Good morning. Sorry for the delay. I'm Tomas Lozano, Head of Corporate Development, Investor Relations, and ESG. Welcome to Grupo Financiero Banorte Third Quarter Earnings Call. Our CEO, Marco Ramirez, will provide an overview of the inflation and its effect on the rate environment year to date, as well as the main results for the group, including the positive trend in long-term NII, controlled asset quality, and the continuous recovery on insurance claims. On the ESG side, we want to thank you, all of you, for your valuable feedback and comments, which have helped Banorte to be ranked in top positions in two well-regarded rankings. Most Socially Responsible Bank, according to Newsweek and Statista, and Most Honest Bank in Mexico, according to Institutional Investor. You will find our quarterly update in the earnings call deck.
After our CEO's presentation, Rafael Arana, our COO and CFO, will provide details of the main financial results of the group, including the ongoing impact of high reference rates, continued cost control, and capital ratios. 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. On page two of our conference call deck, you will find our full disclaimer regarding forward-looking statements. Thank you. Marcos, please go ahead.
Thank you, Tomas. Good morning, everyone. Thank you for joining our call today. The third quarter of the year presented resilient results for the financial group, navigating through a challenging global economic environment. Nevertheless, economic activity in Mexico continues to show good performance and is expected to continue for the remainder of 2022. GDP in Mexico has been driven by the recovery in private consumption, supported by greater mobility, remittances at historically high levels, better employment conditions, along with increasing export activities, despite the potential disruptions in the global supply chains.
Our economic analysis team is holding its annual growth estimate of 2.1% for the year 2022, although recognizing a more challenging scenario towards the end of the year and the next, driven by the potential global recessions, including that of the United States, as well as persistent inflationary pressures and a more restrictive global monetary policy. However, it is safe to assume a soft landing for the Mexican economy, considering that it has not yet reached pre-pandemic levels. In this sense, we believe that Mexico could grow around 1% in 2023, despite a moderate recession in the United States, supported by increasing nearshoring activity. Inflation remains as one of the most important challenges for most of the economies.
With annual inflation in Mexico reaching 8.7% in September, our economic analysis team has revised upwards its forecast to 9% from 8.1% for the year 2022, anticipating a turning point by January to end 2023 at 5.4%. With this background, we expect further tightening of monetary policy. Thus, we recently adjusted our forecast of Banxico's reference rate, expecting it to end 2022 at 10.5%, with a terminal rate of the current restrictive cycle at 11% in the first quarter of 2023, suggesting more tightening monetary conditions for at least the next 12 months. On the political front, Congress is expected to continue to focus on the economic package for 2023.
On the legislative agenda, attention is still on the initiative to reorganize the National Guard under the Secretariat of National Defense. Moving on to the bank's operation. During this quarter, we have strengthened our commercial teams to increase our presence and competitiveness to attract potential customers. Banorte is constantly searching for ways to attend the needs of the Mexican market, and these times are ours to take, always with a responsible approach towards risk and profitability. Moreover, as you might have heard, Banorte was recently granted the banking license for the constitution of its digital bank. This is an important milestone into fulfilling our vision for the year 2023, which is to be the number one financial group in Mexico doing banking in a digital world.
We are aiming to capitalize on all the strength that we have consolidated in more than 120 years of banking and provide Mexican users with a 100% digital personal, easy, and secure solution. We will continue to work with the financial authorities to comply with the regulatory process and certifications until it starts operating in the market. In the upcoming months, you will receive an invitation for our Investor Day, where we will go through our current corporate strategy and, as one of its 3 pillars, we will share all the details about the digital bank. We are working on the general business plan and different scenarios with all the product lines. The operation will be as a fully digital-native bank with a competitive cost structure that will enable us to transfer benefits to our customers.
It's important, the focus of the business will be on profitability. Although we will have KPIs related to our digital bank, we will be basically focused on ROE, ROA, and net profits. In the same line, and aligned with our strategy of promoting hyper-personalization, innovation in the digital field, and the search for alliances that approach us to different customers, during the quarter. Our Banorte Tech digital ecosystem was launched for the Tec de Monterrey community of around 89,000 individuals in 25 campuses across the country. This app, exclusively for Tec students, staff, and alumni, allows an easy and secure access to highly transacting financial products and services, along with availability of the campus ecosystem within the app. Lastly, the adoption rate of our digital channels continues to rise, and most importantly, customer satisfaction in the use of these channels has had relevant improvements.
Our mobile banking reached an NPS of 82.7 in the quarter, 9.1 points higher yearly. Diving into the financial results for the quarter, slide 3, the resilient performance of the group was supported by a dynamic credit demand, sound funding mix, strong fee activity, contained expense below inflation, still better than expected risk metrics, and a shielded balance sheet. Starting off with profitability on slide 4, ROE improved more than 400 basis points on a year-on-year basis on the back of a solid performance across most of the business lines. Nevertheless, it continues to be pressured by insurance results, which are gradually reaching pre-pandemic levels. On slide 5, NII from the loan portfolio increased 8% quarter-over-quarter, partially incorporating the effects of reference rate increases during the first 9 months of the year.
Non-interest income decreased in the quarter as a result of extraordinary expenses from the insurance company registered in other income, this case expenses, and lower trading income. Zooming into fees, slide number 6. They remained flattish in the quarter on higher credit origination through the external sales force. With accumulated figures, we continue to grow fees at double digits, driven by a strong electronic banking fees, higher advisory and structural fees in commercial and government portfolios, and more dynamic transactions in consumer products, aligned with the recovery in private consumption. POS transactions had a seasonal effect during the quarter due to the Hot Sale in May, but they present a steady growing trend through digital and physical means. Moving now to slide number 7, we see a very healthy expansion in the loan book.
Corporate loans were partially affected by prepayments, but the yearly comparison is expected to continue growing from the market that seeks financing in dollars, which is already around 12%-13% of our loan book. Commercial loans are gaining traction, and this trend is expected to continue for the rest of the year as we benefit from the new short-term operations, especially for the manufacturing industry, and increase our exposure in low risk profile SMEs. The government book was also impacted by prepayments from different states in the quarter, but we are not expecting deceleration in the book for the year 2022. The consumer portfolio, slide 8, displays a strong quarterly expansion and a record annual volume increase in the portfolio. The evolution of payroll and credit card loans rely on good consumption dynamics, driven by higher mobility and employment conditions.
Auto loans are recovering as supply shortages start to normalize, and we expect good performance in this segment going forward. Mortgages presented a remarkable annual growth during the quarter of 10.2%, helped by business approach we have had during the origination process, where we prioritize customer lifetime value over short-term margin gains. Going forward, this segment is expected to be resilient during the rising rate cycle as we increase our personalized offerings. However, we might experience some moderation in credit demand at sustained rates above, let's say, 10%. On the slide number 9, asset quality continues to perform better than expected. NPLs remained resilient during the quarter, with delinquency indicators for each product within the expected levels. Currently, we don't foresee deterioration that can represent a trend in any industry or geography.
However, we do expect a normalization of risk metrics as we increase our share in riskier segments, such as the consumer products. Analyzing the results by subsidiary, slide number 10, during the quarter, the bank was slightly impacted by higher operating expenses and provisions. Nevertheless, with accumulated figures, it continues to expand on the back of solid NII, asset quality, expense management below inflation levels, and expanding loan book, showing significantly high levels of ROE above 24%. As previously mentioned, we are constantly analyzing different alternatives to optimize capital and maximize value to our shareholders. The insurance business results are gradually recovering with good premium expansion and COVID-related claims decreasing to almost pre-pandemic levels. Operating results show continued growth, especially in bancassurance. The broker sector showed a quarterly reduction driven by lower transactionality.
The annuities business increased during the quarter driven by business expansion, offsetting higher reserves from inflationary adjustments. As for pension funds, the business was still impacted during the quarter by the fee cap imposed by the regulator, along with the valuation impact of higher rates for its long-term investments. Nevertheless, different initiatives to control expenses started during the quarter and will continue for the rest of the year, aiming to partially mitigate these extraordinary affectations. On the slide number 11, we provide greater detail to insurance, showing an increasing business trending to normalization by the first quarter of 2022, and lower claims. COVID-related claims have almost reached normalization in all portfolios. Health and life claims continue to decrease, while auto and damages are increasing hand in hand with mobility.
Moving on to slide number 12, we continue to see good operating and profitability metrics at the joint venture with Rappi. We are enhancing our unit economics and increasing the number of cards issued, along with credit activity for our users. Shifting gears to ESG, slide number 13. I would like to highlight that among many other initiatives, we have been working on measuring our scope 1, 2, and 3 carbon emissions as we intend to align with climate initiatives such as the Net-Zero Banking Alliance. I also want to express our gratitude to all our stakeholders for the valuable guidance, which has been key to the design of our corporate strategy, in which ESG factors are at the core. This has given us the opportunity to be recognized by relevant international publications, where Banorte has been awarded top-tier positions among several well-regarded banks.
As a final note, regarding the material event released early today, Banorte is no longer participating in the bidding process organized by Citigroup. I would also like to inform that we will call for a shareholders meeting seeking approval to pay dividends and/or buybacks. As I have mentioned in the past, we are always looking to maximize our shareholders value. Banorte has a life of its own, and we will be taking the most out of the opportunities ahead for us. With this, I conclude my remarks, and now Rafa Reina will walk you through the financial results for the third quarter of the year. Rafa, please go ahead.
Thank you. Thank you, Marcos, welcome all, and thank you for the interest in Banorte. We will proceed to go for the different issues that we think are relevant on the financial roadmap. I think the best one is that Banorte continues to have a very strong balance sheet, as you can see, as you have seen in the capital numbers and on the liquidity side. We are really happy with the way we have been controlling inflation. Inflation, as you know, is peaking now close to 9%. The cost that we have been able to manage is around 8%, 8.8%-8.1%. Maybe at the end of the year, we will be having 8.2%.
You know that the digital transformation ongoing in Banorte at a very fast pace. We have a motto now in Banorte, as you know, that Banorte is a bank in minutes, because you can onboard and do transactions and relationships at the bank in a very efficient and a very fast pace. Marcos has just mentioned the JV with Rappi and the digital bank is already on the move. All the basic path that we defined in 2018 that Banorte was to pursue on the evolution of the bank is now fully in motion.
The next parts of the slide, what you can see is a very strong net interest margin, 6.7% for the group and the bank for 6.3%, with a very strong expansion from one quarter to the other and compared to last year. What is also relevant is that the cost of funds continue to be something relevant for us. We know we still have room to improve on that. If you look at the pace of growth on the funding side, as we will see in a slide a bit ahead of the presentation, we are experiencing a very strong growth in the demand deposits, and the mix continues to move to 73% demand deposits and 27% time deposits.
This is really providing us a very strong growth on the margin side. The most important thing, taking into account that we have a very good tailwind on the rates, the fact is that we are getting the margin because the inventory of loans that we have has been performing extremely well. By applying the new margin and the funding cost to a very strong dollar group and peso group, we are really having a continuous expansion in the margin and we expect that to continue for the remaining of the year.
If we talk about the capital numbers, it is already reaching 23% and Q1 14.7, well above the requirements of the TLAC, and that has to be reached by the regulator and by the banks. Banorte is already in full compliance of that part. If we move to the next slide, we will go in the different elements of what we just mentioned. The NIM of the bank, as you can see, continue to expand at a very fast pace. The same goes for the NII. Sequentially, you can see that the NII is growing 30% on a year-to-year basis. The expansion for the quarter for the net interest margin was 71 basis points.
The net income that you can see that is slightly down from the past quarter is basically caused by the trading group that is getting to a much more normal rate of pace, and not at the really extraordinary numbers that we have in the second quarter. The return on equity of the bank that is already reaching 27% for the month continues to be a very positive surprise for the market. I think it's based upon all the elements that we just mentioned about the loan book, the funding, the services, the expense control.
All the elements are really pushing the return on equity of the bank at a very fast pace. You have to take into consideration that the numbers that we want to run the bank from 41, from 12% to 12.5%, and we are well above that number. That, in addition, could also benefit when we start moving dividends from the banks to the group. The return on equity of the bank will continue to expand. The return on assets also continues to go into the right direction. This is as you have seen, the expansion on the consumer group continues to be a very strong lever for this number.
The return on equity for the group that is already for the quarter above the 19% will end the year above the 19% for the group. If we move to the next slide. That describes in a much detailed way the evolution of the NII for the bank and for the group. You see already that the pace of change has completely accelerate on that, based upon what we just mentioned, the funding, the good returns on the book, and a very good control on the expense side. If we move to the next one.
The asset quality continues, as Marcos mentioned, to be a result of all the things that we have been doing in the past about the modeling, the recovery unit. What you have seen is that now it's trending at 1.4%. When we describe exactly the elements that moved that extraordinary elements, not really recurrent ones, some of them are basically related to commercial loans that are really on the process to be sorted out. That number should also start to trend that again to a better number that we see in this quarter. The provisions that you see are a slight pickup on the provisions, and then I also will ask Gerardo to go on this a bit.
This has to do with obviously the rate and the pace of growth of the consumer group. But nothing that we think is a trend or anything that is related to any part of the group. Our exceptional parts that are on the rate of solvency of the commercial loans and the pace of growth of the consumer group is requiring a bit more provisions than expected. Because as you have seen on the growth, the consumer group is growing at double digits, all the consumer group, but the car loans that by the end of the year will be also in double digits. Gerardo, could you please explain a bit of it?
Sure, Rafa. Good morning to everyone. I will tell you that, remind you that payroll loans at Banorte held a 20.8% market share, increasing 33 basis points in the first three quarters of 2022. That ranks us as the second largest lender in this credit product type on the Mexican banking system. I will tell you and assure you that the main reason that the provisions are going higher in payroll loans are due to growth. We still have very good sound practices based on four principles. The first one is establishing an appropriate credit risk environment for this type of product and everything else in the loan book. Second, operating under a sound credit granting process.
Third, maintaining an appropriate credit administration measurement and monitoring process. Last, the fourth one is ensuring adequate controls over credit risk. We feel very comfortable with these provisions and with the growth that payroll loans has been experiencing on all the consumer lending.
Thank you. Thank you, Gerardo. As you can see the rate of rates and there's also a question that always comes, how much you still hold on the, on the extraordinary provisions are close to MXN 1 billion, or that are still on the book, to be used as needed in the coming months, or quarters as needed. If we move to the next one. The funding cost study has been also something that we have been looking very closely to improve. As you can see, the trend is a good trend for Banorte, but we still have, as I mentioned before, room to improve. The mix is on the right direction.
The growth on the money deposits that I mentioned to you, 16% for the year, 2% for the time deposit. We think we are expecting these numbers to go down, the cost of funds by for the remainder of the year because the large inflow of the deposits come at the end of the year. That will also push the cost of funds down. Please, if we move to the next one, please. The sensitivity on the book that has always been a something that the analyst follow very closely, we are still at 1.2 in the peso book, and 896 on the dollar book.
Basically, we are reaching a steady state on both of them. Expenses is a good story in a very challenging environment. We are below inflation, and we're also advancing as many expenses for next year, try to lock as much as we can, prices for the next year. We expect the growth rate of the expense line to be below inflation. That is obviously helping us on the cost income ratio that is now reaching the 37.1%.
We understand that the cost income ratio has to do because the acceleration on the revenue side, because of the margin expansion that we have and all the other good revenue sources that we just described. The controlling expenses has been extraordinarily tight for the bank. At the same time that we increase substantially the potential on the sales side for the commercial, for the SMEs, and for the branch network. We are managing to be ready for expanding the growth, controlling costs, based upon the good returns that we're getting on the revenue side.
The bank and capital ratio, as you see, continue to expand even though the pace of growth of the book has accelerated, but we are still below our limits to continue to provide capital for the bank. We are in a very good position on the capital numbers. As I mentioned to you, we usually like to run the bank from 12%-12.5% on the Core Tier 1. We are well above that, and the total cap is 23%-23% after the call that we did on the AT1 from the past months. The liquidity ratio is now trending to the normal numbers that we have. It is around 160%.
Remember that we usually manage the liquidity ratio from 135 to 150. We are reaching these numbers now. I think we are becoming much more efficient on the management on the liquidity side. The leverage ratio, as you know, we are the least leveraged bank in the market. I also would like to guide you to an adjustment that we just announced for the guidance. The loan growth, now we see the loan growth moving instead of 5-7 to 7-9. The NIM expansion from 25-35, now we are putting a number, a range from 85-100. The NIM bank expansion, the same, 100-115 basis points. The expense growth, 7-9 to 8.4.
The efficiency ratio 37.5%-38.5%. I think there's room for improvement on that, but that's at this point in time, that's the number that we have. The cost of risk trending to the normal rates because of the rate of growth and based on the consumer group to 1.1% to 1.3%-1.5%. Tax rate, the same numbers. Basically the net income, now we're moving from MXN 40.5 billion to MXN 42 billion to MXN 44 billion to MXN 45.4 billion. The return on equity for the group from 18.7% to 19.2%. The return on assets 2.2%-2.3%. This is now the guidance that we commit to the market to comply by the end of the year.
With this, I conclude my remarks.
Thank you, Marcos and Rafael. Now we will continue with our Q&A session. Out of respect for our analysts and investors' time, we will be happy to take your most relevant questions during this call. If you need to disconnect, we are always available off the line to take other questions you may have. Questions will be ordered on a first come, first serve basis. Please raise your hand on the platform, and we will unmute you when your turn comes. For that reason, 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. Before beginning the Q&A, I would like to remark that as it was disclosed to the public through a material event, Banorte is no longer participating in the process organized by Citigroup.
In light of the foregoing and in view of our confidentiality undertakings, no further information in connection with such transaction will be provided. Therefore, we will not be responding to any questions in such regard. We are now ready to start the Q&A session. Thank you. We will start with Ernesto Gabilondo from BofA. I think Ernesto has connection issues. We will move to Geoffrey from Autonomous. Geoffrey, please unmute yourself.
Hello. Can you hear me okay?
Yes, yes.
Great. Thanks very much for taking the question. You finally got the digital banking license, which I know is something that you've been working on for a long time. Can you give some detail around the investment that is going to be needed to build out the digital bank? Does that flow into OpEx? Does it flow into CapEx? Clearly, the long-term goal is to get the efficiency ratio down.
Down, but is there a possibility that the efficiency ratio has to go up in the near term to facilitate some of that investment? Thank you.
Thank you, Geoffrey. We are saving that for the next month. We will go to our Banorte Day and you will see everything. Let's see what we can say about this.
No, Geoffrey, and follow on Marcos. As you know, we have just getting the license on that. I think it's we are really refining all the numbers to be ready for that. Obviously, there's already the capital needs and things, but we'd rather please wait for when we go to the Investor Day, when you will have a full view of exactly how the bank is gonna be funded, how the capital is gonna be working, what we expect about cost, the cost income ratio, how the evolution of the bank. It has been very recent, the license, and we are working all the issues to finalize the process.
Remember that we are still on the review of the last part of the authorities to grant to finally say the go-ahead for the bank. We'd rather wait for that on the Investor Day.
Understood. I mean, is there any color you could give around what you're doing right now? Are you hiring people? Are you moving people out of Banorte into the new entity? What sort of activity is going on right now? I guess more on the, you know, the commercial side so that you're ready to launch this as, you know, as soon as you'd like.
Okay. I will pass this to Francisco Martha.
Thank you, Geoffrey. Yes. We have in the process that we have been through and the authorization that we received at the end of last month implies that we have all the processes and all the regulation for the new bank documented. We already have a platform that it's a platform I mean technology and operations and processes in place that will give us the efficiency that you were mentioning, and we will show you later in the Banorte Day. We have all the strategy based on data, all the platforms that we're going to use and all the data.
Obviously, the repositories are empty, but all the data that we're going to use and the engines, the risk engine, the personalization engine, the empowerment banks that we are creating. We also have an app, a mobile app and a complete customer service application. All of that is ready. People is in place. It's not that we are launching a paper bank, but it's everything that is needed, it's in place. Now we are going to certify that what is in the binders is really operating. That's the next steps with the authorities.
Great. Thank you, and I look forward to the Banorte Day next year.
Thank you.
Thank you.
See you there.
See you.
Thank you. We will now take the next question from Ernesto María Gabilondo Márquez from Bank of America. Ernesto, can you hear us?
Thank you. Hi, good morning, Marcos and Rafa, and good morning, everybody. Thank you for your presentation, and congratulations on your results. My first question is on dividends. We ran some numbers, and we see around MXN 27 billion in excess capital at bank level. If you normalize the Common Equity Tier 1 ratio to 11.4, that was your internal minimum, and we see around MXN 29 billion-MXN 30 billion at group level. The combined in dollars is around $2.8 billion. I just wanted to check with you, is those numbers are reasonable? And if paying dividends, when should we expect them? Is this something that could take place this year or next year, or maybe a portion this year and most of it next year?
Then, my second question is on the regionalization and reshoring opportunities. We started to see several companies moving part of their production to Mexico. I understand that banks will not be financing directly the expansion of the corporate plans, but more the supply chain related to semiconductors, computer and electric components, auto parts, electrical equipment, agro industry, plastic sectors, among others. Just wondering, how is Banorte preparing to take advantage of those opportunities that could be maybe taking place in the next years? Thank you.
Thank you, Ernesto. It seems that you have run your numbers and you are somehow right. Remember winter is coming, and remember the TLAC is coming in some days. Let's be not so enthusiastic. Rafa, please.
No, Ernesto, remember the 11.4% was what we mentioned, that if we go to any M&A, that will be the minimum capital level that we put on the Core Tier 1. The number that we like to run the bank with, and especially at these times, is from 12%-12.5% Core Tier 1, and I think we will stick to that. The numbers that you run on that are right numbers, but you have to deduct that part of the 11.4% to the 12% to the 12.5%. The other part that is relevant about the numbers that you say is that the dividends will be called once we call for the assembly.
We have already been granted the go-ahead to call the assembly. Once we call the assembly, we have 30 days for that. After 30 days, the dividend or the buyback policy for the shareholders will be announced. We really appreciate the patience of our shareholders during this process, because we know we understand always that the money is money of the shareholders. We retain that in a way that we try to guarantee any possibility that we can return more for the shareholders.
Thank you for your patience and we are now in full motion for the dividends on the payback, as is the usual, as is the customary process in Banorte. The numbers is not 11.4%. The number you should be looking is 12%-12.5%.
Maybe Rafa, Alex, you'd like to talk a little bit about the call of Mr.
Sure, Marcos. I will tell you regarding the second part of your question, Ernesto, that Banorte is very well positioned in taking advantage to this trend of nearshoring, friendshoring, whatever you wanna call it. I will tell you that the approaches that we are currently using are by geography, by market segments, and also by banking product and service. Currently, everything related to USMCA accounts for around 11.5% of the total loan book. I will tell you that around or inside those 11.5% of the loan book, manufacturing accounts for 41%, tourism 35%, distribution and logistics 11%, transportation and auto parts 9%, and real estate, talking about industrial parks and maquiladoras, 5%.
We are trying to take advantage of this very important strategic trend for the country and all our corporate banking, commercial banking, fiduciary services, trust services are very well aligned trying to take advantage of that.
That was Gerardo Salazar. He's in the family. Rafael.
Thank you. We will now take the next question from Thiago Batista from UBS. Thiago, go ahead.
Yes. Hi, guys. Congratulations for the results. I have one question about the profitability of the bank. We saw the ROE achieving 20% for the group, even considering this very low leverage that Gerardo discussed. When the bank optimize their capital, what's the level of ROE that we can see for Banorte in the coming years? It's possible to believe in the, let's say, mid-teens or something close to that. My second question is about asset quality. The LGD ratio used to be close or a bit below 2% in the past. Now we are still at 3.3, close to 1%. What do you believe will be the normal level of LGD ratio going forward?
You mentioned that you are expecting already normalization of this NPL ratio, but do we have a new normal now or no? It's possible to see the NPL ratio returning to close to 2% as in the past.
Let's start for the first one. The ROE, obviously with the rates will increase and the ROE will increase, but this is. I don't think this is not the right question. What are we going to do to maintain the NII and to be here for the next 100 years, you know? The idea is to working all the things that we are doing and to open all the accounts that we have, in order to maintain a good ROE in the future, you know? Right now, for the next year, it seems that the rates will go, as said, 11%, and this is still maintaining good, very good, asset quality.
Keep in mind that that is not for sure and forever, you know? We need to be strong. We need to continue the cost control, continue with the digital, with everything, continue with the high penetration, and then we will have a bank for the future, you know. I don't know, Rafael.
No, no. I think Marcos defined perfectly. I mean, if you do the numbers, I agree with you. I mean, the number of the 30% is already there. But the fact is that what Marcos mentioned, if you look at exactly what we're doing is we're continuing to invest aggressively in the digitalization of the Banorte and the spin-offs that we have on the digital bank and that. But I think the most important thing is that we are strengthening all the commercial lines of the bank at the same time in order to be able to maintain whatever the rates are, a very reasonable return on equity for the shareholding. Yeah, eventually you will see a very close number to the 30% at the bank level.
We are pretty sure of that. But I think what you have to see is how that return on equity is really obtained. It's obtained exactly as Marco mentioned, it has to do with a very good cost of fund that needs and continue to improve, a good expansion on the consumer and the commercial books. The most important thing is that the fact that the client relates to Banorte more and more at NPS, very, very close to the 80s, 82, 87, in most of the services that we provide.
If the client like us, if we have a very good cost control, if the asset group is as clean as it is, and all the processes that we are delivering to the market are improving by the day based upon the customer centricity that we have, I think the return on equity will not be depending on the future of accelerating trend or the rates. It will be more and more based upon what the bank can really deliver based upon this huge transformation that is ongoing and is already delivering extremely good results.
Thiago, regarding the second question that you have regarding the asset quality, I will tell you that credit risk ratios are well under control, or even better than pre-COVID levels as you have seen them. Asset quality ratios remain at historic low levels. Looking forward and to the close of 2022, I will tell you that we expect NPL ratios to be ranging from 1%-1.5%, and cost of risk ranging from 1.4%-1.6%. We have been running risky scenarios trying to measure expected losses, unexpected losses and even catastrophic losses. In this modeling, we have really measured impacts and within changing economic financial market and behavioral assumptions.
We remain confident, but very expectant to what might arise, given some of the type of risks that you have all seen, like geopolitical and so many other types. Asset quality, you can rest assured that, for the short term, it is guaranteed to be ranging from those levels that I mentioned.
Thank you. Very clear, answers. Thank you, guys.
Thank you.
Thank you, Thiago. Now we will continue with Rafael Frade from Citi. Rafael, please go ahead.
Hi, guys. Good morning. I have two questions here. The first one is related to the guidance for the updated guidance for 2022. With this updated guidance, it implies that earnings should go down in the fourth quarter versus the third quarter. I would like just to understand if you are being conservative here, if there's any line that potentially can impact the fourth quarter. The second question is related to insurance results, insurance and pension results. You show a very strong improvement in the operational side, but in terms of premiums issued, in fact it fell year on year. Just to understand here where we are in the insurance operation. As you mentioned, it's normalizing.
I would like to understand if it's already almost normalized or if there are still some lags here, just to understand where we are with this.
Thank you, Rafael. The first one, no. This quarter is gonna be at least the same or maybe a little bit up. That's what we are expecting as a guidance. I don't know what's your number, but no, we are going up or at least we think that the same amount, no? You can run the numbers and add them, and you have the final number. The second one, the insurance premiums, yes, we have some explanation that we need to give you that. Go ahead, Rafael.
Yeah. Well, the fact is that, yes, the insurance business is going to normal now. You will see that fully in motion on the first quarter next year, but it's already happening. I would like to clarify something that was a concern of some of the analysts, that in the other income, there was an additional provision for the insurance business and for the annuities business. This has to do for two specific related issues on VAT, potential claims, that is not just for Banorte, for the whole system, that we are anticipating that in order to be prudent on that.
On the annuity side, also some claims on the tax related issue that is ongoing. By the way, we have already gained the first claim for that. I think we are in a good position, but we would like to be prudent on that. That's I think everything is trending in the right direction in the insurance business as you saw on the slides that Marco's projected to you that the premiums are going up and the penetration on our client base continue to go and move on the right direction.
Okay, that's perfect. Thank you.
We can now go with Jason Mollin from Scotiabank. Jason, please go ahead.
Hello, can you hear me?
Yes, perfectly.
Great. Congratulations on the good quarter. I have a follow-up on the cost of risk and provisions. If I heard correctly, I believe there's still MXN 1 billion in excess or additional provisions that could be used going forward. I believe that number was MXN 1.3 billion in the prior quarter. Is it that you consumed that 300 of the prior amount that you had? Maybe if you can give us a little more color on the statements of an increase in provisions and payroll, maybe to talk a little bit about that product. It's a great market share, 21%. If you can tell us a little bit about the clients and what they're facing and what are the risks in that portfolio.
I'm imagining they should be low, but if you can help us understand where delinquency could come from or has come from in the past and could come from in the future? The second theme I thought maybe you could provide some color on is competition. We've seen new entrants growing, credit card plastics issued, at a rapid pace. If you're seeing that as a risk for the market in general, and if there are segments that you think that Banorte should stay away from? Thank you.
Let's start from the second one, the competition in the credit cards in space.
Please. Thank you, Jason. José Francisco Martha González. I agree, as Banorte, the Banorte vehicle, we are being very careful with the segments that can enter into a high-risk or a non-performing loan. We are being very careful growing the portfolio as much as we can, but being careful. We have the other vehicle, at least in our case, that is RappiCard. As we mentioned a quarter ago, we have been slowing the pace of growth because of the situation, but we are still growing very carefully.
We think as you imply in the question that something can be complicated for the new entrants that are giving that kind of cards or kind of credit without reviewing credit bureau or not being as preventive as we are.
Regarding your first question, Jason.
Yes.
COVID provisions were one year ago, MXN 2.997 billion. That was September 2022. As of now, they are MXN 1.038 billion. You are right, it is not 1.3, but MXN 1.038 billion. Going forward, we are still expectant of this winter and see if this same risk factor behaves in a better way or more favorable way to our business. Regarding the payroll behavior, the payroll loan portfolio, I will tell you that there are two main key risk factors. One of these being the cash management services of the payer, the companies that distribute the payrolls.
Once you lose that service, the credit risk activates within each individual loan in this product. We are always monitoring what the behavior is regarding that. The second big credit risk factor is customer payroll mobility. Once it is easy to each customer to change the bank that the account receives the payroll. That is a secondary factor, but it is also in our risk radar all the time. Regarding the behavior of provisions, I will tell you that the first and foremost factor is growth. I underline that is growth. I emphasize that factor. The second one is that we did open credit standards and lowered them within our risk appetite.
You can expect to see cost of risk growing in that product in the near term. Those are the two biggest things that explain this increase in provisioning.
That's very helpful. Just to follow up on the excess provisions. I understand, I think, I don't know if you misheard me, but I think I was referring to the quarter-on-quarter change in the excess provisions that I believe that from the second quarter presentation, we had MXN 1.3 billion, and now as you're suggesting, we're at MXN 1.038 billion.
You, you're right. You're right, Jason, it is 1.298. 1.3 like you said.
Okay. Thank you very much. Much appreciated[crosstalk].
Thank you. Now we will continue with Alonso Garcia from Credit Suisse. Alonso, go ahead.
Hi, good morning, everyone. Thank you for taking my question. The first one is a follow-up on capital. I would just like to touch base on how front-loaded or gradual do you think this process of optimizing capital would be from this 14.7% CET1 ratio to the 12%-12.5% where you would like to run the bank, plus the excess capital you have at the group? I mean, do you think you already mentioned that you are going to call for our shareholders or for an assembly and then announce some dividends. Do you think you will optimize your capital position already with this dividend announcement?
Do you think this would be instead a more gradual process, I don't know, for the next 1, 2 years until you finally optimize your capital structure? Historically, I mean, your returns to shareholders have been much more skewed towards dividends as opposed to share buyback. I don't know if you could provide some color on how the split going forward should be. Second, I have a follow-up, well, a question on your retail strategy, specifically on the mortgage product. I mean, we have seen an acceleration to 10% year-over-year growth from 6% the previous quarter, with 5% in growth in 3Q alone. My question is, how are you competing in this segment? Is it through pricing? How is your pricing strategy relative to your competitors?
That would be my question. Thank you very much.
Thank you, Alonso. Rafa, do you want to-
Let me start with the mortgage one, Alonso. The mortgage, as you know, we have the best risk numbers in the market. The second one to us is double that we have in the mortgage group. If you look at the expected loss of the book, it's really low because the quality of the clients that we can attract. We have been very careful in managing the price hike because we continue to see an acquisition process that is bringing the best clients in the market.
By taking into account the expected loss that is extremely low, we can really manage and still be very competitive on a risk-adjusted margin, even though you see that we have been slow in the hiking of the prices. The other thing that you have to take into account is that usually the mortgage comes with a lot of other products at the same time. The lifetime value of the client is exactly what we are really looking at, and that lifetime value continue to expand.
Don't be surprised if you see that we are sometimes the lowest in the market on the price, but you have to take into account all the issues about risk-adjusted margin, how we manage the risk, and exactly at what position in the timeline we are compared to our competitors. Remember that we basically cater to the high end on the mortgage group. On the second question, the normalization of the capital ratios, I think you described it pretty well. It will go from one to two years to normalize that to 12%-12.5%. Take into account that times are a little bit hectic right now, so be prudent on that front.
Not overly prudent, but being prudent is something that we like to. You have always seen that in the Banorte behavior. You will see a trend toward that number in the coming months, Alonso. I think those are the two questions. On a competitive basis, take into account that I think Banorte is now able to compete in any space with any bank in any product. That is what is really pushing up all the numbers. The good thing is that we are coming from a very low end on the credit numbers that allow us to be, I would not use the word picky, but picky about the type of clients that we would like to have in our book.
That's very clear. Thank you very much, Rafa.
Thank you, Alonso.
Now we'll go with Nicolas Riva from Bank of America.
Thanks very much, Rafa, Marcos, and Tomas for the opportunity to ask questions. My question is on capital once again, and then I see a lot of questions on excess capital, yeah, towards paying some extraordinary larger dividends. If I look at the capital structure, the excess capital is really concentrated, particularly on the AT1 bucket. You have roughly 800 basis points of AT1. The optimal level would be around 150 basis points. Now, given that you already announced we are not gonna be buying Banamex, how should we think about this AT1? I mean, do you agree you have a lot more AT1 than you need? Does it make it more likely that you're gonna be calling the AT1s without even the need to issue more AT1s?
If you would even think about buying back some of these AT1s ahead of time. That's my first question. Then the second question, and potentially you cannot discuss this at all, but on Banamex, my only question is if you can share with us the main factors that led to you no longer being in the running to buy Banamex, if it was more Banorte's decision or Citi rejecting the offer. Thank you.
Start with the end. As anticipated by Tomas, we are unable to share any further information in connection with the Citibanamex transaction per our confidentiality undertakings. Let's go to the good question about the excess capital and the AT1 representation.
Yeah. Nicolás, I think you have to understand that the AT1s for us is not just an issue that we would like to have for the sake of have a more expensive type of instrument than the current senior. Because it allow us to think on liquidity purposes, allow us to have a very stable liquidity base. As you know, the perks characteristic of the AT1s, we don't have to build up liquidity a year before the call. So that's one thing that proves to be very efficient in the pandemic. The second one is that Banorte now is extremely active on the dollar bond. I think we are reaching levels that Banorte was never a player on the dollar bond, and now we are a very strong player in the dollar bond in the market.
We are allowed to have midterm funding for those loans. The AT1 is strategic for us in a way to build up the balance sheet on the dollar group and also to provide. There's always a question that people say, "Why did you call the AT1 if it was not financially wise?" The fact is that we honor the calls, because that's what we say, and we will continue to honor the calls. We will not call the. Some people say, "Well, why don't you call your bonds if they are well below par?" The fact is that for us, it's part of the structure of the balance sheet. It's not a problem.
The way that we manage the balance sheet is in a very conservative way. We don't go up and down based upon opportunistic issues. We always look at the structure of the balance sheet. That's the reason for the AT1s. If you ask me if we're gonna issue more AT1s, it depends on the. As you know, Banorte has always been very opportunistic in going to the market. We never go when we need. We know when we want the instrument. I think at this point in time, the market is extremely volatile about prices. We are concentrating on what we have. I think we have a strong capital base.
As I mentioned to you, the AT1s is a very important part of how do we compete on the dollar funding and dollar yield funding for the group and has been extremely positive for us. Remember that when some people has always tell me in the past, "Well, were you taking equity benefit from the equity line and providing them to the fixed rate part?" Yes, but we are returning 24% on equity, so I think that's a pretty good investment.
Okay. Thanks very much, Rafa.
Thank you, Nicolas. Thanks very much.
Thank you. Now we will continue with Tito Labarta from Goldman Sachs. Tito, please go ahead.
Hi, good morning, everyone. Thank you for taking my question. A couple questions also. Maybe first on your margin. I know you have the guidance, but just wanna think a little bit longer term on the sustainability of it, you know, once rates come down. I guess first, when do you think rates could come down? Any color on, I guess, in inflation and when that may start to come down and what that could mean for rates maybe towards the end of next year? I know you have the sensitivity of MXN 1.2 billion for every 100 basis points increase in rates. Should we consider the same sensitivity on the way down, or is there something that you could do to reduce maybe the sensitivity on the way down? My second question is on your loan growth.
You know, you mentioned your GDP growth slowing into next year. I think you said consumer loans may moderate closer to double digits. You know, any color, how should we think about loan growth for next year? Should we expect a slowdown as GDP growth slows? Thank you.
Let's first see how we see the rates, and then we'll
Okay.
Alex, go ahead, please.
Thank you, Marcos. Thank you, Tito. This is Alejandro Padilla, Chief Economist. Well, what we expect is that Banxico might keep their repo rate at 11% for several months during 2023. However, we are forecasting that they can start cutting rates by the end of next year, maybe decoupling from the Federal Reserve, but at a very mild and cautious pace. Indeed, from that 11% that Marcos was talking about, that we expect in the first quarter, we think that by year-end the repo rate might reach 10.25.
On the other hand, going forward, I think that taking into account inflation dynamics for 2023 and maybe 2024, I think that it's gonna be more a story of 2024 in which Banxico can cut rates at a faster pace. I think, at least in 2023, we might think of higher rates for longer. From the growth side, as Marcos was mentioning before, we are confident in our 2.1% increase of GDP for this year. However, we think that with several headwinds in the global economy, these risks of a global recession, and taking into account that maybe the U.S. will be more resilient than other regions, we think that Mexico can grow.
Around 1% in 2023. However, we have to take into account that we might see a very different pace of growth in Mexico from these states in the central and northern part of the country that are more integrated with trade dynamics with the U.S. from those states that are in the southeast part of the country. Overall, we are forecasting 1% for the GDP of next year.
Great. Thanks, Alejandro.
You're welcome.
Can you maybe follow up on the NIM and the loan growth?
Yes. We will say in the next conference the final numbers of our guidance, but for now, let's keep in mind that between 5%-7% around that will be the loan growth of the next year. Around that. The NIM, I think, recurring we have improved that on the when the rates were low. I think that an attainable sustainable NIM should be around from 6%-6.2%.
Great. Thanks, Marcos and Rafael.
I'll take the next question from Carlos Gomez-Lopez from HSBC. Carlos, go ahead.
Hello, good morning, and thank you for taking my question. Congratulations on the results, and congratulations on never having to answer a question about Banamex again. Specific questions. Going back to your expectation for this year. Again, for the fourth quarter, you essentially have a one-off provision in this third quarter regarding the annuities and the pensions. Rates continue to be up. The average rate is going to be higher in the fourth quarter than the third. Why wouldn't, you know, earnings continue to grow? I know you have increased your guidance by 8%, but as mentioned earlier, you are still implying that we will have a lower fourth quarter. I wonder if there is something else that we are not seeing there. Second, your tax rate for the year.
I think we are coming out at around 26%, which is higher than last year despite higher inflation. Is that where we should expect it for the rest of the year and for next year? Thank you.
Yes, the tax rate should be around 26%. Yes, the earnings should grow. We are cautious. That's our job, no? To keep working hard and let's see what happens, but not.
Okay. It's pure caution. No specific reason.
No, we don't see anything in scenario so far. It's caution.
Okay.
As well as we have the range, Carlos.
Okay. Very clear. Thank you so much.
Thank you, Carlos. Now we will continue with Andres Soto from Santander. Andres, please go ahead. Andres, please unmute yourself. Okay.
Sorry, Tomas, I'm here.
Sorry. Perfect, Andres. Thank you.
Okay, Andres.
Thank you. Good morning to all. Thank you for the presentation. My first question is regarding your decision not to participate in this deal. Actually, this is more related to your strategic plans ahead. If now, how this decision changes, are you willing to grow organically on a more accelerated way? If that's the case, what is going to be the role of the digital banking in this part of the strategy?
Well, as I said, Banorte has a life of its own, and we will be taking the most out of the opportunities ahead of us. When I say that, I mean in all the. We are not a bank. We are a financial group. All the financial tools that we have in Mexico. In Mexico, you know, we need to bankarize a lot in Mexico. We have a lot of things to do. We are hoping for a good future. It's coming for the guys that are prepared, and we want to be prepared. Everything is on the table.
If I may add to what Marcos says. Remember, in 2018, it's not that Banorte is planning the future now. In 2018, we defined the path of growth for Banorte for the coming years. We shortened the planning process to 2023, but really it's for the ongoing future and I think it's very clear, the fact that Banorte, the traditional bank, is now almost fully digital. You can do whatever you want. You can go to the branches, you can do everything on digital. So that transformation is almost complete and will continue to be ongoing on that part. The app is already in place, so that has a space on its own.
The digital bank will have a very specific part that we are multi-segment bank that could approach the high end and the low end at a much better cost base and benefit for the client. What you see is an organization that has all the capabilities in place and in full motion. Also the businesses that we have, the annuities business, the insurance business, the broker-dealer, the mutual funds, all of whom have been part of this deep transformation of Banorte. When we say that it's that we have a life on our own, is that we are constantly evolving from that strong base that Banorte has. We're never gonna be still or anything.
Things like that. You will see a continuous evolution of Banorte. The most important thing to consider about Banorte is Banorte is fully the creator of its own future. We don't need anything else to build up on the future that we see for Banorte.
Perfect. Thank you. My second question is regarding the excess capital that you have at the holding company level. At my last look, that was about $1 billion. I would like to confirm if that's still the figure or what is the new number? If the full purpose of this will be to return to shareholders, or you are going to keep some of this money for pursuing any other opportunities that you may have.
The number is MXN 29 million.
Perfect. The purpose, you know, it's that will be available to return to shareholders.
Yes, to pump up. Yes.
Perfect. Thank you so much.
Thank you. We'll now take the next question from Guillermo Delgado from Santander.
Sure. Thank you. Thank you for the time, Tomas, Marcos, and Rafa. Maybe just on the capital allocation side, no, we have seen the stock having a normal correlation with the markets, with the U.S. banks. This correlation, obviously in the last month was broken, no? The stock outperformed close to 11% versus the benchmark. You have other players that were also bidding in the Banamex process, like Grupo México, they're performing like 14%, no, considering the copper is like flat -1%. So it seems like the stock has discounted obviously a certain part of you taking out of the transaction, right, on the financial calls that we have seen.
With this rally in the stock, obviously the price is close to the higher range of the multiple levels in the last 10 years, 20 years. From a treasury perspective, and maybe this question goes more for Rafa, but obviously both for Marcos. From a treasury perspective, what's gonna be the structural axis for deciding the capital allocation, no? Today, as you said, with the rally, if you divide the return on equity between the book value, it seems that you are investing your money close to 10%, 11%. If you do a dividend, no, the Mexican overnight rate is close to 9.25%, and the 1-year is 10.88%.
It seems for the people or investors looking for yield, the short-term treasury or the overnight seems like a pretty fair alternative. It seems you are in a tough decision, no? Either from the dividend side, given the funding levels, or either from the buyback, given the return on equity divided by book value. What are gonna be the structural axis to return to the shareholders this MXN 29 billion that Marcos already said? That's maybe the first question. The second question is, as we had the conference call, the president was talking about the transaction. It mentioned that the chairman, Carlos Hank, tried to look for him in the night just for a quick call.
He wasn't available, but he was gonna be talking with him after the president's morning call. Is this just a courtesy call, just inform about retiring from the process, or should we take something from this President Carlos Hank González call?
Second one, they have a relationship and they talk on a lot of business. I don't know, and we are here in the meeting. Regarding the first one, it's a tough one because as I said, I use the word approval to pay dividends and/or buybacks, no? We want to maintain both because we need to see what's coming in the future and what's left of the bank and what are the opportunities there. We want to maintain open for around that. I don't know that.
No. Yes, no, and I totally agree with you. I mean, all the time that you see the EPS accretion for the shareholder, you see the dividends at this point in time are much more accretive than the
Mm-hmm
... than the buybacks. On a long-term basis, what's the best deal for the shareholders? The fact is that Banorte will continue to be a strong provider of capital for the shareholders. Also, that allow us to be very opportunistic in the market when we see that something could create additional value for the shareholders. I mean, the credit ratings of Banorte are very strong and we don't have an issue on that if we see something that we like on that part. I think, as you mentioned, we always balance out what's the best deal for the shareholders. We understand that we have shareholders that are basically based upon growth.
Other ones are basically on dividend payout, and other ones are on a fixed rate basis. We have to balance all those out. As you mentioned, we always do all those calculations that you just did in order to maximize each of one of those in the best way that we can.
Great. Just finally, a quick question. On Jason, you have already discussed the provision side. You have already mentioned on the first quarter, second quarter, the yearly comparison, the quarterly comparison was beneficial. On this third quarter, there was a quarter-on-quarter jump of 30%. Marcos said something important about the risk factor. So throughout COVID, throughout 2020, Banorte was one of the state-of-the-art banks to forecast the provisions. So considering this platform, this state-of-the-art platform and what Marcos said about the risk factor to continue monitoring, would you say that throughout October, which is practically done, this risk factor has improved? Should we expect the provisions that we saw in this quarter to start decreasing, or are we still in a wait-and-see mode?
The answer is steady, but let's ask Carlos Salazar to give some color on that.
Yeah, we're still expectant, and our job is to be prudent. There's no change, there is no improvement from this time on, and we are just expectant of what the environment could present to us.
Great. Thanks for the time, Marcos, Rafael.
Thank you.
Thank you. Now we will continue with Vasilis Tzakos from Citi. Vasilis, please go ahead.
Hi. Hi, everyone. Thank you for taking my question. Just a very quick one. I'm sorry if you already answered it. I got disconnected somewhere along the call. Just wanted to ask if you could please remind us what is your long-term sustainable ROE?
First, let's define long-term. We are aiming, let's say, for the 20s, and that's, like, our motto, no? To have it for, let's say, forever. Obviously, we will see and I expect the 30s, and then maybe 18 something. I think as a nice, sustainable, and worldwide recognized ROE should be the 20s, and that's our goal, let's say, in the near and long term.
Thank you.
We'll now take, Edson Murguia from SummaCap. Edson, go ahead.
Thank you. Do you listen? Can I hear?
Yes, sir. Okay.
Sorry. I have two questions. The first one is related to the guidance of expense growth. Just trying to figure out this related that you expressed in the press release, which is about traveling and other types of or even increasing the number of personnel in the commercial force. Looking ahead at the end of 2022, it might be in the same sense or it's gonna adjust because of the dynamics of the economy. That will be the first one. The second one is related about BanorTec. It's interesting, the initiative, so I was wondering if this type of initiative we can see with other universities in Mexico.
We will start with the BanorTec with Paco Mariscal. Please go ahead.
Thank you, Edson. Yes. Yes, you can expect that. We are already reviewing with some other universities and some other institutions where we can create such kind of ecosystems.
Just to follow up on this, do you have any specific target of number of accounts or type of different products in other universities or even with BanorTec type of a launch or origination, or what would be the goal?
The same way that we are planning for the bank and for the three pillars of the strategy, we are not talking about products, but more than products. We're talking about experiences, you know? The students can have an account where they can save money, or they can use their money for payments, and they can have a credit card. We will be launching some type of credits. Depending on if you talk about students, the credit can be for different use than if you talk about the teachers or the alumni, you know? We have now close to 1,600 accounts from a number of 7,000 students. We're targeting.
Not exactly, we don't have a target, a specific target of accounts, but we are trying to move away from the cash and create ecosystems. More than a market share, we are talking about a share of transit as we have talked about this before.
Okay, thank you.
On the expense line, as you can see, there's a lot of moving parts. If you look at the results, personal expenses are going only just 1%, so that's an incredible number. You have to take into account the PTU part that is part of the personal expenses. What we can tell you is that, being in the situation that we are, a bank that is growing and very active and creating more commercial capabilities, I think, we are managing the expenses extremely well.
Because to be able to contain the expense growth and at the same time grow the commercial capabilities and still invest heavy in IT, is, I think, something that we are good at.
Okay. Thank you so much, Rafa, Marcos, and Tomas.
Thank you, Edson. Now we'll continue with Yuri Fernandes from JPMorgan. Yuri, carry on ahead.
Hi, all. Thank you, and congrats on the results. I have just one regarding your non-bank business. You already discussed this during the call sometimes, but if you can provide more color on how you see the insurance, the annuities, the broker-dealer, I guess the Afore. This is 25% of your earnings. ROEs on an aggregated basis has been below the bank. My view here is what you expect for 2023, 2024, like, are you seeing, you know, what can help those units to improve the operations? I guess Afore, we had a lot of regulation, and you already saw a better quarter. Which one could surprise us here? Like, do you see more room for insurance to surprise?
Like, can we still continue to see, you know, better results on the insurance? Like, just a general view on ROEs and growth for those units that we don't discuss a lot in details usually. Thank you very much, Rafa and Marcos.
Yuri, yes, they are in different boxes and different lives now. Let's go for a broker-dealer. It's a little bit complicated because it has a lot of volatility, but we expect to have a very good ROE better than the bank even, no. The same happens with insurance. We will have good news there. Remember, the era is ending, and now they will go back to the good business. Then with this, it happens to be a very good business, and we know how to do it, you know. Now let's talk about the Afore. You know about the regulation. This is another deal totally. It's a deal of more clients and cost control.
I think the worst is over because the rates, you know how they impact the investments of the Afore. It's gonna be another story. At the end, in the future, it's gonna be also a good part of the financial group. Remember, as I always say, we are a financial group and we have complementary cycles, no? The insurance and the annuities is one of them. The Afore should be one when the rates go down. We feel very comfortable with all the business that we have there. I don't know if, Rafa, you want to say something.
I think, Yuri, the fact is if you look at the returns on equity, you're looking at a very efficient use of capital in those businesses. All of them are above 20%. The Afore, we know the Afore has a lot of goodwill included. If you go to tangible, you range in the 30%-34%. The fact on the Afore, it's gonna take, as you know, to double the assets under management based upon the new commission structure that happened and will also increase substantially the amount of money that the individual have to put on the accounts. That's gonna take a full 5 years.
You will start to see some relief after a year, after the third year on that part. There will be benefits coming from the management of the investment that we have on that part. The Afore is a long-term issue. It's a good source of dividends for us. It will become pretty active on the net income side after three years, at least start to balance out the amount of money that flows into the accounts and balance out the reduction on fees. At this point in time, the Afore, as you can see on the numbers, is something that is very well hidden.
No, great. What I understood is basically the annuities and the broker, they may run and they are running very close to the ROE of the bank unit, around those 20-27, right? Insurance is not there yet, but I get the message is that you see this going to kind of that level, and Afore is the only one that ROEs are more in line with cost of capital. Like it's a more specific unit, right? Like, is this summary okay, Rafa?
No, I just.
Did I understand correctly?
No, no, Yuri. You're looking at the return on equity of different businesses 40, above 40%. The return on equity of the insurance business is extremely high. It's above 40%. The annuities is above the 20s. I think the issue that we have on the Afore business is that you have to look on tangible. You will see a much more reasonable one. At this point in time, the return on equity including the goodwill is very positive. The annuities and the insurance business are well above the return on equity of the bank, especially the insurance business. The annuities is more aligned to the return on equity of the bank.
May I jump in?
Yes, go ahead. I'm sorry.
Yes. I want to give you more flavor on what you just asked. I mean that we have a lot of opportunity to growth in all the lines of businesses. Let me start with insurance. I mean, insurance, I mean, the most profitable products that we sell are related to bank insurance, and those are products linked to credit, but also we sell products which are not linked to credit. As long as the bank keeps growing, as it has been, we will see there definitely a very nice growth in earnings in the future.
Because what happened in the past was related to COVID, but that's something that is about to be gone quite recently. I mean, very recently. We're very confident that we will keep growing there. We're also developing some other distribution channels for the insurance products in the digital world. I think we will see there some healthy product. Actually, the return on equity for these lines of businesses is about 50% in the insurance business. It's quite much higher than what you see in the bank level. Now let me go to the annuity firm. The annuity firm has been performing very well. As you know, there are two lines of businesses.
Which are related because it depends on how many pensioners you have. The first business is to, of course, sell annuities. And we have been there, the leader in the market with 46-47% of the market share. It depends on how the market grows, but as you may know, we expect that this market will be growing steadily in the future. Mainly because the transition generation, that is those workers that were that started aft. It will finish for all those workers that started contributing to the system in 1997. They will not have the right to be pensioners according to the previous law. This market will keep growing.
Of course, eventually this will be a very large number. We're the main player. The other line of business is that we sell credit loans, which are payroll loans, but with very low risk because we pay the payroll. We don't have delinquency rates there because we pay those first and then we put the money into the pensioners' accounts. It's a very healthy business. Also, the ROE has been performing quite well. I should mention that we expect that market to keep growing.
I mean, as you know, we have a reduction in the short term of 28% in the commission that we charge on the assets under management. We also face this market instability that reduces the assets under management with respect to what we view in our budget, more or less 13%. That's why we are due to those facts, I mean, we are having like, I would say like, MXN 1,640 million less in terms of commissions with respect to previous year.
Also because we have to invest capital of the Afore in the funds, according to a special reserve. We have a mark-to-market hit for that money of around MXN 870 million. What I will tell you is that taking out those effects, the result would have been double for the Afore. I'm talking here, of course, 100%, because we only own 50% of the Afore. We will have, at this point, the double of the earnings that we are observing. Now, for the future, of course, given the dramatic reduction last year, hopefully we will not see such reductions as in the commissions.
Therefore, we expect that eventually, as the assets under management recover, and also it depends of course on the growth in employment and also on wages. We do foresee in the future that the assets under management will keep growing. With less reduction in the commissions. Something that is coming next year, or start to come next year, is that remember that contributions will rise steadily. I mean, will rise for the next 10 years, more or less 1% on the payroll contributions per year. Taking those facts into consideration, I think that they will be very useful for the Afore business as well.
Hopefully, as you know, we spend a lot on the transfer of accounts. Hopefully, those will also be lower in the future and more concentration in industry. That will also help for better performance of this facet. That's what I would mention. Thank you.
No. Perfect, guys. Thank you very much for all the insights and the color. Thank you.
We will end with the final question from Federico Galassi. Federico, please go ahead.
Got it. Hello, guys. Can you hear me?
Yes. Yes. Welcome, Federico.
Thank you for the call and contacts, for the numbers. Just three questions. The first one, just to check. In your guidance of ROE, you are not including for this year any additional payment of dividends. This is the first one. The second one is, if the fees continue to grow stronger, in particular electronic banking, what do you expect for the second part, for this fourth quarter? The last one, when we see the loans breakdown in the portfolio, mortgage and consumer have been growing faster than commercial. What do you expect for the next year? These two lines growing more than commercial and corporate, as in the last years? That's all. Again, thank you for the call.
If you know, the first one, Federico, yes, the guidance for return on equity does not include any dividend payments.
Exactly. The other question, I think, the mortgage and the consumer has been outstanding growth. If you ask next year, we will see a moderation on the growth, on the mortgage growth, because as you know, the increase in rates, mortgages in Mexico are fixed rate. Eventually, you will see that to lock a credit for 15 years at a high rate, it would not be very appealing for our clients. Even though we have been managing the prices pretty well, but I think that there will be a moderation on the mortgage program for the next year. The other thing is that in some parts of the country, the properties also have been having some discounts, so that one is balancing the other.
That's not the case all over the country, because in other parts, prices are going fast, pretty high. I think it will be a moderation compared to this year, Federico. On the last one, if you could please say about the commercial fees. Fees will continue to expand well above loan growth. You will see that the fourth quarter usually is a very high quarter of fees. That will continue to be the number more on the 13 close to maybe 14% for the fee growth. I think it will continue to outpace the loan growth.
Thank you, Federico. With this, we conclude our presentation. Thank you very much.
Thank you all.