Grupo Fin Banorte Ord

Good morning, everyone. This is Tomas Lozano, Head of Investor Relations, Corporate Development, Financial Planning, and ESG. Welcome to Grupo Financiero's Banorte first quarter earnings call for 2025. Our CEO, Marco Ramirez, will begin today's call by presenting the main results of the quarter and will address the redefinition and next steps of Banorte's digital strategy, as promised in our previous conference call back in January. He will also comment on the items proposed for voting at our upcoming annual shareholders' meetings. Then Rafael Arana, our COO, will go over the financial highlights of the group, providing details on the NIEM evolution, asset quality, capital allocation, as well as expenses for the quarter. 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, Tomas. Good morning, everyone. Thank you for joining our call. The first quarter of the year was driven by strong business dynamics and solid performance across subsidiaries, despite a complex economic environment. The uncertainty surrounding the new global trade order continues to pose additional headwinds for the country. Although Mexico has so far managed to contain the immediate risk of tariffs, the narrative of potential speculation in the United States and other countries has gained traction. Therefore, our economic analysis scheme has revised downwards GDP growth, estimated for the year to 0.5% to reflect a weaker business confidence translated into increasing challenges for investments and a more cautious consumer. In our view, that is targeting Mexico will remain sporadic and will lay the groundwork for an earlier than expected revision of the USMCA in the second half of 2025. Domestically, industrial activity and investment continue to face the strong headwinds, and private consumption, while showing initial signs of deceleration, remains resilient, supported by three key factors, continuity in remittance growth, social programs, and a still dynamic labor market. On the monetary front, inflation continues trending down, approaching Banxico's target. This evolution, along with a softer economic activity, has resulted in a 100 basis points reduction in the reference rate this year, and we anticipate a further 125 basis points cut to reach 7.75% by year-end. On the fiscal side, the government is expected to continue its efforts to strategy between the public and private sectors to drive infrastructure investment. Moreover, on the political front, President Claudia Sheinbaum announced the continuity of the Mexico Plan agenda, highlighting efforts to improve self-sufficiency in key industries such as the automotive, chemical, textile, and pharmaceutical. Finally, regarding the exchange rate, we estimate a range of 19.80 to 20.40 pesos per dollar for the year. I would like to stress that, despite this lower economic growth expectation, we are maintaining our guidance given the operating dynamics we are seeing as of today. If anything in our forecast changes, we will advise the market accordingly. Shifting gears to the business performance on the slide number 3. Net income for the quarter reached 15.3 billion pesos, increasing 11% sequentially and 8% year-over-year, supported by the sound performance of the banking business, reflecting an expanding loan portfolio and a shielded balance sheet that has neutralized its dependence to rate cycles and relies heavily in our business volume. Results were further benefited by a seasonal performance of the insurance company. ROE increased 185 basis points in the whereas ROA expanded 20 basis points, standing at 2.4%, driven by a diversified income generation. Analyzing results by subsidiary on slide number 4, the bank net income reached 11 billion pesos in the quarter, increasing 7% year-over-year driven by greater loan origination and expanding margins, net fees, and trading income. These results yielded an ROE for the bank of 28% for the first quarter of 2025, 182 basis points higher versus the first quarter of 2021. The insurance business expanded 123% sequentially a strong business activity and the positive effect of seasonal policy renewals of the quarter, offsetting an additional increase in the fee scheme paid to the bank for the operation of the back-assurance model. Annuities grew 2% year-over-year, driven by the business expansion despite a highly competitive market, and the pension fund increased 12% in the year, supported by higher yields in financial instruments and a larger base of assets under management. which upset lower regulatory fees. The brokerage sector grew 136% versus the first quarter of 2024 due to greater transactional and trading income. On slide number five, loan expansion performed above guidance, increasing 13% in the year and reported annual double-digit growth across most of the portfolios. respectively in the year, supported by working capital demands. These portfolios were further benefited by FX variations in the dollar book, which currently represents 16% of the total loan book. It is worth mentioning that our full-year guidance assumes a deceleration in our corporate lending as business sentiment is still fragile. Thus, we anticipate higher requirements for working capital and a more cautious approach Moreover, our government book rose 1% in the year, giving the base effect of government spending prior to the elections period last year. We feel comfortable with our current exposure to this portfolio, primarily focusing in developing comprehensive relationships to boost profitability. Turning to slide number six, consumer lending has played a resilient behavior, increasing 12% year over year, driven by some employment levels and labor conditions. our hyper-personalization business model. The mortgage portfolio grew 8% in the year, reflecting an improved time to market for loan origination, personalized offerings, and retention efforts to keep high-quality clients. Auto loans rose 28% in the year, giving a combination of existing commercial alliances and the overall business activity in the sector. We are currently negotiating additional commercial alliances to increase availability in the market. Regarding credit cards, the portfolio increased 19% year-over-year, driven mainly by greater activity from our high-value existing clients, especially as this product keeps gaining In addition, the evolution of this product has been supported by different promotional campaigns to incentivize revolving usage. We continue to monitor the adoption of our segment-driven offering, and we report the evolution as they gain traction. Finally, payroll loans grew 11% in the year, mainly due to the incorporation of new products that enable comprehensive relationships with our customers. On slide number seven, asset quality continues to evolve ahead of our expectations. remains stable at 0.9% in this quarter, and the cost of risk slightly increased to 1.8% due to the volume and mix of loan origination. This, on slide number 8, grew 2% year-over-year, driven by higher transaction volumes in the acquiring business and consumer products, supported by a still strong internal demand. On the other hand, higher origination through the external sales force weighted on pay fees in the period of setting the positive evolution of charged fees. In the quarter, net fees declined in line with the seasonal operation of the third quarter. Moving on to sustainability, I'm happy to share that during the quarter, we published two relevant reports for our investor community. Our 2024 Integrated Annual Report, in which we show progress and incorporate valuable feedback from our stakeholders, across environmental, social, and governance pillars. We also published our fourth climate risk and opportunities report, where we identified potential climate-related risks to our branch network and loan portfolio, confirming our commitment to transparent and timely disclosure for the financial world. Finally, as I committed to during our last earning call, I will address our updated digital strategy as well as comment on our annual share contest meeting that will take place later today, as you know. As you may recall, five years ago, we anticipated the big disruption coming into our industry. We were not certain about the best direction for Binance in this new era, and therefore we moved forward with three simultaneous pathways. First, we accelerated the digital transformation of Banorte, the traditional bank, enabling a bank in Minos with a hyper-personalized operation, leveraging the significant investment in technology and talent. Second, we signed a strategic alliance with Rapid that enabled a first-hand experience in the fintech industry, where we built a tool from scratch to serve a younger clientele based on analytics and data. And the third one, we created a full digital bank from zero with a state-of-the-art technology in models, data, and infrastructures. Let me be very clear. At that point in time, we were not sure about the solution, but we knew one thing. we needed to guarantee our success. Today, after years of testing and learning, the exploration phase is over. Now, I assure you that the best path for Banorte is to consolidate our efforts, leveraging the business scale and technological capabilities achieved through our digital journey, focusing on increasing profitability through our cross-selling potential and cost efficiencies powered by a hyper-personalized business model. Currently, we're focused on the execution of a comprehensive strategy that is founded on the learnings and tools acquired from each of the three ventures that we developed to increase our availability and ability for a sustainable competitive meeting, servicing a multi-segment and multi-demographic market. It was time to choose from the different harvests that we planted years ago and build a plan that consists of One, continue investing heavily in Banorte. Two, acquire 100% of the yen venture with Raffi. As announced last week, sign a long-term exclusive commercial agreement for distribution of Raffi's ecosystem. We have created a tool for credit cards that customers love, and it's a clear winner in that market. But we have reached the promotion. We need to use our scale and increase the value from cross-selling, but not test products to these customers. In other words, we are transforming the entity from a monoproduct into a multiproduct business to boost profitability. Three, integrate with news, learnings, and strategic components of this infrastructure, which we are confident will add value to this new consolidated strategy, while we analyze the possibility of selling the entity, knowing it has an important value in today's market. And four, launch a new digital proposition for younger individuals, focus on value proposition that prioritize functionality and ease of use, combining our acquired tools, products, and learnings. Finally, this robust strategy obviously will only consume a fraction of the cost, supporting our efforts to improve efficiency. Now, regarding our upcoming annual shareholders meeting, we are proposing the distribution of a cash dividend for 50% of the net profit of 2024, equivalent to $9.99 per share, and the constitution of a share-by-back fund for the same amount authorized last year of $32.3 billion for the following 12 months. Both proposals align with our focus on total return to our shareholders. With this, I conclude my remarks, and now Rafa will cover the main financial results of the group. Thank you, and please, Rafa, go ahead.

Okay. Thank you very much all for attending the call. I will now move to a more specific question concerning what just Marcos mentioned about The first one goes to how the net interest income and NII is working for the bank. NII, as you saw, is growing 4% on a year-to-year basis. What is important is the NII of the loans and deposits is growing 16%, 16% year-on-year basis based upon the strong growth that we have been having in the loan book and the continuous downward trend on the funding costs. Non-interest income, 99%, basically driven by the first quarter, very good results of the insurance company that compared to the last year really outperformed the results. Net fees, 2% year-on-year on a group basis. That's basically because when the incremental growth that we have had in the In the lending part, especially in the car loans and also in the mortgage part, it's aligning with a more broker fees that we have to pay for getting the business. So it's one-time investment and you get the results for the life of the loan. Premium income, very good results, 17% year-on-year. So it continues a pretty strong result from the initial business I mentioned before. Trading income, we have a very good quarter for the trading income. As you know, usually trading income, we are kind of flattish for the For that operation this year, based upon the positions that we hold and how we position ourselves and also the business that we do with clients, the trading income grew 104 on a year-to-year basis. So pretty good results on NII, on the loan side, NII on the insurance side, and also on the trading side. If we go now to the bank, the bank continues to perform with very good numbers. The name of the bank is 6.5. There were some concerns on the Why the mean dropped from 6.8 to 6.5? Basically, if you saw the growth in the asset group, the asset group grew basically 3.2% for the quarter. So it was a very strong growth for the quarter on the asset group. It's also that will be a company in the coming months because the funding costs will continue to go down. Now we are building again at a very good pace a portfolio on the loan book. Net fees for the bank, 9% year-on-year, and the NNI for the bank is 9% year-on-year. If you go at the margin numbers on a peso basis, On the PESA numbers, the margin is growing 9% also, so we are really having a pretty good resource on the margin. And also, we have to take in consideration that more and more, the fixed rate part of the group is playing an important role for sustaining the margins. So if we move now to the net interest income and sensitivity evolution, as you know, we have been also working for a long time to position the balance sheet in the way we use it today. That is basically... no issue concerning the effect of the downward trend for the rates. So the sensitivity right now is sitting at 93 per 100 basis points on that part. So the more the rates come down, it's a much better – position for the bank based upon the limits on the loan book and also the continuous downward trend on the funding cost, which has been a slow downward trend, but a continuous downward trend that will accelerate in the coming months. This is basically to a very active ALCO that many, many parts of the organization take part in this management of the ALCO with the Treasury leading that and also the risk thing. The portfolio continues to pretty sound, so that also on the dollar book, you see that we continue to see, have a much more careful view about the sensitivity of the dollar book, because we don't have a clear view exactly where the rates are going to be. When you look at the whole NII sensitivity, it's less than 0.1% for the book. If we go to more numbers of the bank, the ROA of the bank stays at 2.4. Basically, the net income of the bank continues to grow 7% on a year-to-year basis. The return on equity of the bank is sitting at 28%, 182 basis points, as Marcos mentioned before. So basically, the key metrics of the bank concerning the profitability and the management of the bank is in a good trend. And also, what is important to notice about these metrics is that are basically in a very strong activity that is basically facing the bank in the consumer side and also in part of the commercial side and on the SME side. There's also a graph that we also project about the managerial link to try to balance out the effect of the annuity's company. As you see, we are basically on a very steady basis. We know that we are controlling our margin pretty well. The evolution that we see for the coming months will also be, we think, a good story about this. On the cost of funds, you see a very kind of a small downward trick on them. on the graph that we are presenting to you. But if you see at the pace of growth of the non-interest, where the demand deposit on a year-to-year basis is growing 5%, considering there are still a lot of offers in the market that really pays higher for the funding, we haven't had no effect on that issue at all. Interest bearing demand deposit is growing 24%. So basically, we continue to see a very good activity at all the banks of the commercial, the corporate, the government, the retail, really providing the source of funds that we know. And one thing that is quite important is that The sticky deposit is 99% of the base. So I think Banot is in a very well position. It's evolving pretty sound on a downward trend on the funding cost, and that also will privilege the margin as we said before. Time deposits continue to be a good story, 13% on the retail side. So overall, the funding is growing at 10%. We really think that based upon the pace of the first three months that this trend will continue in the common quarters. If we now move to the asset quality, that I think has been a very solid story for the last five years. Trade provisions grew 5% for the quarter. Why? Because basically the loan book on the consumer side and part of the commercial and corporate outpaced the market. what we expected for the quarter. So, basically, the credit provisions are more good provisions that you have to put on the book on day one. So, the cost of risk is staying at 1.8, as Marcus mentioned, too. For this, if UX, tarjeta del futuro is 1.7. And the write-off ratio that I think is something that We consider a lot when we do manage the bank. It's a very steady line that we don't play around with write-offs and things in order to provide steady numbers on the NPS and cost of risk. Another good story is the expense line. The expense line, as you know, we don't load a lot of expenses in the full quarter. There were some concerns about some of our investors and analysts, but it was basically to prepare the bank for a downward trend on the expense line. The downward trend is providing us a cost-income ratio of 34.5. That is below what we expect for the year. Let me be very clear about this. We will continue to be very aggressive on the reduction on the cost side, but this number will have a slight pickup to be what we guide the market to be. Maybe we can continue to do, based upon now that we decide the issue about VINEO and Tarjeta del Futuro, that we have more opportunity to be close to this number by the end of the year. But we have to be very clear. So this is not what we expect at least for the end of the year. It would be a good number, but it's not going to be this number. And the graph that you see on the growth revenue and the expense revenue is a graph that Banote likes to see, and we will continue to see that graph based upon a good trend on the borrowing side and a very managerial base on the cost side. When we move to capital, and I think this will be coming some questions about capital. Capital, as you know, by the end of the year was below, but we basically managed to find around 13.5. It was very close to the 13.2. Now we are back again to the... to the 14.4 based upon the strong basically generation of capital for the group. So the capital base is still and continues to be a solid part of how do we manage the funds. There are always some concerns about why don't we lower more than quarter one. I think based upon what's going on in the world right now, it's a good position to be the number that we have on the portfolio right now. On the graph, you also can see that now on the TLAC basis, we fully comply with TLAC, 17.9. We are 22.9 on this part. So the liquidity ratio continues to be very strong around 183. So I think the solvency and liquidity of the of the bank and the organization continues to be something that we need to keep a very good care of that based upon everything that is going on. But at the same time, providing very strong profitability on the return that we do to the investors with a 28% at the bank and 22 or 23 at the group level. So solid capital foundation, solid liquidity, solid risk numbers, very good growth on the loan group, and very good trend on the funding costs. I will say that that will be. Marcos was very emphasized this at the beginning of the call. We are not changing the guidance, but in the GDP. Now the GDP, we see a GDP more on the range that around zero to to 0.7, that's where we think that the GDP will sit based upon our economist, our chief economist. So that's the only part of the guidance that we are moving. Some people are concerned that while we are not more conservative about the guidance, because we don't have at this point in time based upon the activity of the bank, the results of the bank, the penetration that we have in the market, and how we are delivering the products and services to our clients. But we continue to see pretty reasonable demand that we don't like to change the guidance at this point in time. Let me be very clear about one thing. We know that the market could be in a stress position for some months or maybe for a longer period of time. But Banote is fully prepared to take advantage of the market. I think we can offer products and services to our clients that not many banks can offer to our clients. So, that's the way we're going to compete, and that's the way we are competing, and the way we are delivering the numbers on the long run on the profitability side. So, with that, I close my remarks. Thank you very much.

Thank you. Now, we will move to our Q&A session. As always, we kindly ask you to present only your most relevant question. And we will be happy to take any questions anytime after the call. As you know, today we have our shareholders meeting. So besides taking only one question, we will possibly ask you to disconnect before and take questions later, anytime after the call. Questions will be ordered on a first come first serve basis. Please raise your hand on the platform and we will unmute you when your turn comes. Jose Luis and myself will be calling the name of the person that is next on the line. If there are any technical difficulties, please let us know by using the chat. Thank you. We're now ready to start the Q&A session. We'll start with Renato Meloni from Autonomous. Renato, please go ahead.

Hi, everyone. Thanks for taking my question here. So just looking at the revision for GDP growth at the same time that you didn't revise your loan growth, right? So it's a wide range that you have from 0% to 0.7% on GDP. So what's the GDP estimate that's embedded on the 8% lower end of your guidance, and what downside risks you see to that? Thank you.

Yeah, thank you.

This is Alejandro Padilla, chief economist. Well, first of all, let's see that Mexico's economy contracted by 0.6% in the fourth quarter of 2024, and we anticipate 0.4% decline in the first quarter of 2025. If this is confirmed, two consecutive quarters of decline would meet the definition some use for a technical recession. However, even under this scenario, our full year growth forecast for 2025 remains positive at 0.5%. And this is because we continue to see, on a sectoral basis, more resilient private consumption, taking into account that private consumption accounts for two-thirds of total GDP. By sectors, the main risks are concentrated, obviously, in investment and exports, both highly exposed to global conditions and political uncertainty, particularly stemming from President Trump. Private consumption has shown some resilience, as I mentioned before, though early signs of slowdown are emerging, especially among middle and lower income households. And this is important because when you see the loan book, you can note that on a sectoral basis and on a regional basis, the exposure of Banorte is located in areas of the have been portraying a more resilient performance. And that's why you see these numbers. On the other side, services remain the most solid component of the economy, like tourism, for example, and some goods like automobiles have performed surprisingly well. Just to put an example, auto sales in Mexico in the first quarter of 2025 increased 3.3% on an annual basis, and this is suggesting that there are some pockets of strength that may help cushion the broader slowing of the economy.

Thank you, Alex. Alex, you also asked about the rationale about, Renato, you also asked about the rationale about why we are holding up the guidance of the loan book. Correct, yeah. Before. We continue to see very strong demand, but we are not weakening in any way the onboarding risk profiles that we have, the FICO scores in any way. But the fact is that the more we evolve on the digital evolution, our processes are much more convenient for clients. we are really taking market from other participants in the banking sector. So it's not that the market is going to disappear. The market is going to shrink, but I think we will get some of the best parts of that market. That's why we are still holding the guidance for the 8% to 10% loan growth. That's clear. Thank you. Thank you very much.

We'll now go with Tito Labarta from Goldman Sachs. Go ahead, Tito.

Hi. Good morning. Thanks for the call and taking my question. A little bit of a follow-up to Renato's question on the guidance, but more taking a more optimistic view because, I mean, you already saw a slowdown in 4Q and 1Q, as you mentioned. You're still growing the loan book 13%. You're still not seeing any asset quality issues. could there be upside risk to the guidance? I don't know if it's loan growth or NIM or maybe cost of risk. And I know it's so early in the year, but where could upside risk come from? I mean, if there's less uncertainty about tariffs, I mean, I know there's been a lot of noise about that, but maybe they don't really materialize in the way that is expected currently. Or, you know, Given, as you mentioned, private consumption is still very resilient in Mexico, could there be some upside risks somewhere in the guidance, or what would you need to see to maybe get more comfortable on the outlook for Mexico and for the bank?

Thank you. Thank you, Tito. This is Gerardo Salazar, Chief Risk and Credit Officer. Tito, as you are mentioning, Banorte up to now has experienced long growth with high trade quality and low non-performing loans ratio, despite elevated uncertainty from carries or trade tensions. There are six reasons in order to maintain our expectations regarding the trade outlook for Banorte. The first one is We are practicing rigorous risk-based lending approach. We are in the game of selective lending. We're focusing on resilient sectors that are less exposed to global supply chain disruptions. We also are doing granular risk accommodation, sector risk scoring, factoring in sensitivity to tariffs and supply chain exposure to avoid vulnerable borrowers. The second reason is that we maintain strong credit on the writing and monitoring that is typed on the writing standards, early warning systems, and regular stress testing. Up to now, it is a blessing to have a very well-capitalized partnership. The third reason is for portfolio diversification. Banorte performs sectoral diversification, geographical focus, and also client mix in the wholesale part of the lending book. The fourth reason is strong client relationships and advisory. This is very important in the wholesale market that we attend to. The fifth reason is to focus on creditworthy segments with high-quality forward targeting and data-driven credit scoring, all making an emphasis in the consumer rulebook. And the last reason I can provide to you, Tito, is that we are still practicing prudent growth strategy. That is disciplined growth over aggressive lending, the result of market share gains as As Rafa was telling you, we are in the game of gaining market share and growing above the system's average or above some of our peers. And also, we are focusing on relationship lending, expanding with existing clients, that have proven creditworthiness. So we are still maintaining our prudent approach to loan granting and also for the management of the credit process end-to-end.

And just to say, when do we see the need to change the guidance, you know, the upside risk? I think if you look at all the reports from the U.S. banks and from all the European banks that say you have to wait for the 90 days, I think that we will have a very clear view about how the bull continues to perform on the growth side around maybe August, that for sure we can have a lot more information to change the guidance. Right now, we're sticking with the guidance, but as you mentioned, the bank is extremely active, and we are penetrating pretty well the market as we speak.

As we said, in our forecast changes, we'll advise the market accordingly.

That's very helpful, Carlo. Thank you for that, and congrats on the results.

Thank you, Tito. Now we'll continue with Brian Flores from Citi.

Brian, please go ahead. Hi, Tim. Thank you for the opportunity. I wanted to understand better the NIM dynamics that we are seeing. You mentioned in the report you basically decreased the NIM on lower repo income, some effects due to FX and inflation. I just wanted to understand, could you elaborate a bit on how recurring these effects could be going forward? Thank you.

I mean, as you see, the currency right now is sitting at 1960. That, I think, is too low. That has an effect, obviously, on the corporate book, that we have a portion of the corporate book linked to the dollar book. That's one thing. The other thing about the repo, this year, last quarter, we took advantage. And we break a little bit our discipline about that, but we will go back to that part. So there will be no issue on that part. And I would say that the margin, if you look at the margin and really the composition of the margin, and you see the growth on the asset book, that was the key part, the 3.2% growth on the asset book, that was the case that really – a little bit of a margin that it will be delivered, the margin in the coming quarters. So honestly, we don't see any issue on the margin side that is really related to any weakness or anything on the loan portfolio, on the funding cost, that is a trend that we will decrease the margin over the coming months. I think, honestly, it's a pretty good story for us. that the asset side grew 3.2%, and we have a reduction on the margin on that part. And another portion was the FX, and the other portion was basically, as I mentioned to you, that we overshoot a little bit on the position that we have on the trading. But all of those things are not structural to our margin numbers.

So very clear, Rafa. Thank you. Thank you.

Thank you. Bye. We'll now go with Thiago Batista from UBS. Go ahead.

Yeah. Hi, guys. Congratulations for the results. I have a follow-up on José Marcos' comment in the beginning about the digital strategy of Banorte. If I'm not wrong, Banorte has now two or maybe three digital brands. Maybe I can call Tarjeta de Futuro, Bineo, and maybe Banorte Mobile. After the acquisition of Tarreta, are you expecting to consolidate all the brands in just one app? This is the first question. The second one, when you look for your digital strategy, who are your main competitors right now? Do you see Vancomer, Vanamax, et cetera, or the newcomers like Nu, Mercado Pago, Wallah? So who are you guys competing in your digital side?

Good question. We are competing with BBVA mostly. He's the one that has a scale, and as you know, we have in Mexico the Net Promoting Score, the NPS, and we are competing always against these guys. So that's the main competitor, and it's a good one. And regarding the apps, we are not app of Banorte because we want to have some margin to see what's going in the market and to see if we need to calibrate something and to have more products for our clients. So we will say that we will keep everything in Banorte, but we will be very versatile. I don't know what to say, how we manage our apps, you know. The idea is to concentrate everything in this highway and from here to see all the customers and to see what they need and approach them. No, it is either the way back. We are not proposing. The clients are proposing to us what they want, and we will deliver to them. That's the idea.

Okay, very clear. Thanks.

Thank you. Now we'll continue with Yuri Fernandez from JP Morgan. Yuri, please go ahead. Yuri.

Thank you very much, and also congrats on the results. Just one question here on the trading gains. If you can comment a little bit on this, like how sustainable are those gains, any kind of, I don't know, overview in this line. Thank you very much.

Very important because the rates, as you know, we were positioned that the rates would go down, and they went down. So everything is there already, and maybe we have more trading with our customers and with clients. But talking about our positions, we harvest the positions. So that's why it was so big a challenge. So instead of going through the whole year, the market decided to go in the one quarter, no? And that's it. And now we start from zero in our positions, and maybe in the future we will see more, but not in the same amount.

To give you some color, Yuri, as you know, the trading income, as Marco mentioned, was around $2.1 billion this quarter. And as you know, it's not an official guidance, but the recurring level should be between $0.8 and $1.2 billion, so lower than this.

Super clear. And I guess this is somewhat – I don't want to say a hedge, but part of your knee pressure that you discussed in the previous questions was somewhat upset by these trading gains, right? Thinking together makes some sense, right? Thank you very much. Thank you.

The next question is from Ernesto Gavilondo from Bank of America. Go ahead, Ernesto.

Thank you. Hi, good morning, Marcos and Rafa. I'm sorry about my voice. My question is on expenses. So we know this OPEX came at the double-digit growth. However, considering potential economic recession, impacting potentially loan and NII growth, wouldn't it be reasonable to expect softer OPEX growth? And then just a quick question on Banamex because all of the investors are always asking about it. Banorte became the second, third largest bank in Mexico through acquisitions. So if you acquire Banamex, I believe Banorte will be close to the size of BBVA in the retail side. So I wanted to ask you, would you be interested to take a look into Banamex if the government allows to do cost synergies?

Let me start by the second one. We have been saying the same karma, you know. Our duty is to see whatever is on the market and analyze it. And then our board will decide and you guys, the owners of the top, will decide in the assembly. So we see everything that is moving here, and there is a lot of moving pieces all the day. So we will watch closely what's going on and propose, and that's it. That's our duty, no? And the first one is about the expenses and the OPEX.

On the expense line, as we mentioned, we from a lot on the fourth quarter. Now we see a much more balance on the first quarter, and that gives us a cost income of 34.5%. One key issue that has to be considered is that now that we are integrated, the operation of INNEO and Tarjeta del Futuro inside Banorte, that also will allow us to continue to cut expenses in a very important way. And also, we will not stop the investment in technology. I mean, the good thing about investment in technology is that it's becoming more and more on a specific issues and not to build up a very, very strong technology shop. Now we are really looking for the accelerators on the analytics, the accelerator of artificial intelligence on that. Those are not cheap also, but are not the same amount of money when you are building the whole infrastructure of the bank. So I think you will continue to see Not as aggressive on the first quarter, but a continuous trend on the lowering of expenses through the year. That will consolidate, and let me be very clear, at the end of the year. That was most of the action that we are taking now will really crystallize at the end on the fourth quarter. That's when you will see a big drop on the expense line.

Look at them annually, not monthly. For the year should be between 9 and 10.5 expansion. Perfect.

Thank you very much, Marcus and Rafa. Thank you.

Get well.

Thank you.

The next question is from Ricardo from BTG. Go ahead, Ricardo.

Hi, everyone, and thank you for the opportunity of making questions. Also about the digital strategy going forward, Can you please give more color on how GNAIL fits in this plan? You mentioned you could eventually spin off the operation while transferring some part of the technology to Banorchi and integrating, if I'm not mistaken. But how challenging is it to do that given Banorchi potential legacy systems, right? How can you everything is relatively ready for you to transfer this technology or there is still some some investments you need to do in order to both technologies of pitch banks to run well together. Thank you.

More than the technology, I think it's the experience. We know now the market. We know what's going on. Everybody can get the technology, but not the experience.

Yeah, I think what Marco mentioned is key. I mean, we are basically moving Veneo based upon, we tested a lot of technologies on Veneo, the latest technology on the digital, on the cloud, on the digital, on everything. And when people think about Banorte, they think like a very legacy bank that is really tied up to all their legacy. We have been delivering the legacy system for Banorte for the last six years. So the issue that we are moving the nail here is that Banorte really is now fully functional on digital in anything that you want. It has to do with cloud, anything that goes on the cloud, on the analytics piece, how fast we can go into micro components, in containers, in everything. So Anorti is really a state of the art shop on the technology side. The legacy system is basically now Basically, doing the posting of the transaction, but all the functionality has been the layering and many, many different layers up to the client needs. So, no, when people think about that Panorte is really the whole legacy, no, no, no. That's why we are integrating Banorte Veneo into here, because when Banorte says that we are a banking maintenance and the digital application that Banorte has has been rewarded as the best digital application in the market, it's because really Banorte has really outpaced the market, and not just the Mexican market, in many ways about analytics, technology, and how do we now develop the solutions to the client in a very, very, I would say, not as fast as we would like to be, but much faster than we used to be. Very clear. Thank you.

Thank you. Now we'll continue with Carlos Gomez-Lopez from HSBC. Carlos, please go ahead.

Hello. Thank you for taking my question. And again, congratulations on the results. A question on the margin. Last year, arguably, you hedged perhaps even too much. You left money on the table. This year, those hedges are working very well. As you said, you were able to reap the rewards in one quarter of something that you expected to accrue over the next year. How does it look into 2026 and beyond? Because The expectation that you have an interest rate is now lower than it was a quarter ago. You haven't disclosed here, but I imagine that you have what you expect in 2026, 2027. At some point, the hedges that you have today will have to run out. So what would be the sustainable level of margin? Perhaps you want to keep it without annuities. You have 6.0 now. Where should we expect it to be in 2026, 2027? Thank you.

The ALCO is not working for 2025. As you can see, the rates that we're giving to the market is for several years. We're not worried about 2026, but you are right. Someday the world will keep those. In 2029, I don't know.

What's the duration of the ALCO? What's the average duration of your hedge?

It's four years. Four and a half. Four and a half, okay. Yes, . Yes, yes. Thank you, Marcus. I will add that the ALCO work is very dynamic, and we base our work in four main pillars. One is to also explain and forecast immunization to duration and repricing matching. The second pillar is about emphasizing proactive liability management, which is or has been very important in the deposit side in our liabilities. The third pillar is to highlight dynamic asset pricing and portfolio mix strategy. That has worked very well in our loan book. in the consumer side of the loan book and partially in the wholesale side also that makes a very good contribution to that. The fourth pillar is using hedging and derivatives strategies whenever there is needed. That's more of a tactical approach. It's not part of the strategy. But I will say overall, Carlos, that our balance sheet is designed to preserve earnings across rate cycles. by optimizing the mix of fixed and variable instruments, also managing liability repricing lags, and selectively using hedging instruments. We have insulated, to a big part, our mean from the impact of falling reference rates, demonstrating strong interest rate risk management and pricing discipline. And that's the everyday playbook in the outcome.

If I may add, Carlos, just what Gerardo and Marcos mentioned, I think Gerardo explained it and Marcos pretty well, is that if you look at the mix, how much money you are getting from the volume of the loan book and how much money you are getting on the margin side from really the effect of the rates, More and more is based upon the volume side. So, what I can say to you is that Valnorte used to be, years ago, very dependent on the rates. If rates were going up, the margins were going up. Now, if rates go down, based upon everything that Gerardo was mentioning, and based upon the mix that we have on the balance sheet, Banote is really now dependent on itself to keep on the growth on the group side and really stabilizes with a very steady funding cost the results that you see on the margin. So if you – and I will maybe get burned because of this, but our goal is to keep the margin from 6.2 to 6.4 through the cycles. That's what we would like to have.

This is our target.

Yeah, this – yeah.

Okay, thank you for taking the risk of giving the forecast. And if I can ask, I have noticed that your dollar book has increased considerably, now 16% of total loans. Should it increase any further, or has it reached the limit?

Part of it is that the dollar increased, and that's when you see the proportionate changes, and now it's bigger, no? Now that it went down, it will go down. Part of it is that, no? Another part is that, yes, the clients are, they need that asset, and we are providing them. We don't ask them. They just ask for us.

Thank you.

We'll now go with Andres Soto from Santander. Go ahead, Andres.

Good morning to all, and thank you for taking my question. Regarding your GDP expectations, not only for this year, but if you look ahead over the next few years and what you expect for Mexico, I'm a little bit puzzled by your expectations for cost of risk. If I remember from the 2015 to 2019 period, your cost of risk used to be at around 2.2%. So it's hard for me to reconcile how you can achieve between 1.8% and 2% in a significantly deteriorated macro environment. I understand the asset quality is pretty solid, but at some point you will need to update your model to reflect that you are originating loss in a not so supportive macro environment. So I would like to understand what are the key factors that you will take into account when and if you need to revisit your risk provisioning model.

Thank you. I will ask Alex and Gerardo to go ahead with the question. Alex, please. Thank you, Marcos.

Thank you, Andres. Just to put a bit of context on our expectations on GDP beyond 2025. In 2026, we're expecting 2% growth. And this is explained by three main things. The first one has to do with any type of recovery that we might see, especially the effect of declining interest rates, and also that the government will not continue the consolidation process of the fiscal accounts that we are observing in 2025. The second one is that in 2026, we expect that there will be more visibility of what's going to happen with the trade deal with the U.S. And I think it is important to take into account that even though we have rest of tariffs right now in Mexico, in relative terms, Mexico is better positioned than other countries. And I think it's also relevant to take into account that our baseline scenario that we outlined since President Trump won the election last November remains unchanged. We anticipate that the tariffs were going to be intermittent. but that ahead there was a big chance that the revision of the USMCA will be forward to the second half of 2025. So this will give a boost of confidence to enterprises or firms. to continue their investment strategies once we have the agreement in 2026. So that's the second thing. And the third one is that we are accounting for something between 20 to 30 basis points on GDP based on the World Cup, the effect of consumption given that this event, even though we will not have the largest amount of GDP, games or matches in Mexico, well, this will boost also tourism in 2026. So that's the explanation behind our expectation for 2026.

Yes, and regarding the loan book and the behavior about Travis, there are seven main factors that give us some optimism regarding what we are conveying to you as of now. But let me start with one very special tenet. There is no trade-off in Banorte between market share and risk-taking. And that's very important for you to understand, because we will never exchange market risk in order to grow our roadbook. And that's what we will see as a starting point. The seven main factors, Andres, that... give us this stance. This stance is that one, we have a deep understanding of credit behavior and segments. We do segmentation by credit product, but mainly by customer profile, which is very important for hyper-personalization. The second factor is that we do data quality and enrichment. We are constantly occupied on cleaning and being consistent with the data completeness in our models in the retail side of the book. The third factor is model sophistication with explainability. We do use some advanced techniques, but we keep always in mind that we have to explain and also make predictable results. The fourth factor is robust validation and backtesting. We use champion-challenger testing all the time and also backtesting across trade cycles. The fifth factor is dynamic and granular risk calibration. That is dynamic scoreboards and granular predictive default and loss-given default models. The sixth factor is macroeconomic sensitivity and scenario adjustments. That's the thing you were talking about, GDP expectations, but just this is one of seven factors. And the last factor is portfolio monitoring and feedback loops. That's that keeps learning all the time. I will see this as a base in order to have those expectations that Marcos was telling you about and Rafael has just mentioned.

Thank you very much, Gerardo. And those micro variables, is there any particular one that we need to pay attention to for when you will need to do model updates?

Well, the risk factor is risk and Trump risk, but we are constantly making scenarios and changing parameters. in order to adjust our models in case it is necessary. We don't have a central scenario in which we are providing Trump's behavior. We're not trying to predict Trump's behavior. And given our strong balance sheet, we are very confident that we can withstand any type of crisis being COVID-like, being tequila-like, and being 2008 crisis-like. that will cost us in our capital and deficit ratio no more than 80 to 100 basis points. And those are the kinds of scenario analysis that we have done and gives us the confidence to go forward and not to get afraid without putting risk-taking on the line. We call it internally the tariff volatility. Yes.

Perfect. Thank you again, and congratulations on the results.

Thank you. Now we'll continue with Edson Murguia from Sumacap. Edson, please go ahead.

Hi. Good afternoon. Thank you for taking my question. I follow up on the digital strategy. My first question regarding this is what did you learn from starting a new bank? I know that you, Marcos, explained that you are, right now it's part of the execution. So what do you learn, what would happen with the clients at Vineo? And my second question is, with these acquisitions, or the 50% of Tarjeta del Futuro, this multi-product channel at Rappi, it means that you are using the infrastructure that you built from Vineo? What is the strategy between interconnection between the three pillars that you mentioned in your remarks?

You're not going to like what I'm going to say to you, but you're asking me to deliver the whole strategy of how we're going to compete, so I cannot do that. Let's wait until we really see how do we deliver the strategy into the market, no? We learned a lot of things from Bineo. We learned a lot of things from TVFA, but it was those implemented in there when we go into the market with the offer that we like to deliver into the place. Thank you.

Just a quick follow-up. Regarding on the expenses or the cost of Bineo, looking ahead for the end of 2025, it means that it's going to be a lower number if we compare quarter to quarter?

You will see that going through the year, as we continue to do the efficiencies and integrating the technologies and all things, and how we rationalize all the infrastructure, you will see those flowing through the year, not on a specific month or day for the year. But you will see all this happening in this year.

Okay. Crystal, thank you so much, and congrats on the results. Thank you.

We'll now go with Pablo Ordóñez from GBM.

Yes. Hi, . Congratulations on your results. My question is regarding your funding and deposit dynamics. As you showed in your presentation, your cost of deposits has been rising at around 40% of . And now with interest rates coming down and apparently less competition and but are also reducing the interest rates that they offer, did you see a scenario in which the cost of funds could improve further in the coming quarters? Thank you.

Yes, we see. Rafa, please go ahead. No, yes, as you can see, the You have to take into account that Banorte has a sensible portion of the funding side on the demand deposits without interest and some demand deposits with interest, but also on the time deposit part. Those time deposits basically go 30, 60, or 90 days. Some go all the way to 120. So you have to see those repricing flowing through the funding costs. So, yes, you will continue to see a pretty good evolution on the funding costs. as we speak on the coming months. I think by, I would say by the month of July or August, July, you will see an accelerating trend, one that the compound effect of those lowering rates taking to full effect on the whole funding base, especially on the time deposit base.

Thanks.

That's very helpful. And if I may, a second question on your net fees. Can you comment on what should we expect ahead? Net fees are going only 2% year-over-year, but core banking fees continue to grow strongly at 11%. So what should we expect for the year in this revenue line?

I think what you should expect for the year on the fee side is basically to go above the loan book. I think a number to be expected around 12 to 14 will be a very reasonable number for the fee side. Remember that on fees, we are very active on the car loans and on the mortgage side. that you also have to pay fees for that. That would be some effect on that, but would be compensated by the volume that we are getting from those two products.

Perfect.

That's very helpful.

Thank you very much for your interest in Banorte. With this, we conclude our call. Thank you very much.

Thank you.