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.