Good morning, everyone. I'm Tomás Lozano, Head of Corporate Development, Financial Planning, Investor Relations, and ESG. I would like to welcome you to Grupo Financiero Banorte's third-quarter earnings call. We will begin today's presentation with our CEO, Marcos Ramírez, who will provide an update of the political and macroeconomic events that surrounded our third-quarter's operations, followed by an overview of the group's main results, our quarterly update on sustainability, as well as details on our capital and an update on the shares we bought through the buyback program. Then, Rafael Arana, our COO, will walk us through the evolution of the margin and balance sheet sensitivity, as well as details on asset quality and efficiency, among other relevant updates. Please note that today's presentation may include forward-looking statements that are subject to risk 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, Tomás. Good morning, everyone. Thank you for joining us today. The third quarter of the year showed a sound evolution for Banorte, regardless of the current operating environment. High-frequency economic data continue to show signs of a slowdown, thus bringing us to adjust our GDP growth expectation for 2024 to 1.3%. Nevertheless, we still perceive a strong inertia in domestic demand driven by resilient consumer fundamentals. For 2025, we forecast GDP growth of 1% given the current global headwinds, despite the Mexican resilience derived from its high dependence on the U.S. Annual headline inflation continues to trend down, yet it is still above the central bank target of 3%. Nevertheless, core inflation decreased for the 20th consecutive month, and it's already within Banxico's variability range. We estimate inflation to end the year at 4.7% and 4.4% in 2025.
Regarding monetary policy, we expect two additional cuts this year, reaching 10% by December, and 200 basis points cuts throughout 2025, reaching 8% by the end of next year. Volatility in the Mexican currency is expected to persist, mostly given the uncertainty regarding the upcoming U.S. elections in November. As a result, we forecast MXN 90.9 per $1 by the end of 2024 and MXN 20.9 per $1 in 2025. On the political front, Claudia Sheinbaum took office at the beginning of October, and during her initial speech, the president reinforced the importance of: one, sustaining healthy fiscal policies. Two, enhancing and protecting local and foreign investments in the country. Three, collaborating with the private sector in infrastructure projects through public-private associations. Four, preserving strong relationships with the United States and Canada to boost nearshoring. And five, maintaining the autonomy of the central bank.
So far, her administration has held discussions with both Mexican and foreign business leaders to foster trust-based relationships among the different stakeholders. Moreover, the unveiling of the economic package of 2025 on November 15 should provide further insight about the investment and fiscal priorities of her administration. Let's focus now on the results of the quarter on slide number three. The sound performance of the group was driven by expansion in the loan portfolio, resilient margins, and larger net fees. Notably, despite greater loan origination in our consumer book, asset quality remained solid, with NPLs stable at 1% and cost of risk slightly down to 1.6%, evolving better than expected, given healthy behavior of new vintages in our different portfolios and the calibration of our internal models.
NNI sensitivity on the local currency balance sheet has become almost neutral to monetary cycles, decreasing to MXN 36 million for every 100 basis point change in the reference rate and reaching MXN 531 million in the foreign currency book, further shielding our balance sheet from the easing cycle and increasing our reliance on selective lending and stable deposit volumes. Rafael Arana will provide more details on this. Our strong capital adequacy ratio stood at 19.2%. Later in the fall, I will go deeper into our strategy for capital optimization. Slide number four. Consumer income continues to grow, showing a 7% year-on-year increase to MXN 14.2 billion. Additionally, accumulated net income for 2024 reached MXN 42.5 billion, 8% higher versus the same period of last year, driven by the expansion across most business lines, reflected on a 150 basis point increase in ROE to 22.7%.
On slide number five, the quarter results by subsidiaries show relevant contributions for all sectors. The bank's net income remained relatively flat in the quarter, mostly related to lower non-interest income, despite good core banking dynamics. With accumulated figures, net income from the bank grew 7%, driven by loan volume and mix, as well as positive evolution of net fees. Operating expenses grew in line with our expectation for that year. Altogether, these results yielded a sound 29.5% ROE for the bank, up 180 basis points versus the same period of last year. Our insurance business grew 28% in the cumulative comparison, driven by greater premium growth in the corporate and government sectors. Annuities expanded 11% in the quarter, normalizing the effect of inflation-related movements observed during the second quarter. With accumulated figures, it showed 17% growth, given its greater participation in social security allocations.
The brokerage sector quarterly and annual increases were mostly explained by securities valuation and larger business operations. As for the foreign business, its performance was driven by higher yields on financial products. Slide number six. The loan portfolio continues to expand, reporting double-digit growth. The corporate book had a remarkable 24% year-on-year growth, followed by commercial with 10%, driven by greater business activity across multiple sectors, as well as our ongoing efforts to strengthen relationships with SMEs, which are starting to capitalize from our investments in the segment. During the quarter, FX variation had a positive impact for the dollar loan book, representing 14% of our total portfolio. Our government book grew 2% in the year, impacted by some prepayments. The consumer portfolio, slide number seven, continues to show double-digit growth. Credit cards were up 26% in the year due to greater transactionality.
It is worth mentioning that during the fourth quarter, we were launching two new products addressing the revolving credit needs for our payroll holders, as well as those of younger demographics. These products are expected to help us develop comprehensive relationships with these clients. Nevertheless, we maintain our cautious approach in credit cards to avoid compromising our asset quality metrics. The auto portfolio held a similar pace, increasing 23% year-on-year, mainly driven by our current commercial alliances with different dealerships and ongoing positive dynamics in that sector. Payroll loans grew 9% in the year, despite our prudent approach to clients in government entities with administration changes related to directions. Finally, mortgage loans show a 7% annual expansion, keeping our focus on building a stronger high lifetime value clientele.
On slide number eight, asset quality remained solid in the quarter, with NPLs relatively stable at 1%, despite our higher growth in the consumer segment. It is noteworthy that cost of risk has gone down, driven by the assertiveness of our internal models and our hyper-personalization efforts to engage with high-value customers with better risk profiles that limit unexpected losses. Fees on slide number nine grew 7% in the quarter, mainly due to greater core banking fees and transactionality in investment funds. With accumulated figures, net fees grew 20%, led by higher activity in consumer products and affiliated businesses, supported by a still strong private consumption. Furthermore, we continue to increase our digital transactions. As of the third quarter of the year, the number of digital active clients grew 11% versus the third quarter of 2023.
Turning to slide number ten, we are proud of our MPS, Net Promoter Score Evolution, which remains on track to achieve a 90-point MPS score. The enhancement of our digital capabilities, which enable us to operate as a digital bank with branches, together with the strength of our human digital interactions, is what differentiates us, holding a competitive advantage in the market. Our self-service capabilities are driving value-added in-person experiences, reflected in the high MPS score in all our interactions through different channels. Once again, this demonstrates that our investments in technology and hyper-personalization are paying off, creating a differentiated engagement with our customers. This was recognized by The Banker, granting us its Most Innovative Bank in Latin America award in 2024, and many other worldwide acknowledgments emphasizing the innovation, usefulness, and transformation in our digital initiatives.
Shifting gears to ESG, slide number 11, I would like to highlight Banorte's participation in the 17th Annual Financial Education Week, where we had the chance to share financial education essentials and interact with a diverse audience of more than 2,700 students and young professionals, highlighting the importance of creating a budget, the benefits of starting a savings culture, and the relevance of keeping a healthy credit score, among other topics. On the environmental front, we continue with our efforts to grow our sustainable finance book, using the proceeds of the green and social bonds issued earlier this year. Regarding the operation of our buyback program, we have already bought back MXN 10.1 billion out of the available MXN 3.1 billion, representing an approximate 70.3 billion shares. This morning, we called for a shareholders' meeting to propose their cancellation.
Our capital allocation strategy focuses on providing the highest possible total return to our shareholders, considering the best balance between buyback and extraordinary dividends. Last but not least, I'm proud to share with you that Grupo Financiero Banorte is celebrating 125 years of operation in the market, 125 years of transforming, strengthening, and committing to our country, growing together with Mexico, most importantly, with you, our stakeholders. What started as a small bank in Monterrey in 1899 has now become one of the leading financial groups in Mexico. Our business diversification, our transformation through technological and digital developments, our customer-centric model, and most importantly, the flexibility of that differentiated working culture have been among our strongest assets to move forward in both gray and blue skies alike.
Looking ahead, our focus on hyper-personalization, diligent risk management, strict operational efficiency, together with our continuous investment in technology and human capital, will keep Banorte as a strong and competitive franchise to face both traditional and digital players in the market. I would like to thank you for your support and trust throughout this journey, and we look forward to many more years of development and growth. Now, I will leave you with Rafael Arana, who will dive into detail of the financial results of the quarter. Rafael, please go ahead.
Thank you, Marcos, and thank you all for attending the conference. As Marcos mentioned, and I will just go over the most important metrics about the bank and also some of the metrics about the group.
The balance sheet continues to be our main strength and how we have built the balance sheet in order to support and be able to take advantage of the downward trend on the rates that you can see. And there's something important to notice about this. Some people have questioned that if we were not so fast in really positioning the balance sheet on the downward trend. I would say that it's difficult to put the right time frames to do that, but what we can see now is that the direction and the strategy was exactly the right one. And this is also quite important.
This has cost us around MXN 2 billion to position the balance sheet, but if you project the benefit already of that positioning for the next year, we are already at the rates as is today, it's giving us close to MXN 1.8 billion in additional margin for the next year. So it's like we pay for one year and we will get the benefit for the next five years based upon the tenure that we have on the fixed rate part of the group. So that's important to notice about the balance sheet. The second one is that the group continues to deliver pretty strong return on equity, 22.9%, and that's not on a tangible basis. If you go on a tangible and you take out the goodwill on the acquired business, the goodwill of the group will jump very close to 24% return on equity.
The bank is producing 31.1, as Marcos mentioned, close to 228 basis points compared to the last year. This is also considering that we are still holding 13.9 on the quarter one. So that really shows the efficiency of how do we manage the capital base and the balance sheet and all the results that provide that benefit for the bank. The transformation for the bank, as Marcos mentioned, is a day-to-day operation of the bank. We are in continuous transformation. Marcos shows the graph that shows the bank in minutes that shows that Banorte is really a digital bank that can compete with anyone that comes into the digital space. And that position ourselves that the NPS continues to grow in the right direction. The clients like the way they deal with the bank at the branches. The branches continue to keep improving the NPS on a daily basis.
The digital operations and the digital self-serve capacity of the bank also continues to improve the MPS on a channel by channel basis. The net interest margin of the group is at 6.5%, pretty strong if you look 77 basis points compared to last year. What is also remarkable is the Banorte Bank that is at 6.7%. Some people are concerned about how we can continue to expand the margin even when the interest rates go down, and it has to do with the position of the balance sheet and the fixed rate part of the book, and also the good trending funding costs that we now are experiencing based upon how we are managing the funding base of the bank.
That, I will go in a minute, how the funding base is producing pretty strong returns on the margin side, but also giving us a pretty strong foundation on non-interest-bearing deposits, interest-bearing deposits, time deposits, and also if we need to go to a market for specific reasons, also we go with the market with a very strong benefit for Banorte. So the funding base, liquidity funding, is trending in the right direction and is going to continue to improve the margin as we go to the end of this year and on the next year. The capital base has already been explained, 13.9, the quarter one, and this is quite important after we honor the call that we did on the tier one and also by funding the dividends up to the group, most of those dividends. So that continues to be a very strong quarter one.
Obviously, there's concern that it's too much, that we should return more money on the balance sheet for the investors. Obviously, we're always looking to really return the most value to our investors, and that could be on a buyback basis or also could eventually potentially be an extraordinary dividend, but we have to wait to see how the macroeconomics and the U.S. elections really happen, so Banorte is a position to manage either way on that part, and that's quite important because that flexibility, we have achieved that flexibility by managing the bank in a very conservative way, but also in a very high growth pace.
When you go to the net interest income of the bank, of the group, we will go in a minute for the bank, but you could see on the non-interest income growing. The annuity effects continues to confuse some of our investors, but I think it's a very detailed explanation on the pages on the report, but what is worth mentioning is that NII of loans and deposits increased on a quarter-to-quarter basis 4%, and that's a very, very strong number to have on the loans and deposits, so I would say that NII is trending in the right direction.
Everything concerning the revenue side, also nets, we will see in a minute how the fees are evolving, but what we can really say is that we have a very productive loan base and a very sound funding base that is continuously trending in the right direction to a lower cost on the funding side. If you go to the ratios of the bank, it will show you basically, as we mentioned, the margin of the bank at 6.7% coming from 6.4%. That really shows all this management that we have been doing on the funding, on the loan growth, on how we position ourselves in the market. And this is quite important. When you look at how Banorte is positioned in the market, we are never on the high end of the price base. We are always on the mid to the low end of the price.
We never compete on price. We compete on the service and on the risk that we like to serve the clients. The NNI of the Banorte Bank, as you can see, 7% on a year-to-year basis is a quite good trend, and that trend will continue as we go through the end of the year and on the next year. Net fees are very, very strong numbers, and it shows exactly why the bank continues to evolve in the right direction because we are transforming more and more the activity of the bank in a very productive way. Opening of new accounts, transactional banking services, fees from the commercial, for the corporate, for the government base.
The bank is transforming its activity every single day in a much more productive activity, not just activity, but really activity that is profitable for us and serving our clients in the right way. It's not that we are increasing the cost of the fee on the price of the fees. It's really the activity that the bank is producing in the market. We are gaining market. We are gaining clients. The clients like the way they interact with the bank, and that is giving us a pretty strong growth on the fees. It's not because we increase the price on the fees.
If we go to the, I would say, and this has to do with a lot of work for many people at the bank, the treasury, the risk accounting, everyone looking at how to really position ourselves in the right direction for the downward trend on the rates. You can see now that the sensitivity on the peso group is only at MXN 36 million, that basically we are in a neutral basis on the sensitivity. So the balance sheet has been managed on the way up of the rates in the right direction, in the downward trend of the rates, also in the right direction. So to position the bank on a neutral basis has cost us some money, but we will give us money for the next five years at least. On the foreign currency, we will start to also be more aggressive on reducing the sensitivity.
There are more tools to use on the foreign currency balance sheet. We need still to see how aggressive the Fed is going to be. It's going to be 25 or 50 basis points downward trend. But when you look at the sensitivity on the NII, we almost erase the sensitivity on the NII. And that's not easy to do, and that's something that is the result of very, very intelligent work for many people from the bank. The next one really shows some of the key metrics. The return on assets, 2.6, is a very strong number, 2.6. The net income of the bank, 7% on a year-to-year basis.
I will also try to address that the net income of the bank is already being affected by the foregone interest that, and not just the bank, the group, for the foregone interest on the buyback program that is close to MXN 570 million. It will, by the end of the year, reach around MXN 650 million on a reduction on the margin base. The return on equity of the bank, as we mentioned before, 31.1% with a very strong capital base. So that really gives you the how efficient the management of, I would say, how do we use the capital to improve the returns of the bank in every single space of the bank.
If we move to the next one, the NIM, that's in order because some of you have asked us to extract the annuities effect on the NIM, and you can see on the graph, the NIM with ex-insurance and annuities in order to have a much more rational number that is not depending on the inflation rates and the effect on the annuities. The cost of funds, and this is, even if you will see that it seems that the cost of funds jumped to 49.3, but that has to do with the pace of reduction of the Cetes compared to the TIIE. The Cetes, most of the time deposits are linked to the Cetes base.
So when the Cetes starts to go down, we have to wait for some people to put time deposit to 30 days, other people to 60 days or to 90 days or under 20 days. So you need to get all the process ongoing. So you will see a continuous downward trend that will, the TIIE will eventually chase the Cetes, and the Cetes will erase the lagging effect that has on this renewal of the time deposit base because every time that you basically go on a fixed rate on the time deposit, you have to wait for the renewal at 90, 20, or 30 days or 45 days. So that's what you see as a small pickup on the funding cost.
But when you look at the margin base and improving the margin, that really shows exactly how we are managing the asset side and the funding side that give us a better margin than expected. Another very important thing is that non-interest-bearing deposits are growing 8% on a year-to-year basis because there have been some questions about the effect of some of the announcement of the new bank or other of the new banks or try-to-be banks in the market. What's the effect? As you can see, we continue to gather non-interest-bearing deposits at a very good pace, 8% on a year-to-year basis. And time deposits are growing close to 20%, and time deposits are well below the rates that some of those players are paying in the market. Why? Because we base our relationship base not on a product-by-product base.
When a client comes to the bank, he gets a full suite of products that he can monetize and see that they get a much better deal when they monetize all their relationship with us. Funding is pretty strong, growing in the right direction at a good pace at the right cost. Now we will move to one of what some people are quite, I would say, concerned about: how sustainable are these numbers on the risk side. When you look at the graph on the cost of risk, I will ask Gerardo in a minute to please join us in the conversation. Cost of risk continues to go down in a very important way, in a steady way. At the same time, you see that loan growth is exactly what we projected in the guidance to be 13% as guided.
So we have very sound loan growth, and the cost of risk continues to go in the right direction. Write-off rates is very steady. We are not a bank that jumps and cleans the book on a, I would say, on a non-program basis. So we are very steady on the write-off rates. And credit provisions are right in line with what we expect, below what we expect at the beginning of the year. So these numbers also take into account that if you take away Tarjeta del Futuro, we're at 1.5. If you add Tarjeta del Futuro, we're at 1.6. So on the cost of risk, I will not say more because I will let Gerardo say it. But this is something that Banorte has shown that it's not just in a one-time effect. It's a continuous effect of how do we manage the bank. Please, Gerardo. Yes.
Thank you, Rafael. Good morning, everyone. Over the past several years, our commitment to loan quality has yielded, as you can see, exceptional results, demonstrating the strength and resilience of our portfolio. Through prudent underwriting and robust risk management, we have successfully maintained a high standard of performance even amidst changing economic conditions. I would say that this success reinforces our confidence in our approach, not only for current stability, but as a sustainable model for the future. And we remain focused on long-term growth, ensuring our lending practices continue to deliver value to our stakeholders, as well as supporting the broader financial well-being of the communities we are serving. Together, we look forward to building on this strong foundation for years to come. And additionally, let me emphasize the importance of regulator-approved internal credit risk models.
Their contribution has been very relevant because regarding loan origination, portfolio management, and loan recovery processes, this contribution has been substantial. These models have been providing structured, reliable, and compliant frameworks for managing credit risk, operational efficiency, and portfolio performance. They support profitability, stability, and risk mitigation. I will say that after years of work, our loan quality metrics are very stable, as Rafa was telling you, and also have been predictable and better than ever.
I would like also to say that our model of hyper-personalization is the foundation is the risk by client, not by product anymore. That gives us a very, very, very, I would say, big difference in the market when you address by client and not by product the risk base. Everything on the bank, the foundation of the bank that we deliver to the client is based upon sound risk metrics.
If we like the risk, we like the client, and we can even be very aggressive on how we can sometimes sacrifice some margin in order to bring the clients that we would like to have at the bank. On the expense side, as you can see, we are 35.5% cost-income ratio. Some people have asked us. We had a meeting yesterday, and said, "What would be the cost-income ratio if you go to recurrent basis and excluding Tarjeta del Futuro and Bineo?" The cost-income ratio will be 33.7%. That will be the cost-income ratio that we will have. The recurrent expenses is 7.3%, and 5.2% is the startup expenses coming from Bineo and Tarjeta del Futuro. The operating leverage continues to be very positive, and we will continue to have that operating leverage in a positive way.
The cost-income ratio, I think we are peaking at a cost-income ratio, and we will continue to push that number down for the next year. The bank's regulatory capital, as you can see, is at 13.9% Tier 1, 19.2% overall capital ratio, well above the TLAC requirements. And this really shows, as I mentioned at the beginning, after the AT1 call. That really shows you the capacity of the bank to generate capital. I will address now the issue about dividends and buybacks. We have been, as Marcos mentioned, very, I would say, active on the buyback program. And some people say, "Why you don't activate more the buyback program?" The buyback program allows us to go up to MXN 32 billion. We have used around MXN 10.7 billion. And that's a strategic tool for us to try to defend the value of the share.
At this point in time, there are several, I would say, issues that need to become clear for us in the next month and in the next month. One is the U.S. elections. Another one is the presentation of the budget in Mexico. What exactly will be the programs that the president has announced that we think will allow the market to become much more confident about Mexico in the coming weeks? But we have all the tools to manage the best return for the shareholders. If we see a space after these events to go for an extraordinary dividend, we will do that. If we need to reactivate and activate the buyback program, we will activate the buyback program. So we have all the tools in our hands. So don't think that we are being, I would say, not looking at the market in a very close way.
We are very, very attentive of how the market behaves. But we also understand that there are many issues that are not under control that need to be clarified in the next weeks, not months, weeks. I will be very, very clear about that. Now let me move into the guidance because there have been some questions about the guidance. The guidance, basically, the loan growth, as we mentioned, ex-government will be very close to the 13%. The net interest margin of the bank, as you can see now, is at 6.5%. We are right on track. The recurrent expenses is where we are even below the expense growth. The efficiency ratio shows a better number, but we have to wait for the end of the year. The cost of risk, now we adjust the cost of risk because the cost of risk is trending better than expected.
Tax rate is where we are. And the net income shows already the effect of the reduction of the foregone interest of the buyback program that we have been used. And so that's where you see the reduction of the buyback. I will not say that that's the final number. We continue to see very strong loan growth on October, especially on the consumer side, and a very good trend on the funding side. So that would give us a pickup still on the net income. The return on equity of the bank is in line with the guidance. Pretty sound number is the same for the group. And the ROA is showing a much better number than expected at the beginning of the year. Another very important issue is that when we project all the numbers of the bank, the GDP was expected to be very close to 3%.
We are delivering this number with a GDP of 1.1 to 1.5. This is important to notice because there have been some concerns about what's going to happen with the next year. Okay? If we have been able to manage the bank at a GDP trend of around 1.1, and we continue to see strong loan demand on the consumer and also on the corporate basis on that part, and SME also showing some resilience on that part, that allows us that if GDP for the next year is around 1 to 1.1, we could still see reasonable loan growth close to low double-digit numbers or very close to double-digit numbers. But we will see that as we continue to see when the guidance comes fully in place in January.
It's important to notice that as we speak today, we continue to see reasonable performance on the loan at a GDP of 1.1. I would say that the other thing is that the interest rate that we expect by the end of the year will be around 10% for the year. With that, I conclude my remarks.
Thank you, Rafael. Thank you, Rafael. Now, we'll continue with our Q&A session. As always, we kindly ask you to present only your most relevant questions. We will be happy to take any other questions anytime after the call. Questions will be ordered on a first-come, first-served basis. Please raise your hand on the platform, and we will unmute you when your turn comes. Tania 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. We'll take the first question from Tito Labarta from Goldman Sachs. Tito, please go ahead.
Hi. Good morning, everyone. Thank you for the call and taking my questions. And thanks for some of the points on the uncertainty that's going on and that you still expect pretty healthy loan growth for next year. But maybe just to hone in a little bit on that point, as you mentioned, Rafael, even with 1% GDP growth, you're delivering double-digit loan growth and could maybe even do that again next year. Just what could be the downside or where could the downside come from? In what environment would loans grow single digits? Would asset quality be deteriorating? Is there anything that you're hearing or seeing?
I know there's a lot of uncertainty where you could see that type of scenario. And if that scenario were to arise and you're growing your loan book, let's say, 0%-5%, would you be more aggressive in returning capital given the strong capital you have? Thank you.
Thank you, Tito. Rafa, please go ahead. Tito, when I'm saying that based upon the numbers that we have today, we could achieve very close to double-digit growth or almost double-digit growth. But let me just give you one very important question, one very important issue. If employment continues to hold, that's the foundation of where we think that we could achieve that number. If employment starts to weaken, then that will affect, and then you will see loan growth from 7%-9%. So that's the way we see it. , do you want to add something? Yeah. Thank you.
As Rafa was mentioning before, when you analyze GDP dynamics in Mexico, the main driver of the economy has been private consumption. Indeed, this morning, the third-quarter GDP was released, and it was on the upside. It's surprising in a positive way, especially going from domestic demand. The domestic demand is mainly driven by labor market, as Rafa was saying, and also by strong remittances and a better position of Mexican households. In this regard, as we are waiting for the economic package of 2025, the most likely outcome is that in terms of government spending, they will continue to deliver strong social programs that will benefit households' income. That's why we think that at least from the domestic side, it's going to be positive.
Thinking about risks, well, we are contemplating this 1% GDP growth for next year with one condition: that the U.S. will continue without any recession. We don't think that the U.S. will get into recession. Indeed, also today's first-quarter GDP of the U.S. was quite strong. Labor market has been also very resilient in the U.S. We are forecasting that the U.S. will grow around 1.7% next year. That's going to be positive for Mexico because 56% of the economy we have calculated that is highly dependent on the U.S.
That's very helpful. Thanks, Alex and Rafa. On the second point, would you consider returning more capital in a slower growth environment?
It depends. As Rafa said, we want to keep all the tools here, and we want to bring you the best for you.
So if that's the solution for you and we invest it, we don't have to work to invest, we will return more capital. The answer is yes. Great.
Thank you, Marcos. And just one quick follow-up I forgot to ask. Has there been any other talks of earlier before the election? There were talks about reducing some tax benefits for the banks. Have you heard anything else from the government about any potential impacts on the banks?
Not so far. Nothing at all. Yeah. Okay. Perfect. Thank you, Marcos. Thank you, Tito.
Now we'll go with Ernesto Gabilonda from Bank of America.
Hi, good morning. Thank you. Hi, good morning, Marcos and Rafa. Thanks for the opportunity to ask questions. My question will be only one in terms of now. So we saw it had a loss of MXN 247 million. It was around 1.7% of the consolidated earnings.
So today is working as friends and family. Probably you will launch it to the open market next year. So we just want to understand what could be the size of the loss for every quarter in Bineo. I don't know if at the beginning could be a little bit higher of the 2% of the net income or that should be the level we should be expecting going forward. Thank you.
Thank you. That's a good question because maybe we should say that in the business plan, we saw that we are going to lose money for one or two years. So we need to explain this because it's the way to do that business. Rafa, please go ahead.
If you look at the total expense numbers, as you mentioned, it's around MXN 1.2 million a year.
We don't expect that number to grow from that because, as you know, we are using most of the scale of the bank in order to produce the economies of scale on the cost side. So that number should stay as is and maybe even improve a bit on that part. So you will not see an expansion on the cost line. I think we reached the limit on the cost side, and you shouldn't expect more coming from that line.
Thank you, Rafa. Is that okay, Ernesto? Ernesto, I think you have a mute on your microphone. Okay. We'll go for the next question with Eduardo Rosman from BTG. Eduardo, please go ahead.
Hi. Hi, everyone. One question here regarding the results from the other subsidiaries. You mentioned that the bank is delivering a 31% ROE, which is very strong, right?
And that with the hedges that you did, you're very likely going to be able to protect the ROE from a bigger decline once interest rates go down, right? So can you please elaborate on the other subs? The ROE there, I still see room for improvement. So if you can discuss a little bit, where do you see room for improvements and which one can that be relevant? Thank you.
Thank you, Eduardo. Rafa, please go ahead.
If you go to the return on equity, you see that I think we have opportunities to grow the business on the insurance side. I think we still have a low penetration on our customer base on the bank insurance side. I think we can still do more on that.
I think there are more insurance products coming to the market to address the new issues or the new services that the insurance company needs to deliver to our clients. The annuity things continue to be quite solid on that part. There have been some questions about trading, and since trading had a good quarter, there was like a big jump on the quarter, but if you look at trading for us, it has always been around. Now, if you look at total revenue against trading, it's 5%, and it has been a very steady line for many years, so I think the bank will continue to push forward, and remember that the bank is the main distributor of the insurance business.
So as long as the bank continues to grow and expand, as has been the case in the mortgage side, in the car loans, in credit cards, in payrolls, in banks, the insurance business will continue to grow. And in addition, there will be some in the open market. The annuity business, we are very close to the leaders in that market. So it's pretty good returns. It's a pretty sound business. So no issues on that. So what we have to protect is basically the Afore, the pension company that as we move forward to the coming years, the effect of the reduction on the fees starts to normalize more. But you will see return on equity of the Afore, not on a tangible basis, maybe reaching the 14%. If you go to tangible, then that number will be very close to 10%.
So I think the way the return on equity has been set up, the leasing company could also improve the return on equity on that. We can see a lot more activity on the leasing and factoring company. So that could also improve some of the returns for the group. But that's overall. We don't see any weakness really on any of the businesses.
Oh, great. Thanks a lot for the detailed answer. If I could just follow up on Ernesto's question on Bineo, right? I know that we're still in a work in progress, but do you think that this will be the entity or the brand that will kind of compete with the new entrants like Nu and Mercado Libre? Or do you think that competition will take place kind of across the board, including the Banorte brand, right? So how should we think about it?
It's a different entity, a different brand, or we should think about, look, it's the whole thing that will be competing.
The first thing that you have to notice is if you are competing against banks or fintechs. When the fintechs become banks, then the competition becomes among banks and will be a much more fair play because capital numbers, liquidity, compliance, everything will be on the same level. That's the first question. If you see competition that banks against fintechs, I think the slide that Marco presents, that Banorte is a bank in minutes, you see the power of Banorte in the digital bank. But obviously, Banorte has an issue on the cost structure that is delivering the 33%-34% income ratio for the next years. That could be seen for some people that is a disadvantage to compete in the market.
But when you see that the combination of human and digital that Banorte has, and not only Banorte, but BBVA has the same, that gives also an edge when you see the balances that we open at the branches and the services that we provide on the overall. So when we launch a full value proposition for Bineo, that will be open for any customer on the banking side and also on the fintech side. And some of the banks of Banorte, some of the clients of Banorte could choose to go for that if they like to live only on digital. And that will be okay for us on that part. But we will compete with every single one in the market for the client. The only thing that we will not compete is on a product-driven basis.
We will always compete on a relationship basis by providing all the services and needs that the client needs. We are not just a product-driven bank. That hasn't worked for us in the past. And I don't think that that's the way forward for us.
Thank you, Rafa.
Thank you very much.
Thank you .
Now we take Renato Meloni from Autonomous. Please, Renato, go ahead.
Thanks for taking my question here. So first, I would like you to give a bit more clarity on the balance sheet optimizations that led to this CET1 increase to 6.7%. Just trying to understand here if this is a sustainable level or if this is going to revert back to lower levels going forward, especially because the loan yield or the NIM on the loans was still stable this quarter. And then just secondly, a quick question here on provisions.
Just trying to understand the reduction in the commercial and corporate and government book? If there were some reversals there or if it was just a change in the model that you mentioned and trying to also gauge what's the normalized level here? Thank you.
Thank you, Renato. We will start for the second one, the provisions. Dr. Salazar, please. Yes. As one can see, if you take a look and you take a deep dive into our commercial lending business, you will see that what we have is that the commercial portfolio registered less dynamism versus the first half of 2024. As in the third quarter of 2024, the portfolio rose 5% quarter over quarter and 16.2% year over year, driven by great dynamism in tourist areas such as Riviera Maya, Riviera Nayarita, Los Cabos.
What you can see is that regarding provisions and the increase in the commercial side of the loan book, we are not detecting a pattern either by a sectoral view or by a geographic view. So provisions are no sign of trade deterioration or asset quality deterioration in the commercial side of the business. If you take a look at the corporate side, during the third quarter of 2024, we saw a mild slowdown versus the growth pace observed during the first half of 2024. The portfolio, the corporate loan portfolio grew 7.8% quarter over quarter and 23.6% year over year, driven by trade demand in sectors such as real estate, financial sector, transportation, logistics, manufacturing, and on the other hand, we saw a slower pace in sectors such as oil and gas as well as in infrastructure projects.
That's the loan dynamics in these two parts of the loan portfolio. And the asset quality in the corporate side has been superb, has been excellent. And we remain very confident that in the commercial side and in the corporate side, in the wholesale loan book, it's going to remain very predictable and stable.
Thank you, Doctor Rafael. Are we maintaining?
Yeah. As you know, Renato, the projection for the guidance was below what the NIM is. So I think a sustainable NIM. And one thing that is worth mentioning is that when you look at the mix on the portfolio, 57% of the portfolio now is at fixed rate. So that will more than compensate the reduction on the rates. That position and of the book is what really cost us MXN 2 billion last year, but that will get the benefit for the next five years.
The variable rate part of the book will be always moving as when the rate goes down, that variable rate part of the book will go down. But that's the advantage of Banorte. The variable rate part of the book, when the rates were going up, we were very asset-sensitive on that part and was the one who was really delivering the push on the margin side. And let's say that the fixed rate part of the book was mostly neutral. Now, the fixed rate part of the book is picking up on the margin side with 57% of the book in fixed rate. And the variable rate part of the book will follow the TIIE trend. But that's already been compensated on one to the other. Remember that the variable rate part of the book is 43% of the total book.
So we feel very confident that 6.4% is a very, very steady margin for us on the coming years.
Thank you, Doctor.
Great. Thank you. It's clear. So the message is that the bank name will converge here to the guidance then.
Exactly. If you see maybe on the next two to three years, we'll converge to the guidance because you will continue to see a pickup on the margin for the next year and for the end of this year.
Great. Thank you. Thank you. Thank you. Now we will continue with Olavo Arthuzo from UBS. Olavo, please go ahead.
Yes. Thank you, José Marcos. Rafa, I have a question on Bineo, but it's a kind of different approach because I just wanted to understand how relevant has been the launch of the Money Pockets or money boxes.
I mean, at the current customer base, what is the percentage of clients that has invested into it? And if you could just also please give us the amount in pesos that has been already invested in pockets at Bineo, that would also be great. Thank you. Then I go to my second question.
Remember that we haven't advertised any on that. So basically, it's on the friends and family. So the number that you still see is quite low on the. But what is good is that we have full activation on the pocket side, and we can really provide a client what they want. But you need to wait when we really do the big launch on the Bineo part to really understand the dynamics of the client. The number of clients right now is non-relevant compared to the potential of the Bineo brand, honestly.
That's what I can say.
Okay, so just to follow up, when do you expect this to gain traction?
So we are aiming to have the full value proposition in place in the first quarter of next year, and from there, we'll get the full traction because you will get the payroll, you will get the mortgages, you will get car loans, you will get mutual funds, you will get the credit cards, you will get the debit that is already, the pockets, the funding, so you get a full because Banorte needs to compete on a relationship basis, not on a product-driven basis, and that has to happen on the first quarter next year.
Okay. That's great, Rafa, and also a follow-up question on this topic, but more broadly related to Dinero Móvil.
Is there anything to share with us about the benefits of adopting that technology as being of payment in Mexico, Rafa? Because I just want to understand what are the Banorte's thoughts on that? How many customers are transacting using Dinero? Any data on this regard would also be greatly appreciated.
The technology is good. I think it's a good technology. But we have a structural problem here that is the informality of the market. So we need to move to a much more formalized market in order to have the advantage that Brazil has got in Pix or things like that. So clients still are heavy on cash, even if the technology is pretty good. Honestly, it's pretty good. So I think the more benefits are given into the labor force, the more employment continues to grow and benefits. You are moving much more into financial inclusion.
Even on the remittances side, we are playing a very hard game on remittances to really move the financial inclusion on remittances and build up accounts and that on that part of the market. But I think more on the regulatory side needs to happen. Let me just give you an example. Why not every single public service needs to be paid from an account, a digital account with no cost? But that will really allow those types of technologies to be quite useful for the client.
So the top-up DiMo should be marginally operated for the bank, right?
Right. Right.
Okay. Well, thank you very much, Rafa. Thank you very much, José.
Thank you.
Now we'll go with Yuri Fernandes from JPMorgan. Please, Yuri, go ahead. I think Yuri disconnected, so we can follow with Jorge Kuri from Morgan Stanley. Jorge, please go ahead. Hi, everyone.
Good morning and thanks for taking my question. I wanted to ask about deposits. Your deposit growth rate decelerated a lot during the year. You started the year growing at 17%-18%. And now this quarter, your deposit growth rate was 8% year on year. That's slower than your credit growth, which is 11%. I'm wondering if there is something to be read about competition for deposits from the digital banks. In a new bank, just looking at the GBM disclosure, a new bank has gone from zero to $4 billion in deposits over the last 12 months, which is no longer a small number, right? I mean, that would be equivalent to around 7% of your deposits. And then you also have many more competitors: Ualá, Nu, and Clara, Plata, etc., etc.
So what do you think explains the slowdown in deposits and just the absolute level of growth in deposits below your credit growth? And to what extent do you think that if these platforms continue to overpay for deposits for long, it'll start to change the competitive dynamics for deposits in the system? Thank you.
Thank you, Jorge. That's a good question because here, deposits, deposits, deposits is the name of the game. We agree on that. And the rates are going down, and that's going to be good for everybody. But the war is there compared with the other peers and the new competitors. I would ask Rafa to give you some numbers, please.
Okay.
I think one number that you should be looking is non-interest-bearing deposits that have been growing at 8% for the year.
Based upon the dynamics that we see on that part, that is the top part to fund, you will see that by the end of the year, that number will be very close, very close to loan growth, the non-interest-bearing deposits. So that's the key issue for us to really see how powerful the service proposition that we deliver to the market could bring non-interest-bearing deposits that have to do a lot with payroll service to the companies and individuals. So that's what the big number is. The other big number is time deposits. Time deposits are growing 20% for the year. So when you add everything up, you can really fund the growth on the book based upon those. But the time deposit base, what is good about the time deposit base is not just the growth.
It's that the time deposit base is converging to a much lower funding cost than we needed to put in place when rates were around 11.15. If you ask me if there's pressure in the market for the new bank, for the Ualá on that, of course, it is for some of the people that like to take advantage of that. Usually what happens, and we can see that because you can see where the transfer money goes from Banorte to Nu to the others, that is basically money that moves, takes advantage of the rates, and then comes back to pay the services and loans that they have with the bank. That number is around $3 billion that compared to the other big number that we have on the funding side is really a very, very small number.
It's not that we are not very attentive to that. But what we have seen, and we are very, very pleased, is that the non-interest-bearing part of the book is really growing at a very, very good pace. And you will see that the numbers of non-interest-bearing by the end of the question.
Hi. Thank you, Rafa. If I can just squeeze one additional question. I thought this was going to come out earlier, but it hasn't.
Since your last quarterly earnings, the big development in Mexico, obviously, is the judicial reform, given how much banks in general rely on the courts for repossessing assets, executing guarantees, dealing with labor and civil lawsuits that are normal in your world, to what extent this changes your ability to lend, your appetite to lend, the pricing, the provisions, how does this new judicial reform potentially impact the loan side of the business? Thank you.
Thank you. I will pass this to Gerardo Salazar, please. Go ahead.
Hello, Jorge. I will say that we've been working in very important contractual risk mitigants in order to deal with the effects of this constitutional reform of the judiciary system. We can protect our rights through contractual mitigants that minimize great risk.
If we look at several key ingredients, which I'm going to give you an example, the first ingredient is going to be collateralization and secure lending. We are more than ever looking for those credit structures like asset-backed collaterals. The pledging of receivables is one example. Also, when there is the opportunity, we will work with cash collaterals. Also, the second main ingredient in dealing with the potential effects of this judiciary reform is to look for third-party guarantees in order to protect our sources of payment. I will add a third front in which we have been working, which are the modification of some covenants, like the financial covenants, negative pledges, and more information covenants to be closer than ever to our customers, to see their performance, to see what arises, and to take proactive actions in an early manner.
A fourth ingredient in which we consider we have some mitigants is more intensive use of SPVs, special purpose vehicles, and using bankruptcy remote structures to see how can we deal with this type of deterioration or potential deterioration, which we have not seen as of yet, but we are preparing for that kind of a scenario. We are intensifying the use of escrow accounts and also control agreements with dedicated escrow accounts and some deposit and control agreements in that regard, and also, we are using more than ever cross-default clauses in order to deal with the potential impact of these. Another thing that our team is working in is trying to analyze and change, whenever it is possible, jurisdiction and arbitration clauses. That's going to become, and it is still very important.
We have had some experience in the past regarding that front, but we will deal with it in that manner whenever it is possible. We know that in the commercial side and the corporate side of the business and the wholesale loan book, there are big possibilities to protect ourselves regarding these ingredients. And also, we have been looking for political risk mitigation, working hand in hand with local investors, local entities, and also the developing banks whenever it is possible regarding any size of the loan book. That's the actions that we have been taking previously, trying to foresee the effects of this judiciary reform, which obviously we are trying to protect our rights and also to make our customers feel comfortable in a reasonable manner because of these effects.
Thank you. That's very clear. Thank you.
Thank you, Jorge.
Now we'll continue with Carlos Gómez López from HSBC.
Carlos, please go ahead.
Can't hear you, Carlos. Now you can hear me.
Yeah. Yeah. Thank you. Okay. No, no. Thank you so much. So I actually wanted to follow up on the judicial reform. And again, I understand the mitigants that you're going to introduce, and that's, of course, what you have to do. When do you expect that the changes in the judges and the structure of the courts will start to affect operationally what you do on a day-to-day basis? Is that something that you expect already in the beginning of next year, end of next year, 2025, etc.? And if I can follow up, totally unrelated, can you give us some more information about the Rappi joint venture, the Tarjeta del Futuro? Thank you.
Yes. First one, it's a good question because it's not going to be immediately.
Our lawyers think that two or three years, so it's going to be a long way to walk and to see how we adapt to that. The Rappi one, I will ask Paco Marta is right here with us. Hold on, Paco.
Thank you, Carlos. We keep working with Rappi and the joint venture. We have more than one million cards, 75% of them active month over month. We already crossed the MXN 5,000 million on the portfolio. As we mentioned in the previous call three months ago, we are now in black numbers, reaching the black numbers starting on April of this year. The business is moving forward. The loans are well-managed. The users are heavily using the card. We have more or less the same transactions per month in the credit card, in the Rappi cards as we have in Banorte's card.
So in a nutshell, that's what's happening in the RappiCard business.
Do you see any potential cannibalization between Bineo and Rappi?
You know that only 6% of the customers that we have in RappiCard are also customers on Banorte, not only in credit card in general. And you can see that RappiCard has 75-76% of the customers below 36 years, and that number in Banorte is 30%. So we don't see really a cannibalization, but more than an additional credit card that people are using. You know that in Mexico, it's frequently to have one, two, three, or more credit cards. So it's not that moving towards there. It's leading Banorte.
Thank you so much.
Thank you, Carlos.
Thank you.
Thank you. Now we'll continue with Andrés Soto from Santander. Perfect. Good morning to all. Thank you for the presentation.
I have just a couple of questions. The first one is regarding cost of risk. You are improving a little bit your guidance for this year based on a very positive performance that we have seen so far. It's interesting that this happens at the same time that you downgrade your GDP expectations. So I would like to understand regarding your risk model, if GDP is not the key parameter that we should look at, or is it rather employment, as you mentioned before, and it will require for employment to deteriorate for you guys to need to make an adjustment to the risk model and for that to be reflected as additional provisions? And more broadly speaking, when I look at Banorte, prior to 2018, cost of risk was about 2%. Now you are running at, let's say, 1.8%, and this is quite a sig
nificant shift in your loan mix.
So I would like to understand what can we expect over the medium term, also considering this deteriorated Mexico growth outlook?
Thank you, Andrés. The first one, the cost of risk, Dr. Salazar is chief. Go ahead.
Thank you. Thank you. Thank you, Marcos. I will say, first of all, that regarding the growth drivers of the loan book, at the same time that we are considering a lower GDP growth, we are also considering a lower interest rate, and that's very important for you to consider because that's the income effect and the substitution effect to take into consideration regarding the parameters that we have announced in this call. Also, I will try to complement some other growth drivers in which there are not only the macroeconomic drivers of growth for the loan book. Obviously, those drivers are very important.
As Rafael Arana was saying, the unemployment rate is key for our models, and also it is key trying to deliver some performance because our loan book is dependent on the economic growth, consumer confidence, and income levels, and the unemployment rate is going to be one very important indicator of that, but we have to add some other drivers which are more endogenous, which are under our control in order to provide growth of the loan book. I will say that there is a market and customer demand. Drivers will see loans at a lower price if the interest rates continue to go down. Also, we consider ourselves to have better products for the hyper-personalization Rafael Arana and Marcos was mentioning, and also, we have low pricing drivers.
We are willing to price our loans in low levels because we have the structure and cost of risk is low, as you can see. In order to do that, we have been transforming that key element in the Banorte's strategy into a competitive advantage regarding our peers. Also, I will have to add that regarding growth of the loan book, you have to take into consideration the capital and risk management drivers that we possess. The capital strength of Banorte, in which we account for sufficient capital to support growth, is one key ingredient to support that growth. Our liquidity position makes funds available for loan disbursements. We are on pace of trying to provide a healthy loan growth for the next years.
Thank you so much. And then you've also on the medium-term cost of risk expectations. Yeah.
The cost of risk expectations for the medium term, I will say, Andrés, will be between 1.8% till 2.2%. That's going to be the range. We know that we are below that for the moment. 1.66% is the cost of risk as of now, but we were taking a very conservative view on the potential behavior of this indicator. We will move to consumer products. Yeah.
Yeah. Understood. It will be similar to the pre-COVID level, but with a better loan mix, I would say.
That's correct. Yes. The retail book is going to be more important throughout the years, in a way.
Finally, on expenses, do you guys have any? When we started the year, we had very positive expectations for the Mexican economy, a lot of investment coming up, and you guys also reflected that in terms of your expansion and growth, expense growth that you're forecasting. When you look at 2025, should we look at the expense growth, double-digit, high single digit? What level will be reasonable for you guys next year?
Rafa.
I mean, we will really push to single-digit expense growth. That's our goal, and we are doing everything in our hands to do that. What we're doing, basically integrating everything on the operational side, on the HR side, accounting side, all the back office's functions have been integrated into one for the group. That is going to give us a very reasonable reduction in expenses.
And also, you have to consider that most of the big spending cycle about hiring the bankers, 1,200 bankers that we hired for the nearshoring SME and commercial and corporate now is already in full production. So that also will increase the revenue side, and we don't need to add more cost on that base. Bineo and Rappi will continue to weigh on that. So we have to lower the recurrent base of the cost base that is now sitting at 7.3. And that's the one that we are working to that and not allow the entities Bineo and Rappi to increase the expense side. So I think it's a long shot, but we are aiming to have a reduction to a single-digit expense growth next year. I know it's a long shot, but we are fully working on that. Perfect.
Thank you so much.
So just to summarize, you are expecting, I would say, some efficiency improvement next year, better margins, some deterioration in cost of risk. It will be hard to say that you will be targeting similar levels of ROE to this year, or it's too early to tell.
No, I think ROE will continue to be very close to the number that we have. I think our goal on the bank level is around 28. We are around at 31.1 right now, but I think 28 is what we are aiming to have on that part. Why? Because there's still a potential to manage the capital base on a much efficient way. Why we haven't done that? Because the world is not quiet.
But if you go to a number that we have promised the market to be from 13 to 13.5, you will see an immediate jump on the return on equity with basically the same numbers that the bank produces on us today. So we have many levers, but we would like to keep sound capital base and still deliver very strong return on equity. And I think we have been able to do that in the past years.
Absolutely. That's very clear. Thank you so much.
Thank you. Thank you.
Now we'll go with Nicolas Riva from Bank of America. Please, Nicolas, go ahead.
Thanks very much, Tania, Rafa, and Marcos for the chance to ask questions. So my question is on capital. So this quarter, at the end of September, you called the $600 million outstanding on the six and three quarters. So with that, let's see.
Your CET1 is at 13.9%. So let's call it roughly 14% CET1. The message I get from your comments in this call is that you are not going to be accumulating more capital, more CET1. If anything, this number is going to be stable or really decline a bit. You pretty much don't have any Tier 2 outstanding. I think there's less than $100 million outstanding on the 2031s. That's only, I think, 20 basis points of Tier 2 capital. And then you have the 81s, but you just called the six and three quarters without a capital replacement. So capital requirements in Mexico are very high with TLAC implementation. So by the end of next year, you're going to need to have 17.9% total capital. And again, doing the math, roughly 14% CET1, which is going to be probably stable or going down.
You have 500 basis points of 81, but you have another five perps. And again, you just called the six and three quarters without a capital replacement. So my question would be, if you are thinking of raising more tier two or 81 as you call the next perps, again, to meet that very high capital requirement of 17.9% total capital by the end of next year. Thanks.
Nicolas, you have the big, big picture. You are totally right. And what else we can say? Yes, we are planning to raise more capital. The problem is the market. We don't need it, but it's good to have it. So we will be there, and we will see how the market reacts. And if we see the window, yes, we will issue more tier two or whatever is good for the bank. And you have the whole picture.
So you know what we want to do.
Yes. So, Marcos, a follow-up there. Then, in that case, in the past, you have shown a preference to raise 81 compared to Tier 2 despite theoretically a lower cost of issuing Tier 2. Is that necessarily going to be the case going forward, a preference to replace 81s with new 81 capital, as you call the 81s?
Yes. We prefer the 81s because for us, it works better, and it's a matter of what's better for our balance sheet. So we prefer the 81s, yes.
Okay. Thanks very much, Marcos.
Thank you.
Thank you. We'll continue with Thiago Batista from UBS. Thiago, please go ahead. Thiago, yeah, please unmute. Yeah. Now we hear you. Go ahead, Tiago.
Yes, guys. Thanks for the opportunity. I have a question on the government lending book.
We saw a decline of almost 2% to the Q. The year-to-date position is about to say 2%. So my question is, this recently weak performance of this portfolio was more a decision of the bank to decide to be more conservative with the credit for government lending or lower demand because of all the changes? And also, trying to understand how dilutive is this business for the ROE of the bank. We know that the cost of risk is probably close to zero. Interest rates are much smaller, but how diluted is this business for the ROE of the bank?
Thank you, Tiago. Yes, we saw some prepayments last year. Remember that we are changing of cycle with the new president, but it's a good business for us. Remember, it's not only the lending part. We work with the governments with a lot of pieces.
So for us, it's very important to be with them, and it's good for the country too. So it's a win-win situation. We want to be there. You will see in this year that we will start to be on track again, and we see a lot of things to do. Rafa wants to say something here.
On the dilution side, there's no dilution for a very simple reason. The use of capital is very, very low for the government book because remember that when we lend to the government entities, we set up on a trust that we control the trust. So we get the funds coming from the federal budget into the trust. So as you can see, NPLs are zero, and the usage of capital is very low. Obviously, the margin is what is seen.
The margin in these loans is thinner than on the margin on the corporate side, but the return on equity usually is higher than the corporate on the commercial side. So as Marcos says, the advantage of the government book is the ancillary business that you receive from that relationship. So no, there's no dilution on the ROE from the government book.
Thank you, Thiago. We're almost over on time. We have two final questions. Please, we ask you to only present one question. We'll continue with Igor Pavan. Thiago, please unmute your microphone. Thiago. Yeah. Thank you.
Hi, everyone.
Hi, Igor.
Can you hear me?
Yes, perfectly.
Yes. So thank you for the call and taking my question. Regarding cost of funding, we were expecting a continuous decrease. However, we saw a jump from 47.8 to 49.3.
I kindly would like to understand the main reasons that contributed for this and just confirm how you are seeing the evolution of this line considering the Banxico cuts on policy rates, please.
Thank you, Igor. Let's go to Rafa.
Igor, we explained this at the beginning of the call that you have a different pace on the CETES and on the TIIE. TIIE is related to the asset side, and CETES is more related to the funding side. Remember that on the funding side, on the time deposit base, those gets renewed on a 30, 45, 90 days. So when you see a disconnect about the pace of how fast the CETES is going down compared to the TIIE, you have to wait for the renewal of the time deposits to get adjusted to the new rate.
That's what you see, a 49.8 jump, but you will see that lag closes by the end of the year. That you should see those numbers very close to 47 something at the end of the year. And then the pace of the TIIE and the CETES will be much more aligned. That's the reason for that jump, not that the funding cost overall, because you saw a jump on the margin side on that part. That's the reason.
Oh, okay. That's super clear. Thank you.
Thank you .
Now we'll have our last question for Edson Murguia from Summa Capital. Please, Edson, go ahead.
Hi. Good afternoon. Thank you for taking my questions. I know I have to go for one. And my question is to follow up on what Dr. Salazar said about the risk mitigation that you are doing or you will do for the following months, weeks, or years. Cash collateral, third-party guarantees, modification of covenants, intensive SPVs. How those risk mitigation regarding on the judiciary reform will affect the loan portfolio for the following quarters?
Dr. Salazar, go ahead, please. Sure. Thank you.
Thank you, Edson. I will say that the growth dynamics have not been affected as of yet. That's the main reason that we are providing a range of growth of 10%-12%. So these risk mitigants providing that we are still seeing GDP growth, a tight labor market with a low unemployment rate that makes us confident that looking forward, we will see growth happening with the same quality standards that we have provided as of now.
Okay. Well, thank you so much and happy 125th year. Thank you. The anniversary. Yes.
That's right. Thank you very much. Thank you. With this, we conclude our presentation. Thank you very much for the interest in Banorte. Bye-bye.