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Grupo Fin Banorte Ord
10/31/2024
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.
Yes, thank you, Rafael. Good morning, everyone. Over the past several years, our commitment to the loan quality has yielded, as you can see, exceptional results, demonstrating the strength and resilience of our portfolio. Through prudence of the writing and robust risk management, we have successfully maintained a high standard of performance, even amid changing economic conditions. I would say that this success reinforces our confidence in our approach, not only for current stability, but as a sustainable model for the future. And we remain focused on long-term growth, ensuring our lending practices continue to deliver value to our stakeholders, as well as supporting the broader financial well-being of the communities we are serving. Together, we look forward for building on this strong foundation for years to come. And additionally, let me emphasize the importance of regulator-approved internal risk, trade risk models. Their contribution has been very relevant because regarding loan origination for portfolio management, and non-recovery processes, these contributions have been substantial. These models have been providing structure, reliable, and compliant framework for managing credit risk, operational efficiency, and portfolio performance. They support profitability, stability, and risk mitigation. And I will say that after years of work, our long quality metrics We are very stable, as Rafa was telling you, and also have been predictable and better than ever.
I would like also to say that, Our model of hyper-personalization is the foundation is the risk by client, not by product anymore. And that's what give us a very, very, I would say, a big difference in the market when you address by client and not by product, the risk base. So everything on the bank, the foundation of the bank that we deliver to the client is based upon sound risk metrics. If we like the risk, We like the client, and we can even be very aggressive on how we can sometimes sacrifice some margin in order to bring the clients that we would like to have back to us. On the expense side, as you can see, we are 35.5 cost income ratio. Some people have asked us, we had a meeting yesterday, What would be the cost income ratio if you go to the current basis and X Tarjeta Futuro and Vimeo? The cost income ratio will be 33.7. That will be the cost income ratio that we will have. So the recurrent expenses is 7.3, and 5.2 is the extraordinary expenses coming from Vimeo and Tarjeta Futuro. the operating leverage continues to be very positive, and we will continue to have that operating leverage in a positive way. So the cost income ratio, I think we are picking at a cost income ratio cost, and we will continue to push that number down for the next year. The bank's regulatory capital, as you can see, is at 13.9 the quarter one, 19.2 overall, capital ratio requirements. And this is really shows, as I mentioned at the beginning, after the 81 call. So that really shows you the capacity of the time to generate capital. I will address now the issue about dividends and buybacks. We have been, as Marcos mentioned, act very i would say active on the on the buyback program and some people say why you don't activate more the buyback problem the buyback program allow us to go up to 32 billion we have used around 10.7 10.7 billion uh and and that's a that's a strategic tool for us to to try to to to defend the the value of of of of the share at this point in time there are uh several, I would say, issues that needs to come clear for us in the next month. One is the U.S. elections. Another one is the presentation of the budget in Mexico. What exactly will be the programs that the president has announced that we think will allow the market to become much more confident about Mexico in the coming weeks? But we have all the tools to manage the best return for the shareholders. If we see a space after these events to go for an extraordinary dividend, we will do that. If we need to reactivate and activate the buyback program, we will activate the buyback program. So we have all the tools in our hands. So don't think that we are being, I would say, not looking at the market in a very close We are very, very attentive of how the market behaves, but we also understand that there are many issues that are not under control that needs to be clarified in the next weeks. Weeks, not months, weeks. And I will be very, very clear about that. So, now let me move into the guidance because there have been some questions about the guidance. Basically, the loan growth, as we've mentioned, ex-government will be very close to the 13%. The net interest margin of the bank, as you can see now, is at 6.5, so we are right on track. The recurring expenses is where we are even below the expense growth. The efficiency ratio shows a better number, but we have to wait for the end of the Of the year, cost of risk, now we adjust the cost of risk because the cost of risk is trending better than expected. Tax rate is where we are, and the net income shows already the effect of the reduction of the program interest of the buyback program that we have been used. And so that's where you see the reduction of . I will not say that that's the final number. We continue to see very strong long growth on October, especially on the consumer side, and a very good trend on the funding side. So that could give us a pickup still on the netting. The return of equity of the bank is on line with the guidance. Pretty sound numbers, the same for the group. And the ROA is showing a much better number than expected at the beginning of the year. Another very important issue is that when we project all the numbers of the bank, the GDP was expected to be very close to 3%. We are delivering this number with a GDP of 1.1 to 1.5. This is important to know this because there have been some concerns about what's going to happen with the next year, okay? We have been able to manage the bank at a GDP trend of around 1.1, and we continue to see strong loan demand on the consumer and also on the corporate basis on that part. And SME also showing some resilience on that part. That allows that if GDP for the next year is around 1, 1.1, we could still see reasonable loan growth close to low double digit numbers or very close to low double digit numbers. But we will see that as we continue to see when the guidance comes full in place in January. But it's important to notice that as we speak today, we continue to see reasonable performance of the loan at a GDP of 1.1. So I would say that the other thing is that the interest rate that we expect by the end of the year will be around 10% for the year. So with that, I conclude my remarks. Thank you, Rafael.
Thank you, Rafael. Now I will continue with our Q&A session. As always, we kindly ask you to present only your most relevant questions. 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. Tanya 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. We'll take the first question from Tito Labarta from Goldman Sachs. Tito, please go ahead.
Hi, good morning, everyone. Thank you for the call and taking my questions. And thanks for some of the points on the uncertainty that's going on and that you still expect a pretty healthy loan growth for next year. But maybe just to hone in a little bit on that point, as you mentioned, Rafael, even with 1% GDP growth, you're delivering double-digit loan growth and could maybe even do that again next year. What could be the downsides? or where could the downside come from? Like in what environment would loans grow single digits? Would asset quality be deteriorating? Is there anything that you're hearing or seeing? I know there's a lot of uncertainty where you could see that type of scenario. And if that scenario were to arise and you're growing your loan book, let's say zero to 5%, would you be more aggressive in returning capital given the strong capital you have? Thank you.
Thank you, Tito.
Rafa, please go ahead.
Tito, let's, what I'm saying that based upon the numbers that we have today, we could achieve very close to double digit growth or almost double digit growth. But let me just give you one very important question, one very important issue. If employment continues to hold, That's the foundation of where we think that we could achieve that number. If employment starts to weaken, then that will affect, and then you will see low growth from seven to nine. So that's the way we see it. Alex, do you want to add something?
Yeah, sure. Thank you. Alejandro Padilla, chief economist. Well, as Rafa was mentioning before, when you analyze GDP dynamics in Mexico, the main driver of the economy has been product consumption. Indeed, this morning, the third quarter GDP was released, and it was On the upside, it surprised in a positive way, especially going from domestic demand, and the domestic demand is mainly driven by labor market, as Rafa was saying, and also by strong remittances and a better position of Mexican households. And in this regard, as we are waiting for the economic package of 2025, the most likely outcome is that in terms of government spending, they will continue to deliver strong social programs that will benefit households' income. So that's why we think that, at least from the domestic side, it's going to be positive. And thinking about risks, well, we are contemplating this 1% GDP growth for next year with one condition, that the U.S. will continue without any recession. We don't think that the U.S. will get into recession. Indeed, also today's GDP of the U.S. was quite strong. Labor market has been also very resilient in the U.S. So we are forecasting that the U.S. will grow around 1.7% next year, and that's going to be positive for Mexico because 56% of the economy we have calculated that is highly dependent on the U.S.
That's very helpful. Thanks, Alex and Rafa. And on the second point, would you consider returning more capital in a slower growth environment?
It depends. As Rafa said, we want to keep all the tools here, and we want to bring you the best for you. So if that's the solution for you, and we don't have to work to invest, we will return more capital. The answer is yes.
Great. Thank you, Marcos. Just one quick follow-up I forgot to ask. Has there been any other talks of, earlier in the, before the election, there were talks about reducing some tax benefits for the banks. Have you heard anything else from the government about any potential impacts on the banks?
Not so far.
Nothing at all. Okay, perfect. Thank you, Marcos. Thank you, Tito.
Now we'll go with Ernesto Gabilondo from Bank of America.
Hi, good morning. Thank you. Hi, good morning, Marcos and Rafa. Thanks for the opportunity to ask questions. My question will be your only one in terms of now. So we saw it had a loss of 247 million pesos. It was around 1.7% of the consolidated earnings. So today is working as friends and family. Probably you will launch it to the open market next year. So we just want to understand what could be the size of the loss for every quarter in VINEO. I don't know if at the beginning could be a little bit higher of the 2% of the net income, or that should be the level we should be expecting going forward. Thank you.
Thank you. That's a good question. Maybe we should say that in the business plan, we saw that we are going to lose money for one, two years. So we need to to explain this because it is the way to do business.
If you look at the total expense numbers, as you mentioned, it's around 1.2 billion a year. We don't expect that number to grow from that because, as you know, we are using most of the scale of the bank in order to produce the economies of scale on the cost side. So that number should stay at this and maybe even improve a bit on that part. So you will not see an expansion on the cost line. I think that we reached the limit on the cost side and you shouldn't expect more coming from that line. Thank you, Rafa.
Is that okay, Ernesto?
Ernesto, I think you have a mute on your microphone. Okay. We'll go for the next question with Eduardo Rodman from BTG. Eduardo, please go ahead.
Hi. Hi, everyone. One question here regarding, you know, the results from the other subsidiaries, right? You mentioned that the bank is delivering a 31% ROE, which is very strong, right? And that with the hedges that you did, you're very likely going to be able to protect the ROE from a bigger decline once interest rates go down. So can you please elaborate on the other subs? The ROE there, I still see room for improvement. So if you can discuss a little bit where do you see room for improvement and which one can that be relevant? Thank you.
Thank you, Eduardo.
If you go to the return on equity, you see that I think we have opportunities to grow the business on the insurance side. I think we still have a low penetration on our customer base on the bank insurance side. I think we can still do more on that. I think there are more insurance products coming to the market to address the new issues or the new services that the insurance company need to deliver to a client. The annuity seems to continue to be quite solid in that part. There have been some questions about trading, and since trading had a good quarter, there was like a big jump on the quarter. But if you look at trading for us, it has always been around. Now, if you look at total revenue against trading, it's 5%, and it has been a very steady line for many years. So I think the bank will continue to push forward. And remember that the bank is the main distributor of the insurance business. So as long as the bank continues to grow and expand, as has been the case in the mortgage side, in the car loans, in credit cards, in tables, in banks. The insurance business will continue to grow. And in addition, there will be some in the open market. The annuitant business, we are very close to the leaders in that market. So it's pretty good returns. It's a pretty sound business. So no issues on that. So what we have to protect is basically the affording, the pension company, that as we move forward to the, to the coming years, the effect of the reduction on the fees starts to normalize more. But you will see return on equity of the Afore not on a tangible basis, maybe reaching the 14%. If you go to tangible, then that number will be very close to 10. So I think that the way the return on equity has been set up, The leasing company could also improve the return on equity on that. We can see a lot more activity on the leasing and factoring company, so that could also improve some of the returns for the group. But that's overall. We don't see any weakness, really, on any of the businesses.
Oh, great. Thanks a lot for the detailed answer. If I could just follow up on Ernesto's question on Bineo. I know that we're still in a work in progress, but do you think that this will be the entity or the brand that will compete with the new entrants like Nu and MercadoLibre, or do you think a competition will take place across the board, including the Banwatch brand, right? So how should we think about it? It's a different entity, a different brand, you know, or we should think about, like, look, it's the whole thing that will be competing.
The first thing that you have to notice is if you are competing against bank or fintech. When the trim techs become banks, then the competition becomes among banks and will be a much more fair play because capital numbers, liquidity, compliance, everything will be on the same level. That's the first question. If you see competition that banks against trim techs, I think the slide that Marco presents that Banorte is a bank in minutes, you see the power of Banorte in the digital bank. But obviously, Banorte has an issue on the cost structure that is delivering the 34, 33% of income ratio for the next years. So that could be seen for some people that it's a disadvantage to compete in the market. But when you see that the combination of human and digital that Banorte has, and not only Banorte, but BBVA has the same, that gives us an edge when you see the balances that we open at the at the branches and the services that we provide on the overall. So when we launch a full value proposition for V-mail, that will be open for any customer on the banking side and also on the fintech side. And some of the clients of Anote could choose to go for that if they like to live only on digital, and that will be okay for us. But we will compete with every single one in the market for the clients. The only thing that we will not compete is on a product-driven basis. We will always compete in a relationship basis by providing all the services and needs that a client needs. We are not just on a product-driven plan. That hasn't worked for us in the past, and I don't think that that's the way forward for us. Thank you, Rafa.
Thank you very much. Thank you.
Now we take Renato Meloni from Autonomous. Please, Renato, go ahead.
Hi, everyone. Thanks for taking my questions here. So first, I would like you to give a bit more clarity on the balance sheet optimization that led to this bank name increase to 6.7%. Just trying to understand here if this is a sustainable level or this is going to revert back to lower levels going forward, especially because the loan yield or the name on the loans was still stable this quarter. And then just secondly, a quick question here on provisions. Just trying to understand the reduction in the commercial and corporate and government book. if there were some reversals there, or if it was just a change in the model that you mentioned, and trying to also gauge what's the normalized level here. Thank you.
Thank you, Renato. We will start for the second one, the provisions.
Yes, as one can see, if you take a look and you take a deep dive into our commercial lending business, you will see that What we have is that the commercial portfolio registered less dynamism versus the first half of 2024, passing the third quarter of 24. The portfolio rose 5% quarter-over-quarter and 16.2% year-over-year, driven by great dynamism in tourist areas such as Riviera Maya, Riviera Nayarita, Los Cabos. What you can see is that regarding provisions and increasing the commercial side of the loan book, we are not detecting a pattern either by a sectorial view or by a geographic view. So provisions are no sign of trade deterioration or asset quality deterioration in the commercial side of the business. If you take a look at the corporate side during the third quarter of 2024, we saw a mild slowdown versus the growth phase observed during the first half of 2024. The portfolio, the corporate loan portfolio grew 7.8% quarter-over-quarter and 23.6% year-over-year, driven by great demand in sectors such as real estate, financial sector, transportation, logistics, manufacturing, and in the other hand, we saw a slower pace in sectors such as oil and gas, as well as in infrastructure projects. So that's the loan dynamics in these two parts of the loan portfolio. And the asset quality, the corporate side, has been superb, has been excellent, and we remain very confident that in the commercial side and the corporate side, in the wholesale loan book, it's going to remain very predictable and stable. Thank you, doctor. Rafael, are we mentioning?
Yeah. As you know, Renato, the prediction for the guidance was below what the NIM is. So, I think a sustainable NIM, and one thing that is worth mentioning is that when you look at the NIMs on the portfolio, 57% of the portfolio now is at fixed rate. So that will more than compensate the reduction on the rates. That position of the book is what really cost us $2 billion last year, but that will get the benefit for the next five years. And the variable rate part of the book will be always moving as when the tier goes down, that variable rate part of the book will go down. But that's the advantage of Banorte. The variable rate part of the book, when the rates were going up, we were very asset sensitive on that part and was the one who was really delivering the push on the margin side. And let's say that the fixed rate part of the book was mostly neutral. Now the fixed rate part of the book is picking up on the margin side with 57% of the book in fixed rate. And the variable rate part of the book will follow the TA trend. But that's already been compensated on one to the other. Remember that the variable rate part of the book is 42% of the top of the book. So we feel very confident that 6.4 is a very, very steady margin for us on the coming years. Thank you, Rafa.
Great, thank you. It's clear. So the message is that the bank name will converge here to the guidance then?
Exactly. If you see maybe on the next two to three years, it will converge to the guidance because you will continue to see a pickup on the margin for the next year and for the end of this year. Great. Thank you. Thank you.
Thank you. Now we'll continue with Olavo Artuso from UBS. Olavo, please go ahead.
Yes. Thank you, Jose Marcos, Rafa. I have a question on BNAIL, but it's a kind of different approach. I just wanted to understand how relevant has been the launch of the money pockets or money boxes. I mean, at the current customer base, what is the percentage of clients that has invested into it? And if you could just also please give us the amount of pesos that has been already invested in pockets at BNEO, that would also be great. Then I'll go to my second question.
Remember that we haven't advertised any on that. So, basically, it's on the friends and family. So, the number that you still see is quite low. But what is good is that we have full activation on the bucket side, and we can really provide a client what they want. But you need to wait when we really do the big launch on the Veneo part to really understand it and answer the client. The number of clients right now is not relevant compared to the potential of the Veneo brand, honestly. That's what I can say.
Okay. So just a follow-up. When do you expect this to get in traction?
We are aiming to have the full value proposition in place in the first quarter of next year. And from then, we'll get the full traction because you will get the payroll, you will get the mortgages, you will get car loans, you will get mutual funds, you will get the credit cards, you will get the debit that is already the pockets, the funding. So you get a full, because Banote needs to compete on a relationship basis, not on a product building basis. And that has to happen on the first quarter next year.
Okay. That's great, Rafa. And also a follow-up question on this topic, but more broadly related to D-book, Dinero Mobile. Is there anything to share with us about the benefits of adopting that technology as a means of payment in Mexico, Rafa? Because I just want to understand, what are the bad thoughts on that? How many customers are transacting using Zemo? Any data on this regard would also be greatly appreciated.
The technology is good. I think it's a good technology. But we have a structural problem here that is the informality of the markets. So we need to move to a much more formalized market in order to have the advantage that Brazil has in PICs or things like that. So clients still are heavy on cash, even if the technology is pretty good. Honestly, it's pretty good. So I think the more benefits are given into the labor force, the more employment continues to grow. And benefits, you are moving much more into financial inclusion. even on the remittances side, we are playing a very hard game on remittances to really move the financial inclusion on remittances and build up accounts on that part of the market. But I think more on the regulatory side needs to happen, like let me just give you an example. Quite enough every single public service needs to be paid from an account. a digital account with no cost, but that will really allow those types of technologies to be quite useful for the client.
Okay. So the pop-up demo should be marginally created for the bank, right? Right. Okay. Well, thank you very much, Rafa. Thank you very much, Rafa. Thank you.
Now we'll go with Yuri Fernandez from Gacy Morgan. Thank you, Yuri for this.
I think you're already disconnected, so we can follow with Jorge Cury from Merlin Stanley. Jorge, please go ahead.
Jorge Cury Hi, everyone. Good morning, and thanks for taking my question. I wanted to ask about deposits. Your deposit growth rate decelerated a lot during the year. You started the year growing at 17%, 18%, and now this quarter, your deposits growth rate was 8% year-on-year. That's slower than your credit growth, which is 11%. I'm wondering if there is something to be read about competition for deposits from the digital banks. You know, Nubank, just looking at the CBM disclosure, Nubank has gone from $0 to $4 billion in deposits over the last 12 months, which is no longer a small number, right? I mean, that would be like equivalent to around 7% of your deposits. And then you also have, you know, many more competitors, Wallah, Jeeves, Applara, Plata, et cetera, et cetera. So what do you think explains the slowdown in deposits and just the absolute level of growth in deposits below your credit growth? And to what extent do you think that if these platforms continue to overpay for deposits for long, it'll start to change the competitive dynamics for deposits in the system? Thank you.
That's a good question, because here, deposits, deposits, deposits is the name of the game. We agree on that. And the rates are going down, and that's going to be good for for every battery, and the one is there compared with the other and the new competitors. I will ask Rafa to give you some numbers, please.
Okay. I think one number that you should be looking is and non-interest-bearing deposits that have been growing at 8% for the year. And we, based upon the dynamics that we see on that part, that is the top part to fund, you will see that by the end of the year, that number will be very close, very close to long-growth, the non-interest-bearing deposits. So that's the key issue for us to really see how powerful the service proposition that we delivered to the market could bring non-interest-bearing deposits that have to do a lot with payroll, service to the companies, and individuals. So that's what the big number is. The other big number is time deposits. Time deposits are growing 20% for the year. So when you add everything up, you can really fund the growth on the group based upon those. But the time deposit base, what is good about the time deposit base is not just the growth. It's that the time deposit base is converging to a much lower funding cost than we needed to put in place when rates were around 11.15. So if you ask me if there's pressure in the market for the new bank, for the wallah on that, Of course, it is for some of the people that like to take advantage of that. And usually what happens, and we can see that because you can see where the transfer money goes from Banorte to Nubank or to the others. That is basically money that moves, take advantage of the rate, and then come back to pay the services and loans that they have with the bank. That number is around 3 billion pesos. that compared to the other, to the big numbers that we have on the funding side, it's really a very, very small number. It's not that we are not very attentive to that, but what we have seen and we are very, very pleased is that the non-interest-bearing part of the booth is really growing at a very, very good pace. And you will see that the numbers of non-interest-bearing by the end
question.
Thank you, Rafa. If I can just squeeze one additional question. I thought this was going to come out earlier, but it hasn't. Since your last quarterly earnings, the big development in Mexico, obviously, is the judicial reform. Given how much banks in general rely on the courts for repossessing assets, executing guarantees, deal with labor and civil lawsuits that are normal in your world. To what extent this changes your ability to lend, your appetite to lend, the pricing, the provisions? How does this new judicial reform potentially impact the loan side of the business? Thank you.
Thank you. I will pass this to Gerardo Salazar, please.
Well, hello, Jorge. I will say that we've been working in very important contractual risk mitigants in order to deal with the effects of this constitutional reform of the judiciary system. We can protect our rights through contractual mitigants that minimize great risk If we look at several key ingredients, which I'm going to give you an example. The first ingredient is going to be collateralization and secure lending. We are more than ever looking for those great structures like asset-backed collaterals. The pledging of receivables is one example. Also, when there is the opportunity, we will work with cash collaterals. Also, the second main ingredient in dealing with the potential effects of this judiciary reform is to look for third-party guarantees in order to protect our sources of payment. I will add a third front in which we have been working, which are the modification of some covenants. like the financial covenants, negative pledges, and more information covenants to be closer than ever to our customers to see their performance, to see what arises, and to take proactive actions in an early manner. A fourth ingredient in which we consider we have some mitigants is a more intensive use of SPVs, special purpose vehicles, and using bankruptcy remote structures to see how can we deal with these issues. type of deterioration or potential deterioration, which we have not seen as of yet. But we are preparing for that kind of a scenario. We are intensifying the use of escrow accounts and also control agreements with dedicated escrow accounts and some deposit and control agreements in that regard. And also, we are using more than ever cross default clauses in order to deal with the potential impact of these. Another thing that our team is working in is trying to analyze and change, whenever it's possible, jurisdiction and arbitration clauses. that's going to become, and it is still very important. We have had some experience in the past regarding that front, but we will deal with it in that manner whenever it is possible. We know that in the commercial side and the corporate side of the business and the wholesale loan book, there is big possibilities to protect ourselves regarding these ingredients. And also, we have been looking for political risk mitigation, working hand in hand with local investors, local entities, and also the development banks whenever it is possible regarding any size of the loan book. That's the actions that we have been taking previously trying to foresee the effects of this judiciary reform, which obviously we are trying to protect our rights and also to make our customers feel comfortable in a reasonable manner because of these effects. Thank you. That's very clear. Thank you. Thank you, Jorge.
I will continue with Carlos Gomez-Lopez from HSBC. Carlos, please go ahead.
Can't hear you, Carlos.
Now you can hear me.
Thank you.
Okay, thank you so much. So I actually wanted to follow up on the judicial reform. And again, I understand the mitigants that you're going to introduce. And that's, of course, what you have to do. When do you expect that the changes in the judges and the structure of the courts will start to affect operationally what you do on a day-to-day basis? Is that something that you expect already in the beginning of next year, end of next year, 2025, etc.? ? And if I can follow up, totally unrelated, can you give us some more information about the RAPI joint venture, the Tarjetas del Futuro? Thank you.
Yes, first one is a good question because it's not going to be immediately. Our lawyers think that two or three years, so it's going to be a long way to walk and to see how we adapt to that. And the Rappi one, I will ask Paco Marta is right here with us. Hold on, Paco.
Thank you, Carlos. We keep working with Rappi in the joint venture. We have more than one million cards 75% of them active month over month. We already crossed the 5,000 million pesos on the portfolio. And as we mentioned in the previous call three months ago, we are now in black numbers reaching the The black numbers starting on April of this year. So the business is moving forward. The loans are well managed. The users are heavily using the card. We have more or less the same transactions per month in the credit card, in the rapid cards as we have in Banorte's cards. So in a nutshell, that's what's happening in the rapid card business.
do you see any potential cannibalization between VINEO and Rappi?
You know that only 6% of the customers that we have in RappiCard are also customers from Banorte, not only in credit card, in general, no? And, uh, You can see that RappiCat has 75, 76% of the customers below 36 years, and that number in Banorte is 30%. So we don't see really a cannibalization, but more than an additional credit card that people are using. You know that in Mexico it's frequently to have one, two, three, or more credit cards. So it's not that moving towards there. It's leading Banorte.
Thank you so much.
Thank you, Carlos.
Thank you.
Thank you. Now we'll continue with Andres Soto from Santander.
Perfect. Good morning to all. Thank you for the presentation. I have just a couple of questions. The first one is regarding cost of risk. You are improving a little bit. Your guidance for this year are based on a very positive performance that we have seen so far. It's interesting that this happens at the same time that you downgrade your GDP expectations. So I would like to understand, regarding your risk model, if GDP is not the key parameter that we should look at, or is it rather employment, as you mentioned before, and it will require for employment to deteriorate for you guys to need to make an adjustment to the risk model and for that to be reflected as additional provisions. And more broadly speaking, when I look at Banorte prior to 2018, cost of rates was about 2%. Now you're running at, let's say, 1.8, despite a significant shift in your loan mix. So I would like to understand what can we expect over the medium term, also considering, you know, this deteriorated Mexico growth outlook.
Thanks, Andres. The first one, the cost of risk, Dr. Salazar, is cheap.
All right. Thank you. Thank you, Marcos. I will say, first of all, that regarding the growth drivers of the loan book, at the same time that we are considering a lower GDP growth, we are also considering a lower interest rate. And that's very important for you to consider because that's the income effect and the substitution effect to take into consideration regarding the parameters that we have announced in this call. Also, I will try to complement some other growth drivers in which they are not only the macroeconomic drivers of growth for the loan book. Obviously, those drivers are very important. As Rafael Arana was saying, the unemployment rate is key for our models and also it is key trying to deliver some performance because our loan book is dependent on the economic growth, consumer confidence, and income levels. And the unemployment rate is going to be one very important indicator of that. But We have to add some other drivers which are more endogenous, which are under our control in order to provide growth of the loan book. I will say that there is a market and customer demand drivers will see loans at a lower price if the interest rates continue to go down. Also, we consider ourselves to have better products for the hyper-personalization Rafael Arana and Marcos was mentioning. And also, we have low-pricing drivers. We are willing to price our loans in low levels because we have the structure, and cost of risk is low, as you can see. And in order to do that, we have been transforming that key element in the Banorte strategy into a competitive advantage regarding our peers. Also, I would have to add that regarding growth of the loan book, you have to take into consideration the capital and risk management drivers that we possess. The capital strength of Banorte, in which we account for sufficient capital to support growth, is one key ingredient to support that growth. And also, our liquidity position makes funds available for loan disbursement. So we are in pace of trying to provide a healthy loan growth for the next years. Thank you so much.
And then also the medium-term cost of rates expectations.
Yeah, the cost of risk expectations for the medium term, I will say, Andres, will be between 1.8 to 2.2. That's going to be the range. We know that we are below that for the moment. 1.66 is the cost of risk as of now. But we were taking a very conservative view on the Potential behavior of this indicator, and we will move to consumer products. Yeah. Yeah.
So understood. So it will be similar to the pre-COVID level, but with a better loan mix, I would say.
That's correct. Yes. The retail book is going to be more important throughout the years. Right.
And finally, on expenses, do you guys have any, you know, when we started here, we had a very... positive expectations for the Mexican economy, a lot of investment coming up. And you guys also reflected that in terms of your expansion and growth, expense growth that you're forecasting. When you look at 2025, should we look in the expense growth, double-digit, high single-digit? What level will be reasonable for you guys next year?
Rafa?
I mean,
We will really push to single-digit expense growth. That's our goal, and we are doing everything in our hands to do that. What we're doing, basically integrating everything on the operational side, on the HR side, accounting side, all the backups, offices, functions are being integrated into one for the group. That is going to give us... a very reasonable reduction in expenses. And also, you have to consider that most of the big spending cycle about hiring the bankers, 1,200 bankers that we hire for the near-showing SME and commercial and corporate, now it's already in full production. So that also will increase the... the revenue side, and we don't need to add more costs on that base. VINEO and RAPI will continue to wait on that, so we have to lower the recurring base of the cost base that is now sitting at 7.3, and that's the one that we are working to do that, and not allow the entities VINEO and RAPI to increase the expense side. I think it's a long shot, but we are aiming to have a reduction to a single-digit expense growth next year. I know it's a long shot, but we are fully working on that.
Perfect. Thank you so much. So just to summarize, you are expecting some, I would say, some efficiency improvement next year, better margins, some deterioration in cost of risk. It will be hard to say that you will be targeting similar levels of ROE to this year, or it's too early to tell.
No, I think ROE will continue to be very close to the number that we have. I think our gold on the bank level is around 28. We are around at 31.1 right now. But I think 28 is what we are aiming to have on that part. Why? Because there's still a potential to manage the capital base on a much efficient way. Why we haven't done that? Because the world is not quiet. But if you go to a number that we have promised the market to be from 13 to 13.5, you will see an immediate jump on the return on equity with basically the same numbers that the bank produces on us today. So we have many levers, but we would like to keep sound capital base and still deliver very strong return on equity. And I think we have been able to do that in the past years.
Absolutely. That's very clear. Thank you so much.
Thank you.
Thank you. Now we'll go with Nicolás Rivas from Bank of America. Please, Nicolás, go ahead.
Thanks very much, Tania, Rafa, and Marcos for the chance to ask questions. So my question is on capital. So this quarter, at the end of September, you called the $600 million outstanding on the six and three quarters. So with that, Let's see, your CT1 is at 13.9%. So let's call it roughly 14% CT1. The message I get from your comments in this call is that you are not going to be accumulating more capital, more CT1. If anything, this number is going to be stable or really decline a bit. You pretty much don't have any tier two outstanding. I think there's less than $100 million outstanding on the 2031s. That's only, I think, 20 basis points of tier two capital. And then you have the 81s, but you just call the 603 quarters without a capital replacement. So, you know, capital requirements in Mexico are very high with TLEC implementation. So by the end of next year, you're going to need to have 17.9% total capital. And again, doing the math, roughly 14% CT1, which is going to be probably stable or going down. You have 500 basis points of 81, but you have another five PERPs. And again, you just call the 603 quarters without a capital replacement. So my question would be, if you are thinking of raising more tier two or 81, as you call the next purpose, again, to meet that very high capital requirement of 17.9% total capital by the end of next year. Thanks.
Nicolas, you have the big picture. You are totally right. And what else we can say? Yes, we're planning to raise more capital. The problem is the market. We don't need it, but it's good to have it. So we will be there and we will see how the market reacts. And if we see the window, yes, we will issue more T2 or whatever is good for the bank. And you have the whole picture, so you know what are we going to do.
So, Marcos, a follow-up there. Then in that case, in the past, you have shown a preference to raise 81 compared to Tier 2, despite theoretically a lower cost of issuing Tier 2. Is that necessarily going to be the case going forward, a preference to replace 81s with new 81 capital, as you call the 81s?
Yes, we prefer the 81s because for us it works better, and it's a matter of what's better for our balance sheet. So we prefer the 81s, yes.
Okay, thanks very much, Marcos.
Thank you.
Thank you. We'll continue with Tiago Batista from UBS. Tiago, please go ahead. Tiago, please unmute. Now we'll hear you. Go ahead, Tiago.
Yeah, guys. Thanks for the opportunity. I have a question on the government lending book. We saw a decline of almost 2% to the Q. The year destination is about 2%. So my question is, this recently weak performance of this portfolio was more a decision of the bank decide to be more conservative with the credit card for loan and lending or lower demand because of all the changes. And also try to understand how dilutive is this business for the ROE of the bank. We know that the cost of risk is probably close to zero, interest rates much smaller, but how dilutive is this business for the ROE of the bank?
yes we saw some prepayments last year remember that we're changing of cycle with the new president but it's a good business for us remember it's not it's only it's not only the the lending part we we work with the governments with a lot of pieces so for for us it's very important to to be with them and to uh and it's good for the country too so it's a win-win situation we want to be there you will see in this year that we will start to be on track again, and we see a lot of things to do. Rafa wants to say something here.
On the dilution side, there's no dilution for a very simple reason. The use of capital is very, very low for the government book, because remember that when we lend to the government entities, we set up on a trust, that we control the trust, so we get the funds coming from the federal budgeting to the trust. So as you can see, MPLs are zero, and the usage of capital is very low. Obviously, the margin is what is seen. The margin in these loans is thinner than on the margin on the corporate side, but the return on equity usually is higher than the corporate on the commercial side. So, as Marcos said, the advantage of the government book is the ancillary business that you receive from that relationship. So, no, there's no delusion on the ROE from the government book.
Thank you, Tiago.
We're almost over on time. We have two final questions. Please, we ask you to only present one question. We'll continue with Igor Pavan. Thiago, please unmute your microphone. Thiago?
Yeah, thank you. Hi, everyone. Hi, Igor. Hi. Can you hear me? Yes, perfectly. Yes. So thank you for the call and taking my question. Regarding cost of funding, we were expecting a continuous decrease. However, we saw a jump from 47.8 to 49.3. So I kindly would like to understand the main reasons that contributed for this and just confirm how you are seeing the evolution of design considering the Banchico cuts on police rates, please. Thank you, Igor.
Let's go, Rafa. Igor, we found this at the beginning of the call that you have a different pace on the CERES and on the TA. TA related to the asset side and CERES more related to the funding side. Remember that on the funding side, on the time deposit base, those get renewed on a 30, 40, 50, 90 days. So when you see a disconnect about the pace of how fast the set is going down compared to the tier, you have to wait for the renewal of the time deposits to get adjusted to the new rate. That's where you see a 49.8 jump, but you will see that that lag closes by the end of the year, that you should see those numbers very close to 47 something at the end of the year. And then the pace of the T and the Z will be much more aligned. That's the reason for that jump, not that the funding cost overall, because you saw a jump on the margin side on that part. That's the reason. Oh, okay. That's simply clear. Thank you. Thank you.
Now we'll have our last question for Edson Mugia from Sumacap. Please, Edson, go ahead.
Hi, good afternoon. Thank you for taking my questions. I know I have to go for one, and my question is to follow up on what Dr. Salazar said about the risk mitigation that you are doing or you will do for the following months, weeks, or years. Cash collateral, third-party guarantees, modification of covenants, increasing SBPs. How those... risk mitigation regarding on the judicial reform will affect the long-growth portfolio for the following quarters?
Dr. Salazar, go ahead, please. Sure. Thank you. Thank you, Edson. I will say that the growth dynamics have not been affected as of yet. That's the main reason that we are providing a range of growth of 10% to 12%. So these risk mitigants, providing that we are still seeing GDP growth, a tight labor market with a low unemployment rate, that makes us confident that looking forward, we will see growth happening with the same quality standards that we have provided as of now.
Okay. Well, thank you so much, and happy 125th year.
Thank you. The anniversary. Yes, that's right. Thank you very much.
With this we conclude our presentation. Thank you very much for the interest in Banorte.
Bye-bye.