Grupo Fin Banorte Ord

Recording in progress. Thank you. Marcos, please go ahead. Thank you, Tomás. Good morning, everyone. Thank you for joining us today. The second quarter of the year showed a sound evolution despite the volatility brought in by Mexico's electoral period. In early June, Mexico held its largest ever election, including state, municipal, and congress positions, with value achieved the next president, set to take office on October the 1st. The ruling party secured the qualified majority in the lower house, which was perceived by the market as uncertainty regarding the government's checkers and balances. However, this concern has somewhat been the importance of microeconomic stability, fiscal discipline, rule of law, and independence of the central bank during the current upcoming administration. The new government has also expressed support for an economic model involving more public-private associations to drive key infrastructure projects for the country and has also acknowledged the importance of new sharing opportunities for Mexico. The cabinet appointments so far seem to support this expectation for the next administration. I would like to highlight that over time, Banorte has had respectful relationships with many different government administrations, and we are confident this will continue to be the case as we execute on our strategic plan. For 2024, we expect the Mexican economy to continue to be resilient despite the local and global volatility. Domestic demand will continue to be the main driver of growth due to private consumption and investment, driven in part by news showing. Considering the uncertainty regarding the government transition period and the U.S. election at the end of the year, we have adjusted our GDP growth expectation to 1.9%, slightly lower than the 2.4% we forecasted at the beginning of the year. Nevertheless, we maintain an optimistic outlook for our potential long-term growth in the year, as we see a strong pipeline of projects and investments with our clients. Annual headline inflation continues to trend down compared to the extremely high levels observed since the end of 2022. However, it is still above the central slant target of 3%. We are slightly revising our year-end forecast by 10 basis points to 4.4%. Regarding monetary policy, the reference rate remains at 11%. Today, since the end of March, and we believe the central bank will continue. with a gradual decent strategy with cuts in August and December, when the year at 10.5%. Despite the defensive behavior of the Mexican currency for most part of the year, the recent correction was driven by external and idiosyncratic factors. Therefore, we expect the currency to reach around 18.90 pesos per dollar at the end of 2024. Moving now to slide number three. Financial results for the quarter continue to portray sound operating trends, with expanding lending dynamics and fee activity, both driven by a strong internal demand. Asset quality is monitored with strict discipline, as reflected in our risk metrics, and structurally, we continue to reduce our balance sheet sensitivity, decreasing our dependence on rate cycles. currency at 364 million pesos for every 100 basis points change in the reference rate. Our capital adequacy ratio stood at 20.2%, giving our strong internal capital generation. In this regard, we are constantly analyzing our capital allocation strategy. I will provide more details on this in a moment. Starting off with profitability, slide number four, net income had a slight 1% decline to 14 billion pesos, mainly due by the normalization of insurance businesses after the seasonal peak in the first quarter. Net income for the first half of 2024 reached 28.2 billion pesos, 8% higher versus the same period of last year, giving strong operating trends, mostly at the bank level. ROE for the quarter stood at 23.3%. 125 basis points ahead, quarter over quarter, despite the effect of the insurance business already mentioned. ROE for the first half of the year improved 155 basis points compared to the same period of last year, to 22.6%, driven by sound operating dynamics across most of the business lines. Analyzing the quarterly results by subsidiary, slide number five, the bank presented higher-quality lending activity, larger net peace, and an efficient expense management. Altogether, these results yielded a historically high ROE of 31.5% for the quarter, 539 basis points higher sequentially. With accumulated figures, ROE stood at 28.7%. As I mentioned before, the insurance company results in accumulated basis, business generation continues to expand driven by the Bank Assurance Model. The Amity's business had a sequential decline during the inflation-related movements in the market. With accumulated figures, the Amity's business improved thanks to higher business generation, given the reactivation of resolutions issued by the Social Security Institute. The brokerage sector, quarterly, and annual declines were mostly explained by securities valuation. As for the patient's loan, the afforded, the sequential business performance was affected by lowered yields from financial products. Loan portfolio, slide number 6, continues to expand, focusing on a diligent balance between asset quality and funding costs. Loan expansion continues to cause double-digit annual growth across most of the portfolios. The corporate and commercial books, growing 23% and 12% respectively, led by the expansion supported by the investments in personnel and infrastructure in 2023. During the quarter, FX variations had a positive impact in the dollar long book, which currently represents 13% of our total portfolio. The government book grew 11% in the year, giving short-term movements in the federal government portfolio. Overall, consumer lending on slide number seven maintains its double-digit low, driven by a strong consumption dynamics on the back of to the growth in this portfolio by assertively addressing our customers' demands with relevant offerings to retain and develop their lifetime value. The mortgage portfolio remains one of the main growth drivers, expanding 20 billion pesos despite a more restrictive bridged approach. We continue to prioritize customer lifetime value over short-term margin gains with a strategic preference for customers with low leverage and high credit quality profiles. The evolution of the credit card portfolio, growing 24% year-over-year, was primarily driven by the enhancement of our self-service capabilities, higher transaction volumes, and the integration of the rapid card portfolio since December of last year. Federal loans are performing ahead of expectations, growing 8% in the year, with a high number of applications despite our prudent approach to government entities with administration changes related to the elections. Lastly, car loans show a 23% yearly expansion, mainly driven by our commercial alliances with different dealerships and positive dynamics in the sector overall. This group is consistently gaining relevance in our consumer portfolio. Slide number 8. Asset quality continues to perform ahead of our expectations. With MPLs, the slide is increasing to 1% in the quarter, despite higher growth in our consumer and commercial books. This is the result of higher quality vintages being incorporated into the different portfolios. The sequential increase of indicator responds to unrelated clients in the commercial portfolio, which do not represent sectorial or geographical risks. Cost of risk remains stable in the quarter, despite our heavy mix in consumer lending. Our free revenue, slide number 9, grew 3% in the quarter, giving higher operation with digital-affiliated businesses derived from the hot sale event in May. With accumulated figures for the first half of the year, net interest grew 16%, led by a more dynamic transaction volume in consumer products, driven by the increasing strength of private consumption. and lower dependence from the external sales force for credit orientation. Mobile transactions have had a positive momentum throughout the year, given the ongoing adoption of digital channels and the enhanced digital product offering. On slide number 10, our NPS metrics reflect our customer-centric business model. For more than a decade, Banorte has been investing around 13% the digital and technological capabilities that can allow us to better understand and predict our clients' behavior and place our customers at the center of our product design and process transformation. The results of this transformation journey that started, as I mentioned, more than a decade ago is reflected in our strong NPS, Net Promoter Score, particularly in our Banorte Mobile App, which has been recognized by World Finance as the best consumer digital bank and the best mobile banking app in Mexico, positioning Banorte to compete with any fintech or incumbent player in the market. There are important challenges ahead, but fortunately, Grupo Financiero Banorte has the strategy, the technology, the processes, and most importantly, the people and culture to address the market-changing demands. Shifting gears to our sustainability strategy, it's line number 11. We are working on different projects with our commercial and corporate teams to identify sustainable finance opportunities using the resources of our recently launched sustainable portfolio. To complement our sustainable finance offering, I am proud to share that a few days ago, we launched our first green mortgage, which provides attractive conditions for customers who are purchasing a certified house or apartment. Last but not least, we published our first report on sustainable investing for our mutual funds companies, showing relevant progress in the amount of assets that we analyzed following sustainability best practices. Finally, I would like to give you more details regarding our capital allocation strategy. As you know, our capital generation remains strong. And we are continuously evaluating different alternatives to return value to you, our investors and shareholders. In early June, we started the operation of our share buyback program, which, as a reminder, was approved in our last shareholders meeting in April for approximately 32.4 billion pesos. market capitalization, and we will continue its operation as we see fit, considering the alignment of the valuation with the long-term fundamentals of the group. Our dividend policy remains unchanged. We distributed our ordinary dividend on June 28th at a 50% payout rate, and we are still considering an extraordinary dividend during the fourth quarter. Therefore, we expect an additional capital return in the upcoming months through different alternatives focusing on the total return to our shareholders. As we have communicated, our long-term CEP targets ranges between 12 to 13. However, given the current volatile operation environment, we prefer to hold this ratio between 13 and 13.5%, at least until the U.S. presidential election takes place. Now, I will leave you with Rafa Arana, who will go into the detail of the financial results of the quarter. Rafa, please go ahead.

Thank you, Marcos. Thank you all for attending the conference. First of all, I would like to thank Many analysts and investors called us yesterday to let us align more the conference with you for the main questions that you basically derived to us yesterday. So I would like to address those as we go forward in the presentation. In the first part, I would like to remind you of... Banorte continues to have a very, very strong balance sheet. Everything that we have been doing on a capital basis, on the profitability, on the book and everything, is to set up the balance sheet in a perfect position to take advantage of the easing cycle. The easing cycle, as you know, has been delayed more than we expected, but based upon all the actions that we haven't taken in the past and that that has cost us but now we are pretty confident about the position of our balance sheet and how that balance sheet is going to play in a very good way for us in the coming months. The return on equity of the group, I would like just to repeat what Marcus mentioned. We already reached the 23.3% above our commitment to the market. That was more on the numbers close to the 22%. The bank reached, as Marcus mentioned, A very important number, around 31.5%. This has to do with the dividend flow that we sent out to the group, but also with the very important responsibility that we are deriving in every single action of the bank. The transformation is ongoing. As you know, since 2018, we set up a strategic venue for the growth of Banorte. One was rapid. I just want to comment to you that it will be the fourth month that on a monthly basis we continue to be on profitable numbers. So the evolution of the business finally is in the right track. Now we understand the market and how we can continue grow this market to benefit for the investment that we put in place to understand and learn about this market. BNAIL, there have been many questions about BNAIL, and I would like to address those right now. The main issue about BNAIL, when we launched BNAIL at the beginning of the year, in January, was the response of a strategic decision that we within 2018. But what is relevant to us is that since 2018 to now, many actions have been happening in the market. Many incumbents have come into the market. As you know, many names are now playing in the market. So now we see, and we have been adjusting the strategy in Veneo, and what we can really tell to you is that we are very confident now that we understand the dynamics of the market, how it's moving from the new entrants and the and the fintechs and all that, that Viner will be a very strategic position for La Norte in the coming months and years. We are really driving the bank to be ready to have a value proposition in place by the end of the year or the beginning of the next year. But the most important thing is that now we see clear how the NEO could compete in the market and make Van Orte a sustainable proposition for any incumbent that comes into the market. The net interest margin now for the group is at 5.7. As you know, there has been the effect on the Arnoitis company that is based upon the inflation-related instruments. I will go in a minute when we talk about the NII and expand this explanation. But basically, it's a result of the inflationary effects on the instruments that we hold. And the other thing is a good one. that we grew the business 6% on the pension years. So that's why more technical reserves to put in place. But those are good reserves because of the buildup and growth of the business. The bank is holding a very strong 6.4 net interest margins, 10 basis points compared to the post quarter. And that is the result of two things there. how we have been preparing the balance sheet, but also the dynamic of the lending, on the lending side, the loan book, as Marcus mentioned, continued to grow in a very important way, right on track with either market But the most important piece of this is also that the funding cost on a marginal basis is also trending down finally. So we have a good combination of very good loan growth and marginal reduction on the funding cost that is really showing us where the trend is going to be in the next months. Expenses continue to be under control. As you know, we have been in a heavy investment process in the last year and continue in this year, but we are holding the cost based upon a lot of share services initiatives that are reducing the overall cost of the group. Cost to income came to 35.5. I think we are below what we got in the market, and we like to keep the numbers around these rounds, 35 to 36. Capital adequacy ratio continues to be very positive, 20.2, and quarter one, 14.1, after paying the dividend of the group, and also acting the buyback problem. If I now move to the net interest of the group, I would like to highlight two things. The first one is that NII for loans and deposits on a quarterly basis grew 4%. This is the result of what I mentioned before. Very good expansion on the loan book, but also a marginal reduction on the funding side. So very positive 4% quarter-to-quarter growth on this part. The fact that that is... causing some attention because we received many calls from investors and analysts about what happened with the annuity business. I would like to highlight that in a very short information to give it to you. Basically, what happened is that Technical research in the quarter grew 3.5 billion pesos due to increasing premium income as a result of the reactivation of the business. The business is growing in a nice way again. So, when you see also the instruments that are related to inflation, you see an effect on that. And that effect is also augmented by the case of the buildup of the business that grew up on a 6% basis. That's what you don't see much on the net income basis, considering the technical reserves and what happened with the margin on that. on the business. But it's a good research. It's a good growth of the business. It's a good reactivation of the business. And just to give you an idea, on an income basis, the annuity business grew 22% for the first half of last year compared to the first half of this year. So there were some questions about that. And just to remind you that Annuities is 4.3% of the overall net income of the bill. So I think that NII continues to hold pretty nicely for us. And now that we clarified the annuities piece, everything is moving in the right direction in the NII. The most important thing is what is going on with the loans and deposits. If I go now on the net fees, you continue to see very good growth on the net fees of the bank, 60% of year-on-year basis. So the activity of the bank in every single part of the business, in the retail side, commercial side, corporate side, asset management, all the bank is moving at a very fast pace with the clients that we like to have. You see this reflection on the Netflix side, the activity that is reflecting there, and also on the lending side, how the lending side is growing at a very fast pace. Marcos showed you that, but just to give you two examples. The corporate business, 2023-2024, year-on-year, after a very strong year last year. Car loans have over 20% on the credit card business. The mortgage business is taking its piece on the market, growing nicely with the clients that we like to have. Also, the The payroll business, once you set up the elections year, that basically could affect some of the business that we have with the government. And this now has been fully reactivated and will be on double digit by the end of the year. So I would say that the bank, the activity of the bank, continues to be very, very strong and very positive on an income basis. If I now move what is going on with the sensitivity of the group, the sensitivity of the group now is staying at 306.4. Obviously, to have the balance sheet prepared for the releasing cycle has a cost. We already paid for that cost last year. It was not a small cost, around $2 billion that will be returned to us based upon the mix that we're going to have on the portfolio. That's 57% is fixed rate now, and 43% is a variable rate. So now the variable rate is decreasing the effect on the net interest margin. The fixed rate part of the group is insane. the rates doesn't go down as fast as we are. We are holding that. So the increase in the margin that you see is the result, basically, on the volume that we are achieving on every single part of the group. The local sensitivity on the NII, on the group, as you can see, at the group level, is around 0.2, at the bank level, 0.3. So I think... the balance sheet of the bank is very well prepared for the eastern side. If I go and the numbers basically devoted to the bank, you see that the bank continues to move into a very important phase. The ROA of the bank increased seven basis points on a year-to-year basis. So now we are reaching the 2.6 percentage points on return on assets. But I think it's a very strong number. ahead of what we guide the market to be. And the net income for the bank is growing at about 13% also year-on-year. That is on a double-digit basis. The return on equity of the bank already has been explained by Marcos, 31.5%, 440 basis points on a year-to-year basis. So that is showing clearly all the action that we are doing doing at the bank to increase the profitability, be an efficient operation, and also taking extremely good care of the risk. If I move just to a graph that shows the effect on the annuities and the effect on the group, if we basically normalize the effect, is what the number that you see, the mean ex-insurance, it would be around 5.8 instead of the 5.7 that we currently have. Another important thing that we achieved on the quarter is in the next part, is that the cost of funds on a marginal basis now is trending in the right direction. And that has continued as we speak. This is the result of many actions that have been taking place in every single part of the business, the commercial, the corporate, the retail banking, the preacher banking. All that has been aligned in a very, I would say, defined position, how to manage the funding benefits for the clients in a way that we keep the clients, but we deliver the right products to them. So, funding continues to be there there's no issues on liquidity interest non-interest-bearing deposits through nine percent that i think is a very very strong number considering that Interest rates are still pretty high, so being able to grow 9% non-interest rate in deposits shows the strength and the capacity that we have to gather retail funding from this part. Time deposits continue to hold at a fast pace, 26%, but these time deposits are now in a much more aligned position. I would say way to the funding cost that we would like to achieve. So good growth on the funding side, very important numbers on the non-interest-bearing deposits. That is almost matching the growth on the lending side. Asset quality continues to be prime for the bank. As you know, we have been basically following this trend for the last years, and we will continue to do so. Good long growth, but with the risk that we like to have on the books. Sometimes we are kind of shy on the margin, but never shy on the risk. We are always looking for the risk that we like to put on the book. You continue to see cost of risk X RAPI below the 1.8, with RAPI around 1.8. And the right of rate ratio continues to be very, very steady, as Fanorte has been doing in the past. So the numbers on the trade side continue to be where we like them to be. Expenses also... continue to be under control. If you see the recurring part on the expense line, continue to be very close to the 6%. And when you add up all the Vimeo and the WAPI and the extraordinary investment that we did, that put us on a number, I would say, a little shy below the 13%. We will continue to try to push this number below that and below the guidance that we gave to you. Cost income ratio is around 35.5. I think that's the number that we would like to achieve from the 35 to the 36 by the end of the year. The next part shows The bank and liquidity continues to hold pretty well, as I mentioned to you on the past numbers that refer to the funding side and the ability of the bank to gather the funding side and present itself in the market as needed. And the capital numbers continue to be well above any requirement that the authorities have, with a 14.1 on the portfolio one and 20.2 on the overall capital adequacy ratio. With that, I stop on these numbers. And I would like to now move how the evolution of the guidance, because there were also some concerns about the slight reduction of the net income. On the guidance, if you see long road, we are right on the guidance and above the guidance on the long road. Net interest margin is in range with the guidance. Net interest margin of the bank is also in range of the guidance. The expense growth on the recurring basis is in line. We are looking at a number close to the 13%, so we would like to push that number below the 13%. Efficiency, 36 to 37, we are below that number, so we are in good terms with that part of the guidance. Cost of risk is in line with the guidance, with the low end of the guidance, 1.8. And if you strip the future on that, that would be 1.7. The tax rate is above 2027. It's 27.7. Net income is basically the guidance that you see is being affected basically by the foregone cash that we have been using for the buyback. program. Now it's reaching close to 500 million on that part, and that number could increase depending on, as Marcos mentioned, if we succeed to continue to use the buyback program. The return on equity for the group is above the guidance. Now it's above the 22%. The return on equity of the bank is above the guidance. It's reaching the 31%. and the ROA also is above the guidance. So, basically, we are on line to deliver the guidance, and we have to maneuver on the effect on the buyback program that we will use as needed, and also the effect on the full-time cash that we have been using to pay for the buyback program. So the GDP now has been reduced to 1.9. Inflation rate continues to be 4 to 5%. Today there was an inflation data, but underlying inflation continues to be under control, so no issues on that part. And we see that the reference rate, based upon our estimates of our chief economists, should be reaching, at the end of the year, around the 10.5, on average 10.9. But what we see now is that based upon all the actions that we are taking, now the funding cost is trending now in the right direction, even though the interest rates haven't gone down as expected. With this, I stop my comments. I'm happy to answer any questions of you. Thank you, Marcos and Rafael. Now we will continue with our Q&A session. As always, we kindly ask you to present only your most relevant question, and we will be happy to take any other questions anytime after the call. Questions will be ordered on a first-come, first-served basis. Please raise your hand on the platform, and we will unmute you when your turn comes. José Luis and myself will be calling the name of the person that is next on the line. If there are any technical difficulties, please let us know by using the chat. Thank you. We're now ready to start the Q&A session. We'll start with Yuri Fernandez from JP Morgan. Yuri, please go ahead.

Thank you a lot, Tomás, José Luis, Rafa, and Marco Ramirez. I have a question regarding loan growth. It has been pretty good. And we have elections in early June. So trying to check, guys, if you are seeing any kind of deceleration sign or like how you are seeing, you know, loan growth in June and maybe July. I know it's very short-term oriented. But my point here is to try to understand if business confidence remains in place and, you know, credit demand remains there. And if you may comment, how is your credit appetite? I would assume it's unchanged because you're keeping the loan growth guidance, but trying to understand a little bit the demand and also Banarte's appetite to grow loans here. Thank you very much.