Good morning, everyone. Thank you for joining. I'm Tomás Lozano Derbez, Corporate Development, Investor Relations, and ESG. Welcome to Grupo Financiero Banorte's second quarter earnings call. In today's call, our CEO, Marcos Ramirez, will comment on the effects of rates, inflation, and nearshoring for Banorte, followed by the main results for the quarter, including loan growth, inflation-related effects on the margin, and the evolution of asset quality. He will also provide the key highlights related to our progress in ESG. Rafael Arana, our COO and CFO, will guide you through the financial results and will walk you through the updated guidance for the remainder of the year. 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, Tomas. Good morning, everyone. Thank you for joining our call today. The first half of the year was marked by a sense of macroeconomic stability, extending the positive inertia observed since last year, driven by strong investment, external demand, and private consumption, mainly supported by a sound labor market, higher lending activity, and strong remittances levels. The resilience depicted in the U.S. economy is also supporting Mexico's momentum. The latter has resulted in an upward revision of our 2023 GDP forecast, reaching 2.7% from our initial estimate of approximately 1.5% at the beginning of the year. Inflationary pressures in Mexico continue to fade away.
Although we see signs of a delayed start of the easing cycle, as core inflation dynamics remain challenging, our economic analysis team has revised its forecast for annual inflation to 4.5% from 4.8%. We are expecting tight monetary conditions for the remainder of the year, with the reference rate stable at 11.25% until the first meeting of 2024. Mexico's performance will still be supported by positive tailwinds. We expect the Mexican currency to remain stable in 2023, with a year-end estimate of MXN 17.90 per dollar, supported by high interest rates, strong macroeconomic fundamentals, and more recently, the materialization of nearshoring investments in the country.
Regarding this nearshoring effect, in the last six months, we have seen increasing demand for credit from both foreign companies recently establishing in Mexico, as well as from companies already established but expanding their operations and production capacity. There has been increased activity for industrial spaces and a higher demand for financial opportunities for construction, industrial warehouses, transportation companies, mostly in the north and center of our country, where we have a strong footprint. Moving now to slide number three, the business operation of the first half of the year continues to portray sound margin performance, supported by credit origination volume and mix, although already pressured by higher cost of funds aligned with market conditions.
Structurally, we continue to reduce our margin sensitivity with an active asset liability management, already reaching MXN 860 million additional NII for every 100 basis points increase in rates, down from MXN 1.1 billion last quarter. Rafael Arana, and then Dr. will provide additional details in the following slides. We continue to see solid fee dynamics, together with very positive expansion of lending activity, boosted by strong internal demand and sound employment levels. All this with a strict focus on asset quality, which continues to show better than expected results. Starting off with profitability, slide number 4, ROE improved more than 250 basis points compared with the first half of the year, driven by the expanding performance across most of the business lines, which is also reflected in a solid return on assets.
Moving on to the top-line results of the group, slide number five. Despite solid growth in the loan portfolio, NNI went down 10% in the quarter, mostly driven by a negative valuation effect of inflation in the securities in the annuities business, amounting to around MXN 4 billion. In the quarter, inflation-related instruments, UDIs, dropped 0.10%. It is worth mentioning that net income from the annuities business was not impacted whatsoever, as this negative inflation valuation was practically offset by lower technical reserves in the other half of the business. Another fact that this pressured NNI is the influence of higher rates in our funding cost, despite our ongoing strategies to maintain our collection efforts and the funding mix. Rafael Arana will provide more details on this in a minute.
Non-interest income expanded MXN 3 billion in the quarter on the back of lower technical reserves constitutions in the annuities business, driven by lower inflation along with higher trading income. Fees, slide number six, remained flat in the quarter on higher interchange fees derived from the Hot Sale event, which accelerated online purchases during the quarter. With accumulated fees were 9%, led by a stronger electronic banking fees, higher advisory and structuring fees in commercial and government portfolios, and more dynamic transaction volumes in consumer products, driven by the strength of private consumption. Digital transactions keep growing in tandem with the increased adoption of our digital channels. As of the second quarter of the year, the number of customers conducting mobile banking transactions grew from 5 to 6 million people, up 20% versus the second quarter of 2022.
Loan growth, slide number seven, continues to accelerate with a strong focus on asset quality. Loan expansion posted a double-digit annual growth across most of the portfolio. During the quarter, the commercial book was one of the key drivers for growth, as the strategic focus on low-risk SME lending continues to materialize. We still have a long way to go in this segment, but as we increase our capabilities to provide comprehensive and tailored value propositions, we will be gradually regaining our fair market share and generating more profitable relationships in the long run. Corporate loans had a relevant performance in the first half of the year, although affected by both repayments and FX valuations. Opportunities to increase our dollar loan portfolio continued to grow, currently representing 11.3% of our loan book.
The world government book went down 9% in the quarter, driven by the maturity of some short-term revolving operations. The consumer portfolio, slide number 8, displays double-digit annual increase across all products, reflecting the stability of the labor market and a strong internal demand. Growth in the mortgage book stood as one of the main drivers within the consumer portfolio, consistently growing over MXN 2 billion per month, reflecting the results of our strategic approach to gather high-value customers, focusing on a low leverage, high FICO score client pool. Payroll loans and credit cards continue to show accelerated demand, driven by good employment levels, as well as by the convenient offering of our digital banking channels. Auto loans have increased demand. There has been a recovery of supply shortages and also driven by our commercial partnerships with strategic dealerships.
Mortgages and auto loans account for approximately 29% of the total loans. Slide number nine. As I have mentioned before, asset quality continues to perform ahead of our expectations. NPLs remain practically unchanged quarter-over-quarter, despite higher volume growth in consumer and commercial books. Riskier products, such as SME and credit cards, continue to outperform their historical levels, mostly explained by behavioral changes in our customers' approach to credit, along with more precise origination models, enable us to grow without sacrificing quality. Payroll loans continue their gradual normalization process, but growing with solid risk strategies. The annual increase in cost of risk is well aligned with origination volume and mix. So far, we do not foresee deterioration in any sector or any geographies.
Analyzing the quarterly results by subsidiary, slide number 10, the bank shows some core banking operations, boosted by a more dynamic and higher quality lending activity, as well as better market-related incomes, although slightly offset by higher cost of funds. Altogether, these results yielded a solid 26.6 return on equity for the bank. With accumulated figures, ROE stood at 27.2%. The insurance business had a quarterly reduction, driven mainly by the seasonal effect of the first quarter of the year, which concentrates most premium renewals. On an accumulated basis, the insurance business is already operating at the normal levels, with some business generation. It is worth noting, these results were affected by the upward adjustment in the intercompany fee scheme between the insurance company and the bank for insurance products tied to the bank insurance model, effective as of last quarter.
The broker sector increase was mainly driven by higher business operations. The annuities business, as mentioned before, had relevant inflation-related movements with the PNL, but with neutral impact on the net income. The quarterly reductions responds mainly to lower business generation derived from the market compression. With accumulated figures, the expansion was driven by higher technical results on the back of lower constitutions of reserves for inflation updates. As for the pension funds, it displays a solid evolution with higher yield from financial products. Slide number 11, we provide greater detail into the insurance business performance, showing the seasonal effect in premium origination during the first quarter, along with normalized claims. On an annual basis, it presents a business expansion, especially for life and auto portfolios, with higher claims resulting from the mix of the portfolio.
The acquisition cost line is affected by the bank insurance fee increase mentioned earlier. Shifting gears to ESG, slide number 12. Throughout the first half of the year, we have completed the measurement of carbon emissions and decarbonization targets for the most relevant sectors of our portfolio. We are now implementing different projects that will enable us to reach these targets through the joint efforts of all areas within the financial group. We will keep you updated on their progress. During the quarter, we were proud to receive AA rating by MSCI for the 3rd consecutive year, as well as different recognitions from reputable organizations such as the World Finance, who recognized Banorte as the best retail bank, best corporate governance, and best pension fund in Mexico, among other recognitions. I would like to stress our commitment to focus on organic business generation.
We will prioritize investments related to the hyper-personalization efforts in the bank and the expansion of our digital capabilities, placing the customers at the core of our product design. Moreover, we will focus on improving the efficiency of our branch network, providing either digital interfaces or human interactions based on our customers' requirements, increase our infrastructure footprint in the country through our ATM and new branch model networks, and continuing to strengthen our human capital. Nevertheless, internal capital generation has been consistently strong. Therefore, we will call for a shareholders meeting in the upcoming months to propose the payment of one extraordinary dividend amounting to MXN 15 billion in the last quarter of the year.
This payment will be on top of our dividend policy, which recently had a 50% payout ratio last June, totaling approximately 9% dividend yield for the year, with today's price. I will leave you with Rafa Arana, who will provide additional details about this, and will walk you through the financial results of the second quarter of the year. Rafa, please go ahead.
Thank you. Thank you, Marcos, and thank you for attending the conference. On the slide that you can see on going in detail with what Marcos just mentioned, the balance sheet continued to be in an extremely positive situation. The return on equity continued to move in the right direction. As you know, we have permitted from 20 to 21 for the group. We are a bit above the 21 for the group. The bank is around 26.6%. On that, obviously the question is: What's the recurrent number that you can have for the bank?
What we have seen, based upon all the movements that we see in the group, in the consumer group, and the evolution of all the parts of the business, we really think that from 2022 to 2024 will be a recurrent return on equity for the bank. The transformation continues to be quite strong. We continue to be, if you look at the NPS, that is public information in Mexico, we continue to evolve positively in comparative with our peers, in everything that is related to the mobile banking, to the interfaces on digital and human NIM. The group, Marcos already explained the effect that we have on the annuities side.
That is totally compensated by the technical reserve, so no effect of the net income. Strong return on equity for the business on the annuities business of 20%. We continue to see pretty good evolution of on that business. The effect, as Marcos showed on the slide, the effect that inflation had on the evaluation of the positions is really what is causing that reduction on the NIM for the annuities, fully compensated by the technical reserves. The bank continues at 6.5. It's slowing the pace of growth on the expansion of the NIM, still a very positive expansion on the NIM for the bank, based upon two things.
The consumer groups continues to grow pretty strong. The variable rate part of the group, that is basically the corporate, commercial, and government part of the group, continues to grow in a very positive way, aligned with the hike in the interest rates. The other thing is in the funding cost. The funding cost has been some question about the evolution of the funding cost. As you remember, during the conference call on the Investor Day, we remind that last year we were very positive on the growth, on the term deposits, around 3%, and the month deposits were around close to 14%. It was a very positive funding mix.
We continue to have a very positive funding mix, 72% the month deposits, and 28 are term deposits. Term deposits are obviously asking for a better returns that we, what we used to have last year. Term deposits this year are growing around 8%, and that is causing an effect on the funding cost that we advised during the Investor Day. That number is currently of 43% of CETES, the funding cost, fully compensated by the spread and the evolution of the margin on the loan book against the liability book. If you see, the spread continues to expand and the liabilities against the asset part of the book.
We are in a good position, good growth in the loan book. More expenses on the funding cost because of the growth on the funding mix, on the term deposits, but very positive because the type and the kind of clients that we are attracting to the bank. The funding cost, I think, is on a tipping point. We will see that funding cost coming down on the following months. Really going back to the 41.5% at the end of the year. That was our expectations for the, when we set up for the budget. That's the effect on the funding cost.
If you see the funding cost, some people they say, "Well, the funding cost is growing 90% on the funding side and 60% on the, on the asset side." Yeah, but you have to take into consideration that 90% is basically the 28% part of the funding mix that is cost driven. The other part that is basically demand deposits, close to the, that 72%. Those 72%, 60% are with no cost, so that's what is really funding, basically, the fixed rate part of the book. It's completely positive on that, on that mix.
The effect that is really creating the increase in the funding cost is coming from the term deposits growth, that we are growing nicely on that, in that part of the book, and attracting good clients for us. It's having an effect on the funding cost. Overall, if you see the expansion of the margin, the 24 expansion on the margin, and when you go to the NNI, and you go to the loan and deposits, you will see that 25% is the growth. We are balancing that pretty well. Remember that we are the largest term deposit bank in the market, so we have a market power in that part.
The growth and the ask for better returns for our clients is causing that growth in the funding cost, but pretty manageable based upon the 24% expansion on the NIM, and on the NNI, 25% expansion on the NNI. On the expenses continue to be under control. As you know, we are basically funding two new data centers that has moved the expense line a bit on that part. That will be fully integrated on the second month of the next year. The cost-to-income ratio continues to go in the right direction. Now, it's reaching the 34.1%. This is a record low for us, and we would like to be looking at that number as a possible number ongoing going forward.
When Marcos present the cost-income ratio, and you see the difference from the revenue side and the cost side, we will make more efforts on the cost side to continue to move around the 34-35% cost-income ratio. Capital, as Marcos mentioned, we continue to be net positive generation on the capital numbers. For Tier 1, it's at 15.4. Now that Marcos had advised of the dividend, that will be paid once we get the go from the assembly, will be paid in the month of October on that part. That eventually will put us very close to the same number by the month of October, on that one.
Moving to the next one, that is on a more detailed basis. We already described the return on assets. Return on assets continue to be a pretty good story on that part. We are growing 39 basis points on a year-to-year basis on that part, so based upon the mix that we currently are improving. Remember that we are pushing the fixed rate part of the book in a very positive way. That is basically the mortgage book and the car loans. You also can consider basically, because it's a portfolio, the credit card book and also the payable book. We are pushing that number up. We are very close to the 44-45%, on the total mix of the book.
That will be a natural hedge when the interest rates go down. That has been very positive for us. We are attracting the clients that we like. High-five disclose, very positive. Sometimes we are sacrificing a bit on the margin in order to get the clients that we can build a relationship with them. The return equity for the bank continue to be very strong. If you look on a yearly basis, 294 basis points growth on return on equity, take into account a very sound capital numbers, and the least leveraged bank in the market. That is a very positive balance sheet and a very positive solvency numbers that we run the bank with.
If we go to the next one, get into the net interest income that I already described, that basically, net interest income, very positive, 25% on the loan and the cost is good. The net fees of the bank, very positive, 19% growth of the net fees of the bank. Every single channel is pretty active, from mobile, ATMs, transaction, cash management, everything, is moving on, on that part. The bank is breaking records, numbers on transaction on a monthly basis. The bank is in full motion and in a very, in a very profitable motion on, on that part.
NIM, very positive for the bank, very positive on the fees, 90% and also the net interest income for the bank on the loan to deposit, 24%. I think, we are managing pretty well the potential return to a more normal level of rates. We will see in a minute the sensitivity on that part, but I think, we are very well positioned on the upward trend and very well positioned on the downward trend. Next, please. This is in a detail, because there has been some questions about what was the effect on the annuities. This is basically the way that business has to be run, because we cannot take any risk on the money of the pensioners.
When the inflation goes down, and Marcos show in the graph, and inflation was negative for two consecutive months, that basically affect the valuation part of the positions, but it's fully compensated by the technical reserves. There's no effect on the net income. The net income, as I mentioned before, is pretty sound for the business. High returns on equity, above 20%. You see on the graph to the right, on the colors, how we segregated the effect of the annuities. The bank, very sound on the net interest income, as you can see. The insurance business, very strong again and fully recovered from the pandemia.
You see the effect on the, on the annuities from MXN 6 billion to MXN 2.3 billion. That's the effect on the, on the valuation. It doesn't have any effect of the net income. It has an effect of the net interest margin of the group that will be compensated as inflation stabilizes in the, in the coming months. Okay? If we move to the next one. The asset quality continues to be a very good story. The 1.7% that you see on the cost of risk is right on the guidance that we provided to you at the beginning of the year.
Basically, that uptick on the cost of risk has to do with the high volumes that Marcos referred at the beginning of the conference. You see car loans, 30% growth, payroll loans and credit cards pretty close to the 20%, and it are very positive for commercial loans. If you see the write-off rate, that is really a sound measure of how do we manage risk. You see a very stable number on the write-off rate that doesn't go up and down, as some of our other banks jumps up and down.
This has to do a lot of how we manage the business, because if you look on a risk-adjusted basis, the margin grew 88 basis points on a year-to-year basis. We are really penetrating the market with the clients that we like, with the risk that we like, and building a strong relationship with those clients. You see the number of trade provisions, and it's relevant to mention that we still carry MXN 540 million of extraordinary provisions that we haven't used on that part. We move to the next one. The next one. It will be fully explained by Gerardo in a minute, so I will not take a lot of time on this.
We already start to unwind the positions to be ready for the lowering of the interest rate cycle. As Marcos mentioned, our economist expects the first part of the year to start the easing cycle on that part. On pesos and dollars, we also have reduced our sensitivity. I think that is a very positive news for the market. If you put that into the dimension of the net interest income of the bank, you can see that the group in NNI will suffer 0.6% of the total NNI per each 100 basis points that interest rates go down.
I think when you see that into the dimension of the NNI, you see that we are extremely well positioned for that part. The bank NNI is 0.7 NNI per 100 basis points of lowering on the rates on that part. You see that if you go on aggressive of the 6.5 or 400 basis points lower on the interest rate, it will cost us 2.4% on the group, and it will cost us 2.8% of the NNI of the bank. That will be fully compensated, by the way, by the dynamic of growth that we have on the loan book.
If we move into the next one, here you see what already mentioned, the cost-to-income ratio. That is very positive. What I would like to mention is the graph to the right, on the bottom part of the page. When you see a very strong pickup on the revenue side, and a very stable cost line on the cost side. That cost line is the one that we want to keep pushing lower, based upon what Marcos mentioned a new format on the branch networks, an expansion on the branch network, but with a much more automated processes on that part.
Because we understand that the revenue side will lose a bit of momentum on that part, and we have to compensate that on the cost side. Okay. The capital numbers, as Marcos mentioned to you, and the liquidity. Liquidity is around 170%. Very strong liquidity. Gerardo will also explain a little bit more on that position that we have on the funding side, but we are very well positioned on that part. The capital adequacy ratio is at 21.7%, 50.4% the core Tier 1. It's we're fully compliant with the TLAC number that we require, and you see the leverage ratio that is really at a very positive numbers on that one.
Moving into the next one, I would like Gerardo to go in detail of a graph that he presented at Investor Day and that he has updated based upon the latest news.
Thank you. Thanks, Rafa. At the Banorte Investor Days last March, we provided investors with a better understanding of Banorte financial position and the potential risk we are facing. We strongly believe that balance sheet risk helps investors make informed decisions and assess Banorte's ability to manage risk. Risk-wise, here's an update on six fronts. In front number 1, letter A, at the left upper side of the slide, regarding interest rate risk, you can see that in the fixed interest rate portion of the balance sheet, liabilities more than cover assets measured by outstanding balances by 102%. Notice that the duration provides the same excess, remarkable 146%. In addition, 49% of the loan portfolio has a floating interest rate regime, with 41% variable interest rate funding.
Remember that, at the variable portion of our balance sheet, asset duration exceeds liabilities duration. That means that we are exposed to a risk in the case that interest rates are coming down. That is going to be compensated by the fixed rate portion or gap between assets and liabilities in the fixed rate portion, because asset duration is less than liabilities duration in that part. In order to accommodate our balance sheet, we are using, among others, six strategies. Strategy number one, we use diversification, spreading investments across various assets, classes, industries, and maturities. Strategy number two, duration management and NII sensitivity management. That is, we adjust the portfolio overall duration based on our outlook for interest rates.
For example, you have seen NII sensitivity cut by one third in the first half of this year. We are preparing our balance sheet for the imminent interest rate decrease. Strategy number three, we practice bond laddering, which involves investing in bonds with staggered maturities. Strategy number four, we use interest rate swaps. Strategy number five, we perform active monitoring and analysis, keeping a close eye on economic indicators, central bank policies, and global macroeconomic trends. Strategy number six, we continue to use hedging strategies to protect our portfolios from adverse interest rate movements. All in all, our strategy will depend on our risk tolerance, investment goals, and market outlook. That's regarding the first front. The second front, which is letter B, deposit stickiness.
You will see that, although cost of funds have gone up in relative terms, we expect it will normalize before the end of the year. Demand deposits represent 72% of total deposits, and 96% of total deposits are considered sticky due to several reasons. Some of those reasons could be listed in the following. First of all, we have increased, up to a point, interest rates. Second, we are using hyper-personalization to promote customer loyalty, building trust through personalized services, excellent customer support, tailored financial solutions in that regard. Number three our offerings remain attractive in the liability side of our balance sheet. Number four, we continue to invest in our market reputation to influence deposit stickiness.
Also, we regularly check on economic stability and consumer confidence to detect a trend of our depositors regarding their behavior. Number six, we comply strictly with regulatory standards to build trust. Number seven, we are very sensitive to customer needs and lifetime events, like specific financial goals or life milestones, which could alter the behavior in our depositors. Number eight, we remain competitive in the profile of our deposit offerings, making them attractive all the time. Number nine, we provide and offer accessibility and convenience through our online banking services, mobile apps, and a wide ATM and corresponding banking network. That is very important to make our deposit sticky in that regard.
We decided to provide you with this color, not just with the numbers that you can see at the low portion in the left-hand side of business line. Front number three, letter C. For AT1s, we use cash flow matching. We constantly use and make LDIs decisions, that is liability-driven investments. You will see that this cash flow matching provides us with an investment in treasuries in order to have those cash flows dedicated to that event at the time of the call of the AT1s. We manage and match AT1's future cash flow requirements with corresponding cash inflows from our securities portfolio. Front number four, letter D, at the middle and low side of the slide, you will see that Banorte is the less leveraged banking institution among peers, with a leverage ratio of 12.12%.
This Basel III leverage ratio is an essential regulatory tool to ensure that banks maintain sufficient capital to absorb losses and promote financial stability, which for us is paramount. Front 5, at the upper right-hand side of the slide, you will see that, as you might recall, in the context of Basel III, financial assets are classified into different levels based on their liquidity and how quickly they can be converted into cash. Banorte has a 96.1% Level 1 assets, that is high quality liquid assets. I will remind you that the most liquid and highest quality assets can be readily converted into cash in times of stress.
That's very important for us because you will see that the Basel III framework sets strict criteria for level one assets, requiring them to be highly liquid, low risk, and readily available in the market. The composition of level one assets includes cash on hand, qualifying government and central bank securities and deposits, among others. In front number six, letter F, our balance sheet has already had an adverse, but low severity capital impact of 20 basis points in the available-for-sale securities portfolio. At the close of June 2023, if we were to impact our capital with the unrealized losses of the held-to-maturity portfolio, the theoretical impact would be of only 45 basis points, which is equivalent to a 50% consumption of our variability buffer.
Compare this number with our capital volatility buffer, that will be 83%, because 83 basis points, because by the end of June 2023, we had a 33 basis points consumption. This 45 basis points impact on capital is equivalent to a 50% of the buffer. The consumption will be 83%. Absorbing this very unlikely scenario is totally workable and sustainable in the case of Banorte. Thank you.
There has been some questions about the guidance, I would like to go for the guidance as we start. Now, the guidance, we moved the loan growth from 6%-8% to now to 10%-12%. Net interest margin, that was basically supposed to be at 6.8%.
Now we are, for the group, at 6.2%-6.4%, as we have just mentioned what happened on the annuities side. The net interest margin of the bank that was on, at a point in time, expected to reach the 7%. Now we are lowering that to 6.5%-6.7%, based upon the pulse that has happened on the interest rates hike, but still very positive on the number, that it will be very close to the 6.6%, 6.65%.
The recurring expense growth, 7%-8%, and the total expense growth, 11%-13%, we are considering that the Bineo start up, that it will be account for 2% of that expansion of the expense line. On the efficiency, 35%-37%, we would like to have that a little below that, but I think that's a conservative number. Cost of risk, 1.6%-1.8%, remains the same. Tax rate remains the same. Net income, now we move the lower part of the guidance to MXN 51.5 billion-MXN 53 billion. Remember that on this part, you have to take into consideration two things. We have been affected on two sides.
The effect of the peso that is extremely strong, has had an effect on the dollar position that we have, and also the foregoing interest that we are giving away by paying the the dividend is also take into consideration that number. If that was not the case, that number of 53 would be easily be above the MXN 53 billion. If there's any change coming in the next 3 months, we will advise the market, and we have adjust our guidance, I think in a positive way. Return on equity for the group, 20.5%-21.5%, and for the bank, 26.5%-28.5%. The return on assets, 20%-22.5%.
With the numbers that you see on the economic arena, 2.9% on the GDP, inflation rate from 4%-5%, and the reference rate still at 11.25%, but who knows if things can happen before year-end. That's the adjustment on the guidance that we would like to present to the market.
Thank you, Marcos and Rafael. Now we will continue with our Q&A session. As always, we kindly ask you to present only your most relevant question, and 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 will unmute you when your turn comes. Also, 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 Gustavo Schroden from Bradesco. Gustavo, please.
Hi. Good morning, everybody, thanks for the opportunity. I have a couple of questions, the first one is related to NII and NIM. First of all, I'd like to congratulate you as you presented a very good explanation about the impact on NII due to the impact on annuities. I'd like to clarify with you if it is correct, we mentioned that, or it's correct, we understand that this volatility is much more related to accounting rules from IFRS, or would have anything that the bank or management could do here to reduce this volatility?
If I understood, it is much more related to inflation trends, which in turn impact the annuities valuation in assets and liabilities sides. I'd like to clarify if this volatility is much more related to accounting rules, or would be, or would have anything that you could. Or if you have any way to manage this volatility in NII. My second question is regarding the dividend policy, dividend distribution. You mentioned that you are planning to announce or to propose an extra dividend in amount of a MXN 15 billion. I need to say that is a very welcome from our side, I'd like to understand it. You still have a strong capital position.
We understand that in the past, there was an option of a potential deal, especially regarding the Banamex, but now it is no longer in the radar. Would you think, or are you saving capital for a potential new acquisition? Maybe it would be great if you share with us how do you see, or how are you planning, or what is the growth plan of the bank? Maybe it would be great if you share with us how we should think in terms of growth plans of the bank.
If we should consider potential acquisition or if, the main, growth avenue, would be through, organic, or would be in an organic way. Thank you.
I will start with the second one. We are not saving any more capital. Having said that, as I just said, we will prioritize investment related to the hyper-personalization networks in the bank, the expansion of our digital capabilities, and we will focus on improving the efficiency in our branch network, providing a digital interfaces of human interactions, no, in our customers' requirements. We have a nice infrastructure footprint in the country, but we are with this new joining strategy, you know, these maybe we move some pieces on this. We will grow in ATMs. We are hoping to have 2,000 more in the next months, in the next year.
And all these regarding to strengthen our inside infrastructure, no, and our human capital. So far, we don't see any big buy or anything, no? Maybe, as you know, we are part of our job is to see what's in the market, and if we see a good opportunity, first we go to the assembly, and then we will, in this case, raise money, because so far, we are not saving it, you know? And the strategy so far is to grow organically and in the right direction, and we have a lot of things to do. We have a lot of things in our hands, and that's the strategy, you know? Going to the number one, the NII and NIM, that's correct.
Before the IFRS, these movements were in another place, no? Now you have it there. I would like to see that they are perfectly matched. If they go one way, they go down in the other side of the equation. That's the annuities, no? You have the investment all these reserves in annuities, and if they go up, they go up, and you lose money. You lose money in both ways because that's not our money. That's the money that is there. With this IFRS principles, now it's there, and it moves, and we need to show it, and we need to explain it because it's in the group, not in the bank, no?
The way I see it, you don't have to worry at all because it's perfectly matched. I know if.
All this that Marcos is mentioning is all a matter of accounting geolocation. Where do you want to register each and every item will make a difference. In the financial results and the P&L statement, you will see the same effect on the bottom line. Where you put the item is the only difference, and that's a distortion for in terms of financial analysis.
Let me just, Gustavo, if we were not doing this on the IFRS, if we take risk on the positions, we will not be compliant with our fiduciary duty. That is to protect the pensioners and money in a complete and relevant way. That is the law. That's the way we have to manage the money of the pensioners. The effect of the IFRS is exactly what Marcos mentioned and Gerardo. In the past, it was completely matched, so you didn't see any movement at all. Now you see in two different spots and that's the case. If we will play with the money of the pensioners, I think we will not comply with the law and with our fiduciary duty with the pensioners. It will go up and down.
I mean, inflation went down pretty fast, so that's not a result of that. You will see a much more stable number. You see a big reduction from one year to the other on the position, on the margin, on the annuities, but it's completely matched with the technical reserve. It's no material on the net income, accounting-wise and fiduciary-wise, is the way that we have to manage the position.
Yeah, and also.
Just to remember one thing on the dividends. I think we advised the market that the world was not quiet, and we needed to be careful with the dividends on the capital. We understand the buildup of capital, and if we continue to see how much the pace that is becoming more and more normal there, what is going on all over the place, not just in Mexico, but all over the place, you will continue to see a more aggressive flow to the shareholders in 2024. That's for sure. We are not saving money for anything, but as Marcos mentioned, for organic growth.
There will be enough money to keep on building more benefits for the shareholders.
Just to give some detail on page 5, you can see exactly how it was just Marco, Rafael, and Gerardo discussed. It was basically compensated in the past with IFRS in the NII, and now we're disclosing the technical reserves of annuities. That was MXN 4 billion, and that was the change from the margins to the net technical reserves down in the income statement.
Oh, super clear, and thanks for the answers. Yeah, super clear. Thank you.
Thank you, Gustavo.
Thank you. We'll now take the next question from Geoffrey Elliott, from Autonomous.
Hello. Thanks very much for taking the question. Can you hear me okay?
Yeah, Geoffrey.
It's a question on the deposit side. First of all, you said on the previous call that you were expecting funding costs to come down from May onwards. That's not obvious in the numbers. Did that happen, or is that delayed? Related to that, deposits grew quite a bit faster than loans. Is there a deliberate strategy of kind of pre-funding now, or why are you growing deposits faster than loans in the quarter when deposits are obviously more expensive than they have been previously? Thank you.
Rafael.
Yeah. Geoffrey, it has been a delay on that, but I think, we already saw a tipping point in the month of July on the funding side. We always like to gather deposits the more that we can. It's, in this case, there's an opportunity in the market to bring the clients that we would like to bring, and some of them are asking for more return on the funding side, especially on the time deposit side. As I mentioned, last year, we were extremely fortunate on only 2% growth on demand. On time deposits and 40% on demand deposits. If you see.
this year growing very close to 12%. It's matching the the long road, basically one to one on that part. We are not having like an excess funding or that, because the dynamic of the book is becoming really very, very strong and with the clients that we like. We don't want to lose any opportunity on that part. We are paying more on the funding side, but it's fully compensated, as you saw on the margin side. The spread, if you see the liability on the asset side, the spread continues to move up, not at the same pace, but still expanding month-to-month.
I think it has been a balancing act, but a good balancing act for the group.
Great. Thanks very much.
Thank you. Thank you. Now, we will continue with Tito Labarta from Goldman. Tito, please go ahead.
everybody. Thank you for the call and taking my question. A couple questions. One, maybe a little bit more of a modeling question, but just on the NII and the technical reserves from the annuities, is this a one-time adjustment, or? I mean, I can understand there may be some volatility there, but as inflation maybe stabilizes or doesn't move as much, should, like, next quarter, should we get a spike in net interest income from the annuities business, and then the reserves go back to where they were prior quarter? Just to help us kind of forecast how that can evolve from here, or should we just think about the NII and the technical insurance results kind of combined as a better way to model?
My second question, more a little bit on your ROE outlook for the group, you know, and, you know, thanks for the updated guidance and everything. If we look, you know, like, on, I think it was slide 11 in your presentation, where you have, like, the ROEs by the different subsidiaries, right? You know, the bank ROE, as you mentioned, will probably, you know, come down to that 22-24. If you look, insurance is, you know, about 50%, annuities at 20%, but then maybe under earning on the Afores and the broker-dealer, which are at 10 out of 11. Can you help us think about sustaining that ROE, you know, the 20%-21%? You know, I think, you know, the dividend payment helps as well.
What will offset some of the pressure that you see on the bank ROE as rates come down? You know, what's going to keep it above 20%-21% if we think of the other subsidiaries? Thank you.
Thank you. Going the first one, Tito, it's very, very rare to see negative inflation in the annuities, no? Everybody's expecting when you have the annuities, how much is inflation and how much they have to pay you, sometimes it's low, sometimes it's high, sometimes you're happy, sometimes you're not happy. Negative inflation is rare to see, and that's what happened. I cannot say that we will have more events like this, but I would say that it's gonna be rare to see this case. Again, it doesn't move anything. It goes one way and goes to the other. The only problem is that according to the IFRS, it goes to this part of the NIM. I on my point of view, it was better before the IFRS.
It was more clear, but that's the rules, no, the company rules. Goes one way, it goes to the other. We shouldn't worry about that, no? That's my point. The second one, the ROE, go ahead.
Yeah. Tito, if you look at the activity of the bank, and if you look at the rate of growth that you have on the book, on the consumer book, and going back, how do we expect to maintain the ROE of the 22%-24% on that part? When you see the interest rates go down and based upon the high funding capabilities that the bank has, that we have 72% on demand deposits and 28% on time deposit, you will see also a drop on the cost of funds that will sustain a very strong fixed rate part of the group.
That is, also will be fully compensated by that drop in the funding on the interest rates. That was. That's one point. The other thing is that we continue to see that the bank is now really in full motion in every part of the business: commercial, corporate, consumer, the branch network, the mobile channel. I think, after the pandemia, the bank took some time to really fully recover the activity on that part. If you see SMEs are growing in a very strong pace with very strong credit risk numbers, because we knew a lot about those clients during the pandemia, and we have evolved a lot on that. We hired a lot of people to support the SMEs, the same on the commercial side.
The bank is in full motion, is fully prepared to capture the activity at the bank, at the country, in the tourism side, in the nearshoring side, in the SMEs, in the consumer side. I would say that this, if you look at the pace of growth, and when you see the numbers coming from the CNBV, you will see that the bank is really topping most of the consumer numbers in the market, but create price, because we like to be prudent about great products. That shows really that the bank is now reaching a potential to grow at a very fast pace with a very strong risk numbers. We are not gonna use capital to pay for unexpected losses or on that part.
That's, that's what really allow us to project the 22-24% for the bank and the 21-22% for the group. If you see, as you mentioned, above 50%, return equity on the insurance business, the bank 26, 27%. We know the ICAP, why the, I mean, the ICAP at the most will reach the 14%, if you don't go to tangible, and. Everything else will be above the 20%. I mean, what is going with the, with the, with the broker dealer and that, and that part will fully compensate, and it's a very small portion of the group. We don't see any drag really to keep pushing the bank at 22-24%.
The bank is already taking into account the drag on the pension, on the ICAP business. Everything is going up from now. As Gerardo mentioned, we are fully prepared for the easing cycle on the interest rates. The funding is in the right way. The consumer book is moving a lot more to the fixed rate part of the book.
We are having very strong relationship with our clients, that the banking fees are growing at 19%, and we don't see any reason why we shouldn't be able to keep that pace, because the amount of money that we're investing in the channels, in the distribution, in the way we are setting up our branches, and really, the NPS is another very important thing that you should take into consideration. The NPS for the bank is at record levels. The appetite for the clients to do business with the bank are at, in a very good terms, based upon everything that we have been investing in. That's our confidence. I think it's not coming out of the blue.
It's based upon the numbers that we are seeing and how we are managing the risk and how we are managing the clients.
Okay, great. No, that's helpful. I mean, yeah, I think the bank is pretty clear, but it sounds like even the insurance ROE, you think might be sustainable above that 50% level, and then you get some upside from the ICAP, and maybe even a little bit in the annuities. Is that, is that correct?
Yeah. Yeah.
Okay, perfect. Sorry to go back to my prior question, and Marcos, thanks for the call there, and I understand the difficulty in forecasting that, but bottom line doesn't really matter, right? Just to help us think about the individual line items between NII and the technical results. If we don't see negative inflation again, right, which, as you said, is not common, would we expect sort of a normalization to where we were before this quarter? What happened this quarter was a little bit of a one-off, and then it kind of normalizes to where we were before. Is that the right way to think about it, for both NII and the insurance?
Yeah, I think you will see a more normal numbers on that. I mean, if you see at the drop, MXN 4 billion.
Rafael, may jump in.
Yeah, yeah. Jump in.
Yes, Tito, you mentioned that it would be a good idea to look at the two items together. That would be the financial products that you get from the investment side and the compromises of the annuity company on the technical reserves. If you look at the combined ratio, not the combined ratio, the combined items, then you will see that those things offset each other. We do not control the volatility of inflation. Going forward, we may expect higher inflation, lower inflation. What is important is what was mentioned by both Marcos and Rafa, that the two things are offset to each other, because that's the way it's built.
Because remember that we have to guarantee a real rate of return whenever we sell an annuity, and therefore we match the assets and the liabilities. That's why we invest only in UDIs, which is these instruments issued by the Mexican government, which are linked to inflation. It's just the way to just have it, your question. You have to look at those items together, which was the way it was seen before the changes introduced by IFRS. That, I think, would be the way to look it into the future, because we cannot control the volatility of inflation. That way, you will see that always these things will be offset one to each other.
Okay, perfect. That's very clear. Thank you very much.
Can I add something as well, please? This is Alejandro Padilla-
Perfect.
Chief Economist. You have to also bear in mind that there's seasonality in Mexican inflation every year. You have subsidies to electricity tariffs during the second quarter of the year, and the contrary effect, you will observe it between the third and the fourth quarter, when all the subsidies are completely off, and you see higher inflation. In Mexico, there's a seasonality in which you have deflationary numbers in April and May, and then also in a seasonal basis, in October and November, you have higher inflation rates. Just to add to the answer.
Great. Thanks, Alejandro, for the call.
I think what Fernando mentioned is very important. That's we don't play the game of positions and taking advantage of the money of the pensioners. That's not the way we want to start that business. What you see is exactly, and it's very easily explained on the NNI that we present, that what Fernando mentioned. You match one with the other in a perfect way, it's very clear explained on the slide number 5.
Yep. Okay, perfect. That's very clear. Thank you, Rafa.
Thank you, Diego.
Go with Daniel Vaz from Credit Suisse. Go ahead, Daniel.
Thank you. Thank you for taking my question, and congrats on the results. I would like to switch a bit to the commercial part of the business. I saw good credit growth and also good asset quality on NPL. I would like to take a bit of a sense, what's the amount of that you attribute already to the nearshoring effect, if it's there already or not? Going forward, do you expect that to, I don't know, keep this growth on track or even have a higher growth due to the nearshoring effect or so? That's my question. Thank you.
Thank you, Daniel. Rafa, go ahead.
Daniel, if you look at the numbers of the bank, on the prior years, you see commercial growing around 6%-8%. If you see commercial now growing at 12%, it's basically all what is going on with infrastructure, building, industrial parks, everything that is related to the supply chain. You can add a very important number to that based upon the nearshoring. That is at least of the 12%, at least 5%-6% is related to the nearshoring.
Very, very clear. Going forward, do you expect that to even go higher, right? This could even rise.
Yeah, that's why we set up close to 1,000 new bankers to capture the opportunity.
Perfect. Perfect. That's all. Thank you.
Thank you, Daniel.
Thank you. Now we will continue with Yuri Fernandes from J.P. Morgan. Yuri, please go.
Hi, Marco. Rafa, I had a question regarding your new sensitivity, and congrats in reducing this. I guess this is the big concern of the market, right? Like the easing cycle. Congrats. I think this has been maybe faster than we expected. You put out a soft guidance of the sensitivity reach, reaching about MXN 700 million pesos, right? Every 100 bits change on rates. My question is, why not lower? In the past, I know your balance sheet was smaller, but you had around MXN 500 million pesos. As you said, during the presentation, right, you are growing more fixed rate consumer loans. You are trying to grow your time deposit franchise. That should, you know, also help reducing the sensitivity.
My question is, when should we see the $700 million that you guided there? Why not lower? Why shouldn't we not expect, like, you being able to reduce, even more your rate sensitivity? Then I can have a second question. Thank you.
It's a dynamic process, because if you lower right now, you are losing the opportunity, the margin that is there right now, no? Yes, you need to be prepared and with good assets, and it's a matter of the clients, they produce the good assets, and to be very dynamic because, yes, I would like to have this in zero, but not now. I want to have it when the rates go down, no? We should calibrate when to do it and how to do it, no?
The idea is to go down, go more in the future, with good assets in the long term and in the alto, no, we have some ideas there to reduce it. In the next future, when you say, what did you do when? We did a lot of things, but right now is not a good idea. We need also to take advantage of the rates right now, no? It goes both hands. My answer is we should be dynamic, and we will tell you posted how we move on that sensitivity.
No, super clear. A second one, if I may, regarding funding. There were questions about this already, but checking them in deposits, they are growing actually faster on a quarter-over-quarter basis, right? Your funding co-cost moved up. What is happening with demand deposits? I guess it increased 7% quarter-over-quarter, faster than time deposits. In this higher rate environment, I would expect maybe time deposits to grow faster, right? My question is: What's happening there? Because, again, you had very good quality funding, and it was somewhat a surprise for us here. Thank you.
I think it's part of the offer that the bank has. If you look at the growth that we have been having on the payroll part of the business, that is basically demand deposits with no cost. We continue to grow pretty strong on the payroll side. Also, the SME side, that has been a extremely good surprise for us because of the pace of growth, not just on the loan book, but also on the funding side. It's basically also a demand deposit with no cost, a considerable part of that.
I think those two- are the ones that are basically sustaining the high growth of the, on the demand deposit base, those two parts. Also the activity that we are facing at the bank with the digital offering that we have. The digital opening of accounts that you don't see very high balances opening in the digital, but a lot of new accounts coming into digital. That, when you add everything up, is an important number on the funding side. Those three are the ones that are pushing up. Obviously, you have the time deposit, the big transactional banking movements that we have from the commercial and the corporates and things. On the low end of the cost side, those are the ones that are balancing the cost.
No, super clear, Rafa. You have, like, new players in tech trying to grow on demand deposits, sometimes offering higher yields. I guess it's too early, but are you seeing any pressure on that front or not a big deal?
Not at all.
Perfect. Thank you, guys.
Thank you.
Thank you. The next question is from Ernesto Gabilondo from Bank of America. Ernesto, go ahead.
Hi, good morning, Marcos, Rafa, and good morning to all your team. Thanks for your presentation and for the opportunity to ask questions. My first question is a follow-up on NIMs. If keeping the MXN 4 billion reclassification at the NII level, I think you were guiding before NIM expansion between 20 to 50 basis points. If keeping again the MXN 4 billion at NII, how should would be the NIM expansion this year? Given that you are reducing the sensitivity to interest rates, how should we think about the NIMs next year? Could they be stable or with modest NIM pressure? Any insight will be very helpful. My second question is on your new digital bank.
We have seen that the regulator has approved the digital banking license for Hey Banco and for Openbank. When do you expect Bineo to be open to the market, and what would be Bineo's key differentiators against the new digital banks? Thank you.
Okay. Ernesto, the first one is, would be 10 basis points more. That would be the effect of the MXN 4 billion on that part. What you will see on the margin on next year, I think it will be a very stable situation from the margin. If you ask me what would be a conservative view, it will be around 6.3%-6.5% for the bank, because everything that we have been building up on the fixed rate part of the book, it will protect us on that part. Also the funding side, as Yuri just mentioned, continue to really move into a nice space on that part.
I think the reduction on the funding cost, plus the fixed rate part of the book that will continue to deliver pretty good returns, I think, allow us to have a margin from 6.3%-6.5%. I think most part of the year will be more around the 6.4% net interest margin for the bank on that part.
Excellent. In the digital bank?
The digital bank, I would love to give you a lot of information about the digital bank, but I think it will be a very positive surprise when we launch into the market. Everything is being set up ready as soon as we get the go from the authorities. Now we are seeing when will be the best time to launch, once we get the approval. By the way, it has been very helpful, the authorities in going into this process. Basically, I will compromise most of the strategy if I open the book now. Sorry for being a little bit close on that.
Okay, no, I understood. Thank you very much.
Thank you.
Thank you. We will continue with Luis Janzen. Luis, please go ahead.
Oh, hi, guys. Thanks for taking my questions. I'd like to go back to, you know, the changing guidance on the NIM for the bank specifically, and I appreciate all the color around, you know, the annuities. Help us understand, you know, what were the assumptions back then to think? You know, initially you thought perhaps at the high end, you could have gotten to a 7% NIM, right? Right now, we're at 6.5%. Just trying to understand, what were the assumptions that could have gotten you to 7% on the bank NIM that perhaps you're no longer expecting? Were you sort of thinking that the funding cost pressure was not gonna be as big or something?
I'm trying to understand that because it looks like the average rate that you were assuming for this year is higher than the previous guidance, therefore, that's supposed to be good. You're growing faster on the right segment, so the mix should be helping you. I'm trying to reconcile, you know, the negative change in guidance on the NIM of the bank, specifically for this year. Perhaps a bigger question there is, I would have thought that as rates peak, which we could argue, perhaps the peak is this quarter, with TA still going up this quarter sequentially, and, you know, if rates don't go up anymore, this is kind of the peak. If that's the case, I would have thought perhaps a quarter or two after that, we would have seen the peak in the bank profitability.
It looks like, you know, NIMs may have peaked in the fourth quarter, ROEs may have peaked in the first quarter, and based on your guidance, it looks like that was kind of the case. It's actually the opposite, which surprised me. Did that surprise you or not? How, or how are you thinking, you know, about that? That'll be my first question. Thanks.
I think, the first thing that you have to see is that, we never expect to have the loan growth that we have. Also, if you look at the guidance, basically it was 5%-7% loan growth. That was with a very sound funding mix on the cost side that was very close to 38.5%, 39.5% of surplus. The movement started to peak on the lending side, and also the demand for more returns on the time deposit side.
Even though you have pretty strong growth on time deposits, and more than strong growth on the commercial part and the consumer part of the group, you have to fund those. The competition for funding in the market, obviously we're not on that part, even if we still have a very strong funding mix. I mean, to move from 38.5% to 41% was a big jump. To move to 43% was another jump. You will start to see that number coming back from the 43% back again, close to the 41% at the end of the year.
That was difficult, really, to provide based upon the pace of growth on the lending side, and also the competition for the funding side. We saw a big opportunity on the market to bring clients that which demand more returns on the funding, but give us a much better relationship. That's as simple as that. It's simple math. 38.5, now you look it at 43, based upon the pace of the loan growth and the funding growth and the cost of the funding on the time deposits. From 3% growth on time deposits to 8% growth on time deposits, that explained. If you go to NNI, and you look at loan to deposits, it's growing 25%.
The NIM is growing 24%, but the NII on loans to deposits is 24%, and the spread on the book still is very positive. Obviously, when you see the number, just the margin on the number from very close to 7%, that it was very positive, very possible based upon the initial guidance that we had. Now, I think we are in a much better position with a much important loan book, with a very profitable loan book, and with a very rich clients that we like to have in our book, in order to build up a relationship. It's a game, it's a game theory in this part. I mean, it's not a zero-sum game on this part.
We balance this based upon the pace of growth on the loan book and the demand of the funding side. We went up to 43% cost of funds. Yes, we will go down, but we already have the loans. That's, that was the... I see, I think that was the strategy on this part.
Understood. Thanks for the detailed explanation.
Thank you.
Now we'll go with Nicolas Riva from Bank of America. Nicolas, go ahead.
Thanks very much, Jose Luis, Rafa, and Marcos, for taking my questions. My first question is on your AT1 capital. And of course, you do have a lot of capital. We are all gonna agree on that. If I look at the I mean, the AT1 capital, the Perps have been in dollar terms, fixed at $3.2 billion over the last four quarters. Yet, the contribution to capital has declined by about 180 basis points, to 600 basis points as of the end of this quarter, which for almost any other bank, that would be kind of a huge deal, losing 180 basis points of capital.
I wanted to ask you, and clearly this has been driven by the appreciation of the peso versus the dollar, have you hedged that FX exposure on your dollar PERP? That's my first question. Then the second question, kind of a follow-up on the question, the first question that I think Gustavo was asking. In the past, you have kind of highlighted a potential extraordinary dividend payment before the end of this year. I wanted to ask if there's an update on that, and more importantly, what will be your target of common equity Tier One by the end of this year after paying that extraordinary dividend? Thanks very much.
We start for the second one. We already are paying this extraordinary dividend of MXN 15 billion, and so far, that's it. We don't have anything else to give until the next year, I hope, no? The first one, yes, we have some kind of hedge. Rafa, you want to comment? Yes, I think what you mentioned is correct. That really shows you the capability of the bank to be... I think it's very important what you mentioned, because sometimes people thinks about that the AT1s, we are very dependent on the. No, I think the AT1s are very instrumental for us to compete in the market on the dollar book. We hedge to call those on day one.
Obviously, there has been an effect on the currency rate that we have. As you mentioned, if you see the strength of the capital numbers of this bank and the capacity to manage this, it really shows how careful we are with the balance sheet on this part. The numbers that you will see once we pay the dividend by the end of the year, will be basically the same numbers that you are looking now at this part. What will be our ideal number for the core Tier 1, and we have adjust this to 13%. We will converge to that in the coming months and year.
We will like to be at around the 13%. We hope the world will become more easy, more peaceful, and that we can really understand a lot of the economic things that are moving around. Now that you ask about the AT1s, the other day, people were asking that and you know, by law, we cannot say if we honor the call or not, but let me just give you one note to some people that are concerned about that. The only source that we have for capital, regulatory capital instruments are the AT1s and the AT2. We are not playing in any game to sacrifice our entrance to that market in any way. That's the only thing that I will say about the AT1s.
Very, very clear, Rafa. Maybe just one follow-up there. If I take out MXN 15 billion from your common equity Tier 1, I get to roughly 13.8 CET1. You are saying by the end of this year, you expect to go back to the number you reported, roughly the number you reported at the end of June because of organic capital generation, or?
Yeah, very close to the 15%.
Yeah.
By the end of this year. Not only the bank that provides dividend, the group has cash and received money from the subsidiary. Yes, as Rafa mentioned, it's 15% with the mid part of the guidance.
Okay. Thanks very much, Thomas. One last question then: If the peso continues appreciating versus the dollar, we should expect that AT1 contribution to continue declining a bit just because of that FX translation?
Yes, yes. Mathematically, yes.
Okay. All right.
Thank you.
Well, thank you very much.
We'll continue with Olavo Arthuzo from UBS. Go ahead, Olavo.
Yes. Hi, Marcos. Hi, Rafa. Thank you for taking my question. Actually, I just have one. Sorry, because I was unable to hear the entire call. I just wanna follow up on your digital bank initiative, the Bineo. Thank you for disclosing your new guidance. Basically, I wanted to have an update on this, because you guys have been mentioning in the press the target of 3 million customers. If I'm not wrong, the bank stated at the beginning of this year, the expectation for this initiative to represent something like 5%-7% of the bank's income in less than five years. I'm just trying to understand the potential here. Is that 5%-7% still valid?
In terms of credit portfolio, understand the focus should be on consumer loans, but how much big the portfolio could be? This would help us a lot. Thank you, guys.
Thank you. Yes, we will start the operations of Bineo as soon as the first quarter of next year. We are in the final details and the strategy and all this, and it should move a little bit, the numbers. Rafa, do you have all your numbers?
I think, if you look at 7% of the net income of the group, you are looking at a pretty high number. I mean, you are looking at a net income at that point in time that we want to reach that, the 3 million clients on that part, you are really looking at a very, very high number.
I think it will be a very positive surprise, the digital bank, because we will really like to run that with a costed income ratio, very low, 25%. A full segmentation bank that could reach any segments of the Mexican population. Financial inclusion will be very present. And based upon everything that we have on the risk models and everything, I think it will be a pretty good story about that. Not just on the cost side and the cost income side, but I mean, 7% of a group that will be delivered at that point in time, a pretty high number will be, I think, more bigger than most of the medium banks that you currently have in Mexico.
That's perfect. Thank you very much, Rafa.
Thank you.
Thank you. Now we'll continue with José Cuenca from Citi. José, please go ahead.
Hi, good morning. Thank you for the detailed presentation and taking my question. Just a quick follow-up. If I understood correctly, one of the means for cost of funds, which is 43% of set, is to go down, would be based in your lower needs for funding, as you have already, like, secured, so to speak, some of that funding needs. So that would be one of the mechanism. Just wanted to confirm if that's correct, also just wanted to kind of like tie or link the dots with the bank's NIM guidance?
If I'm understanding correctly, despite that, improvement in cost of funds, and despite stronger loan growth, potentially better mix, that would still not be enough to offset what I would believe are still funding funding cost pressures, and hence the slight trim in NIM of the bank. Would that be the, the correct way to think about it? Thank you.
No, I think what part of the equation is right. I think the funding will go down faster than the assets part of the book. The variable rate part of the book will start trending down because on contractual terms.
Mm-hmm
follow the drop in the interest rates. Remember that we have 56%, 57% of the book in variable rates. Even though we have a very strong mix now on the consumer, and it will be a balancing act, how fast we can lower the funding cost of the overall portfolio, I think that will be the key to see how fast we can really improve or sustain the margin the way we are. We don't know exactly. We are playing all the levers in order to be ready for that. I think it will be a play in the market. It will be something that the market will follow, how fast the funding rates on the market starts to go down. I think that would be the key part.
Perfect. Thanks. Thanks for the clarification.
Before we continue, and I think we need to limit to one question because we are receiving more and more questions, and people on the line. If somebody needs to disconnect, just send us an email. I'm happy to connect after the call with you. Also, we're receiving a lot of chats on clarification on the dividends. I would just like to give the details that have been discussed earlier, is MXN 15 billion to be proposed to the assembly. The payout ratio for the full year is around 83%, and it's around MXN 5.2 pesos per share. This is our question we're receiving, we hope we can clarify with that. Thank you.
Now we'll go with Carlos Gomez from HSBC. Carlos, go ahead.
Yes, hello. Thank you very much for taking the question. Thank you also for the updated guidance, and for the dividend. Quickly, because it's getting too late, can you give us an idea of what you expect for Mexico and for the bank, not for this year, but for the next five or six years? You say that you are already growing very strongly. Do you expect that growth to continue for the next two, three years? What can we realistically expect, not in terms of ROE, but in terms of loan growth, and earnings growth, for the coming 6 years in for Mexico and for Banorte? Thank you.
I think ROE, as we mentioned, loan growth, I think 10%-20% is very feasible for us to continue to grow on that part. Net income, as we promised on the Investor Day, that will be a double-digit number for net income.
Thank you very much, Rafael.
Thank you.
We'll now go with Tejkiran Magesh from WhiteOak Capital. Please go ahead.
Hi, thanks for taking my question. I wanted to get a bit more color on the loan growth. We've been printing more than 10% YOY loan growth for at least three quarters now. I wanted to understand, especially from the consumer side, is it coming from customers who are new to the bank, or is it coming from increased lending or to the existing customers of the bank? On the side of commercial loans, are they more into working capital loans or fixed, you know, investment loans?
Yes.
The first one is coming from both: from new to the bank, and also to increasing the relationship that we currently have with the current banks, based upon the hyper-personalization process that we are moving on that part. On the commercial side, in both ways, you get the capital part, and also the to increase your stock for working capital lines. I would not say that it's one or the other, it's all over on that, on that part.
On the consumer side, just following up, among the customers who are new to the bank, what percentage might be new to the financial system itself? I mean, are we doing any loans to customers where they, it might be their first, formal loan they're taking?
I think the way we manage that is through the payroll. The payroll is for many, are the first relationship that they have with the bank. Once they get into the bank with the payroll, we start looking at the behavior of the accounts and things, and then we start originating the lending side. That's the most healthy way to financial inclusion into the credit cycle of the clients. We also take loans on the personal side, but if you look at the numbers on the personal loans, are very small on that part. We rather graduate the clients through the payroll and then the payroll loan, and then continue to go through the cycle on the car loans and then the credit cards and things.
That's the way we manage the risk, and that's the way we manage the clients, through the risk cycle in the bank.
Thank you. One last quick question about asset quality, if I may. We have seen a very stable NPL ratios and write-offs. Should we adjust for any restructuring or refinancing or portfolio sales among these NPLs, or are they all baked into the NPL numbers that we see in the presentation? That's my last question. Thank you.
No, what you see is what you get. It's nothing.
Out of the ordinary.
Out of the ordinary. It's exactly what it is.
Understood. Thank you, and congratulations on a strong quarter. Thank you.
Thank you very much.
Thank you.
Thank you.
Now we'll continue with Natalia Corfield from J.P. Morgan. Natalia, please go ahead. Natalia, can you hear us? If not, we can come back, and we'll continue.
Can you hear me now?
Yes.
Yes. Okay, sorry. I'll be quick. Just going back to your AT1s and AT2, another way to build capital is through the issuance of AT2. If you are, like, replacing your AT1s, how are you thinking about this? Are you planning to replenish with AT1s, or are you thinking about AT2, and how are you thinking about the issuance in general?
Well, we do not plan to replace the AT1s. They have been very effective for us, and that's why we take care a lot of saying that it's very important for us to take care of that. So far, that's it, Rafa?
Yeah, Natalia, as we mentioned before, if there's an opportunity in the market for the AT2 or so, or anything else that we see that is potentially beneficial for us on the structure of the balance sheet, we are not closed to anything. We look at opportunities in the market. We face the AT1, if it's the AT2, if it's a green bond, that we are actively looking into those, also senior. We look at every single opportunity, and we take the best one for the group.
Right. Would you be open for AT2? Because I remember that.
Yeah
in the past, you didn't like this structure too much.
I think, honestly, the AT1s are much more efficient for us, but the AT2, if there's a window of opportunity for AT2s, we will use it.
Right. Then you could reduce your AT1 stack with perhaps a little bit more of AT2.
Yeah. Yeah.
Okay. Thank you. Thank you very much.
Natalia. We have two more, please let's focus on one question per individual, and happy to connect after the call.
Yeah. We'll go with, Edson Murguia from SummaCap.
Hi, good afternoon. Thank you for taking my question. My question is regarding on the loan book growth. Just trying to understand, how do you manage or if the process of origination change? On annual basis, basically, you grew on a double-digit, mostly in every segment, but the NPL is staying the same. It's 1.7%, the NPL. I was wondering, what changed, or how do you manage this? For me, my reasoning, it doesn't match the long growth and the NPL in the same stage. Thank you.
Mr. Gerardo Salazar, mate.
Yeah. I will tell you that we did make a change for the better. We are getting more selective in the wholesale side of the bank and more selective in the retail side of the bank. Contrary to popular belief, we are not playing a trade-off between credit or loan growth versus credit quality. We're forbidden to do that, and you can see those in any graph that you want to see, like IMOR and NPLs, you will see loan growth without eh jeopardizing credit quality.
On a fundamental level, you did not change the process. It's the same, but you are much likely.
Talking about the credit profits, process from origination to collection, all the phases remain the same. They have been optimized in order to hyper-personalize and attend a better attention and service to our customers, but there is no any risk variable involved in that process or in that redesign or reengineering credit process.
Okay. Crystal clear. Thank you so much, and congrats on the great results.
Thank you. Thank you.
Thank you, Edson. We'll take our last question from Federico Galassi. Federico, please go ahead.
Now, yes. Thank you for the call. Just a quick question, Marcos and Rafa: How do you balance the long growth and capital ratio growing at this level? Is it some level that affect the capital ratio for this year or next year, or you can continue to grow faster than we are doing now? Thanks.
Yeah. It's a dynamic process. At this level and with this level of number, we need to grow around 17% or 18% to start consuming capital. That's why the numbers we projected for CET1 is around 15%, with the increase in the long work guidance.
Thank you.
Thank you. Thank you everyone for your interest in Banorte. With this, we conclude our presentation. Thank you very much.