Good morning. I am Tomas Lozano, Head of Investor Relations, Financial Intelligence and M and A. Welcome to Grupo Financiero Banorteur's 2nd quarter earnings call for 2021. 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, Marco Ramirez, will provide highlights for the quarter, which showed the evolution of a continued recovery in the Mexican economy, although some sectors are still affected by the COVID-nineteen pandemic.
Later on, Rafael Arana, our COO and CFO, We'll provide further detail on asset quality, rate sensitivity and updates to our guidance. We will conclude our call with a Q and A session. Thank you. Marcos, please go ahead.
Thank you, Thomas, and good morning, everyone. It's good to be here with you once again. The Q2 of the year was marked by a general sense of economic recovery. GDP growth estimates for Mexico have been revised upwards, Now reaching close to 6%, driven by the strong commercial ties with the U. S.
Economy, together with a faster than expected reopening of different industries in Mexico. Tourism has also surged with occupancy rates in the Mexican Riviera and Los Cabos reaching more than 80%. However, the rest of the country has had a lower occupancy, but business tourism is still lagging. Despite having a slow start, The vaccination program in Mexico has evolved positively, with more than 50,000,000 doses applied for the most vulnerable sectors of the population And now advancing towards the younger age groups. As the 3rd wave of contagion spreads in Mexico and around the world, We have not lowered our guard and we continue to observe strict measures to protect our customers and employees And we're continuing to implement prudent risk policies.
The increased economic activity during the quarter took its toll on inflation, which reached 5.9% in June, thus triggering the Central Bank to make an unexpected 25 basis hike to the reference rate, reaching 4.25%, ending a constant cycle that lasted for more than 2 years. Our economic analysis teams expect additional hikes to the reference rate for the rest of 2021, estimating it to end the year around 5%. Later on, Rafael will go into more detail regarding our sensitivity to rates and Pablo Casillas available to. Another relevant milestone during the quarter What's the outcome of the midterm elections in June? As no party gained qualified majority in the lower house, it is expected that some pent up investments And business decisions across different government and commercial sectors should begin to materialize throughout the second half of the year and into 2022.
Shifting gears into the financial results, Slide number 4. Net income for the group has gradually recovered, [SPEAKER IGNACIO CUENCA ARAMBARRI:] With you, results already reaching pre pandemic levels. Capital accumulation at the group level still has an impact on Rui. However, return on equity at the bank was above 20% in June, reaching 20.7%. In line with the regulator's guidelines, we have resumed dividend payments distributing 25% of the 2019 net income in May.
[SPEAKER IGNACIO CUENCA ARAMBARRI:] And we have received authorization from the Board to distribute 25% of the 2020 results, which will be paid later in this year. Slide number 5. Net interest income from the loan portfolio increased 2% versus the previous quarter. However, on the group level, NII was affected by results from the insurance businesses, which was impacted not only by a seasonal decline in premium origination, But also by higher COVID related claims, as we will see later in our results by subsidiary. Non interest income was impacted primarily by lower trading results, which were affected by back to market valuation on some instruments derived on the recent increase in interest rates.
NetEase, Slide 6, had a relevant 2% increase during the quarter. Digital adoption from our client base has driven a 10% increase in electronic banking fees. Economic reactivation is evident in both Higher POC transactions and more active consumer loan origination fees, which had a 9% decrease during the quarter.
However, we
are still relying on external sales forces for mortgage and auto loan origination, which increased the amount of fees paid. Moving on to Slide number 7. We continue to see solid loan growth in the consumer sector, Particularly in mortgages and payroll loans. Growth was partially offset by a relevant prepayments in our corporate and government portfolios, Which led our total loans to a minus 1% contraction during the quarter. However, throughout the pandemic, We have gained 116 basis points in our total loan market share, driven by important gains in our commercial and consumer portfolios.
Slide number 8. Asset quality continues to perform ahead of our expectations, with NPL ratio totaling 1.4% in the quarter, Gradually returning to their normal operating levels across all product lines, we continue to work hand in hand with customers that were unable to resume payments after they came out of the relief programs, which as of today Accounts for 0.8% of our total loan portfolio, well below our initial estimates, as you know. Looking at our results by subsidiary, Slide number 9. The most relevant impact during the quarter is evident in our insurance business, Which regrettably continues to register higher claims for COVID-nineteen related cases. Although lower than the previous quarter, claims in our life and health insurance portfolios are still high as the pandemic is not yet behind us And cases from the 3rd wave of Contagion are still among us.
The recent surge in inflation and the subsequent reference rate hike from Banjico Also had an impact in reserves and financial results in the NetEase and Insurance businesses. However, revenue diversification in the financial group Helps to partially offset these effects. As in the previous quarters, we have included supplementary ESG information in the conference to the presentation for your review. With this, I conclude my remarks. And now, Rafal Randall will give you additional details on the main operating and financial update as well as some positive updates to our guidance based on current trends.
Rafael, please go ahead.
Thank you very much, Marcos, and thank you for attending the conference. Let me just start with a brief recap of where we're standing. There was and thank you for the notes that we received from the analysts. Those notes help us a lot to [SPEAKER FRANCOIS VAN BOXMEER:] Concentrate exactly what you need to know about the evolution of Vanorte. As Marco said, I think we have to separate things in 2 parts.
The first one, as you know, during the pandemia, was to control the pandemia, To control the cost of risk, to control the evolution of the potential deterioration of our portfolio. And I think Banorte did a pretty good job on that part. There were some concerns at the beginning that our provisions were too low. And but we were based upon the numbers that we have, we were comfortable about the numbers. Right now, when you look at the evolution of the income statement and also on the balance sheet, Let me just give you a brief part concerning and taking into account that the first part during the pandemia was to control The deterioration of the risk, it was very difficult to grow into that part.
So it was basically to control expenses, to control the risk And also to become a much more efficient bank and continue the evolution and transformation into the digital space. The positive that we now see is that EPS continues to move into the right directions. So we see EPS recovering and trending again to the growth rate that we have before the pandemia. The loan growth, there were some concerns about you say, well, you're getting the results, but there's a lack of growth. Yes, There's lack of growth, especially on the corporate and on the government book, but we see Very good trends for the 3rd and for the 4th quarter on the government book.
Once the elections are over, we will be recovering The growth in that part and the corporate, as Marco said, we start to see some buildup on the pipeline. The consumer is Performing better than expected. We right now we see good numbers, double digit numbers in the mortgage book. Car loans continue to reach At close to double digit and credit cards start to recovery once the consumer start to re lever again the part. Payroll loans also positive growth.
So the consumer that is the book that give us better returns is performing Better than expected, commercially starting to build up again. So we see a 3rd and 4th quarter Much better on the corporate and on the government and a continued strength on the mortgage on the consumer book. So the consumer We'll continue to do well. Now we see a 7% growth in that part and we will continue to do so. So credit is better.
Provisions are much better than expected on that part. So as we mentioned, the loan growth is mixed, but real growth opportunities, as we mentioned. Also Marcos will make a very strong remark about We continue to gain market share under these circumstances. So Banorte is in a position based upon the liquidity and the balance sheet that they have We can go into the market and buy the loans that we would like to buy. The liquidity is quite high.
It's costing us on the net interest margin even though the margin is Better than expected, but liquidity is at 210,000,000 because obviously there's no place to The rate of growth of the liquidity doesn't match the rate of growth of the loan book, so liquidity is building up. We will see A downward trend towards the end of the year because of this buildup of the pipeline that we have on the commercial and on the corporate and the government. Capital generation continues to evolve. As you know, we already paid 25% of net income of 2019 and we will be paying In the 3rd, Q4, the 25% of 2020% on that part, but capital continues to build off At a very good pace, putting Banorte in a very strong position on the balance sheet. We know that's the more efficient way to warehouse capital, but at this point in time based upon regulation that is where we are on that part.
NIM is holding pretty well based upon the cost of funds and the evolution of the consumer book. There were some concerns on some notes that I read about the expenses should be lower based upon the lack of growth. I think we are controlling expenses pretty well. As you know, we always commit ourselves to inflations for 100 and 150 basis points. I think at this point in time, we will be at least 100 basis points below inflation on expenses.
We continue to invest where we need to invest that is The transformation, but expenses are very controlled on the other side, personal and Everything that is not related to transformation on that part. I would say that COVID, as you say, there's still some things to resolve, 3rd wave, 4th wave on that. That's why we are being prudent with the release of provisions. Some note says that we achieved the results based upon The relief of provisions, I want to note that we only use MXN 150 1,000,000 in the quarter of those provisions that are related to COVID. So basically that was the total amount that we released In the Q2 on that and that really proves the fact that the portfolios and recoveries are Performing much better than that.
So 78% of the provisions are still In case we need those provisions to be applied. So we only have been using BRL150 1,000,000 in the second quarter of That and 78% of the provisions still are on the book to be used if needed. The other things that say is in a nutshell that these are unusual times With our liquidity going up, provisions better than expected, lack of growth in some parts of the portfolios, but good growth in other Some things that are very important to be related is that, I would say, People are asking when the cost of risk is going to trend again at the end of today to the usual numbers that Banorte runs. That will happen usually around the 3rd the end of Q4 on that part. When we see again stable numbers on the cost of risk and also on the provisions build up.
So I think we are right on target what we expect when we build up the additional provisions. And There's going to be room for relief of those provisions. We have to see how things evolve on the potential COVID issues, but we are confident that we can release some provision stats. By the way, those provisions Those additional relief of provisions is not included on the guidance that we are giving by the net income by the end of the year. In the graph that you've seen basically is what I just mentioned about The provision and the evolution of the cost of risk and the write off rate, the write off that we're still pending on the, I would say the consumer part of the book is still that some write offs needs to happen on the mortgage book and some of the SMEs, but Well below what we expected when we start building the provision.
Those write offs Usually, they will happen in the at the end of the third quarter and at the end of the Q4 on the SME. I want to remember to I want to recall that in SMEs, we 48% of the portfolio is under nothing guarantees. So we are Confident that we have enough provisions and that the portfolio is performing better than expected on the mortgage book. And you know NPLs are just 1.1%, 1.2% NPL ratio, so better than expected even before that we applied the write offs. If we move into the next page, I think a relevant part is the net interest margin.
As you can see in the graph, there has been A very aggressive drop on the rates, as you know, from 8.6% to 4.3%. But when you look at the bank's NIM, It's now approaching the 6% that is 4.9 And it has been very resilient because of the cost of funds that we have been trying to achieve. Right now, we are 46% offset us and we would like to be at the end of the year around 40% offset us to continue the downward trend on the evolution of the cost of funds and greedy that will push up the net interest margin along With no more interest rates reduction in the near future. So the NIM, A pretty good story. The mix is in the funding side is improving, 72% in our demand deposits.
So that's also a good story. We are not where we want to be on the cost of funds, so there's still room for improvement on that from the 46% to the 40%, as I mentioned to you on that part. On the next page, there has been also questions About what's here, the sensitivity. As you know, we are asset sensitive as it has been in the past. So we will continue to see An evolution of the sensitivity in the balance sheet now towards a good performance for the balance sheet.
So we expect the sensitivity on the balance sheet to continue to evolve On a much positive numbers, closing maybe depending on how fast and How deep the interest rates go up, up to 100 basis points, close again to the usual number that we have, the EUR 1.2 €1,000,000,000 €1,200,000,000 The next page, please. Expenses that there were some comments that, as I mentioned before, that we needed to be more aggressive on the cost side. I think we are being as aggressive as we can, But we are not touching the transformation piece. We continue to evolve on the digital space, as I mentioned before. And there's also been questions about That's when we start to producing the numbers for Rappi and for the digital bank.
I think we need to wait At the end of the year, for the rapid numbers, I will just give you in a nutshell. We are right on target to achieve the 400,000 credit cards that we I'll commit to into the market and on the milestones that we need in order to continue to invest. We are right at 200,000 as I mentioned, And we don't see any problem to reach the €400,000 at the end of the year. Once we have all the acquisition cost and the evolution of the numbers On the risk side, we will start producing metrics, not really the income and balance sheet, but metrics concerning about our commitments to the market when we signed the deal with Trappi. On the digital bank, We continue right on track.
We're waiting for the license to happen. We are, as I mentioned before, At the end of July, we start to test family and friends, the initial stages Of the product evolution and presence to the market. So we are also right on target on that. As you know, both of those initiatives, we expect to breakeven around The 3rd year on both of them, but we will continue to provide once we normalize the run of the businesses Metrics in order for you to see the evolution of those 2. So expenses under control will be below inflation And we right as I where we will see the guidance, we see that we will continue to be on the tag one trend on the expenses.
This is creating an issue concerning The cost income ratio, because the cost income ratio is around 44%, that is well It's quite high compared to the usual 40 below 40 that we run the bank with it. One thing that is important Considering the cost income ratio is that because of the need to create those provisions on the insurance business And the margin has been affected and is affecting the margin of the group around MXN 2,200,000,000. So if you go and put that on a recurring basis because once we start going back to normal that we think that's going to happen [SPEAKER
UNIDENTIFIED COMPANY REPRESENTATIVE:] At the end of the 3rd and the 4th
quarter on the insurance business, you will continue to see a good evolution on the cost income ratio, not because of the rate of growth of Expenses because of the lack of growth on the revenue side, mainly on the insurance side, that It's caused by extraordinary items like the COVID issues and the technical reserves pile up. So You will continue to see a good evolution of the cost to income ratio once we normalize The COVID issue with the insurance business. So expenses under control, cost income ratio above what we would like to be, but it's A very specific reason and it's a non recurrent one. On the next one, basically the capital that this has been Questions related to what's going to happen with the payout ratio. As you know, our commitment to the market is to stay at 12% to 12.5 On the core Tier 1, we are at 15.2%.
Most of the dividend we paid is already warehoused at the group. So there's still a lot of room to your payout ratio. And once we get the goal from the authorities, we will start to normalize again the payout ratio. Do you see also in this graph the numbers about Liquidity is extremely high. We really like to run the liquidity numbers of the bank around 135,000,000 to 140,000,000 But this is because the lack of growth on the loan book.
But I want to stress again, The first part of the process was to control the pandemia, really Take care of the capital base, take care of the liquidity. I think we did a good job on that part. Now we have some good patches of growth in the consumer, And we expect some good growth also on the corporate and government side in the next months. But The first part was to control and to take good care of the balance sheet and on a capital base and on the liquidity I think also Banorte did a good job on that part. And now we are ready to go back into the market.
As you can see on the gain in the market share, Manote is really extremely well positioned for growth in Dalfa. So please next. Now if we like to give you A heads up about the change on the guidance. There's no dramatic changes on the guidance, but they show a trend. The loan growth, we are reducing the loan growth because we even we expect good growth on the 3rd and 4th quarter.
We only have 2 more quarters to grow the book on the corporate and the government book. I think we will achieve the numbers that are there. On the consumer, we are already there on that part. NIB contractions, we see better numbers on the NIB contraction. I think it will be trending more to the Minus 10, based upon what we mentioned about the evolution of the funding side, the mix and the growth on demand deposits.
Expense growth below inflation, 4.2% to 4.6%. That's where we want to be on that part. Efficiency, once we start to normalize the provisions on the insurance side, we will trend again to the 41 to the 42. The cost of risk better than expected and I think that will continue to be a good story on this part. The tax rate stays the same.
Net income, we now are pushing our numbers and it's important on the net income to consider that we are not taking into account Any relief or provisions on this number that I'm giving to you of those 78% that are still pending to be released on the market. Return on equity for the group from 16.5 to 17.5. This is important to notice that these are final numbers for the year. This is not the average number for the year. And the return on equity of the bank, we now see that the number should be more close to the 19% By the end of the year, we already see in June, as I mentioned to you, And numbers above 20% of the return on equity for the bank.
The UDP inflation rate inflation It's very sticky, so it will put pressure on the interest rates on an upward trend. And GDP 6%, 6.5%. But this is a confusing number because what we need is more confidence In the investor side to really be aggressive on the investment side and move the corporate book more onto With this, I close my remarks. And now I pass the word to Marcos again. Thank
you, Marcos and Rafael. Now we will continue with our Q and 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. Jose Luis and myself will be calling the name of the person that is next on the line.
If there are any technical difficulties, please let us know by using the chat. Thank you. We are now ready to start the Q and A session. We will start the first question from Ernesto Gabilondo from Bank of America. Ernesto, please unmute yourself.
Hi, good morning, Marcos, Rafa, and good morning to all your team and thanks for the opportunity. My first question is on NIMs. Your new guidance is showing lower pressure, [SPEAKER DANIEL MARTINEZ VALLE:] And it seems that it implies an important expansion in the second half. So do you think this is a combination [SPEAKER CARLOS GOMES DA SILVA:] Of no longer having the same impact in the insurance business, plus higher rates and loan mix considering that the retail started to grow this quarter. And also, as you mentioned, by better funding costs.
So I would like to know what will be really the drivers for the NIM. My second question is on asset quality. As you mentioned and there is in your presentation, Asset quality has been behaving better than expected, especially in consumer and mortgage loans. However, we noticed a pickup In the NPLs of corporate loans, so can you elaborate if this is related to a specific corporate? And finally, my last question is if you can elaborate on your Google strategy And how would you pretend to use it with your digital banks?
And also related, how can a remittances business help you to bring funding for your new platforms and potentially attend the own bank segments. Thank you.
Thank you, Ernesto. A lot of questions. I hope the first one is regarding the move, you named it. [SPEAKER CARLOS GOMES DA SILVA:] It's all of them, yes, all the expansion, the head rates, all this is going to help. And the combination, we still don't know exactly How much of each of them?
But all of them, we are very positive that all this will happen. I will go first with Paco Marta with the Google strategy and then we'll discuss the other questions. Go ahead, Paco.
Thank you, Ernesto. The alliance with Google has Several different options and different streamlines. We are going to work on strategies around cybersecurity. We're going to work on a strategy around open banking. We're going to run on strategies around beta and help us flow the data, artificial intelligence and all the search engines that Google Cloud has.
So and nonetheless, we are also working with them in how to Take advantage of their culture and their working methodologies. So we're going to leverage not only in the digital banks, not only in the Rapid Card Alliance and in the initiative of the digital bank, but also in the digital transformation that we are doing in Banorte. So we already have some 3 different projects, 1, migrating solutions to the cloud. We're going to migrate the ERP. As I mentioned, implementing some cybersecurity tools within Banorte, the digital transformation of Banorte.
So it's a range of a lot of opportunities that we are seeing with this alliance.
Thank you, Paco. Please, Gerardo, talking about the asset quality in the corporate loans.
Sure. Thank you, Marcos. I will say Ernesto that regarding the wholesale loan book and specifically the corporate loan book, Up to now, we are dealing with isolated delinquencies and remote past due loan cases. However, we are very well aware and on the lookout of any hint or indication of a systemic risk type of case and or situation. This is not has been the case up to now.
We consider that this metric is going to be lower As soon as this month because of sustainable payment, that status, it's going to decrease by the metric you're looking at. So we're not worried at this case. And We have seen that recovery rates, write offs or closures have all gone very, very well. And This metric is just will improve in the short term.
[SPEAKER CARLOS GOMES DA SILVA:] Thank you, Gerardo. Maybe, Rafael, can you help us with the remittances?
Yes. As you know, we are very important player on the remittances business. And the good thing about the digital offering into the market is that Because the acquisition cost is so low and a lot of the remittances now are flowing on a digital space, we can really offer a wide range of Segmentation process to the low end of the market with the remittances, very, very low cost of acquisition that will help us our funding, As you mentioned on that part, so one of the key elements of the digital offering is that once you reduce the origination cost and the Position costs, you can really serve a wide range of segments with Specific value propositions for each of them. So we see a very good opportunity. We are already doing a lot of digital On the remittances side, I think we have been doing it in the last 2 years.
But once we offer the full range of Our value propositions to digital bank remittances will be a key element on that to serve the, I would say, the low end Of the market that can become Bankarize in a very efficient way to the digital offering. We'll
now take our next question from Eduardo Rosman from BTG. Eduardo, please go ahead.
Hi, everyone. So thanks for the opportunity here. I have actually Two questions regarding, let's say, regulation and FinTech ecosystem. I think that first one would be interesting if you could Share with us an update on Codi. As you know, like in Brazil, PIX has been a huge success.
So why Codi has not worked in Mexico yet and what are your expectations for it going forward? This would be my first question. And the second one also Comparing to what's happening in Brazil, we've been seeing like a boom in Brazil's FinTech ecosystem, right? Naturally, This is hurting the valuation of Brazil's of Brazilian banks, right? And in Mexico, I think we are probably going to see that as well, right?
So We do have a new bank MercadoLibre investing more and talking more about growing Mexico. How do you see the
landscape for that in Mexico? I know
that Banuach has been doing And I'll just ask you to note that in Mexico, I know that Banuach has been doing some partnerships and some investments as well to prepare itself. So it would be interesting if you could share your thoughts on these two subjects. Thank you.
Eduardo, very interesting. Yes. The boom that we are watching in Brazil is going to be in the same in the femtech On the ecosystem in Mexico. So in some other time, we will be prepared and that's why we have all our
Looking
at that for sure scenario, no? So I will ask here, Paco Marta, to share what's going on with the COVID, the resources with the CODI and also with the Fintech ecosystem. [SPEAKER CARLOS GOMES
DA SILVA:] Thank you, Marcos. Thank you, Eduardo. Let me start with the COVID one. Although the number of transactions has been growing tremendously, at least for us, the transactions that we have sent Year over year has grown more than doubled and the receipt transactions is like 40%, 50%, let's say. We agree that it has not been able to launch as expected.
The way we see it is that there's no any incentive in the market for the people to transform their money to the digital money. And COVID is built for people that already has an account. And even we have, for example, the possibility to create an N2 account in the web in Vanorte's web, And you can use that for COVID. There's no incentive to transform your cash into the digital world. So We are working with the authorities to be more inclusive in the ecosystem and be able to really move towards financial inclusion.
Around the fintech boom in Brazil and Mexico. Soon You will include in your new bank and MercadoLibre sentence, you will include Rapicar for sure. We are seeing it. We are seeing the Banking Commission approving the Fintechs, some of the Fintechs, Some of them with a lot of conditions, but obviously, the market is moving towards that. But I would like to remark that Neither Fintechs are Nirvana and the banks are the devil, no?
So there's a lot of Grain notes in the middle. And we have to work with them. We are using some of the Fintechs that are in the market, for example, for our payments, for our marketplaces. So it's more a matter of taking advantage of them and then taking advantage of our capabilities because at the end, what we believe is that the customer needs the trust And the trust is not easy to build and Banorte has a lot of trust of our customers.
No, no, great. Just a follow-up here on the CODI subject, because I think you mentioned something very interesting, the incentives, right? So what could change, do you think, if I don't know, maybe if the government starts paying all the benefits Through these digital accounts and maybe incentivize kind of people to use that digital money, Maybe this would force merchants as well to start accepting, right? Maybe this would be a way to think about it. And the other thing would be, as far as I know, Correct me if I'm wrong, only banks are allowed to manage CODI, right.
I think in Brazil, we do have, Let's say payment institutions, some other fintechs, which are able to be part of PIX, right? Naturally, it's different, right? But Would that probably do you think if those two things happen, do you think that this maybe things could accelerate for Cody?
[SPEAKER CARLOS GOMES DA SILVA:] Yes, for sure. But let me tell you that not only banks can manage COVID. Big retailers are already managing COVID like Walmart and Comercio Mexicana. They are using COVID. But at the end, you need to have an account.
But I agree with your first statement. If we are able to ask that the services that the government provides, let's say, power, energy, water, they need to be Debit it automatically in an account that will create a more financial inclusion. So we are asking them, for example, to include QR codes for the transport in Mexico, the buses and some other transportation. And let me tell you, I'm looking in my notes. I don't exactly know the perfect amount, but we are talking with them because there's If we are able the same way that we have the M2 accounts that require less documents and a know your customer easier procedure, If we can also exclude and obviously, not it's not our decision, but if we can also exclude some kind of accounts from the taxes Regulation that will create a more financial inclusion.
[SPEAKER
JEAN LOUIS SERVRANCKX:]
Okay. Thank you. Thank you very much for your answers.
[SPEAKER JEAN LOUIS SERVRANCKX:] Thank you, Doro.
If I just may add one thing about what Paco mentioned, I think the evolution in Mexico concerning the fintechs and things is more Similar to what is happening in the U. S, that the systemic banks, the large banks are becoming faster and much more agile, investing a lot in transformation and And much more agile investing a lot in transformation and digital and having digital offerings into that. And during the pandemic, as Paco mentioned, I think people also look for strong entities to have their money with. On the payment side, on the transaction, maybe there's a room for that. But what we see in the evolution of the pandemic and what's the trend In the U.
S. And in Mexico, we saw the big banks are becoming more and more and more agile and bigger and faster in order to really Compliment the digital offering in the market. Thanks, Rafa. Thank you.
Thank you. We will take now the next question from Thiago Batista from UBS. Thiago, go ahead please.
Yeah. Hi, guys. Thanks for the opportunity. I have two questions. The first one is a follow-up on asset quality.
When you look to the NPL ratio of Banorte, it's still, I can say, well below the pre COVID level that used to be, let's say, close to 2%. Do you see this NPL ratio returning to this pre COVID level? Or Have you seen any change in your portfolio that may maintain your NPL ratio below the pre COVID level? So this is the first one. The second one is about payout ratio and the capital of the bank in the future.
Even considering the 2nd payment of dividend of this year, your current capital will be Very strong in my calculation over 40%, probably one of the highest among Latin banks. In the way I look for the Mexican bank season, I do not see loan growth more than double digits or achieving the double digit level. And if we assume ROE of Banorte returning to the high teens, then thank you, you generate a lot of capital. So my question is, do you see a much Higher payout ratio in the future for minority or do you see other ways to deploy this capital? If there's any special segment where M and A should make sense, so trying to see how your capital will evolve in the future and how to deploy this capital?
Thank you, Thiago. The second is a Tom, well, because we are alert and we don't know still what we're going to do, but we can do everything. So that's the good news, no? So as soon as we have a clear strategy on that, we will go with you. But yes, you are right.
We are creating a lot of capital, which is good, of course. And we will see what are we going to do near future, maybe at the end of the year. And the first one is also very interesting. We will go to the 1.9% around that. And then Depending if the consumer grows more than the others, obviously, the consumer needs more reserves.
So we will change because of the good reasons, maybe to 2.1 around that. I will leave Gerardo, to give you more color on that.
Yes, I will thank you Thiago for the question. That's a question that we Make ourselves daily. And obviously, asset quality predictability has significantly increased. There is more clarity in the retail side of the loan book, and we expect to approach a normalized rate Risk metrics scenario no later than the end of this year. When we look at the past due loan segment of our loan portfolio, It is being successfully managed in an assembly line type approach that is from delinquency management all the way up to legal collection if necessary.
Recovery rates, write offs, foreclosures are going very well. And up to now, past due loan portfolio sales are not being considered. On the contrary, we are buying, not selling and recovery rates are have been performing Very well. Structurally speaking, we will leave any possible structural change on quality credit metrics together, And we are very expectant to witness that. We have taken a very active role In managing the past due loan portfolio and managing the wholesale side of the loan book As well as the retail side of the loan book.
So we remain very optimistic on quality loan growth prospects. And up to now, these past due loan ratios have been performing very well as you have seen.
Thank you. We will now take our next question from Tito Labarta from Goldman Sachs. Tito. Please go ahead.
Hi, good morning, everyone. Thank you for taking my question. A couple of questions also. First, Following up, I guess, on margin, but specifically on the insurance part of it, when do you think that the insurance business begins to normalize? Do the claims normalize already in 3Q?
Do you think you still have some pressure on the claims related to COVID in 3Q and 4Q? So just to get some color on how much the insurance will benefit margin going forward. And just to clarify, the guidance It's for the bank margin or is it for the group? Just want to make sure, understood on that. And then just one quick follow-up on the dividends.
Just any color you can give on your conversations with the authority if you think you will be able to pay out more this year or will you only be able to do the 25% of 2019 25% of 2020 this year. Any color you can give on that would be helpful. Thank you.
I will start with the 3rd one, the dividend. The conversation with the authorities, they know what's going on worldwide and here in Mexico. So they need to know why what's going on and then they move to Mexico. That sounds like that. So we will keep following them soon.
And as soon as they know that we are in control, It's going to be like in the old time trades, let's say that. So let's wait a few months and that's it. We have like 2, 3 months with the rest of the world. That's my point of view. So they will move as soon as the world is ready and we are ready, Which moves me to the first one question.
The insurance business will normalize. I don't know. We hope that we We will normalize very soon. It's another time. The 3rd wave is here among us.
Thanks a lot. We have a lot of people sick, but they are not dying. So it's totally different now the game. And maybe Francisco, this can give us More color on that. Fernando, are you there?
Yes, Marcos. Yes, I'm actually the question that you always ask me, how do we see the Going forward, the insurance business, I'm optimistic. I think it will tend to normalize. I do believe that things will be better. I hope so.
Due to these facts, one Is that something that Gabriel always mentions, I mean the protocols in hospitals and the way to deal with COVID Has improved. So even though we are experiencing more cases lately, we see them to be Les De Berre and we are experiencing less deaths because of that. And also The vaccination, even though it has not gone as fast as we would like to, it's likely that the population that we ensure is more biased towards being vaccinated already. So therefore, even though if they Also get sick, it's not very likely that they will die. And actually what has hurt the book with insurance Mainly is the Life Insurance.
Actually in the Health Lines of business, things are now looking much better. So yes, I do think that we will see better Much more income because we will not take as much in claims and also we will not have to Keep rising being impaired but not reported reserves, because we have been as you know accumulating A lot of money in this reserve. And hopefully, it will be more than enough. So I'm optimistic, but we will see as Marcos is saying, I mean, there's a lot of uncertainty regarding COVID going forward, because we don't know if some of the new mutations of COVID We'll become not only more severe, but also that the vaccines will not work for them. So it's something that we're not considering.
Hopefully, that will not happen. And if that's the case, I do believe that things will start to get better as we move
forward. Thank you. That's very helpful. If I could just have a follow-up there. Any color you can give maybe I know it's Yes.
So early in the quarter, but just through July. Are you already seeing claims coming down, I guess, relative to the peak? Or any color you can provide just How July has gone on the insurance?
Yes, actually that's been the case. The claims have been reduced. Okay,
Great. Thank you. And the other one on the NIM, just to clarify, the guidance is for the bank or is it for the group?
Yes, Tito, the guidance is for the group and for the full year.
Great. Thanks Tomas. Thank you everyone.
[SPEAKER CARLOS GOMES
DA SILVA:] Thank you, Tito. Now we will take our next question, sorry, from Jorge Curi from Morgan Stanley. [SPEAKER MARTIN PEREZ DE SOLAY:] Jorge, please go ahead. Jorge, please unmute yourself. [SPEAKER JEAN FRANCOIS VAN BOXMEER:] Okay.
If not, we will go now with Jason Moglin from Scotia. And Jorge, if you want to ask a question later, please just raise your hand. Jason, please go ahead.
Hello. Can you hear me?
Yes, perfectly.
Great. I have two follow-up questions. First on the NIM and the drive one of the drivers of looking to reduce the cost of funds, I think, Rafael, you mentioned from 46% of TA to 40%. Can you talk about What's going to drive that? Is that with TA increasing and you guys maintaining?
Or what's the strategy to reduce that percentage. And secondly, I guess related to asset quality, but you talked about write offs, Especially in consumer and mortgages and SMEs need to come, if you can talk about what we should be Expecting there you did mention the guarantees in the SME book. Maybe you could talk a little bit about how that works as well? Thanks.
Yes. Rafael, please go ahead with the NIM, please.
Yes. The NIM, As you mentioned, Jason, it's related to Cetus. What I said is not to tier to Cetus, 40 to go to the 40% To Cetus, what is driving that? As I mentioned to you, liquidity is extremely high, 210 at this point in time. Our liquidity will start to reduce because those Funds are not being needed, so we can reduce the price of those funds that we warehouse during the pandemic to be ready for Any need to our extraordinary liquidity, so that will reduce our cost of funds.
And another very good story is the rate of growth of the mining deposits At the network and the commercial entities of the bank that we have been growing close to 12% On year on year with loan growth around 6% overall, so you see a buildup of cheap deposits pretty fast on that. And we see that accelerating on the capacity for the commercial part of the bank networks And all the other entities to be very efficient in the race of deposits. What's driving that? I think the simplicity that you can open an account at the bank, all the digital offerings that we can that you can open accounts on a digital Space pretty fast and pretty easy and all the services that we provide for SMEs and all the transactional banking Also, so I think it's a combination of many things, but all of them are working nicely. So that's our goal to Reached the 40% of to a complete on set space at the end of the year.
So we are confident that we can achieve Chad, on that part.
Thank you, Rafael. Let's move to the Guarantees of Finsai is 70 something, 75%
Yes, 77%
in number
of loans and 45% in terms of balance.
Thank you. And what we see, but we will see Write offs in the 3rd Q4, should they be similar to what we saw in the second quarter
How
about the Accelerator?
No, I think they will be similar to that. And I think You will we don't expect to see a huge pickup on that. It's much more similar to what we've been going on up to tonight to today. And the reason for that is that you have specific regulations for the As you know, we reduced the write off period for the SMEs From 19 months to 9 months, so that's why that buildup of provision will happen until the Q4 on that part. But we don't see any extraordinary numbers going on that.
If you look on the FPLs of SMEs Right now are pretty low compared to the history of Banorte and that's and the reason for that is that we cleaned up a lot of the book in June, Past June on the write off that we did on the SME. The other part of the that has to do with the write off on the mortgage Also the period that we need in order to divide us, but having NPLs around 1.2%, 1.3 Compared to the usual 1% that we run that book, we don't see any aggressive write off that we need to do on the 3rd and the 4th quarter.
Great. Thank you
very much.
I'll also add, Jason, that collateral execution on behalf of these government or Bank agencies, it is immediate. We have a special process in which we check If all the documentation is 100%, we just collect or execute the collateral. There is no delay. And we currently are working with Nafin, Fega, Fornaga and Fira. So that's been functioning very well.
Those programs are on a case by case basis, But the majority are sectorial based, depending on economic activity. That will give you more color in what those kind of guarantees work.
I appreciate Thank you, Jason. Jason, just one more thing. When we approached at the beginning of Change of the new government coming into place that every time that happens, usually get the SME affected By liquidity, so we bought a lot of guarantees before that. Then the pandemic hit, but we already in a very good position with 48% of the book already under nothing guarantees. The rate of claims that we have in that part around on On a monthly basis around €90,000,000 €70,000,000 on that part of guarantees.
So I think it cost us because it reduces The profitability of the SME book, but this has been pretty good for the health of the portfolio.
Interesting. Thank you very much.
We will
go back to Jorge Curi from Morgan Stanley. Jorge, please go ahead.
Hi. Can you hear me?
Yes, we can.
Great. Thank you. Sorry for the previous time. Thanks I have two questions on your guidance, if I may. The first one is on the Prohibition, on the cost of risk, you are at 1.9% to 2.1%.
I'm having a tough time seeing how can you get to those levels. It just seems like a really big ramp up in provisions In the second half of the year, you did 1.5% in the first half. So in order to get to that midpoint of 2%, The provisions for the second half would have to be like 2.5% of average loans. How do you get there? I mean, do you think maybe that there's potential upside to these numbers that provisions can be lower?
Or there anything that we're not seeing that you are? But 2.5% for the second half is a really big jump versus where we are now. And then I'll ask a second question. Thanks.
If I may start and then, Gerardo, Jorge, remember that when you see the drop because The relief programs, you basically put on a standstill for like 6 months in some of the portfolios on that part. So if you look at the graph that we Project on the on how the evolution of the cost of risk goes on the book. When we see the What you call a big ramp up is really the normalized number that we have been running the portfolio that Because that really is coming back to normal. It's not that it's a big ramp up. If you consider that, you have to consider when we were On standstill basis like for 6 months on that part.
So when you compare the numbers, you have to take into account that process. When you talk about the big ramp up on the numbers, it's really no it's a pretty normal tendency that will be below The current number the usual numbers have been not around the cost of risk. So what we're seeing is a better number Once you take into account that relief programs that we did, so by aiming to have around 2% cost of risk At the end of the year, 2.1 is even much better than before the pandemia. So the ramp up that you're talking about is really Taking into account all these standstill process that happen when you go into the relief programs And once you normalize the growth, as Markus mentioned, on the consumer and everything like that, then you start getting into the usual numbers that Banote Have been running, but these numbers are going to be below the usual numbers that Banorte has been running the cost of risk. So it's really not a ramp up.
It's a normalized process In order to go once you clean the portfolio, to go back to normal and you take away all the remains of the relief programs that happened into So I think you will see that a lot more clarity on the Q3, but it's really What we see and are really looking is an extraordinary behavior of the portfolios that we have been taking Gerardo mentioned, you see some issues on the corporate that we sorted out and balanced that out. But we don't see any ramp up concerning that TDTV ratio or anything like that. That's why We are changing the guidance to volume below the normal numbers that Manorte has been running the cost of risk.
And I might add, Rafael, if I can. This lower part of The interval, the 1.9%, it's a metric that Applies for the 12 month period that has the benefit of a longer time frame. But also I will say, and I think I can say that the 12 month average Of that metric is already 1.9% as of now. So what that tells you Jorge is that we are being conservative. And yes, There is some upside expected in managing this type of metric.
So And that's the case because we have seen throughout our internal processes of origination All the way up to collection. So they have been performing very well.
All right. And then So if indeed you're going to see 2.5% in the second half, again, in order to get to that 2%. That's and again, I didn't mean ramp up in the sense that it's extraordinarily high. I see historically, your provisions have been higher. I'm just talking about a ramp up second half versus first half of this year.
And so then what provides the offset? So what
Let me tell you first, Jorge, if I may, Is that the historic number for cost of risk is going out of that 12 month window. I think that explains what you're seeing or what you're saying in a different language. And I will add to that the internal initiatives that we have in order to execute In a very good level of performance.
All right. Maybe we take those this offline. And let me ask my second question, if you don't mind. It's on the credit also on the guidance, sorry. On the credit growth, in order to get to that 5% to 7% growth year on year.
The quarterlies for the 3rd Q4 would have to have Like a 3% sequential growth for both quarters for you to get to that number, which is evidently a pretty strong ramp up relative to what saw in the first half of the year, which was basically flat or actually slightly down. So what gives you confidence that you can accelerate as rapidly over the next 3 months and then again over the next subsequent 3 months.
You want me, Marcos, to go into that? Jose, the first thing is that remember the big tickets Come from the government book and from the corporate book. The consumer is already getting to that numbers and will continue to go above that numbers on The credit card was the one that was lagging and now it's recovering. So we don't see an issue on the consumer to So the big tickets needs to come from the corporate and to the government on the federal side and on the states and municipalities. We stopped completely the lending process because of elections since the beginning of the year on the government book, basically on the States and municipalities.
So now we are back into the market on that. On the corporate side, I would say, honestly, that's The tricky one, because it has to do with the confidence that people have about investing. And we think that once now that the elections are over and we see A lot more balance and power in the houses. Confidence is coming slow, but it's coming back And so that's where we are really thinking that those tickets will come from that from the Restart of the government lending part and also from the corporate pipeline that It's already building up. The commercial, I would say, is more advanced in that pipeline.
I think we've seen much more than that. And remember that because of the elections happens on that, there were a lot of prepayments on the corporate parcel. Some of those will come back again, and Banorte is in a position because of the balance sheet that we have to really go for those loans once now that The company is still more comfortable about investing in that. So as you say, it's a ramp up. This one really is a ramp up, but we think we can do that based upon the potential demand that we could have Because we restrained that demand before the elections.
Great. Thanks, Rafael.
Thank you, Jorge.
Thank you. Now we will go with Alonso Garcia from Credit Suisse. Alonso, please unmute yourself.
Hello, everyone. Good morning and thank you for taking my question. My question is on the fee side. [SPEAKER NICOLAS COTE COLISSON:] And what sort of net fee growth is embedded in your net income guidance for the year? I mean, so far, we have seen a very nice recovery in core bank increase, 28% of year to date compared to last year, but have also seen pressure on the fees paid.
So Pauline, Netfees, Achalad here to date. So could you please elaborate on the sources for pressure on the fees paid side? And yes, what is your expectation for Netfiz for the portfolio? Thank you.
Thank you. Rafael, please go ahead. Yes.
Alonso, thank you. And as you said, I think I would like to separate your question in 2 things. First one, as you mentioned, we see a very strong recovery on the activity of the bank on the transactional side. As you mentioned, The fees, the banking fees are really well above that. And the fees paid are basically related to the external sales force that we needed to develop in order to keep on moving on The needle on the mortgage side and on the car sales, so fees paid that are up 31%, as you see on the numbers.
This phase these fees are part of the origination thing on the acquisition cost that you pay that Once you acquire the loan, but we need to reduce that sales force dependency Once we see much more normalized, I think, on how customers are coming back to to the normal relationship with the bank. And also at the same time, we are working a lot on the digital origination part On the mortgage side and on the car loans like launching marketplaces and things like that. So the pressure is coming from these General sales forces that you will see a reduction in the coming months on that part and you will continue to see good growth On the transactional and activity fees coming from the banking side, but just 31% was the cost of half This external sales forces that is part of the acquisition cost of loans that stay with us for 15, 12 years. So you pay that once, but you keep the benefit for the next 12 years and on the car loans for around 3 or 4 years. But you will see a to a reduction in that part in a downward trend in the coming months and months.
Thank you, Rafael. And based on that, what is the sort of net fee growth that you are incorporating to your income guidance?
I think the net fee growth should be above I would say well above That's a long road. So it should be around 12% 11% to 12%.
[SPEAKER
CARLOS GOMES DA SILVA:]
Got it. Thank you very much, Rafael. Thank you.
We will now take the next question from Edson Morvia from Finamax. Edson, please go ahead.
Hi, good morning. Thank you for taking my questions. I have a couple of them. The first one is on service fee, but specifically on electronic banking. Of course, if you compare to Q2 2020 versus Q2 2021, there's an increase of 58%.
However, when you compare to the Q1 2021, this is a 10% increase. So the question regarding on this is, This 10% as an overall, it's because higher volume or higher fee from Electronic Banking Services. The second one is regarding on brokerage business. You mentioned in the earnings report, 126% in trading income And a 9% increases in fee charge, if I remember correctly. I was wondering if you can give us more color about this.
And the 2 one is on inflation. Last week, we heard from Janney Diamond Alliance Fin saying that inflation is not transitory and whatever that means. However, what is your expectation on inflation? It's transitory. It's not.
Maybe we are going to see a higher inflation from not only the rest of 2021, but maybe 2022. And thank you so much. [SPEAKER CARLOS GOMES DA
SILVA:] Thank you, Edson. I will start with the third one, the inflation. I miss Gabriel. So Gabriel, go ahead please.
Thanks, Marcos. Thanks, excellent for your question.
Yes, we think that inflation,
there are big chunks that are definitely temporary, like commodity prices and certain things, they which supply side will actually respond to the demand shock. Definitely, there will be some not so transitory pressures, and I think places like Mexico will experience that. So we are expecting inflation to end this year at 6.1% and inflation to end year 2022 at 4%. If you need like a more if you need me to elaborate more, just tell me or we can do it offline.
Thank you, Gabriel.
Thank you. Paco, back here with the
The first one, [SPEAKER CARLOS GOMES DA SILVA:] It's volume. At the end, it's volume. The 10% increase
that you were highlighting,
[SPEAKER JEAN LOUIS SERVRANCKX:] It's based on volume. Okay. Makes sense. A quick follow-up on this. So basically maybe let's say for the Second half of the year, let's say it's going to be like a trend around 10% or single digit number?
Well, Well Go ahead, Rafael, please.
No, it will be around 11%. If you go to the numbers on the service fees, Like for instance, our fund transfers Q2 of 2020 to Q2 of 2021 are growing close to 12%. If you go to account management fees, that is basically the more than I have been affected because of the opening of We're on a physical now we move to digital. That's the only one that has been reducing on that around minus 3%. But the electronic banking services are going up 40%.
As Paco mentioned about volume, there's no Changing in line. So you see any line on the fee side is going up in an important way. You do talk about trading, What's going on, on the trading side? The trading up compared to Q2 of 2020 was up 32%. And it's basically about activity and volume on that part.
So I think related to your question, what we see Is the bank becoming much more active than before the pandemia? Loret has been pushed by electronic Numbers and digital origination pieces, but the bank is fully active now on that and that's why you See the growth well above the on the fee side, well above the loan growth on that point. And that will continue in the third and we'll pick on the 4th quarter.
Okay. Thank you so much. And last I promise this is the last one. Regarding on being Fully back at the offices. What are your expectation?
It seems like as an industry or the banking industry, it's like in a hybrid mode. So could you give us a little bit more color or your comments on this? [SPEAKER JEAN FRANCOIS VAN BOXMEER:]
We will take it easy. It's not so easy. So we don't want to be the first one and announce something. So It's working. So we will go like this at least 2, 3 more months
and
we will see from there. And then we will go to the hybrid Let me tell you because we love to do that. Remember, we have this as long as 1, 2, 3. It's become number 1 in the year 2023, and that means in all senses for the customers, for investors and also for the employees. So if we can move on that hybrid model and is working, we want to be there.
So [SPEAKER IGNACIO CUENCA ARAMBARRI:] The idea is to move slowly in the right direction and see what happens and adapt to the new circumstances.
[SPEAKER CARLOS GOMES DA SILVA:] Thank you. Now we'll move to Carlos Gomez from HSBC. Carlos, please go ahead. [SPEAKER CARLOS GOMES DA SILVA:] Hi, Carlos. Can you unmute yourself, please?
Okay. [SPEAKER CARLOS GOMES DA SILVA:] Carlos, if you want to ask a question later on, just raise your hand again. Now we will go with Arturo Langa. Arturo, please go ahead. Hi, good morning.
Thank you, Tomas. Thank you, Markus.
Thank you, Raffa and everybody. So I know you've talked In detail about this already, but one of the scenarios that maybe could play out is a 3rd wave of COVID and corporate, Especially with much less desire to have a credit demand because of the lack of visibility. And on the flip side, as inflation creeps up, maybe you could face some pressure in terms of deposits of Especially institutional deposits looking to maybe have a higher share of time deposits or things like that. So it contrasts a little bit with your outlook on NIM, but Just wanted to ask the question specifically. Should I attach like a high probability of that being a potential Worst case scenario, do you see anything like that as a concern?
Or what is the degree of confidence that you have in the scenario that you presented in your earlier remarks? Thank you.
Apa,
No, I think what you mentioned is has to do with 2 things. First, you have to take into account that we have excess liquidity. And that liquidity is costing us, but that liquidity will be funneled out again into the market because we don't need that. And that basically, Some of that liquidity has a high cost. So that will continue to trend the cost of funds down to support the expansion On the margin, the growth in the consumer book will continue to be there.
It has been there. The 3rd wave of the pandemia, if it happens, as you know and Marcus mentioned, has different Variance now about people continues to work now. It seems like we learned to live With this issue, so it's not like the first one that everything was locked down. So now you see activity going on with the different Ways of related demand and supply and things like that. So I think that will continue to be there.
And on the funding side, what usually happens, what happens during the pandemic is that the consumers tend to save money a lot. So that helps the bank On the funding side, it doesn't help a lot on the lending side, but on the funding side, it continues to do so. And when you have a Stock of loans like Banorte has a big stock of loans on that, that you can serve them with a lower cost of funds that will also Support your margin even if loan growth is not where you want loan growth to be. So I don't see anything that could really hurt the margin unless there's a tragedy going on the market that we don't envision
that. Yes. No, that makes a lot of sense. I think my follow-up question would be, In the total number of clients that you have, if you compare for example your banking clients with your insurance clients, I think that penetration continues to be quite low. Just maybe what would be your outlook in a couple of years in terms of cross sell and maybe where the cross sell ratio is Right now where you want it to be?
Yes. The cross sell ratio is close to 2.1%, And we need that number to really ramp up to the 2.3%, 2.4% on the cross sell ratio. A lot has been doing in the digital Analytics piece in order to really move into personal offerings to the client. I think you will start to see that in the remaining of the Okay. We have much more aggressive training into that.
I think we have a very good source of relationship with the mortgage It's true that we are becoming one of the leaders in the market on the mortgage origination part. So that's also a very important piece, the same on the car loans Saig. Now we see a revamp also on payrolls. And payrolls, you have to segment those By earnings, but we also see that potential in that. But I think our main goal is to really, really become Our relationship bank, I know everybody is talking about that, but we are putting everything and all the pieces in place in order to really achieve that Based upon lifetime value of the client, offering the client, not by product, so all those changes that have been going on, but it It takes time to really implement.
I think we are now fully into implementation mode into that part. [SPEAKER
CARLOS GOMES DA SILVA:]
Thank you. We will go back to Carlos Gomez Lopez from HSBC. Carlos, please go ahead.
Yes. And apologies for the lack of technical proficiency. Very simple question, similar to Jorge. Your tax rate so far this year has been on average 24%. You are guiding for 26%, So that would imply something like a 29% in the second half.
Is there a particular reason for the tax rate to be Sohay?
The only reason is the expansion on the revenue side that you need to pay More taxes on that. That would be the only reason for that.
[SPEAKER CARLOS GOMES DA SILVA:] Okay. Thank you very much. Thank you. And now we will take our last Questions from Federico Galassi. Federico, please go ahead.
[SPEAKER JOSE MARIA ALVAREZ
ALVAREZ:] Hello.
Yes. Can you hear me?
[SPEAKER JOSE MARIA ALVAREZ
ALVAREZ:] Yes. Perfect. Thank you.
[SPEAKER JOSE MARIA ALVAREZ
ALVAREZ:] Yes. Thank you, Marco, Thanks for the conference. A better question if I may. The first one is and going back to the question of provisions. When I look at the first two quarters, the provision was about around ARS 6,000,000,000.
If we assume this 1.9, 2.1, that 1.9 that you expect for the year. We have to assume something like MXN 10,000,000,000 in the 2nd part of the year. This is [SPEAKER CARLOS GOMES DA SILVA:] And I understand that this the seasonality that you have always. But this is again, it's a big chunk. You are more conservative.
You are expecting something there? This is the first question. And the second question, sorry, if I may, is when I see the past due loans, There was a big jump quarter over quarter in the size of corporate. This is related to one particular launch Or there is any other answer?
Thank you, Federico.
Yes. I will tell you, Federico, that yes, you nailed it. For the second half of twenty twenty one, We are expecting a seasonally higher cost of risk. That's the short answer to your question. And for the second question that you're making, I will tell you that those cases are isolated.
I will tell you that some of the economic activities that Corporate NPLs incurred by the Q2 of this year touches the cardboard consumer packaging business. We have a non performing loan of that type. Another example is a city hotel with character problems on behalf of the entrepreneur. [SPEAKER JEAN FRANCOIS VAN BOXMEER:] So as you can see, and I want to exemplify any other case, but those NPL cases [SPEAKER CARLOS GOMES DA SILVA:] In the corporate side, are exemplified by that type but that type of activity And they are not systemic risk in nature. So we are comfortable.
[SPEAKER DANIEL MARTINEZ VALLE:] And obviously, we do not expect that this situation Comes to an end until the Q4 of this year. So that will give you some color about the NPLs that Corporate banking has incurred in the Q2 of this year.
Yes. And also Federico, the second half, we're expecting less prepayments, Better loan growth. And overall, I think it's very important not to mention again that the guidance, as Rafael mentioned at the beginning, [SPEAKER CARLOS GOMES DA SILVA:] It's conservative and does not consider any reversal of provisions.
Perfect. Last question now from my side. If you can remember us, how is the participation of the banking click?
Around 3%. Around, sorry? 3%.
3%. Okay. Thank you, guys.
Thank you, Federico.
[SPEAKER CARLOS GOMES DA SILVA:] Thank you, everyone. With this, we conclude our presentation. Thank you very much.