Good morning. I am Tomato Sano, Head of Investor Relations, Financial Intelligence and M and A. My best wishes to all of you in this New Year. Welcome to Grupo Financieros Van Motor's Fourth Quarter Earnings Call. Today's presentation may include forward looking statements that are subject to risks and uncertainties, which may cause actual results to differ materially.
We ask you to take these into consideration. I would like to thank you for answering the survey. The information you provided is very useful for us in order to improve our presentation and information. We are adopting this new platform and more efficient communications. Our CEO, Magnus, will provide highlights of the second partial lockdown in Mexico and the measures that have been implemented at the group to face this new challenge.
He will guide us through the main financial results and will provide an update on our main ESG initiatives. Later, Rafael Arana, our CFO, will provide and will provide financial and operating results. Will conclude our call with we'll give you some Thank you. Marcos, please go ahead.
Thank you, Tomas. Good morning, everyone. I wish you all a safe and prosperous 2021, and thank you for joining our call. The fourth quarter of twenty twenty was marked by recovery as different sectors in the economy adapted to the new normal and by optimism on hold as the COVID-nineteen vaccines proved to be successful and mass distribution was put into action. Unfortunately, this increased activity unleashed a new wave of contagion and partial lockdowns were once again announced in Mexico City and in other states of the country during the last weeks December.
The daily number of new cases has surged, and death tolls have suddenly reached a new high. Hospitals in red light states are at full capacity, forcing activity to take a step backwards. However, this does not mean that we're back to where we started in March of twenty twenty. We are definitely better prepared than before to cope with this situation both as a society and definitely as a financial good. Business across different industries have come up with new and creative ways to stay afloat, some reinventing their business model and some others skillfully adapting to this new normal.
Restaurants have increased home delivery and adapted their menus to make them takeout friendly. Many of them have enrolled into digital apps such as Rappi and Uber Eats, enabling them to take online orders to their growing customer base. Many retailers have strengthened their online shopping facilities and now offer in store or pickup services. At home, most of us have overcome the learning curve and are now real first in video calls and remote team work. Therefore, will not be compromised again for most businesses.
At Vanorte, we have also become stronger and have remained closer to our customers through enhancement in our mobile app, which provide more ways for our customers to fulfill most of their banking needs with less dependence in our branch network and promoting the use of our digital channels to new and existing customers alike. Rafa will provide more details on our digital initiatives in a few moments. On the macro level on Slide number four, there are also several counterweights that will help Mexico and Banorte to weather this continued challenge and foster growth. Our most recent GDP growth estimates points to a 4% recovery in 2021. The new fiscal stimulus announced by the U.
S. Government is expected to fuel its economic recovery and also of its closest commercial partners. Manufacturing supply chains linked to the newly revised North American trade agreement will ensure a steady export demand for this sector. Moreover, The US nearshoring strategy has both increased foreign investor into Mexico and away from China. Stronger U.
S. Economy will consequently translate into stronger remittances, which fortunately did not stop during 2020 and are a key driver of economic activity for our country. The domestic front Mexico Central Bank has sufficient leeway to increase monetary stimulus if required. Our economic analysis team forecast a 50 basis spot cut in the reference rate during the second half of twenty twenty one. Furthermore, the government has announced a 50% minimum wage increase in 2021, which should also fuel economic activity during the year.
Altogether, these measures should outweigh the challenges brought by the second wave of contagion and by other relevant events during this year. In June, Mexico will go through midterm elections for congress and several state governments. This is why we have heard and will continue to expect regulatory noise as different political players try to stand out throughout their political race. As of today, some regulatory initiatives have been postponed, such as the one related to the US dollar buy backs by the Central Bank, and some others have not gained traction whatsoever, such as some isolated efforts to lower fees or regulate interest rates or financial institutions. From the bank perspective, we have also implemented immediate actions to tackle with these new challenges.
In order to guarantee a safe environment for our customers and employees, we have instructed that all business areas that have been working from home to continue to do so until further notice. Constant communication regarding preventive measures and close monitoring from our medical staff has ensured timely treatment and isolation of suspicious and confirmed cases. In light of the new lockdowns, we will make a more efficient use of our branch network in the most affected cities, increasing the number of shifts and lowering the staff in our branches. We will also temporarily close our reduced number of branches in locations where all other nearby branches may absorb customer traffic without compromising availability and compromising operation. Moving to Slide five.
From a balance sheet perspective, we decided to shield it on the effects of the COVID-nineteen by announcing, as you know, an additional €2,400,000,000 provision charge totaling €7,300,000,000 in additional provisions during the 2020. Similar to what we did in the second quarter of twenty twenty, out of the €2,400,000,000 that were rated in December, 2,000,000,000 were booked as additional loan loss provisions and €400,000,000 were used to fully write off certain commercial and credit card portfolios that were already partially provisioned. With these measures, we intended to concentrate the effects of the pandemic in our 2020 results and to have a stronger balance sheet and a normalized cost of risk during 2021. Had we not used part of our additional provisions to write off existing portfolios, the total amount of provisions would have been close to €25,000,000,000 well above their three year average. Moving on to Slide number six, in order to better understand the sufficiency of our loan loss provision space, I would like to show you the breakdown of our loan portfolio and the degree of expected loss associated to each segment.
As you can see, our largest portfolios have a relatively low expected loss. And our consumer portfolio, which naturally entails a higher risk, is well diversified by product type with credit cards accounting for roughly a third of this portfolio. Our commercial and corporate portfolios have a similar profile with SME customers which carry the highest expected loss within this portfolio accounting for 11.2% of the total commercial and corporate segment or 4.7% of the total loans portfolio. Last but not least, our government portfolio, which accounts for 20% of our total loan book has historically had the lowest expected loss. On Slide number seven, net income for the quarter totaled 30,500,000,000.0, which includes the effect of the additional provisions booked during the fourth quarter.
Excluding this effect, recurring net income amounted to ARS 35,600,000,000.0, up 1% versus our 2019 results. Regarding profitability indicators, these were consequently affected by provisions. The group's ROE totaled 14.8% for the year and with recurring results 17.1%. ROE for the bank totaled 16.720.6% when using recurring results. On Slide number eight, we look at the main revenue lines for the group where I would like to highlight the solid net interest income growth during the year despite a 300 basis points decline in the reference rate during the period and the adverse conditions brought by the pandemic.
This on the slide number nine has relevant quarterly rebounds driven by a more dynamic economic activity. Holiday shopping and seasonal sales during El Guenthien boosted transactions during the quarter with POS and mobile leading growth and getting to a solid 16% quarterly increase in net service fees. Regarding loan growth in Slide number 10, despite a more conservative risk policy across our portfolio, the main growth drivers for the quarter and the year were mortgages and auto loans. Our commercial and corporate portfolios also had a solid performance as several customers used liquidity lines to overcome the stagnant dynamics in many relevant sectors during the low modes of the pandemic. At the end of twenty twenty, the vast majority of our relief programs came to an end with better than expected results.
Rafa will provide more detail on these programs. Regarding asset quality, NPL numbers were temporarily low during the life of the relief programs. And as expected, they have already started a gradual increase towards the normal, the average pre COVID-nineteen level. However, cost of risk is not expected to peak during 2021 as all the impact of additional provisions was registered in 2020. On Slide number 11, we can see the loan growth effects on market share by product 2020.
Market share base for our total loan portfolio was driven by sound performance in commercial and corporate as customers in these segments use liquidity lines to meet their operating needs. As mentioned before, mortgages and auto loans were also essential components of our growth strategy with a more selective risk criteria in our secured our unsecured products such as credit cards and payroll loans. On Slide number 12, I would like to highlight the benefits of businesses diversification within the financial group. Our non banking subsidiaries accounted for over 34% of the group's net income during the quarter and accumulated results for the year were also relevant. The insurance business was impacted by higher claims in the life and health portfolios during the fourth quarter.
However, it benefited from lower auto claims as traffic reduced during the lockdowns. The sound performance of the annuities portfolio was primarily driven by the acquisition of the Sura portfolio as well as by a diligent cost control strategy implemented during the year. The Apore business benefited from the market effects in its assets valuations. Moreover, it increased its assets under management by 4% during the quarter and by 15% over the year. As mentioned during our last conference call on Slide number 13, you will find the most relevant updates regarding our ESG initiatives for the group.
On the environmental side, Panorta received awards for its collaboration with one of the most relevant reforestation projects in the country called Reforestamos Mexico as well as for its participation in a sustainable mobility initiative in Mexico City and Monterrey. On the social arena, we are proud of our participation in more than 68 financial education workshops to over 6,500 beneficiaries across 15 states covering relevant topics such as financial awareness, family finances, savings, digital banking and investments. We have added an ESG appendix at the end of this presentation with additional details on the quarterly evolution of our sustainable finance loan book evaluation and our project evaluation under the Equator Principles. With this, I conclude my remarks and now Rafael Arana will provide further insight into our loan relief programs, NIM evolution and will walk us through our 2021 guidance. Please, Rafael, go ahead.
Yes. Thank you very much, Marcos, and thank you all for being on the call. I would like to to to run to some specific issues that has been of concern to our investors and and and and analysts about what we what's exactly the situation that we are facing concerning the the relief programs, the clients that are out of the relief programs and all the initiatives that we are taking in order to guarantee what we provide as a guidance for you. As as you can see on the on the slide that we're providing, we basically are under a very specific actions to continue to provide the sufficient strength to our balance sheet, to our income statement and also to be quite prudent on the loan growth, but at the same time to have a reasonable loan growth. So the loan growth, as you can see, and Marcos just provide you the information, we were able also to gain market share in most of the products.
The net interest margin on the book as we can see in a minute continue to be quite resilient. The capital numbers continue to grow and be as strong as they can be well above our peers on also in quantity and quality of the capital. Expenses are well under control and will run you into some specific issues about expenses that we did in the fourth quarter of twenty twenty. But I would say that overall, I would say that the balance sheet continues to be as strong as it can be. The capital base continue to grow.
The expenses are under control. And the and the provisioning and and all the relief programs that are mostly done by now confirm us what we basically did on the on the second quarter of of twenty about the provisions, additional provisions that were more than enough at at that time. What we really consider when we see the second wave beating, especially Mexico City and other parts of the country, is that it will be prudent for us to to raise another number of of provisions, not because we saw that there was an immediate need to do so, but we need to manage risk. And at that point in time, we see that the risk was increasing, especially we we expect to have some layoff on the on on some of the companies in in January and February. So we anticipate that that based upon on the second on the second wave.
So moving into the into the next space, I would say that the relief programs are really behaving much better than expected. As you can see now on the numbers that we have basically done on the relief programs, basically, the initial numbers of 630,000 clients that joined the programs, ninety nine percent of those have finished the programs. Of the non paying accounts, and I'm talking about accounts, is around 11% from 10% to 12%. But what is relevant to see is what this really means compared to balances and what this really means compared to the overall size of the loan book of Vanorte. If we compare this 10% to 12% of against the balances, is 6% of the balance of the clients that joined the program.
If you transfer that into balances, it's only 6%. And if you consider this 6% compared to the overall size of the loan book is 1%. So the relief programs proved to be quite efficient to temper out the deterioration of the pandemia and also to support our clients through through the cycle. So this is mostly done, and now we are basically working with that 6% balances that we need to to to keep working with them through the collection department. I think we we are doing a pretty good job also there providing the the the right relief to our clients and and also building up the additional provisions that we need to do so.
So there were some concerns about what we needed to to raise additional provisions was basically as a as a precaution, not because of the the provision that we built on the on the second quarter was not good enough based upon what we on the information that we currently got. But I think it's it's better for us based upon that. We don't know exactly the lockdown on on some of the cities will will stay. But what we found also is what Marcos mentioned that the second lockdown is in a in a way much better managed by the by by by companies, by clients, by everything. So activity hasn't has all also obviously reduced a bit, but not as as in the first one.
So we are quite surprised about SMEs, the behavior of SMEs. Basically, the main deterioration that we have seen and it was expected and that was the way that we did build the provisions on the second quarter was related to basically credit cards that as you know is usually the product that you share with other banks and where the risk could increase easily through the cycle. So very good numbers on the relief programs, the 1% to the total loan book, 6% of balances, and and 10% to 12% on number of clients. Another issue that we have been following very closely with our investors and analysts is what's the behavior of the margin and also what's the increase of the margin on the loan book and what's the behavior of of the of the the cost of funds compared to our peers. As you can see in the graphs to the to the to the left on the on the blue lines, basically, we continue to to drop the cost of funds at a faster pace than our peers.
I think we still have room to go further down on this, and we will push down in 'twenty one to continue to reduce the cost of funds at least around 20 basis points. When you see the net interest margin of the loan portfolio has moved from 8.2% to 8% compared to a decrease in rates of close to two forty two basis points. So I think that has been a resilient portfolio based upon the fact that we have close to €300,000,000,000 in a fixed rate portfolio that has behaving quite strongly through the cycle. As you can see also on the graph to the right, we continue to manage the pricing and the yield on the portfolio quite efficiently. If you compare the decreasing the rates from 11.8 11.9, that was the peak, to 9.3, we have increased also the the yield of the portfolio compared to to the reference rate almost 206 basis points.
So I think that it that has been in a way the results where you see the name of the portfolio. This is because of the of the managing of the of the of the pricing of the portfolio and also on the fixed rate part of the book. When when you look at the name, and and and we have been separating the name of the group and the name and the net interest margin of the bank. I think the reference rate, as I mentioned you to you before, is is dropping 260 basis points. The group NIM reduced from 5.6 to 5.3 where you have the insurance, the pension company, the annuities.
But when you look at the bank's name, that is really our main concern when you see the effect on the rates and how you are really managing your pricing and the yields. The banks NIMs continue to be extremely resilient at 5.8% in the second quarter, in the third quarter and in the fourth quarter based upon what I just mentioned in the past slide. So the NIM continues to be steady. We will talk about a bit in a minute about what's our projections for the next year, and it's important to separate the NIM of the group and the NIM of the bank. Yeah.
Another good story is the the reduction in the sensitivity on the balance sheet due to the extremely work good work about the treasury, the the risk the risk people, the market the market guys, the and and everything that related to planning and and and and accounting. So we have been reducing the the reference the sensitivity from a 100 basis points to that was close to a billion at a point in time to close to half in the fourth quarter of twenty twenty. And we continue to work on that and I think we will we continue to see good potential and continue to reduce the sensitivity of the balance sheet. The expense line, and I like to be very clear about what's happened on the expense line through the year. As you know, we commit the expense line to be around 4.8 by by the by the year end.
But based upon the issues that we saw on the market and and that we would like to accelerate what we usually do every year in January. We accelerate productivity process that we have every year that usually goes around 5% of our personal expenses. We still we we started that in in in December. So we increased the the cost line by 400 and and and and 60,000,000 pesos. That is basically for the severance payments that are gonna happen through the last December and through January.
But expenses control, consider that's gonna be a key element in twenty twenty twenty one. And we also see that the personnel expenses, where you see the drop to 4.1% basically due for what I just mentioned about that increase in in anticipation of the severance payments. The remaining are related to basically all the expenses related to to the operation of of of of the bank. Not nothing nothing relevant. And we also are reducing a lot of the expenses related to physical assets that we have that also will have an impact for the next for this year in the reduction of expenses in rents and occupancy rates in many of the buildings.
The capital of the bank continues to be quite strong. You see a reduction from the third quarter to the fourth quarter of from 21.1% to 20.2%. Basically, it's the effect that we have on the extraordinary provisions. But as you see, the capital the core capital of the bank continues to grow nicely to 13.7 to 13.9. We are not leveraging the capital at all of the company at all.
So we are the least leveraged bank in the market. And compared to the regulatory ratios, we are well above those and we are not taking any waivers or temporary waivers concerning our capitals. The dividends that we have mentioned in the past for 2019 are fully funded at the group level, so that is hurting us in a way the return on equity at the group. And we expect to be able to pay the dividends of 2019 in in in the first semester of twenty twenty. We need to work with the authorities in that, and I think we have proved that we have enough capital and we continue to grow our capital base.
And if possible, we will also like to pay a portion of the profit of 20 in the same year. The payout ratio, as you know, for 2019 was 50% and the payout ratio as we will going to present to the assembly for 2020 will also will be around 50%. The liquidity ratio that has also in a point in time we have always have a concern about liquidity ratio because we know it's expensive to have high liquidity ratios, but we didn't need to rise that because of the conditions of the economy. We raised that to a 194. I honestly think it's too high.
So now that we have all the liquidity lines in place and the economy is becoming much more stable, you will see in the in the in the in the coming quarters, our reductions to normal to the liquidity ratio that is will be on the ranges from 135 to 145. That also will help our net interest margin in the coming months. Now I would like to to move into into the guidance, and I know that there has been some concern about it. And in this time of of difficult process, what's what's the the the the issue to to grant the guidance. But I think we commit to the board yesterday our our our budget for the year.
And I think since we committed to the board, now we have to commit to the market at the same at the same level. The loan growth, we expect to have a loan growth around 6% to 8%. We continue to see good growth in the in the mortgage book, in the car the car loans book. Credit cards will regain its growth from a minus 8% to it will regain its growth to 3%. We continue to see good growth in the payroll loans, not that we know exactly which companies are going to be more stable.
So that's gonna be a growth around 4%. Commercial will be around 6%, corporate around 2%, and the government book will grow 2% for an overall growth of 6% to 8%. With a good mix, with a solid growth and taking good care about the origination. The NIM contraction that we are talking here basically is is is concerning the bank. So we basically see a potential reduction of five 15 to 30 basis points.
As you know, we have been telling the market that our goal was five eighty five and then ongoing that to have around five sixty five to five seventy on the the on the net interest margin. I think it would be achievable because of all the issues that we are taking and all the actions taken into the to reduce the the cost of funds. A very good issue on the on also on the NIM is that the the the strong growth that we have in demand deposits for last year also help us to accelerate the drop in the cost of funds and to sustain our margin for for '21. Expense growth, we see 3.5 to 4.2 with inflation rate around 4%. As I mentioned to you, part of this expense growth is based upon the advances that we did in the fourth quarter for the expense lines to have a clean start for the year.
And we're also working in a very diligent plan to have shared services integrated. Some of the back office back offices that were not fully integrated into the central into the central teams that will allow us to have an additional reductions through the year. The cost of risk, we see 2.1 to 2.3 going back to normal. On the cost of risk, it's very important to note that you will see through the year ups and down on the cost of risk based upon the sequence where you see the the the the growth in the in the NPLs, and then you start applying the the charge offs to level up the the numbers. And also, you will see a reduction in the coverage ratio that right now is at record levels based upon all the additional provisions, and that number should go down again to the 135.
So please bear with us through the year that you will see ups and downs on on this number. We have number that we're talking here is a number that you should see trending through the through the cycle and by the end by the end of the year. You will see right now, like for instance, in credit cards, can see NPLs jumping around 7.8, and you will start doing the charge offs through the first quarter and turn that number down again to the 5.8, the usual number. This is quite important because when you see that our cost of risk is point 0.8 and then jumps to 1.1, then there are some concerns with some analysts that say, well, your your your cost of risk jumped 27. I don't think that's the right way to see it because what you have to compare is to the normal, and the normal is 2.2.
This is basically basically in a way tainted by all the relief programs and things like that and all of the additional provisions. So but we are talking here is going back to the normal on the cost of risk through the cycle and through the year. Tax rate will stay as as we have been, '26 to '27. The net income number, $30.33.5 to 35, billion pesos, return on equity from for the group from 15 to 16%. This is considering already the the the paying of the dividends.
This is quite important to to to to note. The the return on equity for the bank is from 18 to 19%. GDP, we are considering a a rate of growth of three to four, inflation 4%, and the reference rates stay at 4%. If we see any any drastic changes in any of the basic numbers like the reference rate or or inflation, we immediately will go to the market and and advise any any movement that we see on the on each of the guidance that we are giving to you. I think not not not many people were comfortable for us to give a guidance, but I think it's it's it's our duty to once we present to the board, to have the same information that the board to the market.
Thank you, Rafael. With this, we conclude our presentation and now we're ready for q and a. Let me quickly give you some comments on the logistics. Please raise your hand on the platform, and we will unmute unmute your audio. Questions will be automatically ordered on a first come, first served basis.
Jose Luis and myself will be calling the name of the person whose turn is next. If there are any technical difficulties, please let us know by using the chat. Thank you. We are now ready to start the Q and A session. We will start with Ernesto Gabilondo from Bank of America.
Ernesto, please go ahead. Ernesto, you have received an an an unmute.
Can you hear me now?
Perfect. Thank you, Ernesto.
Yeah. Thank you. Thank you, Thomas, and hi. Good morning, Marco, Rafa, and good morning to everyone. Thanks for your presentation and the opportunity.
My question is on asset quality. We saw the NPL ratio that went up as relief programs started to impact the ninety days past due. And in the last conference call, you were expecting the NPL ratio to deteriorate to around 2.2% in the second quarter of this year. So given the NPL deterioration of the quarter and the potential impacts of the second wave, do you continue to see the peak at those levels? Or do you think it could be higher?
And do you expect the reserve coverage ratio returning to the 135 that you mentioned in the second one? Thank you.
Thank you, Ernesto. And we feel very comfortable with our numbers now, and and and that today. I will ask Gerardo to answer.
Yeah. I'll start, and I will ask Rogerado to to go on on him. I think to be precise about if it's gonna be on the second or the third quarter, Ernesto, based upon the last events of the it will be, I I think, a lot to ask about, but to be precise, what we can really commit is that the the the NPL ratio and the will be around the numbers that were just mentioned to you, and the cost of risk will be exactly on the guidance that we are giving. I I think it will be some movements based upon this this lag that we have seen based upon the second wave. It's gonna be on the second quarter or the third quarter, but I we don't see that that will have any effect of the of the final number that we are committing committing to you.
And and and and thank you for your question because I think I need to to to go back again to this to say, look, there's there's moving parts here. I think the overall trend that we see on the NPL and on the cost of risk is exactly what we anticipated on this. We have created additional buffer on the latest provisions that we did, but we are confident to reach the numbers that I we just give to you. I don't know if it's gonna be exactly in the second quarter or on on the third quarter, but that will be the number for for the year. I don't know, Gerardo, you want to to add?
Yeah. Sure. Sure, Rafael. Hi, Ernesto. I will say that we are always acting on metrics as much as we can.
We have been following such factors as the GDP decline, the duration of the economic downturn, the peak of the unemployment rate, and so many factors among others. We strongly believe that we are committed to a long term perspective. However, some significant wild cards remain such as the reemergence of the second wave as you know and the size of the second wave, the lockdown duration, the containment strategy successes, the impact of the fiscal or monetary stimulus, and also the therapeutic, drugs and vaccine deployment advances. So if you take that into consideration, what we have tried to do with general provisions and with the level of of the PDL ratio is to do a smooth transition between expected losses and an unexpected losses. Regarding expected losses, they are they are already already budgeted for 2021.
And regarding or with respect to the unexpected losses, we know we have enough capital to encounter tail risks such a such as a black swan type of risk. So if you look take into consideration the expected losses, we see that the probability of default has increased as you all know. Exposure at default is is the same. And loss even default remains to be seen, but we expect it to to be a bit higher than than than before. But all the the loan portfolio has performed so very well as Rafa and Marcos have said regarding, for example, mortgage portfolios, autos, or car loans and payroll loans, etcetera, that we remain very confident that the PDL ratio will perform within the interval that Rafa mentioned for cost of risk, for example.
So I would tell that these rational behind the general provisions that we made on December is to provide clarity and visibility to all stockholders and stakeholders, both everyone involved in the the VANORTEZ business model. In a in a nutshell, what we're trying to do is to pro to to to be prudent, cautious, and sensible with respect to the situation we're seeing. So we are providing clarity and a market signal to the market regarding these general provisions and the future behavior of the PDL ratio and the cost of risk. So we are very confident that we are performing within the interval that Rafael was just mentioned.
And and in addition to that, Ernesto, what Harold says, looking at the numbers that of the January numbers that we see on a collection on a daily basis, what we are looking at collections for January 21 is the numbers that we are looking at the collection that we were having before the pandemic. So it's clear to us that the portfolio is leveling out exactly as we have before the pandemic. It seems that all the relief that was provided to our clients and now the level of activity that we are seeing in the market is really providing us the confidence to give you the numbers of the cost of risk. Some people said about the external provisions in December. Let me tell you that basically what that part of the provisions are is to assure you that those numbers will be achieved.
Thank you very much, Marcos, Rafa and Gerardo.
Thank you. Thanks. Thank you, Ernesto. Thank you.
Now we will take our next question from Thiago Batista from UBS. Thiago, please go ahead.
Hi, guys. Thanks for the opportunity. I have two questions. The first one about the guidance of ROE. When you look to your ROE guidance, since that you are considering a lot of payments of dividends, I know that Rafa already talked a bit about dividends in 2021, but can you comment on how what are you expecting?
So when do you believe will it be possible to pay dividends sorry, when do you believe it will be possible to resume the dividend payments? If it's only the payment of the earnings of 2019 or if you can assume that some of the 2020 earnings should also be paid? So if you can talk a little bit more about on dividends. And the second question about the 6% of loans of the credit relief program that not resume the payments. Those loans are already in the NPL ratio or are you guys renegotiating those loans?
So how you are approaching the clients that has not resumed the payments on the credit relief program?
Thiago, the first one, to be honest, we still don't know, but we are pushing and talking with the authority. We are getting closer. It seems that it's gonna be, I hope, during this first semester, but we still don't know. But it seems that we're getting closer. It seems that seemed all the the pieces the of or the we are it's gonna be soon, but we cannot be sure.
No? And the second one, please, Rafael.
Yeah. Yeah. Well, as Marco says, we we know that The US banks and some European banks are now being allowed to do a dividend pay, and also buybacks will be announced pretty soon. So I think based upon the capital numbers that we have, I think we have a good story to to go to the authorities and have those payments of dividends to to happen on the on the on the first on the first semester of '20. We still need confirmation from the authorities, as Marco says.
And and also, we will ask also to be able to pay, if not all, a portion of the of the of the of the the net income of 20 in the same year of '21. That will be our goal because we are just building up capital and that is just sitting there on that part. The other thing that you mentioned about the relief and that is quite important to notice is that that 6% that you see is being actively managed by our recovery unit. I think long before those clients start to become non current. We started to work with them really on a very preventive basis once we see the the flows on their on their accounts or the usage of the credit card.
So what we do basically on those restructuring is we build up the provisions. We put on down the provisions, we start working with them in order to be able to provide to them enough space for clients that they just need only space and and time to to regain and be back on their feet. Let me give you an example. If you have a a client that has a mortgage that has been paying for eight years and suddenly have an issue because they have a reduction on the payroll, we work with them on on them and try to to to to keep them current in a in a way. We restructure the loan.
We extend the payment loans. We put down the provisions, but we are working actively in that 6%. That 6% is not a loss. That's very important to consider. Okay?
Will also add to what Rafay is saying is that, we have several restructuring schemes, and, we also take into consideration several risk segments. And that makes a tremendous difference regarding what the solution for those loans is gonna be, like payment discounts, like interest payment elimination, interest payment reduction, interest payment deferment, term increases, and so forth. We we don't do not have one size fits all type of restructuring here even though this is retail credit. So please take that into consideration.
And and also, I I would like and this could be sound a little cocky about this, but we have by far the best collections unit in the market. We have been proving that for the last twenty two years. And, and the way these these people have anticipated and working with the risk people, with the product people in order to to provide to each client, the specific, program that they need, I think has been outstanding.
Very clear. Thank you for your time, guys.
Thank you, Thiago.
Hey. We will take our next question from Jeffrey Elliott from Autonomous. Jeffrey, please go ahead.
Maybe you're on mute.
Thank you. Thanks for telling me. Maybe just very quickly on the dividend to clear that up, and then I've got a more detailed one. Can you tell us what assumption you put into the ROE outlook? I guess the ROE is in part a function of what dividend you're going to pay
out. Rafa?
Yes. The payout ratio that we have been saying for 2019 is 50% and the payout ratio for 2020 is 50% also. That there could be a space for also an extraordinary place if it's feasible for that. That's the assumptions that we are putting here.
Got it. Thank you. And then on the productivity initiative and the charges that you took in 4Q, can you give us some more detail on what the changes that you're making there, how you're going to improve efficiency going forward by taking these charges?
Yeah. Happy to do so. Let me give you exactly what we are doing. As you know, Vanortis have a very well diversified financial group. So we have the annuities company, the insurance company, also the the the the leasing and factory.
And in a way, we have been working a lot in the in the in the at the bank level to integrate and reduce cost and cost and cost. But now we are moving also into those companies by integrating all the back offices functions to the already existing functions at the at the at the at the bank. So the all the HR are coming into one unit. All all all all the all the all the all the buys, all the basically, HR, everything security, a lot some of the issues in technology are also coming into into the central into the central units, fraud prevention, everything is coming to us as centralized units. So we are integrating everything into a shared service type of operations that I think we can move from it from the current 5% reduction in in expenses that we gained through the that 400 and and 60,000,000,000 million on the on the on December.
I think we could rise that to maybe two percentage points more based upon these shared service initiatives. Thanks
very much.
Welcome.
Thank you. We will take our next question from Jorge Curie from Morgan Stanley. Jorge, please go ahead.
Hi. Good morning, everyone. Thanks for the detailed guidance. Very helpful, especially in these volatile times. Hope everyone's doing well.
My my first question is on on the margin sensitivity. In your in your slide page slide 19, it shows that on a quarter on quarter basis, it's been increasing from four twenty eight in the second quarter to 50 five sixty one in the fourth quarter. What what explains that increase over time and and and and how will you reduce that number going forward? You know, how much of this is just hedges that expire and and and then eventually you you you get the full impact? Or just trying to understand your your comments that you can actually get that number to to come down further.
That that that's my first question. Second question is is on on on fees. I I know you already did a lot by providing guidance on so many metrics, but if I can ask, what what's your view on on fees, which was not included in the guidance? They were down last year evidently because of what happened. But, you know, how rapidly you think they can recover and at what level is sort of like a mid to high single digit reasonable number for for this year?
Thank you.
Thank you, Jorge. Vaca, please go ahead.
Yeah. Jorge, I I think it's quite important the question that you that you asked about the sensitivity. The number that you see basically has to do with valuations and with a with a movement on the on on some of the positions that we have in the in the in pesos or or dollars. So I think the number that you should be looking at is a sensitivity around 500,000,000. That number should be the there's a potential improvement on that numbers based upon the because the funding part, you know, the deposit side basically are a part of a natural hedge that we see that we have.
Since last year, we have a very strong growth in demand deposits as you saw 22% overall growth in funding was 13%, but demand deposits grew close to 22%. As you know, you provide that information to the authorities based upon how sticky your deposits are and based upon specific models that we have in different tranches that considers becoming a natural hedge. So the more we we we increase that that numbers in each of the of of of the buckets, we have an additional natural coverage on that. Also, as you mentioned, the cost of hedges has gone down quite substantially on that. And and the number that we think that we should aim based upon the size of the balance sheet and based upon the the speed of the of the potential decrease in rates is around 500,000,000.
So I think that would be a very good number to achieve. Maybe we can reduce that based upon this this funding strategy that I just mentioned to you, but I think that's that would be the the the the number for it to go. The other thing that that that that you that you ask about the fees, if you if you if you remember the the graph that Marcos shows you on the on the fee side, we see already a recovery in the fourth quarter on the fees. So the the fees that you're shooting look for this year is from 7% to 9% fee growth based upon the numbers that we have on the the on on the last quarter. So I think the most important part on the on the fourth quarter and the third quarter was that we finally recovered from the from the decrease that we have in the in the first semester, and we have a very strong recovery.
If you look on a on a on a on a quarter to quarter basis, it goes up to close to 16% growth on the fee side. So I think this digitalization of economy and the position that we have by being the the most the the number one acquirer on on digital transaction is is allowing us to keep pushing fees up. So I would say that that's that's the that's basically it. And I can give you a very also how efficient we are doing the the balance sheet, coverage with cost on the hedging cost of the balance sheet when we were talking in the in in in in in in like, for instance, in in '16, it was around 16% of the of the of the of the balance sheet was covered was hedged with cost. Now we have 2% of the balance sheet hedging with cost.
So I think what you can see, I'm I'm happy to provide you to you and to all this table, we have been able to really manage the balance sheet in a in extremely efficient way, not just both because of the cost of of hedging the balance sheet and the sensitivity, but also the margin for the balance sheet that we have in '16 was 11.2% of the margin on the balance sheet. The margin that we currently have on the balance sheet in in '20 based upon all the reduction in rates and things, this is 11.3. So I think we have been doing a a very good job in managing the balance sheet about this and the sensitivity on the balance.
K. Thanks. Thanks, Rachael, for for the detailed responses. If if I may add a follow on question. Sorry.
The your year end reference rate forecast 4%. If if if we end up at three and a half or three for for the end of the year, how much can you still manage the balance sheet so that you get maybe closer to that minus 30 basis points or or you would really have to rethink the NIM contractual to higher levels of what you have?
I think that's that's that's the the million dollar question, but I think the fact that that the the the reduction in in the funding side will also be quite aggressive. And the size of our our fixed rate portfolio, Jorge, I think we can stick to the number that are even though if we see an additional reduction in that because I think the reduction will happen in the in the second quarter of the year, in the second semester of the year. So on average, I think we will be close to the 4%.
Great. Thanks. Thanks again, Rafa. Thank you.
No. Thank thank you. Okay.
Now we will take our next question from Jason Mollin from Scotiabank. Jason, please go ahead.
Hello. Thank you. Marcus and Rafael, again, thanks for the presentation and the Q and A session. Again, on dividends, you mentioned 50% payout ratios in 2019 earnings and 50% on 2020 earnings, which is not far from our estimate in the 40% range. But in the guidance, you also mentioned you incorporated these payments for the 2021 ROE.
So I'm imagining that probably the timing of that, do you have both of those payments in the first semester or are they spread out more evenly during the year in this calculation?
No. I think, the first one, Jason, the the 19 payout, we we expect to happen on the on the first semester, as as as soon as as as the regulator allow us to happen. And the second one, the the the portion of '21 of 20 in the third maybe on the at the beginning of the fourth quarter.
That's helpful. Also on the regulatory front, how does Banorte assess the risk and impact of potential interest rate caps and fee limitations? Do you think this will be part of the discussion during the midterm elections?
Very well. No.
Okay. But we have to be very, very, I think noise will continue to be there because I think it's a very popular thing to talk about interest rates gaps and but the fact is that, there's a very simple way and a discussion about that that that really, has been turning down all these initiatives. Competition in Mexico is extremely aggressive. And I think you can see that on the mortgage book, the on the car loan book, how aggressive the the market is. You can also easily see that on the government book, how the how the the spreads have been going down on the government book.
And and on the and the same happens on the corporate and the commercial. So I I think that if they try to do anything compared to the interest rates, they will eventually disappear the mid sized banks that doesn't have a a strong funding base. So I think that would be very bad for already an extremely aggressive competition in the market. On the on the on the on the fee side, there has always been the the the saying that that Mexico charges more than other parts of the world. We have present those numbers to the authority, and those numbers are well below when you compare us to any any developing market and also on the on developed markets.
So I think that noise is quite popular. It will come a lot through the based upon the elections. But I think reality is that competition shows that interest rates are where they need to be and fees are moving down based upon the fact that the digital economy is taking over and and you are basically changing physical fees by digital fees that are already below the the the physical ones. So I honestly don't see any reason for that. And and and believe me, that will put a lot of pressure for some of the midsized banks based upon the funding on on the on the funding base of those.
Having said that, we will have and we'll continue to expect regulatory notice now because the political players try to stand out throughout their political race. But Gabriel Garcia wants to talk about this. Gabriel, go ahead, please.
Thank you, Marcos. I believe that what Marcos and Rafa mentioned, Jason, it's it's the most important part. Competition is is the key factor. However, let me let me just mention again. Remember that we have been talking about how AMLO, our president, has been sticking to what he wrote in his books, you know, in the book he wrote before the the elections, the exit, that's the title, and the other one towards a moral economy.
I mean, he has been sticking to that all the time. Even, you know, during the worst recession since 1932 last year, he sticks to a plan. You know? Fiscal austerity, social programs, the infrastructure programs he has been envisioning. So in this context, we do not expect him to really I mean, separate from what he has pointed out in his books.
And he didn't mention anything about putting any any caps on interest rates. So I think we're back again on on what we have been saying, you know, that we can hear a lot of noise, as Marcos and Rafael mentioned, from legislators, but none of these initiatives will go through as long as they are not part of Ambrose program. So I think this is one thing that could that despite the noise the noise, you could be, very comfortable with. Thank you.
Thank you very much, gentlemen.
Thank you. We will take our next question from Alonso Garcia from Credit Suisse. Alonso, please go ahead.
Good morning, and thank you for taking my question. My first question is on head quality and provisions. I mean, you have a 6% overdue ratio in your reprofiled portfolio, only 1% of total loans. And you mentioned in your report that you have in the fourth quarter, you have only used 14% over the €5,000,000,000 of original provisions that you have created. So I'm just wondering if you could be overly conservative on this front and if you think that at some point in the year, a release of provisions could be probable or if that's completely out of the question in your view?
I know it's early to probably, but just want to hear your thoughts on that point. And my second question is if you could comment on your sustainable ROE for the group and what would be the timing for converging to that level? Thank you.
Thank you, Alonso. Rafael, please, please.
Alonso, as you saw and this happens in The US, when you saw the the reports of all of the large ones in The US, that they start releasing the provisions that that they that they anticipated on that. I think the the the the way we have been working on this, and this is working with with other recovery units and with with risk, is that we are just using the provisions, extraordinary provisions for the COVID deterioration of a program. And up to today, as you say, it's it's just a portion of that. If the portfolios continue to to perform in the way they have been performing up to today, we see that maybe we did more than enough and a potential release of provisions could happen through the cycle. I don't know exactly what would be the number of when that will happen, but I think based upon what we are are looking at and based upon what we see on January on the on the collections department, I think that's a possibility.
Yes. Basically, what we did on the on the 7,000,000,000 provisions and charge offs that we anticipated is to pay upfront the cost of risk for '21 in order not to taint '21 with any any any remains of '20 and COVID. You know? That's basically but that's that's a possibility. Yes, Alonso.
That's a a possibility. The sustainable ROE for the group, and and I think we you'll soon will you'll see that that we will release our new guidance for '21 to '23 that will be coming pretty soon. And but I can anticipate you that we see the bank the bank on a on a sustainable ROE around '23, around from 19% to 20%, and I think the group should be from 17.5 to 18.5 recurrent ROE around that that that that that point in time.
Thank you very much, Robert.
Thank you, Alonso.
Now we'll take our next question from Yuri Fernandes from JPMorgan. Yuri, please go ahead.
Good morning, everyone. Thank you for for the opportunity. I also have two questions. First one, on expenses. You mentioned during the call, Hafat, that, part of the increase in personnel expenses was related to some severance packages that you should implement in December and January.
So my question is if you're anticipating major decrease in branches, employees, like what is the call for 2021? I'm pretty sure this isn't the expense guidance, but just on these more qualitative discussions. And also if you can discuss on expenses for the quarter. We saw professional fees, rates and amortization growing very quickly on a quarter over quarter in year over year basis. If you can provide some more color why, that happened, that would be interesting, as well.
And my second question is regarding fees. It's clear, the guidance for 2021, the 7% to 8% you mentioned. But for the quarter specifically, we saw, the interchange fee cost line, so, the the fees you pay growing very quickly, growing like 25% year over year. And it's not clear for me what is the line on the revenues that is offsetting those costs. I guess electronic banking services maybe is the line, that should be reflecting the the increase on your, card transactions.
But my point is, was any change on interchange fees in Mexico? Why expenses are growing slightly higher than revenues? Thank you.
Yes. Let me go to the last one because I think it's quite important. What we have in the fourth quarter is basically a very strong pickup on the car sales and the mortgage sales. And on that you have to pay fees based upon that origination process because many of those happen right at the dealers and right at the where the houses and bills things happen. So because there was a a very low activity in the in the in the second quarter, you see a a big pickup on the on the third and and a and a very important pickup on the on the fourth.
And also most of the payments that were due also, and that will move into '21, we're we're already paying 20 in advance for for that in in that part. So that's basically what it what you see that that offset on the on the origination fees based upon the basically, on the mortgage side and on the car loan side that was basically where those fee those two numbers move is basically when you when you get that that from the on the on the returns on the margin that you get on the on that part and on some of the fees that you collect from the clients on the on the mortgage side and on the on the car loan side. But the the fact is that we we never anticipate such a a large pickup on that on that part, and we also anticipate some of the payments that we see on the trends that we do usually pay in thirty days or forty five days we anticipated in in December. So that's the that's the the first one. In the the fees, if you go down into the fees, you will see that a very strong pickup in on the fees, what we call the transactional fees that are coming basically from the digital POS and and some of from the from the physical POS and from the activity on the credit and the on the on the on the debit card and also on the transactional bank banking on fees coming from remittances.
So I think we have a a strong pickup on on that part. But on the cost side, it's basically that pickup in the origination that happened at the at the end of the year and some anticipation that that we have. On the branch network, I I don't I don't think as you know, we haven't had any growth in the network in the branch network for the last three years, and we will relocate 32 branches this year, but we will close 32 branches also. So where we see a reduction in expenses is on physical assets, rents that we used to have in very I mean, the size of the occupancy rates for our buildings is going down at least 40%. So that will be a part of the expense reduction that you will see through the year.
And we are also looking at, as you know, we did a leaseback on some of our buildings on the past. We are also looking to see if we repurchase those because of the price that we see now on the market and the and the and the benefits for us based upon when we when we lease back those those those buildings. But that's basically it. I don't see that happens in the in the in the branches. So the professional fees basically has to do related to all basically origination, collections, restructuring that happened in the fourth quarter.
And remember that usually in the fourth quarter, you end up closing all of the books, and they were, because of also in the pandemia, a delay in in some of the collections and some of the of the invoice presentations that happened through the year. So I think the the fourth quarter is it was a strange quarter on that on those lines. What we can I can say you is that on the fee page base it was based upon the activity that we have on the on the on the card loans and on the mortgage and also on the on the on the credit and and and debit cards, but basically for building up the business? And we anticipate also some of those payments to the to the dealers and to the and to the brokers in the in the mortgage houses to anticipate some of the payments in general. So
So I guess, like, the bottom line here, Haf, if I may summarize, is that you anticipate a lot of expenses. It's not only about loan loss provisions, but on the fee side, on the expense side, things have been much more behaved in 2021.
Exactly right. Yeah. Yeah. I think we wanted to clean as much as we can in 2020 for 2021. Thank
you.
You're welcome.
We will take our next question from Carlos Gomez from HSBC. Carlos, please go ahead. Hello? Yes, Mario.
You can hear me. Okay. So again, so I wanted to thank you. Second, on the NPLs, on Page 53 of the press release, we can see that without the COVID support measures, the total NPLs would be 1.4 of the total loan portfolio instead of 1.1. When do these support measures expire?
And when would these two numbers converge? I realize it's a minor thing, but we wanted to be clear on it. And second, could you give us an update on the RAPI alliance? Thank you.
And what happened in the first one?
The first one, basically, I think and I I I think I'm thinking for the question, Carlos, because as as I as I told him some of your colleagues, it's difficult to see the the exact conversions of the of the of the numbers, but what you you should see is when we are trending to the normal, and the normal is the the the the 2% to 2.1, 2.2%. I think you will see that on trending to that number. So when you see that the the NPLs go to 1.8, don't think that we are double the deterioration of the portfolio. It's basically that basically, we are going back to the normal numbers that Panorte has been running for the last for the last four years. I think that's that's that's the key message from your question.
When do
I want mean, that is clear. That's I mean, actually, first, your normal should be a bit lower because now your collection period is sorry, your provisioning period is shorter, right? You did that earlier. Your write off is faster. So we I imagine that we would expect a normal NPL, which is a bit lower than in the past.
And again, no, I completely understand that that €1.4 is temporary, and it will come from the measure. We just wanted to know how long the Central Bank or the National Banking Commission has given you these allowances.
No. It doesn't have to do with the allowances from the Central Bank or the CMBB. I think it's just the dynamics of the loan that is showing, But I think you will see in the second quarter a lot of conversions to these numbers on this part. And what you mentioned about that we reduced the charge off process, we reduced that only for the SMEs, that we reduced that from the nineteen months to the nine months, but that already happened in the in the second quarter of of twenty. So now the SME will not be any bubbles building up on the balance sheet.
See, and this is quite important to remind all of you is that we are not using any relief programs from the from the regulators. We are providing a very specific program for our clients, for each of our clients. But based upon the numbers that we have, because we would like to have provisions, we need we need to put down the provisions and not in a way delay the the buildup of provisions. So we are we are basically using our own models and our own policies to build up the provisions and the and the NPLs and the and the charge offs.
Carlos, talking about the RAPI association, we are very happy. You know, they have 15,000,000 clients. Actually, they have nine nine million clients that they make at least three transactions per month. And I will ask Paco Marta, who's online, to give us more color about that. Paco, please go ahead.
Thank you, Marcos. Gladly. Thank you, Carlos. Yeah. We we are moving forward with the with the RAPI alliance.
As you may be aware, in December, we launched the waiting list for the credit card. And as as yesterday, we had a 120,000 customers looking for the credit card, and we will open that to the to we will open it to the to the market next week before the end of the month. And, and, obviously, we will process and and simultaneously these 120,000 applications. And and in parallel, we also launched, last week a program that we called RAPI CONTIGO, RAPI with you, to help the the small restaurants and the dark kitchens that are having some troubles during the pandemic within RAPI. And and it's a a loan program with 200,000 two two hundred fifty 250,000,000 pesos in loans.
And as yesterday, we had 310 restaurants or applications in the waiting list, and we will process them also during next week and the following weeks. So we are moving forward with those two products as of today, and we will be integrating more products as we move forward.
Thank you.
Thank you very much.
Thank
you. We will take our next question from Luis Jamce from Compass Investments. Luis, please go ahead.
Thank you, and hi, guys. Happy New Year. Thanks for taking my questions. I mean, most of them have been answered, but I guess to to follow-up on something you guys mentioned. The first one is, you know, on on the sustainable ROE for the group that you mentioned, perhaps, in the 18% range, that's when I compare that with what you plan to achieve this year, the 15% to 16%, it's almost 300 basis points improvement over the past three years that you're expecting.
So just wanted to understand, you know, broadly speaking, what would be the drivers for that improvement? Because based on what you've said, you know, on on the OpEx side, you seem to be pretty efficient, and you're gonna get some additional rewards this year. But going forward, whether it's coming in that you know, from from that direction, is it just because you you're expecting interest rates to normalize much higher. So if you can share with us what what what's the assumption behind there, and perhaps it's it's just a NIM improvement on that side. Is it on the fee side?
Just to get a sense of, you know, how how how should we think about the biggest drivers for for that improvement in in in the medium term.
Thank you, Luis. Rapha, please, Jorge.
Yeah. Luis, I think, your question is is key to understand the the evolution of, as you know, when we launched the 2020, we basically said that we will double the the net income that we did that in two years before, and there were specific numbers for ROE that was 20% that we achieved that in in '19 before the '20. And basically, a lot of those were related to efficiency, investing in technology and also increasing the value per client. I think the the key element that we see by pushing forward the numbers is that the value per client that we increase on this five year program that was at 2020, we more than doubled the value per client. And we we know that we have all the analytics in place on the multichannel and and the evolution of the digital plus the the linkage with with the rapid and the the new evolution that we have in on the digital with and also with our strong position that we have now in corporate and commercial, I think we we will continue to expand the value per client at a very at a very fast pace.
That's one of the main levers. The other one is as you can see this year on the guidance, revenue is growing below the expense line. So the expense line that is well controlled at 4%, but the revenue that we have basically projected for 2021 is close to 2%. So we have an unbalanced data. We have to correct that pretty quick.
And we would like to really push that forward to this year in order to regain again the rate of growth well above the expense line. So most of the businesses and the evolution of the mix on the portfolio is providing us a sustainable rise on the profitability. But also, I would like to guide you to the numbers of architecture of the group. If you see how the annuities business is behaving like a growing net income 51% for the year and with a very strong return on equity around 25%. You see insurance business around return on equity of 40% even though they have a tough year because of the pandemia and the provisions that they needed to build because to cover those those costs.
And the authority is staying around 50 per 15%. I think it's gonna be tough for the for the pension company to go above the 15%, but I think the annuities company if you look at the annuities company, it's coming close to be at the same size of the of the pension company. And that's a pretty good story because we are growing that business pretty fast, and we can increase the return on equity on that. Also, broker dealer is above the number that I just mentioned on a recurring basis. The bank is already if you look at what happened with the bank last year when we build up the provisions and we reduced the return on equity for the bank drastically for the in the in the in the in in the next month after we did the provisions.
We see a very strong pickup in the in the in the third quarter for the bank that was already close to 19%. So we don't see any issues at at the bank because we will continue to grow the client base, the profitability of the clients. Distribution are becoming much more less expensive based upon digital. So we can reach a lot of new clients now with on a on a very efficient way. But also, I would say that the bank and also the businesses that I just mentioned to you, is where we see, this evolution of the of the sustainable return on equity for the group.
The the main issue that we when you see at the group level is the the goodwill that we have been with the Afore that is a very large goodwill that is it's just sitting there. If you go to tangible, we are already we are already there. So we don't see really that we have any any any issue to really regain that that number based upon the size of the business, the quality of the business and also how fast we can really continue to increase the profitability on a client by client basis.
Thanks a lot, Rafael. That was very helpful. And let me ask you, you know, last question. It's on provisions. I know you've talked a lot about it.
But when you did the first round of additional provisions in the second quarter, the the the thought was that was enough. Right? And then we get the second wave, and you decided that it was prudent to add a little bit more. So I just wonder as we go through this year, there's still clearly uncertainties around there. Is there gonna be a third wave?
Are going are we going to have a much longer lockdown period in the center of the of the country than what you have projected there? So just wondering how much cushion right now you do have to accommodate, let's say, the lockdown stake a month longer than you expected or if GDP growth is not three to 4%, it's two and a half percent, you know, not major deviation, but a little bit here and there, would that probably require another round of additional provisions? Are you think for those small deviations from from what you're expecting, you're comfortable with what you have and you have enough cushion to to to maintain what you're seeing as a more normal cost of risk, for the year?
Rich, I think we feel comfortable with this number. And what is important about your question is what Alonso also was mentioning about if there's going to be a release of these extraordinary provisions. If things get longer, the lockdown or the second wave stays longer than it is, I think the issue is that we will consume more than anticipated the extraordinary provisions. But I don't see honestly any need to build up more provisions by now. I think the fact is how much we can release, not if the numb or if the size of the provision is is is good enough.
Great. That's very helpful. Thanks, guys.
Thank you.
Thank you. We will take our next question from Edson Morgia. Edson, please go ahead.
Hi, good morning. Did you hear me?
Yes, perfect. Yes.
You for taking my question, Marcos and Rafa. I have two of them. The first one is related to your guidance on the loan portfolio because yesterday, an event from Fitch. Fitch is expecting that consumer loan as an overall in Mexico will grow around 5%. So I was wondering if you can give us more color about if you are in in the same way as Fitch, or are you gonna be more careful about this consumer growth portfolio for for 2021?
And the second one is related that historically, not only in The United States, but in Mexico when this crisis used to occur, there is a consolidation in the industry. So I was wondering if you are expecting to buy, I don't know, for portfolio from other institution or if you are watching opportunities in the market.
I will start for the second one. Yes. We may see a consolidation in the industry the way we see in the world, and it's gonna happen in Mexico. And our duty is to watch what's going on and then go to the the board and and to all the instances and and it it makes sense to to provoke a meeting. No?
But it's not in our main driver. Only we need to to be careful and to see what's going on, and and that's our duty. Our objective now for the year 2023 is to go along and and and to give you these numbers. And talking about the first one, the the guidance of the loan portfolio, Rafa, it's 5% to us.
Yeah. I can I can, in a way, dissect the the growth that we see on the consumer? We see on the consumer, on the mortgage book, 10%, maybe maybe a little bit higher than that, 10%. We see on the car loans 7%. We see on the on the payroll loans a rate of 4%.
Credit cards also 4%, and corporate and commercial will be around 3%, and the government group will be 2%. So if you see this, we are in a way above what Fitch is mentioning in some of the of the portfolios. And what is has to be considered is when they say 5%, and let me put you an example about credit cards. We, last year, credit cards was down close to 6%. So when we say 4% growth this year, it's really a big push for the the year.
So so we see the economy moving, I would say, slowly, but in the right direction. And it's unfortunate what is going on because of all the issues con concerning the pandemia and and the plateau that the COVID plateau has reached in Mexico. But, honestly, the country is moving. It's a lot of will to keep on moving on this. And really, the main issues are happening outside the banking sector.
Because as you know, the banking sector really basically deals with formal employment. And informal employment companies have to to to try to keep as much as they can the the number of employees of things. But on the informal economy, the heat has been very, very hard. But this is really happening outside the banking system. The banking system, in a way, if you look at the numbers last year, minus 10% GDP growth, and you see a loan book for for Vanorte closed.
If you if you take away the the the government book above the 8%, it's it's quite difficult to understand. And, when you see the revenue growth and everything but the fact is that the formal sector continues to be diligent and trying to overcome the situation the best that that we can. But on the informal economy, the heat has been very hard.
Okay. Thank you. It was really helpful.
Thank you.
Now we'll take our next question from Jorge Henderson from Santander. Jorge, please go ahead.
Good morning. Thank you very much for the presentation and for the opportunity to ask questions. So I have two questions. The first, you already provided guidance on loan growth by segment, as you read right now. And you've mentioned some growth, will be coming from mortgage and auto loans and the rebound on credit card.
But what I would like like to get is a more in-depth detail on your target asset mix. A bit on the rationale on this for 2021 and also for the medium term. Like, do you target to gain or lose loan export exposure on specific segments? And the second question, you mentioned on your press release that during 2020, transactions in your mobile app increased 44% year on year. Do you see this trend accelerating accelerating even more for 2021 and on?
Could you share what yearly growth do you expect on this? Thank you.
I will start for the second one, the I will ask, again, Paco Marta to give us more color about that. Paco, please.
Thank you, Marcos. Yeah. Well, the the the mobile transactions were we have a ramp up during the year about more than 70% increase in the transactions. As as as you may be aware, we move out we created or we enabled more functions and more services in the in the mobile in the mobile app. So we we were able to to let the customers to stay safe and stay in their houses.
And we saw the transactions moving towards the digital channels. Web channels stayed the same way. Transactions all around the bank increased, and mainly the mobile ones were increasing more than more than 50%.
Thank you, Raha. Anything else, Paco?
No. Thank you.
Thank you. Raha, the the loan growth, please.
Yeah. Jorge, I think if you look at the loan growth and it has to to do with what Marco mentioned and has to do also with the size of provisioning is that the current mix that it it looks in a way weak on the consumer side because 50% of the total book is on the consumer and is only 15%. But it's it's proven at this point in time not because we would love to be to go as our goal to the to the consumer is to to go around 18% to 20%. That would be a very balanced loan book when we reach that number of the consumer. But I would say that the mortgage book will stay around the 20 as we see.
We I think we will see a bit of increase on the corporate, on the on the on the commercial, not a lot more because we are very close to our fair market share there there. That is the the 16%. But we see continuous a evolution and and reaching out to the fair market share is in the credit card that we we gained market share last year, and we have been gaining market share. But we are well below the position that BBVA has close to 30% or or or Citi around 26 to 27%. We are reaching the 11%.
So the the move that we are aiming to go when I I talk about numbers in the consumer from 18 to 20 is to keep increasing the payroll loans portfolio. There there is a portfolio that we can continue to grow easily for the coming years. Also, the credit card that we have right now is a very, very loaded car with benefits, services, digital origination, everything. So we we see an an increase in in market share there. We already gained market share last last year, but not at a at a very fast pace.
The fast pace will come from car loans, payroll loans on on on on on this part. Basically, that would be the the big pusher on the on the acceleration of that. And also on the mortgage side that is separated from the consumer, I think we will stay at around the 21% of the of the overall mix. But the the key fact is that the payroll loans and the car loans, and the credit card will continue to push us up to the 18 to 20% that is our desired number on on the consumer.
Thank you very much.
Welcome.
Thank you. We will take our next question from Gil Garcia from Barclays. Gil, please go ahead.
Hi. Good morning. Thank you
for the call. Do you can you give us any, guidance on your expectations for the insurance technical, results for the year, which have been rather volatile over the past quarters? Thank you.
Thank you. I I will ask Fernando Solis to answer about that. Fernando, please go ahead.
Fernando, please go ahead. I think he's had some technical difficulties. Think we can Okay.
I I think I can. You. Yes. Yes. Martin.
Okay. Thank you. Yes. What I was try what what are you what I what we have been seeing in the last past year, the change in the results as you mentioned were due to technical results and mainly due to the loss ratio. Actually what happened with the book is that we experienced due to COVID after taxes an increase in losses due to COVID in life of and in medical expenses around 1,004 and 433,000,000 pesos.
That was a very important hit. And also, it was partially compensated in the in the loss ratio in in car insurance. There we have benefit of $635,000,000 pesos. If you take those things into account plus the fact that we also have non recurrent income due to the fact that we did not pay dividends either, actually the book would have been grow in terms of net income 50% from 2019 to 2020. So actually those are extraordinary effects that COVID put on this book.
That's those are the main explanation. Otherwise, due to normal terms, if you take out these extraordinary effects, we would have experienced a 15 increase in net in net income. Now what will happen next year or this year, sorry. Of course this year we are also expecting COVID will prevail and actually we were thinking that perhaps the range will be that. As you know what will happen will depend on how fast the vaccination takes place in the Mexican population.
We do not see that we will have enough people being vaccinated, you know, seventy percent, sixty five percent, seventy percent from the first three quarters or perhaps not for the full year. So this year in terms of COVID, we believe that the impact will be even higher. Of course, it is something that hopefully will eventually pass and we will recover our rate of growth in net earnings after that. So that's explained mainly due to this fact.
Thank you.
Thank you. Just a quick reminder that we have time for three more questions, please, in the interest of time. And the next question will come from Tito Labarta from Goldman Sachs. Go ahead, Tito.
Hi. Good morning, everyone. Thanks for taking my question. Just a follow-up on your margin and perhaps related to the last question also on the impact that the insurance has on the margin. But on the guidance that you gave, the 15 to 30 basis point reduction, is that at the bank level?
Because I just want to understand at the group level, right? I mean margin fell like 30 basis points and has been sort of steadily falling on a quarterly basis. So just again, I guess, at the group level, do you think that margin has bottomed now? Because it falls another 30 basis points, the year over year reduction would be a lot greater than the 15 to 30 basis points guidance you gave. So just want to be able to reconcile the bank margin and the group margin and how that should evolve, particularly, I guess, on a quarterly basis to get to that full year guidance?
Thank you.
Thank you, Tito. Perhaps, as well.
No. I think, Tito, thanks for the question. The number that we have mentioned is related to the bank. I think the the group, as
you
mentioned, has a bottom up already. I think that that number has is gonna be be be there on on that part. So so it's basically the the bank.
Thank you, Tito. We'll take our next question from Victor Galiano from Barclays. Victor, please go ahead.
Thank you very much for the call and the opportunity to ask questions. Just a quick one for me On the margin again, looking at that Slide 17, really, you've done a tremendous job on your cost of funds versus your main peers, but it looks like that's now largely done. Do you think there's any risk, I mean, glass half full for 2021, certainly the second half of it, as the economy recovers and as demand grows that you will see your main competitors beginning to compete more aggressively for deposits and core funding. Where do you see the risks aside from aside from, obviously, your hedging to this, to your margin from the liabilities side?
Thank you, Victor. Yeah.
I think why do we still have room for this? The way we have been evolving on the on the funding side is that, first, we needed to take away all the the required market funding that we needed in order to fund the Interaciones assets that that that was done in the in the third quarter of of last year. So as as you as you say, that was a big portion of that. But still, we have for specific accounts that are related to to to two things because we needed to build up liquidity fast. We also pay in some for some accounts close to reference rate or below reference rate, well below market market funding, but but we needed that to to immediately increase the liquidity of that fund.
That liquidity is not needed anymore, so that will be also fact a of how can we also continue to reduce the cost of funds. And also, as you saw last year, our growth on the on the on on time deposits was slower than the market because we let go some of those funds because our demand deposits were growing 22%. We don't expect 22% growth this year on funding. We expect 11% growth, but 7% we expect in demand deposits without cost on that part. And when you see the compression on the on the reference rate, that is also taking away some of the big numbers that were in the past when the rates were around 7% that everybody was looking for, the seven seven five.
When you are dealing in a in a world that reference rate is getting close to 4%, 3.5, I think sensitivity goes also goes down, and it's more related to efficiency, ease of use, a location when you can get and and and and and get the benefit of funding. Also, payrolls, we continue to grow payrolls pretty fast, and that's a very important source of funding at a very low cost. Even though that was, as you say, a big push on the funding side, we still see room for going down on the cost of funds around 20 basis points more. That's our goal for the year.
Great. Thank you very much.
And our last question will come from Brian Flores from Citi. Go ahead, Brian.
Hi. Thank you for the opportunity to ask questions. Rafael, you mentioned that you saw positive surprises in the performance of the SME portfolio. Can you elaborate on why do you think this is happening? And how do you see this going forward?
And the second is a quick follow-up on the guidance you provided for the growth in segments. I only caught up the last two two portions, and I don't know if you could repeat this. Thank you.
Yeah. The why we are, on the SME? The first issue is that, you know, it's 4.7% of the total book. The second issue is that 47% of those are under nothing guarantees. And the third most important one is that of the 420,000 SME clients, twenty nine twenty nine thousand of those have a loan with us.
Of those, we have contact every single one of those. We know exactly what's the position of the company, if they close, if they are in a in a slow movement stage, If we they are regaining its growth. They expect to regain its growth, and we have talked to every single one of them and know the situation. We have visit them on a one to one basis. And you see on the SME what is the key element of the SME, the entrepreneurial vision of these people and the resilience of these people.
Basically, what they need most of them is just a little more time to go back on their feet, but they are more than willing to keep on on pushing forward. So that's where Gerardo was mentioning about going on a one to one basis and create on a specific program for for them. So we we we continue to see, obviously, 12% of the SME that that reached the the the relief programs are not go are are not paying because they are even close, so they are back on that. But that that was expected on that. We were expected a much important number on that.
So 12% is is is for us good enough based upon the the size of the of the crisis. So I think the resilience of the entrepreneurs, the the the the support that the bank is providing them, the nothing guarantees, the size of the SME portfolio, And and and and we are not in SMEs related to to to tourism or or things like that or restaurants. Our our exposure there is extremely low on that part. It's basically SMEs that are linked to either supply chains or other type of of business. But I'm I'm very positively surprised about the behavior of the SME.
And on the guidance on the I will repeat on the on the the mortgage book, 10%, the car loans, 7%, the the payroll loans, four percent, the same that the credit card on that. The the corporate and commercial around 3% and government book around 2%. You can get a range on that of one plus minus one.
That is perfect. Thank you.
Welcome.
Thank you very much for your interest in Manortek. With this, we will conclude our presentation. Thank you.
Thank you very much.