Grupo Financiero Banorte, S.A.B. de C.V. (OTCQX:GBOOF) Q2 2022 Earnings Conference Call July 22, 2022 10:00 AM ET
Corporate Participants
Tomas Lozano – Head, Corporate Development, IR and ESG
José Marcos Ramírez Miguel – CEO
Rafael Arana de la Garza – CFO and COO
Alejandro Padilla – Chief Economist
Gerardo Salazar Viezca – Chief Risk Officer
Héctor Martín Ávila Flores – Chief Legal Counsel
Conference Call Participants
Geoffrey Elliot – Autonomous
Tito Labarta – Goldman Sachs
Ernesto Gabilondo – Bank of America
Gustavo Schroden – Bradesco
Thiago Batista – UBS
Ricardo Buchpiguel – BTG
Alonso Garcia – Credit Suisse
Jorge Henderson – Santander
Carlos Gomez- HSBC
Jose Luis Cuenca – Citi
Yuri Fernandes – JPMorgan
Carlos Legarreta – GBM
Arturo Langa – Itaú
Tomas Lozano
Good morning. I’m Tomas Lozano, Head of Corporate Development, Investor Relations and ESG. Welcome to Grupo Financiero Banorte Second Quarter Earnings Call. Our CEO, Marcos Ramírez will provide an overview of the evolution of the main macroeconomic indicators for the first half of the year, as well as the main results for the group, including loan growth, asset equality and a more evident recovery of our insurance business.
Regarding ESG, you will find our quarterly update in the earnings call deck and in our Investor Relations and sustainability webpage, you may also find our first report on Equator Principles, which summarizes our environmental and social risk assessment practices during 2021. After our CEO’s presentation, Rafael Arana, our COO and CFO will provide details of the main financial results of the group, including the impact of higher reference rate, continued cost control and capital ratios. We will then proceed with a Q&A session.
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.
José Marcos Ramírez Miguel
Thank you, Tomas. Good morning, everyone. Thank you for joining our call today. The second quarter of the year presented encouraging results for the Financial Group despite some evident headwinds in the macroeconomic environment. Mexico, and most of the countries have seen a rebounding COVID-19 cases. However, hospitalization and mortality rates are nowhere near what we experienced during the first waves. Nevertheless, this is still presenting a potential disruption in supply chains.
GDP is poised to extend its recovery throughout the year. Our economic analysis team is holding its annual growth estimate of 2.1% despite the deceleration in the U.S. economy, persistent inflationary pressures and further tightening of monetary policies. High frequency data analysis for the quarter suggested higher than expected industrial growth in manufacturing and construction and additional recovering in services considering weather mobility conditions, strong remittances and good employment dynamics.
Inflation remains as one of the most important challenges for the Mexican economy and the rest of the world. Annual inflation reached 8% and it is expected to end the year in similar levels. Our economic analysis team has advised — forecast to 8.1% from 6.7% for 2020. So, therefore, we anticipate interest rates to climb faster than previously expected, reaching 10% by year-end, later Rafael Arana will comment on the implication of this for our market.
Potential recession in the U.S. could translate into lower external demand for Mexico, lower investment and remittances, resulting in lower GDP, the GDP growth, especially for the year 2024. However, this could be offset by Mexico’s potential gains for near shorting strategies with good increase the current export levels by approximately 10% thanks to Mexico logistic advantages, geographical location and younger demographics.
On the political front, Congress is expected to focus on the budget for the year 2023, which must be presented no later than September the 8th. On the legislative agenda, attention will be centered on the potential introduction of an electoral reform proposal by Morena as well as a proposal to reorganize the National Guard funded the Ministry of Defense.
Moving on to the bank’s operation during this quarter. All our teams have been fully working under the new hybrid working schemes, with sanitary measures still enforced in our different buildings to ensure the safety and wellbeing of all our teams and clients.
Diving into the financial results for the quality of the Slide number three, I would like to highlight that the solid performance is supported by a strong fee activity, container expenses better than expected risk metrics and [shielded] [ph] balance sheet.
Starting off with profitability Slide number four, ROE improved much more than 140 basis points in the quarter on the back of solid performance across most of the businesses. Nevertheless, it continues to be pressured by insurance results, it is still below pre-pandemic levels, but already showing positive signs of recovery towards the second half of the year.
Slide number five, NII, from the loan portfolio increased 4% quarter-over-quarter, and it is not yet incorporated all of the debts of the reference rate increases during the first half of the year. Non-interest income decreased in the quarter as a result of lower training income, and the seasonal effect of insurance premiums during the first quarter of the year, despite stronger fee activity.
Zooming into this, Slide number six, they expanded during the quarter and the year, driven by strong electronic banking fees, higher advisory and restructuring in commercial environment portfolios are more dynamic transactions in consumer products as a result of the reactivation in the internal demand a higher mobility, hence increasing also POS and mobile transactions.
Moving now to line number seven, we see a strong quarterly and annual expansion across the [Technical Difficulty] corporate and commercial loans, gaining traction, and this trend is expected to continue for the second half of the year as we benefit from the near shortening operation, especially from the manufacturing industry. The government book is also picking up, we will continue to see encouraging trends for the rest of the year.
The consumer portfolio Slide number eight also had that [indiscernible] expansion during the quarter driven by payroll and credit card loans. As previously mentioned, high frequency data show good consumption dynamics on the back of higher mobility and employment levels. As for auto loans, we saw better than expected performance despite the supply shortages that we continue to face in the sector. For mortgages, demand is expected to be resilient during the rising rate cycle as we shift our business approach to one that is centered in the customer lifetime value and increased personalized offerings.
And on the Slide number nine asset quality continues to perform better than expected and NPLs remain resilient in the quarter with improvements across most of the portfolios. Analyzing the results by subsidiary scenario number 10. The bank continues to expand on the back of solid NII, asset quality, expense management, and expanding loan book showing historically high levels of ROE above 27%.
On this regard, we are already working on the strategy to optimize the use of capital. I will provide more details on this in a few minutes. The insurance business results were impacted by a normalized premium origination after the seasonal peak in the previous quarter. However, operating results show continued growth especially in bancassurance regarding COVID related claims, we continue to present a downward trend and are expected to gradually reach pre-pandemic levels during the second half of the year.
The broker sector show a particular reduction impact by lower inflation premiums, the annuity business remain relatively stable during that quarter driven by higher reserves from inflationary adjustments. As for pension funds, the business versus the impact during the quarter by a fee cap imposed by the regulator, along with the valuation impact of higher rates in the [indiscernible], long-term investment.
Moving on Slide number 11. We provide greater detail into the insurance business showing seasonal quarterly reduction opinion or elimination. But with good annual expansion, driven by an increase in business we lower claims which are normalizing in output and damages as mobility increases, but those related to health and life are still declining, as COVID-related claims continuing to cease.
Moving on to slide number 12. We continue to see good operating and profitability metrics at the joint venture with Rappi. The number of cards issued are steadily growing. During the quarter we have calculated more than 100,000 additional cardholders. Given that the main focus is profitability, we have now extended the JV to reach breakeven in 2.7 years improving our initial estimates.
Regarding the launch of our new digital bank, the regulatory approvals have been taking longer than anticipated. But we have taken advantage of this additional time to make significant progress in the internal certification of our operating models. And we have also added new products and services that will further enhance our operating offering at the launch day. We are now in the final stage of the regulatory approval process.
Shifting gears to ESG on the Slide number 13. On the environmental pillar, we are currently undergoing an internal process to measure our finances, initials and define the portfolio’s decarbonisation goals to accomplish the commitments made with a science-based targets initiative and the net zero banking alliance. Additionally, I’m glad to inform you that in June Banorte was included in the [indiscernible] indexes due to the bank’s strengths in implementing environmental, social and governance practices in line with international standards.
As a final note, I would like to address a number of questions we have received regarding a potential M&A transaction involving Banorte. And in this radar, I want to highlight that at Banorte we are committed to evaluate permanently the best means to add value to our shareholders, both organic and inorganic alternatives.
So, on the one hand, as we speak, we are seeking to strengthen our commercial teams focusing on the development of hyper personalized customer solutions and enhancing our digital capabilities. On the other hand, we will be open to inorganic growth alternatives as long as any such presented alternative is EPS accretive to our shareholders. Of course, after adjusting for execution risks.
It is worth mentioning that way we estimate the potential uses of capital, we also consider dividend payments and we also consider share buybacks increases. To zoom up, we keep all options open and need to maximize value to our shareholders.
With this I conclude my remarks and now Rafael Arana will walk you through the financial results for the second quarter of the year. Rafa, please walk in.
Rafael Arana de la Garza
Yes, thank you, Marcos. And just continue on the same path that Marcos just mentioned. We continue to strengthen our balance sheet as you know, Banorte has a very strong capability to keep on building capital. We see this as a best fit for the turbulent times that we are living, we are strengthening our balance sheet and we are bringing more and more value into the statements of the bank and the position of the bank.
I will like to go on a piece by piece basis on what is mentioned on the slide, we can move to the next one. The first one is that the bank continues to move in the right direction. And it’s relevant to mention on the return on equity basis, as you see that 27.2 performance for the quarter. That’s an outstanding number, but it will normalize not around the 25 for the remaining of the year.
So that was a result of many extraordinary items in the quarter. But we see a recurrent number more [Technical Difficulty] on the — as you can see the net income of the bank continues to evolve in the right direction for all the things for the right things services. The fee continue to expand, the margin continues to grow, the funding seems to go on a lower trend, as we will see in a later slide. So everything is working along with extraordinary performance of the risk and collections units on the bank, this aligned with our unreasonable growth on the loan book, as you remember, we change the guidance more around the 7% for the year. And now we are looking at numbers around the eight. This number that is now looking that could evolve in a positive way, we still see some positive growth on this. But we want to continue to be very prudent in the growth and really keep all the metrics that have been providing the net income and net income growth for the bank and for all the key metrics in the right direction. That doesn’t mean that we are not poised to grow.
As you as saw during Marcos presentation, they’re very good patches of growth but we also keep growth and risk at the same time, it’s important for us. If you look at the net interest margin of the bank, the net interest margin of the bank continue to expand. And as you know, the margin for the banks mainly has a lag effect. When you see the hike in the interest rates, you need to wait at least six months for the full effect of the — positive full effect of the — in the margin for the interest rate hikes. So that number will continue to expand.
We see that normal reaching the 6 to 6.2 by the end of the year, remember that we now are entering the second part of the year when you start seeing around September, October, a very important inflow of demand deposits coming into the bank that also we’ll have, in addition with the heightened interest rates, to lower the cost of funds and increase the margin.
If we move to the next one, this is quite relevant in the way that that shows exactly the lagging effect of the hike in the interest rates and how the margin moves along with it. So when the interest rates hike, and we think it’s going to end up by the end of the year, you will still have around six more months that you will be receiving the benefits of the latest hike in the [indiscernible]. So that’s also a positive number. And it’s not just the result of interest rate that as a very important piece of it, but also the good road that we have in the funding side. And because the funds that we continue to push those costs down.
We will see in the numbers and you can see in the numbers in the report that demand deposits are continue to grow above 15% on that demand deposits 3% From that point, so, we continue to raise the funding, the demand deposit funding part of the business at a very, very good pace and all the business are contributing to this retail franchise the government, the commercial corporate SME or everybody’s is pushing for the growth in the demand deposits.
In the next slide, what you see is that what has been and we have received several questions about this and I would like to concentrate on this part. There has been some questions about that why our guidance is showing higher numbers and the cost of risk that we continue to see on a downward trend, that doesn’t mean that we see any extraordinary disruption in our portfolios. But I think that we need to be to be prudent at the same time that we are starting the growth again especially on the consumer on the consumer side. So I think we will stay with the guidance. And I would like to pass the word to the Chief Risk Officer to give us more additional information about this.
Gerardo Salazar Viezca
Well, that this part, thank you Rafa, this part of what Rafa saying is that really great risk management is our mainstay of Banorte’s internal control of the loan portfolio. We don’t have a very specific case, in which we could forecast a big problem regarding cost of risk. But we have been performing periodic objective reviews of credit risk levels and risk management processes, which are key to our effective folio management. So we consider it essential that an effective risk identification process must respond not only to be obvious indicators of a problem, such as delinquency, but also most recognized more subtle warnings of conditions that may affect the ability of borrowers to repay on a timely basis.
So we’re always managing risk and maintaining strong rate administration practices. And we firmly do reviews twice every month. And obviously, we manage risk on a daily basis. What we try to do is to stay ahead of the everchanging financial landscape and addressing potential problems as early as possible with a highly prevalent or prudent approach. That’s the thing, we are not hiding anything, we are not forecasting a really large case of personal loans. And what we are just trying to implement here, these are very prudent approach to credit risk.
Rafael Arana de la Garza
Thank you, Gerardo. It is fine, exactly. I’m sure you will see a better performance for the risk numbers and the guidance. But we like to be prudent. And we will like to be assured that the numbers that we put on, if we change the guidance that we are completely sure of those of those numbers, the rescue units are performing extremely well, their recovery units are performing extremely well. But as these are not especially easy times for projections.
So if we now move to the to the funding costs, as you see one of our competitors continue to lower the funding costs, we continue to push that number down. And we continue to be committed to reach the 35 by the end of the year, the trend has been very positive on this part. And we think because of the lag in effect that we see on some of the interest effects in the funding part, we really see that this number should reach the 35 by the end of the year. So we are continuing to be committed to this number.
So there’s another — in the next one, there has been some questions about sensitivity. And they say why sensitivity why is not growing if the interest rates are growing faster than you expected. The fact is, this is a function of the variable rate portfolio and also the demand deposits for it. So this now move, the total number of the funding numbers doesn’t move with the interest rates, the margin those but not the total numbers for the demand deposit base and the variable rate of the portfolio also, even if it’s growing, obviously doesn’t grow at the same pace of the hikes. So that’s the reason I think it’s very reasonable for us to have the sensitivity and we continually on a permanent basis reducing the hedging cost of the balance sheet.
Expenses is a key element of and here you can see that even the cost income ratios are 37.8, we are facing increased pressures on the expense side because of inflation. As you can see, we have been able to contain that number well below inflation. We think that this number could reach at the end of the year more around the 7.6, 7.8 even though the cost to income ratio will continue to grow. This is an asymmetrical piece on that part. But what you can see is that based upon the revenue growth that we think that will continue to be, that will continue to push the cost income ratio down, but the inflation effect on the cost side will take a lagging time around six to eight months to really reach again, the normal levels, one that the inflation starting to recede.
If you go to the next one, please. Capital that has been always a concern. And I want to relate here to what Marco says. We have a very strong balance sheet. We have a strong liquidity. We have the ability to keep on building capital at a very fast pace. And at the same time, not by leveraging the [indiscernible] piece, because if you see the leverage ratio that we are facing, we are one of the least leverage, not the least leverage banking in the market, and the returns of equity that we are providing for the bank and for the group and that are very strong capital base. We are not playing the game of leveraging the bank or the group in order to have an advantage on the return on equity. The return on equity is a solid return on equity based on a strong balance sheet, strong performance on the loan book, strong performance on the risk metrics, good growth on the margin base, good control of expenses. So this is what allows us to feel confident and comfortable that we could bypass these turbulent times as basically in the same trend that you see on this numbers, not by taking more risk or taking the right risk on this one.
So the other thing that I would like to see that you will see a drop in the liquidity coverage ratio, because it was too expensive for us to keep on those level of liquidity, we are reducing the levels of liquidity because of the availability and the liquidity in the market, and also is giving us enough room to continue to drop the cost of funds and improve the margin base.
I also like to see because it was at the beginning of — and Marcos related to that, because we are receiving a lot of questions regarding this. The digital bank, as Marcos mentioned is ongoing, and we are waiting for the approval. But we have not been sitting idle on that part, the digital bank instead of when the digital bank is going to be born, it will be born with a lot more products and services than original was planned. So that will accelerate also the break-even point for the digital bank and will be almost a full offers digital bank for advice.
The other thing that has been concerned and some people are very, very concentrated on this number is that and [indiscernible] in a minute is that we continue to improve the growth on the on the credit cards on the very, very strong profitability metrics. But also the acquisition costs continues to go down. I don’t know what would you want to right on that?
Tomas Lozano
Yes, of course, thank you, Rafa. As Rafa was saying, the key piece here is to be prudent and measuring between growth and risk. So in Banorte we are growing as you saw year-over-year well above 11% on the portfolio. And the number of credit cards that we are selling month-by-month is growing and the attrition is getting low. So we’re confident on that numbers and talking about Rappi as Marcos mentioned, we are about 100,000 cards in the last quarter, but also being very prudent and focusing on the revenue and the Net Promoter Score of the customers because we want them to be extremely happy and we want to be — to gain the principality of the cards.
So with this, I conclude my remarks. Thank you. Thank you very much.
Question-and-Answer Session
A – Tomas Lozano
Thank you, Marcos, and Rafael. Now, we will continue with our Q&A session. We appreciate your understanding during this call, as we will not be taking any questions regarding any potential M&A transaction due to confidentiality matters. I also want to thank you for your valuable feedback. I want to express that regarding the duration of the call, if you need to disconnect and still have questions, please send us an email and we will contact you afterwards. Questions will be ordered on a first come first serve basis, please raise your hand on the platform. And we will unmute you when your turn comes. Rafa and myself will be calling the name of the person that is next on the line. If there are any technical difficulties, please let us know by using the chat. Thank you. We are now ready to start the Q&A session.
Thank you, we will take the first question from Geoffrey Elliot from Autonomous. Goeffrey, go ahead, please.
Geoffrey Elliot
Hello, thanks very much for taking the question. It relates to the net interest margin and rates.
Firstly, could you explain to us the negative development of NII outside of the bank, the bank then was up but the non-bank NIM was down? Can you explain the mechanics behind that? What are the moving pieces that drive it? And then, secondly, the sensitivity analysis that you show us on page 20 of the slides. Can you confirm does that relate to the bank or does that relate to the consolidated group? Thank you.
José Marcos Ramírez Miguel
Thank you, Geoffrey. Rafa please address this one first.
Rafael Arana de la Garza
Yes, Geoffrey. As you mentioned, the net interest margin of the bank continues to expand for the net interest margin of the group, when you are everything to the group, has to do basically with the performance of the insurance business and the performance of the annuities business. As you know, annuity’s businesses, we have a portfolio that is driven basically by inflation related instruments that had a strong peak on the first quarter on that part. So that’s the difference that you see on that. And on the side on H1 business, even we see already a recovery on the net interest margin. Basically, we still are below pre-pandemic levels.
So I think you will continue to see a slow trend — upward trend on the net interest margin of the group, but not at the same fast pace that happened out there at the beginning of the year for the first quarter because of the accelerating pace of inflation that happened on that part. Inflation will continue to be present, but not at the same pace that happened on the first floor. So that’s the reason for that. About the sensitivity is basically for the bank.
Geoffrey Elliot
For the bank. Thank you. Thanks very much.
Tomas Lozano
Thank you. Now we will continue with Tito Labarta from Goldman. Tito, please go ahead.
Tito Labarta
Hi, good morning. Thanks for taking my question. A couple of questions. One, just on the insurance business, you continue to weigh on results a little bit. Can you maybe just get some color there on the outlook I know this quarter impacted by lower premiums but when you think that the results there can normalize and begin to match results of it and then have a second question after that.
José Marcos Ramírez Miguel
We will start with Rafa and then we will get this.
Rafael Arana de la Garza
Yes. Tito as you can see on the numbers, you’ll see already an improvement on the insurance company. And Fernando will add a lot more information about this. So obviously, as you see there’s a continues coming and going from this COVID piece. And in addition for the COVID piece, there’s also a lot more mobility on the car issue. So claim side are now coming through. We are confident that even is not the base that we anticipate that we will be releasing provisions and provisions are on our continuous evolution to be released. But what is more important is if you look at the sales part of the business, the sales part of the business continues to be very strong. And that will continue to happen in the coming months with a with an increase evolution on the right train.
With this I just I would like to pass the word to Fernando to add whatever he considers if it’s needed in addition of what all we said.
José Marcos Ramírez Miguel
Yes, of course, perhaps to give a view or a feeling of how the performance will be going forward for the insurance net income. I will like you know that remember, perhaps a few quarters back, if not one or two, we were we were shocked at an indicator in which the loss ratio, it depends on the frequency and the severity of the account, how large are the losses with respect to the portfolio’s. And mainly our exposure COVID, we are hurt and we are still hurting a little bit especially in health insurance, but mainly due to the characteristics of a portfolio in life insurance?
So let me give you a view in respect to life portfolio. If we were looking at what happened with COVID, what are we really what — how much are we seeing more frequency or more severity, respect to what we have previously, or previously to the pandemic. And for instance, what we were expecting this year, we were expecting for the first quarter, for instance, to have 24 more cases, but more deaths than normal, but actually reported and in current pay, have not incur but paid. It was close to 0.2. So the frequency was very, very low to what was expected.
In the second quarter, we were expecting 16% above the previous COVID levels. And we were also very persistent, and it’s also the 0.2%. Now we will look at the average cost or the severity, we were expecting a 28% above the pre-pandemic levels and we experienced 16.5%. So this indicator, which is not the frequency, look how severe the losses are, we’re still above the pandemic levels 16%. And in the second quarter, we were expecting a 20% and we are used to 13%.
So things are behaving much better than what we expected. And of course, the expectations were even lower than what we experienced in the previous year, which was the most costly parts of the pandemic for the insurance portfolio.
Going forward, if we have to wait and see of course, what’s going to happen with these five ways of calling it mainly perhaps we will be in more above the loss ratio in health insurance, but we are not expecting as much problems with respect to the life portfolio. So, it is hard to tell how much is going to be.
But according to these numbers, of course, this year will not be recovering from previous COVID because we are still facing COVID, we have been paying in the first two quarters a more than the previous levels of the loss ratio. But I think it’s normalizing quite well even with this COVID wave. Now as Rafa was saying on the other hand, we were benefited in the COVID previous periods, because the people were not mobilizing as much as they used to. So they were not using cars as much. And therefore, we experienced an interest reduction in the loss ratio in in the car sector.
Now extending to normalize, actually the loss ratio to you an idea in 2020, it was 47%, previous COVID, the loss ratio for the car insurance, it was somewhere between the previous three years, it was somewhere between 64% and 74%. Then in 2020, the loss ratio was 47%, in 2020, it was 46% and as of today is tending to normalize and we have a loss ratio of 62%. So in this sense is going back to normal as well. And we will not have that benefit due to mobility in this line of business. And to finalize something that I think is very important to notice is that we are experiencing interesting growth in the lines that are more profitable for the insurance company, that is in all those insurance, that is provided through loans, even though the behavior of the loan portfolio, we have a better than expected sales in that sense, but also in what we call alternative channels of distribution, which are mainly call centers. But this time, although increasingly well, ATMs, but it’s not so significant. And it’s also not significant yet, the digital channel, but in those channels, we also experiencing a very healthy growth and also with the products that we distribute through the branches, and the call centers, sorry, and the branches, they are also growing. And those are the most profitable portfolios of the insurance business.
So to finish, I will say that the outlook is good. We’re not going to finish this year with brief pandemic levels of net income, but it’s starting to normalize. And structurally, we’re going into the right direction.
Tito Labarta
Thank you. That’s very helpful, very, very detailed answer there. And my second question, if I may, and I know you’re not taking questions on any M&A transactions. So I appreciate you probably limited, you can say it. But [indiscernible] been released a press release last night saying that their bid doesn’t seem to have been accepted and they’re no longer considering the process. So one can you just confirm that you are still in that process. And then, two I mean, when you think about potential accretions in M&A transaction, so you don’t have to get specific here. But what would have been accretive with your stock at 135 is different than what accretive with your stock at 118. Maybe the stock is getting weighed down by potential M&A risk, as we see very good quarter yet your stock is down a little bit today, something that Mexico is up a little bit.
Just to think about on anything you can say on what you’re considering in terms of what’s potential accretive and the best use of capital in terms of maybe dividends are easier to do when you consider execution risks. Just any color that you can give on that would really appreciate it. Thank you.
José Marcos Ramírez Miguel
Thank you, Tito. Unfortunately, I’m really sorry, but we were in a situation mouth tight. So we cannot say anything about that. And again, we consider also dividend payments here. Yes. We also consider share buybacks decreases. Yes. And as I said, in the beginning, we want to maintain all our options open and then we will decide regarding all the metrics that you have the price there, everything is going to be in blender, and we decide that the spirit and we will do it.
Tito Labarta
Okay. And I appreciate you’re limited and you can say there. Thank you.
Tomas Lozano
Thank you. We’ll now take the next question from Ernesto Gabilondo from Bank of America. Ernesto, go ahead.
Ernesto Gabilondo
Hi, good morning, Marcos and Rafa. And good morning to all your team. Congratulations in your results and thanks for your presentation. I have a couple of questions from my side. The first one is on your loan growth, just wanting to hear your expectations, considering the higher rates and these potential economic recession in Mexico, likely next year. So just wondering if considering a GDP contraction of around 1% next year, how should we think about loan growth? You think it will maintain the same levels of this year? Or it should be lower? I would like to hear like your first impressions.
And also related to this can you remind us what is the percentage of the loan book that has direct exposure to the U.S.? So that’s my first question. And my second question is related to asset quality. So again, considering this scenario of a potential economic recession, how should we think about the asset quality which do you see as the riskier products? And want to hear from you what will be different when compared to previous recessions or crisis? Thank you.
José Marcos Ramírez Miguel
Very interesting, all of them. Let me start with the second and the third one.
Rafael Arana de la Garza
Regarding the direct exposure to the U.S., I will tell you that currently we have 3% of the loan book related to exporting economic activity. Although we have some other economic sectors like industrial parks, maquiladoras and tourism, which is relatively significant size of the loan portfolio, which are direct exports to the U.S. So, if you take that into consideration, you will see that overall our currency exposure in dollar terms, this is 13% of the total loan book. So, we are as you can see, as you have analyzed every economic activity which has been banked by the Norte, it comes to internal economic activity on some other economic and geographies recover within the financial book.
José Marcos Ramírez Miguel
I will start and Alejandro will continue. And this is a very important question, and I think we have to understand what has been happening in Mexico and why we are confident about the asset quality. When they the relief programs came into action. As you know, the banks in Mexico they never receive any monetary surplus or relief coming from any entity. So the banks really need to bear all the burden on themselves. So that oblige us to really evolve a lot in the risk metrics, in the risk origination piece and also a very important part is in the recovery units.
And we put a lot of analytics in place to really follow the client on a day-today basis, where we see any chance of deterioration of the client and immediately address the client to really work with them in order to help them go through the process. So when recession comes and you mentioned, the 1, the 1.2, that it has been also validated by our chief economist, remember that we are also positioned in the north and in the center and in the most important tourism parts of the country. So when you look at the 1.2, or 1, you have to also take into consideration where basically the key activity of the country will come is whereby Banorte position in that part, so that those parts will not be grown at 1 or 1.2, you will see growth around 2 or 3, 4% on that part because of nearshoring because of many, many other things.
So I think we need to understand this that that Mexico is a mosaic of growth. And fortunately for us, because we have been positioned like that, we are in the right places to take advantage of the growth and to be very, very resilient on the downturns because activity will continue to be in the places, tourism will continue to be their, manufacturing will continue to be their, supply chains will continue to be there from that part. And that’s why Banorte’s position and you can show that because people say well, recession will come in the U.S. But recession was in Mexico when the U.S. was growing at 5%. Mexico was well below growth of 1, we were negative for that part. And Banorte continued to be resilient because of the way we have a structure and position ourselves with a client base. That’s what I can say.
Héctor Martín Ávila Flores
And I could add to that, that the front office, the risk team and also the analytics team have modeled that inflation and GDP growth in order to have an expectation as close as possible of what could happen and I will tell you that duration of inflation is key duration of a recession is key. And we have considered two transmission channels which could account for purchasing power of families and also sales from companies and savings available to offset that adverse impact and also a second transmission channel could be on unemployment, which is a very important variable for our retail bank.
So we have modeled and forecasted those and we are confident that perhaps recession will occur within 2023 but not for the whole year of 2023. Our forecast is not at a negative GDP growth for 2023. But we are expecting a possible scenario, as you just said.
Rafael Arana de la Garza
And if I just made that because I think I heard that say that very important. It’s quite important to notice that the world now is facing what Mexico face and the banks in Mexico face during the pandemic. Because now that all the relief programs have been withdrawn in Europe and in the U.S., now the banks are taking all the provisions and things that the banks in Mexico took during the pandemic, believe me, what happened in the pandemic is worse than any residual recession that you can, and Banorte was extremely, extremely resilient number. We know, as Ricardo says, what the meaning of recession. And we know how inflation works in Mexico, because Mexico has been have a very many cycles of high inflation on that part. This is a different inflation face, because what Ricardo mentioned is, duration is going to be the key on that one. So with that, I complete.
Alejandro Padilla
Sorry, this is Alejandro Padilla, Chief Economist. I would like to add something there. Well, our base case scenario is that the U.S. recession is that, the U.S. will face a mild recession, indeed, it’s going to be maybe a couple of quarters with negative rates. However in the whole year, we’re expecting something around 1.3% positive. And given Mexico we are expecting 1% for next year, even market consensus is slightly above which is 1.5%. So we don’t expect a big decline of GDP next year. And what Rafael was mentioned before is true. I mean, Mexico has been lagging vis-à-vis other countries during this recovery of the pandemic. Indeed, our 2.1% forecast for this year is contemplating that 1/3 of economic activity remains lack between 5% to 15%, from pre-pandemic levels, and we think that external demand and private consumption will continue being a very important engine of growth throughout this year, and maybe at the beginning of the next one.
So I think that in this regard, at least some of these risks are well balanced as just Rafael and Héctor mentioned before.
Ernesto Gabilondo
Very helpful. Thank you very much.
Tomas Lozano
Thank you, Ernesto. Now, we will continue with Gustavo Schroden Bradesco. Gustavo, please go ahead.
Gustavo Schroden
Hi, good morning, everybody. Thanks for the opportunity and congrats on the results. Sorry, to insist in this asset quality issue. My question here is [indiscernible] and the cost of research running, I mean, in the historical lows. But on the other hand, if you will analyze the recent loan growth of Banorte and also Mexican banks, but specifically Banorte, so it has been very low loan growth, right? So it’s around 2%, 5% in the last two years. So my question is, if you analyze your guidance over cost of risk, the guidance is estimate an increase in the cost of risk. So my question is, when should we start to see some deterioration in NPLs consider that the bank is recovering the loan growth, especially in the more riskier lines, such as credit cards, personal loans.
I’m just trying to understand how should we consider or how should we model the NPLs and cost of risk because of one size, we’ve seen this is a very positive trend running below the guidance and running below the historical levels. But on the other hand, the bank is growing fast in this riskier lines. So I’m just trying to understand how should we think in terms of our NPLs and our cost of risk by the end of the year?
And my second question is related to loan growth. It is related to the question about the Mexican economy and in U.S. economy because, again, loan growth was above the guidance 8%. But you didn’t change the guidance. So should we expect some deceleration in loan growth in the coming quarters? Or should we work with potential upside in the loan growth as well? Thank you.
José Marcos Ramírez Miguel
Regarding the cost of risk, yes, we are in very good shape, I would say that and but this is not the only data that we should take care of, I call it the efficient [indiscernible], where we put our money. And it doesn’t matter if that also but we are making a good business now. So we expected yes, that this is the bottom and we will increase, because we will start to increase our loan in some sectors that we want to be because the efficient frontier is not there.
And thanks for the equation, with the international growth and offset that we will need. So the idea is to see the opportunities, and maybe it would be a good, I don’t want to say a number but if we get to 2% of the contract percentage or very good number, but because we are doing business now. And they wait to delete this because we have here the tools to go in that direction is not because we don’t want it is because we wanted to do it. So yes, you can expect that we will start to go to consumer and few other products. But taking care of what we are going to do.
So I would like to see that as an opportunity because we’re in good shape. And we can manage the maneuver the risk and see where we want to go. And yes, it will go up. We don’t want it to zero because this is not a bank, it should be something, again, the name of the board is efficient frontier. And regarding, we are moving the loan growth, maybe we can move it a little bit. Let’s say, it’s going to be close to double-digit everybody loves to say that double-digit close to. So we will move it around for the rest of the year. As we said we have this high frequency data. I would like Alex to say a little bit about this tool that we have. Alex please share frequency data analysis that we have.
Alejandro Padilla
Yes, for sure. Marcos. Thank you. Well, what do we have analyzed big data from the bank and other big data that suggests that at least in the first half of this year, the Mexican economy has performed quite well. Indeed that’s why we are holding our GDP forecast for this year at 2.1%. Acknowledging obviously that there’s part of the economic activity that remains below pre-pandemic levels, but they are portraying an important positive trend in the last month.
So far in the year, we have been observing big recovery in external demand index, especially the manufacturing sector, and also the private consumption. So given this data that Marcos was mentioning before, what we have been observing is that product consumption, which is nearly two thirds of total GDP, having observing very good performance benefited by better mobility, remittances at historical highs or better employment conditions. And obviously, these are offsetting part of the negative effects of inflation and interest rates on disposable income.
So given this, we think that services like restaurants, hotels, transportation, entertainment, just to put some examples, will continue performing quite well throughout this year. So at least the high frequency data that that we analyzed is what is suggesting and that’s why we are maintaining or 2.1% GDP growth for this year.
Gustavo Schroden
Great. Thanks a lot and congrats again.
José Marcos Ramírez Miguel
Gustavo just a last one. Remember that we still have 1.2 billion of non-U.S. reserves ready to have any extraordinary issues as needed.
Gustavo Schroden
Yes, sure. Thanks for the clarification and thanks for the answers.
Tomas Lozano
Thank you. We will be asking you to only ask one question because we still have a lot of analyst investors waiting for questions. So please limit yourself to one and if you want we can connect afterwards anytime. So, now we will go with Thiago Batista from UBS.
Thiago Batista
Yes. Hi, guys, thanks for the opportunity. I will continue on the guidance. In my guide my questions about the earnings guidance. The top of the range is not wrong with 42 billion pesos of earnings. In the first half of the year, the bank delivered in 22. So this imply a decline in earnings in the second half of the year. So my question is, this is really the bank expectations, these earnings decline in the second half, or the bank decided to take a more conservative approach in the guidance and not change the guidance every quarter, you are maintaining the guidance but a decline in earnings is not the best case scenario.
José Marcos Ramírez Miguel
Thiago. Thank you. No, we are not changing the path. We will continue growing. We saw we will see a better number there. We think it’s going to be better. We’re not changing because we want to be conservative, but you are right. We will continue in the same track. And the same track leads you to another number and it’s going to be a number bigger. Yes, you are right.
Tomas Lozano
We will move with Ricardo Buchpiguel from BTG. Ricardo?
Ricardo Buchpiguel
I have a quick one on my side, I just want to understand a little bit more what to expect in terms of dynamics for fee income in the following quarters. I saw that Q2 was a very strong quarter, I want you to understand as well, if there was an extraordinary events that help this line in the results? Thank you.
Rafael Arana de la Garza
No. There was no extraordinary events on that. I think it’s the dynamics of the bank moving in all the channels, the physical part of the bank is fully in place, all the digital channels are extremely active. And remember that all the transformation that has been going now you can onboard most of the consumer products in less than five, six minutes and get credit card or mutual funds or whatever. So that is giving us everything that is related to activity, and the fees will continue to grow. There’s no extraordinary items there. There has been a special parts about the special events regarding the great guys, but I will say the core is exactly where it is going. We will continue to grow.
Tomas Lozano
Thank you. Now we will continue with [Lewis Johnson] [ph]. Please go ahead.
Unidentified Analyst
Just one question, I guess. If I mean, your expectations [Technical Difficulty] and I understand the lag effects of that management spend. Yes, I’m saying like, on your expectations that rates go to 10%. And I understand the lag effects of that in terms of the benefit you see at the bank. Just wondering, at that level, once you get the lag effect going away, and you already have the full positive impact. What would be or what could be the NIMs for the group? And what would that mean in terms of the ROE for the group, let’s say at peak profitability, if you will, and what is the assumption within the ROE in terms of dividends, once we get there perhaps, without dividends or with dividends, just to get a sense on that one?
Rafael Arana de la Garza
Yes. As you say all the lag in effect on that part, I think you will continue to see a big push on the bank on the NIM. The bank NIM is basically the key driver for the group. But still we will have the effect of not a fully benefit of the insurance business. And I think the insurance business will start to continue to grow and balance that out. So a return on equity for the group at the full pace after the full effect after the lagging six months that we usually have, you will see from 21 to 22 at the group level and close to 24 on or above the 24 for the Banorte.
Unidentified Analyst
Great. And would that assume an additional dividend that you would pay until, let’s say the peak is, you get the full effect in June next year, with the six month lag, would that assume any additional dividends or that’s just the way it is without limits?
Rafael Arana de la Garza
No. I think, as you have seen in the past, we have a policy for making 250. And when there’s the opportunity to go for extraordinary dividends, we have also played that. But that will relate to what Marcos mentioned, maybe buybacks will be in place on that part and in addition to the dividends. So many options for the bank, based upon the buildup of capital, but also Lewis you have to take into account that at this point in time is prudent for us to be in our way being inefficient by holding capital, because we need to have always a very, very strong balance sheet and I think times us for you to be proved.
Tomas Lozano
Now we will go with Alonso Garcia from Credit Suisse. Please Alonso.
Alonso Garcia
Hi, good morning, everyone. And thank you for taking my question. My question is a follow up on margins. So your guidance of 25 to 35 basis points expansion represents basically a NIM for the year of around 5.8%. In the first half of the year, you have already reported, NIM for your group of 6%. So just want to confirm if you believe your guidance for the year is conservative in this segment as well. Or if you are seeing elements for the second half of the year that makes you more cautious on the NIM, despite the continued positive impact from higher rates, especially at the bank in the coming months. Thank you.
Rafael Arana de la Garza
Yes. Alonso, you will continue to see especially by the end of the year, an acceleration of the net interest margin for the bank is conservative. And maybe you will see that in the third quarter was meant to the guidance.
Tomas Lozano
Thanks. We’ll continue with Jorge Henderson from Santander. Jorge, please go ahead.
Jorge Henderson
Thanks, Tomas. And hi, Marcos and Rafael, thanks for the presentation. My question is regarding asset quality. I understand that [indiscernible] had a great line with you have 2 billion pesos. And all the problems you had in the debt restructuring and the consequently liquidation of the company. My question is, do you see any credit risk on that tranche of your loan book?
Rafael Arana de la Garza
Thank you, Jorge. Let me rewind that. We are in that sector. Yes. But we don’t have any risk exposure in that sector. That’s all I can tell you because we have this confidentiality of the specific clients. But we are not — we don’t have any risk exposure in that sector.
Jorge Henderson
Okay. So you don’t have any [indiscernible], have you had any debt outstanding with you?
Rafael Arana de la Garza
Talking about the sector?
Jorge Henderson
The sector, okay. Well, I mean, if I can add just one more question very quick. You mentioned about the new shoring expectations that you see in the Mexican economy. Have you seen any great demand materializing due to new shoring on your loan book already?
Rafael Arana de la Garza
Actually, yes. It’s very [indiscernible] to put up his mask.
José Marcos Ramírez Miguel
Yes. Thank you. We have a strong pipeline in the sector [indiscernible] very, very hard in this sector. There is a lot of companies from outside China, States and Europe, asking for the Mexicans to supply all that the American market right now. Then we’re very positive about it.
Tomas Lozano
Thank you. Now we will continue with Carlos Gomez from HSBC. Carlos please go ahead. Carlos please unmute yourself.
Carlos Gomez
Sorry, my apologies for the background noise. I would like to know if you could elaborate on your personal expenses, it seems quite extraordinary that they increased only 2% year-on-year with inflation on 8%. Could you explain us, why there is this declining whether we should expect it to continue? And additionally, could you give us the full economic expectations for 2023 that mean interest rates and inflation as well as GDP growth? Thank you.
José Marcos Ramírez Miguel
We’ll start from the second one. Please Alex go ahead.
Alejandro Padilla
For 2023, we are expecting GDP to grow 1%, inflation we have it at 4.1%, interest rates during — big part of the year, we are holding at 10%. But at the end of the year in the fourth quarter of 2023. We think that the central bank will start cutting rates and we have a year-end forecast of 8.5%. And then in terms of the Mexican peso, we have 21.80.
José Marcos Ramírez Miguel
Rafa, please go ahead.
Rafael Arana de la Garza
Yes, Carlos. Remember that two things that are in a way affecting this, [indiscernible] we front load and load up our personnel expenses at the end of the year, to anticipate that and to balance the evolution. We already had the agreement with the union. So there will be no surprises on that. But when you look at the non-interest expenses on the report, when you look at the personal expenses that is really grown on 1%, but you have to add also the PTU that is on that. When you are all that is you are more in the range of 6%.
Tomas Lozano
We will now go with Jose Luis Cuenca from Citi.
Jose Luis Cuenca
Just very quick one on the funding business. Just wanted to hear from you, do you think that the levels of net income that we saw during the first and second quarters, would that be something representative for a more normalized net income in the future? Or what are your expectations there given the cap in [indiscernible]?
José Marcos Ramírez Miguel
Thank you. Remember that we are affected because of two factors. One that is forever have the captives and we don’t have too much move there. And the second one is a devaluation that rate will go up with making the future so no, this is not that. But I will ask Javier Beltrán, how knows more color on that please.
Rafael Arana de la Garza
Marcos, I don’t think, he is not in the call, if you want, I can leave this on call. Well, I think that you just said it. But let me just put some figures on it. If you look year-to-year on the results — the accumulative results as of June 22 with respect to June 21. The effect of the reduction in the commission’s which was very large for us, it was 23 basis points. Remember that we were able to charge a 0.8% on the assets on their administration. That was the fee and now the [indiscernible] except one the public one which is consuming all the fall is due to the cap we’re charging 0.57% that is a reduction of 23 basis points.
Now, if you take that into consideration to the numbers, that means that in respect to the previous year, we have a very large impact. For instance, if the assets under management and what we expected because and we talk about what also happened. We have here a very important effect, which is the 23% reduction in income. Now, given that the height of the rates and given the exposure of our portfolios, mainly on fixed income securities, we observed a reduction — a very drastic reduction on the expected assets under management of 7%. So if you combine those effects we are observing 1044 million pesos less of an operating income.
Of course, one is mentioned, as mentioned by Marcos is a permanent one, and the other will depend on how markets will behave in the future. But of course, there are two offsetting effects, eventually, I mean, higher rates and the new money come in, will also mean a higher returns in the future and also starting 2023, we start observing gradual increment in the contributions of the payroll contributions by employers 1% each year, for 10 years.
Now, we do look also at the exposure that we are obliged to have on the assets under management where it is called a special reserve. And therefore it has to expose the part of this capital area term serve. We had there in 609 million pesos. All of these numbers, of course, are before taxes. So that’s a very important effect. So if you combine these two things, our net income is a lower than what we expected at this stage. When we made the budgets. We have less income of 1.2 million pesos lower. And certainly I would say that at least a contract or so are more explained by the markets than by the structural factors.
So quite would happen from now on, will depend on how the markets will behave. But then he also point something out there is also some pressure on the cost expense, because we are also seeing an increase in the sales activity, something that is actually kind of curious, because of the reduction in commissions. I don’t know whether this will be — forward the same or it will start going down eventually.
And also perhaps something that is interesting, just to give you some numbers, even though Afore has been the most resilient in the market. If you look, this is public information. If you look at the numbers of net income, as for the second semester of this year, the whole industry, earned 1410 million pesos. And our Afore, it had anything come of — this is 100% asset. Remember that the numbers that you see in the presentation is only 50% ownership of Banorte but if taken as a whole, the net income of Afore was 518 million pesos. That is to say, the 33% of the industry earn as of today was earned by Afore.
Tomas Lozano
Thank you. Now we’ll continue with Yuri Fernandes from JPMorgan. Yuri, please go ahead.
Yuri Fernandes
Congrats on the quarter. I will ask about competition look in Mexico. We are seeing loan growth rebounding, right. We may — we saw the industry growing about nine and some of your peers growing slightly faster than you like, Santander, Bancomer and Banamex very much less, right. So my question is, how are you seeing — and you are growing kind of industry level but my question is, how are you seeing competition? How rates are behaving? I remember in the cycle of 17, 18 banks, they were very aggressive on mortgage. They were not repricing. So how do you see this competition in Mexico nowadays? Is there any kind of product that we see more competition? What should we be aware here? Thank you very much.
José Marcos Ramírez Miguel
Yuri, the competition is huge, and they are great competitors and as we they decide to grow and maybe they will not trespass all the interest rate [Technical Difficulty] which is good for our competition. And we are not behind them. We will do some things also to increase our market share. And you’re right, it is quarter, it seems that they were a little bit faster than we did. But, the data that you have is something that from the CMDB and it’s only two months, third month, it was another story here now, you will see in a few days. And but Rafa, do we want to add something or the other?
Rafael Arana de la Garza
Yeah. You have to remember this Banorte has the lowest NPLs in the market, and one of the best risk adjusted margin. So, when you talk about growth, you have to also normalize by the risk adjusted margin. And when you normalize that by the risk adjusted margin, Banorte is growing at the same pace, but with a better results.
We know we have an opportunity in the mortgage book and in the car loan book because we are improving our processes. And they want to be fixed in the next few months. But I don’t see that we have any obstacle to compete, where we want to compete, but we don’t want to compete in every single space, we like to compete, where we see that the growth potential aligned with the risk is the right one.
Yuri Fernandes
Super clear half. So just to be clear, like if you see signs of irrational competition, maybe you will be more comfortable not growing as quickly as some peers, right? Like you should grow industry levels, but looking for profitability. Do you agree with the statement?
Rafael Arana de la Garza
Exactly, right. That’s always been the mantra in Banorte. If you look at some of our competitors growing at a very fast pace, but look at the NPLs.
Tomas Lozano
We will now go with Carlos Legarreta with GBM.
Carlos Legarreta
My question is, have you seen any impact from the current drought [indiscernible] at the industrial level in northern Mexico? And do you think it would have an impact on loan growth or asset quality for your business? Or its effect is limited to inflation?
Rafael Arana de la Garza
So far Carlos, being honest, we don’t have any damage let’s put it that way. Obviously, maybe if that continues to tell you something, but so far, is not moving the needle.
Carlos Legarreta
Okay, thank you for that. If I may, a quick follow up within your total loan portfolio, what is the mix of fixed and variable rates?
Rafael Arana de la Garza
60:40. 60 is variable and 40 is fixed.
Tomas Lozano
And now we will take our last question from Arturo Langa. Please go ahead.
Arturo Langa
The first one is related to the dividend payment that you mentioned in their earnings release, which is six pesos and eight cents. So I was wondering if this dividend payment consider the 2020 amount that the regulator needs to approve to you in order to pay? That will be the first one. And the second one is regarding under a strategic alliance with Abby? Would you give us a little bit more color? Do you have a specific goals with this alliance or it’s something that you want to explore because of the dynamics up to Abby? Thank you.
José Marcos Ramírez Miguel
I will start from the second, one with [indiscernible].
Alejandro Padilla
Thank you. We’re moving forward with the different streamlines with Abby. And we’re expecting to start booking mortgages maybe in a couple of weeks, no later than a couple of weeks, using the Banorte book and as Rafa mentioned at the beginning in the initial speech, we will move forward later with the with a digital bank with a digital mortgage in a completely different way of processing the loans. But also, we’re advancing with some other products that Abby is using themselves, how they are going to promote the Banorte products and some interchange of information and some other business lines that we are analyzing.
Rafael Arana de la Garza
The other part of your question about the six pesos that was paid during the quarter. If you want later on offline, we can walk you through how this was presented in the assembly and the capital numbers, happy to do that afterwards. Thank you.
Tomas Lozano
Thank you, everyone. With this, we conclude our presentation. Thank you again for your interest in Banorte. Have a good day.
Be the first to comment