Good day, and welcome to the Ibanorte Second Quarter twenty nineteen Earnings Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Ursula Wilhelm. Please go ahead.
Thank you, Christian. Hello, and welcome to Grupo Financiero Van Norte's Second Quarter twenty nineteen Results. This morning, Marcos Ramirez, Chief Executive Officer, will lead the presentation. Then Rafael Larrana, COO, will take you through some details of the quarter. And at the end of his comments, we will take your questions.
Before we get started, I'd like to remind you that today's presentation may contain forward looking statements based on management's current expectations and are subject to uncertainty and change in circumstances. Actual results might differ materially from these statements due to a variety of factors. With that said, let me turn it over to Marcos Ramirez.
Thank you, Ursula. Good morning to everyone. Thank you for joining us in the earnings presentation. We had a strong quarter and first half of twenty nineteen. Reported earnings for the second quarter reached MXN 8,700,000,000.0.
Our earnings per share were MXN 3.03, in line with the prior quarter and delivering a strong return on equity of 19.5%. For the first semester, earnings per share reached COP 6.47, increasing 29% over a year ago, resulting in a return on equity of 21.1% or if adjusted for one offs, point 9%. So we are getting very close to the 20% return on equity laid out in our 2020 strategic plan and this one year earlier than projected. Therefore, we will share with you our next medium term strategic plan during the first quarter of next year. In the meantime, we continue to see good momentum within our diversified businesses.
While trade volumes are moderating along with economic activity, customer deposit volumes continue to grow nicely as well as the transactional business including general banking transactions and merchant processing. Our clients continue to embrace our multichannel offers and are increasingly using our digital solutions. Outside of banking, insurance volumes remain adequate. During this time, we have been executing and making progress in our top priorities for the year. First and foremost is the great focus placed on enhanced customer experience as we continue to advance in automating and streamlining customer processes and services.
We are also making investments to expand our digital capabilities to boost customer interaction with the bank. Improving cross sell remains at the heart of our contact with customers and already the cross sell ratio is reaching two products per customer in contrast with the 1.8 ratio of two years ago. From the financial standpoint, profitability and manageable risks are the main drivers of business decisions. All these efforts together are converging in the good performance achieved this first quarter this quarter and half of the year. We have been very active in enhancing our digital payments business for that matter.
In mid June, we announced a minority investment in CLIP, a Mexican fintech aggregator that provides users with card readers and enables them to accept card payments through smartphones and tablets. It is growing its affiliate base at a faster pace than banks. With this alliance, we are aimed to take advantage of the massive market opportunity to become the leading supplier of payment solutions in Mexico. This alliance complements our acquiring business, which as you know is underpinned on digital and e commerce as opposed to the more traditional bricks and mortars merchant businesses. We also launched Vanortego, an extension of our mobile solutions to allow customers to make transactions such as payments, transfers or cash withdrawals on social media apps such as WhatsApp or Facebook, all this without leaving the app.
As it is shown in the conference call deck, the results for the second quarter and the first semester speak from themselves. Let me walk you through the most relevant elements. So let's turn to Slide six, please. Revenues totaling 24,700,000,000.0 slipped 3% against the recurring number of the prior quarter, entirely explained by the seasonality of the insurance at the beginning of every year. Broken down by components, net interest income excluding insurance and annuities grew 2%.
Net fees increased 22%, while other income grew 31% on a recurring basis. Only trading income declined 60% in the quarter. We acknowledge that the subject growth in the entity risk income is partly driven by slower growth in the loan portfolio, which was 1% in the quarter, but also by higher cost of funds as we have increased the share of wholesale money to fund the assets acquired last year. However, an improved funding structure of the transaction already slashed 70 basis points of interest costs, allowing the NIM to absorb and revert the 20 basis point impact produced by the consolidation of Interxion. To sum up, the overall equation is moving according to our projections and is generating positive results as the net interest margin of the banking business improved by all metrics during this quarter.
As such, on Slide six, the net interest margin of the bank increased 10 basis points to 6.3%, while the net interest margin of the group, excluding insurance and annuities, expanded 20 basis points to reach 5.5%. The consolidated net interest margin of the group level declined 20 basis points as was expected. Note that insurance renewals affect the group's NIM by exactly 20 basis points between the first and second quarters every year. To conclude, the NIM is performing according to our forecast and should result in an improvement in the overall consolidated group's net interest margin of 20 basis points going forward. Moving on to expenses on Slide seven, they were lower ARS $479,000,000 than the first quarter on general and administrative expenses.
While total expenses grew 8% for the year, in line with our forecast, They include $770,000,000 related to running the Interxion's operation and also rents on corporate offices, remember the seller leaseback, which are expenses that Banorte didn't have prior to this year. Excluding these new items, expenses at Vanorte are growing at a controlled 3%. We delivered positive operational leverage again and improved our efficiency, which stands at a healthy 38.9% as we roll out our yearly investment plan. The cost of credit remained stable in the quarter as provisions were in line with those of the first quarter mainly because of three factors. First, softer loan growth.
Second, provision reversals related to loan payments in the government book and third, normalization of the NPL formation in some of the consumer books. Compared to last year, the 60 basis points improvement in cost of trade relates to provision reversals on payments within the state government loan book and also from the lower provision requirements of MXN two seventy five million as we have started to use our internal models to calculate LLP's, the loan loss provisions. Our effective tax rate for the quarter was 25.9%, slightly better than our outlook. Now turning to Slide eight, overall credit quality is stable. In the quarter, the group's NPL ratio deteriorated 12 basis points to 1.9% driven by a seasonal deterioration in payroll loans of $420,000,000, slightly higher delinquencies in SMEs of MXN 153,000,000 and two commercial exposures were MXN $270,000,000 in which we are already acting on anticipating them back to performing status in the second quarter semester.
The quarterly increase in the loss ratio of the group as well as in the payroll and SME portfolios is exacerbated by the lower growth in the balance of performing loans. Compared to last year, the group's NPL ratio of 1.9% improved 11 basis points related to lower delinquencies in the credit card book, auto and commercial portfolios. We anticipate a stable asset quality performance going forward as credit underwriting remains tightly controlled in all segments. In the consumer business, we're prioritizing growth within existing customers as new origination is based on credit pre approvals. We think that the current environment still remains fairly supportive to our consumer businesses, particularly as salaries in the country are growing high in real terms and inflation continues falling.
Now let's turn to Slide nine to review the performance of the non bank subsidiaries. Accumulated net profit for Seguro Va Norte excluding the investments in the ForEx were MXN 2,400,000,000.0, increasing 16% annually. Retained premiums grew 6% while claims were down 4%. As it is explained by seasonality, profits in the second quarter were million. Pension Espanorte posted accumulated net income of ARS $495,000,000, which increased 24 annually.
In the quarter, net income was ARS $223,000,000, 18% lower on higher operation expenses. Afore reported MXN 1,600,000,000.0 in accumulated earnings, 20% higher than a year ago on higher financial income on its invested capital, while in the quarter profits increased 4%. Moving to the solvency of the bank, this is Slide 10, the capital adequacy ratio of the quarter was 20% partly boosted by the IT1 bond placement. I want to highlight that the core equity Tier one ratio was 13.1%, which is lower by seven basis points from the previous period as the bank made a dividend to the holding company of MXN 9,900,000,000.0 to complement the group's dividend to shareholders, which was also paid in June. Switching gears to the economy and the marketplace, Page 11.
Throughout the year, Mexico has experienced lower growth, downward inflation and a stable exchange rate. On the one hand, lower growth is explained mainly by the fact that there is always a slowdown during the first year of every administration. As it is shown in Slide 11, for example, the growth rate during the first year of former President Fox administration was minus 0.4%. And the first year of government of former President of Pena Nieto was 1.4%. As in every political cycle, we're pretty sure that confidence will be restored and we will get back to growth rates closer to 2% later on.
It is also worth noting that private consumption has proven to be quite resilient. In our view, this has been mainly explained by solid formal employment dynamics and wages that have continued to increase in real terms, currently growing above two percent. In fact, on the Slide 12, you can see that inflation has been trending downwards towards the Central Bank three percentage target. On the other hand, the exchange rate has remained fairly stable. In our view, this has been mainly due to the wide interest rate differential between the U.
S. Fed funds and Mexico monetary policy rate. The fact that the Mexican government is fed up the Senate ratification of the new trade agreement, the USMCA, as well as the Mexican government's prudent fiscal stance. In this context, the government has pledged to keep the debt unchanged at the current levels around 45% of GDP, which by the way includes PEDMEX debt as it is shown in the upper right corner on this slide. In terms of interest rates, the downward inflation path and the slower growth environment may open up space for rate cuts as we move closer to the end of the year.
In this context, we have rebalanced our asset portfolio towards fixed rates, allowing for a less sensitive balance sheet to inter rate dynamics going forward. All in all, the one thing I want to stress here is that rain or shine regardless of booms and boosts, credit penetration in Mexico has increased around four percentage points in each administration as it is shown in the chart below in Slide 12. Moreover, in the past cycles, Mexico did not have the solid formal employment structure that the country is based upon these days. We do not see why we cannot observe at least a 22% credit to GDP ratio by year 2024. More so than the new administration has the will to boost electronic payments of government services as well as implementing COVID, increasing financial inclusion, which in turn will evolve and foster other financial needs.
And yes, Van Norte will be there too. We have experienced different cycles throughout the years and we have a surprise. We plan to continue doing so. The financial group and its subsidiaries enjoy a strong franchise and business capabilities, a robust financial standing and exceptional solvency. Therefore, we are positioned very strongly to navigate through a more challenging environment and deliver strong performance.
Now Rafael is going to give you some details on the results and the guidance and then we can move back and be happy to take your questions.
We'll take our first question at this time and it comes from Jason Mollin from Scotiabank. Please go ahead. Your line is open.
Hello. This is Jason Mullen. My question is on credit quality and the credit cycle. The cost of risk has been stable at Van Norte and we're seeing very muted economic growth. We're seeing Banorte and the sector slow loan growth.
How do you view where Banorte and the banking system are in the credit cycle? And you did mention and show how strong employment and wages continue to be. How long can that last? And should we expect the turn in this cycle in the next twelve to eighteen months? Thanks.
Ladies and gentlemen, please standby as we're experiencing a temporary interruption in today's conference. Please we thank you for your patience and please remain on the line. Apologies. The line is now reconnected. Please go ahead.
Yes. Since I don't know exactly where we lose connection, will sorry, but I will repeat. Basically what we are discussing at this point in time is how we're going to comply with the guidance. We are in line to achieve the results that we promised to market. Obviously, as a financial group, we have different levers that allow us to have flexibility in the way we generate the revenue.
And the revenue in many of the business has been strong, know that has been slow, but overall we are online to deliver the results promised to you. Let me start with the lending business. The lending business, the consumer portfolios continues to be quite strong and healthy. Mortgage book is growing around 12%. Their car loans are growing 15%.
Credit card is also reaching close to 10%. Payroll loans are the ones that are lagging behind mainly because every change in the administration, we basically stopped the lending process a year before the change in the administration. Now we're going to start again to start giving and growing on the payroll loans. So overall, what you can see on the consumer book is will be around 11% to 12% growth. On the corporate and the commercial books, there's another story.
We see single digit growth, 6% basically on the corporate and commercials. Credit demand for investment has moderately, but we still see strong corporate demand for working capital and also a lot of initiatives to increase the debt profiles. In the government segment, as we anticipate when the balance of loans in the second semester are basically stable or negative. As we anticipate to you and there were some concerns also by some of the investors community that our concentration with the book on government book was too high. We explained them that that concentration is going to go and reduce through the years because the rate of growth of the other parts of the book, the consumer and the corporate and commercial and SMEs.
So we are very pleased with how the government book is performing. As you have seen, a decline in the overall market of 4% in the government book. Loan demand is mainly related to refinancing existing credit and competition is intense, basically leading to margin pressures. Since we have the largest credit portfolio in this segment, we are the target of competition and competition has been extremely aggressive to go for the government loan. But not everything is negative.
This juncture is giving us the opportunity to reduce risk that we don't want to have to strengthen the relationship where appropriate. And our goal is to maintain the profitability of the book and therefore we are letting go those exposures that we believe the spread is not where we want it to be or the relationship is not exactly what we want to have. It's good to recall that these assets provide us with a strong return on equity and very healthy risk as we expected since the acquisition. The concentration of the government book within the total loan book has declined to 25 from 28 as we announced you since the beginning of the acquisition. This number should be continued to trend to 23% to 22% and stays on 22% based upon the rate of growth of the other portfolios.
In sum, we continue to see private sector loan growth exactly as we mentioned to you at the beginning from 7% to 9% with the government book mostly flat. Turning to the net interest margin, we are more optimistic than earlier. And as Marcos mentioned, since the beginning of the acquisition of Interxiones, we basically were funding assets at a reference rate of 20 basis points. Now we are 70 basis points below that cost of funds And we continue an acceleration of the improvement on the cost of funds that will allow us to continue to expand the profitability of the portfolio acquired from Interxiones. A very good work from the treasury has allowed us to see by the end of the year numbers basically at least 40 basis points more on the margin side for the book of Interaciones.
This will improve our margin for at least 20 basis points more as we also mentioned at the beginning of the year. Maybe 20 basis points is the lower end of
Yes, sir. We can hear you loud and clear. We can hear Sorry. All
We thought we were cut from the line. So overall, what we see is a good improvement on the net interest margin by the efficient work of the treasury and from the 70 basis points reduction since the acquisition of Interaciones, now we anticipate 40 basis points more to the end of the year. So the 20 basis points that we see, I think is on the lower end of the potential growth and improvement. In the interest rates, there have been some concern about the sensitivity of the book. As you have seen, we have been working aggressively in reducing the sensitivity of the book.
Now we are coming to a number that 100 basis points has a sensitivity of around MXN $380,000,000 to 400,000,000 that is sensibly lower than the 1,200,000,000 that was two years ago. Another interest another element that will support expansion in the net interest margin and the accelerating on our better funding cost is the additional Tier one capital ratio that we just issued a month ago, equivalent to MXN 20,900,000,000.0 at a blended coupon of 7.9%, which is quite favorable compared to the MXN 7.33 coupon of the 81 that we issued back in 2017. These proceeds including the cost of foreign exchange risk coverage will allow us to manage further down the cost to fund these assets purchased last year. So a good expansion on the profitability of the book from Interxiones will continue to provide a sustained and recurring earnings to our net income. Our liquidity position also becomes more supportive of NIM because the perpetual current future of the bond does not have LCR requirements.
Continuing on revenues, we confirm our estimate to achieve a fee growth of 12% on higher volume of transactions. As Marcos mentioned, we continue to be very aggressively in managing electronic transactions and the acquisition of electronic payments. Now on expenses, we estimate that expense growth will remain in the target range of 7% to 9% for the year, therefore bringing the cost income ratio below the 38.5%. It's worth to mention what Marcos referred to us at the beginning of the presentation that if divide the different components of the expense ratio, Van Norte is growing at a rate of 3% that is right below inflation and right in line what we based upon want to achieve based upon the automation and all the investment that we have been doing in technology. Switching to the cost of risk, there were also some comments on one report.
Let me go through these numbers and also refer to specific pages on our report that allow us to go deep into what I'm going to describe. The cost of risk, maintained a range of two to 2.3. And it's quite important to remember that this cost of risk was given to you at the beginning of the year. Even though the cost of risk at this point in time is of 1.9, many of you have seen and heard us to say that is mainly too low compared to the usual cyclical performance of the book. So what I think for the year what we will see is a range of we keep the 2.3 range, but we will be on the lower end of the range.
On this, there has also and you can see the in Page seven on the quarterly report, a very detailed explanation of provisions that because there's some concern that there was some deterioration of the book. As you have seen, the credit card book continues to be better than last year, an improvement. The mortgage book is at 1% NPL, the car loans 1% NPLs. There was some deterioration, Marco says, on the payroll loans, but this is mainly explained by the change in the labor numbers from basically the government administration. Most of it now has been passed through to the vintages.
Another reflection that I would like to stress is that there were some comments regarding that the coverage ratio reduces 14 basis points on the first half. This has a very clear explanation for that and it doesn't have to anything to do to manage the balance sheet to privilege the income statement. What it has to do is basically of this 14 basis points, 10 of those are coming for the right reasons. For the better performance of the models that now we use, the internal models, prepayments on some of the loans and also a relief from the provisions that we build up at the end of the last year because a very high number of short term loans from the government book came at the December. On the 14% impact on the coverage ratio, only 4% only four basis points come from deterioration that are mainly the payroll book, some commercial loans and some of the on the SMEs.
So the coverage ratio by the end of the year will jump again to the usual 130, 131 as we have seen in the past years. But this doesn't have to do anything to privilege the net income by playing with the reserves or with the coverage ratio. It's a very clear explanation on Page seven on the quarterly report. If I move now to the tax rate, there was also some comments about the tax rate. Let me also give you and guide you to the tax rate to explanation about why the number is below what we guided to the market.
As you know, we have been in the past year and years mainly trying to create all the provisions for the homebuilders process. Since those provisions were difficult to guarantee that there was going to be a recovery of those, those provisions were never deducted or going to deferred taxes. So there was really reducing the financial number and created an additional wave on the income. Since those are now gone, we have not to provide any more for those. So that benefit our and reduce our tax rate.
And the other issue is related to the integration and acquisition of Interxiones of the COP 110,000,000,000. And when you basically apply the inflation rate based upon the rules of the tax authorities, you get also a reduction in the tax rate related to the impact of inflation. So the number that you should see on a recurring basis going forward is 27%. So this is related to the relief that we now have from the homebuilders' issues and related mainly to also the integration of Interxiones and the inflation impact that we have with it. Now moving to the net income.
Why do we move the net income from 36,000,000,000 to €36,800,000,000 and we reduced the range. Basically, we continue to see a very strong numbers in some of the business and very healthy trend on the cost of funds. When the cost of funds were affected by the integration of Interxiones, we jumped the cost of funds overall to 53% of reference rate. Now we are aiming to end the year around 48% and trend by the next year close to the 44% that was before the integration of Interxiones. That trend is sustainable and we see a very positive acceleration to achieve that trend.
So that is basically another push that we will have in that will benefit all of the business with WICOV. It benefits the balance sheet overall for the group. On the another issue that is also coming to many of the questions and interactions with the investors community and the analysts is what is happening with the capital ratio. The capital ratio, as Marcos mentioned, now is sitting at 13.1%, the core Tier one. The additional Tier one that we put on the book allow us to jump that to on Tier the core Tier one plus 81 to 18.5.
And you see another piece of basically Basel II non efficient capital that is sitting at top of the capital ratio that you will see those prepayments happen in the next year to reduce that 2% to stay around the overall capital ratio of 18%. The core Tier one, as we have always mentioned to the market, is our commitment is to stay from 12 to 12.5. Now we are above that and that also the question what's going to be the process to managing the capital. We're always looking for ways to make and return capital to the market in the best efficient way by either tactical dividends or other potential movements that we could have through the process that guarantee that the shareholders gets the best return by managing the capital right. Finally, I also would like because some concerns have been addressed to us.
I want to comment on the bank exposure of the state owned companies and they have these numerous questions about it. Our total exposure to Pemex stands around COP 40,000,000,000, while our exposure to supply is COP 10,500,000,000.0. In the case of CFE, the energy company, exposure stand at ARS 28,000,000,000 and supply is around ARS 1,600,000,000.0. Both exposure are small and manageable from a concentration standpoint and from the capital perspective. That said, we remain vigilant on the execution of the recently announced Pemex program.
With this, I conclude my comments and now we are ready to take your questions.
Thank you, Rafael. Thank you. As a reminder to the participants over the phone, it's star one if you wish to queue up for a question. Please ensure that the mute function is switched off to allow your signal to reach our equipment. We will continue with question from Jason Mollin from Scotiabank.
Please go ahead, Your line is now open.
Hi, thank you very much. Thanks for the presentation and actually addressing a lot of the issues and questions Rafael that I had. But a more general question on the credit cycle in particular for consumers. You've seen a stable cost of risk. You've seen NPLs under control.
And you as you highlighted, you've seen very good employment numbers and wage numbers, positive trends for the consumer. But where do you think we are in this cycle? Is it just one way up or shouldn't we at some point see some kind of downturn on this front? Do you think that the consumer could see some difficulties in the next twelve to eighteen months? Thanks.
Jason, thank you. As we mentioned on the call, we are vigilant and I think we are looking good numbers on employment and good numbers on wages. I think the internal models are providing us with a much better perspective of the credit risk of the portfolio. And also we tightened up the origination process mainly devoted to the clients that we see. We are not confident to say the 1.9 cost of risk that we now currently have and we move to the two to 2.3 or four that we have on the guidance is because we, as you know, by the cycle, we expect some deterioration, especially on the payroll loans.
On the overall books, I think we were on a very happy path to continue strong growth and reasonable numbers. The more vigilant that we have, as you know, every change in administration is the payroll book that is now, I think, mostly through the cycle and will start to improve. And also the SMEs that usually when the lack of funding from the federal government to the state, there's a crunch, a cash crunch that really affects the SMEs. So that's the other part of the book that we have been vigilant and you already see some deterioration on the SME, especially and it's very, very precise location of those in three of the regions that we serve.
So do
you think I mean, you think that
on the consumer, when could you see a downturn or a bigger slowdown in credit cards or car loans or mortgage for that matter? Or is this kind of double digit mid teen growth really sustainable for more than a few quarters?
If you look Jason and I think this is worth mentioning also, we have been in a very aggressive competition with the other banks mainly BBVA, especially on the mortgage book and on the car loan books. And what that is creating is really a very good offering for the market concerning the rates. So I think that will allow the market to continue grow at the pace that we see in the mortgage and the car loans. I honestly think that we will see a pickup on the lending side for the payrolls and SMEs once the federal budget starts to be released to the entities, we also will see a pickup in that. So we don't see any signs of deterioration on the consumer as long as the labor and wages stays in the way they are.
Jason, this is Gabriel Casillas, Chief Economist. Just to complement a little bit to what Rafael has already mentioned, your question is very good in terms that, you know, you see the convergence of two events, a turning political cycle and also turn in the credit cycle. So if you take a look to that both things are happening pretty much at the same time and taking a look at what has been happening not only to consumer credit growth, but also to nonperforming loans that are at the very low level. Then the the question the next question is whether the consumer feels confident to spend, then this will be the beginning of a new credit cycle. But that's the main question.
And that's why Rafael has been saying that we are very vigilant with respect to what has been happening to nonperforming loans and all that. So once this confidence is restored, as it has always happened in the past political cycles, I think that if you see this from a credit cycle standpoint, it will mean the beginning of a new credit cycle. If something is not restored, it will be the other way around. But either way, we do not see any deterioration happening or to happen in the I mean, very soon.
Thank you. Thank you.
Thank you, Jason.
Thank you. We will now take our next question from Jorg Friedman from Citi. Please go ahead. Your line is
Sorry, not sure if this is my turn because I got it broken down. Can you hear me?
Yes, perfectly.
Okay. This is Jorg Friedman from Citigroup. Thank you very much for the opportunity. I have two questions. The first one related to capital.
I think much has been said about the potential negative impacts that the bank could have on its balance sheet when Pemex and CFU were downgraded last month. But I see that securities mark to market were actually a positive contributor to capital this quarter, adding about 13 basis points. I don't know if it's probably related to gains in the longer part of the current structure. So if you could comment about any potential impacts that should follow these downgrades on capital for the next quarter, that would be great or not impact on that would be great. And the second question, just wondering on the guidance, you changed it slightly those two line items highlighted by Rafa during the presentation, both in the upside net interest margins and lower taxation.
But just wondering if you could comment the reasons for not changing the upper part of the net income and ROE ranges that I know were kept stable. Don't you believe that those potential upsides could also bring upside for the overall net income guidance previously established? Thank you very much.
Rafa, please.
Let me go for the first for the second one. We have been prudent on the cost of risk. When you put the numbers and you add up everything to the 2.4 or 2.3 of the high end of the that will can reduce the potential upward trend above what we mentioned on the net income. We are conservative on that point, yes, but we would like to stay in that as what Gabriel mentioned to see how the cycle goes. And I will also want to add some other questions about Jason.
If you just look at the numbers that we've just been published of the retail sales, Retail sales continue to be very, very strong confirming that real wages had a very positive impact already in economy side and on the health of the consumer. So I would say that that's the reason that's mainly the reason for that, that we would like to stick with our cost of risk that we guide the market at the beginning. If we see a much better trend and a sustainable trend by the third quarter, we will change our guidance on that upper part of the number. On the other
Yes. So just for me to understand here, the 2.3%, is the upper range of the cost of risk, you are just working in a conservative manner, tracking if this could wait on the net income. If trends continue healthy as they have been so far, probably you are going to revise up the net income guidance for the next quarter. Is that correct?
That's correct. That's correct. Regarding the Pemex securities, you know, does change on a constant basis on a we mark to market that on a daily basis. And that would be a positive. It has to do a lot more to do with the exchange rate.
That's more about the potential ratings or anything about Pemex. Since the currency has been quite stable, that has been benefit on this part of the securities. Usually, if you look at the numbers on a quarterly basis that we provide the market, you see these numbers range from EUR 1,000,000,000 plus to minus EUR 1,000,000,000 less depending on the currency on the state of the currency.
Perfect, Rafael. No, that's very clear. If you could just remind us as a follow-up there, you mentioned about exposures for both Pemex, CFE and their suppliers. Could you break down those exposures between loans and securities as well? So I think this would facilitate our job in understanding potential impacts going forward.
I really appreciate.
Yes, Ustella has a very detailed because she's a very expert on Pemex.
Not quite, but on the MXN 40,000,000,000 exposure to Pemex around 14.5 are bonds and on the CFP exposure around MXN600 million are bonds. The rest is credit.
That's perfect. Thank you. That's perfect. Thank you very much.
Thank you. We will now take our next question from Marcelo Telles from Credit Suisse. Please go ahead. Your line is open.
Hi, hello everyone. Thanks for the opportunity and congratulations the very good call and a lot of information, very transparent. Appreciate it. I have two questions. The first one regarding the growth of the loan portfolio is kind of a follow-up, you know, from one of the earlier questions.
Kept the guidance for loan growth for this year of seven to 9%. But if you look at your loan growth to date year to date, your portfolio is probably down maybe something close to 2%, which would mean you probably have to grow almost like 4% per quarter, you know, in the second half of the year, you know, to reach the guidance. And we saw one of your peers reducing the guidance from 7% to 9% to four to 6%. So what makes you confident that you can still reach the guidance for the year? And my second question is, I know you talk a lot about the margin outlook, but if you can fast forward a little bit and think about next year, how do you think your NIM should evolve if rates indeed come down a little bit and growth probably not going to change that much.
And plus with some of the instruments that you've been issuing the longer term bonds included this last one that you just did, which definitely improved your LCR in a very big way, which is definitely a positive. But how do you see that play out in the margins down the road? Thank you.
Yes. Thank you, Marcelo. And I think it's very important that we clarify this. The numbers that we mentioned and when we run down the numbers about the 15% growth car loans, 12% on the mortgage book, close to 10% on the credit cards and payrolls and SME lagging, but going to catch up a little bit the remainder of the year. That's basically and in addition with the commercial and corporate growing six to seven, that's basically what we call the banking book excluding the government book.
The government book as you will mention is below the growth of last year. That has been the case for Vanorten in the past. And since we anticipated in the acquisition of Interaciones, that group was not going to grow because of the size that we already have on the market. And also that there was some redundancy on the credits that we have and we would like to better let them go and strengthen the relationship that we have with other parts of the book. So the numbers that you see, even if we there's always a strong pickup at the end of the year on government book.
The government book will not allow us if you add the government book, we will not reach the seven to nine. The seven to nine will be reached basically on banking book. And the government book, the benefits on the government book on the margin side, on the net income side will come from the much better funding cost that we are getting from the relief on the funding cost that we have currently on by funding on the Interxiones book. But it's quite important that and I thank you for clarifying that. If we add the government book, that number will not add up to seven to nine.
The consumer and the corporate and the commercial that will stick to the seven to nine. The government book, as we mentioned at the beginning of the year, will either be flat or growing less minus two.
Thank you. That's very clear, Rafael.
And on the margin side, there has been questions. Honestly, before the evolution of the funding side, we were quite happy to have a sustainable net interest margin around 6.2. Now we see that number that we could potentially even raise it. And there's reason for that. The first one is the continuous return to the former funding cost that Vanorta used to have.
That's a very good trend that is happening. And the other one is that by doing so currently because in a way to accelerate the funding of the Interxiones book, we raised the level of price on the time deposits that allow us to grow the book 18% for the year well above the market, obviously, additional cost. That if you compare the cost of funds of the time deposits book, that is 6.2% compared to the 7.5%, that is basically the funding cost in the market was very positive for us to allow this growth at a different cost as in the past. But that also changed the mix. We used to have 65% demand deposits and 35% on time deposits.
Now the number is 52% to 48%. That when the interest rates start to go down, you will get a relief from the 48 also and not on the 65 as we used to do in the past. So that in addition will boost the margin up. But the main trend, I think now that we see the potential evolution of the overall cost of funds, we are very confident that we will keep a sustainable net interest margin even if interest rates start to drop above the 6.2%, maybe in the range of 6.2% to 6.4%.
You, Rafael. Marcello, gracias. Thank you. We will now take our next question from Claudia Benevente from Santander. Please go ahead.
Your line is open. Hi. Thank you for opportunity of asking questions. I was wondering about the infrastructure portfolio. It's three quarters of no growth there, probably things seasonal because it's the first year of new administration.
So I was wondering when we should be seeing the portfolio to accelerate. As I understand, you can start on the commercial book side, not on government loans. That's why I was wondering if you see any potential of growth there and when?
Thank
you, Claudia. And it's quite important to go through this. One of the main reasons for the acquisition of Interxion is what's the capability that Interxion has in managing the infrastructure business at a much better and efficient way than anyone in the market. There has been a slowdown as we mentioned on the beginning on the call. You will see a very big push for Vanorte on the infrastructure business in a coming event that is going to happen in less than three weeks that we would like to present how the infrastructure process in Mexico could accelerate and we could benefit from that based upon the expertise that we now have the bank.
So you will see in the next three to four weeks a big announcement of related to the infrastructure where Vanorte can play and will lead a key role in developing the infrastructure in Mexico.
Perfect. Thanks so much.
Thank you, Claudia.
Thank you. We'll now take our next question from Ernesto Gabilondo from Bank of America. Please go ahead. Your line is open.
Hi, good morning Marcos and Rafa and thanks for the opportunity. I think you have answered most of the questions during your presentation, so just a couple of questions. I believe the implementation of biometrics is expected during the first quarter of next year. So can you please share with us what would be the targets of this new technology? And would this be implemented in branches, ATMs and smartphones?
And on my second question, it is related to the government book. Given that we have seen downgrades in the credit ratings of Pemex and the sovereign, just want to know how do you see the asset quality of this segment? We know that by regulation, it's not necessary to create additional provisions. But what could happen if next year we see a reduction in federal transfers? Just trying to figure out what is the risk on this portfolio.
Thank you.
Yes. Thank you, Ernesto. Biometrics continues to move aggressively in the market. I can tell you now that the numbers that we have is that now we have authenticated 88% of all the transactions that happened at the branch already. We would like to move to 100%.
Still there's some issues related on testing and linkages and everything that is ongoing on that part. But we will hope to have a very close 100% in the next months and we are very pleased of the evolution of that. Basically right now we're doing at the branch level because on the mobile you can do basic on the by using your biometrics on a personal basis. But I think where we would really like to do the big pushes on the at the branch level that most of transactions that can have additional risk happens. So we like biometrics a lot.
There's a big push. The branches already more than using this application and it's helping us to really reduce fraud in a nice way. That's concerning the biometrics. A lot of evolution will continue to happen on that. And I would like to because there has been concerns on the suppliers of Pemex.
Here is Rene Pimentel that is the head of the Corporate Business that he will basically manage this relationship. Rene, if you could.
Yes. Good morning, Ernesto. Basically, what we're seeing on the suppliers of Pemex and Cefe, we've had a very strong relationship with their main suppliers. And certainly there's been a shift in paradigm and the way they've been operating with Pemex and CFA. But we have seen some opportunities specifically for those suppliers that have been working over a long period of time with Pemex and CFE and our trusted suppliers and deliver, especially in those fronts which are crucial for Pemex's plans of increasing production.
So we have seen some opportunities in that front, probably not the type of opportunities that we expected a couple of years ago in the energy front with the market, but we are certainly seeing some opportunities and we are supporting our clients that have been there present with Pemex and CFE for a long time. So certainly there's been a shift, but this is part of the corporate portfolio that has continued to grow and we are being very vigilant and being very careful with what clients we work with. But certainly the top suppliers have been receiving interesting contracts and are looking at interesting projects.
If we remove the PEMEX and TFE exposure and we talk about only on government loans, I just want to figure out if we have lower further on transfers next year, what could be the risk of the government portfolio next year?
Remember that the federal transfers are like divided in three. You have what we call participations, that is the tax collection from each state government, that the federal government does it and then they give the money back. I mean, if you take a look to what has happened, I mean, these participations have been growing at a very high pace. So we do not foresee that unless tax collection goes down. But we do not foresee that because of two reasons.
Number one, because it's highly likely that next year, the Mexican economy will grow more as everything after the political cycle begins. So we're expecting the economy to grow at least 1.4%. So tax collections should go up. In terms of of the mechanisms to to improve tax collection, the government has been doing a lot of effort to to do that as well. So we do not foresee transfers to to state government to actually come down.
Maybe, you know, the social transfers could be could still be lower, and I see it happen this year. But as you know, 90% of the state budgets are rely on participations, not on social transfers. So we definitely not concerned about that at all.
But on the loan book, Ernesto, we don't we have an over collateralization with the tax money that services the loans. So even if transfers were to be removed, there is a cushion in each of the loans that we have to cover that.
Perfect. Thank you very much, Gabriel and Russela.
We will now take our next question from Arturo Lange from Itau BBA. Please go ahead. Your line is open. Mr. Lange, please be advised your line is open.
Please ensure that you're not muted on your side if you wish to ask a question. There seems to be no question from Arturo Lange at this time. We will move on to our next question. It comes from Carlos Gomez from HSBC. Please go ahead, Your line is open.
Hi, this is Carlos Gomez from HSBC. I have two questions. The first two capital. You talked about it earlier and I may have missed some details. You are now at CET1 of 13.1%.
Your loan portfolio is not growing. So therefore, it's expected that you will accumulate more capital. Up to what level would you feel comfortable at this point? You have been at 11% in the past. And when would you consider the possibility of giving an extraordinary dividend?
And second, we are going to get to 2020 next year. You'll achieve your goals presumably on the 2020 plan. What comes next? Do you expect to have another long term planning exercise? Are you comfortable with the ratios that you're going to obtain?
Are those sustainable? Have you started to think beyond 2020? Thank you so much.
Carlos, thank you. Talking about the what's after the 2020 plan, yes, there is life and we are already working on it. So we are going to, let's say, launch it in as we said in the first quarter of next year. We are already working on it because it's not a new plan. It's something that is a fade in, fade out.
And I think you will be surprised, I hope, everybody. And we will show the strength of Panorte in that plan. And as I said, it's going to be released next year, in the first quarter next week. And talking about the dividend, yes, there is a lot of we can buy shares, we can dividends, but it's too early to predict yet. And as soon as we have more information, we will see what we're going to do with possible excess of capital, but not now yet, okay?
Okay. But could you define excess? What is the minimum level you would like to have?
No. I think Carlos, we have been always commit the market from as you mentioned, there has been a reduction to 11.4% when we did the acquisition of Interxiones that we revamped that in after six months to 12.1%. But our commitment to the market is 12% to 12.5%. And that's the number that we see that the tenors of the AT1s and the issuance that we have in addition with the equity holders, I think there's a balance on that. About that, as Marcos mentioned, there's room for additional tactical dividends as we have been doing in the past plus an additional ways to return value to the shareholders by buybacks and things like that.
That's very clear. Thank you.
Thank you.
Thank you, Carlos.
Thank you. We will now take our next question from Jorge Echevarria from Morgan Stanley. Please go ahead. Your line is open. Hi, Rapha.
Sorry to ask you this again. Could you repeat the exposures you mentioned for Pemex securities portfolio and also CFE?
Ursula, you have the names on it.
Yes. The Pemex the overall Pemex exposure is MXN40 billion, of which MXN14.5 billion are bonds and the rest are loans. The supplier exposures that is suppliers of Pemex is ARS 10,500,000,000.0. And for the electricity company, the total exposure is ARS 28,000,000,000, of which around EUR 600,000,000 are bonds and the rest are loans. And we have EUR 1,600,000,000.0 to suppliers.
Perfect. That's great. Thank you very much. No, thank you very much. Okay.
Thank you, Jorge. Thank you. There are no further questions in the phone queue at this time. Would like to hand the call back over to the speakers for any additional or closing remarks.
Thank you everybody and see you next quarter. Thank you.
This will conclude today's conference. Thank you all for your participation. You may now disconnect.