Good morning. Welcome to the Vanorte First Quarter twenty twenty Earnings Conference Call. All participants will be in listen only mode. Please note that this event is being recorded. I'd like to turn the conference over to Ursula Wilhelm, Head of Investor Relations.
Please go ahead. Thank you. Good morning, everybody. I am Ursula Virchel, Head of Investor Relations at ESG. I hope you and your family are safe and in good health.
Welcome to Grupo Financiero van Norte's first quarter's earnings conference call. Our CEO, Marcos Ramirez, will provide some remarks about what are doing to cope with the pandemic and financial events and will walk us through the quarterly results. Then Rafael Larrana, our COO, will guide through our expectations for the year. Last, we'll hold the Q and A session. Thank you.
Marcos, thank you.
Thank you, Ursula. Good morning, everybody. I also wish you good health to you and your family. This presentation is longer than usual as we are going to talk about some key topics relevant for the environment that we are crossing. I know we are concerned about the world, about Mexico and about Panorte.
We recognize that these are extremely challenging times for everybody and we are focused on being there for our employees, our customers and our country. Personally, I am convinced that we will come out of this challenge renew and with higher spirits. Regarding Banorte, we are entering the downturn from a position of strength with a healthy balance sheet, strong solvency and strong liquidity. We are very proud of all that our company and employees have been able to do over the past weeks. Our top priority has been to provide continued services to clients and support them through this difficult time.
We acknowledge the world is facing a highly uncertain environment as COVID-nineteen has spread out significantly. In Mexico, society's response to the pandemic has been exceptional. Since mid March, businesses and companies of all sizes and diverse sectors implemented drastic safety measures to cope with a sanitary emergency. On April 1, the government declared lockdown of nonessential economic activities, which was recently extended until May. On the economic front, the Mexican government's narrative towards stimulus packages has been inclined towards fiscal austerity with no additional indebtedness and a reliance of the public infrastructure projects as the main engine to boost the economy.
At the federal level, there will be a tightening of expenditures. Social programs will continue to be disbursed. An important government money transfer program to the informal sector is also taking place already and is supporting micro companies short of liquidity to withstand the quarantine. Top credit is being provided for households and SMEs through different schemes and federal government entities such as ISTE and Infonavit for around ARS 200,000,000,000. Additionally, through the development banks, there is around ARS 700,000,000,000 in available credit and guarantees also for SMEs.
All these measures should provide some relief to the informal economy. Meanwhile, the government expects the private sector to resolve its own challenges. At Vanorte, we have been busy implementing the following measures. About three quarters of our branches remain open and functional staff with a minimum number of employees. We estimate that there is about 50% active branch employees.
Customers on branch are kept in small numbers at a time as a safety measure. At our corporate offices, employees were mobilized to work remotely where possible, assuring they have the necessary tools to work successfully. We estimate more than 70% of the staff is working from home. For those that still need to go into the office, we are taking precautions to maintain their safety. The bank is fully operational online.
Close to 90% of transactions are now self-service and customers have 20 fourseven access to the bank and their accounts. We also have available online opening of consumer credit as well as deposit accounts. Our ATM network has remained functional and accessible. Regarding clients, we are conscious that the lockdown will impose significant challenges for the finances and their businesses. To support individuals and families, on March 24, we were the first bank in Mexico to announce a cash flow relief program for consumer credit and SMEs.
Clients are invited to sign in as long as they are current on their loan payments. They received a four month grace period on principal and interest installments. By mid April, there were 449,000 applications, equivalent to 18% of the client base. On Slide three, you will find more details. We have also been busy helping our middle market and corporate clients with liquidity and advice.
We are offering working capital loans to support immediate liquidity needs as well as extending loan payments. Eventually, as the economy is functioning again, we will be rolling out tailor made solutions for each customer and sector. So we expect the credit remediation process to continue well into 2021. Demand for credit increased at the start of the crisis, with many clients confirming or using the revolving lines. For the month of March, we saw an increase in credit of ARS 14,000,000,000.
We also saw a 33% decline in billing on credit and debit cards by March. It's mainly concentrated in sectors such as tourism, restaurants, airlines and gas stations. At the same time, retail and e commerce billing volume remains adequate and growing. Regarding the bank, actions have been directed to keep a strong liquidity and solvency and anticipating asset quality deterioration. Risk oversight has been enhanced to respond to the volatility and changing dynamics.
Committees are functioning permanently to respond quickly both to our own decisions and our clients. Credit risk models were adjusted to make them more rigorous to the new reality, but to still be able to originate to those who will be less impacted by the economic downturn. Now please turn to Slide four for the highlights of our first quarter financial performance. The underlying business fundamentals had good performance this quarter, but we have two tails: January and February, which were good business as usual months and then March, when the crisis started to unfold. For the quarter, the group reported net income of ARS nine point one billion, slightly higher than last quarter and bringing earnings per share at ARS 3.16.
Return on equity was good at 18.8% and return on assets was strong 2.2%. Revenues on Slide five were 6% above last year and 3% up in the quarter. Softer net interest income at the bank and cyclical decline in fees were offset by good growth in insurance premiums and trading volume. The loan portfolio, Slide six, grew 5% in the quarter, excluding government loans, where balances declined by ARS 12,000,000,000. Asset quality remained very strong, very good and stable across portfolios.
The NPL ratio remained unchanged at 1.7% and credit costs increased only 24 basis points to 2.2%. Around 25% of this increase is related to new loans and the remainder is related to portfolio deterioration. The cost of funds further improved this quarter and deposits were more efficiently priced as rates declined. The funding cost now stands at 45% of reference rate. In the next page, deposits growth accelerated 7% in January and February.
We saw normal behavior inflows. However, in March, we saw volatility inflows, particularly from government related clients. Deposits from companies and individuals behave normally. Moving to Slide eight. Solvency at the bank remains very strong with the overall capital adequacy ratio at 18.97%, almost 19%, while the CET1 ratio was 12.18%, down 56 basis points.
The key drivers of growing in risk weighted assets mainly come from the market volatility as mark to market losses of ARS 6,200,000,000.0 were recognized on some available for sale securities and hedging instruments. These valuation losses come from the peso dollar exchange rate and the price of some bonds. It is worth noting that through 2019 and until February, both accounts appreciated as we recognized mark to market gains. Regarding liquidity on Slide nine, even with the support that the bank provided to clients, the liquidity coverage ratio ended the month strong at 120%. Our main source of funding continues to be sticky deposits.
The bank also has available committed lines with counterparties, which have not been used so far. And do not forget that we have available the liquidity facilities provided by the Central Bank if needed. In March, the bank paid down COP 1,000,000,000 in subordinated notes in the local market and have continued servicing the coupons of its perpetual funds. Shifting to Slide 10. Insurance profits were Ps.
1,700,000,000.0, up 6% in the year, while annuities reported earnings $284,000,000 and AforeA posted Ps. $325,000,000 in net income. All in, the group produced a good set of quarterly results, but the challenges ahead are large. We expect a sharp decline in economic activity in the second quarter of twenty twenty that will be extended well into year end.
At this point, our assessment is that GDP will contract 710% this year. This will depend on the length of the lockdown. We are assuming eight to ten weeks of strict observance of social distancing as well as a GDP contraction in The U. S. Of more than 12% in the second quarter of this year, but a quick V shaped recovery.
We also assume that the Mexican government will increase its fiscal support measure to the private sector at some point. In terms of inflation, it should end the year around 3.6% as weak aggregate demand and lower gasoline prices will compensate for the exchange rate pass through effects to the inflation. So with the COVID-nineteen shut economy and moderate inflation, we expect the Central Bank to continue its easing cycle, taking the reference rate to 4.75% by December. At the beginning of the year, we shared our views for the businesses and expected results. The environment has changed materially.
And then the challenges we face as situations unfold are large. Clearly, the guidance released in January is no longer justified. So we are withdrawing it. With this, I conclude my comments. And now I will ask Rafael Arana to provide some additional remarks on the quarter, also the timetable of the guidance and a few other comments.
Thank you. And Rafa, please, Rachael.
Thank you. Thank you, Marcos. Good morning, everyone, and we also wish you and your families good health and spirits during these difficult weeks. As Marcos mentioned, and I would like to go deep in some of the points already mentioned, the results as you can see on the results for the first three months are right on target of what we guide to you at the beginning of the year. There was there has been a very reasonable growth in deposits, very reasonable growth in funding side and also expansion on the consumer and corporate and commercial.
So and a very disciplined expense control at the group. So our guidance that was at the beginning for some a little bit on the upside, I think we were right on target to comply with it. But as Marcos mentioned, now we have to move into the new reality. I would like you to guide you how do we see our evolution into these new standards that we are seeing on the market. If you move to the Slide 11, you can see our quarterly results compared to what we guide to you at the beginning of the year.
The loan growth is around 6% and it was growing at a very good pace. NIM continued to expand it for the first three months. It expanded exactly as above the 15 basis points. It was 24 basis points compared to the fourth quarter. Expense growth that we guide you 5% to 5.5%.
Now we are aiming to have and this is the only guidance that I can assure to you or all the guidance that we will be giving you in the next months. This is already a commitment. Expense growth will be around 4% or less than 4%. So that will put our efficiency below of what we guide to you of the 38% at the beginning of the year. Cost of risk is standing at 2.2, tax rate exactly at 26 and net income for the first quarter is exactly 9.1, that is right on target of what we guided to you.
Return on equity was below the for the group to 18.8%. But on tangible basis and the return on equity of the group continues to be very strong and very solid. But we have to consider that the impact of the Aforti and the goodwill of the Aforti is weighing heavy on this part. If you go to tangible, then it's completely well above the 20%, 25%, 45% for the group. So our guidance was right on target, but now as Marcos mentioned, we are withdrawing this guidance.
It will be very it will not be a conscious decision for us to give you a guidance today. The only one that I'm giving you today is the expense growth that will be below 4%. But everything else, I think we need to see the evolution for the next quarter to be able to give you a reasonable guidance that we can really comply and deliver to you, okay? If we go on a line by basis, we can see that the balance of the government loans declined in the quarter as all facilities were paid. That was expected on this part.
And there has been some concern about what's the collateral on the tax revenues and for the states and municipalities. And we conducted a stress test on how over collateralized we are supporting this debt service and tax revenue would have to fall by 50% to pressure factors below these contractual terms in the loan agreements. The subnational exposure represents 69% of the government book. The rest is federal related risk. If we move now to the P and L, as I mentioned to you, net interest margin continued to expand in part by the positive evolution of the funding costs and the cyclical increase in the insurance premiums.
The NIM of the bank was 6.3% and grew 10 basis points from last year. At the bank, part of the decline in the net interest income on the variable rate credit book has been offset with a rapid repricing of deposits and a very good growth, as we could see in a minute, on the funding side. Our sensitivity up to January basis points in change in rates was million, million below the number based on the balance sheet of the structure in December. As I mentioned to you, expenses continue to go in the right direction. Now they are sitting at 4.7%, and our goal, our aim is to put those below 4% in order to keep improving the efficiency ratio.
Credit cost of 2.2% on the high side of our projections. This is explained mainly by additional increase of MXN $579,000,000. The relevant items on this part was ARS $213,000,000 for the commercial book, in part to cover some dollar denominated loans that were affected by the depreciation of the currency and EUR $341,000,000 were for consumer and the mortgage portfolio that as we could see in a minute, they continue to perform extremely well. All this together align the net profit to the year end target that we guided to you at the beginning of year. As I mentioned to you, our financial commitments for 2020 are no longer valid.
We will provide updated guidance. I think by the end of the next quarter, we will have a very much more clear picture of what's really going on. And we will continue to update this guidance to provide you all the needed information that you need to update your models and take the decisions that you need to make. And one of the key reasons for this is that the GDP that we expected at the beginning of the year was a minus 3% or 4%. This scenario, as Marcos mentioned, is worsened.
And now we are looking at a seven to 10 contraction on GDP. This steep decline in economic activity is not even parallel to the 95% in order to see the magnitude of the process. We expect the labor market to deteriorate on the next several months, even though the many companies in the private sector are holding up and trying not to fire or lay off employees. One example is the bank. We are not laying off any employees, and many companies are doing the same.
But we know this will affect the activity and the employment on formal employment piece. One issue that you have to remember is that a lot of the federal government relief is going to the informal economy in trying to support that part of the economy and the low income that is really moving there. In terms of asset quality, we believe that it will be well into the third quarter when we start to see the real effects of the process. The timelines of support of program of SMEs and consumer, we know and we already know by talking to our clients, will provide significant cash flow relief and should help mitigate future losses. At this point in time, I also want to address, as Marcos mentioned, we were the first to launch these programs into the market.
But at the same time, even a week before we launched these programs, our recovery unit was already in the market, talking to already clients that have issues on the consumer side and also on the corporate and commercial in order to be extremely flexible with the programs to make them became current and give enough flexibility on the time and the rates for them to be at ease and continue to have a good relationship with the bank. That has been extremely well received by clients, not just on the relief program that we launched, but the already existing clients that were in some kind of trouble in the past. On the origination side, we will continue to see a much more strict and conservative underwriting risk management standards. As you know, we have been evolving in the past years to our own internal models. And we have been as you can see, compared to the market of the big banks, we have been always been on the low side of the cost of risk on NPLs.
And this is the result of a very disciplined origination process, good models, extreme good analytics, extreme recovery unit. And the most important thing is that we have been concentrating basically in our own client base, so we know exactly how the flows are really moving into those accounts. As you know, last year, we were not very active in growing the payroll loan book and also the SMEs because we know that every time there's a change in administration, usually you get a lot of issues on the SMEs. And there was a lot of layoffs announced by the government. So we retreat from those two parts of the book.
And now it looks that it was the right decision based upon the potential pressure that these two lines of products could have on this process. We have also been very diligent in the insecure part of the consumer, specifically in credit cards. As you can see, our NPLs on the credit card has been extremely stable. We are below the same month last year on the number of NPLs. And we continue to be very disciplined on to whom we grant the credit cards.
And this relief program has been extremely well accepted by our clientele. The secured portion of the portfolio and the consumer, including mortgages and auto loans, account for 68% of the consumer credit. And there is a substantial amount of equity embedded in them. For example, I can give you the loan to value ratio in the mortgage book that is 57%. So we believe that even with this falling prices in real estate, there are strong incentives for clients to continue servicing the mortgages.
And we think that our relief program has been also very well accepted by this clientele. On the wholesale portfolio, over the years, we have focused on the right risk selection and pricing, also giving priority to the long lasting relationships that we have been creating through many years. Risk elements such as loan mix diversification by industry and the quality and coverage of collateral and guarantees supporting this portfolio should minimize losses. And also there has been an extremely active and proactive actions taken by all the corporate commercial executives in order to be extremely close to our clients, guaranteeing them the liquidity needed in order to pass this process and thus also have been extremely well received by clients. So we want to be in very close communications with them.
We anticipate a period on the commercial and the corporate of at least twelve months of restructurings and workouts with our clients. In Slide 12, we have provided a breakdown on the wholesale book by industry as many of you have been asking what type of exposures we have and what kind of collaterals we have on this. You can see of the total book that Pemex and Pemex suppliers are close to 5% on the electricity company, including the suppliers, 2.3% construction and real estate housing, 1% commercial, 1.4% others are around 1.8% in malls, we have 1.9% tourism, 5.3%, restaurants 0.2%, airports 0.1%. So we are well diversified and we are taking all the necessary actions in order to guarantee liquidity and support to these clients. Credit costs, we know will increase next year, but this will come for a very low base for us.
And we have been running several scenarios and stress test in different ways, taking into account the growth of the loan book, growth of the funding cost. And basically, I think the key element for you to know is how stressed that we can really move the portfolio and what will be the results on this stress. To give you an example of how aggressive the stress test has been in order to see how strong our capital base can support very aggressive deterioration of the cost of risk and NPLs. If we move the cost of risk to 7% from 2.2% to 7% with no growth on the loan book and also 2% growth on demand deposits, our core Tier one will still stay at 10.48%. So we have a strong capital base.
And this is a very extreme scenario because this will consider that in addition of the ARS 18,000,000,000 that we have on the reserves currently one, you have to add another €24,000,000,000 more of reserves in this year. So we have been running several scenarios in order to be and feel comfortable about our capital position, solvency position and also the liquidity processes that we have been delivering also into the market. This projection that I'm just giving to you on the stress test scenario didn't include any credit relief or credit deferral program. So this will help to minimize that as we already saw at the March on the collection side. We already see a very healthy migration zero to one non payments in all of the products because of the relief program.
So that we know this is kind of artificial, but it's part of the relief that we need in order for clients to be at ease and help them to bypass this pandemic situation that we hope that is going to last maybe less than the four months, but we don't know, but we will be monitoring this very closely. On the rate side, as you know, at the beginning, we were aiming to have at least six percent of our rates. Now I think it's five point five percent also. It's looking a little bit on the high end. And I think the number to look now on rates should be around 4.75%.
This will obviously put pressure on the margins even though our book on the consumer side, on the fixed rate side is a very strong book, close to MXN 300,000,000. But we have to manage continue to manage as we have been doing the cost of funds and also to see the depreciation of the variable rate part of the book. As I mentioned to you, expenses will continue to go down to 4%. This will require additional 2,600,000,000.0 more of reduction in expenses that will come not for personnel expenses, but mainly for deferral or lack of activity in some projects that we could reduce the pace or move into the next year and also several actions that we've taken on the expense line. As you have seen on the and Marcos mentioned that the Mexican authorities now the Central Bank have provided extremely strong and good program for to assure liquidity and also a very creative way and also to also allow enough to use some guarantees.
And also, we're waiting for the final rules for the SMEs. But we are very pleased with the support of the Central Bank on the liquidity side and solvency side. And also, there's another thing that we have been asking a lot, and it has to be because we received a note from the CMBB from the regulator that in order to support solvency, they were asking the financial groups to please restrain from the dividend from 2019 and 2020 in order to support solvency. As we communicate to them, VaNorte being as a public institution and the corporate governance of VaNorte, we need to first to present that to the Board. Yesterday, we present these issues to the Board.
We present different scenarios. And the scenario that was decided by the Board was to defer the dividend, not to cancel the dividend, to defer the dividend in order to see how this situation evolves. And when we are in with much more clarity about the situation, we will again go to the Board and then move again to the assembly to propose them what we think is good for the bank and for the shareholders. It's important to remember, as Marcos mentioned, that VaNorte is in a very strong capital position and liquidity position. But I think it's prudent to defer not to cancel this dividend process.
As you know, we also guide you that we were going to be much more active on the share repurchase program that we thought was a little small compared to the potential of what we really wanted to do with the repurchase program. So we moved that in order to accommodate mainly the same size of the shares that we issue to Interxiones at the moment that we plan this. So that has been approved. It's now on hold until we see much more clarity on this. But now we have enough size on our repurchase program to be much more active if we would like and we see fit to do in order to provide better returns to our shareholders.
Another thing that I think it has creating confusion in the market is questions about the possibility to defer coupon payments on the perpetual bonds issued by Vanorte. If the CMBB recommendation on dividend is followed. Regarding this matter, we want to be extremely clear. We don't intend to defer coupon payments. The description of the perpetual bonds is very clear in that only possibility to defer payment is if the capital ratios of the bank fall below a certain regulatory threshold, which is shown in Slide 14.
And as you see, we have a very, very strong buffers and room in order to protect these payments and commitments that we have with our bondholders on this part. Okay. On the other side is the relief program, what's going to be the accounting mechanism for the consumer payment deferral program. On Slide 15, we provide an example of this. What is this program basically is that you defer the four payments, interest and principal for four months, and then the credit starts again on month five.
During this process, you will accrue interest of the unpaid interest that will be reflected as accrued interest. And at the same time, we will create on the asset side an accounts receivable note in order to match exactly the number of the relief programs and the finance of the relief programs against this account receivable on the balance sheet. We will follow that account and how these two numbers follow and we will provide to you on a quarterly basis what's the evolution of this part. But we feel very, very comfortable about exactly how the program has been released to the market. And we also feel very comfortable that this will provide a very good support on the to our clients.
On the SME side, that we have also a strong relief program. There's also, in this part, some specific legal restructuring issues that we that you need to do in the process. And as you know, public offices and notaries are being closed. So this is going to take a little more time and on a one to one basis, we are moving in the right direction on this part. We are signing private agreements with our clients And we hope that by the April and through May, we will almost cover most of the SME clients in order for them to provide the liquidity that they need to pass this process.
We know SME is a critical point in order to sustain the cost of risk numbers that we would like to have by the end of the year. Now with this, I finish my comments and now it's open for Q and A.
Thank you, Rapha. Let's open the microphone.
We will now begin the question and answer session. Our first question is from Ernesto Gabilondo from Bank of America. Go ahead.
Hi, good morning, Marcos, Rafa, Ursula and all your team. Thanks for the detailed presentation and thanks for the opportunity. My question is on the relief program for clients. I believe most of the Mexican banks will not be creating provisions as clients will not be delayed or will not default during the grace period. However, we have seen another Mexican bank that created additional provisions based on expected losses, and they were approved by the regulator.
Also, have seen U. S. Banks reporting first quarter results, and they recognized practically all the provisions they created in 2019 in one quarter. So is there a possibility to see provisions based on expected losses or to create some provisions related to the 30% of your clients that you expect will request for the relief program or to the 19% of the portfolio exposed to riskier sectors? Any color on this would be very helpful.
Thank you.
Thank you, Ernesto. It's a very good question. Rafael is going to give us some color on this. Rafael?
Yes. As you mentioned, one bank provide this. This specific regulation that allows the bank under a specific permit to create general provisions on to see what we see because everything is unexpected loss, but we could see an additional building up of provision if we decide to do so. That's part of what we would like to see during these three months. There is a possibility that we could create additional provisions, not just the required provisions, if we see fit and if we see the evolution of the loan book, yes, there's a possibility of that on the regulation to go to the CNBB and ask for a specific permit to do so based upon numbers that we can present to the CMBB.
At this point in time, we would like to see how this evolves and how many clients we put on to the program and especially on the SMEs, what is really the situation of the SMEs in the next four months. But yes, we are considering that Ernesto as part of the evolution of the new guidance that we will release to you on the next three months.
Very clear. Thank you very much.
Our next question is from Jason Mollin from Scotiabank. Go ahead.
Thank you very much. We appreciate the presentation, Marcos, Rafael, Ursula and the extensive details and color that you've given. My first question is related to a little bit more detail on what you just were talking about asset quality. And you mentioned stress testing with cost of risk potentially even going to 7%. Just a cursory look back, not going back to 'ninety four or 'ninety five, but looking in 02/2009, we saw cost of risk, I think, for three quarters, consecutive quarters, the first three quarters hitting 3.6%.
But maybe you can give us some context in that stress test of 7% by segment, where are the biggest losses, I'm imagining they're in unsecured lines? And then second question is on compensating for this complicated environment. You mentioned keeping costs under control and talking about limiting them to 4% growth. Right now, that's the kind of the one area that is under your control and you are giving that kind of expectation for the next years. Clearly, there's a lot of uncertainty.
But what would that entail? What how can you talk about that cost containment and potentially relate that to the some numbers or data on the digitalization trends that we've been seeing with the crisis? Is this something that's encouraging that your clients who can't who are trying to obey the stay at home are increasing their use of digital channels? Thank you.
Well, Jason, thank you. There is a lot of differences in 1994, 2009 and now. As Rafa mentioned, 1994 the banks were part of the problem. Now we're part of the solution. So it's totally different again from my point of view.
And Rafa is going to give us some color in the context of the stress test and where are the biggest losses. And also, yes, the world is changing. The cost is under control, and we will move to the new world in the digital channels. And also, Rafael is going to to talk a little bit about that. Thank you.
Yes. First, let me go into, I think, what you mentioned about the expense on the expense line. As everybody is doing, we also are adjusting the bonus payments. That's an adjustment on that. We also are adjusting many projects that were considered nonessential at this point in time, like building additional capacity in some offices or creating additional programs to be on the forefront on some of the issues that we know based upon what we have been achieving in the past.
As you can see that on the digitalization process that you just mentioned, digitalization has grown very, very fast during this process. We are providing our clients even the capability to open digital accounts on the funding side, not just on credit loans or payroll loans or anything, but also on the funding side. So we now are a full digital bank that we could generate. This is the basic account, not the account that has to being able to receive quantities above 18,000 or MXN 20,000. But this account allow us to really start serving the digital base on that and then evolve into that account that we can provide also by digital means ways to recover the paper and the necessary authentication process.
So we are extremely pleased of the behavior of our digital channels, growing 50% on the compared to last year. And the most important thing is that the NPS of our clients, not just linked to the relief program, but also by the usage of the digital channels, just to give you a very strong number, has grown from the period of the March 20 to the April 15, grew 35 basis points the NPS. So clients are extremely pleased with our digital access to the banks, web, mobile, call center, even on the ATMs, I've cut off semi physical debt. But they are extremely pleased not just for the relief program, but also how easy it is for them to relate to the bank. Increased 35 basis points in fifteen days, twenty days is really remarkable.
And compared to last year, we increased 50 basis points compared to the in all the channels on that part. So and also, as you can see on the transactional side, even though there has been a substantial reduction in some of the businesses that we serve, like you can imagine, like restaurants, airports, hotels that go down at 5080%. There also has been a very good growth in the digital world like on the Amazon. So the RAP is all those growing 20%, 41%, 48%, so supermarkets, telecommunications. So overall, the transactions have been around a decrease of 30%, but balancing out with on the digital world.
That's concerning. We are not stopping any of the projects on that. We are accelerating those projects on the digital. We are more really delaying projects on the physical world. But on the digital world, we were quite advanced and we are just finalizing most of the initiatives that we have on that.
So that's part of the overall reduction that we could see that we could achieve on the cost side. On the why I decided to show you the extreme case of the 7% cost of risk because it was quite important for us to provide a number to the market of how resilient our capital base can be if we really go to extremes of 7%. That is well above, as you mentioned, the 94% part. If you remember of 02/2008, basically the main problem was the credit card. The credit card reached a cost of risk of 15.4% at that point in time because there was a lack of information on the credit bureau.
There was a lack of the relief programs. We were not on time to deliver the relief programs for our clients. And we are in a completely different scenario right now. I think the relief programs were very, very timely for them and also the collection office also was very timely delivering the new programs. So I think we are showing you the 5% this 7%.
And where we are putting mainly the big pressure in SMEs and in credit cards. That's why we are really putting a lot of that in order to go to this extreme. Honestly, I think we will be more and I don't want to take this as a number, but we are aiming to go I think we can control these numbers more around the 2.7, 2.8 for this year and then see what's the evolution for the next year. But that was an extreme scenario to really provide you enough information to see how the solvency of the bank really stands during this process. But yes, our main concerns will be the SMEs and the credit cards.
But all the programs that we are giving to them and the quality of the base that we have, I think, will provide very decent numbers in this process. What is the number? I will feel much more comfortable to give it to you after maybe at the end of the third quarter. We will keep you posted on the evolution of those numbers, but we have to wait until the third quarter to see exactly what's the potential deterioration of the books.
Very helpful. Thank you, Jason.
Thank you.
Our next question is from Gabriel Nobrega from Citibank. Go ahead.
Hi, everyone. Good morning and thank you for the opportunity to ask questions. I'd like to like to introduce a question on your loan side. How are you perceiving corporate demand over these past few weeks? Also looking
Gabriel Gabriel, sorry Gabriel,
we can't hear you. Gabriel,
could you speak a little bit louder, closer because we cannot hear you.
Okay, sorry.
Sorry. Can you hear me now better?
Yes. Perfect. Perfect. Perfect.
Okay. Okay. So I'd actually like to ask you on loan demand side, what are
you
perceiving from the demand from corporates over the last few weeks? Because for example, here in Brazil, we have been seeing higher demand usually from corporates being that the capital markets are actually muted? They're usually looking for working capital loans. And I'd also like to ask on your corporate loan book being that this loan book is usually countercyclical, do you believe that there could be increased demand from the government from final fees? Thank you.
Thank you, Gabriel. Rafael?
Yes. Gabriel, we saw during the first three months good growth on the mortgage, decent on credit cards, payrolls, we started to see some movement there. And so you see a potential loan growth of 7% because you see good growth on the corporate and on the commercial. But you have to understand that the corporate and commercial was basically part of the liquidity lines that they were needed for support of the process. On the government side, we still see demand entities, but we feel very comfortable with the size of our government book.
If we see fit, we will go into specific loans on some of the government side. When we see that the returns and the relationships really support the deal. But at this point in time on the loan growth, we basically are devoted to support our clients on liquidity and support them on flexible terms in order for them to be able to pass through this time. Honestly, our loan growth is not the main concern at this point in time. It's the health of the book, but it concerns us and provides the necessary support and liquidity to our clients.
So I think you could see some growth, 4%, 5% on this. But what is really something remarkable is the funding part, not just the loan growth. I'm sorry, you didn't ask that. But in comparison to the loan growth, our funding is growing very nicely in these first three months. If you see compared to the last year, you see a very good evolution above double digit numbers and also keeping low our funding costs.
So I think that if we keep our book healthy and keep on going on the funding side, it will be a much better deal that to go and try to grow the loan book. The loan book will be to support our clients and to support the necessary liquidity that they need in order to bypass this process. But in our funding side, we are doing very, very remarkable steps to a much lower cost of funds and a more strong liquidity. Our
next question is from Thomas Paredo from BTG. Go ahead.
Hi, everyone. Thanks for the opportunity. I have two questions, if I may. The first one is if you could just clarify how is the dynamic of the accrual of interest. So I believe we will continue to see the interest being accrued through the P and L, right?
And also if you could clarify to us after how many days of delinquency sorry, can you hear?
Yes, we can hear you.
And how many days of the okay. So and how many days of delinquency after delinquency you stopped accruing interest in the P and L? And due to the grace periods given to clients, this should not happen during the crisis. Am I right? And the second question is if you could give us a bit more of detail on the insurance arm going forward because Banorte has the strongest franchise in Mexico and this could eventually be a key business to help through the crisis.
If you could share some information on how you are seeing the evolution of premiums against claims, if you expect any decrease in claims in the short term, although in the health segment, you could see a spike due to people needing to go to the hospitals? And how is the breakdown of your insurance business? What is the exposure by the different insurance products?
Thank you, Thomas. The first, yes, we are accruing the interest in the P and L, but Rafael is going to give more color. The second one is ninety days, as I remember, also Rafa and Ursula. Talking about the insurance, it's a big topic because we have a lot of insurance and the claims are totally different and some of them has to be with the FX and all this. But also, Soulette is going to give us some color.
Thank you, Thomas. And please, Rafael, go ahead.
Yes. Thomas, thank you for the question. Let me go step by step on how the process was. The first four months will be deferred of payments of capital of interest. So there's no cash flow coming into the bank in these four months, okay?
There will be no charge of interest for this new financing, okay? When you defer the payments, you will not charge any interest like this deferral. The third issue, this interest that we don't recover for the fourth month based upon the of the accounting methodology that is required because the loan is a life loan. You will in an accounting base, you will register those interest accrued interest into the P and L. And at the same time, you will create an account on the balance sheet on the asset side that it will call collection of interest based upon these programs.
So this asset that we are building up on the balance sheet will start to amortize at the moment that the payments start and reactivate again, that will be on the month five. So you have four months that you don't the client doesn't pay anything. Those you accrue the interest. You create an account on the balance sheet, that is an account receivable account based on the interest to be collected, and then you restart the credit on month five. If the client doesn't start paying in month five, you apply the same methodology that you used to apply on a product by product basis.
Ninety days, as Marcos mentioned, on most of the credit cards and that on the mortgage side, you pay up to twelve months to fully reserve the loan. So it's just an impasse of the four months and then everything restarts again. And the same methodologies that apply for past due loans and for the building up of the reserves starts to operate on month five. I don't know
if
that's clear enough or you want me to go deeper into any of the things that I said.
Regarding the have really cleared. Thank you.
And now we move into the insurance part.
Yes. Regarding your questions about insurance, we expect our initial thoughts at the beginning of the year for the insurance operation was to have net profit grow by at least 10%. This obviously, we are going to review these and give you an updated number when we provide more detail on the overall expectation for the group. Remember that in the insurance business, half of the book, if not a little bit more than that, probably it's around 55% right now of the book is made up of insurance of life insurance, which is very stable and very low in losses. The health book of the insurance company is very small, is probably around less than 12% of total premiums.
And it is mostly concentrated in high end customers. So we are not expecting major increase in claims on the life on the health book because of the pandemic. Also, the what we might expect through the next month is that the insurance origination of premiums that are related to the credit products of the bank will follow the similar trends that we see in the at the bank, meaning that if we continue to originate mortgages, well, that will feed through the insurance company and it will continue originating life premiums related to the mortgage book and so on. So overall, we are not that concerned about insurance. In fact, we expect to maintain a pretty solid result through the year.
And just to add to Usula, also on the digital world, we also since you can now ask for your payroll loan on a digital way and everything, we're also providing facilities for them on a digital way to really acquire a life simple life product for the clients. So insurance is a key business for us. I think it will be it will continue to provide decent results for this year, as Ursula mentioned. And just that we are in that part of the business, the pension company continues to do extremely well. I think we will go to a very good growth numbers and that will not be affected by this pandemic that we see.
So one thing will compensate the other because we continue to see very strong numbers on the annuities company. Our
next question is from Marcelo Stegues from Credit Suisse. Go ahead.
Hi, hello everyone and thanks so much for the opportunity to ask questions. I have two questions. The first with regards to your liquidity position, we've seen a decline in your LCR from 133% to 120%. And I was wondering if you think considering that the market remained stress levels and you continue to have to renegotiate some of the loans, if you'd expect your liquidity position to potentially deteriorate in the coming quarters? And what is your action plan in that respect?
And my second question tied to that is, if this is in your stress scenario, you did mention, right, about your capital ratio or your core equity Tier one of close to 10% in that extreme scenario. What would that be in terms of your LCR in that same stress scenario? Thank you.
Yes. The liquidity, Marcelo, I think we continue to support that we will be ranging on the numbers from 115 to 130 on the liquidity ratio. We don't see any reason why not. And the reason for that is that if we need to go to for a new loan, we rather stay with the liquidity that our clients need. So we are not going for high growth in order to stress our liquidity positions.
We only are maintaining our liquidity to support the client base. And we have still room to grow the book, but we are going to be very careful how to grow the book in order to maintain the liquidity at the levels that we would like to have. Even if we have the relief that was given by the CMBB that you can go below the 100% and it's going to be on an average basis and things, no, we would like to stick with our process that we have the liquidity base. We have committed lines that we have not withdrawn those committed lines. And as I mentioned to you, we have been having a very good inflow of funds through this process because also the relief program will also give liquidity to the consumers that will be part of the funding side.
And the companies, once they feel comfortable about the liquidity, that they will have enough liquidity, then that part of the lines also stay with us. So we are managing liquidity on a daily basis. I think we have been it was a very stressful process before the Central Bank really came into the market. And I think once the Central Bank really published the initiatives that we really like those initiatives, I think the market now is at much more at ease on liquidity side. So liquidity, we need to manage the liquidity, but we will be managing that based upon how we can really manage the growth and where do we really want to grow once we have room for growing the book.
On the CET1 that you mentioned, and I think I gave you to also that when we see a reduction on the funding side of minus 2%, that's the stress part. So even the LCR holds pretty well onto that scenario. It's not a matter of liquidity on that scenario. It's much more a matter of do we have enough solvency to support the book or not. That has been and believe me, we every single day, at the end of the day, have a liquidity meeting in order to address the issues.
And we are completely connected the treasury with the consumer, the corporate and the commercial and SMEs to see if they have a new client that they want to go and incorporate. We see if we have room for that. But first, we privilege the already existing relationships that we have. Yes, we can grow, but I think it's a much better situation now if we concentrate of what we have and we manage what we have.
Thanks, Rafael. Do you mind if I just ask one additional question here? Regarding your government portfolio, in particular, the loans to states and municipalities, Given that it's very likely there'll be a significant decline in tax revenues for the states and municipalities in light of the crisis, have you been approached by states to try to renegotiate the debt or provide sort of grace periods for the debt payment? Because even though, of course, you have a big it's very collateralized, in the end, the states, they need to pay their bills, right? And I think that VaNorte has historically been renegotiating when needed.
How do you see that playing out right now?
Marcelo, thank you. So far, the states are not trying to negotiate any debt, and we are open with you. And so far, that's the situation. I don't know in the future, but so far, we feel they feel comfortable and we feel comfortable too. No problem.
Okay. Thank you, Marx.
Our next question is from Carlos Gomez Go ahead.
Hello, good morning. Like others, thank you very much for the presentation. It is very detailed and would really appreciate having the exposure to the sectors and all your concentration on the perpetual bonds. I think that's very clear, very useful. Two minor questions.
What is your expectation for interest rates for the end of the year? I don't know if you have mentioned that. On the dividend, we understand that you have deferred the decision. Is there a time when you have to retake that decision, which is I mean, is it September or after September? And finally, and I realize this is the least of your priorities, what happens to the 2020 plan now?
Carlos,
the first one, we don't have the magic ball, but we are expecting to the Banco Macro to continue with the easing cycle. So, so far, we see a 4.75% at the end of the year as the rate. What happens to the 2020 is still there. We will go for it. We were above the curve and now we are a little bit behind and let's see.
And that's why we are asking you to give us four more months to know what's going on and to see. Now it's too dark, but we are committed to deliver all that we can and let's wait a little bit to see what happens.
Carlos, what was the second question? Sorry, there was a cut on the line.
Yes. When do you need to make a decision about the dividend since it has been postponed? Do you have to do it by September or October? Or you will decide at some indeterminate point in the future?
We don't have a time, a specific time. Give us these four months and as soon we will tell you the date when we will be ready to answer that question.
Thank you.
Thank you, Carlos. You, Carlos.
Our next question is from Thiago Batista from UBS. Go ahead.
Hi, guys. Thanks for the opportunity. I have one follow-up and one question. The follow-up, Rafael, you already mentioned in the beginning of the call about Banorte's intentions to pay dividends and maybe do a buyback. Can you give us the magnitude of those distributions or at least how you guys are looking to it if you are working with any new capital guide, capital target, if this distribution will be a percentage of the earnings or any specific amount.
So if you can try to quantify a little bit this potential buyback and dividends. And the second question, if you see any kind of M and A opportunities in the current scenario, for sure, probably not now, but in a couple of months, if this is a possibility?
I will start for the second one and I will leave then the first one to Rafa. As always, we are telling we are open to see what's going on in the market. It's our duty to see what's going in the market. So far, it's we cannot see. The weather is not clear.
So we don't have any M and A opportunities. Although we see some investments, as you mentioned before, the digital should be the new world and all these. But the weather is not clear. So we are not seeing any M and A opportunities. Although we need to say that we are open and if something comes, we will go to the owners of the bank to see if we found this and that's it.
But no, we are not looking anything actively. And the first one, Rafa, please.
Yes. I think it's important and thank you, Thiago, for the question because it allows us to clear some issues. The dividend number is already sitting on the group at the group level. It's not at the bank. We already funneled that to the group.
So that is sitting at the group. In a way, that is hurting some of the name of the bank, but that's the situation because we were already planning to distribute the dividend close to the 50%. But that is already sitting there on the group. As we said, we see prudent to wait a bit to see how the situation evolves. But it's important to convey to the market that a dividend is already completely funded at the group level at the level of that we decided at the beginning of the year that up to 50%.
So but we need to see how this evolves and then we will move into a much more clear number to give it to you.
And I would like to take the opportunity to remind you that the current dividend payment policy has not been changed. It remains as it was yesterday and last year and so on. The dividend policy is that the group can pay up to 50% of dividends. The range is from 16% to 50% of dividends. As Rafael mentioned, before March, we were expecting to pay a 50% payout and that dividend has already been funded to the holding company from the subsidiaries.
What we are going to do now is to defer the payment until a date in the future, which has not been decided yet and it will depend upon the how this situation unfolds in the next several months.
Okay, perfect. Thank you, Thiago.
Our next question is from Nicolas Riva from Bank of America. Go ahead.
Yes. Thanks very much really for the chance to ask questions. I have two questions, and I apologize if you answered this before already. The first one is, on the measures that Bancoico announced earlier this week that they're going to be providing these loans for eighteen, twenty four months, to commercial and development banks to be used towards lending for SMEs and some individuals. Is the government going to provide any kind of guarantees on these loans?
Because my understanding is that more than having a liquidity problem, the reason really why the banks are being a bit hesitant to lend more in this environment is, of course, because of credit risks. And also, if you were to be using this credit facility, are you going to be using this mainly to lend to your existing clients or also to new clients? And then the second question is, in your earnings presentation, you talk about the exposure to Pemex. And you say that loans to Pemex are about 3% of the loan book and loans to Pemex suppliers are 1.9% of the loan book. I understand that Mexican banks in general have very low, if any, loan or reserves for this exposure.
My question is given that Pemex is now rated high yield by two rating agencies, does that change your need to grid on our reserves for this exposure to PEMEX? Thank you.
Ursula, go ahead.
I will address the question about Pemex. Basically, Nicolas, remember that we follow the guidelines that are provided by the regulators. The regulators view the state owned enterprises as a quasi sovereign risk. And therefore, they have different risk weightings than reserve and requirements than, let's say, the private sector portfolio. In the case of the state owned enterprises, the risk weighting is 20% and the reserve requirement is related to the lowest level of reserve requirement given that is used as a quasi sovereign.
Up until today, the regulators have not made any changes to these guidelines and therefore the bank has not made any changes to its either risk weighting or level of reserves that it has for these exposures. Yes. Okay.
So Uzule, so just to clarify, so we shouldn't expect an increase in loan loss reserves for the exposure to Pemex in the second quarter, for example?
Unless the regulator made a change to the regulation, we would not because on the other hand, the exposures that we have are very dynamic. And all of through this period, Pemex has been paying on time, and there is no evidence that we will see something different.
On the
Central Bank liquidity facilities, we are still evaluating how these facilities will play in terms of the lending book. So we still don't know exactly if we are going to get collateral or if we are going to get funding, what are going to be the requirements. This is still a work in process. However, it's very welcome. And we also have still we have available from the development banks, the guarantee programs that they have up until before the crisis, those programs are still open.
So let's say, if we continue to originate SME loans, for example, if we wanted, we could draw down on the guarantee program that nothing has for SME. But those have not been canceled. This is what we have so far.
Okay. Thanks very much. And
only thing that you said is that we will use this liquidity for new loans. I think that will not be the purpose of the program. I think the purpose of the program is to provide liquidity because that will create a very unstable market that people would like to try to poach based upon funds that are really devoted to liquidity. So I think we will stay with our clients. And if we generate new clients, it will be based upon our own liquidity, not this liquidity.
Okay. Thanks, Rafael.
Thank you.
Our next question is from Claudia Benavente from Santander. Go ahead. Hi, thank you for the call. I was only wondering about the deferral program, like a portion of the Sorry,
CANDIDO Claudia, I cannot hear
risk in overall has spiked. Now it's better?
BRACHER:] Are
you listening better now or no? Sure. No, was wondering like about the commercial book. Maybe most of the loans not necessarily enter into the program of deferring the installment. So I was wondering, taking into account that the overall risk macro risk has deteriorated dramatically, should we see an increase on the provisions there solely because of using the expected loss basis provisioning model.
So I was wondering if you could provide some color there. I understand that there could be many repercussions on a per client basis, but I was wondering only regarding the expected loss price issue. See an important increase in provisions because of that on the commercial book. Thank you.
CARLOS Thank you. Ursula, please go ahead.
Claudia, let me clarify something. The deferral program is only for consumer credit and SMEs. The SME book is worth 2,000,000,000 pesos and it is included in the commercial book. But as you can see, the majority of the commercial book is made up for loans that go to middle markets and larger companies. This book is not part of the deferral program.
We are handling on a case by case basis talking to our customers and understanding what the situation is with them. So the out of SMEs, everything else that is related to companies is being handled on a case by case basis and is not going to go into the deferral program it's not Exactly. It's not a big issue. Yes. No, that's my point.
Since the commercial book is not included in the program and probably you are running it the provisioning model under an expected loss basis. Even though their declines at the moment may not see a deterioration on their operations, you still probably will have to increase provisions because of that. Is that correct?
Claudia, this is Rafael. I think it depends on a case by case basis. Basically, you're doing at this point in time is that you go to the client and you provide a liquidity line for the client in the process that you start the restructuring process. If you don't achieve that the client can't really go through this process, then that will be an increase in reserves, yes. At this point in time, what we have seen with our commercial clients is that we are once they know they will have the liquidity that we promised to them, I think they are much more at ease on that.
Eventually, do we see an increase in provisions? Probably yes, for clients that cannot go through this process. But we will see as soon as if the talking on a one to one basis doesn't work, then we will start to creating reserves, yes. We don't know exactly at this point in time the amounts, but we are doing everything in order to try to minimize this.
Okay. Thank you, Rafael. Now the thing is that what I was wondering is that at the end, you incorporate in the model an input to outline a little bit the framework of how the industry will be performing. If the industry as an overall is deteriorating, then without then maybe talking to the customers, there should be an important deterioration in that front. Only to give an example, like toll roads, even though they are there, the traffic has been reducing dramatically.
So their sales or revenues are going to be lower. So probably they still got an important cash position, but still the environment as an overall is weaker. So that was like the question that I had.
No, yes. And you're right, Claudia. If we know that this is going to go for six or seven months and there will be no not an ending in sight, I think what you say is exactly right. I mean, that will be a very strong deterioration of some of the things. We expect this goes to start to reactivate sooner than that.
But we are that's why we are going and also as mentioned, talking on a one to one basis to each of the clients. And let me give you an example because on tourism, I think the other day, one of your colleagues was asking, do you have strong collaterals on the tourism side? Yes, we have very strong collaterals. I mean prime properties are but that's not the problem. I mean, problem is not that the collateral is not there.
The problem is that when the hotels are going to open again. And that's how long do we have to work with them on the liquidity issue in order for them to allow them to start restarting again in Cabo San Lucas and Cancun. That's where mostly of our properties are. So it's a matter of how long this really is going to take.
Okay. Thank you so much, Rafael. Our next question is from Jeffrey Elliott, who's an Autonomous Investor. It's
Jeffrey Elliott from Autonomous Research. Curious to get an update for those of us not on the ground in Mexico, on the social distancing. What does the compliance there look like? And then you kind of gave a timeframe for how long you expect that to last. I think seven to ten weeks was the kind of time range you discussed.
How realistic do you think that is? We've seen lockdowns in lots of countries be extended already. Thank you.
Thank you, Geoffrey. It's a tough question. So far, our analysts and I think the average is that we are expecting seven weeks around that of total lockdown and then to start to reopen again. But it's too early to say that. It has to be with the climate.
It has to be with everything. So we still don't know that we are seeing though that it will grow by states. There are Northern states that when they are doing the things, I think, right and they will come out first. So it's going to be different in the whole Mexico and you will see some difference, I think, in the future. But still it's too early to say something about that.
Sorry, I don't have the answer.
And in terms of the compliance with the measures, how good is that?
No. The compliance has been generally well behaved. I mean, people are not if you go to the streets, let's say, of Mexico City, you will see there's almost very little people, very little movement. Schools are closed. Some of the factories that are not related to essential economic activity activity are closed.
And so it's working.
Thank you.
This concludes our question and answer session. I would now like to turn the conference over to Marcos Ramirez, CEO, for closing remarks.
Thank you everybody. I hope you are doing well with your families. And if we have something to say, we will meet with you first. And if not, three months from now, we will discuss how this evolves. Thank you very much to everybody.
Thank you to the team of Panorte and let's wait for the best. Thank you.
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.