Good morning, everyone. This is Tania Martínez, Head of Investor Relations. Welcome to Grupo Financiero Banorte's third quarter earnings call for 2026. Our CEO, Marcos Ramírez, will begin today's call by presenting the main results of the quarter and the nine months of the year, highlighting the structural strength of the core business, positive trends across credit portfolio and profitability metrics, and the evolution of the main macro indicators. Rafael Arana, Chief Operating Officer, and Tomás Lozano, Chief Financial Officer, will go over the financial highlights of the group and capital allocation for the remainder of the year. Please note that today's presentation may include forward-looking statements that are subject to risks 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, Tania. Good morning, everyone, and thank you for joining us today. Let me start by saying that this has been a year with a lot of moving pieces, but our core business remains strong. We continue to see sound performance throughout the group, with healthy margins, loan growth picking up across all segments, and asset quality evolving in line with our expectations. Overall, strong operation performance has translated into solid profitability, reinforcing our confidence in delivering on our commitments to the market as we move through the last part of the year. On the macro front, the Mexican economy has shown gradual signs of recovery despite a challenging global environment. We have revised upwards our 2026 GDP growth forecast to 1.9% and expect growth between 1.6% and 2% in 2027, supported by exports, improving economic and trade visibility, and gradual recovery in consumption and investment.
The evolution of Plan México and the rollout of guidelines for the new infrastructure projects, particularly in the energy sector, could provide further support for economic activity, with early opportunities already beginning to emerge and potentially translating into higher investment over time. Regarding monetary policy, given current inflation trends, we anticipate the central bank to keep the reference rate at 6.5% for the remainder of 2026. Moving into 2027, persistent inflationary pressures and the path of the U.S. rates could lead to some tightening, potentially bringing the rate to 7% by year-end. On the fiscal side, we expect the government to maintain its consolidation efforts, helping Mexico preserve its investment-grade credit rating. Moreover, the trade outlook between Mexico and the United States remains constructive.
Ongoing discussions regarding Section 232 tariffs on certain industries point to continued bilateral cooperation, while broader topics such as rules of origin, labor provisions, and other technical aspects will likely to be addressed in 2027. The USMCA review remains an important focus, and continued dialogue will support deepened integration across North America value chains. Looking further ahead, the evolution of the U.S.-Mexico relationship, Mexico 2027 midterm elections, and effective execution of policies aimed of strengthening investment, productivity, and competitiveness will be key to consolidate Mexico economic recovery and sustain medium-term growth prospects. Finally, before turning to our results, I would like to briefly comment on the Digital Economy Law, which was recently approved by the Congress. Our initial assessment is constructive, as the initiative has the potential to advance financial inclusion, support formalization, and accelerate the digitalization of the economy, while enhancing transparency and broadening access to financial services.
Its long-term impact will depend on effective implementation and adequate infrastructure. We believe it has the potential to generate new opportunities for the financial ecosystem. Starting off with results on slide three. Our core business continues to reflect a structural strength and the resilience of our operating model. Margins remain steady, supported by a contained funding cost, accelerating lending volumes, and a favorable portfolio mix. Although the Group NIM continues to face headwinds from inflation index securities in the annuities business, the strong fee generation and continued expansion of the loan book support revenue growth, driven by sustained internal demand, assertive market fit, and the continued deployment of the hyper-personalization strategy. Notably, our loan origination maintains a steady asset quality, with NPLs at 1.4%. Cost of risk remains within the full-year guidance and continues to incorporate additional reserves from the commercial credit event recorded a year ago.
On capital, organic generation remained strong, bringing our capital adequacy ratio to 22.5%. We are managing CET1 around the 13% target while maintaining flexibility to support business expansion. I will come back to capital allocation later in my remarks. Moving to slide four, net income for the quarter reached MXN 15.7 billion, up 1% sequentially and 9% year-over-year with accumulated figures, amounting to MXN 47 billion. Results were driven by higher revenue across subsidiaries, stronger lending activity at the bank, and disciplined management of cost of funds and expenses, offsetting higher provisions associated mainly with loan origination and lower market-related income. Profitability continued to reflect business performance, with ROE for the quarter of 24.5% and accumulated ROE reaching 24.7%, up 235 basis points year-over-year. ROA stood at 2.3% as of the first nine months, increasing six basis points in the same period.
Analyzing results by subsidiary, in slide five, Banorte's net income for the quarter reached MXN 12.3 billion, relatively flat sequentially, and amounted to over MXN 36 billion with accumulated figures, up 7% year-over-year. Results reflected an improving lending mix, consistent low-cost deposit attraction, and strategic management of the funding mix. ROE remained at attractive levels, reaching 31.1% for the quarter and 31.2% with accumulated figures, up 286 basis points year-over-year. Accumulated return on tangible equity stood at 34.6%. Insurance net income increased 2% sequentially, supported by a better performance in financial products, while premium origination normalized from the high levels of the previous quarter. With accumulated figures, the decline mainly reflects change in VAT accreditations and higher bank insurance fees, which offset increased premium volumes across the business. Annuities expanded by 72% in the quarter and 31% on accumulated basis, as business growth more than compensated for higher claims.
Pension funds continued to perform well, with a larger base of assets under management supporting revenues, along with controlled expenses. Despite negative mark-to-market effects during the quarter, accumulated net income grew 11% year-over-year. Lastly, the brokerage sector accumulated decline mainly reflected lower market valuation in the securities portfolio, despite higher transaction fees. Moving to slide six, stage 1 and 2 loans reported double-digit growth of 11% versus the third quarter of 2025, in line with the upper end of our guidance. Commercial and corporate books have gained traction, growing 13% and 11% respectively, as we start to see a gradual recovery in investment across key sectors, including infrastructure, energy, tourism, and industrial parks.
In the quarter, wholesale banking balances also reflect the positive impact of the FX in our dollar-denominated book, which currently represents 14.6% of the total portfolio, recovering most of the decline related to the dollar weakening throughout the year. Government lending increased 14% year-over-year, supported by higher activity at the federal level, despite some prepayments and amortizations from the states and municipalities. Some financial opportunities around Plan México are starting to emerge, potentially enabling a dynamic environment for greater origination in this segment. Moving to slide number seven, consumer lending grew 9% year-over-year. We continue to make better use of our data and technology to deliver more relevant offers to our customers, supporting greater cross-selling and deeper penetration across our client base. Auto loans stand out, growing 23% year-over-year, as our partnerships with leading brands, scale of our sales teams, and hyper-personalized offerings continue to support origination.
Credit cards grew 10% year-over-year, supported by effective commercial campaigns, targeted promotions, and the value of our rewards and loyalty programs for our existing customers. Payroll loans were up 11% versus the third quarter of last year, supported by stronger value propositions that combines relevant benefits with better customer experience, giving our clients the flexibility to engage with us digitally or throughout our branch network. Finally, mortgages grew 6% in the same period, as we continue to make progress in our origination process and customer journey. The service and process adjustments we have implemented are gradually gaining traction, supporting a better trend in the portfolio. On slide number eight, asset quality remained healthy, with NPL ratio improving sequentially to 1.4% and cost of risk for the quarter at 2.3%. As discussed earlier, this reflects the loan growth dynamics of the period, while underlying credit trends remain consistent with our expectations.
That said, we expect the risk indicators to close the year within our guidance. Slide number nine shows continued growth in net fees, up 14% year-over-year and 15% with accumulated figures. This was supported by higher transaction volumes across our channels and products, increased lending and mutual fund activity, and a stronger transactional comprehensive platform. Mobile financial transactions also expanded 20%, supported by a scalable infrastructure capable of processing high volumes efficiently and with a short time to the market. On the ESG front, on slide number 10, we continue our efforts for lower our scope one emissions, with more than 106 branches already undergoing the sustainable certification process, thanks to their improved efficiency in energy and water consumption. Moreover, Banorte improved its 2025 CSA sustainability score, reflecting our overall progress across different environmental, social, and governance performance metrics.
Now, let me give you an update on our progress with artificial intelligence. As we have discussed in previous calls, we keep moving forward our visions for one agent per client, bringing together AI and data to better understand our customers, provide more relevant solutions, and deepen client relationship through cross-selling capabilities. We are also using AI across core business segments to transform processes, with tangible results in simplifying workflows, reducing processing times, and automating repetitive tasks, allowing our teams to focus on higher-value activities. Coding is also a good example, where these tools are already improving development speed and creating new opportunities for cost savings. Importantly, our approach combines autonomous AI capabilities with human judgment. We see human-digital interaction as a key part of our operating model, with technology improving speed and execution while people remain at the center of decision-making.
Finally, I will follow up on our capital allocation plans. The group's organic capital generation enabled us the possibility of an extraordinary dividend during the fourth quarter. Accordingly, we are calling for a shareholders meeting tomorrow to seek approval and proceed with the distribution of 20% of the 2025 net income, equivalent to approximately MXN 4.18 per share during the fourth quarter. With this, our total payout ratio will reach 70%. Now, I will leave you with Rafa and Tomás to get into the details of the financial results of the quarter. Rafa, please go ahead.
Thank you. Thank you, Marcos. And thank you all for the heads-up that you usually send us the day before that allow us to concentrate exactly on the issues that need more clarification and understanding. The first part that we will see is that NII continued to grow at a very positive level. As you can see, 12% on the loans and deposits. That really shows the ability to keep on building up the deposit franchise. 12% has been non-interest-bearing deposit growth for the year. That shows really the strength that our commercial and corporate and government banking has the ability to attract deposits at a very good cost, zero cost, and a very good growth over the lending book. There was also, on the quarter, movements on the insurance side and on the annuity side.
The annuity side had an extraordinary month that allowed us to really grow our market share participation, and the insurance business continues to do on the right track. You can see there are some numbers on the technical reserves that basically, on the year-to-year, shows a decrease on that part, less claims. But the growth on the insurance business continued to be a very good companion to the delivery of all the consumer building blocks on the mortgage book, on the car loans, and also on the credit card and on the payroll. So, a pretty good story for the entities concerning the pension funds, the annuity, and the insurance business. You also see that the annuity is affected by the inflation, but they will be corrected, as you will see.
There you will see a disparity on the technical reserves and the effect of basically the inflation because of the very good growth that we have during the quarter on the annuity side. The non-interest income continued to be a driving force for the bank. That really shows the capacity for the bank to manage more and more and more activity through every single one of the channels that we use. Transactions are growing very close to 40% per year, and most of those transactions are accompanied by some benefit, either on the fee side, but also accompany the entrance of the deposited side and opening of the new accounts and activity for the overall bank. So, I will move into the next year, into the next graph.
The bank continues to do well in every single part of the revenue side. I will move into the cost in a bit. There were some concerns that the NIM of the bank was decreased by a bit for the quarter. There is a clear explanation for that. We have an extraordinary growth on the book, in every single part of the book. Obviously, when you grow your book, you get basically sources from the deposited fund, and that gives you a reduction on the margin for that quarter. Then, once the loan starts to release the margin, that margin will be balanced in the coming quarter, along with a large inflow that we expect on the non-interest-bearing part. So, the NIM that you see at the bank level has to do a lot more with growth than anything else compared to the cost of funds.
On the capacity to grant and acquire on the funding side. On the NII, we already see the loan and deposits growing nicely, and the bank net fees also growing at a very good pace. There has been also concerns that we are overcharging on the fee side. I think, no, it has to do with the fact that the activity of the bank, as I mentioned before, has increased in a substantial way, and that allow us to really serve our client and companies in the way that we need to serve them. Obviously, there is a charge for the service that we provide on that.
But if you compare that to the market, we always below the market, as you can see on the fee structure. When you look at the overall net income of the bank compared to the other peers, we always are at the, maybe at the low end of the fee numbers. Growing nicely, but we take very good care not to overprice on the fee side. If we move to the next graph, basically has to do with the sensitivity management of the book. Marcos Ramírez already referred to that, so I will not go into it. I think we are fully prepared for either another reduction on the rate for the Mexican, for the central bank, or a steady space at least for seven to eight months. So the balance sheet is fully prepared for that.
On the foreign side, as you know, we do not have fixed rate part of the book, so it moves with the rates along with the rate. The sensitivity of the NII continues to be very, very low. So the balance sheet is fully prepared for either a steady state on the rates or even of a reduction, a potential reduction in the rate. If I move into the next one, the bank continues to deliver a solid profitability for the bank, the net income 9% on the year-on-year. There was a comment that I appreciate that comment because it allows us to explain this part. It says, "It is below, it is almost as expenses are growing above the net income." But remember that expenses, when you go to the recurring part of the expense growth, is below 8% on that part.
As you know, we still have some expenses related to the closing of Bineo. The inclusion of Rappi is fully now embedded on that part. Expenses will continue to be a single digit by the end of the year, aligned with the guidance. The fact that the net income is in a case when you add up all the expense line, but you have to take into consideration the fact of the Bineo part. The return on equity for the bank is at 31.1% on that part, and the ROA 2.4% on that part. I think the bank continues to deliver as expected and in line with the guidance what we provide the market with. In the next line, please. This is the graph that allow us to keep, and it should give you an idea of how resilient the margin is for the book.
You will see the graph that is on the middle, the black graph with the red dotted lines. It shows exactly how we have been able to sustain the margin of the book, even though the steady state of the rate for the market. The thing that is relevant in this part is that we will continue to see this evolution because we expect a very important inflow of non-interest-bearing deposits for the next three months, even though at this point in time, net interest-bearing deposits are growing at a pace of 12% per year. That really shows the ability to really manage the funding costs. Big volumes with the right cost, and also on the time deposits, we are also growing and keeping the first position in the market. The next one, please.
That shows exactly the funding cost and the split about non-interest-bearing, interest-bearing demand deposits, and also the time deposits on that part that allow us to move on there. That is slide 45.2 that you see a small pickup on that, has to be related to the fact that Marcos Ramírez just mentioned, we have an extraordinary third quarter on the loan growth. That really put some pressure on the funding cost that will be balanced out on the last part of the year because of the large inflow that we will get on the funding side. Overall, funding cost in line what we expect, and it will continue to go down. The margin on the book continues to be steady. Net interest margin for the bank continues exactly as we provide for the guidance.
I think you will see on the fourth quarter, also an increase on the margin side. I would like to also go to something that somebody make a comment also in one of the reports yesterday. If we could go back to the pace of growth of the book. Let me just guide you to something that is relevant concerning the guidance for the year. When you see the pace of growth that happened in the third quarter in the corporate or also in the government book and in the commercial book, compared to what happened in 2025, you will see that in 2025, the third quarter really was like a steady third quarter and jump into the fourth quarter.
What happened this year, and we are grateful for that because of the efforts that all the banks are putting in place, government, corporate, commercial, that we saw a jump a quarter before last year. That will allow us to keep on building the margin, but also when you compare the third quarter to the fourth quarter on this year, you will not see a strong growth like you saw yesterday. It will be a much more balanced growth. It will be aligned on the low part of the guidance because the growth happened in the third quarter and not in the fourth quarter, so the fourth quarter will be a base comparison that is higher that was the year before. That has to be taken into account.
It's not that the portfolio is not growing nicely, because it's growing nicely in every single part, consumer, corporate, commercial, but it anticipated compared to last year. So take that into account when you see the evolution of the loan growth on that part. That doesn't mean that we will be below the guidance, but you will not see a big pickup like you saw yesterday, the year before on that part. That is also quite important. Another relevant question that you sent to us yesterday is concerning the provision side. Let me remember you this part because, if you look at the commercial line, if you look on the first quarter of the commercial line of 2025, the commercial line was around 1.3, and it jumped to 1.5 in the second quarter of 2025.
Then that special case that we have been talking about, that we are actively working to release that case, make the commercial book to jump to 2.8. But the commercial people has been working not on that case, but on the overall health of the book, that now the number is around 2.4. If you normalize that to the 1.5 when we saw the pickup, the commercial book is in better shape than it was in the third quarter of 2025. Let's be very clear about that. It's not deterioration of the book in any case. It's just that simple case that we are building provisions on that part, but that explain exactly why the relation goes into that part.
If I now go into the consumer, if you look on the credit card book on that part and on the overall consumer, what you can see is that some people were surprised that they say MXN 826 million were the rise on the provisions on the consumer. But if you strip that down, only 1% of that has to do to deterioration. 86% has to do with growth, because we have been growing nicely in every single part of the book, and 13% goes to the calibration that we did on the mortgage book. So that explains that any concerns about deterioration of the book on that has to be stripped by growth, the recalibration of models, and really the deterioration that is only 1%. On that part. Thank you for the heads-up on that part. That allows us to go deep in the explanation of this part.
Now, if I go now to the you will see that for the quarter, based upon the provisions that we wrapped and what I just mentioned about the growth, you see a pickup on the cost of risk, but on a yearly basis, we are right on guidance around the 1.9. I already explained that 86% on the consumer has to do with growth, that we have been growing nicely and capturing market share in every single part of the book on the consumer side on that part. The commercial, I think I already explained that the commercial is doing even better when you strip that case away from the book. When you look at the credit risk, you have to look at the right of part and also the buildup of the provisions on that part.
We are never at ease with the risk, but we are actively managing the risk at a very good growth, and we are taking into consideration, and some people have concern that our models on the credit card are, let's say, overweight on the buildup of provisions. But remember that the market in Mexico has created what I call a difficult process, especially from the fintechs that are really building up non-current clients at a very fast pace because of the high interest rate that they charge to them. So, we are taking that into consideration, and our models reflect that, and they are very predictive, and we are very at ease with the way we have been building up the provisions based upon the growth and the quality of the book. If we move to the next one.
Expenses also, when they say expenses are growing above the net income, take into account the consideration that I just mentioned on that part. If you take into consideration the buildup of provisions that we have for that special case that is above MXN 2 billion, plus the Bineo part that is MXN 850 million, you are looking at a net income effect on the book very above the MXN 3.2 billion that is already embedded on the net income. When you release that case and also you finalize the process that we have with Bineo, you will have a much more current way of moving forward on the cost side. But the cost will be below, it will go to, as we promised the market, at one single-digit growth for the end of the year.
That will also put the cost-to-income ratio at 35.5 concerning the third quarter, a better number than the second quarter, not better than the first quarter, that you have a very large inflow on the insurance side, and then you get a better on the revenue part. But I think the cost-income ratio, as we mentioned, 2026 is a leveling year. 2027 will be a trend as we like to go, very close to the 34, and then continue to go as we proceed also on the artificial intelligence move. If we go to the next one.
The capital, and I would like to thank you, especially the bondholders and the equity holders of the bank, because when we jump into the third quarter of 2026 and our base capital was at 12.5%, there were concerns that we were too happy giving up dividends and not taking care of the capital. We are taking very good care of how the bank is able to generate capital at a very fast pace because the discipline we have on the risk side, that the unexpected loss is kept at a minimum level on that part, and we are not consuming capital in that part. When you see the jump from the second quarter to the third quarter, you see a very substantial jump from 12.5%- 13.2%.
Where we would like always to be is around the 13%, maybe from 12.5%-13.5%, but much more closely to the 13% on the core Tier 1. Now the third quarter is already at 13.2%, and that capital will continue to build up into the fourth quarter. As Marcos mentioned, that will allow us to go into an extraordinary dividend that we have done in the past, not at the same level, but also at an important level of MXN 4.2 per share in additional dividend. We are way above the TLAC part, so I think the bank continues to deploy capital at a very fast pace on that part. We do not want to save capital for us. We would like to return that to the market at a safe way and in a continuous way. I would say that basically, if we jump into that part.
I will now ask Tomás to reinforce the guidance for you.
Thank you, Rafael. Yes, as Marcos and Rafael just discussed, we are maintaining the guidance. If we go line by line, as Rafael just discussed about the loan growth, you are seeing these very good trends all over the portfolio, so we are maintaining the 8%-11%. About the margin, as they discussed also, for the group right now, we are covering the low end because the inflation at the annuities, but we expect that to recover towards year-end, so we are maintaining that. The bank margin is on the high end, as you have seen for this year, we are at 6.8%, so on the high end of the guidance. The expenses, as Rafael just mentioned, we continue fully committed, and there were some questions about this. Remember, we manage this on an annual basis, so we are fully committed on delivering the expenses guidance for the year.
The cost of risk also, as has been discussed today, due to this isolated case, evidence suggests that we can be on the high end of the cost of risk, but still within the guidance. I would like to clarify what Marcos and Rafael discussed about the normalized NPL. The reported was 1.41%, but if you take out this isolated case and the changes in the mortgage book, the number is 1.01%. I think this is a better description of the dynamics that we're seeing from a risk perspective. Taxes, no changes. Net income, no changes. The other change that we really had was coming from our Chief Economist, Alex Padilla. If you remember, at the beginning of the year, we started with a guidance of 1.4%-1.8% in the GDP. Now we are moving that to 1.9%.
Other than that, we are fully committed to delivering the guidance. With this, we conclude, and we will go back with Tania to start the Q&A.
Just one thing.
Yeah.
Concerning the tax rate, because there was also a question about the tax rate, remember that we do that on a yearly basis. The first quarter, we basically overload the provisioning on the tax rate, and then we start to level that up to finalize at the guidance by the end of the year. That was the effect that happened on this quarter.
Yes. Thank you.
Thank you. Thank you. We will now move to our Q&A session. As always, we kindly ask you to present only your most relevant questions, and we will be happy to follow up 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. I will be calling the names of the person that is next in line. If there are any technical difficulties, please let us know by using the chat. We are now ready to take our first question from Yuri Fernandes from J.P. Morgan. Please, Yuri.
Hi, Tania. Hi, Marcos, Rafa, Tomás, everyone. Congrats on another quarter. Rafa already mentioned a little bit about asset quality, how NPL ratios they have been behaved, and some of the movements about cost of risk. But if you can help us just to understand, after this higher cost of risk from maybe an easier comps, should we see cost of risk moving towards the guidance, Rafa, in the coming quarters? And what should we think about the coverage ratio? Because I think part of the explanation is that maybe your results, they would be stronger if your coverage was flattish, but instead, we saw your coverage ratio moving up. So if you can help just understand a little bit the dynamics of the provisions and the dynamic of the coverage ratio, I think this is an important point for investors. Thank you.
Yeah.
Thank you, Yuri. Rafa will talk about this.
And then I-
dynamics for-
As I mentioned, Yuri Fernandes, let me start with the dynamics of what we call the NPL formation on the book, and if we see deterioration of that. As I mentioned to you, deterioration, if you look at the book overall, it's only 1% deterioration. The rest has to do with the fast-paced growth that we have in every single part of the consumer book, and now also on the commercial and the government and the corporate book, that is not creating any pressure on that part. The government book at the beginning demands some special provisions for a very low period of time, three or four months at the most. We don't see that, and that is very easy to see on a line-by-line basis that we provide the market the information for them. We don't think that there's concern about the book.
We're always concerned about the book, but at this point in time, we are more concerned about that the pace of growth aligned with the quality of the book continues in the same trend that we have. We don't see really deterioration of that. And we can provide that breakdown that I just gave to you, that 86% has to do with growth, 1% deterioration, and the rest, 13%, has to do with the recalibration of the models on the mortgage book on the consumer side. On the commercial side, I already explained that the book is even performing better than before that special case that we have been building up provisions last year and this year, and we are very close to the MXN 2 billion of provisions that are being put into that book. And believe me, we are actively seeking to become that asset current.
We don't know if that is going to happen at the end of this year, on the first quarter or second quarter of this year, but we are seeking that to be resolved. That has to do concerning about deterioration, and I think we are, as I mentioned, never at risk, but comfortable with the way the growth, the risk, the expected loss, and the unexpected loss is behaving. As I mentioned to you, the unexpected loss is very easy to measure on a very simple way. Look at the pace of growth of the capital base. The other thing concerning the issue about the coverage ratio that you just mentioned, I think if Gerardo wants to jump into that, and then I close the remark about the coverage ratio.
Hello, Yuri. This is Gerardo Salazar, Chief Risk and Credit Officer. I will tell you that we are considering always six factors regarding NPL normalization and cost of risk normalization. Let me begin with that. The first factor for NPL normalization is portfolio seasoning. If I provide you some color very briefly about this normalization, and we talk about portfolio seasoning, new loan vintages mature with delinquency gradually converging toward historical patterns. The second factor that we're considering in this NPL normalization is stronger borrower fundamentals, and that's very important. We always consider that factor. I don't think it needs more explanation. The third factor is improved underwriting. What we're doing is better scoring, segmentation, affordability assessments to reduce default formation. The fourth factor we're taking into consideration in this normalization of NPLs is effective collections. Earlier intervention improves cure rates and recoveries.
The fifth one is portfolio mix, which clearly is one big explanatory variable regarding the performance of this third quarter. The sixth one is write-offs. We agree that there could be some denominator effects that influence reported NPLs ratios, but do not necessarily represent genuine improvements in credit quality. Those six factors are what we consider as essential looking at NPL normalization. If I look at cost of risk normalization, there's always six factors. I will just list it very briefly. The first one is the provisioning base effects. The second one is model recalibration, as Rafa was saying. The third one is portfolio seasoning. In this case, stabilization of circuit losses as new origination cohorts mature. The fourth one is lower default formation. The fifth one, isolated commercial exposures, which we continue to have some very isolated cases in a very low number.
The sixth one is portfolio composition. Obviously, growth in lower risk lending can offset higher expected losses from consumer expansion. Looking ahead, we expect NPLs and cost of risk to be influenced by portfolio seasoning, borrower repayment capacity, disciplined underwriting, and effective collections. On the provisioning side, normalization should also reflect the absorption of model recalibrations, the absence of unusual reserve adjustments, and the evolution of isolated commercial exposures. But our focus is on stabilizing underlying default formation and expected trade losses rather than relying on portfolio growth or write-offs to improve reported ratios. Just remember, normalization is primarily about actual borrower performance, while cost of risk normalization also reflects forward-looking expected losses, portfolio growth, model assumptions, and provisioning effects. That will be a bit of color regarding this normalization phenomenon that we're experiencing.
Concerning the coverage ratio, Yuri, let me just give you a very simple explanation about that. When you see that the credit card portfolio is growing at the fast pace that we are growing, and the way we have to put provisions of day one, that is really related to that credit model that we have that demand the provisions that we have, and we have to build up the coverage ratio because of the models that we use for the credit card. It is not that we are anticipating deterioration or anything like that. It is really related to the pace of growth of the portfolio. We are really looking at a pace of growth for the year in credit cards, very close to 900,000 credit cards. That is really a record for Banorte, and that is the number that has put us on the third place on the market.
As you know, we have always been, let us say, below our fair market share in the credit cards. But the coverage ratio has to do exactly with the way that we provide based upon of the models that we have on the proprietary models, related especially to the credit card part. That is why you see a growth in the coverage ratio, Yuri.
No, super clear, Gerardo, Rafa. So it is not like a worsening in the environment, like more fintechs and people getting more leverages. It is basically growth. You are growing more, you are providing more.
Exactly. That is correct.
Just one follow-up on the corporate case, Rafa. It is clear you are not going to revert this. You are working to revert this soon. What about more provisions? Do you anticipate more provisions for the corporate case?
Yeah. On the corporate cost for the year, we need around MXN 125 more by the end of the year that needs to be put into the book. That is already being considered as part of the guidance that we are in order to be in line what we promised the market.
Oh, perfect. Thank you very much, guys. Oh, sorry.
Just to add to that, Yuri, at the end of this year, 72% of that credit exposure will be covered by provisions.
Thank you, Gerardo.
Thank you. Now we'll take our next question with Beatriz Shinye from UBS, please.
Hi, everyone. Good morning. Thanks for the time to make questions. Just one from my side here on profitability. You're running at an ROE close to 25% despite a lower rate environment and relative elevated credit costs. As we think about next year, what should we think about the ROE from here? Is the current level sustainable? Thank you.
Beatriz, thank you.
It's sustainable.
We think we could handle this, and as soon as we have the guide for the next year, we will release it to you. Yes, it should be around that.
If you take or ask us of a long-term basis, because you have heard us saying that in the meetings that we have with you, right? I mean, 31, 32, as we have at Banorte, I think on a long-term basis, that number should be much more around the 26, but has to do a lot with also the cost of capital that the country has. On the overall for the group, should be more around the 22 for the group. So, on a long-term basis. Okay?
Thank you. Super clear.
Thank you, Beatriz.
Thank you. Now we will take our next question from Renato Meloni from Autonomous.
Hi, everyone. Thanks for taking the question. Rafa, picking up on one of your earlier comments that you are seeing more leverage in consumers, particularly coming from the fintechs. Are you in any types of conversations with the regulator to tackle this problem and prevent a higher over-leverage? Should we expect some measures on those to tackle those, or do you think the market will self-regulate? Thank you.
That is a tough question, Renato, but we are working as Asociación de Bancos de México, as ABM. We should address this to the regulator. They know that there should be a potential problem. We do not know yet. We are aware of that, and we will manage as soon as the pieces move. I cannot tell you any more because that is the truth.
And as a response to that, Renato, if you look at the way we have been managing the entrance of this new entrance into the financial systems, I think the marketing piece that we put in place for the young people that is called VA, is also as a response to that, to address the fact that we needed to bring those people again into the financial system, and allowing them to restart the credit cycle. But we needed to do it in a very intelligent way. We are using what we call a guarantee credit card that we basically have some funding put in place for us, and then we start freeing some line of credit into a specific credit card.
Also, we are using, if you are having a payroll, then we link your payroll to a specific credit card in order to reduce substantially the rate that we charge to those clients. To give you an idea, it's less than a third of what those fintechs are charging those people. But at the same time, we also pay on the guarantee funds a reasonable return to the investor. I think we're moving in all the pieces because we know that we cannot send such a large amount of newcomers into the financial system, to the credit bureau, and really stop them to be able to get a credit on the financial system for five years.
As Marcos Ramírez said, the regulators are already aware of that, but we are advancing on that part in order to bring those people into the financial system in a secure way, in a safe way. I would say, this is going to be a strong word, in a decent way.
Thanks very much, guys. That's clear.
Great.
Thank you. We'll take our next question from Tito Labarta from Goldman Sachs. Please, Tito, go ahead.
Thanks, Tania. Hi, Marcos, Rafa, and Tomás. Thank you for the call and taking my questions. My question, just to follow up a little bit on the NIM. I know, Rafa, you mentioned, given the strong growth that impacted NIM a little bit, but if I think overall, I think there was also some impacts from inflation. Then also trying to compare that with the insurance, because of the annuities business, and I know in the past there's been some offsets because the technical reserves were lower, also cost of claims were lower. How should we be thinking about the group NIM evolution, also considering that insurance, the technical reserves were lower, just to think if one is sort of compensating the other overall? Then if I can ask just a second question on the loan growth, right? Good acceleration there. How sustainable is this growth?
Because part of it was wholesale and government. You talked a little bit about the consumer, but how do you think about this sort of loan growth going into next year, and also how that will eventually impact the NIM? Thank you.
Thank you, Tito. I will start for the second one. The loan growth for the next year in the government, we will release it next year, but should be again around double digit. We are thinking around the same as this year. Maybe you can give us a color, Alex, how do you see the next year? Then we will go back to the first question.
Yeah, for sure. Thank you, Marcos. Thank you, Tito. This is Alejandro Padilla, Chief Economist. As Marcos was mentioning the early remarks, we're expecting growth next year around 2%. I think the most important part is that the engines of growth should level in 2027, not only the exporting sector, but we think that private consumption and investment should play a significant role as well. Think about investments and Plan México and all the infrastructure that Mexico requires, we're optimistic that this is getting traction. The most recent data suggests that construction and anything regarding energy and transportation that was lagging behind in previous years have been gaining momentum. That's part of our expectations for the next year.
Thank you.
Adding on loan growth, what we are expecting regarding loan book growth, we're considering seven factors. The first one was already mentioned by Alejandro, which is stronger than expected economic growth, which is very important. The second one is we are still banking on the premise that nearshoring and infrastructure investment are bankable up to now. The third factor, in transitory terms or for now, is the lower interest rates. We don't know how the cycle is going to change. We know looking forward that the interest rates should go up eventually if expectations remain as they are now. But that factor, although is transitory, is still working and being considered. The fourth factor is consumer lending expansion. We continue to see, as the report clearly emphasizes, a very healthy loan growth there. The fifth factor, SME banking penetration.
SME banking within Banorte has been penetrating the market more than proportionally, and that gives us the formation, a very good expectation regarding growth. The sixth one is market share gains and deeper customer relationships in several parts of the loan book. We're seeing that, and we are eager to take advantage of those opportunities. The last and seventh factor will be greater utilization of existing credit lines. There is more upselling, but with the customers that we really want from the risk point of view.
Thank you, Gerardo.
Tito, if you go to the NIM and you took insurance and annuities, you see a range from 6.0-6.3. I would say that 3 basis points are related to these fluctuations of the inflation rate on the annuity side. I would say that the NIM for the group on a steady basis should be more around the 6.3, on top 6.4, on that compared to the 6.8 at the bank level, if you steady the inflation pace on the annuity side. I would say that is what we have seen in the past.
Tito, on a year-on-year basis, just to give you the number in MXN is, the impact is MXN 1.2 billion of less margin related to inflation that, as you mentioned, was compensated in the technical-
Technical results.
Yeah.
No, very thorough. That's very clear. Thank you very much.
Thank you, Tito.
Thank you.
Now we're taking our next question with Gustavo Schroden from Citi. Please, Gustavo, go ahead.
Hi, guys. Good morning, and congrats on the results. Let me explore a little bit about your capital. Rafa was clear in saying that Banorte does not intend to retain capital unnecessarily. Given the current Common Equity Tier 1 position and the completion of TLAC requirements, what is the minimal Common Equity Tier 1 level that management feels comfortable with through the cycle? Understanding that target would help us to assess how much of the capital generated over next few years could be available for distribution. That's it. Thank you.
Rafael, please go ahead.
Thank you, Gustavo, for the question. The 13.5% is what we have been telling the market that from 13%- 13.5% is in the range that we feel comfortable to be around that number. We have also proved, and that was something that we used to have in the past years, from 12.5%- 13.5% was the range that we used to move the core Tier 1, and then the capacity to distribute funds. As you know, 50% is what we have been basically on a steady basis released to the market. Once we release the 50% of the net income of the past year, then we look by the third quarter what's the potential to keep building up capital based upon two things: the quality of the book and also the capacity that we have to keep building capital from our own internal operations.
Also, now concerning what Alejandro mentioned, now we see that potentially we could have a better year next year, and that will also demand more capital in order to grow the book more. If that's the case, I think that we will be comfortable around 13% as a minimum for the capital number, and the range to go to an extraordinary dividend will be when we reach 13.5% or above that, from 13%- 13.5% or above that. I would say that will be our guidance for the market.
Okay. Cool, Rafa. If I may, just a quick one regarding the efficiency ratio, or the cost to income. We have seen very good numbers over the past quarters and years. Do you still see room to improve that number so we can dream with something close to 32%-33%, or something at that level? Or do you think that the bank has captured all the efficiency?
Gustavo, we should go there. It is a matter of time, but it should go there and even further. That is the idea. Artificial intelligence is going to help us, and more clients and more volume. The idea is to go there in a few years, even further.
We are not happy with the 35%. We are not happy at all. We already have been on 34%. We are much more comfortable below 34% than at 35%.
Cool, guys. Thank you, and congrats again for the results.
Thank you.
Thank you. Now we will take our next question from Daniel Vaz from Safra. Please.
Thank you, Tania. Congrats for the results, and good morning also to Marcos, Rafa, and Tomás. Maybe my question, maybe I am a bit too soon to talk about that, but we are following the Democratic sweep in the yesterday U.S. elections, and I am trying to get a sense here if this change in the Congress in the U.S. improve maybe the outlook for investment in Mexico, right? We are talking about better trade policy visibility. I do not know, we can talk back again of unlocking the nearshoring projects. Maybe if you have a sense if this would represent upside to your current loan growth expectations for next years, and if this is too soon, but which sectors tends to benefit the first? Thank you.
Thank you, Daniel. We saw that coming, so we have an idea what is going to happen next. Please, Alex, go ahead.
Yeah, for sure. Thank you, Daniel, for the question. And yeah, definitely geopolitics is one of the key variables that we analyze when doing the forecasts. It was highly expected that the Democrats could win at least one of the two chambers. This blue wave suggests that there should be some guardrails for some of the policies that President Trump has implemented specifically with Mexico. What we think is that regardless of which type of party controls the Congress, the relationship between Mexico and the U.S. will continue to be constructive. In that regard, I think that the bilateral talks regarding not only the USMCA extension or the annual reviews that will take place, but also what will happen with tariffs, will continue to go on a very positive path. We think that Mexico has enough competitive advantages to continue integrating with the U.S.
We think that integrated supply chains will help Mexico to continue attracting investment, to continue to be one of the key players in trade. Just to put some numbers, I mean, as of today, Mexico represents 18% of the total imports that the U.S. made annually. We are the main trading partner. Mexican exports have increased so far year to date 30%, 30%. So, I think that's a very clear sign that the integration of North America will continue. I think that given this change in the political landscape in the U.S., the trade relationship between Mexico and U.S. will continue strengthening. We are optimistic that nearshoring will continue to take place, and in coming years, we will continue attracting that investment and will continue increasing exports to the U.S.
Thank you.
Thank you. Thank you for the answer.
Thank you. Now we are taking our next question from Ricardo Buchpiguel from BTG. Please, Ricardo.
Hi, everyone, and thank you for the opportunity to ask questions. I have a follow-up here on one of the questions. From the current ROE of 24%-25% to the 22% that you mentioned as structural ROE, what are the key pieces that need to normalize in your view? Just to confirm, I assume that this does not factor in the efficiency improvement that you mentioned on around like 32%, 30%, 33%. Thank you.
Thank you, Ricardo. Rafa, please go ahead.
I think, Ricardo, the key is what we call principality, and it has to do with the relationship that we hold with our clients, that more and more the bank is really moving into a client-driven perspective on that part. I think you see that on the government part, on the commercial, and on the corporate, and on that. The consumer is also moving into that. When we look at the return on equity on that part, and you do not see and let me give you an example. There are some cases when you look at a relationship with a client that maybe some of the products in an isolated way, it has a weak ROE. But when you look at the return on equity that the client delivers to us, then the return on equity really jumps into the numbers that we would really like to be.
If you ask me what is the driving force on that part, is keep building the relationship with our clients that we have. Banorte is in a very special position since we were a small bank in the north when Banamex and BBVA were already basically the owners of the market. Banorte has been building up this customer base, but we also have share, we share those clients, our clients with other banks because this path of growth that we had. We have a lot of business to be put into the bank from our own individual clients to keep enhancing the relationship that we have with them.
Since we now price the relationship with the client based upon the lifetime value that that client could deliver to us, I think the offers that those clients are receiving to become clients of Banorte are very powerful one, and we already have very good proof of that. The return on equity has to do with principality, because principality is like economies of scale of the usage of capital and the return that you put that capital to use with your own individual clients on that part. When I talk individual clients, it is commercial, government, consumer, all that. I think that will be the driving force for Banorte in the next years.
Thank you, Rafael.
Thank you very much.
Thank you.
Thank you. Now, we will take our next question from Natalia Corfield from J.P. Morgan.
Hi, everybody. Thank you for taking my question. I think Yuri addressed the fundamental side of the results, and my question is more related to your AT1s. I just wanted to know plans of issuance for next year. You have one AT1 that is callable in January, and I think we are all expecting that that is going to happen. Looking at your capitalization, I would not think that you would need to come back to the market, but you have another call in 2028, so I would like to know how you are thinking about this.
Well, that is a good question, Natalia. Yes, you are right. We cannot say anything by law, but the idea is to continue with our policies, and we have some callings in the future. The idea is to go to the markets, and Banorte is very strong, so we think we could make it, and we will find the window. We were always trying to find the right window and to issue on those days. That is going to be the idea, to be looking at the markets and looking for a good time to do it.
So, we probably can expect you to be back next year?
Yes.
Natalia, remember that our AT1s has a specific range that we like to have, and the most important thing is that the AT1s, being a local bank, are key for us to compete in what we have been really leaders in the market, in the growth on the dollar book, on that part. Based upon the demand of the dollar book, that will really condition the need to go or not to go, as Marcos Ramírez mentioned, in specific windows that we see on the market. But the demand for the dollar book continues to be very strong for Banorte, and that's why we really are always looking for windows to go into the AT1s. I will use exactly the same words that you used at the beginning of your comment about the call.
Yeah. Perfect. Can you remind me what is the range of AT1s that you think that you feel comfortable?
30%-40%.
30%-40%. Okay.
Yeah.
All right. Thank you very much.
Thank you, Natalia.
Now we will take our next question from Carlos Gomez-Lopez from HSBC. Please, Carlos, go ahead.
Hello. Good morning, Rafael, Marcos, Tomás. I want to ask you about your outlook for next year, because I have to say, when I look at your numbers, when I look at how you have changed your economic assumptions, one gets the sense that you are less concerned or less conservative that you have been in the past and that you are taking a slightly more positive outlook. Is that our perception, or that is indeed how you see things? Second, going back to the AT1s, that percentage of your core Tier 1, 30%-40% that you have now, that is something that you expect to maintain for the next year, or that is something that, depending on circumstances, could go higher than that? Thank you.
The first one, yes, we are more optimistic. We just changed to 1.9 the GDP for this year, and we are moving the next year for around two. So, if you want to call it that optimistic, it is better than before.
We are in that range for the next year. Talking about the second one, the AT1s, Rafa, please go ahead.
The AT1s, I would like to stay around those numbers, but if demand continues to be present in the way that they have been, and there has been an extraordinary acceleration in the market, maybe for a specific period of time, we could go above the 40%. But I do not think that will be something that will be a customary way of doing business on the AT1s.
They understand that is demand for dollars for you to lend or demand for the AT1?
Demand for the dollar book that needs to be funded using the AT1s.
Okay. Thank you so much.
Thank you, Carlos.
Thank you, Carlos. Now we are taking our next question from Andres Soto from Santander. Please, Andres.
Thank you, Tania. Thank you, everybody, for the presentation. One of the most impressive areas of your results is your growth in deposits. They are growing even faster than your loans. I would like to understand a little bit what is driving this. It is related to more liquidity in the market? You are getting more principality from your customers? How are you seeing the competitive dynamics for the deposits, and what is your expectations in terms of growing deposits at the same level or even above loans going forward?
It is a mix of everything, Andres. We are giving 75 trucks in the next few days. Imagine that in the branches. Rafa, please go ahead.
I think, Andres, what you mentioned is the activity of the bank has increased, as I mentioned before, in a very important way. Every single one of the different branches of business that we have, from the government side, from the corporate, commercial, and SMEs, and also obviously the branches, are being more and more and more looking at principality of the clients. The more we look into principality, the more we can really get on the benefit of the funding side. I would say that it has to do with principality, has to do with the activity of the branches, and see how do we really address the relationship with our clients.
Another important thing is that the way Banorte works on how to really price the relationship with the clients on a one-to-one basis really allow us to have, on average, a better funding cost, but a better relation with the client, because some clients get a much better benefit on the resources, other not so much, but they get another benefit on the asset side than in the funding side. On the overall, that gives that the client is happy with us and is happy to have a full relationship with us. I would say that that's the case. The more we get on the principality, the more the funding side will continue to grow the way it has been growing.
Thank you, Rafa.
Thank you, Rafa, Marcos. My last question is, when you guys think about 2027, what is your main concern, if anything? Is it persistent delay in investment recovery in Mexico, continued asset quality deterioration at the system level, competition both from traditional bank and fintechs, or any other factor that I'm not mentioning here?
I would say all of the above, but I would say the environment with the policies of the government and all that.
So more related on a persistent delay in investment recovery?
Yes.
That is very clear. Thank you, Marcos, and congratulations, guys, on the results.
Thank you, Andres. With this, we conclude our presentation. Thank you, everyone, for your interest in Banorte.