Grupo Financiero Banorte, S.A.B. de C.V. (OTCQX:GBOOF) Q4 2022 Earnings Conference Call January 20, 2023 10:00 AM ET
Company Participants
Tomas Lozano – Head-Corporate Development, IR and ESG
Marcos Ramírez – CEO
Rafael Arana – COO and CFO
Gerardo Salazar Viezca – Chief Risk Officer
Conference Call Participants
Ernesto Gabilondo – Bank of America Merrill Lynch
Ricardo Buchpiguel – BTG
Tito Labarta – Goldman Sachs
Jason Mollin – Scotiabank
Yuri Fernandes – JPMorgan
Carlos Gomez – HSBC
Marcelo Telles – Credit Suisse
Gilberto García – Barclays
José Luis Cuenca – Citi
Nicolas Riva – Bank of America Merrill Lynch
Natalia Corfield – JPMorgan
Mariel Arévalo – Benito Juárez
Tomas Lozano
Good morning. I’m Tomas Lozano, Head of Corporate Development, Investor Relations and ESG. Welcome to Grupo Financiero Banorte’s Fourth Quarter Earnings Call. Our CEO, Marcos Ramírez will provide an overview of the main results for the quarter and the year, including the market and the payable loan growth and deposits that can grew from the right environment in the country and the global recovery of our non-bank subsidiaries.
On our ESG lights, we will find the most relevant updates from this project and I would like to highlight the completion of the first stage of to quantify the carbon emissions of the most intensive sectors in our loan portfolio. You may refer to the medium and long term reduction targets in our sustainability update.
After our CEO’s presentation, Rafael Arana, our CFO, and CRO, who’ll provide a closer description of our main dynamics, the rationale behind our cost structure and our capital ratios. He will also present our expectation for this year’s guidance. We will again, open up decision for any questions you may have.
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 that you will find our full disclaimer regarding forward-looking statements. Thank you. Marcos, please go ahead.
Marcos Ramirez
Thank you, Tomas. Good morning, everyone. I wish you all a successful new year. Thank you for joining us today.
We close the year with a strong quarter, mark by expansion across most of our business lines. We then evident recovering in sectors that were hurt by the pandemic and sound performance at the bank. This is supported by accelerated loan growth during the quarter, solid asset quality and a well oiled machinery that has allowed us benefit from the positive rate environment in the country.
Despite that challenging and uncertain global environment during 2022, the Mexican economy performed better than initially anticipated, with GDP growth for the year ending close to 3% on the back of a consistent recovery in primary consumption and increased activity in the export sector.
For 2023, we expect a moderate economic activity, as we incorporate the effects of a potential global recession. However, we believe that these headwinds will be partially offset by the initial benefits of the nearshoring activity, along with increasing external demand, private consumption and government spending. Therefore, we have revised our GDP growth estimates for the year to 1.5% from the 1.0% previously forecast.
Regarding monetary policy, we expect Bank GBOOF [ph] to have one last 50 basis points hike in February, taking the reference rate to speak to 11% for every month and then start the coding cycle towards the fourth quarter of the year to end 10%. This tightening policy together with stability in the fees valuation are expected to have a positive impact on inflation during the year after peaking in the fourth quarter of 2022 inflation is expected to remain somewhat sticky during the first half of the year, and rapidly bring down during the second half to end close to 5%.
On the political front, attention will center in the trading agreement resolutions regarding automotive, electrical and agricultural matters. Moreover, June, we will have elections for two governorships in the state of Mexico. On the legislative agenda, discussions in Congress regarding reforms to secondary electoral laws will continue. And in March, the lower house will elect a new President of the National Electoral Institute’s General Console that in it.
Overall business results on this line number three, describe a solid balance sheet. We’re prepared to take the most out of the right cycle in Mexico. On the long side, we’ll reach double digit growth in our portfolio before they’re supported by continuous efforts to reduce our funding costs. Moreover, structural changes at the bank are keeping asset quality below historical averages. Well, economic recovery has kept a more dynamic reactivity.
Starting off with profitability, slide number four. Net income shows a consistent quarterly evolution, yielding an accumulated 30% increase for the year. ROE improved almost 400 basis points on a year on year basis, reflecting an expanding performance across most businesses, which is also reflected by a solid return on assets. Our non-banking subsidiaries are gradually recording their contribution to these indicators as we will see further ahead.
Moving on to the top line results of revenue on slide number five. Net interest income has had a positive trend during the year, and particularly during the fourth quarter as interest rate hikes has been gradually incorporated into our portfolio and strengthened by a sound deposit mix and a billion loan insurance across most of the product lines.
Non-interest income was also supported by a strong fee income from banking operations offsetting inflation related impacts in the world with it’s [indiscernible] called reserves. Altogether, total revenues showed solid quarterly and annual increases.
[Indiscernible] to this, in slide number six, they show a 7% sequential expansion driven by higher seasonal activity in the quarter. With related figures, these have double digit growth, led by a strong electronic bank with these higher advisory and restructuring leasing commercial and government portfolios and higher domestic demand for consumer products.
Digital and physical POS transactions had a seasonal boost during the quarter, driven by retail events in November, such as El Buen Fin, which is Black Friday, and Cyber Monday. However, there was positive momentum for this throughout the entire year, as mobility was fully restored in the country.
Moving now to slide number seven. We see a strong expansion across the loan book, which exceeded our expectations reaching an aggregated 12% growth. During the quarter, it was primarily led by a record high expansion of the commercial portfolio, which is expected to continue as nearshoring operation to actually materialize in the country. In preparation for this, we are currently strengthening our commercial teams in the north and central regions of Mexico, where most of these opportunities will be located.
The government book had a strong quarter, with a good credit demand from federal, state and municipal governments. Corporate loans were affected by payments, but continue to benefit from the dollar loan market, which currently represents 30% of our loan book.
The consumer portfolio on slide number eight displays a strong quarterly expansion and report annual increase. The evolution of payroll and credit card loans has been driven by good consumption dynamics and has been particularly accelerated by the adoption of our digital offerings through the mobile app, the web and other self-service channels.
Auto Loans continue to recover as supply shortages start to normalize. And mortgages continue to expand with a particular focus on high lifetime value customers, which will bring long term profitability for that group.
On the slide number nine, asset quality during the quarter and the yield continues to exceed our expectations. The quarterly increase in NPLs responds to isolate the cases and does not represent any industry wide or geographical trend. In fact, some of these cases are expected to normalize within a few months. It is worth mentioning that we have made a structural changes in our origination and collection processes to account for the favorable changes in our customers approach to credit, particularly as they have a higher adoption of our digital channels.
Analyzing the quarter results by subsidiary that’s on slide number 10. The bank results were impacted by higher extraordinary expenses that will strengthen our future operations, which we will review in detail later on with Rafael.
Nevertheless, with that related fingers, the bank continues to expand on the back of solid NII and asset quality as well as the stronger lending and pre dynamics, maintaining an ROE above 24%. As part of our commitment to our shareholders, we will be analyzing different alternatives for capital return throughout the year. The insurance business continues to recover, with good premium expansion and COVID related claims normalizing down to pre pandemic levels and current insurance claims increasing also to pre pandemic levels as mobility is fully restored in the country.
The brokerage sector show on quarterly reduction driven by lower interest in the business, and with this business has an impact during the quarter, resulting from a year-long market from the contraction and inflation adjustments in its clinical reserves. As for pension funds, the businesses is still impacted by the pickup imposed by the regulator at the beginning of the year to remember on top of the valuation effect of higher rates, its long term investments. These effects will slowly be offset by an increase in assets under management brought by a gradual increase in employer contributions from 6.5% today, up to 15% over the next seven years.
On slide number 11, we provide greater detail into the insurance business performance, showing the steady growth in premium already mentioned, together with a gradual normalization to pre pandemic levels in claims.
Moving on to slide number 12. We are proud to have reached the second operating year of our joint venture with Rappi, accomplishing the operating and profitability targets initially said. We will continue with the steady growth in internal credit cards, with the strict risk control and a continued focus on profitability.
On slide number 13, our obsession with listening to our customers voice, and putting them at the core of every project has still very positive results in our net promoter score NPS across all channels. We know there is still a lot of work to do, but we are on the right track to achieve a 90 point score and beyond.
Shifting gears to ESG, on slide number 14. I would like to highlight that during the quarter we completed at relevant or yet quantified the carbon emissions of the most carbon intensive sectors within our loan portfolio. We’ve set medium and long term decarbonisation targets for those sectors, following international guidelines and standards in compliance with our commitment with a net zero banking alliance. You may refer to these targets in our sustainability webpage.
As a final note, I am happy to announce that we have already set the date for our Investor Day, which will take place on March the 28th in New York City. We look forward on sharing with you the details of our most recent digital advancements which are already in transforming the way we do business with our clients in the digital world. You will resume the receiving of our invitation with all the details on the venue, time confirming and I hope to see you all there very soon.
Now, I will leave with Rafael Arana, who will walk you through these positive results in our NIM have more detail explanation our expense structure. And as you know, our new guidance for the year. Rafael, please go ahead.
Rafael Arana
Thank you, Marcos, and thank you all for doing the article. Let’s go through I would say there are some questions about what’s the behavior of the expenses, and what are the main performing and what’s some potential outlook for the — what’s going on for the interest rates and the effect that we will have on the NIM.
As you can see on the on the slide, we have — I would say very basically, issues that are presented there, we continue to have positive operating leverage at the bank, the cost to income ratio and the group continues to go down, 38% is the cost to income ratio. And I think it’s difficult at this process that we are living on the economy to really concentrate in just one metric like would be the expense line. I think we need to look at the revenue side and also look at the other coastline and try to always be positive on the operating levers. That basically what we’re doing at Banorte.
So, when you see the cost to income ratio of 38%, compared to the last year, you see a very, very strong evolution in the right trend. We continue to — as Marcos mentioned, to be very aggressive on the transformation on Barnote and the subsidiaries, [indiscernible] and also [indiscernible]. And I think we can consider now Banorte really a digital bank with branches and you will see that on the Investor Day, that we’ll look to send you the evolution that we have at Banorte and the result that we are achieving with our clients.
On the — basically, I would say that it’s important to make a difference about because there were some concerns about some minorities that say well the evolution of the NIM hasn’t been so strong. I think you have to consider the evolution of the NIM at the bank and the evolution of the NIM at the group.
The devolution of the NIM at the bank continues to be very positive. And you have to remember that the lag effect of interest rates hike is really takes us around six months to fully take the benefit of the hype, and you get the, I would say the effect the negative effect on the liability side.
So, we see a very positive growth on the net interest margin for the bank for the coming year for this year, and also you will see a more balancing net interest margin for the group, because you have to remember that many of the group on the upward rate [ph], on the pension company or the annuity company, and even in the insurance company at a lesser level, we have to weigh out the effect of the inflation and get on the positions that we hold on that and the same of the brokers out.
But we see a very positive movement for the NIM for the bank. The capital ratio continues to be very strong 22.9% and CET1 15.2%. This is before we fund a lot of the dividend for the bank through the deal. That will be a reduction that we were very close depending on the time of the dividend payment, very close to again to the 14%.
If we move to the to the next slide, you will see the evolution of the NIM, and also the return on assets. And the effect that that’s having on the return on equity. The net income of the bank, you’ll see a reduction in the fourth quarter and basically that has to do with decisions that we do concerning the expense line, and also advanced some of the projects that were very close to them to finalize the benefits on the IT side to accelerate the amortization and capitalization of those projects.
If you strip that number out, the number of the fourth quarter will be very close to the 10,000 billion basis. But I think it was a very positive measure that we took and it will be beneficiary for this year. The return on equity of the bank, as you can see it reaches 24.6%. On that point, if you normalize the net income that return on equity for the bank will be well above 25%.
The return on assets for the bank is 2.3% coming from 1.8, so we continue to see a good evolution, our main goals were to be close to 2.2 now we are at 2.3. And you can see the evolution on the graph to the right hand corner, that the NIM of the bank accelerates pretty strong on a quarter to quarter basis.
Some people say well, if the interest rates are reaching the 10% and maybe we will reach into 10.5%, what will be the effect of the margin. You have to consider that lag effect of the six months that that goes that will be very positive when the hiking the interest rate stops, because you still have around six months or more of benefits of the rates, and you will get immediately the benefit on the liability side once the interest rate starts to go to go down.
So we are very confident about the net income of the bank. If you see the net income on a year to year basis for the bank, it was above the 23%. But I think it’s quite positive concerning all the issue that you have on the funding side, on availability side and on the asset side and the lagging effect.
If we move to the next slide. Here you see a much more detail graph that shows the trend and how the acceleration part of the margin, you see a big jump in the second quarter from 5.6 to 6.3 in this entire quarter 10% to 6.7% on that part. What we feel confident about the continuous evolution of the margin is that the funding process you will see on a slide that I think [indiscernible] we continue to be positive on the reduction on the funding costs.
We understand that the liquidity issues that are not just in Mexico but all over the place will eventually will move the main deposits process to kind of deposit and put pressure on the funding cost. I think we could manage that I would have been able to managing that in the past. The NIM of the group is having a slower pace, as I mentioned before, because of the position that you hold on the insurance company in the annuity company and on the pension and on the pension company, but still will be a very positive number by the end of the year.
If we move to the next one. The asset quality, Marcos also touched on that, but what we have been very efficient in the managing of the balance sheet and also on how to use the potential benefits of the margin is that we have not been able, we have not been using those benefits of the margin to really pay for provisions that usually come under this cycle that you have a hiking interest rates, and you have pressure on the on the cost of risk. That hasn’t been the case for Banorte.
You see a small take in the third to fourth quarter, but basically, this what we call good provisions because of the growth of the portfolio. As Marcos mentioned, with a portfolio on the pay was going about 22% credit cards 15%. And most of their consumer group growing at double digit numbers, based upon the way they do their provision in lines is that uptick and basically also on the commercial side is specifically to cases that are well under control, but they affect a bit on the cost of risk. But nothing — we don’t see a negative trend in any of the portfolios.
On the rise of rates, you see that has also been very steady, nothing really above the line that we have seen on the past month. And the credit provision, as I mentioned before, based upon the growth of the portfolio has been extremely possible.
On the next one, please. The funding costs, as I mentioned before continues to be a goal that we have to continue to drop the funding costs in order to support the expansion on the margin even though if the interest rates start to go down, I think the funding costs tells a good story because the mix on the demand deposits is now reaching 74% and 26% on time deposit. So we see a good trend there, and that will be a strong support for the evolution of the margin, whatever the interest rates are on that part.
So good trend on the on the funding costs, as you saw demand deposits grew close to 16% for the year overall growth on the funding side 12%. So well above the very close to the asset side. So we see a good trend on the funding side that transactional banking on the corporate is reporting a very large inflow of funds. Also on the government side, so we continue to be very positive for the funding side for this year.
Next. Also, a recurring question is one of the sensitivity is really happening at the bank, you’ll see in pesos 1.2 billion for each 100 basis points and on the dollar book 1 billion for the dollar book. So we continue to be very asset sensitive and taking very good care of the balance sheet and position the balance sheet, also for an eventual dropping the interest rates.
If you move to the next one please. The expenses, that obviously is a relevant question for the market. We have to split the expense growth in what is recurring expenses and what was really the extraordinary expenses. The recurring expenses will — if you look in detail of the information that we provide to you was 5.3. The recurring expenses and extraordinary expenses account for 1.5 5 billion.
Also, you see on the graph to the right on the bottom side, really the pace of growth of the recurring expenses has been very controlled and below inflation on that part. The extraordinary expenses the rationale for the extraordinary expenses are two. The first one is that based upon the dynamics that we observe on the commercial side, on the SME side, we decided to strengthen the position that we have on the commercial side on the SME side. And we hire more than 1000 bankers to accelerate the market and captured the market, that we see an opportunity there based upon everything that is going on in Mexico.
And I think we were underrepresented on the commercial side, and on the SME side, against one of our peers. Now, we feel very confident, now you see the expense. But this year, you will see also the benefits of that expense that we’ve been last year. So, we are very well positioned, as we see for the growth that we are experiencing in the commercial book and on the SMEs. And we are now very well representing what basically the growth is happening in Mexico.
So, we will give also in detail as I mentioned before, another part of extraordinary expenses is accelerated, that we did on the IT side. And also relevant to notice is that Banorte is to finalize the migration of the data centers that we currently have, I think we are moving to a top of the line data centers to have resilience, right now, our operating capability is at 99.9%, we want to conserve that we have to be a top of the line on the data centers, I think we will achieve that by the first month of ‘24. But we are already in full migration of the data centers to the new standards that we are having for Banorte.
That is also created additional expenses. But I think this is a good expense that will be there for the future, and allow us to have top of the line data centers and capability on the IT side. So the expenses were not really expenses that were really non-productive at all, I think they are very productive expenses. And the recurring expenses are well under control on that part.
Another issue that you have to remember, that because you can, you can follow that is that usually the effect of inflation has a lagging effect of one year. And that has been the story for Banorte for the most of the companies. So I think we are well positioned to have continued to evolve to a more positive costing completion in this year. And in the coming years, based upon all the digital efforts that we’re putting at the bank.
If you see the display about stuff, and I’m back office and stuff, and the sale part of the group, 80% is really devoted to the business and 20% is devoted to staff on the back offices. So I think we have a very, very well balanced. And that’s really the result of all the technology that we have put in place for managing the operation and the growth of the business.
So in a much, if we also move to the liquidity coverage ratio, you see a drop on the liquidity ratio, it has to do with the rate of growth that we experienced on the asset side. But also it’s clear that that liquidity not just for Mexico, but all over the world will be pressured on this year. That’s why we are concentrate a lot on the funding side on that part. And taking very good care of the relationship that we have on the specially on the wholesale banking, that is basically that they want to require separate tickets on the asset side, I think we are very well positioned for those companies.
And we have a very discipline view about where to put our capital is where the relationships can grow with us. Not just in the person not just go for the tickets, but go for the relationship and also that cities on the consumer side. The capital ratio continues to be very strong. Well above all the delight requirements that we have. And as you have seen in the past, our leverage ratio continues to be the most delevers ratio in the market.
If we move to the next, what was the result about the guidance that we gave you at the beginning of the year. And it’s important to notice that, as you remember, we changed the guidance, as we saw that the evolution of the market was better than expected. And maybe that will be the case, you’re also for this year.
The long road we anticipated 7% to 9%, we achieved 12%, the new expansion was in range 90 basis points. The bank expansion was also in range 110 basis points. The expense growth and reporting side was positive, not on total, because of the decisions that we decided to invest on the business number, and on the IT side.
The efficiency ratio is in line, what we got. Cost of risk is also in line, tax rate, the same net income at the high end of the guidance, the return on equity for the group, at the top of the guidance, and the return on assets for the group also, at the top of the guidance. So that was a result of the guidance that we achieved.
You have to remember, as I mentioned that we change the guidance as we saw the evolution of the market. And I think it will be the same place for this year, even though there’s a lot of uncertainty about what will be the potential recession in the US or what will be the evolution of the market. But Mexico continues to be, I think, very well positioned to capture the evolution of what’s going on in the market.
I will now move to the 2023 guidance. The loan growth we anticipate based off of what we mentioned, GDP growth was 3% last year, we see GDP this year growing 1.5. So, loan growth is 6% to 8%. The net interest margin 6%, this is the average number for the year, and for the bank will be very close and in some months, you will see that the NIM of the bank will be well above the 7%.
On average, we are putting 6.7% to 7%. Recurring expenses will be 7% to 8% and the total expense growth to 11% to 13%, because of the lag in effect that I mentioned to you, but the efficiency ratio will continue to go down and we will have positive operating leverage on the group.
The costs of risk, we are moving a bit of 1.6 to 1.8 because we will continue to see good evolution on the consumer side. Tax rate 24% to 26% as our usual net income from 50.5 to 15 points 52 point 5 billion pesos, the return on equity close to 21% for the group and for the bank, very close to the 30% return on equity for the bank.
The return on assets reaching above the 2.4. That will be a very positive number for the for the history of the group. And as I mentioned to you the GDP from 0.5 to 1.5 with the GDP pushes over to the 1.5 we will adjust the loan growth and the consequential numbers that are affected by the loan growth.
The inflation at the end of the year, the inflation will be very close to 5.5. Maybe there will be a discussion with our economists, where she has been very precise on adjusting the numbers for the inflation. The rates, we see an average rate of 10.75, that will continue to be through the year that will be the effect through the year on that part. There will be some pressure on the funding side. But I think the assets will continue to be very positive because the asset sensitivity that the time has.
With this I conclude my remarks. And as Marcos mentioned to you, we see the Investor day on the 28th of March. On Investor day tries to answer the questions that many of you have posed to us.
How is the dynamics in Banorte, that Banorte is achieving the results on a continuous upward trend on that part. And that’s exactly what we will like to show to you live on industrial day. How really Banorte operates and how we really address the market and the client. Thank you very much for your time and now we move to the Q&A.
Question-and-Answer Session
A – Tomas Lozano
Thank you, Marcos and Rafael. Now we’ll continue with our Q&A session. In the interest of everyone’s time, we kindly ask you to present only one most relevant question. And as always, we’ll be happy to take other questions anytime after the call. Questions will be answered on a first come first served basis, please raise your hand on the platform and wait you till your turn comes. As myself will be calling the name of the person that is next on the line. There any technical difficulties with let us know by using the chat. Thank you. We are now ready to start the Q&A session.
We will start with Ernesto Gabilondo from Bank of America. Ernesto, please go ahead.
Ernesto Gabilondo
Thank you, Tomas. Hi, good morning, Marcos and Rafael. Good morning, everybody. Thank you for your presentation, and congratulations on your results. And your double digit net income growth guidance for the year, which I believe already includes the new investments.
My question is on that on the new investments, we notice your OpEx growth guidance of 11 — 13% is considering 2% related to email [ph] and I think 3% related to the IT investments and the commercial hirings. I understand that investments represent an attractive opportunity for organic growth. But when should we start to see these investments translating into revenues, especially in email, as we have seen that affect you in the digital transformation, I think globally and in the region has changed to profitability, versus client growth. And also the monetization is coming from having more digital deposits, and digital loans. So I would like to hear your thoughts on that. Thank you.
Marcos Ramírez
Ernesto, thank you very much. Yes, your numbers are perfectly right. We are working on the same numbers that you have. Remember, we are running the bank, we are changing the bank. And that’s why we are separating these two because we want to reveal to them and show you how it moves. And right, our main focus always is profitability, is not where we need to be done, we are not this kind of impacts and so profitability. And we are expecting a let’s say in three years to see the results of all these investments and show you clearly where the money is going and all these but they — all these goes with accountability. We’re not sending money and see next what’s happening. We are very careful on what we’re doing.
Rafael, do you want to explain?
Rafael Arana
No, no, that was Marco mentioned, the three years for the renewable, the hiring of the people will be producing results this year.
Ernesto Gabilondo
Perfect. Thank you very much, guys. And just last question on dividends, we continue to see these high common equity tier one ratio. So just wondering on what should we expect in terms of the dividend policy, and the buyback for this year? To my knowledge, you haven’t used so much the buyback that you announced last year. So you was wondering, on your expectations on that?
Marcos Ramirez
Thank you. A 50% minimum and let’s see how it goes. But we’re so committed, but let’s say that more than 50% done.
Ernesto Gabilondo
And the buyback it will be same amount.
Rafael Arana
Yes, the buybacks are, we have discussed with you are present and we are analyzing every single day, the opportunity and how do we make them makes about dividend for that. Marcos mentioned, the dividend in will be 50%. And in addition to that, we are looking to ways to reward the investors in the way in the best possible way.
Marcos Ramirez
He says ways, no waste. Ways.
Ernesto Gabilondo
Thank you very much.
Rafael Arana
We covered our guidance for core Tier1 or half a lot of highly starts in the previous conference call, we will be getting there eventually shortening that can give you an idea of the total amount that markets are referring to.
Ernesto Gabilondo
Perfect. Thank you very much.
Rafael Arana
And remember one thing, Banorte doesn’t have a parent company. So we need always to be very prudent with the capital numbers and with the liquidity numbers. So we are never seen no to remove more than the 50%. But if you look at the world, the world is not in steady state. So we like to be prudent and opportunistic when we see the ways to reward the shareholder working. I think the best way that we can reward shareholders is to really take very good capital and the returns of the capital.
And as you can see, for the returns for the for the bank very close to the 30%, and return on equity for the group about the 20%, or maybe very close to the 22%. I think with this level of capital, and with the level on the level of leverage that we have, I think we are very prudent, we would like to return as much capital as we can to our shareholders. But we know and we understand that we are living in a not very predictable world as we speak.
Marcos Ramirez
Remember that and talking about the election. Now this year, we will start with resource requirements, topical. So everything is there.
Ernesto Gabilondo
Thank you very much.
Tomas Lozano
We’ll now take the next question from Ricardo Buchpiguel from BTG. Please go ahead, Ricardo.
Ricardo Buchpiguel
Good morning and congrats on the results. Just a quick question here. Can you please explain what are the exact headwinds that are impacting the annuity business? And when exactly should we see the space of recovery? And also for the insurance business, is the structure there fully normalized post COVID, in terms of the claims? Thank you.
Marcos Ramirez
Thank you, Ricardo. Please welcome Tomas.
Tomas Lozano
Yes, no, thank you, Ricardo. I think it’s important to look at these two witnesses on a separate basis. And if you look at antisense and you are — the actual net income, year-to-year increase 36%. However, remember that part of the — let me call it negative of the numbers are on the technical reserves, and the positive it’s in the NII. So that’s why you need to see these in a consolidated basis.
On the Annuities, there was a reduction on the reserves for two main parts, the first one is a decrease in the business that was generated is not only for the Banorte, they use to had a reduction of 14% plus related to the inflation dynamics, you also have a reduction there on the results. So to pretty shortly the pension company that the business is growing profitability 36%. And I think it’s better to see this on a separate base.
Yes. And you can see this on page 24. You can see the insurance and on page 26 of the report. You can see the income statement for the Annuities company. But let us know and if you want we can connect to this into more detail.
Ricardo Buchpiguel
Oh, no, very clear. Just a quick follow up. Moving forward, should we see that our recovery on this annual annuity income line because we wouldn’t have the impact on inflation or this impact should still have a lagging effect and impact the next few quarters. What should be the dynamic?
Rafael Arana
Thank you. This year we will continue to see positive prints on the net income work for the company.
Marcos Ramirez
Thank you, Ricardo.
Tomas Lozano
Thank you. Now we’ll continue with Tito Labarta from Goldman Sachs. Tito, please go ahead.
Tito Labarta
Hi, good morning. Thank you for taking my question. Question on loan growth. So your guidance for the year but also if you can give a little bit more color sort of by segment right seeing good growth on both the consumer side and the commercial SME side which you mentioned you’re investing in? Should those be the segments that continue to drive growth any color you can give on sort of the loan growth by segment?
Marcos Ramirez
A column we have it right here and yes, as I said is the neighborhood is different depending on where — their mortgage around 8% to 10% credit card 16% to 18%, auto loans 10% to 12%, payrolls 9% to 11%, so that consumer very, very good. The media of all these is 10% to 12% the consumer, because…
Commercial, then commercial 9% to 11%, corporate 5% to 7% and government 1% to 3%. That’s why the total goes to 6% to 8%. So it’s very important these because we are going to grow in the places that we want to grow. And remember it’s a different animal different NIMs in different territory, but the average goes 6% to 8%, but the composition is totally different. We are forecasting all this we hope we can achieve it.
Tito Labarta
Great, thank you, Marcos. That’s helpful. If I can ask one follow up more I guess on the impact then on asset quality right because your cost of risk is going up I think because partly because of the mix but NPLS continue to be very much on the control. Any concerns there or when do you think NPLs kind of normalized from where you are today?
Marcos Ramirez
We are today. Well, we wouldn’t say on our pre-pandemic era. Please continue…
Gerardo Salazar Viezca
Yes, Tito. This is Gerardo Salazar. I will tell you that that perhaps you’re referring to a small bump provisions, but that the small bump is not a new burden event. They do not constitute a trend or person to an idea syncretic type of risk. That is this is not a worker workout case, we’ll explain it. This small bump is seasonal growth mainly is very card payroll and government loans, the loan portfolio as a whole also often increase in the last year, we continue to increase recovery rates, increase write offs and available control over your nation managing collection practices and execution.
If you see cost of risk, the historic average throughout the life of Banorte is 2.2%. Prior to the pandemic, if you take an average of cost of risk from December 2017 to March 2020, you will see the historic average is almost 1.97% or 2%. So cost of risk should increase. But there is no even one or two events that can explain it as of now.
Marcos Ramirez
Yes, Tito and you have to remember the dynamics that we had and on the growth as macro churn and doses. I think it’s extremely positive. I mean, when you see numbers on payrolls 22% credit cards above 50% car loans fully recuperating the value of the mortgage also double digit, obviously you will have a different pattern on the provisioning line, but not because you have bad risk is because you are growing in a very positive way the consumer group.
Tito Labarta
That’s clear, thank you very much.
Tomas Lozano
We’ll now take the next question from Jason Mollin from Scotiabank. Jason, go ahead. Thank you.
Jason Mollin
Hello, can you hear me?
Tomas Lozano
Yes.
Jason Mollin
Hello, everyone. Congratulations on the strong quarter. I guess, since some of my questions have been addressed. I wanted to talk on the strategic side about the initiative you mentioned to strengthen the commercial teams in the center in north of Mexico and that you mentioned adding 1000 bankers, can you and the headcount, I guess has gone up just for the banking sector brokerage. And so far, I guess it includes the long term savings employees, that was up 700 and plus in the year 2022 and over 1800 since 2020. If you can talk about how you stack up in that business, what kind of loans are you planning to offer in this segment, how should we think about that business? Sounds like a pretty big investment from my side.
And then the second question would be talking about the payroll lending business is growing quickly. It’s a reasonable size of the portfolio these days and I did notice an uptick in the stage three payroll, payroll loans up actually quite high 19% quarter on quarter and 60%. Year-on-year if you can tell us what’s going on there and on the asset quality in that segment and perhaps talk about why people with payroll deducted payments are — were seeing some issues. Are they losing their jobs? Is that the main driver? Thank you.
Marcos Ramirez
I will take the second about the payroll. Rafa please.
Rafael Arana
Yes, Jason. As you can see the expectation for the growth in the payroll loads this year comes down to 12%. We haven’t seen any weakness on the job market on the country continues to be quite strong. But we are prudent about where we want to keep on growing the payroll loans. I think we have to wait and see. I think that the starting of the year is very positive on the economic side. But obviously when you grow a portfolio like they will loans or any portfolio about 20% you have to expect that even if you have a very good origination process, just the provision in line because on day one that we have to put on the book will a great uptake on that. But we haven’t seen any is really on the table or on the job market. But we are very we have been proven to in a way that we’re reducing that half the level of growth on the payroll book.
I think that’s I’m okay. Did you want me to add?
Marcos Ramirez
Yes, I will just add that non-performing loans ratio for payroll loans are still below pre pandemic levels. So on every business line segment and product, correct product, is still below pre pandemic NPLs.
Rafael Arana
Yes, I think, Jason, if you look at the payroll loan book, on an average for the years, you are around the 4.2 on NPLs, right now we are at 3.4. So we are still on the on the right part of the trend. But it’s a product that that we have to wait and see how the job market goes, it’s going pretty well as we speak. But we are prudent, that’s why we are reducing the pace of growth to have.
Marcos Ramirez
Jason ever in this province, registered a robust performance of 3.3% quarter over quarter, and an impressive 22.5% year over year growth. In terms of asset quality NPLs, we saw a 40% deterioration, but that corresponds for growth factor.
Rafael Arana
And the other part well, as you know, everything the genesis of all this is ensuring we are a hoping that a lot of companies will come here, Mexico it has a lot of Mexico. So we know where we need to grow, we have a lack of growth over last year in review, see if you compare us with another banks, so we need to close that gap. And then we want to continue and maybe grow more, because we see a lot of business coming in the next month, or a year now. But we’re not going to grow from zero to 1000 in one month, wherever we as soon as we see that the 100 people is there and they are working with will come up with more and more and more than the name of the game theory is accountability, you know, the areas that they are asking for these people, they need to give us back the numbers. And we will continue with that. But the numbers show that we need to grow into demons, we need to grow in all the living and stay analytic in the big company. So we have a lack thereof of employees that we are closing, and hopefully we are growing. And you will see that in the numbers of the at the end of this year and the beginning of it.
But it’s not that we’re going to hiring up 1000 people who will start to believe it accountability and rolling and rolling and rolling. And maybe we see that the numbers show that maybe we will need around 1000. That’s why we start selling.
Marcos Ramirez
And the Russian…
Jason Mollin
If we think about these kinds of loans, these kind of bankers. Sorry, go ahead.
Marcos Ramirez
Jason, please go ahead.
Jason Mollin
My question, I’m thinking like, should we be thinking on some metrics, like these bankers are in the commercial side? Like what, they could have 30 clients per head, they try to have 50 clients and then they’re growing an average portfolio of I’m not sure what amount like what segment you’re really targeting there and what is that? What could be the growth related to these hires? Is that the way to think about that business that you needed to bankers in order to have the relationships and grow the commercial portfolio?
Marcos Ramirez
Exactly, right. Right, exactly right. We manage the corporate and the commercial banking as a full relationship bank. So we are not selling credit, we are selling or the whole relationship on that requires that people need to be present with the companies for the time not for the credit for the for the transactional banking, for the derivatives for everything. I mean, I think it’s very important that the relationship side of the corporate and commercial banking in Banorte is very, very strong.
We don’t drive by credit. We drive by relationships on that. And that’s why we need the people to be there with the companies that are being put in place and you want stay the ones that we were absent from because we lacked the size and the presence in some parts of the country or the country is moving quite aggressively.
Jason Mollin
Is this is this headcount where you are today. Is that reflecting what you believe you need? Or you think you could even go higher going forward?
Marcos Ramirez
No, no, I think that the analysis was on a region by region basis, on a very detail how the competition is, is present, especially one competitor. And we compare again to that. So, no, I think it was a very detailed, and we got very specific metric, as you mentioned, Jason, how many relationships by banker we would need to have. And another thing that we have to take into consideration of the expenses that we put in place in December is the severance payment. And the severance payment usually goes around, let’s say 500 people to 600 people, so that the 1000 people that we are putting on the business side, are being compensated in part by the severance that we have on upon a year to year basis, when I was referring to the numbers of the ad.
Jason Mollin
That’s, that’s very helpful.
Tomas Lozano
Thank you, Jason. Thank you, Rafa, Thank you, Marcos. Now we’ll continue with Yuri Fernandes from JPMorgan. Yuri, please go ahead.
Yuri Fernandes
Hi, Marcos. Thank you very much for asking questions. I have a follow up regarding efficiency and operating leverage, I guess automation, you expect this to grow in 2023 from 38, to maybe 36 38. And my question here is how right because if you’re going to grow your expenses by 30%, you must improve your revenues, right.
And looking to the margins. I know like a full year, there is some room for expansion, especially the first half of the year, because the corpse versus the first half of 2022 is very easy. But growing your loan book by six, eight years, I mean, the mid point of the guidance is like 6.6 6.7, right? It’s mostly stable, when you are no allies, the first Q.
So my — so and I actually grow faster than most for sure, but not much faster than the loan books. So the point is, how to improve, you know, efficiency, growing expenses, 11 13. And again, I totally understood the strategy you’re going for revenues is digital transformation. But just the guidance of cost to income improving is not clear for me how you’re going to get there. I don’t know if it’s the no bank business, if it sees. So if you can explain, that would be helpful. So that’s the first question. And also on expenses. Just depreciation and amortization, it was higher dimension, no faster amortization is on your report. So if you can explain a little bit more, why DNA or are high enough? Thank you.
Marcos Ramirez
Hey, Rafael, please.
Rafael Arana
Thank you for the question. No, I think that the key part is to understand the dynamics of the margins. If you look at the dynamic of the growth in the margin at the bank, is growing at 18%, at least from the low end of the guidance 18%. That can accelerate more. I think so. But I think we have been prudent on that part.
At the group side, as you mentioned, is probably only 13%. So the big push for the margin will come from the bank, because of the positions out there that the subsidiaries hold on that part, when the interest rates go down, the subsidiaries will be very beneficiary for that part. So I think it’s important to understand that the margin at the pond will grow at least 18% compared to the 23, that that grew last year. But that’s the low end of the march of the guidance. So I think you have to expect the margin at your bank growing from 18% to 22% again, on that part. So that was that’s a very important part of the operating leverage that will come from that.
So we are confident to reduce that that cost because of the control of expenses that we have the return of the investment that we have on the commercial bankers that we will produce this year as we speak. And on the amortization part, we put in at the group 865 million vessels. Why we did that? Because some of the projects that we were coming from the 2016 already are reaching the full efficiency of the projects. So instead of holding those for longer, we basically are cleaning up those projects and we accelerate that. But it was not a small part, it was 865 million, that money will not be present in this year. Okay. Because we already cleaned up.
So that’s why the operating leverage, even if you see tight the operating levers that the revenues flowing 13 and expenses? Well, I think that’s a very tight measure, because of the dynamics of the margin. But we would like to reprogram that, and we are fully confident that the cost income ratio will again, decrease next year, and that we operating leverage this year, and that the operating leverage will be possible. Because as I mentioned, you guided that very well, the subsidiaries are going to be penalized on the margin, but the bank will continue to accelerate the margin from that.
If you look at the expansion of the margin, from MXN85 billion on the bank numbers, it will go above MXN125 [ph] billion for next year. So that’s a pretty big jump, already existing big number on the margin.
Yuri Fernandes
No, that’s super clear, how far and by the way, 38% cost to income ratio is a very good number. So no pressure here, but just to try to understand, so very clear.
Rafael Arana
Thank you.
Tomas Lozano
We’ll now take the next question from Carlos Gomez Lopez from HSBC. Carlos, go ahead.
Carlos Gomez
Hello, good morning. My question is about asset quality. I remember in the previous cycle, Rafael, when we were talking about what would happen if interest rates went to certain levels. And at that point, do we are thinking that perhaps going to 8% would be the maximum that companies could take. Today we are contemplating 11% and I do not see much concern, what has changed in Mexico in the meantime? And also in your expansion for the SMEs and the corporate that seems to be targeted to a specific competitor. Would that be correct? Thank you.
Marcos Ramírez
The second one, the specific competitor is everybody. The first one maybe Gerardo or Rafa or Tomas, or Rafa, go ahead.
Rafael Arana
Carlos, I think what’s changed on this, I mean, we know that we have fixed rate part of the group that is the mortgage group, and the and the car loan group is fixed rate. So that that part of the book, as you see we see a reduction for this year, not a big reduction for a reduction compared to last year.
And there’s another issue, we understanding the same way that the incorporate and the commercial bankers were, we work in the same way on the consumer, we know that we cannot exactly put the same trained price on the mortgage, because we will be completely out of the market. And there will a lot of good customers that are willing to that the risk is very low. So the expected loss is almost zero on that part. So the risk adjusted margin even if you are slow on repricing the book, you still get a very sensible return on the portfolio.
Last year, you have seen the growth on the mortgage book. That was the arbitrary book. We almost pays the largest competitor in the market. But we understand that this is also a time to help the clients. And we are helping the clients based upon the relationship that they have with us. We’re not just pricing the assets on following them the rates, we are pricing the relationship based upon the lifetime value of the client. And that has allowed us to have a reasonable growth in the market with very low risk.
If you look at the NPLs of on the car loans is 0.6. The NPLs on the mortgage book is 0.8. So that is really half of what the competitor adapt. So we have an advantage there to price the relationship in a positive way for the client. That’s what’s changed on car loans. We are not just following the race by following the rates. We are really keeping the relationship and building up relationship for 2024 that we’ll see a reduction in the rates. So we are building up the bikes and we are building up the inventory with very good risk on the car loans and on the mortgage group that have fixed rates.
Rafael Arana
Just talking about resilience, you’re just seeing rates, the monetary side of the economy, but do you take into consideration the appeal side of the economy, GDP growth is there, job market resilience is there, tourism activities are increasing, international transfers are there, territories and economic sectors have been very dynamic. And I think this the info remains to be seen. And it will all depend on the slowdown, duration and size of a possible recession. So we’re taking a prudent approach, we are just seeing these figures with humility, because up to now, things have been great. But we remain with our arms in a defense position.
And we’re trying to see what’s going to be next. We have been working around portfolio, and we have taken an approach bottom up approach, and also an expert approach, reviewing the portfolio that could be linked to United States recession, that could be linked to insecurity factors that could be linked to rule of law in some territories, and we have provided a lot of scenarios as Marcos is saying, the stress test of our loan portfolio. And we have changed the dynamics, of course, to promote quite sectors to promote for this 2023 year.
So, we remain prudent and expecting and doing internal activities, just to deal with this scenario that makes us also a bit nervous.
Marcos Ramirez
But I think, Carlos, you know, very well, in the past, when the crisis here in in Mexico, the banks were not capitalized, interest rates just flowing all over the place and provisionals were killing the banks, in this case and in this cycle, what we have seen is that the margin are expanding. The margin are not being used to cover for the losses, and the capital generation of the bank continues to be very strong. So we are in a different cycle on this part.
But I mention, that doesn’t mean that we are not being prudent about this. We are very vigilant, very prudent. But we are very beneficiaries of the way the bank is managing the cycle.
Rafael Arana
And remember Carlos at the peak of the rate seems to be short lived, you know, from February to September, only seven months, thing really going lower and solid timing is very important for the company loan. We need to see that from that perspective also.
Carlos Gomez
Thank you. That was very detailed. And to clarify, again, you are expecting a lower growth. You’re expecting — you’re preparing for a possible recession, but so far in your numbers in your origination, and your day to day business, have you seen any type of a slowdown in demand or or any reason for concern or just thinking about the future?
Marcos Ramirez
No, not at all there. We see start off the year, very strong the start of the year, but I think we cannot ignore the the world. I mean, we have to be — we have being clear that Mexico is very linked to them. The U.S. we are buoyant on that one.
Carlos Gomez
Thank you so much.
Tomas Lozano
Thank you Carlos. Now we will continue Marcelo Telles from Credit Suisse. Marcelo, please go ahead.
Marcelo Telles
Hi, everyone. Thanks for the opportunity here to address questions and congrats on the results and all the guidance as well. I have two different questions. Number one, with regards to the your OpEx growth, you know, your guidance for 11% to 13% in 2023, can we say this is — how do you see this growth in terms of — is this a multi year — I tried to look a little bit beyond 2023 with my question.
Can you say that Banorte will be over the coming years, let’s say at a heavy investment phase and do you think we should expect operating expense growth to be high, beyond 2023, in light of the investments or growth that you guys are doing? Of course, you have the Digital Bank initiative as well, which you mentioned, I think, is accounting for, like two percentage points of the growth. So if you could comment on that? I mean, if you if this is kind of the beginning or continuation for having the investment phase for Banorte?
And the second question related to your loan portfolio, as you’ve said, there was very strong growth in the fourth quarter, across the board. And when you think about — I’m more interested in knowing a bit more about the credit card portfolio. As you know, we have a new bank and other players have been quite aggressive, right, in growing customers in Mexico. So I’m wondering, what your strategy in credit card has been. Are you still focusing more on your existing client base, or you’re seeing the need maybe to expand, maybe go more to the open market to try to be more competitive vis-à-vis these newcomers? Thank you.
Marcos Ramirez
We will start with the second. Marcelo. Thank you. Rafa will take that.
Gerardo Salazar Viezca
Hello, Marcelo. Thank you for your question. The strategies, we have been working in processes and product, and we’re confident that we have the best of breed processes, either in the branch or in the mobile banking or in different platforms, including call centers. So we are focusing, we have a lot of customers within the bank that are not using our credit card. You can see the numbers, 2 million credit card versus 10 million customers. So there are plenty of space, but that doesn’t mean that we’re not going to the market.
And also on the product side, you can see that we have now alliances with different companies. We have Marriott, we have United, we have some other co-branded cards that can cover whatever the customer wants. And last but not least in the usage of the card, we have our platform that we call [indiscernible], that can be your preferred card, where you can see you — as a customer, you can see all your your promotions, all the things that we are launching, all the advantages that you can have in one single site.
So that we are confident that with process and product, we will be able to grow the — what you saw on the guide.
Marcos Ramirez
Thank you Rafa and Rafa, please the OpEx note.
Rafael Arana
Yeah, the OpEx, I think Marcelo, that’s a very important question. And thank you for because it helped us clarify the trend. You will see a reduction in ’24 and ’25, an important reduction in expense, and expense growth related to inflation. What you mentioned about investment, we continue to be very active investment in technology. But this year, what was different that the usual rate of growth on the investment side, okay, I believe was the data centers that we put under cleanup [ph] of the projects on that part.
That is really close to MXN1.3 billion, on that part. That will not be present on the next year. But I think the important part is to remember that Banorte has a very disciplined way to invest at least 12% of the revenues in technology. And we have been able to invest at that pace because the reduction in the costs on HR, operations, and everything related to managing the infrastructure has been reduced drastically through the years.
So that reduction has allowed us to accommodate the investment in that side. That’s why we continue to see the cost to income ratio going down and down on a year-to-year basis. But we’re confident that we can reduce the cost to income ratio this year, because we already paid for many of the expenses that will happen on this year. And we paid for those on last year. So for investment in IT will continue. We don’t have a parent company that we can split the cost among the different countries. So we have to be on ourselves investing at the same level that all those competitors invest in the global markets.
Marcelo Telles
Very clear. Rafael and Marcos and everyone. Appreciate it. Thank you. Congrats again.
Tomas Lozano
The next question is from Gilberto García from Barclays. Gil, go ahead.
Gilberto García
Hi, good morning. Thank you for the call. I had a follow-up on the SME growth strategy. Obviously SME is a very broad concept. But are you going for the clients that used to be clients of the non-bank lender financial institutions that have gone into trouble? Or are you going for that they had higher average tickets on those? Thank you.
Marcos Ramirez
Rafa?
Rafael Arana
Gilberto, very straightway we got 420,000 SME clients, and only 30,000 of those have a loan with us. So we need to attend to the clients that we already have, because we already know the flows, we already know the behavior of those clients. And that’s exactly the client that we want to serve with this number of bankers that we’ve put in place. That’s the strategy.
Gilberto García
Very clear. Thank you very much.
Marcos Ramirez
Thank you, Gilberto.
Tomas Lozano
Thank you, Gilberto. Now we will continue with José Luis Cuenca from Citi. José, please go ahead.
José Luis Cuenca
Hi, everyone. Good morning. Just a very quick question on rate provisions. In the report was mentioned that there was a particular requirement in the commercial portfolio that kind of affected a little bit provisions. Even though you say that it does not represent a trend or anything like that, just wanted to understand to what sector was this related and any color you could give behind what drove this situation would be helpful. Thank you.
Marcos Ramirez
Jose, Gerardo, please.
Gerardo Salazar Viezca
Yeah, Jose, I will tell you that we just move forward making provisions with one specific case, which is a very small one. And we are expecting recoveries by March of this year.
José Luis Cuenca
Great, just can you comment on what sector it is, or just very, very — just to get a basic sense.
Gerardo Salazar Viezca
This is a medium company in the manufacturing sector of business.
José Luis Cuenca
Perfect. Thank you.
Gerardo Salazar Viezca
Very small.
José Luis Cuenca
Appreciate it. Thanks.
Gerardo Salazar Viezca
Thanks.
Tomas Lozano
Now, the next question from Nicolas Riva from Bank of America. Go ahead, Nicolas. Nicolas, are you there?
Nicolas Riva
Yes, I’m here. Yeah. Thanks very much, guys. So I got a few questions. The first one, if you can comment a bit on competition and the impact that a new player in the financial system such as [indiscernible] potentially Banamex, how that would change the competition maybe between you and Banamex, for example. If you can make any comments on that.
Then second on capital, if you can remind us your internal targets and the path to get there. And and you know what, I’m going to make a pause there and then I have two more questions again.
Marcos Ramirez
Thank you, Nicolas. The first one, as you know, we cannot say too much. But there is a split of banks, we will see instead of one bank, we will see two banks a one bigger than the other. And how will this change the competition? I don’t know. Mexico will have big banks instead of that we will be the one. The two — Citi is going to be buy the two and very good banks. I understand that Citi alone is going to be the eight bank, and Banamex, I don’t know that fourth or five, I don’t know.
So seeing more competition, but we are used to that, because it’s the best in class in the world. So, we don’t have any say anything more to say there. And the internal CapEx and the capital we covered, right, Rafa please.
Rafael Arana
Yeah, as you know, we have always say that core Tier 1 has to move from 12% to 12.5%. In cases which is stress in the market we move to 13% the core Tier 1. We are well above that even after paying the tax on that path, and we would like to converge to the 12.5%, 12.6% in the next years to be much more efficient in the use of capital, but the world has been not very steady for us the last year. So we better be prudent about that.
Nicolas Riva
Okay, and then if I can make two more questions, in the guidance, you’re assuming 0.5% to 1.5% Mexico GDP growth for this year? How would an assumption of zero GDP growth in Mexico change your outlook for cost of risk, and for the bank ROE? And then the last one on issuance, on bond issuance plans. If the rally in the bond market continues, would you consider issuing more bonds this year to replace the 6.75% in 2024 or 5.875% in 2027?
Rafael Arana
I start with the second one, Nicholas. We are open to the possibilities there. We see a window where we can tap it there we will do it. And the first one is very interesting, because maybe the GDP is going to be zero. Yes, you’re right. But that we have a lot of things. So we are aiming to this — I don’t know how to say, the same objective. So we will move product parts in order to compensate for that, but I don’t see that it’s going to move too much so far. We are optimistic but if that goes to zero maybe instead of that number that we’re giving you is a little bit less, but we don’t see a lot of movements there.
Marcos Ramirez
And let’s assume that zero GDP growth on that part. Remember that the benefit that the bank has is that we are very asset sensitive. So we already have a very important inventory, that will be producing the margin and we have enough buffer on the provision side to continue to be positive on that. Remember that in the pandemic Mexico reached levels of 9 or 6 on average 5.
So we already have been there, on that part, a very negative part.
So I think loan growth, as we mentioned, remember that last year, we started there, the guidance from 5% to 7%. And then we upgrade to close to above 10%. We think that even though you go to zero at least loan growth will be the rate of 4% to 5%. I don’t think that because of all everything that is happening, the center and in the north part of Mexico. And employment continues to be there on that bar. So I think we consider that scenario. But we still confident that we will be more on the range of 5 to 1.5, 6 [ph].
Nicolas Riva
Thanks very much, Marcos and Rafael.
Marcos Ramirez
Thank you.
Tomas Lozano
Thank you. I will continue with [indiscernible] please go ahead.
Unidentified Analyst
Hi, good morning. Thank you for taking my questions. I have two of them. The first one is related to Afore. It seems that — of course 2022 was a difficult year because cap on pace [ph]. So looking ahead, are we going to be expecting the same numbers as a base case scenario on revenue and so forth? And the second one is regarding on [indiscernible]. You mentioned in the press release this as a looking ahead for a new path for the bank. However, I was wondering if this can be replicated in other parts of the business.
I just go to my notes and I remember that Michael Tolosa [ph] I think last year that the transformation on digital is not only in the bank but as a group. So I was wondering if you could give us a little bit more color about that. Thank you.
Marcos Ramirez
With the first, yes we expect better numbers for next year because of two things now. The critical mass is going to be bigger each year and this is good. And the hit that we took this year financially is not going to be there the next year. So but I want to elaborate on these please, Rafa please, are you there? If not, I can elaborate more closely.
Rafael Arana
Yes, I think what you said is quite right. I mean, Afore was really hit this year because reduction in 30% in the commissions and also we were also hit because of the markets as you already explained because the mark-to-market valuation. And those two things explain why this year was very bad for Afore. Well for one thing, I mean, there will be no — we do not expect any reduction this year, further reduction in the commission. So that hit will not continue. And also we foresee that perhaps markets will be behaving more reasonably this year. So we do see that — I mean, we have guidance expecting an important recovery. We’re expecting somewhere between — depending on the market, but somewhere between 30% to 50% increase in net income in Afore.
Unidentified Analyst
And on the digital transformation and digital workflow performance we see.
Marcos Ramirez
Thank you. Of course, we will keep extending Maja [ph] to some other business and processes. We are using it — you can see it in the portal, in the webpage. Now we’re using it in mobile banking. We’re using it in the acquiring business. So the more we can — the more the technology is learning, some artificial intelligence, it will be extending the capacity to some other business and processes and channels.
Unidentified Analyst
Okay, crystal clear. Thank you so much.
Marcos Ramirez
Thank you.
Tomas Lozano
Thank you. The next question from Natalia Corfield from JPMorgan. Go ahead, Natalia.
Natalia Corfield
Hi, everybody. Thank you for taking my question. Just going back to the topic of issuance, you mentioned issuance of 81. But and I’m wondering what about senior issuance. And if you could remind us of your rationale for issuing so many 81s, that would be great? And lastly, on the topic of the 81s, which you have been always very clear about your intentions, just to reiterate that you — that we remain on the same page that nothing has changed, since we have seen some extensions in the region. Thank you.
Marcos Ramirez
Thank you, Natalia. Thanks for the opportunity. Rafa, go ahead.
Rafael Arana
Natalia, thank you for the question. As you know, the 81s for us are part of a very important business strategy, not just a funding strategy, or just on a capital basis strategy. That allows us to compete on the dollar group on a midterm basis. And even sometimes in the long term basis, because we don’t have the advantage that some of the global banks have on the funding side on the dollar. So the 81s are critical for us on a business perspective to really serve our clients and be part of the dollar book credit lines. If you see the growth of the dollar book from Banorte for the last two years have been exceptional. I mean, we are now a very strong player in the dollar, in the dollar book.
We love to continue to issue 81s. We have a limit for that, based upon the total gap that is part of the 81s. But we have to wait as Marcos mentioned for a window to be there. And we will continue as usually to call our 81s.
Why do we need always — sometimes some people think that we are not very smart financially because we’re calling the 81s. But we have a promise to respect to the market. And we will honor that promise to the market because that’s the way we sell them, the 81s, based upon the call, on the call page. So we will continue to do so Natalia and we will continue to issue 81s to a point when the window is there for us to go back into the market again.
Natalia Corfield
All right, guys. Thank you Rafa.
Rafael Arana
Thank you, Natalia.
Tomas Lozano
Thank you. Now we will take our last question from Mariel Arévalo from Benito Juárez. Mariel, please go ahead.
Mariel Arévalo
Hi, thank you for taking the question and congratulations on your results. My question is on capital. You have excess capital at the moment. Growth is expected to slow down. So I would like to hear about capital allocation, on capital allocation plans, since your capital is in excess at the moment. Thank you.
Marcos Ramirez
Thanks Mariel. Rafa, please go ahead.
Rafael Arana
Yes, Mariel. As we mentioned, and Marcos already said that 50% will be the payment, the main the payment on the dividend side. And as always as we know the story in the past, if we see that we can also reward shareholders with dividends, or in this case we are looking also at a buyback mix, we also will do so. But right now, we are committed to 50% of dividends of ’22. That’s where we are. And remember, as I mentioned at the beginning, we know that we have excess capital. We are not leveraging the bank. But we also understand that we are living in a world that is not very predictable at this point in time. And we’d like to be on the safe side. And we are giving returns to our shareholders at the bank level about 24% and very close to 20% on the group. So we are we are always looking at that potential to reward shareholders.
But also we understand the dynamics of the economy of the world and how the world is behaving at this point in time. So I think 50% is for sure. And maybe buybacks and an extraordinary dividend is a possibility.
Mariel Arévalo
Thank you, thank you very much.
Rafael Arana
Thank you, Mariel.
Tomas Lozano
Thank you everyone. With this. We conclude our presentation. Thank you for your interest in Banorte.
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