Hello and welcome to Virtual Investor Conferences. My name is Bob Power and on behalf of OTC Markets, we're very pleased you've joined us for our next presentation from Binorte. Before I introduce our speaker, a few points to note. Please submit your questions in the questions box below the slides. Once the Q and A session ended, don't log out.
You'll automatically be transferred into the Boenorte booth where you can continue to ask questions via chat and access shareholder materials. On a final note, all of today's presentations will be recorded and available for 20 fourseven replay. At this point, I'm very pleased to welcome Ursula Wilhelm, Executive Director of Investor Relations of Grupo Financiero Panorte, which trades on the OTCQX best market under the symbol GBOOY and on the BMV under the symbol GFNORTEO. Welcome back, Ursula.
Well, thank you very much for inviting us to participate in the virtual conference. And thank you both TCQX and everybody who is joining this afternoon to share a little bit about what we are doing. I'd like to say that our our quote in OCCQX is Gvoy. It's easy to to remember. So so just remember about Gvoy.
It's Grupo Pinocerero Banorte in Mexico. I will I have a deck of present of of information that I want to to share with you this morning. So I will go through it and after that I will then look at the questions that we have received and we'll be providing answers to those. So I will start with just a few numbers on the macro environment. As sales were in the world, Mexico has been affected by this COVID pandemic and crisis.
And the outlook for the economy has changed from where we were back in January. So our current projections in terms of the macro environment are as you can see on the screen, we are projecting a contraction in GDP of 7.8% with the largest decline in GDP happening in the second quarter of this year expected to be around 16%. And from there, smaller contractions in Q3 and Q4 for an overall decline in the economic activity of around 8%. This projection is pretty much in the middle of where most where economists and consensus is. The most optimistic economists project a GDP contraction of minus 6% and the most pessimistic economists project a contraction of minus 12%.
So at Van Norte, we are more or less in the middle of it. We are also expecting inflation to decline by the end of the year. As you can see in the chart by December, should be at a 3% range, which is the target of inflation, I mean, 3.5%, which is getting close to the target of inflation by the Central Bank. In fact, inflation is not really a major issue this year as is economic activity. In terms of interest rates, we are also projecting a decline in interest rates.
In the chart here, we are showing at the end of the year rates at 650%. However, this is our previous forecast. Our current forecast is 4.75%. In fact, the current rate is already at 5.5. So we are expecting the Central Bank to reduce rates from the level that they are today by another 175 basis points between June and September.
So by the end of the year, the exchange rate in Mexico will be at around 4.75. Now, these are the general macro numbers and I will give you more color of what is going on in the economy as we go through some of the other slides that I have prepared for this presentation. I just want to remind you a little bit about VaNorte. We are a solid financial institution, one of the largest in Mexico and a very profitable franchise. We have a very nice business mix, which is probably we are the most diversified financial group in Mexico with operations in various areas of financial spectrum.
The company enjoys a very strong financial fundamentals. And this is key because even though COVID COVID crisis is something that we have not seen in the world and we have not lived through it, we are entering into this crisis with very strong fundamentals, and we expect that these are going to support us to provide a cushion for the potential problems that we overcome, especially on the asset quality side that we overcome in the next several months. We have a strong corporate governance. We have an independent board member. We have independent an independent governance solid governance structure that has been tested in different times in the past.
And Grupo Financiero Banos is also one of the most public companies in Mexico, close to 85% to 87% of the shares of the group float in the market and are held by institutional investors across the globe. So we are not just a very public company, but in terms of ownership, very diverse. In terms of the business, Manorte is the result of the collection of many mergers and acquisitions that took place in the past. And in the last five years, we have focused entirely on organic growth. All of the transformation that we have done has been within the retail bank.
And we have basically moved from a customer driven product driven organization to a customer centric organization. IT has been fundamental element that has driven this change. And this transformation has led a very solid financial profile and also a very stronger position in the Mexican market. You can see in the following slide, the diversification of the businesses of the group is very strong. We have the bank, which accounts for 62% of the profits of the group.
The insurance company, of which half of the business comes from bank assurance and the other half comes from regular insurance, the traditional insurance market accounts for 21% of the profits of the group. Then we have pension fund, which manages the retirement savings within the Mexican, the private pension system. It is the largest one in terms of assets under management with close to 25% of assets under under management. And it accounts for 4% of the profits of the group because we only own 50% of this company and so we only account for 50% of the profit. The owner of the other 50% is the Mexican Social Security Institute.
Then we have a number of other smaller finance companies that provide leasing, factoring, warehousing, brokerage services and so on that complement the business of the group. As you can see, the subsidiaries also are quite profitable. All of them were very strong return on equity. But the bank in particular maintains a very strong return on equity that has been increasing over the last five years as you will see later. In terms of market penetration, you can see here that we are the third largest in terms of deposits and the second largest in terms of the loan book.
And this position has been increasing over time. Panorte was a very small bank. There was a time when its market share was close to less than 5% and currently we are the second largest in the institution. Moving now to what has been our what we have been doing through this pandemic in terms of our operations and in terms of our customers. First of all, let me show you in terms of our operations, we clearly took action in mid March with several initiatives.
Most employees are doing home office like has happened elsewhere. You can see here at the corporate level, it says 75%, but at this moment, it's close to 85% of employees are in home office. At branches, we are only having branches staffed at 50% capacity. And every two weeks, we are rotating the branch personnel. In the ops and IT area, we also have a large portion of employees doing home office.
We clearly took health and sanitary precautions in all of our buildings, not just for our employees, but also for our customers. And we have been managing the branch network as with these self measures to maintain a safety environment for everybody. We have 1.2 1,200 branches. Of these, only around 210 branches are closed because of the location where they are. For example, if they are located at a shopping mall and shopping malls are closed, then the branches are also closed.
So we have close to two ten branches closed. The rest are opening or functioning only at 50% capacity. One of the issues with this pandemic was the fact that the economy is closed, poses significant to everybody in terms of employment, in terms of businesses, in terms of revenues and so on. So we were the first one, the first bank in Mexico that on January on March 24, we announced a program, a relief program to support our customers with consumer credit and also our SME customers. This program was open from March 24 until April.
And basically, customers had to apply for the program and they received a four month grace period in the payments of capital and interest on their loans. The only two considerations were that customers have to be have to have their loan with Vanorte and that they have to be current at the end of the loans have to be current at the February. You can see in the screen that close to 35% of the consumer and the SME book applied for the program. The different for example, mortgage was the one that got the largest application with 37% of the balances of mortgages entered into this program. The program is now up and running and customers are not paying their installments from April until July.
From an accounting point of view, this program will have the following effects. Principal and interest payments will be deferred for four months. The amortization schedule of capital of the loans will be extended for four months. At month five, installments will be reactivated and so customers will start to have to pay normally. And we will recognize the accrued but unpaid interest in the p and l against an an interest receivable account on the asset side on the asset side, and we will start collecting on the accrued but unpaid interest starting in the month five.
We also on the wholesale portfolio, we have been providing liquidity assistance to our customers in the form of working capital and liquidity lines that are available for one year. We have been doing this since April and until now, and we expect to enter into a renegotiation process with within the the wholesale portfolio that will be very intense and will start probably around September when the economy is still at a more normalized level, if we can call it that way, and customers have a clearer picture of what their future cash flows are going to be. So this process, we believe it's going to be open from between September and probably until the end of the first quarter of next year. In the next slides, I have some financial information on our last reported results, which were as of the first quarter. I will not comment on them a lot.
But what I can tell you is that posted a very strong quarter considering the circumstances. We withdrew the guidance that we have given to the market back in January, and we will provide a new guidance probably when we report our second quarter numbers. What I can tell you is that we are going to anticipate some of the loan loss provisions that we expect to be required for the deterioration of the portfolio. We are going to anticipate them in starting in June. So you will see an increase in loan loss provisions in the second quarter and in the third quarter mainly.
That will be covering for expected losses that might appear between the third quarter of the year and until the June 21, which is the time where we expect the peak of the NPL deterioration to start showing. So earnings will depend upon how much additional loan loss provisions we bring to the P and L. Around for the month of June, we are expecting between 4,000,000,000 to MXN 5,000,000,000 in additional provisions to the provisions that we'll be making for the regular performance of the portfolios. Just so that you have an idea, for this year, our expectation of loan loss provisions ranges in the at around COP 18,000,000,000. And this number does not incorporate COVID impact.
So in addition to the COP 18,000,000,000, we will have more provisions to cover for COVID impact. In terms of costs, we well, you can see here cost of risk and NPL, it's still at normalized levels. But as I mentioned, we will see an increase in cost of risk this year as we anticipate provisions. On funding costs, we have had a very strong few months despite the difficulties. Deposits have been growing very nicely at a rate of around 9%.
First quarter was 7%, but it's accelerated and the funding costs have been declining. In the first quarter, we were at 45% of the reference rate and we are currently approaching 42%. So there has been a positive performance of deposits and funding costs in this second quarter of the year. In terms of capital, the capital ratio of the banks remains very strong. The CET1 ratio that we reported in the first quarter was 12.2.
We expect this ratio to strengthen further in the next few months and we do not anticipate a major impact on capital. Our worst case scenario that we have run projects that CET1 ratio would drop to a level of 11% if NPLs increase significantly. So we maintain very solid ratios. I also will point out that the regulator in Mexico, the Central Bank reduced the minimum regulatory requirements for one year that is from March 20 to March 21 by close to 200 basis points. And you have in the slide what the new minimums are for Manorte.
But as I mentioned, we do not expect to get there any at any time. It's clearly been ruled out. In terms of support from the regulatory authorities, the Central Bank has been providing monetary support to financial markets and to the banking system. This monetary support has been in the form of liquidity and also credit facilities to provide loans to SMEs, corporates and mid market companies. The all of the supports that the Central Bank has provided is equivalent to close to 3.5% of GDP.
Additionally, the capital ratios were relaxed, as I already mentioned, and also the liquidity ratios of the banking system were relaxed. The minimum liquidity ratio was 100% and currently stands at 85%. And finally, some credit exposures that are relevant, you can see in the screen in the oil industry will have 5% of the book. In tourism, we have 5% of the book. We don't have exposure to airlines.
We have a very small exposure to airports. And as I said, we expect that some of these exposures and some of and we will start a workout and restructuring process within our wholesale portfolio to support our customers. Finally, one comment on the digital what has been the digital behavior. As expected, digital is becoming the new way to do banking as customers have now been using it constantly and accepting it. Most of our digital operations, half of the transactions happen in the mobile and in the Internet and only a very small portion of 4% are happening at the branches.
We also have digital products that can be onboarded digitally without need to have a person to person presence, And we have been marketing those very successfully in these two months of confinement, and we have seen a very important growth in those. With this, I close with this final comment, I close the presentation. And now I will turn to the questions to see if you have any questions for me. The first question is very simple. When you see the second quarter numbers at the July, probably the July, around the twenty fourth, July 25, that's when we would have the release.
Another question is, can you speak about the actions that the Mexican government is taking to assist the economy during this pandemic? Yes, unfortunately, the support of the Mexican government to the economy has been quite limited. There has been a resistance on the part of the federal government to provide support to the private sector. And basically, the government announced that it would continue to invest in its flagship infrastructure its flagship infrastructure projects as a way to support the economy and to produce employment. It's very limited.
On the other hand, the Central Bank has provided support equivalent to 3.5% of GDP in the form of credits that can be placed in the economy and that has been really exceptional and have been supporting the banking system. We do not expect any additional support from the Mexican government. That's to be said. I have another question here about dividends. Have you been paying a dividend?
And if so, did you expect Banorte to continue to pay dividends? This has been a recurring question. We have not paid yet the dividend related to the 2019 profit. We announced when we released our first quarter results that we would defer the dividend decision to a later date once we had a clearer idea of what the environment was like and what was the impact of the COVID situation in our operations. So I expect that we will have a decision made about the dividend.
Traditionally, VaNorte has paid dividends every year. Our current dividend policy is a maximum payout ratio of 50% of net profits. And we believe that it's very likely that we would pay a dividend in 2019. The only decision that needs to be made is the amount and the date of payment, but that will follow. Finally, I have another question here.
Can you speak to market share in Mexico and if you have operations outside of Mexico? Yes. First, no, we don't have operations outside of Mexico. We are a Mexican institution that only operates in Mexico and our goal through time has been to strengthen our position in Mexico. We are currently the second largest financial group with a market share of around 15% in assets and we expect to continue that to grow that market share.
If we look at different businesses, we have been growing strongly on the consumer side. We're a distant player in consumer credit five to seven years ago, and we have been gaining share both in credit cards, in auto loans, in mortgages, and in general in the consumer landscape. So our market share here, for example, in credit card has increased from below 6% to currently close to 10. And in mortgages, we have a market share that is approaching 20% of the market. One I have one final question given that we are getting close to the end of the conference.
How is your digital strategy help you grow your consumer business? Digital has been a fundamental element of growing the consumer. Over the last three years, most of the investment in IT in the business has been moving to digital. We are currently a full digital bank in terms of onboarding of operation and even service. I think that what this is the this COVID crisis provides us with the opportunity to make great changes in the future that will bring about further improvements in efficiency.
And all of this is because we are now a full operating digital bank. Our current efficiency ratio runs between 38% to 40%. So as you can see, it's quite low. But I think that with the tests that we have had of home office work and the fact that customers have now completely adopted digital operations, there's a possibility to further improve efficiency in the future by making some changes to the way we work on a day to day basis, basically. Thank you for taking the time to listen to Vanorte and to listen to to to our operations and to our story.
Thank you for the questions. At this point, I I don't have any more comments. So, Bob, thank you for the time.