Grupo Fin Banorte Ord

Good morning, everyone. I'm Tomas Lozano, Head of Corporate Development, Financial Planning, Investor Relations, and ESG. I would like to welcome you to Grupo Financiero Banorcero's third quarter earnings call. We will begin today's presentation with our CEO, Marco Ramirez, who will provide an update of the political and macroeconomic events that surrounded our third quarter's operation, followed by an overview of the group's main results, our quarterly update on sustainability, as well as details on our capital and an update on the shares we bought through the buyback program. Then Rafael Arana, our COO, will walk us through the evolution of the margin and balance sheet sensitivity, as well as details on asset quality and efficiency, among other relevant updates. Please note that today's presentation may include forward-looking statements that are subject to risk and uncertainties, which may cause actual results to differ materially. On page two of our conference call deck, you will find our full disclaimer regarding forward-looking statements. Thank you. Marcos, please go ahead.

Thank you, Thomas. Good morning, everyone. Thank you for joining us today. The third quarter of the year showed a sound evolution for Banot, regardless of the current operation, operating environment. High-frequency economic data continue to show signs of a slowdown, thus bringing us to adjust our GDP growth expectation for 2024 to 1.3%. Nevertheless, we still perceive a strong inertia in domestic demand, driven by resilient consumer fundamentals. For 2025, we forecast GDP growth of 1% given the current global step boost, despite the Mexican resilience derived from its high dependence to the U.S. Annual headline inflation continues to trend down, yet it is still above the central bank target of 3%. Nevertheless, core inflation decreased for the 20 consecutive months, and it's already within Banxico variability range. We estimate inflation to end the year at 4.7% and 4% in 2025. Regarding monetary policy, we expect two additional cuts this year, reaching 10% by December, and 200 basis points cut throughout 2025. reaching 8% by the end of next year. Volatility in the Mexican currency is expected to persist, mostly given the uncertainty regarding the upcoming U.S. elections in November. As a result, we forecast 90.9 pesos per dollar by the end of 2024 and 20.9 in 2025. On the political front, Claudia Sheinbaum took office at the beginning of October. And during her initial speech, the President reinforced the importance of, one, sustaining healthy fiscal policies. Two, enhancing and protecting local and foreign investments in the country. Three, collaborating with the private sector in infrastructure projects through public-private associations. Four, preserving strong relationships with the United States and Canada to boost nearshoring. And five, maintaining the autonomy of the central bank. So far, her administration has held discussions with both Mexican and foreign business leaders to foster trust-based relationships among the different stakeholders. Moreover, the unveiling of the economic package of 2025 on November the 15th should provide further insight about the investment and fiscal priorities of her administration. Let's focus now on the results of the quarter on slide number three. The sound performance of the group was driven by expansion in the loan portfolio, resilient margins, and larger net fees. Notably, despite greater loan origination in our consumer book, asset quality remained solid, with MPLs stable at 1% and cost of risk slightly down to 1.6%, evolving better than expected, leaving healthy behavior of new vintages in our different portfolios and the calibration of our internal models. NNI sensitivity from the local currency balance sheet has become almost neutral to monetary cycles, decreasing to 36 million pesos for every 100 basis point change in the reference rate and reaching 531 million pesos in the foreign currency book. Further, shielding our balance sheet from the easing cycle and increasing our reliance in selective lending and stable deposit volumes. Rafa Rana will provide more details on this. Our strong capital adequacy ratio stood at 19.2%. Later in the fall, I will go deeper into our strategy for capital optimization. Slide number four. Trust income continues to grow, showing a 7% year-on-year increase to 14.2 billion pesos. Additionally, accumulated net income for 2024 reached 42.5 billion pesos, 8% higher versus the same period of last year, driven by the expansion across most business lines reflected on a 150 basis points increase in ROE to 22.7%. On slide number five, the quarter results by subsidiary show relevant contributions for all sectors. The bank's net income remains relatively flat in the quarter, mostly related to lower non-interest income, despite good core banking dynamics. With accumulated figures, net income from the bank grew 7%, driven by loan volume and mix, as well as positive evolution of net fees. Operating expenses grew in line with our expectation for that year. Altogether, these results yielded a sound 29.5% ROE for the bank, up 180 basis points versus the same period of last year. Our insurance business grew 28% in the cumulative comparison, driven by greater premium growth in the corporate and government sectors. Annuities expanded 11% in the quarter, normalizing the effect of inflation-related movements observed during the second quarter. With accumulated figures, it showed 17% growth, given its greater participation in social security allocations. The brokerage sector, quarterly and annual increases were mostly explained by security valuation and larger business operations. As for the afforded business, its performance was driven by higher yields on financial products. Slide number six. The loan portfolio continues to expand, reporting double-digit growth. The corporate book has a remarkable 24% year-on-year growth, followed by commercial with 10%. driven by greater business activity across multiple sectors, as well as our ongoing efforts to strengthen relationships with SMEs, which are starting to capitalize from our investments in the segment. During the quarter, FX variations had a positive impact for the dollar loan book, representing 14% of our total portfolio. Our government book grew 2% in the year, impacted by some prepayments. The consumer portfolio, slide number seven, continues to show double-digit growth. Credit cards were up 26% in the year due to greater transactionality. It is worth mentioning that during the fourth quarter, we were launching two new products addressing the revolving credit needs for our payroll holders, as well as those of younger demographics. These products are expected to help us develop comprehensive relationships with these clients. Nevertheless, we maintain our cautious approach in credit cards to avoid compromising our asset quality metrics. The auto portfolio held a similar pace, increasing 23% year on year, mainly driven by our current commercial alliances with different dealerships and ongoing positive dynamics in that sector. Payroll loans grew 9% in the year, despite our current approach to clients in government entities with administration changes related to dialections. Finally, mortgage loans showed a 7% annual expansion, keeping our focus on building a stronger high lifetime value clientele. On slide number eight, asset quality remains solid in that quarter, with MPLs relatively stable at 1%, despite our higher growth in the consumer segment. It is not worthy that cost of risk has gone down, driven by the assertiveness of our internal model and our hyper-personalization efforts to engage with high-value customers with better risk profiles that limit unexpected losses. Fees on slide number nine grew 7% in that quarter, mainly due to greater core banking fees and transactionality in investment funds. With accumulated figures, net fees grew 20% led by higher activity in consumer products and related businesses, supported by skills from private consumption. Furthermore, we continue to increase our digital transactions. As of the third quarter of the year, the number of digital active clients grew 11% versus the third quarter of 2023. Turning to slide number 10, we are proud of our NPS, Net Promoter Score Evolution, which remains on track to achieve a 90-point NPS score. The enhancement of our digital capabilities, which enable us to operate as a digital bank with branches, together with the strength of our human-digital interactions, is what differentiates us holding a competitive advantage in the market. Our self-service capabilities are driving valuable in-person experiences, reflected in the high NPS score in all our interactions through different channels. Once again, This demonstrates that our investment in technology and hyper-personalization are playing off, creating a differentiated engagement with our customers. This was recognized by the banker, granting us its most innovative banking Latin America award in 2024, and many other worldwide acknowledgments emphasizing the innovation, usefulness, and transformation in our digital initiatives. Shifting gears to ESG, slide number 11. I would like to highlight Van Orten's participation in the 17th Annual Financial Education Week, where we had the chance to share financial education essentials and interact with a diverse audience of more than 2,700 students and young professionals. highlighting the importance of creating a budget, the benefits of starting a savings culture, and the relevance of keeping a healthy credit score, among other topics. On the environmental front, we continue with our efforts to grow our sustainable finance group using the proceeds of the green and social bond issue earlier this year. Regarding the operation of our buyback program, we have already bought back 10.1 billion pesos out of the available 3.2 billion, representing an approximate 70.3 billion shares. This morning, we called for a shareholder meeting to propose their cancellation. Our capital allocation strategy focuses on providing the highest possible total return to our shareholders. considering the best balance between buyback and extraordinary dividends. Last but not least, I'm proud to share with you that Grupo Financiero Banorte is celebrating 125 years of operating the market, 125 years of transforming, strengthening, and committing to our country, growing together with Mexico, most importantly with you, our stakeholders. What started as a small bank in Monterrey in 1899 has now become one of the leading financial groups in Mexico. Our business diversification, our transformation through technological and digital development, our customer-centric model, and most importantly, the flexibility of that differentiated working culture have been among our strongest assets to move forward in both gray and blue skies alike. Looking ahead, Our focus on hyper-personalization, daily and risk management, strict operational efficiency, together with our continuous investment in technology and human capital, will keep Banorte as a strong and competitive franchise to face both traditional and digital players in the market. I would like to thank you for your support and trust throughout this journey, and we look forward to many more years of development and growth. Now, I will leave you with Rafa Arana, who will draw into detail of the financial results of the quarter. Rafa, please go ahead.

Thank you, Marcos, and thank you all for attending the conference. As Marcos mentioned, and I will just go by the most important metrics about the bank and also some of the metrics about the group, the balance sheet continues to be our main strength on how we have built the balance sheet in order to support and be able to take advantage of the downward trend and the rates, as you can see. And there's something important to notice about this. Some people have questioned that if we were not so fast in really positioning the balance sheet on the downward trend. I would think that it's difficult to put the right timeframes to do that, but what we can see now is that the direction and the strategy was exactly the right one. And this is also quite important. This has cost us around 2 billion pesos to position the balance sheet, but if you project the already benefit of that positioning for the next year, we already at the rate as is today is giving us close to 1.8 billion in additional margin for the next year. So it's like we pay for one year, we will get the benefit for the next five years based upon the tenure that we have on the fixed rate part of the group. So that's important to notice about the balance sheet. The second one is that the group continues to deliver pretty strong return on equity, 22.9, and that's not on a tangible basis. If you go on tangible and you take out the goodwill on the afforded business, the goodwill of the group will jump very close to 24 return on equity. The bank is producing 31.1, as Michael mentioned. close to 228 basis points compared to the last year. This is also considering that we are still holding 13.9 on the cost year one. So that really shows the efficiency of how do we manage the capital base and the balance sheet and all the resources that provide that benefit for the bank. The transformation for the bank, as Marcos mentioned, is a day-to-day operation of the bank. We have a continuous transformation. Marcos shows the graph that shows the banking minutes that shows that Banote is really a digital bank that can compete with anyone that comes into the digital space. And that position ourselves that the NPS continues to grow in the right direction. The clients like the way they deal with the bank at the branches. The branches continue to keep improving the NPS on a daily basis. And the digital operations and the digital self-serve capacity of the bank also continues to improve the NPS on a channel by channel basis. The net interest margin of the group is at 6.5, pretty strong if you look 77 basis points compared to last year. And what is also remarkable is the Banorte Bank that is at 6.7. Some people is concerned about how we can continue to expand the margin even when the interest rates go down. And it has to do with the position of the balance sheet and the fixed rate part of the book. good trending funding costs that we now are experienced based upon how we are managing the funding base of the bank. That I will go in a minute how the funding base is producing pretty strong returns on the margin side, but also giving us a pretty strong foundation on non-interest bearing deposits, interest bearing deposits, time deposits, And also, if we need to go to a market for specific reasons, also we go with the market with a very strong benefit for the market. So the funding base, liquidity funding is trending in the right direction, and it's going to continue to improve the margin as we go towards the end of this year and on the next year. The capital base has already been explained, 13.9, the quarter one. After, and this is quite important, after we honor the call that we did on the tier one, and also by funding the dividends up to the group, most of those dividends. So that continues to be a very strong core tier one. Obviously, there's concern that it's too much, that we should return more money on the balance sheet for that. For the investors, obviously, we're always looking to really return the most value to our investors, and that could be on a buyback basis or also could eventually potentially be an historic dividend, but we have to wait to see how the macroeconomics and the U.S. elections really happen. to manage either way on that part. And that's what's important because that flexibility, we have achieved that flexibility by managing the bank in a very conservative way, but also in a very high . When you go to the income of the bank, of the group, We will go in a minute for the bank, but you could see on the non-interest income growing, the annual effects continues to confuse some of our investors, but I think it's a very detailed explanation on the pages on the report. But what is worth mentioning is that NII of loans and deposits increase on a quarter-to-quarter basis 4%, and that's a very, very strong number to have on there. on the loans and deposits. So I would say that NNI is trending in the right direction. Everything concerning the revenue side also nets. We will see in a minute how the fees are evolving. But what we can really say is that we have a very productive loan base and a very, very sound funding base that is continuously trending in the right direction to a lower cost from the funding side. If you go to the ratios of the bank, it will show you basically, as we mentioned, the margin of the bank, like 6.7 coming from 6.4. That really shows all this management that we have been doing on the funding, on the long road, on how we position ourselves in the market. And this is quite important. When you look at how Banot is positioned in the market, we are never on the high end of the price base. we are always on the mid to the low end of the price. We never compete on price. We compete on the service and on the risk that we like to serve the clients. The NNI of the Banorte Bank, as you can see, 7% on a year-to-year basis is a quite good trend, and that trend will continue as we go to the end of the year and on the next year. Next Feeds are very, very strong numbers, and it shows exactly Why the bank continues to evolve in the right direction? Because we are transforming more and more the activity of the bank in a very productive way. Opening of new accounts, transactional banking, services, fees for the commercial, for the corporate, for the government base. All the bank is It's transforming this activity every single day in a much more productive activity, not just activity, but really activity that is profitable for us and serving our clients in the right way. It's not that we are increasing the cost of the fee and the price of the fees. It's really the activity that the bank is producing in the market. We are gaining market. We are gaining clients. The clients like the way they interact with the bank, and that is giving us a pretty strong growth on the fees. It's not because we increase the price on the fees. If we go to the, I would say, and this has to do with a lot of work for many people at the bank, the treasury, the risk accounting, everyone looking at how to really position ourselves in the right direction for the downward trend on the rates. You can see now that the sensitivity on the peso group is only at 36 million, that basically we are in a neutral basis on the sensitivity. So the balance sheet has been managed on the way up of the rates in the right direction, in the downward trend of the rates, also in the right direction. So to position the bank on a neutral basis has cost us some money, but we will give us money for the next five years at least. On the foreign currency, we will start to also be more aggressive on reducing the sensitivity. There are more tools to use on the foreign currency balance sheet. I don't wish that we need still to see how aggressive the Fed is going to be. It's going to be 25 or 50 basis points downward trend. But when you look at the sensitivity on the NII, we almost erase the sensitivity on the NII. That's not easy to do, and that's something that is the result of very, very intelligent work . The next one really shows some of the key metrics. The return on asset 2.6 is a very strong number, 2.6. The net income of the bank, 7% on a year-to-year basis. And also, I will also try to address that the net income of the bank is already being affected by the foregone interest that, and not just the bank, the group for the foregone interest on the buyback program that is close to $570 million and will, by the end of the year, reach around $650 million on a reduction on the margin rates. The return on equity of the bank, as we mentioned before, 31.1% with a very strong capital base. So that really gives you the how efficient the management of, I would say, how do we use the capital to improve the returns of the bank in every single space of the bank. If we move to the next one, the managerial name, because some of you have asked us to extract the annuities effect on the NIM, and you can see on the graph the NIM with ex-insurance and annuities in order to have a much more rational number that is not depending on the inflation rates and the effect on the annuities. The cost of funds, and this is a, Even if you will see that, it shows that it seems that the cost of funds jumped to 49.3, but that has to do with the pace of reduction of the sectors compared to the tier. The status, most of the time deposits are linked to the status base. So when the status starts to go down, we have to wait for some people put the time deposit to 30 days, other people to 60 days, or to 90 days, 120 days. So you need to get all the process ongoing. So you will see a continuous downward trend that will The TA will eventually change the setting, and the setting will erase the lagging effect that has on this renewal of the time deposit base. Because every time that you basically go on a fixed rate on the time deposit, you have to wait for the renewal of 90, 20, or 30 days, or 45 days. So that's what you see as a small pickup on the funding cost. But when you look at the margin base and improving the margin, that really shows exactly how we are managing the asset side and the funding side that give us a better margin than expected. Another very important thing is that non-interest bearing deposits are growing 8% on a year-to-year basis. Because there have been some questions about the effect of some of the announcement of the new banks or try to be banks in the market. What's the effect? As you can see, we continue to gather non-interest bearing deposits at a very good pace, 8% on a year-to-year basis. And time deposits are growing close to 20%. And time deposits are well below the rates that some of those players are paying in the market. Why? Because we base our relationship base not on a product-by-product base. So when a client comes to the bank, he gets a full suite of products that he can monetize and see that they get a much better deal when they monetize all their relationship with us. So funding pretty strong, going in the right direction, at a good base, at the right cost. So now we will move to one of what some people are quite, I would say, concerned about how sustainable is these numbers, you know, on the risk side. And when you look at the graph on the cost of risk, and I will ask in a minute to please join us on the conversation. Cost of risk continues to go down in a very important way. in a steady way, and at the same time, you see that loan growth is exactly what we produce on the guidance to be 13% ex-government. So we have very sound loan growth, and the cost of risk continues to go in the right direction. Write-off rates is very steady. We are not a bank that jumps and cleans the book on a, I would say, on a non-program basis, so we are very steady on the write-off rates. And credit provisions are right on line, what we expect below what we expect at the beginning of the year. So these numbers also take into account that if you take away Tarjeta del Futuro, we're at 1.5. If you add Tarjeta del Futuro, we're at 1.6. So on the cost of risk, I would note because I will let Gerardo say it, but this is something that Banorte has shown that it's not just in a one-time effect. It's a continuous effect of how do we manage the time. Please, Gerardo.