Good morning. I'm Tomás Lozano, Head of Corporate Development, Investor Relations, and ESG. Welcome to Grupo Financiero Banorte's third quarter earnings call. In today's call, our CEO, Marcos Ramírez, will walk us through the main results of the bank, providing details on the positive trends of our loan portfolio, including nearshoring opportunities and the continued strength in consumer. He will also comment on asset quality and the normalization process of the non-banking subsidiaries, as well as an update on ESG. Then Rafael Arana, our COO and CFO, will provide an overview of the main financial results, including a deeper breakdown on the margin and the components, the evolution of expense control for the year, and capital allocation. 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 our call today. The third quarter of the year showed solid macroeconomic performance, supported mainly by private consumption and investment dynamics. This trend has resulted in an upward revision of our 2023 initial estimate of approximately 1.5% at the beginning of the year. For 2024, we anticipate GDP growth of 2.4%, despite headwinds for the global economy, as Mexico becomes more resilient. Inflationary pressures in Mexico keep fading away, although we still see challenges at the non-core component already showing an upward risk. Our economic analysis team has revised its 2023 forecast for annual inflation to 5% from the original 4.5% earlier in the year, and expects 4.3% towards the end of 2024.
Therefore, we are anticipating a delayed start of the easing cycle for the central bank, maintaining the current level of 11.25% for the rest of the year, and expecting the first cut in May 2024, reaching 9.25% by the end of next year. Mexico performance will still be supported by positive tailwinds. Despite the strengthening of the U.S. dollar and the recent outbreak of volatility and risk aversion in the international markets, we expect the Mexican currency to remain stable in 2023, with a year-end estimate of 17.90 pesos per dollar, supported by high interest rates, foreign direct investments, remittances, and the continued materialization of nearshoring investment in the country.
Elaborating on the nearshoring opportunity, during this current first stage, we have seen tangible evidence of its potential through the new investments, an expanding labor market, and increasing demand for credit, especially for corporate and commercial loans. At this point, lending activity is mainly coming from companies already established in Mexico, which require resources to expand their operations or production capacity. To fully benefit from this opportunity in the upcoming years, we have already strengthened our human capital with more than 1,300 bankers in front and back office, dedicated to our commercial and SME clients, and we are expecting to increase another 700 positions through 2024.
In addition to this, we are currently strengthening our infrastructure capabilities, expanding our branch network by around 150 branches in the north and center regions of the country in the following three years, increasing our ATM footprint and enhancing our personal abilities to capture and develop highly profitable, long-lasting, lasting businesses. Finally, before diving into the business operation, you have raised different concerns regarding the recent regulatory changes for airports. In this regard, we reaffirm our non-material exposure to the sector, neither in credit nor in market-related securities. Most importantly, we do not foresee any risk of contagion affecting the Mexican banking system. Starting off with slide number two, the operation in the quarter display a solid margin performance, supported by a dynamic lending activity, as well as by a normalized valuation of inflation index securities in the annuities business.
We continue to reduce the rate sensitivity of our balance sheet, already reaching MXN 650 million in NII for every 100 basis points change in rates, down from MXN 865 million in the second quarter. These dynamics also reflected the sound economic activity that I mentioned before. Fees had a slight reduction in the quarter, due to a MXN 158 million reclassification of derivative collateral interest to the NII. Considering nine-month figures, fees for the group grew 8% versus the same period in 2022, and 17% for the bank. Moving to profitability, in slide four, net income for the quarter was 50% higher versus the third quarter of last year. ROE was up 210 basis points year-over-year.
It is worth noting that most subsidiaries' net profits had double-digit growth, which is also reflected in an expanding year-over-year return on assets. In slide five, top-line results for the group showed NII with 16% sequential increase, mainly driven by loan growth expansion, together with a positive inflation valuation effect in the annuities bank businesses. On an accumulated basis, NII grew 10%, supported by greater loan origination volumes, as well as the benefit of higher rates, offsetting the increase in the cost of funds, although we keep managing our fund, funding mix quite stable. Non-interest income reached MXN 613 million in the quarter on the back of a regularized constitution of technical reserves in the annuities business, as inflation went back to a positive ground in the quarter. Moreover, trading income was sequentially lower, mostly given to volatile market conditions observed in the previous-...
Fees on the slide number six, they grew 8% on a cumulative basis, led by a stronger electronic banking fees and more dynamic transaction volumes in consumer products, portraying strong private consumption. Part of the figures were negatively impacted by the reclassification into the NII mentioned earlier. Mobile transactions have had a positive momentum throughout the year, given the ongoing adoption of digital channels and a consistently stronger digital product offering. Loan portfolio, this is slide number seven, continues to expand at a strong pace, with a diligent focus on asset quality, as we will see later on. In this quarter, the loan book surpassed the MXN 3 million balance, driven by the commercial and corporate books, which were the fastest growing segments. This growth was led by increasing loan demand from companies which are preparing for the imminent nearshoring opportunities.
The government portfolio had a more moderated sequential expansion, which is expected to remain low going forward as we approach election year. The consumer portfolio, slide number eight, displays double-digit annual growth across all products, reflecting the stability in the labor market, a strong internal demand, and GDP expansion. Growth in the mortgage book is still one of the main drivers within the consumer portfolio, consistently growing over MXN 7 billion per quarter in the year. As previously mentioned, current demand is allowing us to target a low leverage, high FICO Score ideal. Powering on our analytics and hyper-personalization strategy, we will increase the lifetime value of these customers. Payroll loans and credit cards continue to show accelerated demand. Nevertheless, we are taking a more conservative approach towards them in order to preserve their asset quality. Auto loans keep displaying increasing demand.
However, annual figures had an important low base effect due to the supply shortages in 2022. Going forward, we can expect it to continue as one of the main growth drivers in the book. Slide number nine, asset quality continues to exceed our expectations, as our lending decisions have been centered on proven and selected growth, prioritizing risk-adjusted profitability. NPLs came in lower quarter-over-quarter, despite higher growth volume in consumer and commercial books. Payroll loans are the only product that we are following closer. We have adjusted our origination strategies to preserve the quality of the portfolio. Besides this, NPLs for the rest of the products and segments continue to be stable, and the quarterly increase in cost of risk is well aligned with origination volume and mix.
Analyzing the quarterly results by subsidiary, slide number 10, the bank have had sound core banking operations, boosted by a more dynamic and higher quality lending activity, better market-related income, and efficient cost control, despite higher cost of funds. Altogether, these results yielded a solid 28.3% return on equity for the bank. With accumulated figures, ROE stood at 27.6%. The insurance business had a quarterly reduction, driven by a lower premium income, as the second quarter had the benefit of a delayed premium registration, as you know. On a cumulative basis, the insurance company is posting sound business generation, despite being affected by the upward adjustments in the intercompany fee scheme between the insurance company and the bank, effective as of the first quarter of 2023. The brokerage sector decline was mainly driven by the effect of inflationary premium during the last year.
The annuities business sequential increase was driven by a sound business generation. Compared to last year, the decline was mainly the combination of lower inflation levels, a reduction in fatalities impacting reserves, along with a market-related business compression. As for the affordability, it was affected by lower deals from financial products. On slide number 11, we provide greater detail into the insurance business operation, showing normalized premium origination, typical of the quarter and lower claims. On an annual basis, it presents solid business expansion, despite the acquisition cost line being impacted by the banc assurance fee increase mentioned earlier. Shifting gears to ESG, slide number 12. We are happy to announce that after a long time and diligent process, our decarbonization targets have been validated by Science Based Targets initiative, becoming the first bank in Latin America to complete this process.
This is yet another step towards providing comparable and more transparent disclosures of our environmental evolution. During the quarter, we also launched several cross-functional working groups that we call cells, células, which will improve the pace of ESG project implementation and product development across Banorte. We will keep you updated on their progress. Last but not least, a few days ago, we concluded our participation in the National Week for Financial Education, an annual event organized by the banking sector, which contributes towards greater financial health for the overall population, especially women and young individuals. It highlights the importance of savings, insurance, on these days, protection, and a responsible use of credit and debit cards, among other topics. Finally, as you can see in the numbers, the internal capital generation has been consistently strong.
Therefore, we expect to continue exploring the best possible alternatives to return value to our shareholders and converge towards our target CET1 ratio. Now I will leave you with Rafa Arana, who will go into the detail of the financial results of the quarter. Rafa, please go ahead.
Thank you, Marcos. Morning to everyone. We would like to start the financial highlights with some highlights about how we have been managing the quarter. As you know, the balance sheet, we have always been very conservative and very efficient in the managing of the balance sheet. And I think we are very well prepared for the downward trend that eventually will come, I don't know, in the second or on the third quarter of next year. Something that is important to notice is that there has been some questions about how much, by anticipating the drop in the interest rates, has cost on the margin side.
If you look at the cost of really positioning the balance sheet in the right track for the downward trend, you can basically take a number around 2.2 billion pesos. That is the cost that we are incurring by putting the balance sheet in the right position for the downward trend. That numbers will be more than fully recuperated on the downward trend of the balance sheet.
So it's very important to notice that when you look at the margin of the bank and the margin, basically the margin of the bank, and you see the sensitivity that we have been reducing the sensitivity, we will look into that in detail in a minute. It's around MXN 600 million, the reduction in the sensitivity already in the peso book. And that is basically the cost of having that drop in the sensitivity is running around MXN 2.2 billion. That will be fully recuperated during the downward trend, as I mentioned before. But even though that, you can still see an expansion on the margin, on the net interest margin, on a quarter-to-quarter basis, around 88 basis points.
So that really shows that the way we have been managed the balance sheet through the cycle has been very positive for the numbers of the bank. I will go into more detail in a minute. Return on equity continues to be quite strong, as Marco, as Marcos mentioned, especially for the bank. The bank is running at 28.3 on an accumulated basis, 166 basis points year-on-year basis. So even though this, I would say, uncertain conditions in the market, we have been able to continue to provide a very good returns based on the way we have been managing the balance sheet and the results of the net income on the net income statement.
Basically, the NIM, as I mentioned to you before, you see an expansion on a quarter-to-quarter basis, around eight basis points. That is notable because if you look at the... Obviously, when you see the interest rates around 11.2, investors always looking to get more returns on the money. So obviously, the time deposits have been increasing in the composition of the on the mix and the cost on the mix, but still, we have been able to manage the increase in the funding cost with a very good returns on the asset side that we have on the balance sheet. So we will continue to manage that cost on the funding side with good returns on the asset side.
Yeah, and another very important thing to notice is that the balance sheet continues to be very sound concerning the quality on the asset side. Expenses continue to be under control. We will go in detail what's the recurring expense growth and what's the extraordinary expenses that we are really positioning the bank for the very near future. Investing in, as I mentioned, in branches, in more bankers, and also into data centers that we just ended just a month ago. So when you, when we will look at the recurring and extraordinary expenses, you will see that expenses are well under control.
Capital ratios continue to be very strong, 22.2%, quarter one, 15.7, after paying the dividend that we just paid to the, to the group. If we move to the next slide, you will see now more, in more detail, the situation at the bank. Net income of the bank is growing 22% year-on-year, 6% quarter-on-quarter, and on the first nine months of the year, it's growing 22% year-on-year. The return on equity of the bank, as I mentioned to you, is 28.3% for the quarter and 27.6% for the year. Strong returns on the equity with a fully loaded capital base.
ROA for the bank now is reaching a high number, around 2.6%, seven basis points growth on quarter-to-quarter, and 35 basis points growing on year-to-year. So that also shows that the asset side of the balance sheet is continued to perform in the right direction.
If we move into the next slide and get a closer look at the NIM and NII and NPLs of the bank, you will see that the NIM of the bank, as I mentioned to you, continues to expand on a continuous basis, even though the pressure that we have on the funding cost, that the mix on the variable rate part of the book and the fixed rate part of the book is really delivering the results that we anticipated. Taking into consideration what I mentioned before, that the balance sheet now is well positioned for the downward trend on the sensitivity side. NII of the bank is growing at 22% on a year-to-year basis.
So that continues to be the difference that we have, basically driven by the loan to deposit relationship that we have in a positive way. So that's a 22% NII growth, so it's a very positive number. Net fees for the bank, 17% for the year. So also that reflects the full activity that we have on the digital channels and also on the physical channels of the bank. When we go to the NIM, now we'll move into the NIM of the group. You'll see the NIM of the group at 6.4 compared to the 6.6 of the bank.
And now you see a much more balanced trend with the NIM of the group based upon the evolution of the annuity side that is now reflecting a positive trend on the inflation, and now is really going into a much more normal direction. That's much more an accounting issue than really a profitability issue, because as you know, the net income for the annuities business hasn't been affected at all by this by this inflation-related process. The asset quality, I would like to turn to Gerardo Salazar, our Chief Risk Officer, to give us a brief description on how the asset quality is performing on a different metrics.
Thank you, Rafael. As you can see, asset quality still exceeds expectations. It is below pre-pandemic averages. NPL is lower at 1.01%, improving four basis points quarter-over-quarter. Pre-pandemic averages ranges from 2% to 2.2%, if you remember our recent history. Provisions went up 12% or MXN 503 million versus the second quarter of 2023, given higher requirements on origination volume and mix. This origination volume and mix is very important to explain the recent trend of higher provisions. That is, out of MXN 4.54 billion provisions recorded in the quarter, 31% correspond to new loan origination, and that's very important for you to take into consideration.
During the remaining balance of those provisions, talking about COVID-19 pandemic, that started, if you remember, in 2020, for around MXN 7.3 billion, is just MXN 380 million expected to be gradually used. But we use up to September 2023, is MXN 320 million of the MXN 7.3 billion, being made in total from the beginning in 2020 with the pandemic. Cost of risk is stable at 1.8%, increasing 15 basis points versus the second quarter of 2023, and 38 basis points versus the third quarter of 2022, aligned with higher provisions given the loan origination mix. During the quarter, risk profiles and mitigation strategies have been adjusted according to each different origination channel, prioritizing asset quality over growth, and particularly in digital channels.
Write-off rate is practically stable quarter-over-quarter, reaching 0.42% versus 0.38% in the second quarter of 2023. That reflects sound recovery management. Loan loss reserves coverage ratios stood at 187.9% in the quarter, improving 5.72 basis points when compared to the 182.2% from the previous quarter. So, we can say that rapid loan portfolio growth with higher selectivity is a strategy that combines both expansion and risk management. It allows us to quickly maneuver our loan portfolio and focus on credit quality and risk mitigation. The behavior of loan loss provisions within a significant positive loan growth scenario is influenced by a complex interplay of economic conditions, risk management practices, loan quality, and regulatory requirements.
We closely monitor the loan portfolio to assess risk and adjust provisions accordingly to maintain financial stability and compliance with regulatory standards. Prudent provisioning practices help us manage risk and ensure the sustainability of our lending operations. Asset quality is an item we are very proud of, and we are very confident that we are managing the credit cycle with a positive but still growing GDP. We remain confident that we are controlling the loan portfolio in very good terms.
Thank you, Gerardo. So it's really relevant what Gerardo mentions, that we can grow on a selective basis with the best risk in the market. I think that's, that's the result of extremely well-managed risks, well recovery unit, and taking advantage of the expansion cycle that we see on the lending side. If we move to the net interest income sensitivity, it's exactly what I was mentioning at the beginning, that some people think that we were too fast in anticipating for the position on the balance sheet. But it, you have to take into account that we also have a lot of natural coverage on the balance sheet by the deposit mix that we have and the thickness of the deposits that we have.
So now you see the sensitivity that is now trending to the MXN 650 million for the peso book, and that is really why, what, where we feel confident about position on the balance sheet. That, as I mentioned to you, is around MXN 2.4 billion, that you see a reduction on the margin, even though the margin continues to expand. But we are more than well positioned for the downward trend on the interest rates. And as you know, you have to be in the money when you go for the coverage and for the coverage of the rates, on that. You don't want to be out of the money in any way.
On the dollar book, the sensitivity is around 800, because we see much more stable and potential another hike. We don't know, but we are start slowly, not as aggressive on the peso book, but still trending more on a stable for the hiking cycle on the rates, on the US dollars. Some numbers that are relevant for us to mention to you, because there has been some questions about what the sensitivity on the NII.
If you go to 100 basis points on the sensitivity on the NII, you see that for the group NII, it's around 0.4% of the total NII for the group NII, and for the bank, it's 0.5%. So you see that we are very well positioned, and we almost have, let's say, in being neutral about the... Not completely, but almost neutral about the sensitivity rates for the balance sheet. I think we are in a good position to manage the cycle again.
On the next graph, the expenses, basically, you have to take into consideration that the bank is positioned not to manage the current cycle, that we are high growth, high demand, potential growth on the nearshoring that is being more and more a reality. But also, we are investing for the future with the bankers, with the ATMs, with the branches, very strong in technology and analytics and things. So if we like to see the expense trends that you see on the top of the table, you see that recurrent expenses is still at 6%, very aligned with inflation.
Inflation will be around 5% by the end of the year, so we always like to be around 150 basis points above inflation. So 6% on the recurrent base is pretty in line what we like to have. When you add the IT and the strengthening of the commercial teams, we add 5 percentage points more to the recurrent, to the recurring base. The IT is the 2 data centers that we just opened, and the strengthening of the teams is basically for taking advantage on the commercial, corporate, and SME on the nearshoring effect. That is, by now, as you can see on the growth, on the demand, for the credit demand, that is already paying pretty good returns for that.
So we are well positioned for the present and for the future, for the taking those opportunities. So non-interest expenses, as you can see, 11.5, as I just mentioned, was the difference on the recurring and non-recurring. So when you see cycles like this, that you see strong demand, good quality, goods, good profitability, good numbers, you have to keep the profitability numbers, but also invest for the future, and that's what Banorte is doing as we speak. The cost to income ratio is at 34.1. That number maybe ranges from 34.1 to 35-35.5 for the rest of the year.
But you see on the graph to the right, on the yellow graph, basically the very good trend on the revenue side and a very steady state of the expense numbers. That if we go to a definition, exactly how we have been managing the ability to keep investing in technology and at the same time taking the cost income ratio in the right direction, you see the balance on how the revenue has grown two point, the net income has grown 2.7 times. The IT numbers has grown 2.9 times.
But how we have been able to invest and keep the pace on the IT side is basically by reducing the human resource component of the expense, 1.7. The operating costs also down to 1.1, and the administrative and facilities, sorry, to 1.1, and the other one was 1.2. So you see that we have been able to manage the expense and the investment side by really becoming more and more efficient by investing in technology. In the next graph, we basically go to the liquidity numbers, regulatory and capital liquidity, that is 175. So liquidity continues to be strong. We have no issues with liquidity.
but as you know, liquidity has been becoming more expensive, so that's why we are managing the mix in a very, very tactical way. You see the capital numbers of the bank well above the TLAC requirements, quarter one at 15.7. That 15.7, as you know, our goal is to be trending at 13% in the coming years. There have been some questions about dividends. As you know, we just paid 82% of the net income for the year as a dividend payout, and we will continue to balance only to return to the investors as much as we can, but at the same time, being very prudent in the managing of the capital base. So people is asking that if we will move the 50%, payout ratio.
No, we will stay at 50% payout ratio, but be much more tactical on how we deliver dividends to the, to the investor, to the investor base. Another thing that has been at the attention of our, our investors is how Banorte is dealing with the customer centricity and the customer metrics. We are happy to report that all the NPS on the key channels of the bank continues to be on an upward trend. As you can see, the app on the mobile is 83, 83.2, 84.6 for the web, ATMs at 73.6, and branches at 79.1. As you know, this is measured not just by us, but also by different metrics, by Bain, NPS, et cetera.
Now, I will turn to something that is something to report, and there has been some concerns about what was the effect of the hurricane on Guerrero, and how was the bank reacting to that? As you can see on the graph, Banorte, again, was the first one to move to be at the side of our clients, and we basically set up a plan to have a skip payment of six months for credit cards, mortgages, car loans, payroll loans, personal loans, and SME loans, in order to give space for our clients to recovery. We used that during the pandemia, and we follow on a client-by-client basis, the needs and conditions of each of our clients.
So we hope that we will have the same results that we got during the pandemic. This is not just for the credit cards and not for the credit; it's also on the insurance side. Banorte is really becoming an alliance to our clients by advancing some of the money in order to clean up the houses, repair the windows, and make the houses livable again. So not just the bank, but also the insurance company is extremely active by providing relief to our clients. We know that many of those lost all their data and all the documents and everything.
The insurance company is really giving a very strong support on that because we have all the information, so the clients doesn't need to go and dig for the data in order to comply with this. So I would say that this is what Banorte is doing for Guerrero. It's a very sad situation, but Banorte will be at the side of our clients, and we will help them coming through this situation. We also have on the phone—As you know, we have a fundación that is giving a peso per one peso per one peso that the clients of Banorte make for the relief of Guerrero.
And also everybody's working in order to put Guerrero back on their feet again, as fast as we can on that part. With this, I conclude on this, and I would just like to make a conclusion about the comments. I would say, Banorte is ready for the future and is managing the present in a very efficient way. We know how to manage the cycles. We are managing the cycles in the right way. We are well positioned for the downward trend on the rates, and we are very confident that next year we can still manage the long road with the right risk and with the right cost on the funding side.
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 questions, 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. José 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. Now, we're ready to start the Q&A session. We will start with, Geoff from Autonomous. Geoff, please go ahead.
Well, hello, thanks very much for taking the question. I wanted to ask on the guidance slide; it looks like everything is unchanged from last quarter, and that feels in some cases a little bit strange, particularly around loan growth, where clearly your year-on-year run rate was 15%, and the guide is 10%-12%, so quite a bit lower. So could you talk around; is that all still current? Are there places where you see upside risk, downside risk? Just is that really the latest thinking, or is there more color you can give us around the guidance? Thank you.
Thank you. Yes, it seems that we have a good tailwind, but also we have bad news, like the rare issue, no? So if you put all together in the box, we will keep our words tight and we seems that it's achievable, but we don't want to change it right now, you know? We are working in the guide for the 2024 and 2025 and 2026, and soon we will deliver to you. But so far, we are not moving anything. Rafael, I don't know if you want to say something.
No, I think, as you mentioned, you can see that the loan growth continues to be very strong, but also you have to take into consideration that we are facing a funding cost pressure, that we are managing that in the right way. But we won't, we don't like to overshoot on the guidance, but we still see pressure on the funding costs. I honestly think that the peak on the funding costs was October, and now we will see a relief coming November and December. So maybe at the end of the year, you will see the effect of that. But right now, as Marcos mentioned, I think it's prudent to keep the guidance as is.
Just to follow up on that funding cost point.
Mm-hmm.
I think on the 1Q call, you talked about maybe May being the inflection point.
Yeah.
On the 2Q call, you talked about July. Now you're saying, you know, October and relief in, in November and December. What, what's been changing there that's shifted your expectations? And how confident are you that we really are at, at the point where we start to get relief on, on funding costs?
Basically, that we are getting the cycle when you get most of the bonuses and the payments for the companies, for the employees in November and December. What happened in the past, and we were also hoping for that to happen before, is that you have to take into account that the economy continues to be very hot. So the central bank is tightening the cycle as much as they can. So the amount of money that is disposable to really balance out the economy obviously is less than the need. That's why you do the tightening. So that is really rising the cost faster than we thought. I mean, we thought that the economy was gonna start to cool down a bit on the months that you mentioned before.
That hasn't been the case. The economy continues to be very hot, full employment good growth and good quality on the growth. But it has been an extraordinary year. I really, we are really managing this almost by the day with a clear view of where we want to go. But you have to manage really this by the day, based upon this, this cycle that is a completely different cycle that we have experienced in the past. So sorry and for advancing those numbers, as you mentioned before, but that was the, the logical way of thinking, but that, this cycle has not been very logical really.
Great. Thanks very much.
Thank you.
Thank you.
Thanks.
We'll now take the next question from Jorge Kuri from Morgan Stanley. Go ahead, Jorge. Jorge?
Jorge, please unmute yourself. We can come back to Jorge. We have Ernesto Gabilondo from Bank of America. Ernesto, please go ahead.
Thank you, Tomás. Hi, good morning, Marcos, Rafa, and good morning, everybody. Thanks for the opportunity to ask questions. My first one is a follow-up on your guidance. It seems that you're on track to meet the guidance for the year, so they think on growth of around 16%. However, when looking to next year, do you expect earnings to keep double digits, and what will be the drivers behind that? And just a second question, if I may, and this isn't related to any potential tax or regulatory risks after what happened to the Mexican airports. Are you hearing anything, for example, lower deductions and fiscal losses, a litigation process against the value-added tax in the insurance sector?
Or, for example, the COFECE, the Antitrust Commission in Mexico, proposing to the Mexican Central Bank to review the MDRs related to E-Global and process. So any color on that will be very helpful.
Thank you, Ernesto. I will start with the second one, and, being very honest, everything that we can see so far, we don't have any regulatory risks that we can tell you about. Now, everybody's talking about something, but we don't see anything to capitalize. So, everybody's talking about the insurance sector, but, it seems that there is not so much problem. And, so the... We cannot talk about it. Our duty is if we know something by real, we'll go immediately with you, and we will say: "Listen, guys, this is what is going on." But so far, there is nothing that we can talk about. So we don't see any regulatory risk so far. We-- Obviously, we need to be on ground and see what's going on.
That's our duty. W e'll be very, very transparent with you if we see something, no? The first one, Rafa, we'll talk about it.
Ernesto, I think your question is very timely. If you see the way we have been managing the balance sheet on the asset side, we have been building up very good quality assets on the fixed rate part of the book. That is like building up inventory for the downward trend. So even sometimes we have been sacrificing margin in order to build up this part of the book. The good thing about this is going into 2024, is that that is very high quality inventory that will be delivering pretty good returns on the margin side. Because we already know the risk, and we know the quality of the clients on that part.
So, 2024, even though interest rates starts to come down, to come down, and we hope that that's the case, we have been very well positioned on the balance sheet, but also on the asset side, on the balance sheet, with our fixed rate part of the book, that will be a natural hedge to counterbalance the drop in the variable rate part of the book. So that building up of the inventory has been in anticipation for the next year, how we can really keep the margin at bay, based upon that strategy. So that, I think, will be... We will continue to see pretty, pretty strong demand on next year.
We will balance that out, and we will see, based upon that it's an election year. You usually have more liquidity on the market in the election year for the four or five months of the year. So that also will balance out some on the margin side. So the whole strategy has been to build up a strong balance sheet on the asset side, very well balanced, fixed and variable rate, in order to balance out the drop in the interest rates.
Perfect. Thank you very much, Marcos and Rafa.
Thank you.
Thank you, Ernesto.
We'll now go with Brian Flores from Citi. Brian, please go ahead.
Hi, team. Thank you for the opportunity to ask questions. Marcos, you mentioned that the dynamics on the payroll loan segment is a bit complicated. Could you elaborate a bit on what are you seeing there? Is it a product of competition, or is it lower disposable income? Any insights you can have on the segment would be appreciated. Thank you.
It's a variable that we are focused, but it's not bad, let me tell you that, no? It's, let's call it the worst, but it's not bad. And Dr. Salazar will talking about it.
Yeah. W e still have, Brian, a lot of trust in consumer resilience within Mexico. You can just make an inventory of what the tailwinds are, and you will see that the minimum wages are surpassing inflation, GDP growth is positive, we have a low unemployment rate, we have an optimistic consumer sentiment and expectations. We have and we project to have a fiscal policy expansion for 2024, fixed rate loan products like auto and mortgages and also a very low financial leverage on behalf of Mexican families. Headwinds are less in number. If we make a quick inventory of what we have contributing to consumer resilience, obviously, higher inflation is not good news for Mexican families.
Also, the price of oil being higher, high interest rate in credit cards, personal loans, payroll loans, the one you mentioned, and also a restrictive monetary policy. If you balance those tailwinds and put them against those headwinds, the balance is still positive for the credit quality of payroll loans. We are more inclined to recognize and event risk regarding payroll loans, because if the dependability and the sources of payment depend in a to a higher degree on who has the disbursements of the loans, what bank manages the liquidity of the payer of the of the of the-
Client
Of the client, of the payer of the payroll, and that constitutes a very specific event, in which some cases can turn of lower quality loans. But in those cases, we have mitigating strategies consisting in selling the portfolio outright and as quick as possible. So we consider that to be a positive net effect on payroll loans and the in the consumer, Mexican consumer resilience in general. If I may add, Brian, and I-- we can send you the graph, but if you look at the NPLs graph for the market that is provided by the CNBV, you will see that based upon what Gerardo mentioned, that full employment wages are going up.
Obviously, the employees have a lot more opportunities to move for better wages from one company to the other. So when they move, exactly happens what Gerardo was mentioned. You keep the payroll, but the payroll loan goes to another bank. So in that case, that becomes really like a personal loan. So it's not that the consumer is weak or anything like that, it's that he has a lot more opportunities now in the market, and he's looking for better wages all over the place.
So if you look at those graphs, and we will send that to you, you will see a graph that is completely crazy, up and down for all the banks. Because these movements on the labor force is causing this disruption on the NPLs of the payroll. But if you look at the numbers, we are at pre-pandemic levels on payroll loans, and growing on a pretty solid way. But this is happening, and it's good for the employees. The fact is that we have to react, as Gerardo mentioned, very fast to see if we sell the payroll, so we keep the payrolls based upon the quality of the client.
But it's also a good condition for the market, because wages are going up all over the place, and that is creating a much more resilience on the consumer. So it's a mixed feelings, event, Brian. It's good for the employees. It's a lot of turnover on the companies for the good reasons, for the employees, so we have to follow and adjust to this new reality.
More than concerned, we are taking this as an opportunity.
An opportunity.
Yeah.
Yeah.
Super sure. Thank you, team.
Thank you, Brian.
Thank you, Brian. Now, we will continue with Tito Labarta from Goldman. Tito, please go ahead.
Hi, good morning. Thank you for the call, and thank you for my question. I guess a follow-up on the loan growth a little bit. I mean, you mentioned also you kinda tightened credit standards a little bit, focusing on higher quality clients. But, you know, given a lot of the tailwinds that you mentioned, right, inflation coming down, rates should come down next year, GDP growth strong. I mean, is there room to be, you know, a bit more aggressive on the loan growth? And if not, why not? And, do you think this... And I know you said you're sort of thinking about the guidance for this year, but thinking about 2024, I mean, double digit loan growth, maybe even mid-teens loan growth, I mean, is that feasible?
Just any color on, on how this pace of loan growth can continue into next year? We appreciate it. Thank you.
Thank you, Tito. Rafael, go ahead.
Tito, thank you. Let's go on a piece-by-piece basis on the board. If you look at our car loans growing over 30%, very close to the 20%. Payroll loan's the same. Mortgage is 14%. Corporate and commercial ranging from 19%-14%. You see very, very strong loan growth. When you see a total loan growth around 14%-15%, it's because the government book is really almost flat, and it's good because of the election process. So if we keep numbers around 12% for the next year, they will be coming on a very, very high base. So that 12% will be a very noticeable number.
When Gerardo was mentioning, I don't like to use the word restricting growth. I would like to believe that we have the chance, and we have the opportunity to be very selective on which clients we like to put on our books. Because of the strong demand that is happening, and because of the analytics that we have, and because of the risk models that we have, it looks that we can grow at very good numbers, around double digit numbers, and still keep the risk numbers where we like to be. So we are in no way being absent from the market in any way. We are very present at the market, but where we like to be present. And this is a once in a lifetime opportunity that we have seen.
Usually, the cycles are not like this, but we are taking full advantage of that, but only if we like the risk. If we don't like the risk, we don't go for the client.
Okay. No, that's very clear. Thanks, Rafael. If I can ask a second question really quickly, actually, just more on the insurance. You know, there was a big spike in the technical reserves that I think related to inflation. Just, should that come down as inflation comes down? Just, do you already have, you know, 50%+ ROE on insurance, just to think about the insurance outlook, given some of the volatility there. Thank you.
And that's right. Rafael, please go on.
No, yes, as you mentioned, I mean, insurance business is reaching and a little above pre-pandemic levels. You see the growth in technical premiums. You see the change that happens in the first and the second quarter, because one of the big policies moved to the second quarter. But no, we are very happy with the insurance business. But you mentioned it has to be inflation related, basically. And no, we are very clear, and I can take the opportunity, and I would like to see if Fernando wants to.
Sure.
to talk, or Salvador, what's our exposure in Guerrero with the insurance that we have, but no, the insurance company is well on their way to become more and more profitable every year.
Yes, sir.
Yes, thank you, Rafael, Salvador, are you there, or do you want me to go in?
As you wish. As you wish.
Go ahead, Salvador, yeah, and I will get in if I. No, Salvador, it's not. Well, I will tell you about exposure. Well, in terms of how many structures we have insured in Guerrero, they are 1,579 structures. Most of them in Acapulco and nearby Acapulco. Of those, 1,254 are insured because of mortgages. Just to give you an idea of how much this percent of our insured values in the whole country, it only represents 0.9%.
And only if you take into account some of the proportional insurance count r einsurance contracts that we have with the best-in-class reinsurers in the world, with the retained risk for our whole portfolio, it represents in this line of business only 0.8%. In terms of car insurance, we only have an exposure of 1,292 cars, which represents 0.1% of our whole portfolio of insured risks. However, we also have some catastrophic excess loss insurance. And it's important to mention that due to the fact that we have this coverage, the maximum probable loss that we will face because of this hurricane, it will be only $5 million. That's our exposure.
Oh, that's-
That's the maximum probable loss. It might be less-
Yeah.
Because of course, that, that would be thinking of not of many of these structures and many of these cars to be complete loss, which will not be necessarily the case.
No, that's very helpful, Carlos. I thank you.
Thank you.
Can I clarify just that you said the car insurance, 1,292 policies, is 0. what% of the whole portfolio?
In terms of the structures?
Yes.
Yes. It's only 0.9% of, of the whole risks that I insure, but of the retained risk of the, of the proportional reinsurance is only 0.8%. But since we have also this, excess loss insurance for catastrophes, that is, if we aggregate all the possible losses, our maximum probable loss, as I mentioned, is only $5 million. So it's not very, important.
Also talk about the seguro, no, it's $5 million, and that's it.
That's it. $5 million is our maximum probable loss. That doesn't mean that we will experience that loss. It might be less, because that would represent really, that all of these structures and all of these, cars are, useless, which is not going to be the case.
Thank you. Thank you, Fernando. Thank you very much.
That's great. Thank you very, thank you very much.
Thank you. We'll, we'll continue with Olavo Arthuzo from UBS. Go ahead, Olavo.
Hi, Marcos, Rafa, thank you for taking my question. I just would like to shift the conversation for the asset quality of credit card loans, because I basically just wanted to have a more granularity on the dynamics here. I mean, how have behaved the NPL of the lower income bracket of your portfolio? And also, how should we think about the delinquency rate of your credit card portfolio as a whole going forward? Thank you very much.
Interesting question, Olavo. I will need to hand to Dr. Salazar. Please go ahead.
Yes, Olavo, what I can reveal to you is not a very detailed analysis of this very good question that you are presenting to us. But I will tell you that, in consumer credit in general, we have adopted stricter credit scoring. We have done also lots of stress testing and scenario modeling, and we have higher minimum credit scores, and that's, that's, very important for us. If we talk about some other consumer loan segments like auto or mortgages, we have ended up with higher down payments. We also have lower loan-to-value ratios and higher minimum or lower loan-to-income ratios. So as a matter of fact, our credit standards have been increased just to play the credit cycle in a responsible way, and that includes credit card loans.
Let me remind you, and to all, that payroll loans and credit card loans are very provision intensive, but have the highest ROEs there, there are in that family of loan products. So we remain very confident that we are almost also discriminating lower quality clusters and cohorts within the credit card segments in order for us to assure profitability in a risk-adjusted basis.
And just to-
That's-
another number.
Go ahead.
Before the pandemic-
The NPLs were 5.5, and now we are running at 2.7. What Gerardo mentioned is quite important. The low end of the segment that you were mentioning, obviously they have a much more stringent, strict authorization models for that. So we are very cautious about getting in close in touch. We basically are much more in the mid to the high. That doesn't mean that we don't touch the low end of the segment, but we are much more centered in the mid to the high on that part.
Just to elaborate on that, if we talk about personal loans, there are just two clusters which we are satisfying the needs of our customers. The other clusters are not allowed in into loan origination, and that's a good example of what Rafael is saying.
Okay, guys. Thank you, Marcos. Thank you, Rafa.
You're welcome.
Thank you.
Thank you. We will go back with Jorge Kuri from Morgan Stanley, that's had a technical issue. Jorge, please go ahead.
Hi, can you hear me now?
Yes, perfect.
Awesome. Thank you. Sorry for that. Congrats on the numbers and, and thanks for the call. I wanted to ask about expenses. So you, you had the strengthening of the commercial teams and IT investments pushing up your total growth to 11% for the first nine months of the year. Is that done for this year, or will the fourth quarter still have another uptick of this, you know, quote, unquote, extraordinary items?
As we look into 2024, if growth continues to be above trend, meaning that, you know, you hopefully potentially see another year with 15% loan growth rather than 10%-11%, would you need, again, to invest in the commercial teams, or you think that this investment will be able to manage an accelerated growth going forward? Thanks.
Thank you, Jorge. Yes, you're right. It's not expenses, it's investment. So, Rafa, will you give us a little bit of color on that?
I think we're done for the year, Jorge, for this year. And the good thing is that the investment that we did on the bankers, on the 1,300 bankers, is already becoming profitable. So that's a good number. We will need to go and invest maybe 700 more in the coming months, but this will already be paying by the excess that those bankers that we put on last year are already bringing into the bank.
The effect that you will have on the next year is the Bineo startup that will start and will bring around 3% on additional expenses for the year. But you will see that going through the year, you also will see that the recurring expenses becoming lower and extraordinary expenses becoming also lower. So that in a way, I think that 2024 will be the peak of the expense line, and then from 2025, we will go back again to the usual numbers of inflation for 150 basis points.
So, but no, for this year, we're done on that part, but we will see the opportunity to continue to invest in the bankers, because we see a lot of opportunities coming through the... not just for the nearshoring, but the expansion of the internal economy that is happening in Mexico.
Jorge, if you ask how do I see the next? The name of the game is gonna be to keep it simple. We already have all the structure that we need. All the infrastructure is in place, and now the name of the game is to go out to the market and to be like, in a military way, to perform. So, you won't see that we will move too much in strange directions or in inventing things. We will keep it very simple because we know that we have everything that we need, and for the next years, that's the name of the game.
Great, thank you. And if I may just add a follow-up to that. So if that extraordinary investment slash expense is behind, and given that you're accelerating growth now, which will generate earnings, revenues in the next six to 12 months, and the fact that it is possible that the central bank is delayed with cutting rates, that would probably indicate a nice uptick in your return on equity for next year. So it would be reasonable to expect that ROE is gonna be higher in 2024 versus 2023. Would you agree with that?
If that happen, that's yes.
Yes, I agree.
We have the same model that we got. Yes.
I agree with you. That's, yeah, you're right. Completely right.
All right. Great. Thanks, and congrats again.
Thank you.
Thank you. Now, we will continue with, Edson Murguia from, SummaCap. Edson, please go ahead.
Thank you. Good morning. I have a follow-up on Bineo. Could you give us a little bit more color, your expectations? I know that the launch of Bineo, it's delayed for 2024, but, could you give us a little more color about this? And my second question is regarding to ESG, specifically in pension or the Afore. Could you describe a little bit more about the thematic investment part of the business and the impact investment? Because this quarter increases 15%. Just trying to understand what specifically is about impact investment and thematic investment for you guys. Thank you so much.
Thank you, Edson. The first one, I will ask Paco Martha to answer it. Please, Paco, please.
Thank you, Edson. On the digital bank, we are in the last steps of the certification with the authorities. We have been working with them closely in the last quarter. And, yes, we are expecting to launch at the beginning of next year. You know, that even we're just about to be ready. It's not the right moment to launch anything in the last months of the year because of the parties and Christmas and all that. So you will hear more from us starting next year, no later than a couple of months.
Okay. I will follow up, ESG, AFORE Solis , are you there?
Yes, I'm here. Well, I will say that, well, I'm convinced that perhaps our Afore is the one that is most advanced in this arena among the industry. I mean, we're, we were the first ones to subscribe the principles of ESG. And, and, and we are, and we are also following the major guidance of the group by moving into, you know, following the investments which are friendly to the environment, but also in the social and also in terms of the gender. And, so I think we're doing quite well there, and we're the most advanced in this arena.
Of course, we're also going to be moving accordingly with the group in putting in place more measures to be followed by our investors in what we're doing there.
Just a quick follow-up on this. I think, what is the differences between impact versus, thematic investments?
Okay.
Yes. I can take that, Edson. This is José Luis Muñoz from ESG.
Thank you.
Most of the thematic investments are basically either green or sustainable. Those are the ones that have been issued in the market by development banks and other federal entities. And the Afore does have appetite for those. The impact are not so popular right now in the market. I think eventually there will be appetite for the Afore, but for now it's more thematic.
Okay. Thank you so much.
Thank you, José Luis. Thank you, Edson.
Thank you. Now we'll continue with Yuri Fernandez from JP Morgan. Yuri, please go ahead.
Hey, guys. Good morning, everybody. I have a question regarding net fees. Despite, despite the sound macro, the good loan growth, we are seeing fees up only 6% year-over-year, and they are slightly down quarter-over-quarter, but I think there is some seasonality here on a quarterly comparison. But still, my question is, should we see fees accelerating at some point, or not really? I don't know, because of competition, maybe because of electronic transactions. So just more color on fees here. What is the outlook for the net fees for the group? Thank you.
Thank you, Yuri.
Yuri, if you look at the bank fees, bank fees are growing 17%, and we are entering the cycle of the time of the year that you get extraordinary events that fees really pick up for the year. I think you'll have to look more on the banking fees that are growing around 1 7%. If you look at the overall group, group fees, you will see a balancing out, because we basically are much more centered on how the electronic transactions and the POS, ATMs, bank, all the banking transactions, the transactional banking fees, cash management, that all those happen in the bank, and that continues to expand above the credit, the credit number.
So no, I think you will see a pickup by the end of the year on these numbers, and you will continue to see it for next year on the banking side, that fees will outpace the loan growth.
So that's super helpful, Rafa. Thank you very much.
Thank you.
Thank you.
Thank you. Now we'll continue with Nicolas Riva from Bank of America. Nicholas, please go ahead.
Thanks very much, Tomás and Rafa, and Marcos. So I have two questions. The first one on the Perps. So you have said many times that you plan to call the Perps, but in the last few calls, you mentioned that one possibility could be to refinance the Perps by issuing AT1s. Right now, you essentially have almost no Tier 2s outstanding. So I wanted to ask if there is a possibility to refinance the cost of the Perps issuing Tier 2s? And then the second question on your dividends.
So should I read your comments earlier in the call as essentially saying that you're gonna be paying a minimum dividend payout of 50%, minimum payout, and then you said, "We wanna be more tactical about our dividend payments." Should I read that as essentially you could be paying extraordinary dividends depending on the opportunities to deploy them? to deploy capital. And also, I wanted to ask if, assuming a 50% dividend payout at the holdco, if we should also assume a 50% dividend payout at the bank, at the bank level? Because I remember that in the past, you did have some excess capital at the holdco that you could use. Thanks.
Well, what a question, Nicholas. I will start with the second one, the dividends. Yes, we have a tactical approach, and maybe we will see, you will see extraordinary dividends. We don't know what's gonna happen, but the idea is to put everything there and see what's best for you. And we can see this opportunity, yes. And the perks, obviously, we are open. If that... We don't know the rates, we don't know how it's gonna work so far. So, if the window opens, let's call it that way, we will go for them. If not, we have a lot of another tools in the box.
So we will maximize for you the capital. That's the idea, no? But we-- right now, I cannot tell you exactly what we are going to do because we don't know how it's gonna be the market, but we will be ready. And we know that we can move, and we can move fast, and we have everything ready in order to eventually issue the perps, no? And going back again to the dividends, it's a way to pay, is, maybe we can do another things. We-- I'm not saying anything. I am saying that we are open to everything. That's the idea. Rafa?
Nicholas, as you know, I cannot say by law that I will honor the call.
Okay.
But the usual story of Banorte is that we will always honor the calls. And something is happening in Mexico because of the position that Banorte now has on the dollar book. Banorte has been becoming a very important player on the dollar book, and the funding side on the dollar book has been very rich for us this year. So that, in a way, has been a very positive element for us in order to refinance the AT1s. In a natural way, we are getting the funding on the dollar book, and that has allowed us to balance out that position that we have in the market for the dollar book. So Banorte is always having the position on the AT1s. If the tier two is a position, we will do a position on that.
But a very important issue now for the market to know is that the calls that we did last year has been more than offset by the funding that we have on the dollar book. And that has a much more cheaper way to finance the dollar book that we used to have on the AT1s. We like the AT1, but we have a very good opportunity now by the rising volume of the funding in dollars that Banorte is experiencing.
And the main two things that Marcos mentioned at the beginning of the call is, we have a dividend policy from 16 to 50, and we have a commitment of a core equity tier one between 12 and 13, that Rafael and Marcos have been mentioning, that we'll be close to the 13. So above that, as you mentioned, we constantly upstream dividends, not only from the bank, but from the other subsidiaries. But even with that, as Rafael mentioned, the bank will finish the year close to core equity tier one, around 15%, even with another upstream that we just did a couple of weeks ago.
Remember the TLAC, that we-
Yeah
we need to increase our capital.
Yeah, to 17.9% by 2025.
By 2025, yes.
But you had another question, Nicholas, what was?
No, no, I was just gonna confirm then, that most of the dividends that the holdco is gonna pay, we should assume, are gonna be upstream from the bank to the holdco. You don't have much excess capital at the holdco level that you could use to pay dividends?
No, yes, we, we do have, and, we also have, dividends potential at the insurance company and the annuities company and the afore company. So we continue upstream dividends to the group to the group level, coming from all these, these entities. The good architecture of the group allow us to have a, a continuous flow of dividends for companies that are, that are very efficient in the use of capital and, and the, and the bank. So we continue upstream dividends to the group. The, at the group level, we still have, a very important portion of, of, of dividends to be paid around MXN 12 billion.
Yeah, by year-end, we expect 18 at the holdco, plus 15% core equity at the bank, Nicholas, and MXN 18 billion-MXN 20 billion at the holdco by December.
Okay, awesome. Thanks very much, guys.
Thank you.
We'll now go with Carlos Gomez- Lopez from HSBC. Go ahead, Carlos.
Hello, good morning, and congratulations also with, for the results. I wanted to go back to the loan growth, which has been quite extraordinary, especially in commercial and corporate. Again, 7% this quarter is, is very high. And it also goes against the trend, because if you look at the aggregate figures for the system, corporate loans are not growing quite as much as, as, retail. So what are you doing differently there? Where have you found the opportunities to grow the the commercial loan portfolio? And is this something that you expect to continue in the coming two years? And second, on the sensitivity to rates, you show two numbers, one for the pesos, one for the dollars. I notice that the dollar has not decreased about MXN 880 million pesos.
I mean, the intention is to keep that disabled, because you think that rates could stay longer in U.S. dollars. Thank you.
First, one, the opportunities for everyone, not only for us. I will ask Alex Padilla to give us some color with what we can see in the future for the commercial and corporate in the future, what help are you at least?
Thank you, Marcos. Well, regarding Carlos, your question about rates, well, in the U.S., what we are expecting is that the central bank will keep on with this-
Alex, not rates. It's really the opportunity for the corporate and the commercial.
Okay. P erfect. So, in terms of the opportunity for commercial loans and corporate loans, well, from the economic perspective, what we are forecasting is that the economy will continue very resilient with very positive figures, growing next year around 2.4%, still above potential. And, what we are expecting is the first half, which will be very positive, given all of the spending from the government in social programs, but also in infrastructure programs. We also see very positive dynamics coming from nearshoring. We already are observing some very promising data there. For example, the demand for industrial parks continue increasing around 30%.
Foreign direct investment in Mexico in the first half of this year was $29 billion, which is almost 6% above what we observed in 2022. Given the all of the investment announcements that have been taking place throughout this year, we think that in 2024, we should see larger demand for industrial parks, for infrastructure, for expanding capacity. I think that's gonna be positive for the economy and also for loans in 2024.
Now, the second one, Alex, rate sensitivity. What the-
Yeah, for sure.
I think that the fact is that we mentioned before, we see dollar still a potential hike on dollars, and in pesos, we don't see any potential hike in pesos. But I don't know if you want to add anything else, Alejandro, there.
Yeah, maybe just in terms of our, our monetary policy outlook, we think that the Federal Reserve could still hike one more time by 25 basis points in December. And the most important thing is that we think that they will remain with these very high levels of interest rates for a very significant part of 2024. Indeed, we are forecasting the first rate cut from the Federal Reserve in July 2024, and maybe in a gradual way, we will see the easing cycle throughout 2024 and 2025. And in Mexico, as you mentioned before, Rafa, well, we think that the central bank will stay put for longer. We think that we will see this 11.25 until May 2024, when Banxico will start cutting rates.
Once the central bank starts cutting rates, they will go also in a gradual way, and we expect the repo rate in Mexico to close 2024 at 9.25%.
If I may add, Carlos, to the first question, what we are doing different. The corporate and commercial banking in Banorte has always been very client-driven, and they were lacking some tools in the past, like a full capacity on transactional banking, that we now are very happy to say that we can outpace the market in many ways, in the Intelligent Treasury, in many services that we provide to the company. So what I can tell you is that Banorte in the past, some years ago, we were not able to compete with the international banks in the syndicated loans or anything like that.
Now, Banorte is fully, fully in motion to compete in any, any place that we need to compete for the transactional banking, the cash management, the services, the syndicated loans, dollar books, fees, services, international trading, everything that you need to have. Banorte now is fully, fully equipped to match any, any offer that the, that the market has. That's what has been happening on the corporate book, and we are taking full advantage of that. That took us, like, three or four years to build up, but now we are in full motion about this.
Thank you so much.
Thank you, Carlos. Thank you, Carlos.
Now, the next question is from Tejkiran Kannaluri from White Oak Capital. Please go ahead.
Hi. Thank you for the opportunity. Just wanted to understand, could you let us know what were the AT1 coupons paid directly in the equity, for the third quarter of 2024? And I have some more questions on asset quality. Maybe I'll come back after this, after your answer to this question.
Sorry, uh-
AT1 with coupons?
Because there was some noise on the line, could you repeat it, please, the question?
Yeah, sure. The first question is around what was the AT1 coupon paid in the third quarter, I mean, in this quarter, that that was directly charged to equity?
Well, it depends on what tenure you have. If you have the 24, or you have the 30 s- I don't know exactly what coupon that we have. It's basically, I don't know exactly which one you're referring to.
I mean, the impact on equity that was the total, you know, net amount impacted just due to 81 coupon payment that occurred during this quarter.
What was the impact on the income statement?
Yes, on income statement and equity, book value equity.
I think you want. I can send you the calendar for the payment-
Exactly.
effective ones. I will send this in an email to you.
Yeah.
quarter by quarter.
Yes, we will send you everything, all of them.
Yeah.
All of the
Yeah, sure, sure.
That you can see.
Yes.
Thank you so much. That would be great. And secondly-
Thank-
I just wanted to. Yeah, sorry, please have a go.
Yeah. Yeah, it doesn't affect the P&L, just to be clear. It goes directly to capital, but we will send you the detail. I'm happy to connect afterwards if you want to see the full year.
Thank you. Thank you, that's very generous.
Thank you.
The second question, I just wanted to understand if I got your commentary on payroll loans correct. You're seeing this as a resultant of the increased economic activity. So would it be fair to say that although the gross NPL stock is at 3.2%, your expectation of loss given default and the measures you're taking is actually quite lower, and that's what makes you comfortable with the payroll loans?
Yeah. No, I think basically what Rafael mentioned is the key. That is, since employment is very good, people can move from one company to the other. So what you have is, as I mentioned, the-- You change the bank, and then you need to... It takes you around three months to collect and to have again that... So that's why the NPL moves, but it's not that we're expecting a higher NPL looking forward. It's just that if you look at the graph that we will send it to you as well, you can see that it's like a zigzag for all the banks due to this, and it typically takes around three months to normalize. We will send you a graph. I'm happy to connect afterwards to go into the full detail about this.
Okay. My final question on the loan growth, if you look at the segments, so that the two segments that stand out are government loans, which have grown at a smaller pace, and auto loans at a much higher pace than the rest of the loan book. So are these conscious decisions that you've taken to grow government loans at a lower pace, or is it a factor of demand in the market? And this also we see-
And auto-
Yeah, please.
And auto, yeah, sorry. The just for autos and mortgages, as Rafael mentioned, is part of the strategy of growing this part of the book. But also, in autos, consider that last year there were no inventory of autos, and that's why we had a low base. So it's very. In autos, in particular, is a base that was very low.
Because of the year that we're living, the-
Yeah
The government is gonna be low, and we expect it to be low until the election, and then we will see next year. It's typical. It's not always the same every six years in Mexico.
Got it. Okay. Thank you for the answers, and congratulations on the quarter.
Now we'll take the question from Andres Soto from Santander. Go ahead, Andres.
Good morning to all, and thank you for the presentation and the opportunity to ask questions. I have a couple of follow-ups regarding your expectations for 2024. The first one related to margins. In the previous call, three months ago, you mentioned you were expecting 20 basis points reduction in your total NIM next year. Since then, we have seen interest rate moving up. You have reduced your sensitivity to interest rate movements. So based on that, should we expect margins to be stable? And even that will be sort of conservative, assuming that, you know, you're expecting better liquidity conditions next year, and we could even see margin improvement. Is that the way that you are looking at this?
We still don't have the figures for the next year, but maybe Rafa can talk about a little bit about it, but we will release it as soon as we have it, the guide for the next year. We are working on it.
I think, in order to answer your question, honestly, I... It's not that I'm trying to move away from your question, but I need to understand exactly what's gonna happen in November, December, and January and in the first months to be able to really know exactly what how the margin is gonna behave. What we now see is that the balance sheet is in a very good position to sustain the margin in the numbers that we gave it before the 20, around 20 basis points less, but maybe that number could be better based upon what happened in November, December, and in the January month. So, sorry for not being so precise, but that's the information that I have.
Understood. And then, a small follow-up on the loan growth expectations. I want to understand the fact that we have an electoral year in 2024. Is that a tailwind or a headwind for loan growth, specifically on the government government segment?
Oh, the government book will stay flat as is, because we basically wait until the elections to see the federal budget, how things move. So you will continue to see three to four low growth on the government book. That's what we expect. And the other way around, as soon as the election is there, you will start to see a big movement there, no? This is always the same, so we expect it to remain the same.
Well, it will be sort of a slow growth the first half of the year and a faster growth the second half. Is that correct?
Yeah, no.
Perfect. Thank you so much.
The number. Yes, because it's gonna be at the end, very end of the year.
Understood. Thank you.
Thank you. We'll take one last question.
From Federico Galassi from Rohatyn Group. Go ahead, Federico.
Hi, guys. Thank you for taking my question, and congrats for the results. Two quick questions. The first one, Rafa, if you continue to grow, and this is very speculative, at 16% next year, I'm assuming that you continue to increase the capitalization ratios. Is there any number of growth that you are in the limit to increase the capitalization ratios? And the second one is more related with the competitive environment. Looks like you are continuing to gain in market share. How is the competition in the north of the country, in particular, Bajío? That's the two questions.
Tomás, go ahead.
I think-
Federico, if the bank grows below 16%, we continue to generate capital at a very fast pace. I think the limit for us to grow is 16%-17%, and we start consuming capital on that part. So, that's the number that we follow. If you ask me what's the number that you want to reach on the capital numbers, it's from 15%-13%, and trending to 13% on quarter one.
Okay.
The competitive environment, competition in the north and in Bajío, as tough as always.
Exactly.
That, that's why we are strengthening the bankers in the north and in the center, because it's a tough competitor, but it's a good competition, really, believe me. It's a very rational competition, the one we are facing.
But we can assume that part of the growth in the loans in the corporates is coming from the ... You are increasing or gaining market share in the north of the country? That is, could we assume that?
Yes.
Okay, perfect. Okay. Again, thank you so much, and congrats on the results.
Thank you.
Thank you.
Thank you for joining. This concludes our call. Thank you.