Good morning. I'm Tomás Lozano , Head of Corporate Development, Investor Relations, and ESG. Welcome to Grupo Financiero Banorte's Q1 earnings call . On behalf of Banorte's management team, I want to thank you for attending our Banorte Day New York a few weeks ago. We hope we have met your expectations and answered your most pressing questions regarding the group's strategy and the long-term profitability. Many of you received an email request to participate in a short survey over the phone regarding the clarity and content of the event. We would appreciate if you could accept the interview, as it would provide us valuable feedback to improve our communication with all of you. In today's call, our CEO, Marcos Ramírez , will provide a quick macroeconomic overview, including the positive impact of nearshoring for Mexico and Banorte, followed by a review of the main results of the quarter.
On our ESG slides, you will find highlights of our 2020 integrated annual report, as well as our TCFD report, which we launched at the end of March. After our CEO's presentation, Rafael Arana de la Garza , our COO and CFO, will walk you through our main financial results, including our NIM evolution, strong asset quality, and capital levels. Please note that today's presentation may include forward-looking statements that are subject to risks and uncertainties, which may cause actual results to differ materially. On page two of our conference call deck, you will find our full disclaimer regarding forward-looking statements. Thank you. Marcos, please go ahead.
Thank you, Tomás. Good morning, everyone. Thank you for joining us today. First, I would like to take a moment to thank you for the interest and participation in our recent Banorte Day. Your presence and engagement were key in making it a success. As discussed during the event, we are committed to become the best financial group operating in a digital world. In order to achieve that, we are optimizing our technological capabilities along with hyper-personalization business model to drive our competitive edge in the marketplace. We know how important it is for you to have visibility in our strategy. Therefore, we have set an ambitious set of financial targets that we aim to accomplish in the next five years, at the same time that we create value for our investors, customers, and employees.
We will work permanently to achieve them, and we'll keep you informed in our progress. Moving on to the macroeconomic environment. We expect the Mexican economy to extend the positive performance observed in 2022 throughout most of 2023. Despite the risk of a global economy a slowdown and a likely recession in several regions, Mexico could remain resilient, even due to two important drivers, private consumption and external demand. In this regard, we revised our 2023 GDP estimate from 1.5 to 2%. Inflationary pressures in Mexico are starting to fade away. Although we still see some indicators of tight monetary conditions for the remainder of the year, we expect annual inflation to gradually normalize down, reaching around 5% at the end of the year.
We anticipate an additional interest rate hike from Banxico in May, taking the reference rate in a terminal level of 11.5%, which should remain stable until the start of the following cycle in early 2024. Mexico will continue on the spotlight, driven by positive tailwinds. We expect a continued strength of the Mexican peso with a year-end estimate of 11.7 pesos per dollar, supported by high interest rates and a strong macroeconomic fundamentals. Nearshoring activity will continue its momentum, as we expect more companies to announce further investment projects in our country. We are convinced that the nearshoring is a reality, as evidenced by incremental investments in industrial and commercial real estate along the border with the U.S. and in the center of the country.
Currently, established manufacturing operations in different sectors have the most to gain in the short term. However, we also foresee opportunities in warehouse construction, as well as investment in logistics and transportation and so on. Not to mention the transactional banking opportunities that may come once the companies are fully operational in Mexico. We estimate nearshoring to generate an additional spillover of MXN 168 billion over the next five years, ignoring oil exports, which will come on top of the inertial trend that has been well established by the trade agreement with the U.S . and Canada.
Moving now to the business operation on slide number three, we highlight the solid performance of the group, supported by improving margins, a well-prepared asset and liability management strategy that should help us take advantage of the rate cycle and anticipate a timely change in strategy of peers to face the imminent easing cycle. Moreover, during the quarter, we saw a dynamic fee activity and an expanding loan portfolio, both underpinned by stronger internal demand. Our stable asset quality has been supported by structural changes at the bank, including internal risk models and improved recoveries. Last but not least, we strive to optimize our capital and liquidity levels, which have been of paramount importance, particularly in recent turbulent times. Rafa will provide more details on this in a minute. Starting off with profitability, slide number four. Net income had a 12% increase quarter-over-quarter.
ROE improved more than 200 basis points in the quarter, driven by an expanding performance across most businesses, which is also reflected in a solid return on assets. Our non-banking subsidiaries continue to recover their contribution to these indicators, as we will see in a moment. Moving on to the top line results of the group on slide number 5. NII from the loan portfolio increased 4% on a quarterly basis on volume origination across all product lines and the positive effect of the rates hikes that have been gradually incorporated into our portfolio. Our sound deposit mix continues to strengthen our net interest income performance. Non-interest income in the quarter was supported by a seasonal effect of insurance premiums renewals during the first quarter of the year, along with a better performance of other operating income.
On a yearly basis, the result was impacted by lower trading results, despite the strong fee income from banking operations. Altogether, total revenues showed solid quarterly and annual increases. Zooming into fees, slide number six, they remain flat sequentially despite the high seasonal activity during the Q4 . On an annual basis, fees have double-digit growth led by strong core banking fees, higher advisory and structuring fees in commercial and government portfolios, and higher domestic demand for consumer products. Digital transactions continue to evolve, driven by the ongoing adoption of digital channels and a stronger digital product offerings. Loan growth, on slide number seven, continues to exceed our initial expectations given the positive macroeconomic environment. Loan expansion reached double-digit annual growth across most of our portfolio. During the quarter, the commercial portfolio continued to expand and further growth is expected as nearshoring operations materialize in the country.
Corporate loans had a relevant performance in the quarter. We were affected by the prepayments. The dollar loan market continues to add to this group performance. It currently represents close to 12% of our loan book. The government book had a strong quarter as well, with solid demand from federal, state and municipal governments. The consumer portfolio, slide number 8, displays a solid quarter of a record annual increase, reflecting the internal demand dynamism in all consumer lending activity. The evolution of payroll loans and credit cards has been driven by good consumption dynamics, as well as by the adoption of our digital banking offerings. Auto loans had a strong recovery as the industry normalized the supply shortages, and also improved thanks to new commercial partnerships with strategic units.
The mortgage book kept on a positive trend, reflecting the results of our strategic approach to optimize the customer lifetime value of high-value customers. On slide number 9, asset quality continues to perform better than expected. The quarterly decline in NPLs was supported by higher loan origination, along with durable changes of our existing risk models, adapting us to behavioral changes in our customers approach to credit, particularly when using the convenience of digital channels to higher riskier products such as digital payroll loans. The annual increase in cost of risk is well aligned with growth in the loan book, and includes some isolated non-performing cases which do not represent any industry-wide or geographical trend and are expected to normalize in the upcoming months.
Analyzing the quarterly results by subsidiary, slide number 10, the bank results displays a sound core banking operations boosted by a more dynamic lending activity and higher rate environment together with a strong fee income. On that regard, it is worth mentioning that as of this quarter, the intercompany fee scheme between the insurance company and the bank had an upward adjustment for insurance products hired through bancassurance. Altogether, these results sustain a solid return on equity of 27.5% for the bank. The insurance business is already operating at pre-pandemic levels in terms of claims with good premium expansion. This should normalize this business contribution to the group's overall performance. The brokerage sector reduction was mainly driven by the inflation premiums in assets valuation during 2022.
The annuities business was impacted during the quarter by higher technical reserves related to premium sales and inflation adjustments. As for the pension funds, the quarterly evolution was affected by the valuation effect of higher rates in its long-term investments. Nevertheless, the yearly comparison displays a solid evolution with higher from financial products. On slide number 11, we provide greater detail into the insurance business performance, showing the seasonal effect in premium origination during the first quarter, together with the normalization of claims to pre-pandemic levels. On an annual basis, the reduction in premiums was responsible temporarily delay of a multi-annual premium renewal. Moreover, the acquisition cost line is affected by the bancassurance fee increase mentioned earlier. Moving on to slide number 12, Rappi's operation continued to perform as expected.
During the Banorte Day, we committed to achieve five-year targets for the business as well as for our digital bank. We will keep you posted on this progress. Shifting gears to ESG, slide number 13, we have just completed the initial steps for our decarbonization strategy, which we started in October of last year. We now have fully quantified carbon emissions for the most intensive sectors in our portfolio, and we have also set carbon reduction targets for all of them, which you may find in our sustainability webpage. On slide number 14, I am happy to communicate that in late March we released our most recent integrated annual report, which underscores the importance of ESG as a fundamental part of our core strategy. I want to thank you for your constant feedback regarding ESG matters.
We have incorporated many of your recommendations into the design and content of this report, including greater disclosure in our executive compensation structure, our gender equality agenda, and greater detail in our board composition and its alignment with our corporate strategy. In addition to this, we also published our second TCFD report, which provides a deeper insight into our climate-related risks and opportunities. Now, I will leave you with Rafael Arana , who will walk you through the positive results of the first quarter of the year. Rafa, please go ahead.
Thank you very much, and thank you for your interest in Banorte. I will move to the next slide, Deck. Basically, what we're gonna cover in the next minutes about the balance sheet, the return on equity, the trans-transformation process, the capital expenses, and the net interest margin. There has been some concerns about the evolution of the margin. We will touch on that in a bit. Also, there were some concerns related to what's the operational effect that had on the capital because of the change in the regulation. We also will touch on that. I will move to the next slide, please.
You see that at the bank level, we will look at the numbers of the bank level. The ROE of the bank, as you can see, is moving to 26%. Again, strong 65 basis points from a year earlier. We continue to see a very good trend on the ROE, because as you have seen, the consumer book is really moving forward on that part. The net income of the bank jumped to 35% on a year-to-year basis. That's a continuous positive trend on the net income of the bank.
The return on equity of the bank is a very strong 665 basis points on a year-to-year basis, reaching the 27.5%. I would like to also to remember that we are the least leveraged bank in the market. This has an additional benefit for the strength of the bank. Very positive results at the bank level. On the next slide, as you can see, we will start to touch some of the concerns that you have. The net interest margin of the bank, you see that there was a reduction from 6.7% to 6.5%. There's a very clear explanation about this.
Assets grew at a very fast pace in the last part of the month and during the end of the quarter. You can see that the revenue grew 0.5%, but the assets grew 3%. Those assets will mature in the next quarters and will benefit against the expansion of the margin. We are very confident to see a continuous evolution on a very positive trend for the margin. What is very positive is that this loan growth will benefit in the coming months for the bank. I also would like to add here another thing.
On the net interest margin of the bank, especially on the loan book, you have seen a continuous evolution on the fixed rate part of the book. That fixed part of the book is the one that is now 42% fixed rate, loan book around 58 variable rate book. The more we push the fixed rate part of the book, it will be a natural hedge against the reduction on the rates when the rates starts to come down. I think it was extraordinary what happened at the NIM because of the very strong growth on the loan book.
Another issue that is important to highlight is that in the month of February, and this is not usually the case, the liability side, the center side, creep above the TIIE that is the asset side. That will reverse in the it will immediately reverse on March, but that effect also is putting some pressure on the NIM, but it's nothing structural about the NIM. We are very positive about the NIM expansion. If you return to that. Sorry. No, in the next. What also is quite very important to notice is the net interest margin of the loan portfolio is exactly the same case.
The net interest margin, the NII from the loan portfolio is growing 2.5%, and the assets, the loans, are growing 2.7%. It will eventually be coming back towards that benefit of the margin. We see very strong NIM coming from the loan portfolio. The net fees of the bank, also something very relevant, grew 24.2% on a year-to-year basis. That reflects all the activity that is happening at the bank in every single of the channels of the bank and every one of the products of the bank. We are very positive about this net fee growth.
Again, if you move to the next one, please. The NIM expansion that I just mentioned to you is nothing structural. It will be basically coming back to us in the next quarter. We are very positive is that the quality of the book that we have, so the loans that we put on the book, are very positive loans regarding the risk rating part. We are very positive about the NIM expansion in the coming quarters. Thank you. As you can see, Gerardo explained that very well on the Banorte Day, we continue to have a pretty strong numbers on credit.
We don't like to compare ourselves anymore to the pandemic or pre-pandemic, the numbers continue to be quite strong. You have to take into effect that we have been having a very strong growth on especially on the consumer book. The consumer book, growing at 17.5% is really something that the bank has not experienced in the past. The write-off rates continue to be very steady, cost of risk at 1.6%, and as you can see, NPLs barely above 1%. The credit quality continues to be a stronghold for Banorte.
There had, there was also a question. Thank you for that question, because I think allow us to clarify, and we were very clear about this at the investor day. Last year, we had an extraordinary mix, based upon very strong growth of close to 14% on the demand deposit side, and only 3% growth on the time deposit side. We were able to really manage the cost on a very efficient way. Remember that we experienced a very high loan growth, especially in the Q4 last year on that part.
We also advise at the Banorte at the Investor Day that our cost of funds will reach close to the 40% to 41%, based upon the need to balance out the very high growth of the on the balance sheet that we have on the loan book. Remember that basically the first three months, and it usually goes to May, you have a dry season on the funding side. Okay? Now that will start to recover, but what's completely abnormal during this year is that usually the deposits and the loans are basically at the same pace. This year, the pace of the growth of the loan book was completely aggressive against the funding side.
We will manage that to balance out during the year, but this has put pressure on the funding cost, basically because we have to start moving. As you know, we are the leaders in the time deposit side, so we are now pushing more the time deposits also along with the demand deposits. That is, that's the explanation of the expansion of the funding cost. Well, the competition is not following exactly that. They will eventually be doing.
The sensitivity on the book, and we also touched this on the Banorte Day, we are around MXN 1 billion per 100 basis points on the peso book, and MXN 977 million on the dollar book. As we advise also, we think that these numbers will reach around MXN 800 million when we start to see the downward trend on the funding side, on the interest rates. That's basically referring to what Marcos mentioned, that's why we are very preparing the balance sheet to support this. The more we grow on the fixed rate part of the book, the better we will be on this.
There's also, as you know, we advanced some important expenses last year, we are now starting to normalize the expense growth. Remember that if you split the expense growth, close to 6% goes to the personal expenses, and 3.2% of those. This will be also a once event for the expense growth. We are building 2 data centers in order to be able to run almost as online real-time all the time. We will have really best-in-class for our data centers, that is putting around 3.2% cost for the expansion on the expense side. Basically, we see expenses under control.
We are investing where we need to invest. The other thing that is quite important is that the cost-to-income ratio now is reaching the 34.2%. That is a record for Banorte. We are investing where we need to invest and building up some of the high part of the expense line. It will be really for support and continuous evolution of the transformation process for Banorte. The capital ratio, as you can see, continues to be very strong. Now you are looking at the change that happened in the TLAC. Now, the minimum TLAC is 13.0225. Banorte is well above that on that part. Liquidity also very on-online where we want to be, around 150, 156.
The liquidity in the right place, the capital really in the right place, and the leverage ratio, as I mentioned before, the least leverage in the market. I will refer to this slide because there were some concerns that we addressed At the Banorte Day, and Gerardo was very clear about our capacity and stability on the funding side. I will ask Gerardo if you can really go through the slide, please.
Sure, Rafa. Thank you. As Rafa was telling you, in Banorte Day, we stressed that the maturity transformation gain is non-existent in the fixed interest rate part of the book, and very modest in the variable interest rate part of the book. I will explain myself with some arguments here. The first one being that if we play a maturity transformation game, that means that we borrow short term to lend long term. That doesn't happen in the fixed interest rate part of the book. As you can see, asset duration is four years, and liabilities duration is 5.5 years. Liabilities duration exceeds asset duration if you measure that by outstanding balances by 103%. If you measure that by duration, it is 138%.
That's very important. If you divide 5.5 years by four years, that is liability duration divided by asset duration, you will get to 137.5%. That's in rounded numbers, 138%. You can see that in that part of the book, we are depending on deposit stickiness, which it is happening because 62% of the fixed rate deposits are retail deposits, and 34% are non-retail, but transactional banking related deposits, which is very, very important for us. 59% of those deposits are issued by IPAB, we can be very comfortable in that part of the book.
Although this slide doesn't depict what we told you at the Banorte Day regarding the variable interest rate, I will remind you by March with some latest figures that liability duration in our variable interest rate part of the book is 2.8 years. It was 2.4 by December of last year. Asset duration remains at 3.2 years. We play a maturity transformation gain, which is very modest in the variable interest rate part of the book. I will tell you that by now the difference between liabilities and asset duration in this part of the book is just 0.4 years, which is less than the 0.8 years that we had by the end of 2022.
We remain very conservative and prudent managing the balance sheet risk. Regarding point C, AT1s hedge to call, you remember that Rafa stressed the fact that held-to-maturity government USD fixed rate bonds are a budgeted inflow that the treasury just made in order to hedge against the outflow of the AT1s US dollars fixed rate. We have a 100% economic hedge by outstanding balances, so AT1s are just budgeted to be paid, and a 102% economic hedge by duration to call. We remain very prudent on that regard, everything is automated within our balance sheet regarding that AT1s within our capital structure.
Measuring in point B, the Basel III leverage, Marcos and Rafa were telling us that we are the least leveraged bank with comparable banks. You can see by Basel III, I just remind you that what you do trying to make this calculation possible is to have our capital measure divided by risk-weighted assets. The less it is, the least leveraged we are. We have more capital in proportion to risk-weighted assets. Banorte is the least leveraged bank among peers. At the right-hand side of this slide, we will remind you that theoretically, what we have, if we were to mark-to-market held-to-maturity unrealized losses, we will have an impact of just 47 basis points on capital. That remains a very low probability event regarding the bank.
We remain very prudent and conservative in that regard. We already have accounted for realized losses in the available-for-sale part of our bond book. We had 23 basis points impact on our capital. Liquidity remains very good. If we were to realize those losses, we can withstand that. You will recall that when this market volatility started with these bankruptcy events on some US banks, we told you that the impact that we were expecting was 70 basis points. After that, we just make a calculation of 59 basis points against capital, which was delivered to you as our metric in the investor day.
By the end of March, due to market volatility being lower, that same impact accounts for just 47 basis points against our capital. Those are the metrics, and we are just very satisfied with the way that we have been managing the balance sheet risk in our books.
Thank you, Gerardo. Along with that, there was some concerns about the annuities, what would be the case for the annuities in case that we do some of the calculations that Gerardo mentioned. Remember that the annuities by law, the money of the person has to stay there. There cannot be a run of rate or risk on the annuity side. By law, by contract, that's the way it goes. There's no case to even measure those.
Thank you, Marcos, Rafael, and Gerardo. We will continue with our Q&A session. As always, we kindly ask you to present only your most relevant questions. We will be happy to take any other questions anytime after the call. Questions will be ordered on a first-come, first-served basis. Please raise your hand on the platform and we'll unmute you when your turn comes. Jose Luis and myself will be calling the name of the person that is next on the line. If there are any technical difficulties, please let us know by using the chat. Thank you. We are now ready to start the Q&A session. We will start with Tito Labarta from Goldman. Tito, please go ahead.
Hi, and thanks so much. Good morning, everyone. Thank you for the call and taking my question. My question, I guess, is on the margin. Just to understand a little bit, as you reduce your sensitivity to interest rates, you know, what does that mean, I guess, both on a short-term and longer term basis? I kind of understand, but, you know, you mentioned, Marcos, you expect another increase in rates in May. But as you're reducing sort of some of that exposure, is there any more upside to your margin from here? Do you think that's now capped? Then, you know, thinking longer term, you know, at the investor day, I think you gave guidance for your long-term margins between 6% to 6.3%.
You know, will that primarily be a function of you reducing that sensitivity? How long will it take so that when rates start to come down, your margin, you know, doesn't come down immediately? Just to understand a little bit that sensitivity and the movements in rates over the next year or so.
Thank you, Tito Labarta. Tough question. I will ask Rafa about answer.
Yeah, Tito. This is, remember, we preferred. Banorte has always been very, I would say, very efficient in running the bank on the upward trend and on the downward trend. If you see the stability that we have on the yields of the balance sheet, you will see that it ranges from 10.2%-11.2%. That's the whole piece. What we are talking about this now is that we have to start preparing the balance sheet in order to be prepared for the downward trend of the rates. Obviously, that will put some, I would say, pressure on the sensitivity part. That will reduce to MXN 1 billion that is currently the 1 to 800.
MXN 200 million would be on that part. Remember that we are building also the fixed rate portfolio. The fixed rate portfolio, we also balance that out in a continuous way going forward. The NIM compression that eventually will happen on the variable rate part of the group will be not fully, but in a very important way, compensated by the fixed rate part of the group. Also remember that the liabilities immediately get updated. On the asset side, it usually takes around 6 months to fully reprice the effect on the upward trend of the rates.
You see that there's a buffer on this timeframe about going down on the rates and how the balance sheet is positioned. When we said that 6.0% to 6.3% is the running rate of the normal stage of the margin, we are looking at rates around 5.5% interest rates. That can give you a very good understanding of how we are building up more and more a much more profitable portfolio and not to be fully dependent on the upward trend of the rates or the downward trend of the rates. We are a very balanced portfolio, a very balanced. For you.
Obviously, when you see the potential downward trend, you start releasing some of the hedges that you put in place, and that is the one that is reducing the sensitivity. You will see that the fixed rate part of the book will start balancing that out in a very important way in the coming months. I would say that we are confident that we can manage the downward trend in the same way that we managed the upward trend. A very important thing that you have to, and you can check that out based upon the data that you have, is that the spread that you have on the liability side and on the asset side continues to expand for Banorte.
That is giving you this buffer about the six months that I'm taking once the interest rates start to going down. That will allow you to have also, some time, additional time to balance out exactly how you want to position the balance sheet.
Thanks, Rafael. That's very helpful. just maybe to simplify a little bit from my perspective, does that mean that your margin probably in the short term, you're kind of at these peak levels, but, and you're now beginning to focus on making sure it doesn't go down much more as? I mean, rates, I think you said 2024 is when you expect rates to come down.
Down.
Just to get that shorter term sort of evolution, any color that you can give there would be helpful.
Yeah. You will continue to see expansion on the margin through the year. The margin will continue to expand, even when the interest rates start to going down.
Will come down.
You will see an increase on the margin.
Momentum.
A momentum will continue on that part of the margin, Tito. We are very positive about how we are managing the balance sheet and how we're managing the margin. We don't have the exact date of the interest rates, but we position ourselves on that. I think the treasury, those are extremely good work on that.
Only in Tito.
Okay.
We can still get to the guidance on the new that mentioned change. Just to complement with everything that Rafael mentioned, the full movement of the change in sensitivity can take up to nine months, somewhere between six and nine months.
Okay. No, that's very helpful. Sorry, just one last point on the margins really quick. I think this quarter, as you mentioned, you know, it was down a little bit particularly for the bank, but those seem to be more, like, one-time things that, you know, as you kind of get through that, you know, that's probably where the upside would come from in the short term.
Yeah, because as we mentioned, the very strong growth on the asset side, the NII grew the revenue 0.5%, but the asset side grew 3%. It's 1 to 6. You can see that really we have an extraordinary month on the loan growth. That obviously will benefit us through time, you know, in a very short time.
Yeah. Okay. No, that's clear. Thanks so much.
Thank you, Tito.
Thank you, Tito.
We'll now take the next question from Ernesto Gabilondo from Bank of America. Please go ahead, Ernesto.
Hi. Good morning, Marcos, Rafael, and good morning to all your team. Thanks for the opportunity to ask questions. My question will be on your net income guidance. We were positively surprised by the double-digit loan growth, which is above your 6%, 8% guidance, and also about the solid asset quality with the cost of risk growing at the low end of your guidance. How should we think about your net income guidance for the year, again, given the solid loan growth, good asset quality, subsidiaries earnings bouncing back? Can we expect now the high end of the range, and if we can expect some upside risks? My second question is on your dividend payment and the buyback program.
We have been hearing most of the Mexican banks are evaluating to pay the dividend in two exhibitions this year. Is this something that you are also considering given the higher than expected credit demand, and also to be cautious given the global volatility on banks? On the other hand, how much of your buyback announced last year has been used and what are your expectations to use it this year? Thank you.
I'm gonna start from the end. We are not using the buyback so far. The years, you are right, Ernesto, and thank you for your question. Maybe we will move to the high end of the guidance, but we are not moving it. No? That means that maybe in future we can change it. Not now. No? Yes, we are moving to the high end. Talking about the dividend, Rafael.
It would be the 50% we will be paying the dividend in the.
May.
May or June. We will be paying the 50% of the net income of 2022 to balance that out in one exhibition.
Okay, thank you. Just a follow-up on the first question about the guidance. Again, in terms of loan growth, you guided 6% to 8%, given from what you're seeing and the nearshoring, should we be thinking that the double-digit loan growth is sustainable or do you still need another quarter to think about it could be at those levels?
In order to say it, we want to wait another quarter officially, let's say, but it seems that it's gonna happen, no?
Okay, perfect. Thank you very much.
Thank you, Ernesto.
Thank you. Now we will go with Geoffrey Elliott from Autonomous. Geoff, please go ahead.
Hi. Can you hear me okay?
Yeah, perfectly.
Great. Thanks very much for taking the question. I wanted to drill down a bit more into the deposit side. About a 5% decline in non-interest bearing deposits this quarter. How much of that is seasonal? I know you do get a bit of a seasonal impact there in Q1. How much of that is simply clients looking at the opportunity cost of leaving non-interest bearing money and moving it into somewhere they can earn some interest? How should we think about that share of non-interest bearing deposits evolving as it goes forward? Thank you.
Yes. We have a seasonal also effect because the aguinaldo and all this, and it's hard to say that each year we expect a little down in that, no? Rafael, you know how to distinguish what one and the other, I don't know.
Yeah. I think, Geoffrey, this year. Last year happened something that was not usual on that part. We have the normal inflow of very high number of demand deposits coming to the bank in November or December. Usually, those deposits stay up to the end of January. This year, because of all inflation and people were more and more active on buying and the economy recovering, that number really stayed for a few weeks, less than a week in January. That is also the case on the demand deposit side. What we have seen now is that what you mentioned about people moving more to the interest-bearing deposits is happening.
We are the leaders in that part of the market, and we were able to, because of market power, to really control that. Now we see that we need to pay a little bit more on the interest-bearing side. We are very confident because of what we do in the transactional banking payroll. The opening of accounts at the branches and on digital is really, really active. We think that we will start to balance it out by the end, by the May, by the month of May, we will start to balance this out and start to trending down the cost of funds again or leveling out the cost of funds again. It's a combination of what you mentioned, people looking for more returns.
Inflation obviously accelerates the speed of the money in the market, that's also an issue. Now we see a much more stable month of March was starting to be on the positive side on the demand deposits growth and also on the time deposits growth. The transactional banking piece also is becoming extremely active also in the managing of funds. Remember that we are growing very nicely in the acquiring business, on the merchant business. The merchant business is also a very strong source of funds for us on the funding side. The 300 more bankers that we put on SMEs at the end of last year is also basically devoted to bring more funding onto the bank. We experienced an extraordinary event last year. I think we are balancing that out, not as fast as we like, but we are balancing that out.
That's great. Thanks very much.
Thank you, Geoff. We will now take the question from Rafael Frade from Citi. Please go ahead, Rafael.
Hi, guys. Good morning. Thank you for taking my question. I have two questions here. The first one is related to you mentioned that there were some delay in the renewal of premiums. Just to understand what was that and how we should expect the impact for the, maybe for the coming quarters. The second question relate to fees, very strong fees, growth in fees. If you could elaborate a little bit on the breakdown here. Is mostly across the board or is there any particularly line that is helping the strong performance in fees? That would be helpful.
Thank you, Rafael. The first one, please, Tomás.
Yeah, Rafael, it was a premium that, as you know, seasonally typically happens most of them in the first quarter. It was a large premium government related that will be happening in the second quarter. That was the effect. Actually, we have already closed the business with them. We obtained the policy again. We have been having this policy for the last almost six years. Is the largest life insurance policy in the Mexican market. It's for the federal employees. We're already close a deal with them, and it's gonna be paid this month. That was explanation. Of course, in terms of course, we expected in the budget and the guidance, for instance, we didn't even plan it to have it because it's very, it's a very difficult and very competitive process. Fortunately, we will have it again.
Yeah, Rafael. With this, you will see it in the second quarter. That's the effect. Thank you so much.
The second one?
Yes.
The breakdown down the graph please.
Yes. On the breakdown of fees that explains it, I think, you will have a combination that is explained. I think, the electronic banking piece is growing extremely strong. Everything related to merchant business is also pretty strong. All the loan growth that we have during this quarter also adds to this. I will say that is all over the place. I think it's not just one specific part. Another thing that you see is that on the insurance side, since we have an arm's length negotiation with our company, because that's the way it has to happen. We benchmark against the market the fees that we pay to the bank from the insurance company.
That also is adding, a bit on that part. I will say it's all over. It's not just one. The activity that we have seen on the transactional banking piece, on the branches, on the digital world, I think everything is adding up to that. We have seen a lot of activity at the bank. I can give you some three events that happened during the month of February and March. The number of transactions that we usually run at the bank, from, they peak usually around December. Well, in March, we have more transactions than what happened in December. The bank is extremely active in every single part of the business.
That's perfect. Thank you.
Thank you. Now we will continue with Thiago Batista from UBS.
Hi, guys. Thanks for the opportunity and congratulations for the results. I have a question on the bank's capital position. Banorte is raising a lot of capital and this combination of ROE over 20% plus a loan growth of high single, if I use the guidance or even in the first Q with low teens, clearly the bank is raising a lot of capital. I remember in the past that you had a target of core capital of 12.5. Now we have around 15% of core capital. Can when I look to the medium term, how can we think about the capital?
The bank will deploy this capital only with a traditional payout ratio, or we can see other ways to really try to improve, not sure if improve is the right word, but to reduce your excess capital.
Thank you for the question, Thiago. Rafa, please go ahead. Thiago, I think, as we mentioned before, we will start to converge to the numbers that we. I think it's more prudent now to move to the 12.5%, 12% to 12.5% to 13%, but we have to converge to that number. It's not gonna be dividends. We are always looking for opportunities in the market. If we see an opportunity in the market that we can present to the shareholders, and the shareholders say yes, we will start using some of that capital also to specific, I would say acquisitions or a specific way to increase the profitability of the bank. I think I agree with you.
Sometimes we see that we have more capital than we need. Remember, as we said at the investor day, the world is not quiet at all. At this point in time, I think it's prudent to have capital in the way we have been managing the capital, stay with the dividend policy, and if we see an opportunity in the market, believe me, we will take it.
Thanks, Rafa.
Thank you.
Thank you. Now we'll go with Nicolas Riva from Bank of America.
Yes, sir.
Thanks very much, Jose Luis, Tomás, Rafa, and Marcos for the chance to ask questions. I also have a question on, on capital. If I think about your capital structure or capital stack, I'm going back to Thiago's point just now that you are guiding for that 12.5%-13% CET1. It's gonna take some time to get there. When you think of that kind of terminal or target, CET1, if I look at the rest of the capital structure, at this point, you essentially have no Tier 2 capital, and the strategy has been taking out some of that old Tier 2, replacing that with the Additional Tier 1. Right now you have about 630 basis points of AT1s.
The number does fluctuate every quarter also because of FX volatility. If I look into the minimum capital requirements you're gonna have with TLAC fully loaded by 2025, that minimum total capital requirement is gonna be for you, I believe 17.9%. If I take your target of, let's say, 12.5% CET1, and then I add what you currently have of AT1, which is 630 basis points, then I get to a number of about 19% total capital, assuming no Tier 2, which would be about 100 basis points above your minimum requirement by 2025. Which means that in this case, you would be looking to replace the AT1s that you have outstanding. If you call them, you would replace them with new AT1s. Is that kind of how you think about that target or terminal capital structure?
We are following you, and everything, you are okay. Yes, Rafa, please go ahead.
Nicolas, as always, you read the map perfectly. I mean, no, I think the AT1s, as you mentioned, we will be replacing those AT1s. By the way, yesterday, we went to the board, and we asked the board that allow us to start building up what we call a continuous emission program for the market. We also asked for the board that allow us to replace the next AT1s that are coming to the market. I think this time also we will be looking also potential Tier 2 to be on the balance sheet. But the number that you reached, the 19.9, is exactly the number that we've seen.
We will be going in a merry-go-round with the AT1s on a replacement basis, maybe, less amount or a little more in some cases. I think we are very comfortable with the way we manage the AT1s. Maybe this time, also, tier two will be present on the balance.
Rafa, if I can do just a follow-up. I think in the past, the strategy was to replace the old-style Tier 2s from past acquisitions with the new AT1s. Going forward, you are saying is that there is an option to issue some of the Basel III Tier 2s as well. You wouldn't have a necessary preference for AT1 versus Basel III Tier 2s, or would you?
Oh, yes. We would love to have the current structure of the... Maybe reduce a bit on the AT1s and start building up some of the, on the tier two, because of efficiency. But I think the main contributors will still be the AT1s.
Okay. Thank you very much, Rafa.
Very much, Nicolas.
Thank you. Now we will continue with Carlos Gomez-Lopez from HSBC.
Hello, good morning, and thank you for taking my questions. The first one is going back to the beginning, to the loan growth, which has been quite strong in the first quarter. How do you see that continuing, again, now that we are well into the second quarter? And as you mentioned, Rafael, you may eventually exceed the 6%-8% guidance that you have given. By how much? I mean, how far do you think you can actually go? The second is, if you could comment on your asset quality.
I remember in the previous cycle you mentioned that if rates went above 8%, we could see asset quality trouble, but we are now at 11, and we don't seem to see any. When should we expect to start to see NPLs? The last one, just to verify, you have given us new economic assumptions, but your guidance is not based on these new economic assumptions. I look at the table that you have at the end. You are still using the previous set of assumptions. Is that correct? Thank you.
The third one is yes. Yes, you are correct. The first one, we don't know. That's why we are not changing the guidance. It's best to wait and we can discuss that in the next quarter. The second one, it hasn't been hurt. I don't know if you have some answers there.
Yeah. What works? Yeah. What we have seen, thank you, Marcos, is unexpected cost of risk, which is, for the time being, lower that we provided as an assumption to run some our internal models. We keep. We still think that NPLs and cost of risk, although they're improving in some market segments and some loan types, up to now, it's too early to tell if we will see these make a trend for the rest of the year. It is almost impossible to lower our sense of prudence regarding this issue. It is too early in the year to go to a more optimistic mood.
Time and length.
Yeah. Remember that we still have MXN 560 million of extraordinary provisions that we have not used. I agree with Gerardo, it will be not prudent, and it will not be wise to start moving numbers right now.
We understand that. On the provisions, where is the surprise? Is it mostly in the SMEs or in the consumer or everything together? Going back once more for the loan growth, I mean, as we enter the second quarter, have you seen any type of a slowdown so far, or we are still maintaining the same trends you had as of the end of March?
Nothing new so far either way. There is no new so far, no. The other one, please go forward.
Yeah. Well, the, the positive surprises, we can locate them in mortgages and our commercial portfolio, the corporate portfolio, government. SMEs which have been performing extremely well. Mortgages, SME and auto are very positive surprises. The other ones are not bad either, but they're not as good as them.
Thank you very much.
Thank you.
Thank you, Carlos.
We'll now go with Federico Galassi from The Rohatyn Group. Federico, go ahead. Hello? I think if not, we can continue with Gilberto Garcia from Barclays. Gil, please go ahead.
Hi. Good morning, and thank you for the call. I had a question on your very strong growth in the auto segment. You mentioned that that was partly driven by new partnerships. Can you give us some color on what the breakdown of the growth was between those new partnerships and the overall recovery of the industry and whether those new partnerships are for new cars or concentrated in, I'm sorry, used cars. Thank you.
You are right. We have some new partnerships with Honda and Honda. Please, Tomás.
Yeah, no, it's a mix of the two factors here. I think it's a combination of the two. These new alliances that Marcos just mentioned, and also the recovery as Mexico is receiving more cars that are available for sale, no?
If you let me add, I mean, we also closed a new deal with Kia, and that's bringing also a lot of business, and that's mainly for the new, the new cars. We were not very strong competitors in the used car market, and now we are also being more active in that market. In that market, for instance, well, I will not mention which market is the leader, but we're closing there also, the gaps. I think I'm optimistic about the growth in the future because of this and some other things that we're working on.
Very clear. Thank you very much.
I will go with Andrés Soto from Santander. Go ahead, Andrés.
Good morning, Marcos, Rafael, and team. Thank you for your presentation. I have two questions. The first one is regarding the cost of risk, but this more looking into the medium term. In your investor day, you mentioned you are now targeting for a higher level of ROE between 19.5 and 21.5%. I would like to understand what is the implicit cost of risk that is on this assumption.
Yeah. Thank you, Marcos. What we're considering overall is 1.7%. That's the short answer. We have seen that mortgages, commercial, corporate, PyMEs or SMEs keep improving. The last time that we reviewed this same number, it was 1.8%. Now we're moving to 1.7%.
Perfect. That's very clear. My second question is regarding the Citibanamex deal. We were expecting to get news about this, and I guess in this case, new news is not good news for Citi, at least. I would like to understand from your perspective the reason why you drop off from the deal. It was just a matter of pricing expectations or there is something more fundamental that make you decide that this was not the right asset for Banorte?
Andrés, believe us, we cannot say anything by contract. Sorry. I'm really sorry. We cannot say anything.
Got it. Fair enough. Thank you, Marcos.
Thank you. This was the last question. With this, with this we conclude our presentation. Thank you very much for the interest in Banorte. Thank you.
Thank you.