Good morning. I'm Tomás Lozano, Head of Corporate Development, Investor Relations, and ESG. Welcome to Grupo Financiero Banorte third quarter earnings call. 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. Our CEO, Marcos Ramírez, will provide the highlights of the quarter, including the relevant progress in asset quality, as well as better growth dynamics in fees and loan growth. He will also provide an update on the digital strategy for the group, together with key milestones in our ESG strategy. Later on, Rafael Arana, our COO and CFO, will provide further detail on asset quality, improvements in the cost of funds, progress on the sensitivity to rates, and continued cost control. We will conclude our call with a Q&A session. Thank you. Marcos, please go ahead.
Thank you, Tomás. I hope everyone is doing well, and thank you for joining our call today. The third quarter of the year presented a mix of factors that resulted in overall recovery. During July and August, the highly contagious Delta variant of COVID-19 generated fear of new lockdowns threatening to delay the incipient recovery in economic activity in Mexico. Fortunately, the less severe symptoms are accompanied with lower mortality rates and higher vaccination rates in Mexico have led to reactivation across different industries such as construction, tourism, and entertainment. In addition to the manufacturing supply chain with the United States, which has been present since the beginning of the year. Total vaccines have already surpassed 110 million doses, with more than 40% of the population being fully vaccinated. GDP growth estimates for the year are still ranging between 5.5% and 6%.
However, economic recovery came at a price, with the most recent inflation estimates now reaching 6.8% at the end of the year, well above the central bank target of 3%. Monetary policy decisions by the central bank took the reference rate 50 basis points higher during the quarter, ending at 4.75%. Our economic analysis teams expect two more hikes for the remainder of the year to reach 5.25%. Later on, Rafael Arana will comment on the positive implication of this for the bank's margin. Overall, as you will see with greater detail throughout this presentation, results for the group have evolved favorably with better-than-expected asset quality, margin improvement, cost control, and solid capital ratios. In our daily operation, customer experience is permanently at the core of our strategy.
We have listened to customer feedback and have had significant improvement in the NPS score across all our channels, particularly in our mobile app. In response to this feedback, we recently launched a newly designed mobile app with improved features, including intuitive and faster navigation, which has had a remarkable acceptance among our digital customers. Diving into the financial results for the quarter, slide number four, we saw a 4% improvement in the bottom line for the group, driven by stronger net interest income from the bank, better asset quality across our portfolios, and better dynamics in fees, despite a still pressure insurance result from the high COVID-19-related reserves and claims. ROE of the group was further impacted by the unpaid dividends that are sitting at the group level, while ROE of the bank is progressing favorably, already above 19% for the quarter.
On slide number five, NII was driven by stronger loan dynamics in consumer and commercial portfolios. Increased mobility and reactivation across different economic sectors, pushed fees 5% during the quarter, while trading income showed a normalized behavior. Going deeper into fees on slide number six, net fees are already at pre-pandemic levels, driven by higher origination fees in consumer, mortgages, and commercial portfolios, as well as by higher activity in credit and debit card transactions. Loan growth, slide number seven, show positive recovery signs for the quarter, led by government, commercial, and corporate portfolios. Consumer loans have not eased their pace, despite the pandemic, our loan market share rose more than 50 basis points during the year. Asset quality continues to exceed our expectations.
NPLs, in slide number eight, ended the quarter at 1.2%, MXN 1.2 billion below the previous quarter, driven by a one-off corporate case that progressed favorably together with improvements in credit cards. Looking at the rest of the subsidiaries of the group on slide number nine, the insurance business regrettably continues to face a high number of COVID-19-related claims in the life segment. Remember that life accounts for more than 30% of the portfolio of insurance, making COVID-19 the most expensive event in the history of insurance companies in Mexico. The rest of the segments, however, show a steady quarter, contributing to the overall results for the group. Regarding our JV with Rappi, the new digital credit card origination continues at a strong pace with more than 300,000 active credit cards, well in line to reach the 400,000 card target at the end of the year.
Our partnership with Google Cloud is also evolving well on the three main fronts. The first one, culture, to improve our teamwork methodology. The second, security, implementing solutions to improve cyber security at the group. The third one, cloud, where we have made very good progress towards moving services to the cloud. We are finalizing the details of our upcoming Banorte Investor Day, which will take place early next year. In this event, we will communicate our next medium-term plan, including new operating and financial targets for the bank, our JV with Rappi, and our brand-new digital bank, which will position Banorte at the frontline of the digital arena in Mexico. You will soon receive our invitation for this event.
As many of you know, ESG continues to be fundamental part of our core strategy, and I would like to highlight some of the most relevant updates on each of the strategic pillars. One, on the environmental front, Banorte made a commitment to decarbonize its loan portfolio by the year 2050 by becoming founding signatory of the Net-Zero Banking Alliance. During the quarter, we implemented different work groups to establish the short, the medium, and the long-term plans to achieve this objective. On the social area, we are implementing a 3-stage program to improve inclusion across the financial group. The first step is gender equality, where we will adopt best practices to value talent, making sure everyone has ample opportunities for development. Last but not least, on the governance side, we have just completed a comprehensive board self-evaluation and initiated our ESG training program to our board members.
You will find this and more additional ESG information on the final slides of this presentation. With this, I conclude my remarks. Now Rafael Arana will provide you further insight into our operating results, asset quality, and progress in the bank's sensitivity to rate changes. Rafa, please go ahead.
Thank you. Thank you, Marcos, thank you all for attending the conference. Also thank you very much for the reports that allow us to concentrate on the key issues that you want to discuss on the conference. Help us a lot to really focus on what we really want to communicate further, some of the points. If I would like to see how the evolution of to the third quarter. Based upon what Marcos has mentioned, I think we are managing the crisis in the, I would say, not in the final stages or later stages of the crisis. During this period, basically what we have been doing is taking care of the following issues that I think we can then communicate the specific metrics, all the stuff that is basically all the loan book.
We have been taking very good care of the loan book. On the risk side, as you can have seen on what Marcos presented, we have very notable numbers on cost of risk and NPLs. That's the result of our very careful management of the crisis on the recovery side, on the onboarding side, and on the risk side to tailor specific products for the clients. There was a first commitment to put on the whole organization to take very good care of the book. The second part was the funding side. The funding side, in order to because of the lack of possible growth that you have seen, that we have regained growth on the third quarter, but the first two quarters were very slow.
We needed to basically concentrate on the funding side in order to make the net interest margin and the inventory most profitable. I will be going numbers specifically to prove that. The other thing that has been helping us is the sensitivity of the balance sheet to the hike on the interest rates that has accelerated the net interest margin growth. We see a continuous evolution of that part. The other part is that, as Marcos mentioned, we continue to gain market share in the market. Even though we have a slow economy on this, but we continue to gain market share at a very good risk and a very reasonable prices.
On the digital space, we continue to evolve aggressively, and we are happy to say that most of the products of the bank can be now on board in less than 10 minutes on the digital space. That has helped us to keep on building the franchise in the new economy that we see coming for the bank. Now that we, in a nutshell, define what has been the concentration of these three quarters, I would not like to mention a thing. There has been some comments about expenses. Expenses, as you see, are growing 4% below inflation on that part.
On the expense line, you have to take into consideration that on the third quarter, you now will see a movement because of the new law, the outsourcing law, that as you remember, we have been telling you in the past two quarters that the growth in fees has been quite strong, but also the part of fees paid has also been growing, basically because we needed to put external sales forces to balance out the requirements of the clients on the mortgage side and on the car side, on the car loan side. Those now are going to be, because of the outsourcing law, will be part of the cost line of the bank. The expense growth that you see on the third quarter is basically MXN 150 million.
That basically was before on fees paid, and now has been moved internally to the expenses of the bank. If you take away that MXN 150 million, the expense line on a quarter-to-quarter basis was flat on that part. That part, you have to continue to see in the next quarters and in next year, that effect on the internalization of the sales force. On the other side, what you will see is a growth on the fees that we charge to the market. Now those fees that in the past were basically on the variable rate for these external sales forces, now will be passing to the expense line because that will be an internal cost. You will see a growth in net fees, I would say pretty reasonable for the fourth quarter and for the next year. After that, if we go now on a line-to-line basis.
Basically, what you will see, Marcos already mentioned that, is that the cost of risk is at record lows. You have to take into account that this number is at record lows. Once we start growing again, you should see that the cost of risk of the bank should return to the usual numbers, maybe a little lower than the usual 2 - 2.2, to numbers around the 1.8 - 1.9. Another thing that has been also very positive is the write-off rate. The write-off rate in the third quarter was below even the second quarter. You have to take into consideration that we have already clean on write-off the credit card book, the payroll book, and the credit card book, car loan book, and payroll. It's still pending the mortgage book, a portion of the mortgage book, and a portion of the SMEs.
The numbers on write-off will pick up in the third quarter and on the first quarter of 2022, to the levels basically around the 0.55, 0.56 that you see that. Don't be alarmed if you see a pickup on the write-off because the remaining portfolio of the SME and the mortgage part, we still have some write-offs to do on that part. On the net interest margin, I think it's relevant to mention that we have already had a pretty good trend even before the hike in interest rates. That's basically because of the funding cost that we continue to evolve. I will go into that in one minute. What we see is now that the effect of the hike has started really to be noticed on the net interest margin.
Is now at 6.1. We see that evolving into the fourth quarter to a better number around the 6.2 on that part. Then continue into the next year to a better evolution than what we saw this year. On the net interest margin of the group, you already see that the effect of the insurance company is what is hindering the return to the normal levels. You have to normalize that number. If you add on a recurring basis, close to MXN 3.7 billion of margin that we have been losing on the insurance business. Okay. That will start to recover in the fourth quarter and continue to recover in the next year. The bank, as you see, will continue to have an upward trend on the net interest margin.
I've mentioned the cost of funds, and there have been a lot of questions about where we meet the funding cost. We started the year on the funding cost close to 48%. Concerning to status, we are now sitting at 42%, but we still have room to improve. As you can see that two banks are still below us. We see that we will finalize the year close to 40% or a little below 40%, and continue to have that evolution in the next year. Basically because all the action that we're taking on the onboarding and the incentive scheme for the branches. The margin sensitivity, that also has been a recurring question from the market. Now we are sitting at 842, up to 638.
We continue that the sensitivity will continue to move upwards, close to MXN 1 billion that we have in the fourth quarter of 2018. The expenses that I just mentioned a bit, if you look at the growth in the expense line from MXN 10.8 -MXN 11.01, is basically what I just mentioned, that we internalize the external sales forces that I just mentioned on the mortgage and on the car loan side. That is the effect that is around MXN 150 million. That is our growth in expenses. That also reflects on the other side, on the net income side. That is a positive expansion on the fees that we charge to the market. Okay. The liquidity continues to be strong. Too strong from our point of view, because it is costing us money.
We have been reducing that, but I think we will stay around 180 -1 60. That will be the desired number on the liquidity side. On the capital ratio, you continue to see a pretty strong evolution on the capital ratio, up to 21.9%, and Core Tier one is around 14.9%. There has been a lot of questions from the market about what's going to happen with the upcoming Tier one that is due next year, if we're going to call, and yes, we always honor the calls. As you know, we are always on the look for opportunity to go and strengthen our balance sheet with a potential issuance into the market, if we see that is opportunistic for us at the price that we think is the right one.
On the digital evolution I just mentioned before, I think we have made a lot of progress on Banorte. All of the consumer loan products, but mortgages and car loans, everything originates online, on your mobile, in less than 10 minutes, most of the products. The only one that still we have above 10 minutes, and it's around 11.5 minutes, is the basic checking account that you open at the branches. Everything else, you can onboard on your digital application in less than 10 minutes, whatever you want to do. On the funding, on the wealth management side, or on the lending side, and also on the digital checking accounts on that part. Banorte has been improving a lot on that lately, and we will continue to do so. Marcos just mentioned the Rappi, and I think later there will be more questions about that.
I would say that it's going where we expect that to happen. I think we'll be accelerating on the fourth quarter to reach the 400,000 commitment that we have with the board. The Google Cloud also, Marco already mentioned that. On the Google, I just want to mention one thing, because there have been some questions from the market, that if Google replaces IBM or. The answer is, we have been building from the ground up. First, we started with IBM to change all the infrastructure, communication, cybersecurity, architecture of the bank, the multichannel facilities. Once we start feeling comfortable that we have a much more agile way to deal with the legacy and with the architecture of the bank, we start building layers upon those.
We have the help from other suppliers like SAP, we continue to build up flexibility into the response to the market. The latest part that we needed is to really tie it up with a company that is very concentrated on the behavior of the client. When you see the Google Cloud application, that we will have a lot of benefits on the cloud and things. I think the main benefit is really to really evolve at the same way that Google knows the client. That's why we are very happy with the relationship with Google. We have a lot of services that we're going to go into the cloud, that will bring a lot more efficiency on that.
I think the key gain here is that we are building from the ground up, from the basic architecture to flexibility to agile, and now to the understanding and behavior of the client. That's why we are very pleased with the latest partnership that we have with Google. With that, I would say that's all from my part. Now I pass the floor to.
We are open to your questions.
Yes. Thank you, Marcos and Rafael . We will continue with our Q&A session. Please raise your hand on the platform and we will unmute you when your turn comes. Questions will be ordered automatically on a first come, first serve basis. 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 ready now to start the Q&A session.
Thank you. We will take our first question from Jorg Friedemann from Citi. George, go ahead.
Thank you. Can you hear me?
Perfectly.
Oh, perfect. Thank you so much for the opportunity to make questions. Luis, Marcos, Rafael, thank you very much for the presentation as well. I have a couple of questions. First, with regards to your guidance of cost of risk. I heard you talking about it running at very low levels and potentially normalizing at 1.8%, 1.9% level. You have the full year guidance for cost of risk between 1.9% and 2.1%. For you to reach the guidance, you would have to be at 3% and over in the last quarter. How do you see this evolving? If this guidance still makes sense, I see that you did not update guidance, but I think it is now away from being reasonable. This is the first question. The second question, I was looking here into the evolution of COVID fatalities in Mexico.
Of course, since the peak achieved earlier in the year, have been making very strong progress with the vaccination. Last numbers that I have here for October show, that's below 200 per day. I was a bit surprised when you mentioned, Rafa, that the normalization of insurance should start only in the beginning of 2022. Given that the great part of the claims are related to life, would not it be expected to see some normalization already happening? This is my question.
The second one I will pass to Fernando Solís. We have a lag to pay the fatalities and that's why you will see the recovery after 2022. Fernando will speak about that. The first one, you are right, we are too conservative in the numbers and I think it's okay now because yes, we need a pre in order to get to that number, but we still don't know and that's why we are saying the same. I hope we will, again, have good numbers for you. I will pass to Fernando Solís. Please go ahead.
Yes, thank you, Marcos. Well, actually, yes, we are already seeing some progress in terms of the loss ratio and the claims. Actually, the leading indicators in terms of claims, we have been seeing a recovery. Actually it has already started. However, the normalization to go to the normal levels of net income, we'll always have a lag, because there is a lag which has been taking several weeks for some to come up with the claims in terms of gathering the information that is required to process the claim. Definitely, there is a recovery already taking place. Actually, the last month, we had a better result, better than what we have expected. We do foresee that normalization is already starting to take place.
I will take the opportunity just to mention that we do take into consideration all these effects of COVID. If we look at the results without this effect, actually, the net income would have been higher than last year by 15%, because other lines of business are doing much better. All the impact, as you know, is from COVID. Yes, the answer is to your question, recovery has already started, fortunately.
Perfect. Thank you very much. Just to understand, on the point of cost of risk as a follow-up, when you talk about the normalization of 1.8%, 1.9%, should these be what is expected already for the fourth quarter or more normal levels into the midterm, such as 2022 and beyond? Thank you.
Jorg, this is exactly as you mentioned, the second one, is the running rate that the bank should be around 1.8. You will continue to see pretty strong numbers on through the fourth quarter. We haven't changed the guidance for a simple reason. You see the evolution of the numbers that we present, and to us, to change the guidance at this point in time in the year, it really doesn't make much sense. I think is important to notice what you mentioned. The 1.8%-2% is the running rate that we see eventually reaching that number when we normalize the rate of growth of the loan book.
That's perfect, Rafa. Thank you very much, and thank you everyone for the clarifications. Congratulations for the results.
Thank you.
Thank you. Now we will take our next question from Ernesto Gabilondo from Bank of America. Ernesto, please go ahead.
Hi, good morning, Marcos, Rafa, Luis, and all your team. Congratulations on the solid asset quality in the quarter, and thanks for the opportunity. I have three questions from my side. The first one is on your expectations for loan growth and net interest income. We have seen still modest loan growth in the first nine months. However, looking to next year, do you think that the net interest income should be favoring from easy year-over-year comps in the insurance business, from higher rates, and from increased retail exposure, and this helping the loan book to gain some time to show again strong activity? My second question is on provision charges. I remember you stock of preventive from the ones that you built last year, and that you can be releasing at some point, if I am not mistaken, around MXN 1 billion.
Considering that the country is already in green in most of the status in terms of COVID, what do you need to see to release those provisions? Do you prefer to keep conservative for the rest of this year and maybe to release them early next year? My last question is on the dividend payment. I just want to know if there is any update with the regulator to let you fully pay the deferred dividends by year end or early next year. Thank you.
Thank you, Ernesto. I will start for the third one, the dividend. We are talking with the regulator. Next week, we have another meeting, we think we will have good news for you at the end of the year. We still don't know, it makes sense for everybody. We will tell the market as soon as we know. Talking about the provisions, we will wait until the end of the year to make the numbers, let's say, return to releasing the extra ones. It's going to be at the end of the year, the beginning of the next year, we will start fresh, we will make the numbers there. The first one, the loan growth, Rafa and NII, please go ahead.
I think, Ernesto, what you say about the NII, yes. I think if you project the third quarter based upon the loan growth that we have in the ones that were lagging behind, like the corporate. It's worth to mention on the corporate is that we were coming from a very strong last year of around 15% loan growth in the corporate because of the liquidity lines that the companies draw. We start, as you know, the second quarter was -12%. Now we are going to -7% because we have a pretty good growth on the third quarter on the corporate, that's already in a good trend. I think I see very difficult to go to positive, we will be much better than the -12%, that will continue to evolve on the next year on the corporate.
The government book is also picking up pretty fast. You will continue in the fourth quarter, I would say, a good acceleration on the government group. That already started to happen in the third quarter, that will help the NII. The consumer will continue to be, as Marcos mentioned, pretty strong on the mortgage, on the cars. The only issue with the cars is the availability of cars, but I think we have all the processes in place. The credit card is already regaining a pretty good growth, and the best part of the year is now in November and December. Payables continue to evolve nicely. Yes, we will see that the NII will continue to expand nicely into the fourth quarter and also into the next year.
I would say a big piece of that also will come from the insurance company, as we just mentioned from Fernando, that we already see the start of the recovery there. Also a big push will come from the insurance company. That if you see the insurance and the annuity company NII is -21 up to today. That will balance out on the next year. NII will improve, I would say, in a very reasonable number. Also, the funding side also will help us, because we are growing pretty strong on the funding side and the costs continue to go down, as I show you now in that part. I would say that we think the margin also will continue to expand, the net interest margin, to numbers around 6.2% for the fourth quarter.
Going into the first quarter of next year, based upon the hikes that we expect to happen at the end of the year, we will continue to see a evolution to numbers before the start of the downward trend in the interest rates. That's the overall, and I will just add to what Marcos mentioned about provisions. We still have MXN 2.9 billion of provisions to be released. We are looking at when is the best time, as Marcos mentioned, at the end of the year because we were criticized at the beginning that we were not prudent building up provisions. We showed that we were very prudent building up provisions, and we will be as prudent in the release of the provisions.
No, this is super helpful. Thank you very much. Just last question, related to some regulatory risks in the energy sector and the cap rate for the Afores. Just wanted to know your thoughts on potential impacts on your business.
What would I say? It's irresponsible now to talk about what's going to happen. We don't know. We know that the talks are right now and we need to wait. Let's wait a little bit, and then you will hear from us. We can say that we are not worried so far and we expect the best on that. What was the other thing?
The energy-
No.
Investor book and the exposure.
The exposure.
Yeah.
Gerardo is going to talk about that.
Yeah. Ernesto, what I will tell you that we have an extremely manageable exposure to green energy. As of now, NPL ratios within that part of the loan book are equal to zero. I will tell you that for the time being, in this energy transition, the relation of fossil energy to green energy exposures is more than eight to one.
In any case, what we have done is that we have modeled expected severity, that is, on the terms and conditions of potential legal modifications of the self-supply contracts on the green energy realm, and we remain very comfortable in managing that kind of a scenario. We will wait, as Marcos said, and provide you with the precise information once this regulatory reform or constitutional change takes place.
Talking about the follow, I will ask Fernando Solís to talk a little bit about that. Yes, we have bad news, that fees are going down, and we have good news that the volume is going to grow. It's not the same, but you need to add the two factors to the equation. Fernando, please go ahead.
Yes. Thank you, Marcos. Just as you mentioned, Ernesto, there has been a major change in the regulation of Afores. There was a change in the law, as you mentioned, they put a cap, and the cap is established taking into consideration free markets. The one in Chile, the one in Colombia, also the 401(k) in the U.S. I will not talk whether that methodologies are proper or not. We believe it is not, I will not elaborate on that. They have not published yet the cap. We are aware that the board of the regulatory body last week gathered, and the information that we have is that the reduction in the commissions will be very high.
Actually, the cap, as far as we know, it may change because it has not been published, and we are aware that the association and some Afores are talking with the regulators to see whether they can change this cap that has been mentioned. I will give you a number in a moment. Take into consideration that this may change, but I'm not quite sure that will be the case. We will see, and we will see what will be the legal action if it happens from some place, we don't know. What we have heard unofficially is that the cap, and let me be very careful on that. Unofficially, it has not been published. The cap that they want to establish is 0.57%. For us, that means a reduction.
Since we're currently charging 0.8 on assets under management, it means a reduction of 23 basis points. This is a huge impact. This will be the cap for all the Afores. That's something that will change in terms of what has been seen in the past. In the past, except for the public institution, the PENSIONISSSTE, we are the lowest in terms of prices. The impact to other Afores will be even higher. This will, everything else the same, of course, we do not do anything. We work, spend in the same way in commercial and so on and so forth. Certainly, this will have an impact on net income. As you can imagine, it would mean with the assets under management currently, it would have been a reduction perhaps of MXN 700 million to Banorte.
The double of that would be for the Afore because, as you know, we only own 50% of this firm. However, that is everything else the same. It's very hard to forecast what will happen in the future, but we do think that for some Afores, it will be hard to remain in market. I think there will be some consolidation. Also, we foresee, but as Javier said, we have to wait and see how the players will do with this change. We do foresee also that the sales forces will be reduced and also what is being paid for the sales forces will reduce. There will be some offset on these numbers that I just mentioned, but it's hard to tell how much we will be able to offset the negative impact.
I would also say that the impact for us will be less than for others. I will also say that we are the best placed to this change because we have the largest assets under management. We are the most efficient Afore in terms of expenses. We also have a very high quality of the portfolio. That is, if you take the average, with the assets under management take into account, divided by the accounts that we manage, we're among the best. We're very positioned for this impact. This will impact us in the short term, but we do think that in the long term, we're going to be the player that perhaps will benefit the most of this change. Also something that we have to take into consideration is that we have two very strong partners.
We have Grupo Financiero Banorte. That would also provide some advantage to us. In what sense? For instance, we will have a very productive sales force. We have to see how, taking into consideration the laws and the regulations and so on and so forth. I think that we can use this sales force also to
To help us into what is called the portability of the people that is on a payroll. I think that there are some other things that we can do to offset this impact. Definitely, in the short term, it will hurt us, as Marcos mentioned. That's the considerations at this moment.
Thank you very much, Marcos and Fernando.
You're welcome.
Thank you. Now we will take the next question from Thiago Batista from UBS. Thiago, please go ahead.
Hi, guys. Thanks for the opportunity. I have two questions. The first one about the profile of RappiCard holders. When you look for the clients that you got in the partnership with Rappi, are those clients already, or they used to be already clients of Banorte? Are those guys, they used to be unbanked? If you can give it to us, some profile of the clients that you got on RappiCard. The second one, about the ROE of Banorte. Clearly, the bank is posting a very good operating trend. ROE is still at 15%, for sure, because of the high level capital position that the bank has right now.
When you look for next year, I know that you don't have the guidance, but is it possible to see already a ROE of, let's say, high teens next year or at least in the next years?
Thank you, Thiago. I will start with the profile of the RappiCard holders. It's another business. That's why we call it another business, and it's another type of profile. Paco or Marcos will
Thank you, Thiago. The profile is, 28% of those 300,000 customers, they have not a previous credit card. They were all Rappi customers. They were all using Rappi, but they were using Rappi in cash. 28% were not users of a credit card. From the rest, 72%, if we assume the market share that we have, 10%, 11% will have a Banorte credit card. The other 89% will have credit cards from other banks.
Thank you, Paco. Talking about the ROE, can we see ROE in the high teens next year? Yes, as soon as we pay dividends. Remember that in the bank, we already have almost 20%. It's not so difficult, let's say that. As soon as we pay dividends, we are hoping and aiming to go to 20% as soon as the end of next year. Yes.
Clear. Very clear. Thanks.
Thank you.
Yeah. Just talking about this, what Marcos mentioned on the bank. I think, the bank that is already funneling up dividends, you already see, as Marcos mentioned, above 19% on that. On the group, as we get the normalization of the insurance company, you will see a strong pickup, and also with the dividend payout, that those numbers will normalize. I totally agree with Marcos. We are in a very good trend on the key metrics. If you look at the ROA for the bank, it's already close to the 2.1%, 2.2%. I think the key metrics are already in the right trend.
Thank you. Now we will continue with Tito Labarta from Goldman Sachs. Tito, please go ahead.
Hi. Good morning, everyone. Thank you for the call and taking the question. Two follow-up questions, I guess, on my end. First, going back on the provisions and more thinking about it from asset quality, right? Because NPLs have improved further. Your coverage ratio is 170%. When you're thinking about potentially releasing provisions, I assume the trend for asset quality may play a role. Any color you can provide. Do you think asset quality has bottomed here? Do you expect to see some deterioration through year-end and into next year? How do we think about the NPL evolution going forward? Then the second - Go ahead, you can answer, and then I'll ask my second question.
Okay. First one, I will ask Rafa and then Gerardo.
Yeah. No, I think everybody is looking at numbers that are extremely low. Remember that when we have these numbers, suddenly we have a pickup because of the charge-off that we did on the credit card on the second quarter last year, some people know that this is going to go on a very aggressive upward trend because of deterioration. No, that's not the case. As we mentioned before, Gerardo will go into this, the only things that we need to clean up on the consumer group are the mortgage group and the SME group, are at levels that are pretty low compared to the expectations that we had at the beginning of the pandemic.
If you look at the NPLs that are running 1.1, 1.3 on the mortgage side, that number, once we apply the charge-off in the fourth quarter and remains on the third quarter, will go down again to the 1.1. The overall numbers that you will continue to see at the beginning of next year will also be very strong on the cost of risk. Eventually, we will go back to the usual numbers of 1.8. It's not because we don't see any deterioration on the consumer book. On the commercial book, as you know, there was no relief programs like on the consumer, and there are specific relief situations for each of the clients that could have some issues on the commercial.
Maybe on the commercial, we will eventually see a pickup, but also coming down from very low numbers. The remains are the SME that we still need to pass the fourth quarter to charge off the numbers on the SMEs. If you look at the NPLs of the SME, are extremely low. We have a lot of room to expand the number before we're going back to normal. I go to Gerardo for the risk point of view on this.
Yeah. We are also surprised, positively surprised. We are convinced that from loan origination to loan recovery, sooner or later, credit process quality equals asset quality. We have seen that. Remember, we were first to market in relief and forbearance programs. Internally, we use agile methodologies. We engage and organize with sales in order to originate and also to recover loans. We have had quick and important workup efforts. We use internal modeling with a thorough cost-benefit analysis in order to propose restructuring schemes. We overall have reasonably low loan-to-value and loan-to-cost parameters. We do lots of follow-up to restructuring schemes. We have good second sources of payment. That's the importance of collateral, mainly in the SME loan book. We also have good timing with the payroll and credit cards debtors in regards to income generation. We collect until there is income to be collected.
We use a holistic, active management of non-performing loans. We are continuously calculating probabilities of default, exposure of defaults, loss-given defaults, and so forth. We are accustomed internally to compare expected losses as the loan is currently in one state of nature versus the expected loss with the selected payment alternatives. We calculate the expected benefit, we compare that to the cost of recovery, we expect positive net values, we proceed. We continuously review those schemes. We have been surprised about the behavior and performance of the loan book. This asset quality has been very good, as you have seen. Of course, we do not believe this is going to be stable. As Marcos and Rafael said, we are expecting the cost of risk to go higher and also the NPLs to go higher.
All right. Thank you. That's very helpful. My second question was back on the insurance results. In two parts. I know you said the claims are coming down, just to understand, because if I go back, in July, you initially thought claims were also coming down, and it looks like they did pick up marginally. Is the main difference just vaccinations have increased? I guess the question is, do you have more confidence now that the claims should come down going into the fourth quarter? The other part was, the technical reserves picked up a lot because of inflation, right? Inflation seems to be trending a bit, staying at that higher end for now at least. Is there a risk that those technical reserves remain high or go even higher in Q4?
Just to think about, I guess, the insurance on those two issues.
Please, Fernando Solís?
I'm sorry. I lost you the last question because I was answering one by chat. Could you repeat the one on insurance, please?
Start with the first question.
Sorry about that.
Sure. Yeah, no problem. Yeah, just the insurance, right? If we go back in July, claims were also initially coming down. I just want to understand what gives you more confidence that claims will come down in Q4. Is it just vaccination levels have increased, or is there any other risk that claims can go up again? We did see them go up in Q3 even though they had initially started to come down. The second part was on the technical reserves. They went up a lot this quarter. You had higher inflation. Inflation seems to be remaining a bit high. Is there a risk that those technical reserves have to go up more?
Well, actually, for the first one, I think that things are better and are going to be better because, as you mentioned, vaccination is accelerating. Also, even though people get sick, the protocols in the medical experience are better. I'm confident that things are going to be better for the last quarter. As I just mentioned, the last observation that we had the previous month, it was much better than we expected. It's very hard to forecast things that happens every hundred years and so on and so forth. I'm very confident that things are going to be much better in this quarter. I have to put the disclaimer that we cannot foresee the future. Now about the technical reserves. What happens in technical reserves is explained mainly because the annuity firm has been growing very fast.
That's mainly what is explaining. Also because of inflation, but mainly because we are doing so well in terms of how much we're selling premiums. Actually, the size of the market was much higher than expected. Even though we have a market share, more or less of 46%, but mainly what explains, because last year at this point, we were having perhaps the same or perhaps 47%, but the size of the market was much higher. Therefore, maintaining this market share, that explains. Remember that in the annuity business, when we sell the annuities, and most of it goes at the first moment to reserves, which eventually are used to pay to the pensioners over time. Of course, these reserves also, we will have to actualize them by inflation.
Remember that the pensions are paid in real terms. Therefore, whenever the inflation goes up, the technical reserve will have to go up. Mainly it's because of the growth of the market. Remember also that, of course, we do not have a problem in terms of the asset liability management, because even if liability goes up due to inflation, we are investing in securities which are linked to inflation. There is a hedge there, so it's no problem for us. That's what you will see the technical reserves. It's because we have been growing so much. That's the explanation. Actually, in the insurance business, it's actually in the loss ratio where you will see. We have two things there. We have the claims that have been paid, but also we have what we call the incurred but not reported reserve.
That's according to the previous behavior of the claims, we forecast how much has not been reported, but has already occurred. The experience with this pandemia is that we have seen a lag, as far as four to five days to get the documents that show that the beneficiaries have the right to claim. The incurred but not reported reserve also is in this loss ratio. It's not in the other technical reserves. I hope I have it clear. If the answer is not, then you know.
Yeah, no, very clear. Thank you. That's very helpful. If I could ask you one last quick question, just back on the guidance, on the net income guidance, 34- 35.5 . You're on track to deliver that, and you're not. Yeah. Okay, perfect. Thank you.
Thank you, Tito.
Thank you. We will take the next-
Banorte is doing an IPO process, and Mexico is naturally one of their target markets. In Brazil, we saw that valuation of incumbent banks have been very much impacted by this competition with banks like Nubank. Our first one, I want to understand a little bit, how do you understand that competition with FinTech to impact your business, and how Banorte is preparing for that? You mentioned the partnership with Rappi as some initiatives in the digital as well, right? For my second question, I wanted to understand a little bit, if you could give us an update on CoDi in Mexico, the instant payment initiative. I understand it hasn't picked up as much as we saw in Brazil with Pix. Kind of help us understand why is that, and what is the expectations ahead for CoDi. Thank you.
Start with the first one with Paco.
Thank you, Ricardo. We have three different layers for the strategy and to prepare ourselves to compete with the FinTechs. One is, as Rafa mentioned in his exposition, the accelerated digital transformation of Banorte. You can open almost every product in less than 10 minutes, mainly digitally. If you have to go to the branch, the process are completely linked. That's on one hand. The other hand is the new digital bank, brand new, that we are working on. The third one is the strategy with Rappi that we already mentioned. The key point here is, as they are not being as regulated as we are because they are not the bank, we have to move forward towards the digital onboarding where we are working on, and we will be ready to launch before the end of the year.
As I mentioned, the last quarter, Ricardo, and I will insist on that, not all the FinTechs are the nirvana, neither the banks are the hell, no. There are plenty of room in the middle, and we have to work on that. If you want me to answer the second one to the CoDi one.
Yes, please.
It's a big challenge, Ricardo, because CoDi, we have been tracking Pix. The challenge here in Mexico is that CoDi, you need an account to operate CoDi. It's not designed based on financial inclusion because you need to open the account. We are working with the authorities to see if we can leverage CoDi in a different way. If we can, in some way, let the people use some kind of payments as happened in India below some amount that can be under the fiscal or the taxes review, so we can improve and we can foster the use of CoDi. Mainly, the main challenge is that, one, you need the account, and the financial inclusion, as you know, in Mexico, the financial penetration is less than 50%.
Exactly.
Thank you
Thank you. Now we will take our next question from Alonso García from Credit Suisse. Alonso, please go ahead. Alonso, please unmute yourself.
Hello, everyone. Can you hear me?
Perfectly.
Yes.
Thanks for taking my question, and good morning to everyone. My first question is on insurance. You mentioned an impact of MXN 3.1 billion in claims from COVID for the first nine months of the year. Based on that, I estimate that it's MXN 400 for the 3rd quarter, which is less than half in the 2nd quarter. I was wondering if there was something else, any other line of your insurance business that was impacted by COVID in this 3rd quarter. I think you mentioned in a previous question about the incurred but not reported reserves. I don't know if you can possibly quantify the impact on that line during the 3rd quarter. My second question is on Rappi. I don't know if you could provide a bit more color on that initiative. For instance, how do you define active rates for your clients?
If you have already set a target in terms of cards for next year. Finally, if you could provide color on the average ticket so far in those cards. Thank you.
Thanks, Alonso. I will start with the insurance business. Remember that, as I said, 70% of the insurance business is life insurance. Everything is there. We don't see anything more. Talking about Rappi, Paco is going to.
Thank you, Alonso. We prefer to give you all the information in the Banorte Investor Day. As you can imagine, all the numbers are very volatile. We are working on them for giving you some forecasts and definitive numbers. Alonso , just on your first question about insurance, the number you have, 400, is almost 1,000 once you adjust by the reserves. In total, for the year, the impact has been MXN 3.1 billion. The third quarter accounts for one unit this.
This is 400 impact in claims and 600 in technical reserves from COVID.
That's correct.
Impact from COVID in the third quarter is MXN 1 billion.
Okay. Perfect. Thank you. Thank you, Tomás. Thank you, everyone.
Thank you. We will take the next question from Jorge Henderson from Santander. Go ahead, Jorge.
Hi. Thank you very much for the opportunity to ask questions. I have a follow-up question on your loan growth expectations. You already spoke about the government, corporate, and consumer segments. Regarding SMEs, your growth was flat on a one quarter-to-quarter basis. My question is, what do you expect or when do you expect SMEs to pick up and reactivate, and how do you see the asset quality trends in this segment? Also, I have one other question. This is on RappiCard. I know you are saying that you want to provide more detail on your Investor Day. I was wondering if you have any asset quality data, such as NPL rate or something like that. Thank you.
Okay.
Let me start with the second one. As you can imagine, when you start a business and you not even see the vintages of the first part, it would be very difficult to give numbers. That's why I think what Paco mentioned about wait to see the evolution of the cards and look at the evolution. What I can tell you is that the milestone at the beginning was an activation and the number of cards, and we are right on track to achieve that. We are taking all the elements to make that business as profitable as it needs to be. The other one that you mentioned is the SME. It's not that we are retreating from the SME at all. If you look at the numbers up to the second quarter, we were the only ones that we were gaining on the market.
We were flat, as you mentioned, on the third quarter, not because we want to retreat from that, but because it's a segment that you need to be very careful on that. What we are doing right now is creating the right product for that segment based upon the new normal that we see, and also taking advantage of the huge funding that that segment is giving us. We are concentrating a lot more on the service side on the SME, and we are not disregarding the lending side at all. With the service side, we understand the behavior of the client, and then we move into the lending side. You will start to see a pretty good momentum on the SME starting on the first quarter of next year.
Okay. Thank you. Just a follow-up on the RappiCard. I was wondering if you have any target for next year. You've talked a lot about this. You see a lot of competition coming from Nubank and coming from Ualá and other credit cards also. I don't know if you think you're going to be able to compete with this, being the leader on this segment, or do you expect to I don't know, more detail on the competition, on your opinion on that? Thanks.
No. Look, I think what Paco mentioned is key. Three strategies Banorte decided in 2019. Complete the evolution of Banorte in the digital space. You can open a digital card on Banorte now in less than five minutes with an extremely good customer experience. That's not the lack of competitive advantage for Banorte. I think that the advantage that the neo banks have is the cost, because they don't have any branches at all. That's why the launch of the digital bank that Paco mentioned is key, because that bank will operate at even a less cost-income ratio than the neo banks because of the shared services that we will provide from Banorte. We don't disregard the competitions. We like the competition a lot.
In order to compete with an initiative like the Nubank, you have Rappi on one side and the digital bank on the other side, that will not only provide the lending side, but also the wealth management side and all the services of a full bank with the digital costs. I think that's the way we are preparing for the competition.
Okay. Thank you. Just one last question. Do you have data of the Net Promoter Score on the Rappi joint venture?
At this point in time, what we have is we are testing the market on that part. We will start getting the NPS once we normalize all the processes and products that we are launching in the market. Right now, to launch the NPS, as you know, in Banorte, we have an NPS online real-time, every single moment of the client relationship. On Rappi will happen the same. We are building up that feedback in order to have that metrics for you. As Paco mentioned, pretty soon you will get those numbers.
Thank you very much for the detail.
Thank you. We have received two questions in the chat. One is from Iñigo Vega about Rappi. Iñigo, I think that with this, your question was already answered. The other one from Jeff from Amundi regarding the variation in the CET1. Jeff, it was basically the dividend that the bank paid to the group that is MXN 10 billion. That basically explains the difference. With that, now we will take the next question from Edson Murguia. Edson, please go ahead.
Hi. Good morning. Can you hear me?
Yes.
Yes.
Thank you. I have a couple of them. The first one is related to digital transformation, not only in the bank. What about the other part of the businesses as the group? Maybe the brokerage business or even the pension or the Afore. Are you expecting to transform those businesses in more digitalized world or there is a part of the strategy that it's going to take maybe couple of years from now? The second one, it's related to a follow-up on the dividends payment. I know that you already mentioned that you are in talks with the regulatory authorities, but my concern is, it is something about the regulators are not comfortable with? It seems that the economic recovery is in a good pace, and maybe the worst is over.
I just want to understand, it is part of the regulators, or it's a concern from regulators, or it's more a market concern?
I will start with the second one. I think the regulators are waiting a little bit to have more clarity in what's going on. They definitely want to release the dividends. They need hard data to release them. We expect that to happen before the end of the year. We still don't know, obviously, and we are talking with them, but that's my feeling. The first one, you are right. We don't want to be a digital bank. We want to be a group that work in a digital world, and that's the whole difference. We want to be digital everywhere, so in the pension funds, in the brokerage, in Afore. In Afore, you will see that we are taking some steps going there. It's our decision to move in a digital manner everywhere.
You will see that we are working in all the fronts, and that's our main target for the 2023, which we will release in the Banorte Day.
Okay. Last question about maybe efficiency that you discovered during this pandemic times. Are you expecting to be in a hybrid working mode for the following years and maybe efficiency on the profit levels? Maybe you don't need all the office spaces that you have in Mexico, and providing on that, what is your thoughts?
Yes. We'd like to learn something about all this. We released, I don't remember, a lot of meters of rents here in Mexico. It's like MXN 200 million per year. We will go with, everybody's happy to do it. I hope we learn something, and in the future, we will work hard, but a little bit flexible. It depends on the areas. Obviously, if you work to a branch, you need to be there, no? A lot of people is preferring to work, and we will respect that, and then we will make some accountability and see if that's working. My bet is it's going to work perfectly. We want to be a modern bank, and the people is going to be happy. If they are happy, they will produce more, and it's a win-win situation. We will go to that route.
Okay. Thank you so much, Marcos.
Thank you.
We will take the next question from Gilberto Garcia from Barclays. Gil, go ahead.
Hello, good morning, and thank you for the call. Several state governments, particularly those where there were elections this year, have been in the news lately due to having fairly severe liquidity situations. Have you seen any impact from this? Are you comfortable with your exposures to state governments? Thank you.
Yes. The answer is yes. We don't see any problem there. We would love to go to work with them. Remember, when we make this fusion with Interacciones, everybody was concerned, but all the competitors, all of them, they went to after the governments, and the rates went down drastically. Now everybody's there. We were the first ones. We know how to do it, and we are very happy with them.
Thank you very much.
Thank you, Gilberto Garcia. We will continue with Jason Mollin from Scotiabank. Jason, please go ahead.
Hello. Can you hear me? Good morning.
Yes.
Yes.
Jason.
Thank you for the presentation, Marcos, Rafa, and team. I have two questions. One on potential risks, and one on the group's digital strategy objectives. You've made comments on insurance normalizing next year in 2022, loan growth picking up, NII, NIM recovering. What are GF Banorte's management's greatest concerns related to generating the kind of pre-COVID-19 ROE levels of 20% that you mentioned? One that I think that you mentioned was that the potential regulatory change for the Afores, the pension funds. Actually, I just want to make sure I got that number. I think you guys disclosed or spoke about a all else equal hit to net income if the commissions' level was indeed to be reduced to 0.57%. Also, what are the other main risks you see? Just on the, it seems like we're waiting.
We're excited to hear about more details on the three-pronged digitalization strategy, that you've talked about, and that we should hear more at the Banorte Day. Have you guys established a firm date for that? Thanks.
Around April. We still don't know. As soon as we know, we will send an invitation to you. Let me give you some advances on that. We call it the 1, 2, 3, the new step of the bank, and it's with the first one in the year 2023, talking about digitality. We made a move there, and you will see a lot of stuff that we are working on. In April, we will see the rest of it. The potential risk, yes, the Afore. Remember that the Afore is like 6% of our business, around that. It's going to be hard, maybe. We still don't know. We will fight for that. You will see some good news in the Afore in the future. I am concerned, obviously, but not so concerned. We need to work.
The potential risks, all of them. We have a lot of business in Mexico, and whatever happens to Mexico happened to us. My main concern, we are a proxy of Mexico, so whatever happens to political issue, immediately the reaction comes to us. It is what it is, and that's our risk. On the other hand, if you want to buy Mexico, you buy Banorte.
Jason, about the clarification you asked about the impact on the Afore that Fernando discussed. He stated MXN 700 million, assuming we don't do anything, but of course, we will take actions to reduce.
Thank you. I understand clearly the proxy of Mexico and political risks. On the operating side, what are the things that could limit your ability to achieve the profitability prospects that you've been talking about. Is it competition? Is it irrational pricing? Is it that costs for some reason get out of control? What keeps you up at night when we think about the operating side and not meeting these? You have it, I think you've shown it and talked about it, and we like to talk about the diversified nature. Yes, Afore is only 6% and insurance is X, what can you tell us on the operating side that you want to control and make sure or are concerned about going forward?
I would say, Jason, that it's not external, it's internal. It's our ability to adapt to this new Mexico and this new digital world. We better be prepared. We better be prepared to be hybrid, or whatever you call it, to work. We need to work a lot. My concerns are internal. To work as a team, to make it, to understand everything, and to move faster than the others, because we are in Mexico, and we know the situation. If we do that, I'm sure that we will go faster than our good competitors, because they are very good, and we can provide good results for you. That's my main concern internally, to work as a team and to understand perfectly what's going on and to be faster than the others. Yeah.
Is that a way of saying that is the market getting tight for good talent in Mexico, given these startups willing to pay? Is the concern about the talent pool and that being pulled towards these new ventures that are achieving, looks like so far, a pack of valuations?
No. The way I see it is, we were the first one to launch this program to our customers. The path is very good for us. Now, all the competitors are there. All of them, they want to be in Mexico. Mexico is a great country, and if you want to be on the world map, you need to be in Mexico. They will unleash everything, and we need to be prepared, and we need to move fast. I'm saying that we have the best talent, from my point of view, in Mexico. Yeah, we need to put that to work.
Thank you.
Jason, just one thing. The digital evolution of Banorte, and you will see that on Investor Day, but we can also show to the investors whenever they want, because you can do that on a mobile application. I think we have achieved a really big advantage on the digital onboard process on the consumer, and also moving aggressively into the transactional fees of the bank. When you see what Marcos mentioned, the culture of Banorte has evolved a lot in the last five years. I think culture is also a key factor for Banorte, and it's what is helping us to attract the talent that we need.
Another thing that we want all to tell the market is that we are joining forces with the most prestigious institution in Mexico, university and graduate programs, that is ITESM Tecnológico de Monterrey, in order to keep providing all the services to the young and coming, to the high talented individuals, on that alliance. We are moving in every single part that we need to put around Banorte. The digitalization process is going extremely well. The culture evolution of Banorte is also something to be proud of.
Super helpful, gentlemen. Thank you.
Thank you, Jason.
Thank you. Now we'll continue with Yuri Fernandes. Yuri, please go ahead.
Hi, all. Can you hear me?
Yes, Yuri.
Hi, Rafa, Marcos, everyone. Thank you for the opportunity. I'll be brief here. I have just one question, actually, a follow-up regarding asset quality. This quarter, your settlement gains on the new NPL formation, I guess the cash collection, was a bit higher than normal, like three, four times the usual run rate. Again, I got your NPLs are very good. Asset quality trends are very good this quarter. We don't know what drove the settlements to be much higher. My question is, what is explaining this, I guess, MXN 2.2 billion reversal this quarter regarding settlements? That's my question. Thank you.
I don't think that nothing extraordinary, Yuri. As you can compare that to other years, you see that there's a kind of seasonality in that part. What I can tell you about also is that the cash recovery in the collection shop has been going up and up and up. We expect to have, compared to last year, close to 40% more cash collections than the year before. Nothing extraordinary. I think this part of the seasonality, if you compare on year-to-year part. That's what I can say. Nothing really out of the ordinary. The only thing that we have improved a lot is the cash collection process in this funding.
Perfect. Thank you, Rafa.
Thank you.
We will take the next question from Carlos Gomez-Lopez from HSBC. Carlos, go ahead. Carlos, please unmute yourself.
Yes, sorry about that. Thanks again for the call and for your patience. Two very brief questions. The first one, I kind of know the answer. If you already have the name and the date of launch of your new digital bank, I suspect that it's going to come in the rest of the day. Second, regarding competition, we have seen asset quality being very good across the board. I wonder how come that is not reflected in some of the banks, having to be more aggressive and seeing narrower spreads. Are you considering that for yourself, or are you seeing that in any other player, that competition has started to erode, just simply because the asset quality performance has been so good? Thank you.
First of all, we have the name of the bank, but yes, we will release it in Banorte. Sorry.
different
Different. You will hear from that. Competition is there, and it's that pressure, yes. We have been working with this competition. We have 50 banks in Mexico. For us, it's not new. We know that everything that could happen, and everyone is going to be there, and we need to be prepared. It's good for the country at the end, welcome. We know how to work with that. We prefer to work internally and not to worry too much about that type of competition.
Carlos, if I may to add what Marcos mentioned. Banorte has the balance sheet, has the liquidity, has the capital to compete in the market at a very strong position, and also the best risk numbers in the market. Our risk-adjusted margin is the best in the market, second to only one bank because of the mix of the portfolio. The risk-adjusted margin and the risk numbers are extremely strong. Whenever we see that the risk is right, Banorte will be there.
Okay. Again, you have not seen a significant increase in competition. You have not seen somebody becoming significantly more aggressive after the pandemic than they were before.
No. As usual, it's a lot, but no, as usual.
Thank you so much.
Thank you. We'll take our next question from Federico. Federico Galassi, sorry. No, he unraised his hand. Thank you, everyone. Thank you for your interest in Banorte. With this, we conclude our presentation. Thank you very much.
Thank you.