Good morning. I am Tomás Lozano, head of Corporate Development, Investor Relations, and ESG.
My best wishes to everyone in this new year, and welcome to Grupo Financiero Banorte Q4 earnings call. Our CEO, Marco Ramírez, will provide a brief macro overview, followed by the main highlights of the quarter, including the performance of the loan portfolio and positive evolution of asset quality, an update on the COVID-19 impact for our insurance business, as well as a quick preview of what to expect in our next annual report that will be published in March.
I would like to take this opportunity to mention that this year we will launch an additional document, a shorter and hopefully convenient reference for our analysts and investors that will provide a brief summary of our ESG strategy, including progress under each ESG topic, main key performance indicators, as well as a short- and medium-term milestones that will lead to our long-term objectives.
You will receive more information regarding this release date soon. After our CEO presentation, Rafael Arana, our COO and CFO, will provide further detail on our updated sensitivity to rates, improvements to our cost of funds, details on some extraordinary expenses during the quarter, as well as our results of our JV with Rappi as we concluded the first year of operations. We will then proceed with the Q&A session.
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. Thank you. Marcos, please go ahead.
Thank you, Tomás. Also, I would like to take this opportunity to wish everyone a healthy and successful new year. Thank you for joining us today. The last quarter of 2021 ended with continued signs of recovery for the Mexican economy.
However, they were somewhat shadowed by the rapid spread of the new Omicron variant of the COVID-19 virus. Its higher contagion rate have been partially offset by less severe health complications.
More than 57% of the Mexican population has been fully vaccinated, and close to 8% has had a booster dose, thus significantly reducing hospital occupancy and mortality rates. Although this surge in contagion may still cause some headwinds for the country's economic activity, we expect progress on supply chain issues and resilience in consumption to offset these effects.
GDP growth for 2021 totaled 5.7%, and our expectations aim to approximately 3% growth for 2022, fueled by relevant employment gains which have already offset the job losses brought in by the pandemic, as well as by solid remittances, which are likely to continue surging in 2022 after reaching a $51 billion record in 2021. Inflation remains as one of the most important issues for the economy, reaching 7.4% in 2021.
However, it is expected to gradually decline during the second half of 2022 to end the year around 4.5%, supported by a more restrictive monetary policy from the central bank. The most recent decision in December took the reference rate 50 basis points higher to end the year at 5.5%.
Our economic analysis teams expects another similar hike in February, followed by a steady 25 basis point increases at the end of each quarter to end at 7% in 2022. We believe these rate levels will contribute to a solid margin evolution at the bank. Rafa will provide deeper insight into this in a moment. On the political front, we expect to see active campaigns from parties and candidates.
At least six state governorships will be up for election in June. On the legislative agenda, attention will be centered on the constitutional reform to the electric sector and the potential introduction of a reform to reorganize the National Guard under the Ministry of Defense. Key projects for the current administration will likely be inaugurated, such as the Dos Bocas Refinery and Santa Lucía Airport. Moving on to the bank's operation.
After nearly two years of remote work for most of our corporate offices personnel, we are convinced that a permanent hybrid work scheme is the new way to work. Banorte's strength relies in our human capital. Therefore, we have implemented important changes to provide a convenient, attractive, and flexible work environment that maximizes productivity while fostering talent retention and attraction.
Depending on the nature of the job of their job functions, some people will return to the office full time, while some others will follow a hybrid mode, working remotely between two or three days on average. To accommodate this new scheme, we have remodeled office space in our corporate offices with convenient layouts that adapt well to the new mobility requirements. Less frequent commutes will also have a positive impact for the environment, which is also a key priority in our strategy.
Meanwhile, in an effort to ensure the safety and well-being of all our teams, we will continue working from home until contagion rates are down. Now, let me highlight the main quarterly results, which show a solid performance of the group, supported by an improving margin, a strong fee activity, healthy asset quality, and a shielded balance sheet, which point for a strong start of 2022.
Starting now with profitability, slide 4. ROE for the group is still impacted by non-paid dividends and high COVID-19 related claims in our insurance businesses. However, claims are expected to gradually return to pre-pandemic levels during the second half of the year. As we will see later on, ROE of the bank unaffected by these factors is already above 19%, driven by better NII, solid asset quality, and growth in fees.
On slide number five, NII is already incorporating the effects of earlier reference rate increases, despite still being pressured by high insurance claims. Non-interest income had a favorable result driven by strong fee activity during the quarter, led by higher credit card activity from the holiday shopping season and strong core banking fees. Looking in greater detail at slide number six, net fees show a relevant increase during the quarter and the year, already showing the effects of economic recovery and higher mobility.
The accounting reclassification of fees paid to external sales forces into expense line had a more evident effect on net fees during the quarter. Loan growth on slide number seven shows better strength in corporate and commercial portfolios during the quarter, while mortgages and consumer were clear loan leaders throughout the whole year.
A flat third half of the year for corporate and government loans was further impacted by large prepayments during the quarter, which resulted in lower than expected total loan growth for the year. Asset quality, slide number eight, was one of the most positive results throughout the year, with NPLs ending the year below pre-pandemic averages. During the quarter, some specific cases were written off, paving the way for a clean start in 2022. Analyzing the results by subsidiary, slide number 9, the insurance business continues to stand out among the rest.
We still have high claims from COVID-19 cases in the life and medical expenses portfolios, and a return to normal claims in the car insurance sector resulting from higher mobility in the country.
The corporate business had a good performance during the quarter, and as previously announced, it will be impacted in 2022 by the fee reduction initiative implemented by the regulator.
Slide 10, we provide greater detail into insurance business, showing steady quarterly growth in premium origination. However, the impact resides in claims which are expected to gradually recover from the pandemic to pre-pandemic levels during the second half of the year, as I said. Switching gears to ESG, I would like to mention that we have gathered comments and suggestions from our investor base, and following the best international practices, we will be including additional disclosures in various ESG topics in this year's annual report, which will be published at the end of March. Among other updates on the disclosure of information, on the governance side, you will find major details regarding our board composition.
A key matrix will provide greater insight into each member's professional background, their value contributions to the board, and how this aligns with the group's corporate strategy. On the environmental side, we will show short, medium, and long-term goals that will mark the path towards achieving a net-zero alliance pledge in 2050.
On the social pillar, we will discuss our diversity targets, as well as short and medium-term plans to reach them. In particular, you will see milestones to increase the number of women in senior management positions and to promote salary equality. We will also provide metrics to show our progress in non-discrimination practices and diversity training to our personnel. Furthermore, we will reveal our financial inclusion results for 2021 and what to expect ahead. In addition to this, we will publish our first TCFD report.
Going forward, we will keep reporting our climate risk exposure and strategy using the TCFD recommendations. On the sustainable finance pillar, we are currently working on a sustainable product rollout on the consumer, corporate, and SME segments that will align to sustainable development KPIs. As a final note, many investors have been inquiring about our reaction to the announcement regarding the sale of Citibanamex retail operations in Mexico. At this point, I can tell you that it's our duty to make a full assessment of this opportunity.
If we find that a potential transaction could mean additional value for our shareholders, then it will be for them to decide. With this, I conclude my remarks, and now Rafa, Rafael Arana will provide further details in our sensitivity to rate increases, as well as efficiencies in cost of funds and asset quality.
He will also provide an update on our ESG strategy and will walk you through our 2022 guidance, which shows double-digit net income growth for the year. Rafa, please go ahead.
Thank you. Thank you, Marcos. I would like to go, as Marcos mentioned, in some of the elements of that we will be trying to achieve and are already included in the guidance. As Marcos mentioned, we continue to protect the balance sheet as best as we can. I think we have been doing a good job on the balance sheet, on the capital side, on the key metrics that really allow us to have a very comfortable position on the capital base and also on the liquidity.
As Marcos mentioned on the fact about the expenses, because there has been some comments because we commit to the market that our guidance was gonna be 4%-4.6% on the expense line. Basically, we ended up well above that even though we ended up below inflation. There's a reason for that, and it's a reason because we consider it because the inflation ended the year above 7.4% that we needed to protect the expense line for 2022. We decided to advance basically on the severance payment side because we are reducing 2% cost on the personal expenses. We decided to front load that in December.
Based upon the guidance that we have on the inflation, I'm talking with several providers. We also anticipate payments to them in order to secure prices in that part. What you will see in this year, because obviously the lagging effect of inflation will still be pressuring the cost line, is that that will be basically on a downward trend through the year. For the year, you will be having 7.2%-7.4% for the expense growth, but trending down at the latest part of the year. We needed to do that because of the lagging effect of the inflation side.
Basically, taking that into account, we also see that there are several improvements on the basic metrics of the bank and also the group. If we follow, as Marcos mentioned, the return on equity for the bank, as we guide the market, last year, we were to basically end the year above the 19% return on equity for the bank. We ended up 19.2%. If you go to recurring and take away the expense line that we anticipated, that number should reach the 22.4% for the year. As Marcos mentioned, the net interest income of the bank continues to grow quite nicely in every single part of the line.
We continue to see a very good trend on that part. The return on assets also is a good story. We are already above the 2%, 2.1%. If you exclude extraordinary payments that we did in December, the bank ended the year at 2.5% on return on assets. A good story on the return on equity and the trend that we promised the market. The net interest income is also in a good recovery trend, and the return on assets also is now above the 2% for the that we will when we go to the guidance, what we expect for the year.
The new expansion for the year for the bank has been on a constant basis above 6%, and now we ended the year at 6.4% for Banorte. This is the effect of a much better mix, reduced cost of funds that we will talk about in a minute, and also the impact of the repricing on the portfolio. What we expect is that the number that we ended the year will be basically the number that we anticipate as an average for the full year. We peaked around 6.5-6.6 in some of the months of this year.
The net interest margin of the group, as Marcos mentioned also, we continue to see the effect of the claims on the insurance business. We have seen a much better trend on the Q3, on the Q4 on the build-up of technical provisions that allow us to think that, as Marcos mentioned, we will get to a more normal number by the end of the Q2. The growth in sales and premiums, as we saw, continues to be quite strong. Structurally, the business is in a very good trend, and the technical reserves and claims are now starting to level up.
If we move to the asset quality piece, that I think has been a very good story and has to do with how we have managed the process during the pandemic. Things that are relevant to that is that there have been many questions about the cost of risk that we are looking at 1.3%. What would be the normalized cost of risk? As you know, Banorte has always been running the cost of risk as the numbers around 2%. We think that we are reaching a new normal on that part because all the efficiency in the models, on the onboarding models and on the collection process on the...
We now are looking at numbers more on the 1.6%-1.7% on a recurrent basis. Also, the NPLs that we have been reaching very good levels during the year. We also see that that also will be a reduction in the usual trend that the bank runs, that part of the portfolio to numbers more on the ranges around 1.7%-1.8%. Asset quality, a very good story. It's relevant to say here that we decided not to release provisions, as we have talked to many of you during the several meetings.
MXN 1.8 billion are still on the balance sheet because we haven't decided to release those provisions because of the new variant that came in place, the Omicron. We still have MXN 1.8 billion provisions that are ready to be released as we need through the year. It is also relevant to mention that we decided to clean up a part of the commercial portfolio during the Q4. We decided also to use around MXN 700 million of those provisions to clean up part of the commercial portfolio. We face the year with a very strong asset quality portfolio that is ready to grow.
We have seen some good trends, as you saw on the numbers of the growth in the loan book that show us that the trend that we saw in the third and Q4 will continue into the first and Q2 of the year, and are much improved for the third and the Q4. The coverage ratio that we have is also reaching record limits around 191. As you know, that number usually we run the bank around 135, 140. That also will be a downward trend, but a very slow downward trend in that part. Another commitment that we guide the market also is that we needed to accelerate the reduction in the cost of funds.
We started the year around 4.8% cost of funds, considered and set as a reference rate, and we ended at 3.8%. It was basically the result of a much improved mix on the demand deposits. The number in demand deposits really reached record, also record levels. Now we have a mix of 72% demand deposits and 28% time deposits. The cost of funds will continue to be a priority for us in 2022. We are aiming to reach, as you see on the graph, our benchmark competitors that are still below us. Now we are in an accelerated trend to reach those numbers. There also has been many questions about the sensitivity on the balance sheet.
As you can see in the graph, that number in the Q4 reached the 1.1%. That number will eventually reach the 1.3% on the local currency. Also you see the effect on the foreign currency that we have on the balance sheet. This is also the result of a very active ALCO that is protecting the balance sheet. We are as sensitive, and we have a positive gap in the increase in rates that we have seen in this part. Now I turn to the line that has caused many of the questions about investors and analysts, what happened with the expense line.
Basically, as I mentioned before, it's the result of what we decided to front load in December to basically the severance payment that we knew we needed to pay in 2022. We anticipate those, that is really 2% of the personal expenses. The other thing that also was basically, as I mentioned before, everything related to providers that we needed to also lock the prices on those goods.
We think that we did the right thing in order to balance out the lagging effect of inflation. That's the result of that 7%. If you strip that, we will be right on target for the 4.2, as we mentioned to the market.
We decided to front load those, and that had the effect, as we saw, in that we not comply with the guidance that we gave you at the beginning of the year. Those are the reasons that we didn't comply for that. The other thing that has been also being quite important is everything that is related to the capital ratio and dividends. As you see on the graph, we are reaching 24.7 of total CAP and Core Tier 1 at 15.3. Those numbers are well above our commitments to the market, that is 12.5% and 41%, well above any requirements concerning TLAC or anything that is related to any buffer that the regulatory imposes.
I anticipate the questions of when dividends are gonna be paid out or whatever. There's also we are waiting for the latest result of the stress test, and we hope to have an answer for you. I know this has been a recurrent we don't know. Sorry, but that's everything that we can tell you at this point in time, that we are doing everything that we can in order to provide all the information required by the regulators to allow us to comply with the payments that are pending to the market on that part. Also, I would like to anticipate another question that is gonna be present on this is if anything on the possibility.
I'm just taking exactly the words that Marcos mentioned, that after looking at everything that we see on a potential interest in the transaction and everything, then it's for the shareholders to decide also what could happen on the dividends concerning a potential transaction. We don't have, at this point in time, anything that we can tell you, because we don't have any information related to when we're gonna be able to pay the dividends or what's gonna happen with that information that has been running around the market around the Banamex potential transaction.
If I just now report to you the Rappi information, and I would like also if Paco wants to mention anything of this. On Rappi we are right on target what we promised the market, the 400,000 active cards on that part. We are where we wanted to be, and we have learned a lot from that business. We feel confident that for this year, we will evolve a lot more in the acquisition cost and a lot of metrics that we can present to you, and we expect to present to you those metrics at the end of the Q1. Much more clear metrics about what's going on in Rappi.
We can tell you at this point in time that everything that we commit to market about the 400,000 cards are now on file and active as we promised you when we decided to go to the joint venture on this. I don't know, Paco, if you want to add anything on that. That has been a good story, and we hope that that will continue to be a good story. We are learning a lot about managing those type of operations that are basically digital operations. Now I jump to the guidance. The guidance, as you see, we are expecting a loan growth of 7%-9%, and this is based upon the trend that we saw on the third and the Q4.
NIM expansion, we expect 30-40 basis points. The needed expansion at the bank level, we hope to have 45-65 basis points. The expense growth will be 7%-7.6%. Given this inflation now is aiming to be to end the year around 4.4%, we think that the lagging effect of inflation will still be present through the year. Several efforts will be put into the expense line to control that as much as we can, but at this point in time, this is the numbers that we can provide to you. If we see a change in that, we will immediately guide the market of changes for the expense growth. The efficiency will trend again more to the 40%.
That is the number that we want to be, 40 or below 40. Cost of risk, as we mentioned, we think we reach a new normal, so we are guiding 1.6%-1.9%, but we think that the normal will be more on the 1.6%. Tax rate, 26%-27%. In this point, I also want to clarify that there was a because of inflation accounting principles, there was a resource that we put into the group and the net income resource because we have an effect of inflation that reduce the payments on taxes for the month of December. That did not just happen for Banorte, it happened for all the banks because of inflation accounting principles on that part.
Most of that benefit was that we anticipated on the cost lag. The other thing that we would like to guide is the net income. We expect net income to go to MXN 39.5-MXN 41.1. I know it's a wide range, but at this point in time, it's what we see because during the release of provisions from insurance will happen and also if the Omicron will stay as is, so we need to release provisions at a faster pace. Also, I would like to go to the return on equity for the group. The return on equity for the group will be reaching 70%-80% in that part.
This is considering that we are able to pay the dividends that are pending. The return on equity for the bank will reach 21% for the year. Return on assets for the group, 2.2, and return on assets for the bank will be above 2.2%. GDP, we expect GDP to be at the top of 3%. I think it will be a little below that, but that's the GDP that we have from our economic area. Inflation rate from 4.2%-6%, I think the lag in effect will be an issue for the year. That's why we are anticipating that expense growth. The reference rate on average that we are using for the budget is 6.4 for the year.
With this, I conclude my remarks, and I pass the word to Marcos.
Thank you, Marcos and Rafael. Now we will continue with our Q&A session. Please raise your hand on the platform. We will unmute you when your turn comes. Questions will be ordered automatically on a first come, first served basis. José 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&A session. We will take our first question from Jorge Friedmann. Jorge, please go ahead.
Thank you. Can you hear me?
Perfectly.
That's perfect. Thank you very much for the presentation, Marcos, Rafa, and thank you for the opportunity to make questions. I have two questions. Let's start, you know, the first one with the toughest one. I know that you are in a position that it's very difficult to anticipate anything, but I think this is the most important thing for discussion with investors which related to your interest that's already stated on the acquisition of the available asset in the market. I understand also that you cannot, you know, give too much ideas. Let's talk about, you know, just a ton of ideas.
In case you already stated that you have the interest, so how you should proceed in terms of dividends if the government authorizes you, the regulator authorizes you to pay off higher dividends? It's, you know, fair to assume that you are going to be more conservative in terms of dividends until you have, you know, decision about, you know, the potential transaction. This is the first related question to the team. Also related to that, if you anticipate any issues in terms of antitrust. I know that in terms of, you know, loans, you would be probably very aligned with the market leader.
There are also other segments that I think I know might be of consideration of the regulatory authorities, such as the Afores, for instance. You know, the last one in terms of the guidance, just wondering, you know, what you really considered at the end of the day to come up with the guidance in terms of the GDP growth, because as Rafa anticipated in the question, you believe that it could be a bit lower. In our case here at Citi, we work with less than 2%. Just wondering, how much accommodation we could have in the guidance for a lower GDP.
We are particularly, you know, concerned here in the potential impact that could have in terms of loan growth and also in terms of, you know, expenses. Expenses, actually, we did not understand that much why so high if you already front loaded a bit of the expenses. You know, just a consideration here. Thank you so much for taking the time. Thank you.
George Friedman, thank you very much for the questions. Yeah, I will start with the first one. We will continue talking with the authority, with the CNBV and SHCP and all this. We want to be ready to pay the dividend. As soon as we can do it, we will do it. We want to continue with the business as usual. Then we will evaluate the other assets, as you call it, in due time. That's what we are going to do. Now we will continue our path and nothing is gonna stop us. The second, because I don't know, we still don't know the asset that we still don't know anything, so it's irresponsible to answer that.
The third one, yes, you are right. We were discussing before the it's not 3, it's 2.5, maybe 2.2. We leave it at like that. The guidance is we will keep it the same. When you worry about that number, we know about that we need and our guidance remains the same.
If I may add, Jorge Friedmann, to what you mentioned about expenses and the range that you see in the loan growth from 7%-9% assumes that if you have a push down on the GDP, it will be more around the 7% than on the 9%. Based upon the dynamics that we are seeing in the market and also the opportunities that have been presented, as you saw, we have been gaining market share on a permanent basis on that part, and we continue to do so now because the market is growing faster. We can achieve a better growth than the market based upon how we can really attend to the clients and how we can really serve the clients with the capital base that we have.
Now we are very, very present also in the dollar group, but it's also giving us additional growth. On the expense line, you're right on that, but you have to take into consideration that even we anticipate a reduction in 2% on the personal expenses, the main effect of the inflation will be basically in wages. That will hit you at the beginning of the year and stay with you for the year. Many other efforts will come from many other parts.
Even if we already front load the severance payment on that part and part of the growth in some of the suppliers, we also anticipate that other parts of the cost line will also move. We are really putting this number at around 7%, taking into consideration that as we see the lagging effects of the inflation will continue, but we also are looking to many ways to try to reduce this. I agree with you based upon all the effort that we did, that number should go down. Once we reach that, we will communicate to the market that we are already in a downward trend on a much faster pace than we anticipate.
Perfect. Thank you so much, Rafa. You know, with lower GDP, I think, probably, it would also make sense to work in the lower range of these OpEx guidance, no?
Yes. I agree with you.
That's absolutely right.
I agree with you.
Perfect. I appreciate. Thank you so much for the answers, and, I wish-
Thank you, George, for the question.
Thank you, Jorge. Thank you. We will now take the next question from Ernesto Gabilondo from Bank of America. Thank you, Ernesto.
Hi, good morning, Marcos and Rafa, and good morning to everyone. Thank you for your presentation and for the opportunity. My first question is on the potential acquisition of Citibanamex. As you mentioned, you are analyzing the potential transaction for your shareholders. However, at first glance, where do you see the key operating and funding cost synergies? My second question is also related to the potential Citibanamex transaction and dividends. Can you remind us what is the excess capital level at the group and at the bank is reducing it to an internal minimum of 12.5%? I just want to double-check if this excess capital is around $2.1 billion. Finally, my last question is on the Afore Banamex.
Citigroup's press release is not mentioning the sale of Afore Banamex. However, if it is in the package, would you like to analyze it, or do you think it's too big for you, considering that you already own the largest Afore in Mexico? If analyzing it, don't you think it could delay the approval of the COFECE, the Antitrust Commission, for the Citibanamex retail business? Any thoughts on this will be very helpful. Thank you.
Ernesto, thank you. I will start first the second question, which is the excess capital of the group, it's around MXN 52 billion. It should be around that level. That's our excess capital. Again, the number one and number three, you know better than we do, we are talking about this consultation, about the approval of the regulator, the COFECE, the synergies. We are still here in the step one, which is trying to analyze if we are going to analyze to see it. It's too early to say anything about that. Sorry, but that's the right question, the right answer. Thank you.
Thank you. Let me just make another question about your guidance, in terms of the provision charges. You mentioned that you have a stock of provisions of around MXN 1.8 billion that you can be releasing during 2022. Your new cost to risk guidance, is it considering it or not?
Yes. We are considering that we will start to flow some of these provisions. We don't know exactly how much, but that's why the range goes from 30, 39.5 to 41 on that. That, Ernesto, is not fully depending on what part of the range you are. But we think that we based upon what we have seen on the Omicron, we think we will start to release those provisions through the year, and that will put us on the high end of the range.
Perfect. Thank you very much.
Welcome. Thank you. We will now go with Tito Labarta from Goldman. Tito, please go ahead.
Hi, good morning, everyone. Thank you for taking my question. A couple of questions also. First, following up on the cost of risk and provisions. Thinking about in terms of what kind of assumptions are implied for like NPLs? You know, do you expect some deterioration from here? You know, do you expect to go back to pre-COVID levels? When does that begin to happen, if it does? Just some color on the asset quality that you're assuming for the cost of risk guidance that you gave. Second question, if you can give any color on expectations for fees. You know, good quarter for fees there. Do you expect that trend to continue in 2022?
Thank you, Tito. Please go ahead.
Yeah. I will start on that. I will jump to start to comment on this. As we mentioned, the cost of risk, we think we reach a new normal on the cost of risk, so the number should be more on the 1.6% based upon all the origination processes and collection improvement that we have put in place. So now we feel more confident around the 1.6%. That I think will be the new normal on the for the bank. Some months we will have a lower and an upper, but that I would think, I think that should be our goal. I will as in a minute ask Gerardo to comment on that.
On the fee side, you should expect double digits growth on fee side. If you saw what happened on the trend on fees, I think we have been achieving a pretty good rate of growth on that. We feel confident to go into double-digit growth on the fee side based upon all the growth that we have, and not just on the digital piece. That's very important because we are also becoming extremely active at the branch level on the opening of a new account and things on those type of services, also an improvement in the number of services that we can provide for the SME. We feel confident to have double digits growth also on the fee side.
On my behalf, Tito, I will add just that asset quality ratios are well under control, better than originally forecasted in our budget, and way better than our stress scenarios for 2022.
They have converged to pre-COVID levels or even better as you have seen and analyzed. Past-due loan ratio decreased from 1.2%-1.6% during Q4 2021, still below 1.7% pre-COVID in the Q1 of 2020. I will also add that we maintain available that MXN 1.8 billion that Rafael was talking about. The provisions were MXN 555 billion, as you remember. By 2021 year-end, we have used just MXN 2.1 billion of those provisions and significantly below original projections.
Due to new COVID variants, we decided to keep MXN 1.8 billion because pandemic dynamics will have us very expectant to analyze vaccination rates, infection rates, COVID-19 virus mutations, and so forth. We entered this dynamic that is very well-known for all of us. At the end, at the bottom line, I will say that sooner or later, the credit process quality equals asset quality.
That's the reason behind what Rafael was commenting on, reaching a new normal of cost of risk. We remain very confident that we can maintain the cost of risk below previous historic levels, based on what we have experienced in the last two years. Thank you, Gerardo.
Thank you, Tito.
Great. Thank you. Can I ask just a quick follow-up? First, just on the NPL. Yeah, I mean, at that 1% NPL level, I mean, it seems. How long can it stay there? Do you expect to see some deterioration, though? I mean, I get the cost of risk will be below historical levels, which makes a lot of sense given these NPLs. But any color in terms of the deterioration that you could see, do you go back to historical levels or does NPL ratio also remain, you know, fairly low given the levels we see now? I have one more follow-up on the fees, if I can.
Yeah. Please, please go ahead.
Yeah. I guess on the fees, more kind of related to, because a lot of the growth in fees was that came from the electronic banking. I don't know if the JV with Rappi is contributing at all to that. Do you expect sort of like these digital initiatives to help also the fee income growth? I mean, you know, now that Nubank's public, you know, they're growing quickly in Mexico. I think they've mentioned close to maybe 1 million cards in Mexico. How do you see sort of that competitive dynamic and then your ability to grow your digital initiatives and potential benefits to fees from that? Thank you.
On the NPLs, as Gerardo mentioned, we reach a new normal also, Tito. Don't expect of us to go to the 2.1 pre-pandemic level. I think we will also be in the range of 1.6%-1.8%. Not that we expect deterioration, but we expect growth basically on the consumer lines. As you know, the credit cards and all those products demand initially a lot of build-up on provisions and things, but we don't expect, and we are extremely happy with the performance of the portfolio and the quality of the portfolio that we have at the bank.
We now know exactly how to manage those acquisition and onboarding process at a much better level than we had before because all the build-up and information that we have put in place for the internal models that the bank has. That's a very important characteristic of Banorte, that the proprietary models that we have on the onboarding side are proved to be extremely predictable. Also the recovery unit that Banorte has, and I think has always been a benchmark in the industry, is also acquiring a lot more analytic techniques to prevent any deterioration and tailor solutions for the clients. That's the reason for that. On the other thing, no, Rappi hasn't put any on the fee side at all. If you see the...
I think the gain with Rappi, and Paco can complement on that, is how do we manage the acquisition cost and how we improve that acquisition cost in order to reach the breakeven as soon as we can. We think that we have a pretty good handle on the business right now, and we can project that, but I think Paco can also add more on that.
Sí. Thank you, Tito. No, we have not. The Rappi deal is not providing any fee to the numbers that you have seen. As Rafael is saying, the way we see this-
As much as we can control our expenses and we can translate that efficiency to the customer, we can be able to grow the number of customers and to reduce the cost to the customer acquisition cost and the cost to serve. As you know, Rappi has in Mexico close to 9 million customers transacting, so there's plenty of information that we can reach. Although as you saw in the numbers that Rafa presented previously, one third of our customers are new to a credit card. So it's good news for both sides.
Great. Thank you very much. Thank you. We will now take the next question from Jorge Henderson from Santander. Jorge, go ahead. Thank you.
Hi. Good morning, Marcos and Rafael. Thanks for the presentation and for the opportunity to ask questions. My question is related to the Rappi joint venture. I was wondering if you could share with us the NPL ratio and the loan portfolio size of the Rappi JV and the Rappi Card. Also, if you have any updates or color you could share with us regarding the launch of your new digital bank, it would be highly appreciated. Thank you very much.
Thank you, Jorge. Rafa or-
Look, Jorge, as we mentioned, I think we need to wait for the Q1 to go to the numbers on NPL. You know that the roll rates and the curves of acquisition and risk need to stabilize. I think we have a much better view by at the end of the Q1 on that part. What I can assure you is that the first few months were challenging for the venture. We took control of collections and took control of risk origination and things. Now we feel quite at ease of what we see on the trends on the risk side.
We will rather wait for the Q1 to provide to you. Then the second one, the digital bank.
Thank you, Jorge. On the digital bank, we are already running tests, pilot tests with friends and family. Obviously, we cannot move any kind of money until we have a final approval from the authorities. We're expecting that process. As you know, the process implies two steps. The first step is the license in paper, and then a certification process. We're expecting that to happen the first part in the Q1. As far as it concerns to us, we are close to be ready, and with the application and all the products that are going to be serving in the first minimum viable product.
Okay. Thank you very much for the answers.
Thank you.
Thank you, Jorge. Now we will go with Nicolas. I'm assuming it's Nicolas Riva. Nicolas, can you confirm, please, your last name? Nicolas? Okay. We will then go with Jason Mollin from Scotiabank. Jason, please go ahead.
Yes. Can you hear me?
Yes. Perfect.
Great. I have two follow-up questions. First, on the guidance for the 2022 ROE outlook, if you can talk, and I think, Rafa, you mentioned that this assumes the dividend payments, but can you just again clarify what are those dividend assumptions? Then my second question is also a follow-up on the Rappi JV. You mentioned you learned a lot, and I think you mentioned certain points here and there, but maybe you can just be more explicit on what have you learned from the JV at Rappi. Is it really the cost focus that you're mentioning, or is there anything else on both the positive or not so positive side? Thank you. Ciao.
Thank you, Jason. The first to Rafa, and second Rafa after Nicholas.
Yeah. What we are implying for the return on equity of the group, Jason, is that we gonna be able to pay MXN 34 billion of dividends to the shareholders.
Very clear.
Thank you.
Thank you, Jason. On the Rappi side, plenty of things that we have learned. Personally, I can tell you that I keep learning every day on how this business moves different than the traditional credit card in the bank. I will highlight a couple of them. First on the risk side, the different models that we are using and we're implementing and moving forward with low and grow strategies has been very useful also for the bank. I mean, it's something that we are learning in Rappi and it's improving, and then we can implement it also here in the bank.
The second one is, remember when we started this, we were telling you that we can connect the three flows, the information flow, the financial flow, but also the physical, the product flow. We are learning on if the customer leaves a tip
He's a better payer. If the customer acquires such products, then he prefers to be communicated in different ways. We are learning, we are testing and learning how to contact better our customers and moving towards a personalized offering.
Very helpful. Rafa, maybe just.
If I may, Jason, let me add just something to that.
Yeah
Because I think it's also relevant because of many questions that we have received. Also, I think when you find this type of organizations, everybody's like very millennial. They feel very attracted to the fintech world, you know? When you try to match those with the banking principles like collections, accounting, fraud prevention, risk metrics and things, you think in addition to what Paco mentioned, that you need to have a very stable and solid back-office operations and very flexible front-office operations. That combination is what makes these joint ventures feasible to succeed. If you don't apply all the regulatory processes and all the discipline in the back-office process, you lose a lot of money in the front office.
when you do that combination, very flexible, very customer-oriented, very innovative, front office, but with a very, I would say, solid back office operations, then you really start learning that that's the way to go into the market. The client appreciates that a lot.
Very helpful. Rafa, I mean, is it in the MXN 34 billion dividend that you mentioned to be paid, is the assumption that that's paid on average throughout the year? Like, would you say just that'll be paid in the middle of the year to calculate that? Or how are you forecasting?
Yeah. I think to anticipate that will be before the middle of the year that we have information about the regulatory and we don't have. We are looking at least at the middle of the year and then start paying at the middle of the year the dividends.
Thank you very much, gentlemen.
Welcome, Jason.
We'll take the next question from Nicolas Riva from Bank of America. Nicolas, go ahead. Thank you.
Hello, guys. Can you hear me well?
Yes.
Okay, great. Thanks. Apologize for that. I have three questions. The first one on Banamex. Can you tell us in the case that you were to acquire the retail business of Banamex? I would assume, of course, you would do an equity offering. Is there a minimum level of CET1 and total capital that you would like to run the bank with after a potential acquisition of this business?
That's my first question. Second question, completely different topic. IFRS 9, I understand it will begin to be implemented in Mexico starting January first. It's gonna apply to all the banks. Can you tell us what would be the impact on capital at the time of adoption, and also the impact on provisions for loan losses on a quarterly basis going forward?
More generally, I mean, so far you have been reporting, of course, the NPL ratios as any bank. I understand now you will have to report the loans in three different brackets, stage one, two, and three. How should we think about that new reporting compared to the NPL ratio that's been reported so far? The third question on your AT1 bonds. You have a perp which is callable in July. I assume this has already been pre-funded with your most recent perp issuance back in November. If you can confirm that, thanks very much, Marcos and Rafa.
Thank you, Nicolas. I will start for the third one, the perpetual, the callable in July. Yes, we are planning to pay it for you. The first one of any assets that we could buy, any one, at least we should have a minimum level of 11.4. The overview is a strong Banorte, and that is, I cannot tell you anymore because I don't know more. I can tell you that we have this line for any asset. The second one, and Rafa please go ahead.
No, the second one.
Gerardo.
Gerardo. Please, Gerardo, go ahead.
Yeah. IFRS 9, we have been measuring each and every month in the last half year of what the impact is gonna be. I can tell you that as of now, at the close of December, if everything remains equal, the impact will be MXN 746 million. As you know, like, lifetime horizon provisions for credits on phase two will take place, and loss given default will change also. The total impact of loan provisions will be charged to capital, not profit and loss. That's very important for you to know. We will make our numbers by the end of January. We have been considering the impact on the credit portfolio, the derivatives portfolio, and the leasing operations.
We remain very confident that this is not gonna be a big impact for Banorte.
And, and also-
Yeah.
That you are in a way why we set the 11.4%. If you remember when we did the acquisition of Interacciones, we reduced the capital numbers to that number. Then immediately we went to the 12.5%. That is the number that we like to have. As Marcos mentioned, we are willing to go as low as 11.4%, for any asset on that part.
Rafa, one thing. When Marcos before said excess capital we have right now is MXN 52 billion, which will be like $2.6 billion.
Yeah.
In that case, are you using the minimum level of 11.4 or the 12.5 for CET1?
Exactly. The 11.4, Nicolas. Yeah.
Okay. Thanks very much. One last follow-up for Gerardo. You said the impact of IFRS 9, did you say MXN 746 million? Did I hear that correctly?
Yes, that's in the credit portfolio. If you add the impact on leasing operations and also derivatives, the number will go up to MXN 1.4 billion.
Okay. That would be a positive impact on capital to be taken directly as a positive impact on capital.
It will be a capital deduction.
A capital deduction. Okay. All right. Okay.
Post P&L. Yeah.
Yes. Okay. Well, thanks very much, Gerardo, Marcos, and Rafa.
Thank you, Nicolas. Thanks, Nicolas.
Thank you. Now we will go with, Alonso Garcia from Credit Suisse. Alonso, please go ahead.
Hi, good morning, everyone. Thank you for taking my question. I actually have two questions. My first is if you could provide some details on your loan growth. I mean, how are you seeing growth for the year by segment? And just to clarify there, if this includes some credit card loans from your RappiCard JV, or, I mean, just to understand how this JV is going to be accounted in your books. And my second question on the insurance side, I mean, is it possible for you to quantify the impact on insurance claim in 2021 from the pandemic, and how much is embedded in your 2022 guidance?
I mean, I know it's hard to estimate how much you will have this year because it's hard to know how the pandemic will evolve. Just to understand how much is embedded currently in your guidance and your guidance for margin expansion. Thank you.
Thank you, Alonso. Let's see, the first one. The mortgage is around 8%-9%. Payables accelerating to 5%-6%. Auto loans like 7%-8%. Credit cards is improving around 5%. Commercial, more aggressive, and customers were likely to it's 5%-6%. SMEs is still cautious, 2%-3%. Government, two to three are expected to continue participating in this. Corporate we will see, but should be around this level. All these because we have a lot of it should be around 7%-9% loan growth, around that. Talking about the impact on insurance claims from COVID, I will ask firstly Gerardo there.
Yes, Marcos, thank you. Well, first of all, let me tell you that the trend is good in the insurance sector. For instance, let me just mention some things and I will go to the question. For instance, the retail products that we sell through branches last year grew 13%. Also the insurance which is embedded in the current products grew 12%. The fundamental and the more profitable products, I think the business is doing well, as Rafa mentioned in the introduction.
I should mention that the reduction in the net earnings this year with respect to the previous one, which was 40%, was due mainly, of course, because of COVID, but also we had an impact in insurance business due to the interest rates. Because as you know, we sell mainly short-term products, and therefore we had an impact because of the reduction in the interest rates during the year. That impact was around MXN 500 million in net earnings. The difference to explain the result was due to COVID.
Now, let me mention first how was the behavior of the difference of the number of claims and also of the losses within the year. To explain this, what we did, we took the average of the claims and of the losses previous to the pandemic, and then we compared to what we observed in 2020 and 2021. Let me just refer to 2021, not for taking that much time. For instance, in terms of claims in the Q1, we had 25.2% more claims than the average previously to this pandemic. In the Q2, it grew a little bit, well, let me go by quarter.
25.2, and then we have, in terms of losses, 48% more losses than with the average of the previous to the pandemic. In the Q2, in terms of claims, it was a little bit higher, 25.9. But since the average claim was lower, we had a reduction in the losses, and it was only above the previous to the pandemic 47%. By the Q3, we had a reduction in this number from almost 26% of the previous quarter to 22.4%, and also a reduction in the losses with these numbers. It went down from almost 47 to 40%.
By the Q4, we observed that the number of claims above the average of the previous COVID levels was 16%. The loss ratio had also a very important reduction with respect to the previous quarter because it was only above the normal levels by 28%. The trend is good. So far what we have seen, of course, is more volume. So far, what we have seen in these weeks of January, which is of course very soon to tell, and remember that we're in the midst of the peaks of the number of people that have COVID in the country.
We will be perhaps affected a little bit because of the volume, because it's a very high volume, more infections than previously. On the other side, if you look at some leading indicators, that is, the number of claims, and also looking at what happened in the line of business, which is the health part of the business, we do not see that much increase in serious cases due to COVID. Of course, there is a lot of uncertainty, but we are projecting that we will keep going down with the number of claims and that the loss level will go a level down to the previous ones.
As was mentioned, I mean, we are making a conservative assumption, and we are making a reduction, which is but not very steep because we have a lot of uncertainty. I think we will have more to say next quarter. Certainly, I think that what has been mentioned is that very likely, if everything else the same, of course, and as Marco has been mentioning some other places, if nothing else shows up that is not. That hopefully we will not see another variant or something that will change this. I think that we will level up by the Q2 of this year.
Also if I just add to what I think Fernando explained it perfectly, the good evolution of what we see. If you go to the budget on the issuance side, we are assuming a very conservative net income growth, but you saw last year that we have a reduction to close to 50% in net income. For this year, we are only considering a 14% growth on the issuance side. We are still, as Fernando mentioned, very conservative about this. If we see a much better trend, we will guide you the evolution of that. But at this point in time, we are being conservative with the issuance business, but very confident in the evolution of the business on the sales side.
Perfect. Thank you very much, Rafa. Just a last follow-up, you know, on the RappiCard loans, will they be booked in your balance sheet or maybe booked aside?
No, they will be on an independent booking. Once we decide exactly how the joint venture is gonna act, if we will have a. As you know now it's 50-50, so we don't consolidate that, but we will present that as a part of investments in place that we have.
Okay, perfect. Thank you very much, everyone.
We received some emails asking us to repeat the guidance by product. Mortgages is around 9%, payroll six or better than that. Autos around 8%. Credit cards still recovering above 5%. Commercial around 6%. In the corporate and government, we will see recovery this year, and we are not giving a specific guidance, but we should continue to see recovery as we continue. The other question is that, yes, just to be clear, this is even considering a lower GDP. We just received these two questions, and I want to be very clear about that. Thank you. Now we will go with Gustavo Schroden from Bradesco. Gustavo, please go ahead.
Hi, good morning, and thanks for taking my question. Can you hear me?
Perfectly.
Okay, thanks. Good to talk to you. Well, I have two questions, and the first one is still related to your guidance. Can you give us any color regarding which lines you are more comfortable, and then you think that we should work at the high end of the guidance, and then which lines you are less comfortable, and then we should work at the low end of guidance? Any color on that would be great. My second question is a follow-up on this potential lower GDP, you know.
I'm asking that because we have received many questions from investors regarding this potential weaker GDP. Here at the Bradesco BBI, we are already working with a 2% GDP, so we are below your numbers. You are very comfortable saying that in your guidance, although you showed 3%, you think that the bottom line and the evolution of the business would be at the same, even considering the lower GDP. My question is, with definitely lower GDP we should see some impacts on the loan growth on asset quality, operating expenses, fee income. I mean, which lines do you think could be impacted that most in a lower GDP?
Which lines could offset these negatives from a lower GDP, that at the end of the day, we should continue working with this guidance range you provided. Those are my two questions, and thanks again.
I will start with the second one. Why we are so comfortable, because we were named with the number 3, because it's, let's call it an odd number, but which we are working in all the other data. It's gonna move down. That's why we feel that, working, I don't know, saying 3, but in the reality of the internal number that we are working is around 2. That's the truth. No, we since the beginning, we knew that this number is gonna change a lot, and it's very volatile, and we don't want to depend on that. That's why it doesn't move our needle here. That's the reason. I'm sorry to be that soft, but this is a good reason. No?
The first one, talking about the guidance, Rafael.
Yeah.
The most comfortable.
No, I think, Gustavo, if you look at the margin side, we are confident on the margin because of the interest rates, the mix, the sensitivity that we have on the balance sheet. We are pretty confident on the margin side. The second one is the fee side. The fee continues to be trending in the good way. If we survive the process during the pandemic, that we don't have the physical, but just the digital, we also see a very good trend on the fee side. On the loan growth, also we continue to see, based upon the third and the Q4, good expansion, and that will benefit also the margin.
The funding cost that is also related to the margin continue to expand well above deposit growth above the loan growth. That also will be a good source for the margin. Trading will be in balance at least as we see, so we don't see any impact on that part. I think we have been positioned pretty well for the downward trend and also for the upward trend, so we don't see an impact on that part. The expense line is the one that we have to really look hard into the expense line to reduce that 7% that we have given you on that part.
That's the risk part, but it's in our control now that we anticipate a lot in the Q4. I think we have more control on that, and we have to look at ways to reduce that. NPLs and cost of risk, we feel confident because of what we suffered during the high levels of the pandemic, everything was locked down and how we managed the client. We also feel confident in that, and we have that MXN 1.8 billion sitting there to protect us from any deviation that we see on that. We also see a potential benefit if what Fernando mentioned improve faster than we anticipate. We also see that part. On GDP, I think that you have to understand that Mexico is like two Mexicos.
You see the center and the north are pretty active by exports and moving forward on manufacturing and most part of the business. A part of tourism also moving quite nicely in the Baja part. Also on the tourism side, Cancún and also pretty active in that.
The centers to the south is basically nothing. So when you look at GDP, you also have to look at local GDP from state to state, and that's a completely different. That's why we think that we can manage that number that we've given you on the loan growth, even though the GDP is gonna fall down for sure below 2%. In some parts of the country, the local GDP will be higher above the 3%.
That's what basically we are doing business in that part of the country. In the south, on the tourism, in the center and the north, with the manufacturing. That's where Banorte is basically very active.
Rafael, I will let Alex defend a little bit at MXN 2.5 billion. Alex, go ahead.
Thank you. This is Alejandro Padilla, Chief Economist. Well, as Marcos and Rafael mentioned before, the guidance is hovering around 3%. Right now, market consensus is at 2.5%. I think that Rafael was quite accurate to outline our expectations about several sectors in the economy. As in the world, GDPs are recovering at a different pace.
It's gonna be the same thing in Mexico. We think that we will observe different velocities in terms of growth, for example, in external demand or anything that has to do with manufacturing or the exporting sector. Why?
Because we are confident that we will continue benefiting from growth in the U.S., from nearshoring, from all these strategies that Mexico has been achieving in the last years to strengthen trade between the U.S. and Mexico. We are confident in that part. Also, in terms of domestic demand, we have to stress out that consumption can be resilient now that we have vaccination program that will allow consumers to keep on with their activities. Remittances are at all-time highs, and remittances are basically focusing on consumption.
Also we have been observing improvement in terms of employment. Exactly what Rafael was saying that, despite the consensus is around 2.5% for GDP this year, we have to take into account that Mexico has different regions, different sectors. I think that he accurately said in which sectors Banorte has several strengths.
Yes. Yes, no, very good, very clear. Thanks for the answers. Just, if I could, if I may just to do one follow-up on the guidance, especially on the NII. I consider you are comfortable with the line and that you are more optimistic. According to your answer regarding the insurance business in the previous question from my colleague, if I understood correctly, you are adopting a more conservative approach for insurance in this year, right? So any positive surprise from insurance business could represent a potential upside in your NII estimates. Is that correct?
Yes, it is correct. Hopefully.
Okay, great. Thank you very much.
Thank you very much.
Thank you. We have received different comments now regarding the duration of this call. If anyone needs to leave, please send us an email and we can arrange a call later on. Also please, if your question has been already answered, please, we can connect now or later to go into other details. We will continue with Geoffrey Elliott. Geoff, please go ahead.
Hello, thanks very much for taking the question for the call. I know you don't want to get into the specifics of Banamex, and clearly that's completely understandable. So maybe let's broaden it out. Could you talk about the criteria that you generally look at when you're considering a significant M&A transaction, how that evaluation works? You know, you guys have got lots of experience doing this with other deals in the past, most recently with Interacciones. So what are the criteria that you look at when you're thinking about a significant deal?
It's a holistic approach. It's not so easy to say different bits. We see all the pieces and then it all comes the most important acquisition for our investors. Obviously we see even ESG. We see everything. As you said, we have a let's call it fees department here that talks about all this. We see all the opportunities. Everything that is moving in the market is not. We have the duty to look at it. We are seeing each moving piece that is different. I would say that we cannot answer so directly, you know, because it's a holistic approach that we make.
As soon as we have some, let's call it color, we go with the in this case our board of directors, and then we move on and then after the assembly, you know. We know the dream, we know everything, but we look everything. The acquisition is the most important, as you say.
Understood. Thanks very much.
We'll now go with Carlos Gomez-Lopez from HSBC. Carlos, please go ahead.
Hello, and thank you for taking my question. I want to ask you about the Afore business. You mentioned that now we know the fee which is going to be charged. In the previous conference call, you mentioned the impact that the reduction in fees could have on your business without mitigating measures. Now that you have all the information, what are your expectations for the Afore business? This year you made about MXN 4 billion, about a 2% increase. It's 5.5% of the business. Where do you realistically expect it to be next year? The second, again, I know that you cannot say too much about any possible transaction.
I was wondering, it would seem to me that one of the most valuable things of Banamex is actually the brand, but you have your own. Does the brand have any value for Banorte when you consider a possible combination with them? Thank you very much.
I will start with the first one, and David Azu is on the line. As soon as he's finished, we will go to the second one. David, go ahead please.
No.
Okay.
Fernando.
Fernando, sorry.
Yes, thank you. I can answer that. Yes, well, the Afore is a challenge because as you know, I mean, certainly the reduction in the fees was materialized. What I mentioned in previous conference call, the impact in net income without doing anything else, it was quite significant because it was a reduction of 23 basis points. Therefore, in terms of net income, without doing anything else, the impact was somewhere between MXN 1,400 million-MXN 1,500 million. As of today, we are considering of course reducing the expenses in the commercial side. We are considering there that perhaps we will be able to reduce the expenses perhaps MXN 300 million.
What is a challenge for the other expenses is that there are some regulations that we are trying to change within the next quarter. Therefore, it's very hard for us to know exactly how those regulations will impact for good or bad in some other expenses. Let me give you an example. For instance, they are considering the regulator is considering that perhaps the Afores we will not be able to pay commissions to the sales force.
Well, if that happens and they want to transform the sales persons more into advisors, and therefore, you cannot pay them commissions, you have to pay them a fixed salary without commissions in the total compensation. That might be a positive to say one thing.
Some other thing that is likely that will happen because is that the regulator is trying to reduce, given that they reduced the commission so much, they are trying to come up with some offset measures, like for instance, reducing some regulations, perhaps relying more on in self-regulation within the Afores to reduce that. Also to concentrate the files, so on and so forth.
Those are under discussion. Most of them are positives, but there are some others which may not be positive in terms that they are perhaps also planning to enhance some services that will have to be provided to the clients. Because of that, we have some uncertainty.
Also, something that is under discussion, which will be positive for us, is they are discussing that we can reduce the level of the reserves that we have to keep according to the assets under management.
That will also be a positive. There are gonna be minuses and pluses. I would say that so far, that's what we have seen. The only thing concrete, and we will have more color hopefully by the Q1, is that we have this impact due to the reduction in our income and this offset in the reduction of around so far at this point, but hopefully it could go higher, but we have to wait and see, of MXN 300 million.
I'm not sure if I was.
Fernando, if I understand correctly, first, the reduction in the fee was, if I recall correctly, from 0.8 to 0.57. Could you confirm?
That's correct. That's correct.
Okay. You mentioned your previous calculation was a reduction in net income of MXN 1.4-MXN 1.5. You said that you could mitigate it by about MXN 300 million with a reduction in the sales expenses, correct?
Yes. I have to be careful to tell you that there are some things that are happening, as I mentioned, some regulatory changes. Some things will be beneficial, some others will not. That's why we have to wait and see each quarter to give you more color about what we expect for the end of the year.
Thank you, sir.
Carlos, just a quick clarification. That's the amount for the impact of the full Afore. Remember, we only have 50%, so you need to divide the, not that, until you get to around MXN 750, and then-
Yes, that's right.
Yeah, to around 300.
Yeah. Sorry. I always mention the numbers of Afore in terms of Afore as a whole, but as you know, the impact for us is only 50% of that.
Yeah, that's clear.
For good or for bad.
Thank you, Carlos. Regarding the second question.
Yes. As I said, we are doing that in each case, a holistic approach. One of the pieces is the brand, which is one of the multiple issues that we see. That is, we see a lot of things. 100 in total. This is one of them? Yes, that's one of them.
Thank you.
Carlos, if you look at the Interbrand that they put the value on the brands, you will see that the Banorte brand has more value than the Banamex brand as we speak. That's also a fact.
Okay. No, I don't doubt that. You know, as a fact, you already have a valuable brand and therefore, if you were to acquire that asset, that would not bring a brand. It might bring it to somebody else, but not to you.
Yes. Thank you.
Thank you.
Okay. We'll now move on to Yuri Fernandez from J.P. Morgan. Thank you, Yuri.
Hi, guys. Good morning, and thank you for waiting for my question here. A lot of questions. I have one on margin sensitivity. There is this nice chart here showing like the sensitivity to rates increasing over time. And it seems pretty good now at MXN 1.1 billion per 100 basis points change in rates. My question is how much more can we see this moving forward?
Because I guess Rafa mentioned that he believes this sensitivity may continue to increase. So my question is how much more can we see this for the middle of the year, for the year end, where this can be the sensitivity? And I have a second question and sorry for returning for this topic on Banamex dividends and capital.
Looking to your Tier 1 and Core Tier 1, it's pretty solid. Like, you have a lot of capital. My point here is more on the core equity than the Tier 1, because on the core equity, I guess it's tougher for you to generate this kind of capital. You mentioned MXN 52 billion pesos of excess capital. My question is, if you pay those MXN 34 billion, your excess capital will decrease materially, right? Like if the 34 is not calculated as part of those 52. In addition to that, again, we don't know about the acquisition, we don't know the price, we don't know what will be generated, the RWA calculation. There are many moving parts.
Considering the dividends and the prices we are seeing, people discussing around, my question is can you keep the 11.4 capital with such material acquisition, or would you need to increase capital or finance this with debt in the holding? Because I know also that in Mexico, the Basel III regulation, it's not a financial conglomerate, right?
One thing is looking to the capital at the bank level, another thing is thinking about the holding. My question is, thinking about dividends you pay, as you said, the excess capital would reduce, and it's a super big acquisition, right? I don't know how to fit the 11.4 core Tier 1 that you mentioned with all those moving parts here, and I would like to understand this a little bit better. Thank you.
Thank you, Yuri. I have at least, please compliment a lot with the pesos.
Sure. First of all, the sensitivity. Yes, as you mentioned, Yuri, we have been increasing that in the local currency. Balance sheet is around 1.1, and we are expecting an expansion there of around MXN 200 million on the foreign currency balance sheet. We're at around 900, and we also expect some expansion in that regard. Then I think that your question about the Core Tier 1 is what's the excess capital given the Core Tier 1 that we're going to maintain is the MXN 52 billion that Rafael discussed.
Okay, we can discuss this later because it's many moving parts here, and I'm not getting like the 52. Like the 52 includes the MXN 34 billion payments because 52 less 34, it will decrease materially, right? After the dividend payments.
It's not 52 plus those 34. I think Yuri, we need to define what is material because you're looking at a 15.4 Core Tier 1, okay? That Core Tier 1 is only taking into account 60% of the net income of 2021. Everything else is already at the group. That will not be a reduction on the capital numbers, what is already at the group. That is MXN 16 billion that are sitting at the group. What we are talking about is another MXN 16 billion that will be put down.
The 54 to 52 is if we would like to decrease the level of Core Tier 1 to levels of 11.4 or 11.6 that Marcos mentioned. That is the basic metric that we run when we want to reduce the capital for any asset that we need to acquire. I think that distinction needs to be made, that MXN 16 billion are already sitting at the group. When you're talking about material, you're only talking that MXN 16 billion will be the effect on the 15.4 of Core Tier 1 that we have. It's not. It's really non-material. Obviously, it's important, but it doesn't move. It will feel well above the 12.5. That is the number that we would like to run the bank with.
Yeah, I'm not concerned about the dividends. You have a lot of capital to pay all those dividends. I'm thinking about the acquisition, the capital for the acquisition.
Yeah. The acquisition, that's the tricky one, is you take into account after paying the dividends, so you take into account of the dividend part of the acquisition. That's the key part that we cannot answer.
That's the key part. Like, if you keep the dividends inside or you pay the dividend and acquire something else.
Yeah.
That's the question.
That's it. Yeah.
Okay. Thank you. Thank you, Rafa.
Sure.
Thank you. Now we will go with Gilberto Garcia from Barclays. Gil, please go ahead.
Hi, good morning. Thank you for the call. Not to try to sneak in another question about potential M&A, but given that you already have a sizable branch network, how do you think about this physical presence, especially as you continue to learn about the digital business, through the Rappi JV?
I want to tell you that's one of the factors that you are right. We need to see what the future of the industry and all people. That's why it's sustainable, and that's why we are analyzing, because it's not so easy to say it's a piece of cake or we should go there or not.
If you look at the sector, I think you have to see that the largest number of branches belongs to BBVA. That's up close to 500 branches more than Banorte. The same number than Banamex, because the branches of Banorte and Banamex are basically the same. I think whatever happens in the market, there will be, I think, more branches than needed. That's a factor why everyone moves into this acquisition. As you know, Banorte hasn't grown the branch network in the past three years. What we are doing is remodeling the branch network to a better layout and a better orientation for the service. That's what we can tell you about that.
We have to go and look at the value of branches, what's their potential to grow things, and also the potential cost savings based upon the digital. It's a balancing act for you, honestly.
Also very clear. A follow-up on the insurance business, if I may. Thinking longer term, you mentioned that you've seen strong demand for insurance products at the branches. Do you believe this could be sustained, leading to wider adoption of private insurance, particularly considering how low insurance penetration is in Mexico?
Sorry, are you there?
Yes, I'm still here. Yes, I do believe so. I mean, precisely because of that. I think that the distribution through the, I mean, what is called bancassurance, is a very strong distribution channel. Also in the digital world, I think there is also something that we have to keep looking at, and I think there are also very good opportunities. For instance, everything else the same, of course, we cross-sell products, as we know, in the credit products, but also in the other part of the balance sheet, I mean, in deposits.
I think we have very good opportunities. I mean, also for acquiring clients, I think we have some room to improve the cross-sell as well, and also to upgrade, not only when we cross-sell, when they buy a deposit product or a credit product, but also to offer some upgrades as they do that. I'm optimistic about this line of business, certainly.
Thank you very much.
Now, we will take the next question from Edson Murguia . We don't have the company that you represent. If you could state the company, please.
Yeah. Well, I'm an independent researcher. Good morning. Thank you for taking my question. Giving a follow-up on Jorge's question and your comment on the portfolio quality, I would like to ask, considering the reported provision level, are your current local macroeconomic view to have diminished from previous levels? Are you expecting to allocate more resources? Following this line of thought, are you anticipating to increase available credit lines from the banking counterparts and Banxico this year from the reported levels? Finally, regarding derivatives, at what point of the year can we expect to see a full transition of the underlyings to SOFR or from LIBOR? Thank you very much.
George, I don't want to feel rude about this, but I think those questions require deep answers on that. If you allow us to go on a one-to-one with you, happy to show you because there's a lot of regulatory issues that we have to show in that part, everything related to credit lines. And there's some secrecy about who are the counterparts and things like that, as you know, by regulation. I'm happy to take offline, but happy to answer each one of those.
Well, thank you very much. It'll be great.
Thank you.
Now we'll go with Olavo Arthuzo from UBS. Olavo, go ahead.
Yes. Hi, Rafa, Jose, can you hear me well?
Yes.
Perfect.
Okay. Thank you for taking my question at this moment of the call. I wanted to explore one single topic here. Actually, I wanted to understand the bank's strategy for the credit card portfolio of the bank for this year. In this Q4, it was one of the highlights within the customer portfolio. As you mentioned earlier this call, the growth rate for this year should be something above 5%, and correct me if I'm wrong. Could you share with us the rationale of this growth rate? I mean, will it be supported by more aggressive pricing approach or supported by the expected demand for the year? And one last thing here on this topic.
Is there the pipeline for this product to launch some new features like new reward programs, partnerships with other non-financial companies? Or on the other side, allow some other initiatives to foster the use of your credit card through debit transactions? If you could add the card strategy through the partnership with Rappi to it would be great. Thank you very much, Rafa, also.
Thank you, Olavo. Remember that we are, let's call it, a big bank and our natural quota should be around 15-20, I don't know, in all the products, and we don't have it here. We have a lot of improvements and a lot to do here. We are optimistic, and we know what to do. Paco, please go ahead.
Yeah. Thank you, Rolando. On the credit card, we are planning to grow that percentage considering the capabilities and all the infrastructure that we have already in place. As you may be aware, we have a complete set of products. We have alliances with Marriott, with United, with AT&T, with some advertising group here in Mexico. We believe that in the basket of the products, we have products that can cover all the needs for all the customers. On the process side, we have been working during these 2 years in making what we call the bank in a minute, so you can open a credit card in a minute, in 5 minutes, 10 minutes in the digital channels. That's
Also the customer can serve almost all the transactions that they want using the mobile banking. They can claim some non-recognized charge or a statement, payments, obviously. We also have the digital cards, and we have more than that. Additional to that, we have the rewards platform that you can use it in three different ways. You can buy in the shop, you can pay in a commerce with your points, or you can erase your transaction using, again, your mobile banking. We believe that we are in a very good position to serve the customers and to attract more and more customers.
Additional to that, as you can imagine, the portfolio is very clean. We're confident that the customers that we have there are going to behave properly in this new post-pandemic or post-two-years of pandemic season.
No, that's great. Thank you for your answer.
Thank you.
Thank you. Now we will go with, Brian Flores. Brian, please go ahead.
Hi. Thank you. Can you hear me well?
Yes, perfectly.
Great. I just wanted to know if you can detail how would the process of M&A evaluation goes internally. Let's say your team analyzes an idea, likes it. How long does it take for it to be approved internally and then to be taken to the shareholders' meeting, which you already have mentioned?
Yeah.
Thanks, Brian.
Brian, as you know, we have an M&A area that is always valuing assets in the market on a permanent basis, not because something comes and appears in the market. We do this exercise on a monthly basis. We update the values and everything that is in the market, even if it's for sale or not for sale on that part. That's one step that is permanent. Once we define that it's something that's worth it to take into the board, we take it to the board. How long it takes, it's really based upon the availability of the information that the potential assets allow us to look at.
On valuation processes, we are on a permanent basis, looking at every single asset that is in the market, even if it's for sale or not, or not for sale. How fast the decisions are internally at Banorte, pretty fast. I mean, compared to anybody else, it's pretty fast because we, the decision process is local and the board is local, and then we call for the assembly that is obviously global. The internal process goes very smooth and very fast. What is worth mentioning is that permanently, every single month, we update the value of any potential asset that is in the market.
Rafa, just a quick follow-up. Assuming you have this availability of data, so how quick are we talking around? Are we talking 3, 6 months? Just to have an idea.
I think at the most, three months.
Perfect. Thank you very much.
Thank you, Brian.
Now we will take our final question from Rodrigo Ortega from BBVA. Rodrigo, go ahead.
Hi, guys. Can you listen to me?
Yes. Yes, we can.
Great. Thanks for the opportunity to ask questions. I was thinking about looking long-term and the substantial funding improvements that you have achieved. I wanted to know how much of the loan growth do you think that Banorte can support before this funding improvements start to erode. I think it would be reasonable to think that before loan growth materially points will start to consume the excess savings. How should we think about this balance in the mid-term between growth and funding efficiencies? The second one, a follow-up on credit card. What are you expecting regarding the evolution of clients making full payment, which continues to trend upwards with data as of October from CNBV?
also about the average revolving balance with these clients.
Marco, why don't you start with the first one?
Yes. Thank you, Rodrigo. We are expecting, as you know, we have more customers now paying all the debt more than revolving. We are expecting that to start moving towards our previous numbers, pre-pandemic numbers by the Q3 of this year. Again, as I was saying previously, considering what we are doing in personalized offers, we believe that we can pull that earlier in the year.
Okay, thanks.
Thank you. Rafael?
Yeah. Rodrigo, if you look at the history of Banorte, there's two things that we have to take into consideration about loan growth. The capital consumption and so the deposit availability for growth. Basically, if we stay in the range from 10%-12% on the funding side, we don't have any issue about the cost. Not because of the availability, because availability is there, but on the cost 10%-12%. If we go to 15% loan growth, we start consuming capital.
Okay, that's very helpful, Rafael. Thank you.
Thank you.
Thank you very much.
Okay, thank you.
Thank you very much. Your next question.