Good day. Welcome to the Banorte third quarter 2020 earnings call. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key, followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your touch-tone phone. To withdraw your question, please press star then two. Please note this event is being recorded. I would now like to turn the conference over to Marcos Ramírez, CEO. Please go ahead.
Good morning. I'm Tomás Lozano, Head of Investor Relations, Financial Intelligence and M&A. I am happy to meet you again. Welcome to Grupo Financiero Banorte'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, Marcos Ramírez, 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&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 these, being closer to our investors and analysts is key. Thank you. Marcos, please go ahead.
Thank you, Tomás. Good morning, everyone. Thank you for your interest in Banorte and for joining our call. After a volatile and uncertain first half of the year, the third quarter of 2020 brought some positive news for our country and consequently, for the bank. After reaching its peak in late June, the number of new COVID-19 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. 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, 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 Ministry of Finance and the CNBV 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 provides better clarity of the real condition of our balance sheet. The final decision will be timely communicated to you and to the banking regulators. In an effort to contribute to the economy reactivation, the government recently announced an infrastructure program consisting of 32 projects in different sectors for a total amount of MXN 260 billion, 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 all our expertise in infrastructure lending. The economic implications of over six months of the COVID-19 crisis still points towards a -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 details. 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 operations, 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 in the program have already ended their grace period, and over 91% of them have resumed their payment schedule. As I mentioned, this is much better than our initial expectations. Later on, Rafael Arana will walk you through the details. On the digital side, as you can see on slide number three, we've tried 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 Banorte Móvil and our web services. On slide number four, after an atypical second quarter in terms of provisions, profitability for the third quarter shows a stronger result, with net income totaling MXN 8.9 billion, return on equity for the bank at 21.1%, and for the group, return on equity stood at 16.9%, mainly impacted 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 normal levels in the third quarter. Fifth, on slide number six, please, recovered together with that unfolding economic reactivation. There was an increase in core banking fees during the quarter. POS transactions continued their upward trend as 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. 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 Banorte has had a higher share of the bidding processes awarded during the year. As spreads 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 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 in pension allocations during the year.
Our leasing business merged with Sólida and now operates under the name of Arrendadora y Factor Banorte. There are still challenges ahead. 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. 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. We have been devoted to developing ESG since 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 S 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&A session. With this, I conclude my remarks. 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, thank you, everyone, for attending the call. I would like to go 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 it, that is the size of the provisions that we did in the second quarter are going to be good enough for the remaining of the year. I would say 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, up to September, the figure is 64% of the individuals or SMEs that got into the relief programs now are out of the program. Our original expectations were that 22% of those were not going to be able to pay when they come back out of the relief programs. The real numbers now we are looking is 9%. It's a better number that we expected and anticipated. Based upon the provisions that we did on the second quarter, was mainly based upon the 22 number, not on the 9% number. If this number is going to hold, still, we have to see that. I think we will have a much more clarity at the beginning of December, at the end of 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 reviewed are showing us that are basically the same. We anticipated a more risky wave on the third one. Now, based upon the information that we have, we see that it's basically behaving and performing like the first and the second one. The numbers up to today, better than expected, still a long way to go. 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 are showing us that what we expected and did on the second quarter is good enough. Another 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 margins? There's a graph that can show you, because when you look at the numbers on the margin, shows a better-than-expected performance. There's a specific reason for that. Now, can you hear me now?
Hello, yes, we can hear you. Please proceed.
Okay. 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 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 lost the line. 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 show 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 Interacciones. The NIM of the loan portfolio continues to move upwards from 8- 8.1. Okay. Yeah. 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 has been improving substantially for us and against our peers. When you go back and detailing to the net interest margin, basically what you can see is that the net interest margin continues to hold at the bank's level, even though the reference rate has been going down to 132 basis points.
Explain exactly what we mentioned in the previous slide that has to do with the cost of funds, a much better improvement on the yield of the portfolio against the tier under a very challenging environment of declining interest rates. You can see on the graph to the right that the NIM continues to be steady, there have been questions about what we can consider that is a sustainable margin going forward. We have been looking at numbers of 5.5- 5.6 for the bank. Okay?
If we continue to the next slide. There's also always the concern about what's the evolution and the sensitivity on the balance sheet that has been reduced substantially in the past two years. In the past 400 basis points was close to MXN 1 billion. Now we have a much larger balance sheet, MXN 504 million of sensitivity. This has to do with a lot of how we have been managing the hedging process on the balance sheet. That's a very important number that we can provide in this. In September of 2017, when we have a fixed rate portfolio of MXN 220 billion, the margin on the balance sheet was around 9.9 with very high interest rates. Now, if we move that to September 20th of this year, the fixed rate portfolio is close to MXN 300 billion. The most important piece is the margin.
The accumulated margin on the balance sheet has grown from 9.9%- 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. There's also, when you see a decrease in the pace of the revenue, basically you have to look at how your cost evolution is moving. In this graph, what we are showing to you is that we think we will end the year in the range of 4%- 4.8%. We will maybe front-load some expenses at the end of the year because, as you know, we usually, at the beginning of the year, we do productivity analysis concerning which people is non-conforming to the productivity that we expect. We basically will front-load some of these provisions for the end of the year.
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, we will return to revenue growth and match those expenses again. 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%-4.8%. Okay? This put us on an efficiency ratio at the end of the year, close to 40% 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 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 a quarter- to- quarter, close to 50 basis points, from 13.2- 13.7 Core Tier 1. What is important to mention here is that this 13.7 is without the dividend that is already being warehoused at the group level. The 13.7 is without the MXN 16 billion of dividend that is now warehoused at the group. We continue to see a continuous evolution 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 capital. The architecture of the group is also helping us 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 to do buybacks. We present that to the board and the board to the assembly, and they agreed to warehouse the dividend. Not to cancel the dividend in any way, but to postpone the dividend in that part. That's what we are doing. We are talking with authorities in order to present the evolution and the numbers on liquidity basis, on a capital basis to show that Banorte has a very strong balance sheet to support the evolution of the pandemic and still comply with the promises that we have with our investors. Next one, please. On liquidity, there also has been some questions about liquidity. As you know, in the past, our liquidity ratio was always around 125%. We were sometimes in the low end of our peers.
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 AT1 that is also helping us to raise the liquidity. Now liquidity is sitting at MXN 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 MXN 130, but at this point in time, I think it's worth to have additional liquidity ready for us. This also has been some questions concerning of the facility that has been quite useful from the Bank of Mexico. What's the usage of those lines? As you can see 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 facility, a good facility, but at this point in time, there has been almost no usage of that. The bank is sustaining its liquidity on its own strength and base. We have additional possibilities 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 use those lines. Okay? There's also always the questions about what's going on, what's going to be the end of the year, what's the potential guidance that you can give us. I would say that 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 move on a day-to-day basis.
What we show you at the beginning of the 9% is much better than and we are showing very strong numbers, as Marcos mentioned, in NPLs, 0.8. Our cost of risk, record levels. Coverage ratio up to really very high numbers. We know this is a work in progress. We are not taking these as numbers or as the running rates. We will go back to the usual numbers that we have, I think, at the end of 2021. We will see a continued deterioration of our portfolios, 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 to this in a bit, in the second and third quarter of 2021. This is considering on our models, and it's considering on the provisions that we did.
Again, if we need to go and we see that deterioration goes beyond what we expect, Banorte has the balance sheet, the capital, the strength, the income to provide additional provisions are needed. Obviously, there is 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 the surplus of the capital that we have, and the liquidity and the balance sheet and the revenue stream to support whatever comes on that base. We need to have the right information and not anticipate or not be on the right track concerning the provisions. Expense control will continue to grow. Loan growth, I think, will be around 6%-8%. Expense growth, as we mentioned to you, 4%-4.8%.
Tax rate, a little below the usual rate because of the additional provisions that we did on the second quarter. On an estimate of GDP of 9%-11%, inflation 4%, and potential reference rate going down to 4%. There has also been concern why we have been able to grow the loan book in 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%-6%. Mortgages will be around 10%. Credit cards will be flat. A very important number that Marcos mentioned is that the -13% of the government book now is +3%, based upon much better spreads, as Marcos mentioned.
Also, something that is relevant, and I think it will show in the next slide, is the concern that our exposure to some of the sectors that have been heavily hit by the pandemic. As you can see, that's the exposure that we have with Pemex, 3.6% of the total book. Suppliers, 1.6%. CFE, 2.1%. That's the numbers. Supplies, 0.4%. Housing, 1%. Commercial, 1.8%. Others, 1.9%. Malls, 2%. Tourism is 4.3%. Restaurants, 0.2%. Airports, almost nothing, on one. At this point in time, what I would like to also give you, because there have been 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.
I will ask René Pimentel, our Head of corporate, to give us a color on exactly what's on the ground with the company, talking to them on exposures and what are the philosophy that Banorte has been holding in the relationship with this exposure that we have. René, if you can give us some color on this, please.
Sure, Rafa. Thank you very much for the call. Basically, it's been a challenging year for corporates, as you may imagine. Clients have been facing liquidity pressures due to the close-down of the economy. Now, having said this, as Rafa mentioned, we've managed to grow the portfolio 18% year-on-year. It's been accompanied by a growth in deposits of around 21% year-on-year with these same clients. It'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 to execute this pipeline in the first half of the year. 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. 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 US dollars. This has contributed to the growth that we're seeing this year. 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 non-performing loans that we had on the balance sheet, but these loans had become non-performing really in 2018 and 2019. We had no new cases of non-performing loans this year. The way we've achieved this is we continued to work very closely with our clients.
We've implemented tailor-made solutions to address the pressures in liquidity that they have faced. As Rafa just mentioned, the portfolio is pretty well diversified in terms of clients, in terms of sectors and regions. We're actually beginning to see some signs of recovery in some sectors like manufacturing, industrial real estate, construction, some parts of infrastructure. We're still seeing some pressure in hotels, tourism in general, commercial real estate, some retailers and energy 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 medium term, and we will be there to help them out.
Going forward, we will continue to be very selective, as we do not have a lot of certainty of what's going to happen. We will favor the quality of the portfolio over growth. Our clients are mostly holding off on expansion projects and therefore on new financing decisions. 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 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 arises. Thank you, Rafa.
Thank you, René. Now we open for Q&A.
At this time, we will begin the question and answer session. To ask a question, please press star one on your touch tone phone. If you are using a speaker phone please pick up your handset before before pressing the keys. To withdraw your question please press star then two. Our first question today will come from Ernesto Gabilondo with Bank of America. Please go ahead.
Hi, good morning, Marcos, Rafa, good morning to all your team. Congratulations on your results, thank you for your presentation. My question will be on deferred loans. As you mentioned in your presentation, 64% of your consumer and SME clients resumed payments in September, and only 9% are delayed, which compares positively with the 22% that you were expecting before. My question is for the remaining portfolio that will resume payments during the next months. I believe it's a riskier portfolio. What will be your expectations for this portfolio? I don't know if delays could be around 10%-15%. 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 behavior on the deferred portfolio? Thank you.
Thank you very much, Ernesto. Dr. Gerardo Salazar 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 and support programs for clients, more 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 initially expected, as Marcos was saying, and also Rafa. Despite all the strategies taken to preserve the loan portfolio quality, it will still be affected from then on by the COVID-19 crisis. We projected asset quality indicators under certain scenarios, taking into account the strength of our credit process, collaterals, and portfolio mix.
We estimate the worst part of the crisis will be reflected on the second quarter of 2021 and the third quarter of 2021. Currently, past-due loan ratio, as you have seen, is 0.8% at the close of September. At this closing of CD ratio of 0.8%. Sorry. At the close of this year, for the fourth quarter 2020, 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% for the fourth quarter of 2020, and for the second quarter of 2021, we expect 2.2% PDL ratio. The effect of the crisis on asset quality is going to deteriorate from then on.
You will see that we are taking a more holistic approach to this forecast, and we have been reviewing daily and weekly our transition matrices within the retail portfolio. Also, we are reviewing on a case-by-case basis, the wholesale loan portfolio. Ernesto, I don't know if that's enough, or you want to follow on your first question?
Yeah, I think it's helpful to understand the level of the NPL ratio for next year. I would like to know what will be your expectations for the remaining portfolio that will be resuming payments during October and November. The first wave was with a delay of only 9% of your total loans, and now I would like to understand if it's a risky portfolio and if the delays could be higher than the previous one.
Yeah. I will tell you that we are expecting more risk, obviously, because unemployment numbers, GDP numbers are rebounding, but not to take the previous level of the COVID crisis 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 would like. You will see that our transition matrices are well-behaved and are respecting some monotonicity requirements. All in all, are reality-based. You will see, for example, three things. The worst rating classes present higher default probabilities. Second, transition probabilities decrease with increase in the number of notches from the initial rating class. Third, probability of migrating towards a certain rating is higher for the newest classes.
We are closing that assessment on a biweekly basis, and we publish results and report results to our CEO on a monthly basis. We are following this development very closely, and we are doing the same thing in our wholesale loan portfolio, both of commercial and also corporate loans.
Ernesto, just to complement what Gerardo mentioned. Remember that we rank on high risk, low risk, medium risk, and no risk. What we have been seeing is that this, as Gerardo mentioned, a lot of stability on this cluster. There's no migration to high risk and less migration to a better risk. It's quite stable, a lot better than expected. Even the new ones that the latest wave that we expected, that we were expecting a highest risk, we still see a much better behavior than expected on that. 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. I think now better than expected.
We think November will come to reasonable news, and a much clearer view we'll have at the beginning of December on this part.
Up to now, we can differentiate the two clusters very clearly, because those that enrolled in the credit deferral program are behaving worse than those that didn't enroll. Those that were within the forbearance program are not complying with the higher default probability that we expected. That's all in all, I think the synthesis of what we're seeing.
Yeah. Let me just give you on a very specific of exactly what Gerardo 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 6%-6.2%. That's the steady state 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 2021, and then go back at the usual 5.8% in the third and fourth quarter of 2021. Why? Charge-offs will start to happen in the second month of the year of 2021. I think we have enough room, enough buffers to accommodate the deterioration that is coming based upon all the contingent rates that happened during the relief programs and the excess reserves that we provide for the book.
Next, please.
Yep. Our next question will come from Thiago Batista with UBS. Please go ahead.
Yeah, 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 third Q at 14%, or close to that. If this is allowed by regulator, can Banorte announce a buyback or material dividend payment in 2021, if this is approved by regulators? 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. The second is about the branch network. With clients becoming more digital, is it possible to see a material reduction in the number of branches of Banorte in coming years?
Thank you, Thiago. I will start for the branch network. We don't expect a material reduction in the future. We expect a shuffle. Going to the right places, maybe with smaller branches. We still don't know. No, it's not the idea. Mexico needs a lot of the branches yet. We need to go to a lot of places. The idea is to move to good places and remain pretty the same. I will ask Rafa to talk about the capital position.
Thank you, Thiago. As you know, we have always been very clear to the market that our ideal position on the quarter one is from 12%-12.5%. As you know, when we acquired Afirme, that number dropped to 11.4% and rebound again after six months to 12.2%. The number that we would like to have on a constant basis is from 12%-12.5%. This range, based upon if when we pay the dividend to the group or not. Right now we are at a high number on this. We are building up the dividend for 2020 and to be eventually moved to the group. The number is 12%-12.5%. That's the number.
Okay, very clear. Thanks for the answer.
Thank you.
Our next question will come from Jorge Kuri with Morgan Stanley. Please go ahead.
Hi. Good morning, everyone. 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 Banorte to have a more aggressive approach to expenses and end up maybe having lower expenses on a year-on-year basis next year? What would need to happen for us to see that? 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 fees 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? Thanks.
Thank you, Jorge. Talking about the expenses is not so clear because we have the good expenses, the top ones. We continue growing our lending book, the technological ones, so the new projects. The idea is to, I don't know, to inflation maybe around that or something like that. Talking about the fees, Rafa, please help us.
Yeah. Concerning what you mentioned, Jorge, it's relevant. 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. What we have seen, and maybe Gabriel can build upon this, is that we already start to see a rebound in some key elements of the economy, still way below than it used to be. In job creation, car sales, retail sales, and also the rebound that the GDP had on the third quarter. I will not touch more on this one because Gabriel can add a lot more. This puts you in a conflicting view about what's going to be the evolution when you see the next year, the potential loan growth and things like that.
I think there will be some good revenues of growth on the consumer, on the mortgage book, and also on 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 in reasonable numbers, around 5%-6% on that part. What Marcos mentioned about expenses, that this 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 we need to accelerate that reduction in the expense base. We need to change structurally the cost base, because marginally will not do the job.
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. 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. On the first guidance of next year, we will give you the evolution of that structural reduction in the cost base.
Thank you.
Jorge, 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 the 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. Now, 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. Mexico, as you know, it's a private sector country. 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 employment side, sorry, after having lost 555,000 jobs in the formal sector in April, there were some job losses in May, June and July. In August, job creation begun, and it has continued in September. Even though we don't have October data, the president this morning in his morning press conference said that there was a creation of more than 100,000 jobs. 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 downwards. We have not even reached the all-time high of 6.3% that we reached back in 2009. Now, this also reflected, as Rafael was mentioning, in large retail sales. Now they have recovered quite quickly from -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. Even department stores that suffer a lot, they are doing well. Number 3 and last, the sectors that will take longer to recover, such as tourism. We have seen a quicker than expected recovery here as well. On the airline passenger side, we have observed a monthly average of 6.5 million travelers in the past few years.
With the pandemic, it came down to zero in April and May. Now we are around that 4.1 million passengers in September. In terms of hotel occupancy ratios, we usually have a monthly average of 65%. COVID threw it down to 0% in May. It has rebounded to 14% in September, one four. It's still down, but quicker than expected. Summing up, we recently revised our GDP growth forecast for this and next year. To -9% for year 2020 and +4.1% for year 2021. We are on the optimistic side of the spectrum, but honestly, I think we're being very realistic. 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. Our next question today will come from Jason Mollin with Deutsche Bank. Please go ahead.
Hi. Thank you, Marcos, Rafa, René, Tomás, 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 Monreal's proposal on bank fees in the past. That seemed to be somewhat, the banking association seemed 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. 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 is 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. If you can tell us how you're managing that and the cost associated with that. Thank you.
Thank you, Jason. Talking about topic number one, about the congressional proposals. You know better than we do, sometimes it's there, sometimes it's not. The last one, we are analyzing it, but it seems that it's reasonable because it gives the power to Banxico, CNBV, about all this that they already have. We are, as you, looking careful for that, but so far we don't have any news, no. We should take care, but we don't have more news than you have. The second one about the hedge positions. Yes, we are very active on that, and we will continue doing that. I will ask Rafa to walk you some details about that.
Yeah. Jason, I'm sure I will confuse some of you, I will try to go slowly and line by line. Let's compare September 2017 to September 2020. As I mentioned before, the fixed rate loan book was MXN 220 billion in September 2017. Now it's MXN 200 billion in September 2020. The total coverage of the book that we had on 2017 was 36%. Now it's 36%, the same. The coverage with cost for that, where 17% was covered with additional costs, now it's only 2%. The yield 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 had in 2017 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 regulator's approval on several buckets that we have, and in that way, we can hedge the portfolio in a much better way. That has been reduced the cost substantially. I can give you what was the, based upon this, we have increased the margin on the balance sheet from 9.9- 11.1. Happy to go on one-on-one to you and provide you all the necessary information, but what I can give it to you is that based upon the thickness of the deposits, the approval of the regulator, the reduction on the hedging cost, and keeping the coverage 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 substantial way with a lot less cost than we used to have before. Happy to provide that information to you. We will send that back to you.
Thank you very much, Rafa. Thank you, Marcos.
Just one thing, this is Gabriel Casillas. I would like to add something real quick on the congressional initiatives that Jason was 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, as we have been telling you, that he has stuck to the policies he outlined in his books, including fiscal austerity, even with what we're experiencing in the pandemic. The only important thing is, zero of the non-market friendly legislative initiatives have been approved. No political surprises. Honestly, these interest rate capping and on the fees and all that, are not in AMLO'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.
Our next question will come from Tito Labarta with Goldman Sachs. Please go ahead.
Hi. Good morning. Thank you for the call. A couple questions also. One follow-up in terms of your provisioning and thinking excluding any additional provisions you may need. If you look at the cost of risk this quarter, it's down to 1.6%, pretty low level. Just to understand what drove it being so much lower. I know asset quality's 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 think about the loan book now and the recurring level of the cost of risk. The second question on the back of that, in terms of profitability, you already reached a 17% ROE. Perhaps the cost of risk may be a bit low at these levels.
What's a sustainable level of profitability going forward, and can you get back to the 18%-20% that we saw in the past? If you can, what would be the drivers to get there? Thank you.
Thank you, Tito. Let me start with the first one. Gerardo Salazar 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. As of the close of 2020, we expect cost of risk to go as high as 2.2%. We are seeing the lowest level there is for cost of risk, and that metric could go up all the way to 4.1% at the middle of next year. Let's keep that in mind, because we are being consistent in forecasting the PDL ratio, the cost of risk, and also you should see a decrease in the coverage ratio as well. That's the short answer for your question. I didn't know if you want to follow on that, or you want more detail on that?
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 cost of risk go up.
Tito, the second one, it's a tough one. We are working on that. Some progress, only an idea. It's not a matter of a rate, it's a matter of spread. The rates five years ago were, I don't know, eight, nine, I don't remember. The ROE was 20. Now the rates have fallen, they will continue going down. It's a matter of spreads also. Obviously, it's a matter of cost of risk, we know that. We are working on that. It should be a nice one. Talking about 17, 18 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, Tito.
Okay. Thank you.
Our next question will come from Marcelo Telles with Credit Suisse. Please go ahead.
Hi. Hello, Marcos. Hello, Rafael, Gabriel. Hello, everyone. Thanks for the time. First, I have two comments here. I just want to thank for the disclosure on the LCR. I think asset protective improving quite a lot over the past quarters. The disclosure of the use of the credit lines are very useful and clearly you're in a very good spot on that. I appreciate that. Also, the initiative on ESG and reporting on their SASB, the decision to incorporate SASB by target, I think that's very important for you guys in the long run, so I appreciate that as well. Some of my questions have been answered, but I had two questions. One, if you could comment a little bit on what has been the performance of credit spreads and the margin on the large corporate and your government loan book.
It'd be good to understand how that is behaving lately.
Sorry, this is the operator. Just one moment. Please proceed.
Gerardo, please go ahead.
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 on that communication. Thank you for your comments and the feedback that you gave to us last call. The second one was exactly what?
Yeah. My first question was on the evolution of credit spreads on your government loan book and large corporate loan book. My second question was with regards to the outlook for your NII growth going forward. If you think in 2021, if you think you'd be able to grow without, of course, communicating any number, but if you think it's possible to grow the NII next year?
I think the key element is a matter of wh`at Marcos Ramírez mentioned, that's about spreads. Competition on the mortgage book has been, I would say, tough with some of the markets. We will continue to grow that book with some reduction on the spreads. We still see room for the cost of funds to go down. That's why we are modeling that our ongoing and net interest margin for the bank
Should be around 5.5% or 5.6%. I think that could be a recurrent for 2021 also. Based upon the better spreads that we're getting, better cost of funds. If you look at our funding side, now the mix is 70/30. It went down as low as 58- 42. Now we are 70- 30. We continue to push the cost of funds down. I think we have been quite efficient in doing that. That will, again, the growth in the fixed rate portfolio, and the behavior of the portfolios itself will allow us to have a reasonable 5.5% net interest margin, maybe on tops to 5.6%. I think 5.5% is a reasonable number to achieve.
Thank you very much.
Thank you, Marcelo.
Once again if you would like to ask a question please press star then one. Again it is star then one to ask a question. Our next question will come from Carlos Gomez with HSBC. Please go ahead.
Hello, good morning, and thank you for the questions. Also thank you for the disclosure on the risky assets exposure to US dollars. All of that information is very useful, and you present it 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. Yet, we're in the middle of the pandemic. There's uncertainty. If you have a lot of capital, wouldn't it be prudent to have a bigger reserve buffer? 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?
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. Again, we understand it's a choice, and there's nothing wrong with having over-provisioned. 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? In that case, we would have effectively something like 100% payout ratio, or we might skip one year because of the crisis. Thank you.
Carlos, I will start for the second one. I don't know what the word, we pumped already the dividend and it's ready to be paid. We are only waiting. It's a global issue, it's not a Mexican issue. We are waiting for the authorization, it's going to be, we hope, in the next year. That's the 2019 dividend. 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. Going to the number 1, the provisions, it is the same. We don't have more visibility, with all the things that we can see and forecast and the pipeline and all this, 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.
Yeah. I think the key element for that is that Gerardo just mentioned the very key numbers, cost of risk, NPL formation through the 2021, and what have been our expectations. I will just give you one thing. Do Banorte 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 add just a review of the main metrics regarding provisions. The past due loan ratio, as you know, closed at 0.8%, is expected to close this year, the third quarter, 1.6%. By the middle of next year, should be 2.2%. The cost of risk, you just seen it at 1.6%. It is expected to close the third quarter of 2020 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 MXN 3 billion have not been used yet. 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
We are prepared with that buffer. There is some buffers. For the forecast point of view, I will tell you that our central scenario is currently what we have been using as a tool for making the provisions. We have an extreme scenario and also a black swan, a catastrophic scenario, and in which we can share with you that our capital, our solvency gets respected and solves the problem in a very good way, in a very big way.
Thank you.
We have solvency. We respond. Yeah. Thanks, Carlos.
Thank you. 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%. What will be the average cost of risk for the year?
I think if you look at the coverage cost of risk for Banorte on a running rate basis, it is around from 2.2%. It has shown in some cases to 2.4% in the past years. I think the usual number is around 2.0%-2.2%. The numbers that Gerardo has given to you are not small numbers. The 4.1% is a big number compared to that, but it will immediately go down again to the normal levels because you start getting all the charge-offs and that part. I think that's the key element. Some people say, "Why don't you build more provisions?" Remember what Gerardo just mentioned to you. There was also a cleanup of the balance sheet of MXN 4.8 billion on the second quarter on the charge-off. That's in addition to the MXN 4.6 billion of that period on the provision in line.
If we need to do more, we will have much more clarity around December. An easy way to do things is let's put more provisions on the book and let's see what's going on. I think that for us is not the best way to do things. I think we have to look at our models, look at the behavior on a day-to-day basis. If we see a substantial movement on any of the variables that we are monitoring, immediately we will advise the market that we see some changes in the behavior that will push us to do more provisions. 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 room on the income statement to do so on a capital basis, there's a lot of room. What Gerardo just mentioned about the black swan is really a very catastrophic provisions that we'll need to create additional. Usually, the bank goes for around MXN 18.4 billion on a usual year on provisions. That will mean to jump to MXN 40 billion of provisions on the catastrophic debt. Can we accommodate that without even touching the dividend that we have at the group level on that? Yes, we can accommodate that.
Thank you. Again, for next year, you 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?
Yeah. The 2.2.4 I think is what you should be expecting, Carlos.
Okay. Thank you very much. Very clear. Thank you.
Thank you, Carlos.
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 first one on asset quality. I wanted to ask you about the accounting treatment of NPLs. If you are still counting all of the restructured loans, that 18% of the loan portfolio as performing, and specifically, what's the treatment of that 9% of those loans that exited the relief program but are still not paying? 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. 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.
The second question on your perpetual bonds, that you have a bunch outstanding. I wanted to ask you can call these bonds starting in 2022. I wanted to ask you, what's your commitment to call these bonds? If I look at all of the Basel III bonds, the 31s lose capital treatment if they are not called, but the perps do not. If I look at the reset spread on the perp, which is about 500 basis points on average, but U.S. Treasury yields are much lower than they were when you issued the perp. I wanted to get your thoughts in terms of how we should think about the likelihood of these perpetual bonds being called. Thank you.
Thank you, Nicolas. I will start for the second one. Yes, we have full commitment to all these ones, regardless of the rates and if we can do business because the rate is up or down. No, the idea is to honor that and to continue with this in the next years. That's the idea and a very strong commitment. Talking about the asset quality, I will ask Gerardo to discuss about that.
Sure, Marcos. Thank you. I will tell you, Nicolas, the treatment that we are delivering as a solution to our customers on restructured loans is extending the credit term. We are giving them more ample room to comply with the obligations of the loans. We are lowering monthly payments on a case-by-case basis, and we're making a diagnosis of the archetypes and the credit risk profile of each and every one of the customers. Also in some cases, we are providing charge-offs, which is something that we want to review very carefully because we don't want to cover a bad loan with a structure that makes it look like a good loan. That, on the short term, is going to be bad for us and bad for the balance sheet and the income statement. We are providing those types of solution in a case-by-case basis.
It is also different on the type 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 other loans. We have a very interesting internal matrix in which we provide a script for each of the account executives on the branches and also a script for our centros de atención telefónica. What we were seeing is a case-by-case treatment on restructured loans. We are trying to maximize recovery, and we are trying to put a solution on the table on behalf of our customers.
Yeah. I would say, Nicolas, because I think it's quite important what you mentioned about the T1s and Marcos just mentioned. We will honor the calls. I think there were some concerns about us, that we will be paying interest because of this restriction and the dividend. No, the AT1s will continue to be paid fully on that, and we will honor the calls. It's quite important what Gerardo mentioned about this. This 9%, some of those we know they're never going to be able to bounce back because they lost their jobs, so maybe an SME, and we immediately do the charge-off on that. We are bubbling up the balance sheet on that part. The solutions come, as Gerardo mentioned, on a client-by-client basis. Remember one important thing, Banorte has been, for the last 20 years, the best recovery unit in the market by far.
As you know, we buy and sell portfolios. We have been, I would say, toughened through the years by the cycles on this recovery unit. This recovery unit is fully operational, talking to our clients, anticipating issues in order to be quite in line what the situation is. 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. I think we are putting all the elements that we can in order to bypass this process. The most important thing, the balance sheet of Banorte can really stand a lot of pain.
Thanks very much for that, Rafa. One quick just follow-up. The 9% of the clients that exited the relief programs but are not paying yet, are you including those in the 2.8% NPL ratio? Will you include those in the fourth quarter? Hello?
Pardon me, this is the conference operator. Just one moment.
Sorry, it seems that we are out again. Could you please hold on a couple seconds?
Yes, no, we include those.
I rejoined this meeting.
Nicolas, we include those.
Okay, you include those in the NPL ratio. Okay, thanks very much, Rafa.
No, thank you, Nicolas.
Our next question will come from Geoffrey Elliott with Autonomous. Please go ahead.
Hi. Thank you very much for taking the question. I just want to check I've got the message right on provisions, because there were quite a lot of questions and quite a lot of answers. If I paraphrase what I think you were trying to say, and then you tell us if I'm getting it wrong. For 2021, you're saying base case is cost of risk kind of 2.2%-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 have a temporary spike to that 4%, 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.
Our next question will come from Yuri Fernandes with JPMorgan. Please go ahead.
Hi, Marcos, Rafa, thank you. I'll try to be brief, too. Two questions. First one, the 90% of non-payment in the deferrals, that includes the, I don't know, a second wave of deferrals, because one of your peers, he has the NPL and also a small amount of the second wave renegotiations? Just checking if that number has the second wave, and if not, if you can provide us the number of the second kind of relief you are providing to those customers. A second question here on these endless discussions on provisions. From the previous conference call in the second Q, I had an understanding that the MXN 4.9 billion you did in additional provisions, that should be enough until the second half of 2021 to keep cost of risk somewhat stable around those 2%. Now I think I got a different message.
You are not calling this an additional provision. 4.1% cost of risk is very similar to the level of cost of risk that you had in the second Q 2020. Just checking if the speech has changed here regarding provisions for 2021. Thank you.
Yes, Yuri, the first one, the 9% includes a second wave of deferral. So far, so good. That's it. Talking the second one, the provision, Rafa.
Yes. You have to look at the average cost of risk for the year. I think the numbers that we are giving 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. That's the difference that you see.
We should see some quarters with 1.82%, and the peaking with 4%, right? Some quarters should be below two.
Exactly right.
Thank you.
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 charge-offs. I saw that from last quarter's past due loans to this quarter's, there were MXN 4.1 billion in charge-offs. When looking at the consumer's non-performing loans balance, we saw a relevant sequential decline, which I presume stems from the combination of support programs and the write-offs. 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 4.8 billion. The usual charge-offs that the bank does on a quarterly basis are MXN 4.2 billion, MXN 4.4 billion. If you look at the charge-off for the quarter, on the second quarter, it jumped to MXN 8.2 billion. That shows you exactly the size of the cleanup of the balance sheet. Remember that we reduced the charge-off period for the SME from 19 months- 10 months. 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 Yuri was mentioning.
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 4.4.2 on a natural basis. Maybe on the second quarter of 2021, 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. 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. Okay, great. Thank you. Very helpful.
This will conclude our questions. Oops.
Thank you.
Go ahead.
questions that we received online. I will read them. I think the question that was made by Victor Galliano has been already answered, the same by Chris of BlackRock. I think Marcos and Rafael already answered when are we expecting to resume the dividends. 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. How is Banorte going to be affected by this? Are we seeing any M&A activity opportunity and consolidation in the market?
Thank you, Claudia. The pension reform is, Fernando Solís, are you there?
Yes.
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 it to be passed, we are not certain about the time in which it will happen. Of course, as you know, it has some features that will enhance the output accumulation because the contributions will rise from 6.5% to 15%. That's very good. We will have to see what will happen in terms of There is an article about commissions. We don't know yet whether it's going to be standing the way it is or it will be changed, because there has been some lobbying about it. If it remains the way it is, we will expect further consolidation in the system, which of course, being Afore, the largest of the system, we will benefit from that.
We will benefit from more asset accumulation, and we'll benefit from the consolidation, even though we may see some reductions in short-term earnings. That's something we have to wait and see how it will follow. 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 industry the most, and certainly most players are very concerned about it. We will have to wait and see. It will also provide more accumulation if it goes through, and it will also benefit the pension part of the withdrawal part of the accumulation phase. Let's put it that way. The accumulation phase will be benefited to Afores, but also the annuity firms will be benefited because of two things.
One is that more people will start to retire due to old age, given the transition of the law. Therefore, we will have more assets there and therefore more annuities. Let's put it this way: higher annuities than otherwise. I think that will be beneficial also for the accumulation phase. We don't know whether it's 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 all right.
Claudia, talking about the second, the consolidation, the market. I don't want to sound boring, but it's always the same answer, no? 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. Then we will go to the first instance, the caps and the board of directors. Then if it makes sense, we will go to the assembly. It's up to you to decide whatever is going to happen. Yes, worldwide and in Mexico, we see and we can guess that there's going to be a lot of movement, no? Yes, we are very strong and we can do some things, and we don't know. Let's keep eyes open and see what's going on in the market, no? The opportunities will be there, and if it matches someone with our future, welcome.
That is always the same story, but it's always true. Thank you, Claudia.
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. At this time, you may now disconnect your lines.