Good day, and welcome to the Banorte Third Quarter twenty twenty Earnings Call. Please note this event is being recorded. I would now like to turn the conference over to Marcos Ramirez, CEO. Please go ahead.
Good morning. I'm Tomato Sano, Head of Investor Relations, Financial Intelligence and M
and A. I am happy
to meet you again. Welcome to Grupo Financiros Va Norte's third quarter earnings call. Today's presentation may include forward looking statements subject to risks and uncertainties, which may cause actual results to differ materially. We ask you to take this into consideration. Our CEO, Marco Ramirez, will provide an update on the effects of the partial reactivation of the Mexican economy, the outcomes of the initial set of customers that came out of the relief programs as well as the main financial performance results.
Later on, Rafael Arana, our COO, will provide further detail on our financial and operating results and will share some additional color on our expectations for the rest of 2020. Finally, we will conclude our call with a Q and A session. I would like to take the opportunity to encourage you to participate in a very short survey aimed to get your feedback in order to improve our presentation and the information we provide. For us, during times like this, being closer to our investors and analysts is key. Thank you.
Marcos, please go ahead.
Thank you, Thomas. Good morning, everyone. Thank you for your interest in Vanorte and for joining our call. After a volatile and uncertain first half of the year, the third quarter of twenty twenty brought some positive news for our country and consequently for the bank. After reaching its peak in late June, the number of new COVID-nineteen cases and casualties has been slowly declining and economic activity has partially resumed.
The first industries to reactivate were those linked to manufacturing for the supply chain with The U. S. And Canada as well as mining and construction. The tourism sector, which was broadly hit by a full shutdown for several months, has also seen a gradual recovery with occupancy rates reaching close to 40% in important touristic destinations such as Los Cabos and Cancun. The entertainment industry has seen a lower and more scattered recovery.
Some restaurants and shopping malls have reopened, some with certain capacity restrictions and reduced hours of operation. Whereas some other sectors like theaters, sports arenas and other large venues still remain closed. Schools and universities still operate remotely. Home office is still widely adopted by most medium and large corporates. Depending on the number of new cases and casualties, the states in Mexico have red, orange or green flags that dictate the degree of reactivation that is allowed for different sectors.
The largest cities, including Mexico City, are still partially restricted with orange flags until further notice. Government support has been limited to certain programs provided by the Minister of Finance and the CNBB that facilitate loan restructuring for the banking sector, specifically for individuals and SMEs. After a diligent analysis of these new facilities and their potential benefit for our clients and for the bank, we are more inclined towards not adopting them as we consider that our existing restructuring mechanism provide better clarity of the real condition of our balance sheet. The final decision will be tightly communicated to you and to the banking regulator. In an effort to contribute to the economy reactivation, the government recently announced an infrastructure program consisting in 32 projects in different sectors for a total amount of Ps.
$260,000,000,000, equivalent to 1.2% of the country's GDP. I would like to stress that Banorte is ready to participate in these projects and we will leverage on our expertise in infrastructure lending. The economic implications of over six months of the COVID-nineteen crisis still points towards a minus 9% GDP contraction in Mexico. In terms of inflation, we still expect to end the year close to 4%, although there has been some inflationary pressure that may still leave the door open for one more cut to the reference rate in November. Later on, if you want, Gabriel Casillas will provide further detail.
Switching gears, I would like to give you an overview of the most recent developments and results for the bank. The bank has maintained seamless operation with the majority of our branches and ATM network fully available for all our customers. We continue to enforce strict sanitary measures to ensure our personnel and customers' safety. Furthermore, over 70% of our corporate office personnel is still working from home until we have better conditions for a partial return to our offices. As you know, back in March, Banorte was the first bank to announce a relief program for our consumer and SME customers.
And we have been working thoroughly to ensure that they resume their payments on time. I'm very happy to tell you that the outcome of these efforts has been better than expected. More than 60% of those who enrolled into the program have already ended their grace period, and over ninety one percent of them have resumed their payment schedule. As I mentioned, this is much better than our initial expectations. Later on, Rafael de Arana will walk you through the details.
On the digital side, as you can see on Slide number three, we strive to enhance the features and functionality of our digital channels. As customers continue to adopt our mobile and web channels, we have seen significant improvements in customer satisfaction as measured by our NPS in Vanortemobi and our web services. On Slide number four, after a typical second quarter in terms of provisions, profitability for the third quarter shows a stronger result with net income totaling MXN 8,900,000,000.0, return on equity for the bank at 21.1% and for the group, return on equity stood at 16.9, mainly impact by higher capital accumulation at the group level as we have not yet distributed the 2019 dividend. Rafael will revisit this in a few minutes. Moving to Slide number five, net interest income year to date had a robust 5% growth compared to that in 2019, driven by better spreads in our corporate and government books and supported by diligent efforts to improve our cost of funds.
Moreover, trading income along with other operating income returned to a normal levels in the third quarter. This on Slide number six please, recovered together with that unfolding economic reactivation. There was an increase in core banking fees during the quarter and PO transactions continued their upward trend customers continue shifting their spending patterns toward online merchants and more frequent use of our mobile features. As you can see on Slide number seven, loan growth was driven by good dynamics in mortgages and consumer loans. Despite some prepayments in our corporate book, we have seen increased loan demand in this sector, while government loans recovered compared to 2019.
So portfolio quality remains very positive, partially helped by the relief programs in place during the quarter. Taking a deeper dive into our government portfolio, Slide number eight, notice that VaNorte has had a higher share of the bidding processes awarded during the year. Assets now have improved more than 50 basis points compared to those in 2019. We will still privilege profitability over volume and these market conditions now are favorable for growth in this sector. Our subsidiaries in the slide number nine provided a solid contribution to the group's accumulated results.
The bank's ROE year to date totaled 18.3%. And excluding the effect of additional provisions in the previous quarter, it totaled 22%. The insurance business showed 6% increase in net income compared to last year. Moreover, our annuities business already incorporates the most recent portfolio acquisition from SURA, resulting in a 50% increase pension allocations during the year. Additionally, our leasing business merged with Solida and now operates under the name of Arendador de Factor Panorte.
There are still challenges ahead. However, we now have more visibility of the evolution of our portfolios and we remain very confident that our franchise will keep strong for the rest of the 2020. Now moving to Slide number 10, I will address a subject in which we have been heavily involved for many years, but that we have not mentioned explicitly in our conference calls, our ESG strategy. As you can see, we have been devoted to developing ESG since 02/2009, joining the global reporting initiative, later on adopting the Equator Principles, signing the Principles for Responsible Investment And more recently, last year, we were one of the 28 founding banks that signed the principles for responsible banking. A quick overview on every aspect of our ESG initiatives.
On the E side, environmental. We have been quite active implementing policies to help our planet cope with climate change such as reducing waste and increasing the use of electricity from renewable sources to mention a few. On the F side, social, the improvement of our human capital has been key in the past few years as well as our active participation in financial education and inclusion along with our long standing community engagement programs. On the G, governance arena, we have continued improving our Board of Directors selection processes, setting goals
for a higher share of
independent Board members as well as developing our risk management systems in a more holistic way. We have progressed significantly in terms of sustainable finance. From now on, we will release updated information on several metrics on a quarterly basis, such as the number of analyzed projects under the Equator Principles and the percentage of banking loans that have been analyzed under the ESG perspective. We have included some additional slides regarding this topic and Gabriel Casillas may also provide more detail during our Q and A session. With this, I conclude my remarks.
Now Rafa will walk you through the details of our relief programs, provide additional color on our capital position and our expectation for the remainder of the year.
Rafa, please go ahead. Thank you, Marcos, and thank you everyone for attending the call. I would like to go on and continue the explanations that Marcos just mentioned as a framework for how the bank is doing and how we are operating. We know there's concerns about that is the number the size of the provisions that we have been doing that we did in the second quarter are going to be good enough for the remaining of year. And I would say that that's a question that still has to be resolved based upon what's the evolution of the day to day operation of the collection and touching with our clients.
As you can see on the slide that we are presenting to you and this is based upon what we are doing all the provisioning and the highlights of our recovery and relief programs. As you can see now, to September, sixty four percent of the individuals that got into the or SMEs that got into the relief programs now are out of the program. Our original expectations were that 22 of those were not gonna be able to pay for the when they come back to the to out of the relief programs. The real numbers now we are looking is nine percent. It's a better number that we expected, anticipated.
Based upon the provisionings that we did on the second quarter was mainly based upon the 2022 number, not on the 9% number. Is that this number is going to hold? It's still we have to see that. Think we have a we will have a much more clarity by the at the December, at the November when most of the programs will come to an end. There's also have been some questions about that if the mix that we will have on the third wave because this is basically the first and the second wave, the third wave is going to be more risky than the first and the second.
And the latest number that we just review are showing us that are basically the same. We anticipated a more risky wave on the third one, but now based upon the information that we have, we see that it's basically behaving and performing like the first and the second one. So the numbers up to today, better than expected, a long way to go. And rest assured that we will do whatever we need to do in order to provide enough relief on the provisioning side or anything that needs to be done. At this point in time, these are the numbers that are showing us that what we expected and did on the second quarter is good enough.
Important piece concerning some questions from analysts and investors is what's the behavior on the NIM and what's the sustainable number for the net interest margin. And there's a graph that can show you because when you look at the numbers on the margin shows better than expected performance and there's a specific reason for that. Can you hear me now?
Yes, we can hear you. Please proceed.
Okay. So as you can see on the slide, it's basically showing the main component of why the margin has been so resilient. The first one to the left on the blue lines on the graph, what it shows to you is the cost of funds have been decreasing so sustainable through the last year and this year based upon that we have now almost no external funding that was in a point in time. Sorry, I think we missed the line, so I will restart the NIM slide. The slide basically shows why the NIM has been so resilient.
As I mentioned to you, the blue line showed the cost of funds decreased against the competition and against the market. We have been quite efficient in decreasing the cost of funds. We have got rid of some expensive funding that we needed in order to balance out the acquisition of Interxiones. And the NIM of the loan portfolio continues to move upwards from eight to 8.1. Okay?
Yes. So we were reviewing I don't know where we lost the line. We were reviewing the Slide 13 where we were showing the resilience of the NIM and why the yield on the portfolio and what the cost of funds been improving substantially for us and against our peers. When you go back detailing to the net interest margin, basically, what you can see is that the net interest margins continues to hold at the bank level even though the reference rate has been going down to a 132 basis points. Explain exactly what we mentioned in the in the in the the the previous slide that has to do with the cost of funds, a much better improvement on the yield of the portfolio against the TI under a very challenging environment of declining interest rates.
You can see on the on the graph to the right that the NIM continues to be steady, and there have been questions about what we can consider that it's a a sustainable margin on the going forward. And we have been looking at numbers of 5.5 to 5.6 for the bank. Okay? If if we continue to the next slide, there's also always the the concern about what's the evolution of the of and the sensitivity on the balance sheet that has been reduced substantially to in the past two years. In the past, 400 basis points was close to a a billion pesos.
Now we have a, with a much larger balance sheet, $04,000,000 pesos of sensitivity. This has to do with a lot of how we have been managing the hedging process on the balance sheet. And there's a very important number that we can provide in this. In September of twenty seventeen, when we have a fixed rate portfolio of $220,000,000,000. The the the margin on the balance sheet was around 9.9 with the but with very high interest rates.
Now if we move that to September the twenty of of of of this year, The fixed rate portfolio is close to $3.03 300,000,000,000 pesos, but the most important piece is the margin, the accumulated margin on the balance sheet has grown from 9.9 to 11.1. This has to do with this hedging strategy that we have been implementing in the past two years. If we move now to the next slide, this also when you see a decrease in the in the in the base of of the revenue, basically, you have to look at your how how your cost evolution is is is moving. In this graph, what we are are showing to you is that we think we will end the the year around in the in the range of four to 4.8%. We will maybe front load some expenses at the end of the year because, as you know, we usually at beginning the of the year, we do productivity analysis concerning the which which people is is is non nonconforming to the productivity that we expect.
So we basically front we will frontload some of these provisions for the end of the year. And also, the decline on the revenue side is also putting some pressure on the amortization projects that we had in the past. Nothing to worry about, but it will return to revenue growth and match those expenses again. But as you can see, personal expenses are well under control, 1% growth. And the remaining is what is giving us the range around the 4% to 4.8%, okay?
This put us on an efficiency ratio at the end of the year, close to 40% for for for the group. If we move to the next slide, it will show you the numbers that are also a lot of questions coming from from from the investors and analysts what's going on with the capital ratio and the dividend policy. As you can see, the capital ratio continues to increase substantially from quarter to quarter, close to 50 basis points from 13.2% to 13.7% core Tier one. And what is important to mention here is that this 13.7% is without the dividend that is already being warehoused at at the group level. So the 13.7 is without the 16,000,000,000 pesos of dividend that is now warehoused at the at at at the group.
So we continue to see a continuous evolution of the of the capital, and it has to do with the architecture of the group where we have very efficient subsidiaries on our capital numbers and on our fee based numbers that allows the bank mostly to be on its own to build up its its its capital. So the architecture of the group, it's also healthy enough to keep a continuous evolution on the capital ratio. Concerning the dividend, as you know, there was a recommendation by the authorities not to pay the dividends or or to do buybacks. We are we present that to the board and the board to the assembly, and they agreed to to warehouse the dividend, not to cancel the dividend in any way, but to to postpone the dividend in in in that part. So that's that's what we are doing.
We are talking with authorities in order to to to present the the evolution and the numbers of the on liquidity basis, on a capital basis, to show that VaNorte has a a very strong balance sheet to support the evolution of the pandemia and still comply with the the promises that we have
with our with our investors.
Next one, please. On liquidity, there also has been some some questions about liquidity. As you know, in the past, our liquidity ratio was always around a 125%. We were sometimes in the low end of the of of our peers, but it has to do with efficiency because, obviously, liquidity has cost. At this point in time, we decided to raise liquidity.
As you know, we issue an 81 that is also helping us to raise the liquidity. Non liquidity is sitting at 194. I think it's a record level on this, but I think it goes with the times. I think we will feel much more efficient around a 130, but at this point in time, I think it's it's worth to have additional liquidity ready for us. And this also has been some some questions concerning of the facility that has been quite useful from the from the the from the the Bank of Mexico.
But what's the what's the usage of those lines? As you can see on the on the graph that we are showing you, there has been almost no usage of those lines. It's good for us to have that that facility, good facilities, but at this point in time, there has been almost no usage of that that. So the bank is a sustained liquidity on its own strength and base, and but we have an additional possibilities on the on on or with the Central Bank that we can use if we need to do so. At this point in time, we have not been in a need to to use those lines.
Okay? This also always the questions about what's going on, what's gonna be the the end of the year, what's gone there, the potential guidance that you can give us on. And I I would say that it's it's difficult for us to give you a guidance concerning the net income numbers and also numbers concerning the cost of risk because our numbers that move on a day to day basis, what we show you at the beginning that the 9% is much better than and we are showing a very strong numbers, as Marco mentioned, in NPLs, point eight, cost of risk, record levels, coverage ratio up to really very high numbers. But we know this is a work in progress, so we are not taking this as as numbers as as the running rate. We will go back to the usual numbers that we have, I think, at the end of the sec sec of of twenty one.
We will see continued deterioration of our portfolio, I think, in the fourth quarter to go back in the numbers that we used to have before and peak, as I'm sure Gerardo will add into this in a in a bit in the in the second and third quarter of twenty one. But this is considering on our models and is considering on the on the provisions that that we did. But, if we need to go and and and and we see that deterioration goes beyond what we expect, Panorta has the balance sheet, the capital, the strength, the income to to provide additional provisions is needed. Obviously, there's always a concern why you don't anticipate that because we think that based upon the information that we have, we are doing what we need to do, and we have surplus of the capital that we have on the liquidity and the balance sheet and the and the and the and the revenue stream to support whatever comes on the on on on on that page. But we need to have the right information and not anticipate or not be on the right track concerning the provisions.
So expense control will continue to grow. Loan loan growth, I think, will be around 6% to 8%. Expense growth, as we mentioned to you, 4% to 4.8%. Tax rate, a little below the usual rate because of the additional provisions that we did on the second quarter. And on an estimate of GDP of nine to 11, minus nine to 11, inflation 4% and potential reference rate going back to four going down to 44%.
There has also been concern why we have been able to grow the loan book in a in a such a severe contraction of that. On the consumer, we continue to see good growth on the mortgage, as Marcos mentioned. Car loans are starting to wake up again to numbers around 5% to 6%. Nurses will be around 10%. Credit cards will be flat.
But a very important number to mention that Marcos mentioned is that the minus 13% of the government book now is is plus positive 3% based upon much better spreads as as Marcus mentioned. And also, something that is relevant, and I think, it will show in the next slide, is the concern that what are the exposure to some of the sectors that have been heavily hit by the by the pandemic. As you can see, that's the that's the exposure that we have with Pemex, 3.6% of the total group. Supply is 1.6%. CFE, 2.1%.
And that's the numbers. Supply is 4.4%. Housing, 1%. Commercial, 1.8. Others, 1.9.
Almost 2%. Tourist, 4.3. And restaurants, point 2%. And airports, almost nothing on one. And this point in time, I would like to to to to also give you, because there have been some a a lot of questions concerning why corporate is growing so much and why commercial is growing so strongly on that and what's the exposure.
So I will ask Rene Pimentel, our head of corporate, to give us color of exactly what's the what's on on the ground with the company, talking to them on on on exposures and what are the the the philosophy that that Vannorte has been holding on the in in the relationship with this with this with this exposure that we have. So, Rene, if we if you can give me some color on this, please. Sure, Rafael. Thank you very much for the call. Basically, it's been it's been a challenging year for corporates, as you may imagine.
Clients have been facing liquidity pressures due to the closing of the economy. Now having said this, as Rafa mentioned, we've managed to grow in the portfolio 18% year on year, and it's been accompanied by a growth in deposits of around 21% year on year with these same clients. So that's been a very positive development for the portfolio this year. Now this has been the result of several factors. I would say, first, a strong pipeline that we carried over since 2019.
We managed execute this pipeline in the first half of the year. But second, it also has to do with clients drawing their available credit facilities. As the pandemic began in March, clients have been looking to strengthen their balance sheets, accumulate as much liquidity as possible due to the uncertainty. And third, I would say, is the devaluation of the peso during the period. Keep in mind that close to 25% of the loan book corporate is in U.
S. Dollars. So this has contributed to to the growth that we're seeing this year. I will I would also add that in terms of the quality of the portfolio, it remains very good. NPLs, as you've seen, remain at 0.3%.
You may recall that in June, we provisioned the nonperforming loans that we had on the balance sheet. But these loans have become nonperforming really in 2018 and 02/2019, so we've had no new cases of of nonperforming loans this year. Now the way we've achieved this is we've continued to work very closely with our clients. We've implemented tailor made solutions to address the pressures and liquidity that they that they have faced. As Rafael just mentioned, the portfolio is pretty well diversified in terms of clients, in terms of sectors and regions.
And we're actually beginning to see some signs of recovery in some sectors like manufacturing, industrial real estate, construction, some parts of infrastructure. But we're still seeing some pressure in hotels, tourism in general, commercial real estate, some some retailers, and energy are the are the sectors that are being more hit. We feel very comfortable with the type of clients we serve. Many of them are leaders in their own sectors. They're very well diversified themselves.
And most likely, many of these will be looking for consolidation opportunities in the in the medium term, and we will be there to help them out. Going forward, we will be we could we will continue to be very selective as as as we do not have a lot of certainty of what's gonna happen. We will favor the quality of the portfolio overgrowth. Our clients are mostly holding up on expansion projects and therefore on new financing decisions. So this is not to say that we're out of the woods.
It's important to say that if we face a new and sustained close down of the economy, we could see some added pressure in in this portfolio. Now having said this, we will continue to be very close to these clients. We are in a very good position with a very strong balance sheet to help them navigate through waters and whatever it was. Thank you, Graham. Thank you, Rene.
So now we open for Q and A.
And our first question today will come from Ernesto Gabilondo with Bank of America. Please go ahead.
Hi, good morning, Marco Raza, and good morning to all your team. Congratulations on your results and thank you for your presentation. My question will be on deferred loans. As you mentioned in your presentation, 64% of your consumer and SMEs clients resume payments in September and only 9% are delayed, which compares positively with the 22% that you were expecting before. So my question is for the remaining portfolio that will resume payments during the next months.
I believe it's a riskier portfolio. So what will be your expectations for this portfolio? I don't know if delays could be around 10% to 15%. And then my second question is on what would you need to see to create more preventive provisions? Will this be related to the GDP growth or the unemployment rate or the final disavow on the deferred portfolio?
Thank you.
Thank you very much, Ernesto. Doctor. Geroz Alacer is going to help us with this. Go ahead please, Gerardo.
Sure, Marcos. Hi, everyone. I would like to say the following regarding asset quality forecast. That's the question, Ernesto, that you're asking. Banorte has implemented a set of different measures to preserve the loan portfolio quality.
Such strategies have been deferral on support programs for clients, most restrictive loan origination standards in retail portfolios and a case by case analysis in our commercial and corporate clients. Within the retail portfolio, clients for whom the support programs have expired are showing a better behavior than we should expect it, as Marcos was saying, and also Rafa. Despite all the strategy saying to preserve the loan portfolio quality, it will still be affected from then on by the COVID-nineteen crisis. We projected asset quality indicators under certain scenarios taking into account the strength of our client, our credit process, collaterals and portfolio mix. We estimate the worst part of the crisis will be reflected in the second quarter of twenty twenty one and the third quarter of twenty twenty one.
Currently, past due loan ratio, as you have seen, is 0.8% at the close of September.
And we
expect that indicator at the close of So at the close of this year, for the fourth quarter twenty twenty, we expect the PDL ratio to be 1.6%, double what we have on September. We're not expecting any better situation, just 1.6% in the fourth quarter of twenty twenty. And for the second quarter of twenty twenty one, we expect 2.2 PVL ratio. So the effect of the crisis and asset quality is gonna to is gonna to deteriorate from from then on. So you you will see that we we are taking a a more holistic approach to this forecast, and we have been reviewing daily and and weekly our transition matrices within the the the retail portfolio.
And also, we we are reviewing in a case by case basis the the wholesale loan portfolio. So, Ernesto, I don't know
if if that's enough or you you wanna
to follow on on your first question.
Yes. No, I think it's helpful to understand the level of the NPL ratio for next year. But I would like to know what will be your expectations for the remaining portfolio that will be resuming payments during October and November? Because the first wave was with a delay of only nine percent of your total loans. And now I would like to understand if it's a riskier portfolio and if the delays could be higher than the previous one.
Yeah. I I will I will tell you that we we we're expecting more risk, obviously, because unemployment unemployment numbers, GDP numbers are rebounding, but not not to take the the the previous level of the the the COVID crisis that that that we're seeing. If you would like to get into details, we can share on a one on one basis our transition matrices with conditionals and marginal default probabilities and also our vintage analysis, if you will like, you will see that our transition matrices are well behaved and are expecting some monotonicity requirements. But in all all in all, our reality based. You will see, for example, three things.
The worst rating classes present higher default probabilities. Second, transition probability decrease with increasing the number of notches from the initial rating class. And third, probability of migrating towards a certain rating is higher for the newest classes. So we we are closing that assessment on a biweekly basis, and we publish results and report results to our CEO on a monthly basis. So we are following these developments very closely, and we are doing the same thing in our wholesale loan portfolio, those of commercial and also corporate loans.
And Ernesto, just to complement what Gerardo mentioned, that we rank the on high risk, low risk, medium risk and no risk. And what we have been seeing is that this, as Ricardo mentioned, a lot of stability on this cluster. So we are there's no migration to high risk and and less migration to to a better risk. So it's quite stable, better a lot better than than And even the new ones that the last the latest wave that we expected that we were expecting highest risk, We still see a much better behavior than expected on that. And remember, we will update the market on a monthly basis of any substantial movement on this.
We will not wait for the calls if we see a substantial move in either way, on a better way or on a worst case scenario. So I think now better than expected, we think November will come to reasonable news and a a much clearer view we will have at the at the December on on on this part. And and up to now, we can we can differentiate the two two clusters very clearly because those that enrolled in the in in the credit deferral program are behaving worse than than those that didn't enroll. But those that well, we've seen the the the forbearance program are not, complying with the higher default probability that we expected. That's all in all, I think, the synthesis of of what we're seeing.
Yeah.
Yeah. Let let let's let's let me just give you on a on a very specific of exactly what Ricardo was mentioned. I think it gives a very clear picture of that. Credit card, if you look at the credit card NPL ratio, that usually the bank is rolling at six to 6.2. That's the steady state of of the credit card.
Now you're looking at numbers of 3.1. We expect those numbers to jump to 8.2 in the second quarter of twenty one and then go back at the usual 5.8% in the third and fourth quarter of twenty twenty one. Why? Because charge offs will start to happen in the second month of the year of the 2021. So I think we have enough room, enough buffers to accommodate the the the deterioration that is coming based upon all the contention rates that happened during the the relief programs and and and the excess reserves that we provide for the book.
Next, please.
Our next question will come from Thiago Batista with UBS. Please go ahead.
Yes, guys. Thanks for the opportunity. I have two questions. The first one, regarding the bank's capital position, the core capital of the bank ended the Q at 14% or close to that. If this is allowed by regulator, can Bannot announced a buyback or a maturity payment in 2021 if this is approved by regulators?
And how can we believe about the bank's capital position in this new normal? How is the level of capital that the bank probably will have in coming years? This is the first one. And the second is about the branch network. With clients becoming more digital, is it possible to see a material reduction in the banks in the branch in the number of branch of minority in coming years?
Thank you, Thiago. I will start for the branch network. We don't expect a material reduction in the few years. We expect a shuffle, going to the right places and maybe with smaller branches. We still don't know.
But no, it is not the idea. Mexico needs a lot of the branches yet, we need to go to a lot of places. So the idea is to move to good places and remain pretty the same. And I will
ask Rasha to talk about the capital position. Yes. Thank you, Thiago. As you know, we have always been very clear to the market that our ideal position on the core Tier one is from 12% to 12.5%. As you know, when we acquire Interxion, that number dropped to 11.4 and rebound again in after six months to 12.2.
So the number that we would like to have on a constant basis is from 12 to 12.5. This range, based upon is when we pay the dividend to the group or or not. Right now, we are at a high at a high number of of on this. We are building up the the the the dividend for the for for 20 and and to be eventually moved to the to to the group. But the number is 12 to 12.5.
That that that that's that's that's the number.
Okay. Very clear. Thanks for the answer.
Thank you.
And our next question will come from Jorge Corre with Morgan Stanley. Please go ahead.
Hi. Good morning, everyone. I have
two questions, please. The first one is on
expenses. What's the outlook for expenses next year? It's probably not going to be a great year for the economy given still the potential problems with COVID in the first half of the year. Is there any room for VaNorte to have a more aggressive push to expenses and end up maybe having lower expenses on a year on year basis next year? What would what would need to happen for us to see that?
And the second is on fees. And I guess related to the potential weakness on the economy, how do you see fees developing in 2021? What are the things that are going to drag this down or the other way around, which should see better performance, again, in the context of potentially, hopefully, a recovery,
but not a strong economy?
Thank you, Jorge. Talking of expenses is not so clear because we have the good expenses, the ones. We continue growing our lending book, the technological ones, so the new projects. But the idea is to, I don't know, inflation maybe around that or something like that. And talking about fees, Rafael, please help us.
Yes. Concerning the what you mentioned, Jorge, is relevant. I mean, when you look at a lack of connection with GDP contraction and the loan growth that we have been experiencing this year, it's really quite confusing. But what we have seen and and and and maybe Gabriel can can build upon this is that we already start to see a rebound in the in in some key elements of the economy. It's still way below that it it used to be, but, like, in job creation, car sales, retail sales, that and also the rebound that the GDP had on the on the third quarter.
I will not touch more on this one because Gabriel can can add a a lot more. But this is puts you in a in a conflicting view about what's gonna be the evolution when you see the next year, the potential loan growth and and and and and things like that. So I think there will be some some good revenues of growth on on the on the consumer, on the on the mortgage book, and also on the car sales. I think payroll loans will rebound. Credit cards will be slower to rebound.
I think we will have a reasonable growth on the deposit base on that part. I think corporate and commercial will behave not as this year, but and reasonable numbers around 5% to 6% on that part. And what Marcos mentioned about expenses, that it also is a key element of this. I think that at this point in time, when you see what has been happening in the market and the lack of usage that you have on fixed assets like buildings and things, that will we need to accelerate that reduction in the expense base. We need to change structurally the cost base because marginally, we do not do the job.
So we need really to go structurally on that. I think reorganization, back offices and back office operations, consolidation on that part, in order to be able, as Marcos mentioned, to reach inflation numbers on the cost base. If we don't do that, if we don't change structurally the cost base, the cost base will creep up slowly, but will continue to creep up because revenue growth will be better than this year, but not at the pace that we used to have in the past. So in order to keep our efficiency ratio in the numbers that we would like to have, we need to change structurally the cost base, and that's what we are working on. And we will on the first on the first guidance of next year, we will give you the evolution of that structural reduction in the cost base.
Thank you.
So okay. This is Gabriel.
Let me add a few things that you already know just to support a couple of things that Rafael and Marcos mentioned. As you know, a lot of people are wondering why Mexico Mexican economy is rebounding at a faster pace given that fiscal support has been extremely limited. As you know, Mexico is a country mainly driven by the private sector, in contrast with Brazil that you know pretty well as well, where the government accounts for 30%, three zero, of GDP, in Mexico is half of that. So Mexico, as you know, it's a private sector country. And let me summarize in three aspects.
Number one, even before we hit by COVID on the health related issue, exports declined 40% and imports 20% in April. However, once we were able to reopen in May, in which the traffic light system that Marcos mentioned, allowed manufacturing companies to operate and reconnect with the global supply chain, exports rebounded 75% in June. In fact, automotive production has almost recovered in full in September. Number two, on the unemployment side, after having lost 555,000 jobs in the formal sector in April, there were some job losses in May, June, and July. But in August, job creation began, and it has continued in September.
And even though we don't have October data, the president this morning in his morning press conference said that there was a a creation of more than 100,000 jobs. So we're still facing a net loss of 700,000 jobs, but job recovery is taking place. In fact, on the unemployment rate side, it increased from 3.3% in March to 5.4 in May, and we are now at 5.1 and going going downwards. No? And we have not even reached the all time high of 6.3% that we reached back in in 02/2009.
Now this also reflected, as Rafael was mentioning, in large retailer sales, you know, that have recovered quite quickly from minus 23% in April at annual rate to nearly 0% right now with supermarkets doing very well. Actually, they have done very well throughout the year. And even department stores that suffer a lot, they they are doing well. And number three and last, the sectors that will take longer to recover, such as tourism. We have seen a quicker and expected recovery here as well.
On the airline passenger side, we have observed a monthly average of 6,500,000 travelers in the past few years. With the pandemic, it came down it came down to zero in April and May, and now we are around at 4,100,000 passengers in September. Now in terms of hotel occupancy ratios, we usually have a monthly average of 55%. COVID slowed it down to zero percent in May, and it has rebounded to fourteen percent in in September. So it's still still down, but quicker than expected.
So summing up, what is simply the revised GDP growth forecast for this and next year up to minus 9% for year 2020 and plus 4.1 for year 2020 to 2021. We are on the optimistic side of the spectrum, but honestly, I think we're being very realistic. And as Rafael mentioned, today's GDP number in the third quarter, I think, give us a lot of conviction despite the uncertainties we are definitely experiencing.
Thanks, Gabriel. And our next question today will come from Jason Mollin with Deutsche Bank. Please go ahead.
Hi, thank you Marcos, Rafa, Rene, Tomas, Gabriel. Thanks for the presentation. I have two questions. One, I guess, would be on the top down picture. If you can provide an update on congressional proposals that aim to intervene in financial markets.
We saw Montreal's proposal on bank fees in the past. That seemed to be somewhat you guys the the banking association seem to be able to negotiate reasonable terms there. Now we're hearing about proposals talking about capping interest rates. If you can provide your views and colors on how that may impact the banking business. And then specifically on your operations, second question, can you talk about the hedging strategies you mentioned that the bank is using to secure net interest margins or at least stabilize them at a higher level?
It interesting to see that the operations with derivatives doubled in your balance sheet, year on year, on both the asset and liability side. I guess if you net them out, it wouldn't be such a big difference. But if you can tell us, how you're managing that, the costs associated with that. Thank you.
Thank you, Jason. Talking about topic number one, about the congressional proposals, you know better than we do. There. Sometimes it's there, sometimes it's not. And the last one, we are analyzing it, but it seems that it's reasonable because it gives the power to one commission on CNBB about all these that they already have.
So we are as you are looking careful for that. But so far, we don't have any news, no? We should take care, and in fact, we don't have more views than you have. The second one about the ALCO and the hedge positions, yes, we are very active on that, and we will continue doing that. And I will ask Rafa to walk you through some details about that.
Yes. Jason, I will I'm sure I will confuse some of you, but I will try to go slowly on line by line. And let's compare September 17 to September 20 about as I mentioned before, the fixed rate loan book was €220,000,000,000 in September 17. Now it's EUR 200,000,000,000 in September. The total coverage of the book that we had on 'seventeen was 30%, now it's 36% the same.
But the coverage with cost for that was 17% was covered with a cost additional cost. Now it's only 2%. And the yield on the on the on the loan book at that point in time was 13.4, now it's 13.7. The total cost on the balance sheet by that hedging process that we have in 'seventeen was 3.6%. Now it's 2.5%.
Why we achieved that? Because we are basically using the thickness of the deposit based upon the the the regulators approval on that on on several the buckets that we have. And in in that way, we we can hedge the the portfolio in a much better way. And and that has been reduced the cost substantially. I can give you what was the the and I I I based upon this, we have increased the margin on the balance sheet from 9.9 to 11.1.
Happy to go on one on one to you and provide you the all the necessary information. But what I can give you to you is that based upon the power the stickiness of the deposits, the approval of the regulator, the the reduction and on the on the on the on on the hedging cost and keeping the the the ratio that we used to have before, we have improved based upon the growth on the fixed rate portfolio, the yield on the balance sheet, I would say, in a in a substantial way with a lot less cost that we used to have before. But happy to provide that that information to you. We will send that back to you.
Thank you very much, Rafael. Thank you, Marcos.
Just one thing. This is Gabriel Garcia. I would like to add something real quick on the congressional initiatives that Jason were asking. Honestly, we have seen no surprises on the political side if we judge it by what has been happening. I mean, we're in the second year of AMLO and you can tell that we have been we have been telling you that he has sticked to the policies he outlined in his books, including fiscal austerity, even with what we are experiencing in the pandemic.
So I mean, the only important thing is, I mean, zero of the nonmarket friendly legislative initiatives have been approved. So not political surprises. And, honestly, these interest rate capping and and on, you know, the fees and all that are not in Ambrose's book. As long as they are not there, we have seen that none of those prosper. I just wanted to highlight that, Jason.
Thank you, Gabriel.
And our next question will come from Tito Labarta with Goldman Sachs. Please go ahead.
Hi, good morning. Thank you for the call. A couple of questions also. One follow-up in terms of your provisioning and excluding any additional provisions you may need, right? I mean if you look at the cost of risk, this quarter is down to 1.6%, pretty low level.
So just to understand what drove it being so much lower. I mean, I know asset quality has improved. Is this sustainable? Do you think on a recurring basis that cost of risk gets back above the 2%? How quickly would you get there without any additional provisions?
Just to kind of think about the loan book down, the recurring level of the cost of risk. And then the second question on the back of that, in terms profitability, you already reached a 17% ROE. Perhaps the cost of risk may be a bit low at these levels. So what's the sustainable level of profitability going forward? And can you get back to the 18% to 20% that we saw in the past?
And if you can, what would be the drivers to get there? Thank you.
Thank you, Tito. Let me start with the first one. Gerardo Fazal is going to help us with that.
Sure, Marcos. Hello, Tito. I will say to you that eventually, cost of risk is going to get higher. And as of the close of 2020, we expect cost of risk to go as high as two point two percent. So we are seeing the lowest level there is for cost of risk, that metric could go up all the way to 4.1% at the middle of next year.
So let's keep that in mind because we are being consistent in forecasting the PDL ratio because of risk and also you should see a decrease in the coverage ratio as well. So that's the short answer for your question.
I didn't know if you you can
you want to follow on follow on on that, or you you you you want more detail on that?
Yeah. No. I think that's clear. I think maybe addressing then the second question in terms of the profitability and what would drive that, particularly if the market risk go up.
Tito, the
second We are working on that. It's in progress, but it's only an idea. It's not a matter of a rate. It's a matter of spread, no?
The rates were five years ago, were, I don't know, eight, nine, I don't remember. And so the ROE was 20. Now the rates are at four, and they will continue going down. So it's a matter of spreads also. Obviously, it's a matter of cost of risk.
We know that. But we are working on that. It should be a nice one. Talking about twenty seventeen, eighteen for us looks very nice. I don't know for you, but we are working on that.
As soon as we launch the next program for the next years, we can discuss that. Thank you, Peter.
Okay. Thank you.
And our next question will come from Marcelo Tailles with Credit Suisse. Please go ahead.
Hi. Hello, Marcus. Hello, Rafael. Gabriel, hello, everyone. Thanks for the time.
Know, first, I have two comments here. I I just wanna, you know, thank for the disclosure on on the, LCR. I think, you know, aside from the fact we've been improving quite a lot, you know, over the past quarters, you know, the the disclosure of the use of the the credit lines are, you know, very useful and, you know, clearly, you're in a very good, you know, in a very good spot on that. So I appreciate that. And, also, you know, the the initiative on on ESG and, reporting the on their size, the decision to, you know, to incorporate size.
I think that's very important, you know, for you guys in the long run, so I appreciate that as well. My some of my my questions have been answered, but my you know, one I had two questions. One, if you could comment a little bit on what has been the performance of credit spreads at the margin, you know, on the on the large corporate and your government loan book. So it'd be good to understand how that that is behaving lately. And and secondly, you know, if you think about Okay.
Sorry, mate. This is the operator. Just one moment. Please proceed.
Okay. Thank you.
Marcelo, could you go back to the second one because we lost you in a bit. I think that the first one about the LCR and the liquidity and ESG, yes, I think we will be much more precise in that communication. Thank you for your comments and the feedback that you gave us to us last call. So the second one was exactly what?
Yes. So my first question was on the evolution of credit spreads on on your government loan book and and large corporate loan book. And my second question, was with regards to the outlook for your NII growth, you know, going forward. I mean, if you think, you know, in 02/2021, if you think you'd be able to grow without, of course, committing to any number, but if you think if you think it's possible to grow the NII, next year.
Yeah. The I think the the key element is a matter of what Marco mentioned as about spreads. Competition on the on the mortgage book has been has been, I would say, tough with with with some of the market. So we will continue to grow that that book with a with a with a some reduction in spreads, but we still see room for the cost of funds to go to go down. So that's why we we we are modeling that our on ongoing and and net interest margin for the bank should be around 5.5 or 5.6.
I think that that could be a recurrent for for for '20 for '21 also. Based upon the better spreads that we're getting better cost of funds, I if you look at our funding side, now the mix is seven thirty. It was to go it it went down as as low as 58 to to to to to point two. So now we are 70 to 30. So we we continue to to push the cost of funds down.
I think we have been quite efficient in doing that. So that will, again, the growth in the fixed rate portfolio and and and and the behavior of the of of of of the portfolio itself will allow us to have a reasonable 5.5 net interest margin, maybe on top to 5.6, but I think four point five five point five is a reasonable number to achieve.
Thank you very much.
Thank you, Marcelo.
And our next question will come from Carlos Gomez with HSBC. Please go ahead.
Hello, good morning. Thank you for the questions. And also thank you for the disclosure on the risky assets exposure to U. S. Dollars.
All of that information is very useful and you presented very clearly and I think we all appreciate that. I want to go back to the provisions. We understand that this is a choice that you make and that the portfolio has been performing better than you expected, and you don't need to make so many provisions. And yet, you know, we're in the middle of the pandemic, this uncertainty. Wouldn't if you have a lot of capital, wouldn't it be prudent to have a bigger reserve buffer?
I mean, we know that your coverage is very high, but that's because the NPS has come down. Wouldn't you rather accumulate a bit more provisions this year just in case of what happens next year? Because otherwise, the impression we get is that, yes, you are maximizing the returns today, but in a sense, you're taking a bit more risk than you might otherwise. And again, we understand it's a choice, and there's nothing wrong with having the other provision. The second question is about the dividend.
It's very clear to us that you are ready to prepare the 2019 dividend if and when allowed from what it seems that will be an event for next year. Do you think realistically that you might also be able to pay a dividend on 2020 earnings? And in that case, we would have effectively something like 100% payout ratio Or we might skip one year because of the crisis? Carlos,
I will start with the second one. Yes, I don't know what's the word, but we pumped already the dividend, and it's ready to be paid. And we are only waiting for the it's a global issue. It's not a Mexican issue. So we are waiting for the authorization, and it's going to be, we hope, in the next year.
And yes, that's the 2019 dividend. So we are working for the 2020 dividend. It's going to be there also. We expect that. As we see the numbers, so far, we don't see any problem.
And going to the number one, the provisions, we do the same. We don't have more visibility, but with all the things that we can see and forecast and the pipeline and all these, we think that right now, we don't need more provisions. I don't know if Rafa can give us more color on that, please.
I think Gerardo will give you I think the key element for that is that Gerardo just mentioned, very key numbers, cost of risk NPL formation through the 2021 and what has been our expectations. But I will just give you one thing. Do VaNorte has room for additional provisions? Yes, we have a lot, if needed, a lot of room to provide for that. At this point in time, we don't see that need.
Please, Gerardo. Sure, Marcos Rafa. I will ask just a review of the main metrics regarding provisions. The past due loan ratio, as you know, closed at 0.8%. It is expected to close this year, third quarter, 1.6%.
And by the middle of next year, should be 2.2%. And the cost of risk, you just seen it at 1.6%, it is expected to close the third quarter of twenty twenty at 2.2%. And by the middle of next year should go up as high as 4.1. At this point, Carlos, I will remind you that the extraordinary journal provisions that we made at the close of June of this year of 3,000,000,000 pesos have not been been used yet, but we expect to use a big portion of that for the fourth quarter of this year. We don't just know how much of that, but we are prepared with that buffer.
So there is some buffers. And for the forecast point of view, I will tell you that our central scenario is currently what we have been using it has been using as a tool for for making the provisions. But we have an extreme scenario and also a black ceramic catastrophic scenario, and in which we we we can share with you that our capital, our solvency, gets respected and and and and solve the problem in a very good way, in a very big, big way.
Thank you. And again, with that
We have solvency and we responded.
Thank you. And again, it's clear that you have the solvency to do more. You have said several times that the peak cost of risk will be 4.1 percent. What will be the average cost of risk for the year?
No. I think if you look at
the coverage cost of risk
for Van Norte on a running rate basis, it gets around from 2.2%. It has shown in some cases, to 2.4 in the past years. But I think the usual number is around two point zero to 2.2. The numbers that Gerardo has given you are not small numbers. The 4.1 is a big number compared to that, but it will immediately jump go down again to the to the normal levels because you start getting all the charge offs on that on the on that part.
So I think that's that's that's the key element. Some people say, why don't you build more provisions? Remember what Steve Hader just mentioned to you.
There was also a cleanup of
the balance sheet of €4,800,000,000 on the second quarter on the charge off. So that's in addition to the 4,600,000,000.0 that that we are on on the on the provisioning line. If we need to do more, we will have much more clarity around the sender. An easy way to do things is is let's put more provisions on the book and and let's see what's going on. But I think that that's that for us is not the the best way to do things.
I think we have to look at models, look at the behavior on a day to day basis. If we see substantial movement on any of the variables that we are monitoring, immediately, we will advise the market that we see some changes in the in the behavior that will push us for to do more provisions. But at this point in time, the behavior that we have seen is better than expected, and so we don't see a need to create more provisions. If there's room on the balance sheet and rooms on their income statement to do so on on the on the capital basis, there's a lot of room. What Carlos just mentioned about the black swan is really not a it's a a very, very catastrophic provisions that, will need to create additional usually, the bank, goes for around 18,400,000,000.0 pesos on a usual year on provisions.
That will mean to jump to 40,000,000,000 for the of provisions on on the catastrophic debt. But can we accommodate that without even touching the the dividend that we have at the good level on on that? Yes. We can accommodate that.
Thank you. And again, for next year, would consider it to be a normal year? I mean, something like 2.2% is what you would expect for the years ago? Or is it a worse than normal year?
The 2.2%, 2.4% I think is what you should be expecting Carlos.
Okay. Thank you very much. Very clear. Thank you.
Thank you, Carlos.
And our next question will come from Nicolas Riva with Bank of America. Please go ahead.
Thanks very much for the chance to ask questions. I have two questions. The the first one on asset quality. I wanted to ask you if you are about the account about the the accounting treatment of of NPLs. If you are still counting all of the restructure loans, that 18% of the loan portfolio as performing, and and, specifically, what's the treatment of that 9% of those loans that exited the relief program but are still not paying.
And it seems from the tone of this call and also from what we saw in terms of provisions for loan losses in the third quarter that you feel more comfortable with the economy in general. You didn't book additional loan loss provisions in this third quarter compared to the second quarter. So therefore, in addition to the current treatment, I also wanted to ask you when we should expect NPLs to be treated as they were before the pandemic? And then the second question on on your perpetual bonds that you have a a bunch outstanding. I wanted to to ask you, they they they you can call these bonds starting in 2022.
And I wanted to ask you what's your commitment to call these bonds. If I look at all of the Basel III bonds, the 30 ones lose capital treatment if they are not called, but the perps do not. And if I look at the reset spread on the on the perps, it's about 500 basis points on average, but US treasury yields are much lower than they were when you issued the per. So I wanted to get your thoughts in terms of how we should think about the likelihood of these perpetual bonds being called. Thank you.
I will start thank you, Nicolas. I will start for the second one. Yes, we have full commitment to call these bonds regardless of the rates and if we can do business because the rate is up down, the idea is to honor that and to continue with this in the next years. That's the idea and a very strong commitment. And talking about the asset quality, I will ask Gerardo to discuss about that.
Sure, sure, Michael. Thank you. I will tell you, Nicolas, what we the treatment that we are being delivering as solution for our customers on restructuring loans is extending the credit term. We are giving them more ample room to comply with the obligations of the loans. Also, we are lowering monthly payments on a case by case basis, and we're making a diagnosis of the archetypes and credit risk profile of each and every one of the customers.
And also, in some cases, we are providing charge offs, which is something that we we wanna review very, very carefully because we don't want to to to cover that loan with a structure that makes it look like a good loan. That, the short term, is going to be bad for us and bad for the balance sheet and the income statement. So we are providing those type of solution in a case by case basis, but it is it is also different on the type of of the loans that we are restructuring. There is no treatment for mortgages or bullet payments, for revolving credit lines, for credit, for credit card and auto loan. So we have a very interesting internal matrix in which we provide a strict for each of of of the account executives on the branches and also a strict for the for our Central Tatencian Telefonica, which So so what we were seeing is is a case a by case treatment on the structured loans.
So so we are trying to maximize recovery, and we are trying to put the solution on the table on behalf of our customers. Yeah. And and and and I would say, Nicolas, because I think it's very important what you mentioned about the t ones that Marcos just mentioned. We are with some of the calls. I think there were some concerns about that if that we will be repaying interest because of this restriction on the dividend.
No. The 81 will continue to be paid fully on on that, and we will honor the calls. And it's quite important what Gerardo mentioned about this. This 9%, some of those we know that they never gonna be able to go to to bounce back into because they lost their jobs or maybe an SME, and we need to do the charge offs on that. We are not bubbling up the balance sheet on that on on that part.
But the solutions come, as as Gerardo mentioned, on a client by client basis. And remember one important thing, Banovi has had been, for the last twenty years, the best recovery unit in the market by far. As you know, we buy and sell portfolios, so so we have been, I would say, toughened through the years by by the cycles on this recovery unit. And this recovery unit is fully operational, talking to our clients, anticipating issues in order to be quite in line what what the situation is. So we are not, in a way, at ease in any way.
I think we are, as all everybody, very vigilant about what's going on. But I think we are putting all the elements that we can in order to to bypass this process. And the most important thing, the balance sheet of Panorte can really stand a lot of pain.
Thanks One quick just follow-up. The nine percent of the clients that are that exited the relief programs but are not paying yet, are you including those in that in the 0.8% NPL ratio? Or you or will you will you include those in the starting in the fourth quarter? Hello?
Sorry. It seems that we are out again. Could you please hold on a couple of seconds? Yes. No.
We we have those.
I rejoined the state. We we include those.
Okay. You include those in the NPRH. Okay. Thanks very much, doctor.
No. Thank you, Nicolas.
And our next question will come from Geoffrey Elliott with Autonomous. Please go ahead.
Hello. Thank you very much for taking the question. I just want check if I've got the message right on provisions because there were quite a lot of questions and quite a lot of answers. So if I paraphrase what I think you were trying to say, and then you tell you tell us if I'm getting it wrong. So for 2021, you're saying base case is cost of risk kind of 2.2 to 2.4%.
If it turns out that, things don't work out as well as you thought, maybe with some of the loans on deferral or the way the economy is emerging from COVID, then you could kind of have a temporary spike to that kind of 4.1% level that you were talking about for, I don't know, a quarter. Is that what you were trying to say in all those questions on provisions and cost of risk?
Yes, exactly right.
Got it. Thanks for clarifying. I won't go with any more questions because I know it's been quite long already. Thank you.
Thank you. Thank you.
And our next question will come from Yuri Fernandes with JPMorgan. Please go ahead.
Hi, Marcos. Thank you. I'll try to be brief too. Two questions. First one, the 9% of nonpayment in the deferrals, that includes the, I don't know, a second wave of deferrals because one of your peers, he has NPL and also a small amount of the second wave renegotiations.
So just checking if that number has the second wave. And if not, if you can provide us the number of, like, the second, kind of relief you are providing to those customers. And a second, question here on on these endless discussions on provisions. From the previous conference call in the second q, I had an understanding that, the 4,900,000,000.0, you did in additional provisions, that should be enough, you know, until the February to keep cost of risk somewhat stable on those 2%. And now I think I I got a a different message.
Right? You're not calling this an additional provision, but 4.1% cost of risk is very similar to the level of cost of risk that you had in the second Q twenty twenty. So just checking if the speech has changed here regarding provisions for 2021. Thank you.
Rapha, yes, Yuri, the first one, the 9% includes a second wave of deferral. So far, so good. So that's it. And talking the second one, the provision, Rafael?
Yes. Yuri, you have to look at the average cost of risk for the year. I think the numbers that we have given you, the 2.4, it's concerning that it will drop to 4.1 to go down to the 2.2 by the end of the year. So that's the difference that you see. So we should see some quarters with 1.82% and the peaking with 4%, right?
So some quarters should be below 2%. Exactly right. Thank you.
And our next question will come from Natalia Zamora with GBM. Please go ahead.
Hi. Thank you for taking my question. Actually, it's a follow-up on charges. I saw that from last quarter's past due loans to this quarter's, there were 4,100,000,000.0 in charge offs. When looking at the consumer's nonperforming loans balance, we saw a relevant sequential decline, which I presume stems from the combination of support programs and the write offs.
But my question is, I was wondering if you could elaborate a little more on the write offs and perhaps share some insights on what you expect in terms of write offs in the coming quarters. I understand you expect them to increase, but do you expect them to be much higher on a quarterly basis than what we saw this quarter? Thank you.
No. Natalia, I think you need to remember that the charge offs that we did on the second quarter was close to MXN 4,800,000,000.0. The usual charge offs that the bank does on a quarterly basis are MXN 4,200,000,000.0, 4,400,000,000.0. If you look at the charge off for the quarter and the second quarter, it jumped to $8,200,000,000 So that shows you exactly the size of the cleanup of the balance sheet. And remember that we reduced the charge off period for the SMEs from nineteen months to ten months.
So that's part of the cleanup on that. That's also a part that we had, as Gerardo mentioned, that buffer on the balance sheet to absorb additional losses and has to do with also what Juri was mentioned. So what you need to see is that the charge offs will continue to be on the ratio of what we have been having in the past to the 4.4, 4.2 on a natural basis. Maybe on the third quarter on the second quarter of twenty twenty one, when you accelerate the charge off of the credit cards to drop the NPL from 8.2% to the 6%, that will be the case.
Okay. Great. So in the coming quarters, we could see something more in the line of what we saw in the second quarter or even higher?
No, I think more in line for the first quarter.
Okay, great. Thank you. Very helpful.
This will conclude our question.
Thank you.
We have two questions that we received online. So I was with them. I think the question that was made by Victor Galeno has been already answered, the same by Chris of BlackRock. I think Marcos and Rafael already answered when are we expecting to resume the dividend. And the third one is from Claudia Benavente from Santander.
She's asking about the pension reform, any updates there? And she was expecting it to happen in September and how is Panorte going to be affected by this? Are we seeing any M and A activity opportunity and consolidation in the market?
Thank you, Claudia. The pension reform is Fernando Solis, are you there? Yes. So go ahead, please.
Yes. I'm here, Marcos.
Do you want me to
go ahead?
The pension reforms, what do you expect? And how do you see all that?
Well, as you know, it's
in Congress, and we're expecting to pass, but we are not certain about the time in which it will happen. And of course, as you know, we have some features that will enhance the the the active accumulation because because the contributions will rise from 6.5 to 15%. That's very good. And and we will have to see what's gonna happen in terms of the there's an article about commissions, but we don't know yet whether it's gonna be we stand in the way it is or it would be be changed because we have been some lobbying about it. But if it remains the way it is, we will expect further consolidation in the in the in the system, which, of course, is is being our the four largest of the system, we will benefit from that.
We will benefit from more of the activation, and we'll benefit from the consolidation even though we may see some reductions in short term earnings. But that's that's that's something we have to wait and see how it's it's gonna follow. And so we we don't know yet whether that article will be changed or not, which is article 37, which is the one that is concerning the issue the most, and, certainly, most players are very concerned about it. So we would have to wait and see. And we will also provide more accumulation if it goes through, and it will also benefit the pension the pension part of the withdrawal part of the the the the the the accumulation phase, let's put it away.
The accumulation phase will be benefited to the forest, but also the annuity firms will be benefited because the the cost of two things. One is that more people will start to retire due to old age due to the transition of the of the of the law. And therefore, we will have more assets there and therefore, more annuities. I mean, more in higher let's let's put it this way, higher annuities than otherwise. So I I think that would be beneficial also for the the accumulation phase.
But we don't know what is going to be passed this year or not. That's uncertain. I don't know if you want me to elaborate more on this issue or that's
right.
Claudia, talking about the second, the consolidation, the market, I don't want to sound boring, but it's always the same answer. It's our duty to see what's going on in the market. Yes, we see a lot of movement. Let's see what happens. And then we will go to the first instance, the caps and the Board of Directors.
And then if it makes sense, we will go to the assembly, after assembly. And it's up to you to decide whatever is going to happen. But yes, worldwide and in Mexico, we see and we can guess that there is going to be a lot of movement. And yes, we are very strong and we can do some things and we don't know. But let's keep it open and eyes open and see what's going on in the market.
The opportunities will be there. And if it match someone with our future, welcome. And that's it's always the same, sorry, but it's always true. Thank you, Clavier.
Thank you, everyone. With this, we conclude our presentation. Thank you very much.
Ladies and gentlemen, the conference has now concluded. Thank you for attending today's presentation. And at this time, you may now disconnect your lines.