised by continuous strong momentum in most of the business of the group, and I would like to go in more detail in that. As you can see on the slide, the return on equity of the group continues to grow on a very strong pace, 134 basis points quarter on quarter. Now we are reaching above the Our initial guidance was close to the 22. We are at 22.2. And the bank, even though you see a reduction on a quarter-to-quarter basis point, seven basis points, continues to be very strong. And this is also due because of the buildup of the capital at the bank, which has been, as always, at a very, very strong pace. I will go into more detail on the transformation of Banorte, because as we have met with many of you, you were concerned about what was the strategy of Banorte if Banorte was not taken into consideration. the evolution of the new fintechs or new banks that come into the marketplace. And you will see that Barnote was very serious addressing that issue since 2018. I will be going into much more detail in a minute. The net interest margin of the group continues to grow to 6.5, one basis point on a quarter-quarter basis, and the bank 6.4. You see a reduction on a quarterly basis. That's based on two things. You see a very large inflow in the fourth quarter of very low-cost demand deposits that really help us to boost the margin up. Now that we enter the normal cycle of the year, as you know, the first three months of the year, usually we see an outflow of those big inflow of deposits that come at the end of the year. But you will see in a minute in a graph that we are really starting now to push the cost of funds slowly but surely to the desired numbers that we would like to develop. You remember that by the end of the year, we have a strong reduction on the funding cost that really pushed the margin for the bank up. Now you see that that margin was, I would say, affected by this additional growth on the book, on the loan book, and also the funding cost that usually grows in the first few months of the year. I will go in detail in a minute. Expenses. We advise you that expenses was going to be a very important point of control for us. Cost income ratio is below 34. It's 33.99. 49 basis points compared to on a year-to-year basis. You remember that we anticipate an important part of expenses in the HR side and also in the amortization and depreciation for the for the group at the end of the last year. But also the evolution of our shared service and centralized operations initiative is already bringing good results on this. So I think the first part of the year, the first quarter of the year was also benefited by a strong insurance growth. As you see that usually The evolution on the first quarter of the year, the insurance business basically book most of the premiums for the years, and then they go through the years. This year, there's a difference on also why the number is so... So I would say it's a normal number because last year we split the first quarter with the two quarters, the big volume of the high premiums that we bought through the years. This year is a normalization of that. That moves everything to the first quarter. So that shows you a very big, I would say, jump from the... on the revenues of the insurance business. But it's fair to say that the insurance business is in full recovery, growing at a very good pace, and also looking at a lot of initiatives to keep increasing and growing the business. So capital continues to be, as we mentioned, fast-paced on the growth side. The total capital adequacy ratio is 21.3, and the quarter one is 15.5. This has to do also with the slight reduction that you saw on the return on equity of the bank based upon the high buildup of capital at the bank. If I now move to the NII, net interest and non-interest income growth. Net interest, NII on a quarterly basis grew 2% and 10% on a year-to-year basis. If we go just only for the loan deposits growth, it was 1% growth on a quarterly basis. This is also important because we are facing, as we have mentioned to many of you, an equilibrium with the funding costs and the pace of growth on the asset side. So I think we are reaching that point where we can continue to grow the loan book. with a very, I would say, not conservative with the word, but very aligned funding cost with the asset growth. So NIA continues to expand also the loans to deposit at a lower pace. And this also has to do that 82% of the loan book on the commercial and corporate side is in the variable rate part. So since the rate has paused for many months now, the variable rate part of the book has stayed put. And the fixed rate part of the book just barely are getting the last reduction on the rates, the 25 basis points that would be fully addressed in the second quarter. So I think to have an expansion on the NII based upon those considerations, I think is positive for us. If I move now to the core banking fees that Marcos also mentioned, the bank continues to be at a very active pace on all that is related to services and fees, opening of accounts, the opening of accounts has accelerated in a very important way in the digital channels, and also in the branches, in the physical channels. As you know, the balances coming from the branches are at a much higher number than the ones that are coming from the digital, but the digital is allowing us to also incorporate clients that in the past was difficult for the bank to to address those clients because of the profitability that was needed for us to really address those clients. So core banking fees continue to be a good story, 14% year on year. Mobile, POS, merchant business, everything at the bank level is actively transactional banking, cash management, everything related to the commercial corporate government is providing a continuous source of growth for the net fees. If I now move to a specific metrics there of Banorte, Banorte net income grew 2% quarter-on-quarter, and on a year-to-year basis, also 2%. The return on equity is 26.4%, as I told you before, and the ROA is at 2.4. The net income of the bank, as I mentioned, reached the 10.47 billion pesos. And we see steady numbers coming to the ROA and the return on equity of the bank as the bank starts to move also part of the capital to the group. in order to prepare for the dividend outflow, we will continue to see an improvement on the return on FTP of the bank aligned with an increased profitability of the operation of the bank. I already addressed a part of the mean, the 6.4. As you know, we are basically facing not a liquidity issue in the market because we have enough liquidity, but the funding cost continues to be there. And since the fact of the variable rate part of the book and the very important growth that we have on the fixed rate part of the book, to prepare the balance sheet for the downward trend on the rates is taking us around the 6.4. That is perfectly aligned of what we glad you at the beginning of the year. And we continue to see a slight evolution on the funding cost that will continue through the year. And that will allow us to keep the margin on the numbers that we died at the beginning of the year. So the name is in the right place. Fees are growing nicely on that part. NII, helped also by the insurance business, is giving us a pretty good start of the year. If I move now to the next one, I think we need to try to explain what is going on on the funding costs. The funding costs, as you see, are dropped at the end of the year. There was a large inflow that basically comes with the pandemic. with the bonuses that has to be paid for the payroll roles that we serve. But the important thing is that the slight reduction that you see on the 47.9, that is really now trending in the right direction after the seasonality of the large inflow of the demand deposits. But also it's important to notice that the high cost of funds diminish from 158 million in the fourth quarter of 23 to 153 million in the first quarter of 24. And you will continue to see that evolution of really releasing the high-cost fund that we needed to support the high growth of the balance sheet last year. If I now move to the asset quality. And I think that we'll start to also make the separation of what's the normal trend with the bank and what's the incorporation of property that we now to control in the month of November. Credit, the cost of risk continued to be very solid, very, very solid numbers. As you can see, the cost of risk was 1.84 at the end of the first quarter of 24. But if you take away the target of the future that is rapid, it's really 1.71. That is a very, very strong number. And you see how steady that evolution on the cost of risk is. That doesn't mean that Trapi is not being addressed now fully, that we have control of the operation. to take all the necessary measures to continue to lower the cost of risk. If you see the NPLs of rapid, it's around 4.8, the NPLs of rapid. The cost of risk continues to be high, and we need to trend that funding cost to a number very close to the 12%. Right now, what you see is a very accelerated write-off in order to clean up the book. That was part of why we took control of that, because we consider that we have a very reasonable market fit with the clients that we would like to put on the book. So now we know how to grow in that business, how to make that business break-even, as Marcos mentioned, in the following months, and what's the potential size of the business in order for us to address that market that is completely different from the market that usually Banot deserves. If I move to the... to the write-off rate. You see the write-off rate steady at 0.45 if you take away Tarjeta del Futuro. So we continue to see very good numbers, as Marcos mentioned, an NPL that is below 1%, 0.9%, and if you take away Tarjeta del Futuro, below 9%. So we continue to see very solid numbers coming from the from the risk portfolio. And that has to do with the strategy that we really like to keep the health of the book as we have been keeping for the last years. As we mentioned, we are not chasing market share. Last year, we outpaced the market in most of the products on a year-to-year basis. But at the same time, we were able to do so with very, very strong risk numbers. And that's the way we will continue to grow. If we like the risk, we will grow. If we don't like the risk, we will not address the growth on that part. That has been positive for Banorte for many years and has to do a lot of how the risk unit works with the commercial units and with the recovery. So now, if I move, some of you have some questions about the net interest income evolution and how we prepare the balance sheet on this part. Now, the balance sheet, we have a graph that shows the local sensitivity against the NII on pesos and the dollar group. You see that for the group, the sensitivity has gone down to 0.2%. 0.3 for the bank, coming down from 0.7. And you can see that some people could say that we anticipate too much the decrease in the rates, but I think that's a prudent way to address the the way we see the market. The 25 basis points was really something that we anticipated. Now we see a slower trend on the downward trend of the rates, but we will continue to see a reduction in the rates in the coming months. And the 2 billion pesos that we used last year to really put the balance sheet in the way that we like the balance sheet to be, now we will start to recover as rates start to go down. Another important part that we didn't mention that has to do in a way of how the balance sheet is prepared and how the balance sheet is affected is that because of the strong currency that we have been facing in Mexico, that has also affected us around 656 million because of the strength of the currency. We now see a more reasonable trend on the currency, so that also will ease that part of the effect that we have on the market. So we have a balance sheet that is very strong on solvency and liquidity, very strong growth on the capital numbers, very well prepared for the downward trend. Obviously, that in a way put pressure on the margin on a temporary basis, but will fully recover when the downward trend starts. So if we now move to the expense and the cost income ratio, the expenses for the quarter were down 14% percentage points based upon all that we anticipated at the end of the year. And the expense, including RAPI and BNL, is 13%. If you exclude those two, you barely reach the 8% year-on-year for the bank. We will continue to push the numbers below the 13% on the cost basis based upon the shared service initiatives. And you can see that it was a very strong number to be below the 34% cost income ratio. And it's based upon all the initiatives that we are taking and also that the revenue growth was a little above 14% for the year. I would say that if I go to a graph that some of you has instructed to show the market, you see that the historical expense by category has been very positive. You see the graph on the left that we have gone down from 70% to expenses to net income to 46 expenses to net income. And when you strip those on where we are putting the expenses, we basically are putting where we produce revenue on the HR side and also on the IT side that allow us to serve the client better and also to reduce the operating costs and also the administrative costs that you've have dropped in a very important way through the years. The graph on the year show on a different view that you see IT grow 3.4 times compared to the net income. You see that net income has grown three times since 2016. So some people say, well, you are investing a lot in technology. Yes. Because that's the way that we see the business. We see the business as an analytical driven business, a technology driven business. And also, when people are concerned about how advanced Banorte is on their artificial intelligence, we have to remember the market that we were the first one along with eight other banks. in many parts of the world that we embark on the Watson adventure. Watson has been a learning process for us, but now it's fully embedded on the mobile application, on the transaction-driven parts, and many initiatives with Microsoft, with Google, that allow us to really be on the forefront of the usage of artificial intelligence. Analytics has been heavy users of artificial intelligence, for many years, and we will continue to be on the forefront of that because we'll see a lot of advantage because all that we are doing in the hyper-personalization move that we'll really address on a client-by-client basis, everything is based upon artificial intelligence. So we see a pretty good trend on the cost basis. We know that the HR spike because we needed bankers to serve the near-shore initiatives and also the high growth that we have on the SME side. But this blue line that spiked to 1.9 is producing strong revenue already as you saw on the numbers. Now I'm moving to the capital ratios. The capital ratios for the bank now is a 15.5, the fourth tier one, 21.3 total cap, well above the T-LAC requirements. Liquidity is 178. We know that liquidity so high uh cost of some on the margin but we like to be prudent about about about this so strong capital growth strong strong numbers on the on the risk side reasonable growth on a year-to-year basis and reasonable growth and sustaining the margin and also the most important thing is that we are growing with a very very good uh credit quality uh so i will now will address some of the issues that you also considered every year, what will not be the dividend policy. The dividend policy last year was 83% of net incomes. This year, we will go to the board and ask for to continue on the policy that we have from 16 to 50%. We will ask for the 50% dividend retribution to our shareholders. And as we see fit through the year, as Marcos also mentioned, we'll see the potential additional dividend by the fourth quarter of the year in order to emulate what happened last year, because we will continue to see very good growth on the capital. Now I would like to address those concerns that people The first one was that Banorte was not fully addressing the evolution of the new entrants in the financial markets. The second one was if it's not going to be a confusion about Binel, Rappi, and Banorte. And let me go back to 2018. That's when the decision were made about to have three different strategies to really face what was going in the market. And when you take this path, that doesn't mean that you're gonna be perfectly, exactly what you want through those initiatives to be. But the most important thing is what you learn from those initiatives and how those initiatives allows you to be a much better fit on the market based upon the new evolutions that we see on that space. So the strategic initiatives in 18 was basically to link with a company that was not a financial company, that was very, very useful, especially for the young people and was very easy for them to use. And they were very pleased with the application. That was the Rappi joint venture. that we defined with them on a 50-50 basis to grow a credit card business, very similar in some parts, not exactly, but in some parts of what Nubank was really trying to bring into the Mexican market and what we learned about NU coming from the learning process in Brazil. So basically, the rapid initiative that is in the midst part of the graph has been evolving. I would say in an evolution of a high growth business that because basically you are addressing clients that were not banking clients that were new to the bank that were jumping into the trade cycle. And we experienced a very high growth at the beginning, but also very heavy losses. So we defined that was another strategy that we wanted to grow. The risk people from Banorte started to take control. We changed the CEO. The head of analytics for Banorte was sent to run the CEO of Rappi. And now after the control that we paid in November to have full control of the operation, we now see that we have very comfortable to reach the break-even point on a monthly basis in the next two months. And also the most important part that based upon analytics and a very aggressive segmentation on a very detailed basis, we now understand which clients to put on the book and which clients would be profitable for us. And we put really grow with them and have a reasonable return from the relationship with them. So Rappi now is reaching a breaking point on a monthly basis with a good market fit. NPS is very high. It's even higher than what you find in the market. And also the usage of the card now is very, very satisfying for the clients. It's very easy for the clients to use the card. The app is very convenient. NPS is quite high. So I think we now understand the market. We know how to manage the market. We know how to manage the company and how to make that company profitable. The second initiative was to really accelerate the full transformation of Banorte to become a digital bank with branches that I think we are in a very good trend. Last year, World Finance recognized that Banorte has the best digital app. in the market and also that Banorte was the best digital banking in the market. So now the model that we have that Banorte is a bank in minutes is based upon all the digital process that we have put all through the bank in the commercial side, corporate side, and also on the retail side. And you will continue to see a very strong evolution of the digital participation of every single part of the bank will move into that. And we will continue to have our branches, because our branches continue to be a very important source of cheap funding for us. And also, on the near-shoring part, the presence is needed, so we will continue to open 45 branches this year. That is already put on the cost base that we anticipate to be. The last one is Bineo. The idea of Vinneo was, we know that the battle for the banks in the near future will be cost, analytics, technology, and how can you really deal with a client based upon all those things. So we needed to have the experience and also to really try to move into a full digital bank We know that the onboarding process on the digital side on Banote is very cheap, very, very low cost when you strip all the cost of the structural costs. So we needed to transform that into a new operation. That was the idea of Bineo. And Bineo will be a full retail bank. a full value proposition from checking accounts, debit accounts, everything will be on digital, and also up to mortgages, wealth management products, that you will see that evolution through the year. The most important thing about also of BNEO is that when we decide that BNEO will have I share services on the back offices and operations and things in order to lower the cost more. But on the servicing side and also on the technology side, we will also implement the new technology that was basically flu-driven since the beginning. evolution from the traditional banks to the cloud you need to move from on-premises to the cloud so that duplicated cost so we needed to have a full digital bank that was cloud driven since the beginning and see how the the the evolution on the cost space could be that eventually that will allow us to move part of the technology that we have on the traditional to a much more costly, less costly technology platforms. So that's also a very important part of Veneo. So Veneo has many strategic initiatives for us. First, to have a full value proposition on the retail offering on a digital base, a low cost base, because we need to achieve 20% cost income ratio in this platform. And as Marcos mentioned, we need to put this bank in breakeven in three years. So the value proposition that you see in the market right now is very limited because we are on a friend and family base and testing the frontiers that we could have on the evolution of the technology on that bank. But now that you will see as the year goes by, a full value proposition will be in place with the traditional values of Van Orteg, customer centricity, personalization, low cost to operate, and high NPS for the market. So with this, I conclude my remarks, and I move into Q&A.