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Grupo Fin Banorte Ord
7/24/2024
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.
Thank you, Louis. Yes, we do have appetite, but first we want to control the voice. So we want to see first the voice and then the appetite, and that's the way we should continue. But... saying that we expect to have it as we said at the beginning of the year and now again more than two digits you wrote between all the all the credits so maybe a little bit down maybe we don't know but at least we think that it's reachable and, as I said, with a very good quality of risk. I don't know, Rafa, what do you think?
Just to say that Demand continues to be there. I think Bernalde has positioned in a very important way on the corporate, on the commercial side, on the SME side, and on the consumer side. So all the evolution that we have having that in digital and all the technology that we offer to our clients allow us to be on a prime position to deliver the loan growth. We, as Marcos mentioned, continue to see a very reasonable demand on loan growth that will continue and allow us to deliver the guidance that we promised you.
Yeah, if I might add, this is Gerardo Salazar, I will just add that as long as we can see GDP growth of those lower, lowering unemployment rates, eventually lowering interest rates, Consumer confidence is still there. Business investment environment is still positive in several sectors of the economy. Also, the housing market conditions are in place. We are seeing good patterns of consumer spending and also some bank specific factors that contribute to this long growth. So we remain with a positive outlook regarding long growth because of this and some other factors.
Super clear. And if I understood, the growth should continue to come from SMEs, consumer, like no major change in the growth mix, right?
And corporate and commercial are really growing at a very important pace.
Thank you very much, guys.
Thank you. We'll now take the next question from Ernesto Gabilondo from Bank of America. Go ahead, Ernesto.
Thank you. Hi, good morning, Marcos and Rafa, and thanks for the opportunity to take questions. My first question will be a follow-up on long-growth. So just wanted to hear from you still soon, but I don't know if we can expect double digit loan growth during the next administration. If you can share with us in which sectors are you detecting the stronger lending activity? If you are hearing that the new government could be more active through public private associations, and so far in terms of energy, water, infrastructure, highways, trains, and also the near-sharing opportunities, if you are already preparing Banorte to benefit from that. And I don't know if it will be finally the opportunity to leverage on the Interacciones expertise. And on the other hand, on the consumer segment, We have seen high inflation prints, but at the same time, we have a strong labor market, higher salaries, the social program. So also wanted to hear your thoughts on that segment. And then just very quickly, a second question on the implications of your buyback program. So can you share with us how much of the buyback program has been used Again, if you use most of the buyback, how should we expect of the special dividend by year-end? If you use most of it, we should not expect a special dividend, or what should we think about that? And also, you were mentioning that if you use the buyback, you will be having lower financial interest that today are invested at CETES. So also can just give you the amount of how much lower interest have been lost because of using the buyback. And then because of that, would it be reasonable to expect the net income growth guidance to be more in the low end of the range? And also when do you expect to have the cancellation of those shares? Thank you.
Wow, what a question. I will start with the share buyback program. So, as you know, we have been operating our share buyback program amounting to close to 50 million shares. That's where we stand right now. We started its operation with significant discounts in relative valuation price to earnings, the TA, and price to book value. And this would be accreted to our shareholders when shares are canceled. with significant growth in earnings per share and dividends per share in the upcoming months and years, obviously. Special dividend depends. If we continue, maybe we need to decide in the future which is best for the investors, or maybe we can not give a special dividend. But so far, we are thinking depending on how the market reacts, we will see what is better for the investors. And I think that's it about the share buyback program. And going to the yes, as I said, the The new government has also expressed support for an economic model involving more public-private associations to guide the key infrastructure projects to the country, and has also acknowledged the importance of the new sharing opportunity in Mexico. So we are confident that all this is going to happen. As I said, the cabinet appointments so far seem to support this expectation for the next administration. And we know the same as you know, but it's still that they want to give opportunity to the private investments. What else? The loan growth. Yes, we can expect double-digit loan in the next administration. The sectors, they obviously know that. consumer is going to be there. And also the government. Government right now is only short-term because nobody wants to see more than these three, four months ahead of us. As soon as this cloud is secure and the new government needs to take action on all the new investments that they need, we see a a long-term demand in government. And so we do expect at least 10% in the next years. It seems fair to say yes. We don't know yet. We don't have any other data, but it seems that it's reasonable in this environment as mentioned earlier. Gerardo, that everything is there. He is showing the opportunities and the willingness of everyone. So that's it. What else?
The other one was the foregone interest on the buyback program. Ernesto has been around $400 to $500 million already and could reach at the tops to $1.5 to 2 billion on a full scale basis. So that's the program interest and I think we could manage that with a slight reduction on the upper side of the guidance on that based upon the dynamic of the lending side and the fee side and all the activity of the bank and also the good trend that we are seeing now on the funding side. So I think It's in a way hurting us on the foreground interest, but I think it's going to be pretty good on the EPS acquisition in the coming years. If you do the numbers, it's going to be pretty good. Alex, do you want to say something?
Thank you, Marcos. Alejandro Padilla, Chief Economist. Well, regarding your question about the nearshoring opportunities and also what should we expect in terms of infrastructure, well, so far we have seen significant evidence that nearshoring is taking place in Mexico. For example, when you see the imports of capital goods, especially machinery and equipment since last year has been growing at a two-digit pace. the demand for industrial parks and also the rents or the prices of these industrial parks in the last 12 months have been increasing at a two-digit pace as well. We have been observing a lot of investment announcements since last year. Last year, they added nearly $110 billion. So far in the year, we have been observing $45 billion. And very interesting that even during the month of June and also July, we continue to see these announcements of investments. So all in all, I think that nearshoring is going to be a good opportunity for Mexico. We continue to see it at a sectoral and at a regional level, especially in the central and northern part of the country. And this will require a lot of infrastructure, given the bottlenecks that we have in Mexico, especially in terms of access to water, electricity, roads, ports, et cetera. So given the limited room of maneuver of fiscal accounts in Mexico, given the adjustments that we might see in the economic package for 2025, I think that there's a good opportunity for the private sector to jump in, and we'll see a lot of public and private associations as Marcos mentioned before. And on the consumption side, at least from the economic standpoint, we have been observing a very resilient domestic demand. Private consumption continues to grow. Also, investment. Product consumption is a big chunk of GDP, and it has been supported by remittances, but by social programs that have been increasing steadily, also by very good conditions in the labor market. And, well, we have to say it also has been supported consumption. So we continue to observe this engine of the economy to continue to perform well, at least in the next quarters.
Oh, thank you very much. Very helpful, Marcos, Rafa, and Alex. Thank you.
Thank you, Ernesto. Thank you. Now we'll continue with Natalia Corkel from JP Morgan. Natalia, please go ahead.
Hi, everybody, and thank you for taking my question. I'll actually go back to the extraordinary dividends. It seems that it might be part of the plan. for this year. And under this context, I was looking at your capitalization. You have the call of one of your perps in September this year. I'm not going to ask the question if it's going to be called or not. I know your thoughts around that. But given that you have this call, and next year, at the end of the year, you have the introduction of T-LASK, I calculated that you're going to have, based on the numbers of the second quarter, around 120 base points of coercion over the fully loaded T-LAC. So this is usually a coercion that's low for binocular standards. You usually have more than that. So with all of that said, I think my real question is, if you're thinking about issuing a subordinated note, And if this would be either an H1 or a Tier 2.
Thank you, Natalia. Yes, we have this in September. As I said, we cannot say that willingness is there. All this is considered already. It is going to be 17.9 by 2025. So, we are already there. So, we don't need to do anything. We need to maintain everything. And we are already there. not preoccupied, we are occupied on that, and we don't see any problems so far.
No, I think what Mark says, Natalia, we are always looking for windows of opportunity in the market to have, as you know, we like to have around the 28 to 30% on the total cap of our instruments, capital notes that are efficient for us, and We're always looking for windows of opportunity. When the window is there, we are not chasing the market. We are looking for the window, and if the window is there, go to the market.
Thank you. If I may follow up, any preference for instrument, if it's either H1 or G2?
Whatever is the best for us at that window, Natalia. If it's a T2 or a T1, whatever is the best for us.
We want to have the box full of tools, and then we decide which tool we can use. So far, we have all the tools that are in the box.
All right. Thank you so much.
Thank you, Natalia.
The next question is from Brian Flores from Citi. Go ahead, Brian.
Hi, Tim, and thank you very much for the opportunity. Very two quick questions. The first one is on NPL curation, because I think this is the highest level in some quarters, so I just wanted to understand if this, and I think it's coming from the commercial side, so I just wanted to understand if this is in hand with the revision, not only from you, but also from consensus on GDP. Are you seeing more sluggish activity on the commercial side, or what do you think is explaining this behavior on companies. And then, Rafa, if I may, you made some very interesting comments on Vineo. You mentioned that you already know exactly the niche that you want to attack. Can you elaborate a bit on what is this niche and how does it compare to other players, big banks and fintechs? And if you could also expand a bit on how does it affect fees and funding going forward for your operations? Thank you very much.
Thank you, Brian. The first one, the NPL ratio, I will ask Gerardo to do some Colorado. Yeah, Brian, I will tell you that we are maintaining a very low and stable NPL and also a very low and stable cost of risk. We contribute to that indicator in five fronts. The first front is an efficient recovery process. The second one is we perform a regular impairment review. The third front is that we do a proactive credit management. The fourth front is enhanced credit analysis. And the fifth front is a dynamic risk assessment. So we are not seeing... sort around the road, any problem of a systemic nature. We, as Marcos said at the beginning of this session, we are not seeing any high correlation within our commercial loan portfolio between or among some loans that have gone bad. So we just made the provisions for those. We started to resolve them, and we are not expecting a 0% recovery rate. We are implementing all of our resources in those five fronts that I just mentioned. We have isolated cases in companies that do not represent any industry or regional concerns so far. I came there.
What I mentioned is when we decided about the launch of the digital bank was to really look at the evolution that the new entrants into the market were doing. So basically we need to have a very good response on that. We invest in technology that was basically a digital native technology and that. But what you have to understand also that from 18 to 24 years, Banorte Bank also evolved a lot in the digital side. So now we know exactly how to deliver the value in a very, very efficient way for the market of Veneo. That will allow Veneo to touch parts of the market that in the past Banorte was not touching on that part. but in a very, very efficient way. So what you will see when the value proposition comes in place in Veneo and the way we're going to compete for Veneo is that we'll be a multi-segment bank, but with a very, very low cost income ratio and a very high efficiency on how we deliver the products and services to the clients. So it will be A bank that will be on the backdrop of everything that Granada has evolved, with the advantage that we'll have a lot of native technology and evolution of the analytical skills. And also with, I would say, uncomfortable cost space that we are saving up for the bank.
Thank you. If I may follow up just very quickly, when you say parts that you didn't touch, does this mean going a bit lower on the income segments? Or are you thinking another segment in particular?
I think, like, for instance, remittances. Remittances is a don't deal for Veneo. Everything will be digital, no fees, and that will evolve from that. But I'm talking about that part of the market. But then you also will look for the paywalls. You also will look. for the insurance business. We also will look for everything that is related to evolve the client in a very efficient way in a very local space business. You have a business that will have all the technology with a local space to operate and deliver every single product that is needed in the market for the clients that we will serve. So we are pretty pleased of how we have been defining the strategic positioning of VINEO concerning the overall architecture of the group, and we are very pleased with that.
Super clear.
Thank you. Thank you. And now we'll continue with Renato Meloni from Autonomous. Renato, please go ahead.
Hi, everyone. Thanks for the call, for the questions. I want to go back to the funding side. So last call, you were saying that you were not feeling the competition from the fintechs on the high yield accounts. But you added a remark in the earnings release this time citing the increasing sensitivity of customers to higher yields. So I wonder if this means that now you're seeing more competition and what does that mean for the trajectory here in cost of funding? And also if you could comment a bit on the strategies that you're applying to keep cost of funding coming down. Thank you.
A bunch.
If you look at the trend on the funding cost, it shows you that the effect of all this new, I would not say that they have zero effect, but it's a completely different way to approach the market. If you drive your relationship with the client on a relationship basis that allows you to have the credit card, the payroll, the mortgage, everything that is related to service the client on the retail side, compared to just set up the funding costs. You know, I'm going to pay you 15% on the funding side, but I'm going to charge you 120 on the credit card side. So that's not the way we approach the market. We approach the market in a way that sometimes the merit for them is to have a better return on what they have on the funding side because of the relationship that they have. But in many other ways, it's the service that we provide overall that is not just specifically related to the funding side. If we were just competing based upon the funding side, not on a relationship, I think we would be in a very bad position because everybody would be paying 15, 16% to achieve funding. But just imagine, if you're gathering funds at 15, 16%, what's going to be the price that you're going to put on the products? It's going to be crazy going into the market. So if you look like, for instance, let me guide you to the prices that we have on the mortgage side. The mortgage side went from $9.75 to $11.5, well below, even below the reference rate. How is it possible that because of all the relationships that you have with the client, you provide them the credit card, you provide them the insurance, you provide them. So the lifetime value of the clients allows you to have a pretty strong relationship to them and like them in a very healthy way to keep on solving all the financial needs. Not to give me 50% here and I charge you 220 here. So that's not the way Banosta works.
Okay, that's understood. But how do you expect the trajectory here on cost of funding towards the end of the year? And what do you see the number now? It's at 47.8%.
I think it will continue to go down. It will continue to go down. Based upon all the strategies that we have been seeing, we see already in July a pretty good trend, and that will continue through the year. Remember that the difficult part of the year is really the March, April, June month. That are really the slow months. So the funding gathering really starts to pick up around September or November. and really big from around December. But already the trend is better than expected for us.
Okay. Thanks. Thank you.
Thank you.
The next question is from Jorge Curi from Morgan Stanley. Go ahead, Jorge.
Hi, everyone. Good morning. Thanks for the opportunity to ask questions. I wanted to ask about the... The change in the sensitivity of the balance sheets to rates, you've done an extraordinary job at reducing the sensitivity over the last two years. I just want to understand how permanent is that and what happens if rates just don't come down either as quickly as we expect or as much as we expect? which I guess I'm not saying something that hasn't happened, right? I mean, evidently rates have been higher for longer. And so if we continue in this environment of higher for longer rates, say for the next six to nine months, you know, are you going to start to, you know, have to pay up for this unwinding? Just walk us through how your either P&L or balance sheet get impacted if and so this rate scenario plays out. Thank you.
Thank you, Kuri. It's obviously a good question. Yes, our strategy so far, and we are aiming and we have a strategy that Banco Mico will increase two times during the year and 50 basis points. So that's our, let's see, our frame of work. Obviously, we have tools. That doesn't matter. So far, it seems that it's going to happen. We will do something. We have a meeting every Friday here, and we see all the data and take the decisions. We have tools. We can do something with the assets that we have. As you said, we some instruments to turn around, and we will manage it. But so far, we have this strategy, and you can see it right now, it's projected. When the rates go down, what we can do when the rates go up. And we have it in pesos, and we have it in dollars. So it's The answer is that it's a matter of each week to decide and to do the we cannot turn around immediately, but at least we can react and react in the data that we are receiving, no? And Rafa wants to say something about it.
No, I think what Marcos mentioned is this is a permanent, as you see in the graph, now we are not liability sensitive, very close to be liability sensitive. We are 324 on the asset sensitive side. What is strange, and this is what is, I would say, very positive for Banorte, is that basically that we are in a neutral position because we have 57% on fixed and 43% on variable. and variable could reach very easy, the 48, 49. If we speed up some of the loans coming from the government side, we will be in a neutral position. So that will allow us time enough to shift from now that you have fixed to variable, from variable to fixed. That's the evolution that we have. And also the key defensive part that we have is the funding costs. So that's why we are working so much on the funding costs that allow us to have a very reasonable funding cost that allow us to manage the ups and downs on that. We really think the rates are going to go down, but there's a possibility, as you mentioned, that rates would go up. And we are very vigilant on that part. That's when the shifts change. The variable rate part of the book, again, will sustain the growth on the net interest margin. And the fixed rate part of the book, the key part, is to keep the risk very, very low. Because on a risk-adjusted basis, we continue to evolve in a very positive way. I'm going to give you just a number two. to show you how strong the position that we have on the fixed rate part of the bill. If you look at the NPLs of the mortgage group, we are around 0.8, like this. The next one in the market is a double of that. So, If we compete on the funding side, we will continue to deliver margin on a very steady basis. But if I move to another part of the portfolio, the auto loans, 0.5% NPLs. The next one, very close to two. So on a risk-adjusted basis, we have been able to really sustain a permanent growth on the net interest margin for two reasons. very sound growth but the funding cost also is very slowly trending down in a positive way so that continues to keep the margin at 6.4 so many people were concerned when we set up the margin of 6.4 when they said when rates go down you will going to be hit very hard on the margin side. No, because the funding cost will also accompany that down drop on the rate. So everything has to do with manage an equilibrium fixed to variable on the lending side and the funding cost. All that is what is giving Banorte the ability to sustain the market. If the rates go up, we immediately react, and based upon almost half of the portfolio, immediately we'll get the penalty. And we will adjust the other part of the book based upon what we see on the market. But we are very vigilant about that. Jorge, thank you for the question because I think it's a unique position that that one of the right now is we already pay for the for the sensitivity but they but really the downward trend passing really starting in a permanent way but we are ready for that and we are also ready if rates go up because of the position of the of the loan book that we have thank you that that was very clear do you mind if i um uh add another question related to the deposits which has been um yep
Can you hear me?
Yes, go ahead. Please go ahead.
Sorry. Yeah, so I wanted to ask about Binel and how you're going to position the deposit remuneration there. I mean, it does seem that the type of clients that the neobanks are attracting, you know, whether it's Nubank or Klar or Wallah, they obviously enjoy this. the higher remuneration on the deposit side. And I do think it also has to do with the particularity of the client that the neobanks attract versus what the incumbent banks do. And so is it possible for BNEO to pay up for deposits? And do you think you won't be able to attract the young demographic, more tech savvy that I'm guessing you want to with Vino if you don't pay as much as the neobanks slash digital banks are paying up in Mexico.
Yes, Jorge. I think the whole idea of setting up Veneo and I think the experience with Rappi allow us to really understand that market because we move into the new commerce into the market. Now that we know how to make that business profitable, how to set up the risk profiles and everything. And for Veneo, I think the good thing about Veneo, we don't want to compete on a 15% interest rate because that will deposition the bank as a product-driven bank. And we don't like to make Veneo a product-driven bank. Veneo will be a lifetime value bank that allows us to set up the price of the relationship based upon the lifetime value of the client. So maybe, maybe, and this is I would say on a hypothetical issue, some clients could maybe marry to have a high interest rate to repay for them because of the lifetime value that they have on the overall relationship. And maybe we could do that if the relationship is profitable. But we will never compete just for the sake of gathering funds at a very high cost that we cannot deploy on the asset side. We will never go into that. We're already starting to base interest at BNAIL, I think, at a reasonable level. We don't like to have an arbitrage with Banorte in any way. But on a client-by-client basis, In Banorte, we sometimes could pay above the reference rate if we would like to keep a relationship with the client. And in Binel, it would be the same, based upon the value and profitability of the client. We don't like Binel to be positioned in any way as a product-driven bank. It's a relationship-driven bank that sets everything based upon the lifetime value, and based upon that, we will price the deposits, the lending, based upon the risk of decline. So it's a completely different ballgame that we will have on that. We have learned that already in Banote, because in Banote, we're already working like that. In Banorte, in the hyper-personalization process that we have, now we price the relationship based upon risk, lifetime value of the client, and needs of the client. And it's delivering pretty strong results. That's part of the numbers that you see on the fee side and the numbers that you see on the growth on the lending side. It's that we are really setting up the relationship, not on a product-driven basis, but on a relationship based upon the needs and risks of the client.
Understood. Thank you very much.
Thank you.
Gracias.
Thank you, Jorge. Now we'll continue with Tito Lagarta from Goldman Sachs. Tito, please go ahead.
Hi, good morning, everyone. Thank you for the call and taking my question. My question is on expenses. I think you had mentioned that you worked to maybe try to get below the guidance just to see, you know, where you see some potential savings there and also following up a little bit, you know, thanks for the disclosure on BNAO. We see, right, the expenses running around $300 million, $350 million. Pesos per quarter, is that the right base there? Is that an area for potential savings also, or is that sort of the base that you can work off of BNAIL? And any thoughts? I know it's very early, but I think you've mentioned you want it to be profitable. When do you think BNAIL could break even?
Thank you. I'll start with the expenses. We have a historical role by category, right? And everything is, IP is 3.4 of the total. 1.9 is human resources. 1.5 is administrative facilities. And operating is 1.4. So we are, I will show it to you in one second. Because the graphic is a nice graphic that you should see. as an investment, no? And then you have the net income is going at 3%. So we are going more than the net income, the IT expenses, but we are saving the others, no? And we want to keep it that way. The graphic is there for a second, this one. And it shows everything here, no? and you see how it has been evolved during the years, and we want to keep it that way. Obviously, if something is wrong, we can decide and accommodate these figures and to be more relaxed or more in the other side. And talking about the VINEO, Rafa, please go ahead.
No, I think VINEO is already set up as a As an entity around 200, 250 people, you can imagine the efficiency that we could reach on that business once we set up all the product and value proposition in place. So I don't think – I think the NEO already is causing some issues on the – around 2.4% on the expense side, but it's already well under control. I think it's positive. Where we see a lot of savings coming is – from this shared service opportunity that we are centralizing all the backups operations of the group into just one operating unit. That could really deliver the reduction from the 36 to the 35.5 on the guidance. I think that will stay for the coming years. I think B&O is being born in an efficient way. And the great human of B&O we are aiming to have, once we set up the value proposition in place, three years from now.
Okay. No, that's very helpful. Thank you. And if I could ask just actually one clarification back on the buyback program, Rafa, you mentioned, I think, $400 million, $500 million impact. Was that specifically for this quarter? Just to clarify if that impacted this quarter at all.
No, it's for the remaining of the year.
Okay.
So a portion in that quarter, and that will retreat in the coming months.
Okay. So was there any impact from the buyback program on interest income in this quarter?
Yeah, a bit, but if you see the margin at the bank at 6.4, so no, I think yes, but not material.
Okay, perfect. Thank you very much. Thank you. We'll take the next question from Carlos Gomez-Lopez from HSBC. Go ahead, Carlos.
Hello, good morning. Thank you for taking the question. I wanted to ask you about loan growth and to what extent the depreciation of the peso has affected it, if you know how much the loan growth would have been without it. And when I look at the loan growth by category, I see that your consumer loan growth and mortgages have actually been gliding down for the last year, right? In the year-on-year, numbers have been declining. Continuously. Do you expect that to continue? Do you see demand continuing to slow down because of high rates? Or do you expect it to stabilize going forward?
I will go for the second one first, Carlos. The mortgage has been declined a little bit, but we expect it to not stabilize that way. We expect it to go the other way around because the rates will go down eventually. I'm interested in that. No clients will ask for mortgage. We are in that line of thinking right now. And as you know, we have 13% of our assets are in dollars. So, yes, it affects all the data there. But we do not expect the long road to be there.
No, I don't think that. Marcos mentioned, and going to the mortgage part, You remember, Carlos, that last year we were very vocal about that we were holding up the long road. because the funding cost was creeping up at a faster pace. So we really reduced the pace of growth. One of the places that we reduced the growth, not because we didn't have the demand, was on the mortgage part. Now that the funding cost is trending in the right direction and we see that we will continue to expand on the mortgage side, we like that market a lot. We have the demand in place. The process has been improved a lot. So, no, you will continue to see pretty good numbers coming on the mortgage side. And if you look at the overall numbers of the market, you will see that basically most of the banks reduced the pace of expansion on the mortgage side by the end of the year. Now we are Picking up again, you will continue to see those numbers increasing on a continuous basis from the months coming now and from the coming months. But it was basically that we hold up the long road because of the funding costs.
So a year ago, you were growing at 16%. Today, you're growing at 80%.
No, I think you will be on double digits, around 12%, 13%, because of the slow start that we have at the beginning of the year. But right now, the pace is the same that we have the pace at the mid of last year that we were picking up on the lending side.
Okay. And if I can follow up with just a technical question, you show us the guidance. You have made a tiny adjustment to your net income expectation. I calculate it's 0.7% to 1.4%, which is almost exactly, you know, reflected in the reduction in the share count. So should we understand that you are maintaining the guidance in EPS terms, but you are adjusting slightly in terms of net income?
Correct, Carlos. I remember that all this buy-buy program is going to change the numbers a little bit, so let's match again, because if you keep some data, the other gets better.
Okay.
Thank you so much.
Exactly as you said, and thank you for saying, because we couldn't say it better. Thank you so much. Thank you. Now we'll continue with Edson Moria from Summer Cup. Edson, please go ahead.
Hi, good afternoon. Thank you for taking my questions. The first one is related to the changing methodology of calculation of ratios. My question is, does it have a material impact on regulatory reports to the authorities? And if you can explain a little bit more what changed for a future comparison ahead. My second question is regarding to BNAIL, but what you have learned since launch BNAIL in order to enhance the value proposition for the second part of the 2024? Thank you.
Thank you Edson. I will start with the first one. We don't see no material changes. I have here the articles 180 to the CUV were amended. But we have all the data here, but being sincerely with you, it doesn't change materially anything. So we will continue with it. It's confirmed. It's almost the same. And the second one that's interesting, Rafa, please go ahead.
Sorry, Edson. I cannot say because it's all the strategy that we are setting up for renaissance. Sorry, but you will be seeing in the coming months how the value proposition takes place and how the NEO position itself to deliver value to the market. But it's really a very difficult time for us to convey the strategic initiatives that we are delivering to.
Okay. Well, I'm going to wait then. But thanks so much.
Thank you. Thank you. Now we will continue with Diego Spinoza from BTG Pactual. Diego, please go ahead.
Hi, Rafael. Hi, Jose Marcos. Thank you for taking my questions. Can you hear me?
Yes.
Perfect. I just have a quick question there regarding the bank's results. I saw that the ROE presented an important growth there. You posted that 31.5% ROE. That is a pretty solid, good number. I can understand that most of this comes from a higher portfolio growth interest income, but there is a line there regarding that you have had a less tax payment compared quarter over quarter, okay, compared with the first quarter. Can you explain or give us more color about what changed here or what is the reason of this lower tax payment in the income results? Yeah.
Thank you, Diego.
Diego, if you remember the first quarter, we were criticized because we had above 30% tax rate, and that was because of the provision that we do at the beginning of the year. What you see now is that that is trending to the number that we got, that is at 27%. We still are above that. So, no, it's not because you can't even say that on the first quarter you overpaid on the tax rate, and on the second quarter you're starting to normalize that. But that's really not material. I think The return on equity has to do with the results that the bank is on the basic business of the bank, the margin, the fees, and the provision inside. And I would say also the fact that we've paid the dividends from the bank to the group. that way of dividends reduce the capital base of the bank. That's still pretty high, 14.1. But that also helps us to increase the return on equity for the bank. Remember that sometimes we have been, in a way, I say cost to attention that if we pay more dividends, we will have a much better return on equity instead of the 28, 29. I think, yes, but we don't like to play the leverage game in any way. And I think the numbers that we are delivering in return on equity are really coming from the operations with a high capital ratio, with very decent numbers on every single part of the business. It's not that we are managing the balance sheet affecting the net income in a way that we could provide different results just by managing the capital base. The capital base is there. We pay the dividends when it needs to be paid. But the fact is that the bank build-ups capital at a pretty fast pace.
And taxes should be seen on a manual basis, no?
Yeah.
Perfect. Thank you very much.
Thank you. Now we'll take the final question from Nicolás Riva from Bank of America. Go ahead, Nicolás.
Thanks very much, Marcos and Rafa, for taking my question. I'm going to go back a bit to the question that Natalia asked about the capital ratios and the call option that you have on the six and three quarter of the PERP in September. So, as Natalia said, I think we all have a pretty good idea of what you're going to do, and I think most likely you're going to be calling that PERP. In that case, you would be losing 100 basis points of capital. And then I look at your total capital at the end of September, at the end of June, 20.2%. So that means you would be at about 19.2% if you call the six and three quarter in September. And if you are not to call, if you are not to issue a new bond. In that case, then your capital ratios, you would be like basically about 130 basis bonds over the minimum requirement. So then my question is, would you be okay having a buffer of just 130 basis points over the minimum requirements, or in that case, if you prefer to issue a new 81 or a new Tier 2, replace their capital and have some more buffer over the minimum requirements. Thanks.
We are okay with that. Obviously, if we see a window of opportunity, we will take it, but we are okay. And remember, we will start the next year again from zero and growing the capital, so it's going to be the lowest part of the we feel comfortable.
Okay. Thanks, Marcos.
Thank you very much for your interest in Banorte. With this, we conclude our call. Thank you.