Grupo Financiero Banorte, S.A.B. de C.V. (GBOOF) Q3 2022 Earnings Call Transcript

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Grupo Financiero Banorte, S.A.B. de C.V. (OTCQX:GBOOF) Q3 2022 Earnings Conference Call October 21, 2022 10:00 AM ET

Company Participants

Tomas Lozano – Head-Corporate Development, Investor Relations and ESG

Marcos Ramírez – Chief Executive Officer

Rafael Arana – Chief Operating Officer and Chief Financial Officer

Gerardo Salazar Viezca – Chief Risk Officer

Alejandro Padilla – Chief Economist

Francisco Martha – Director

Conference Call Participants

Geoffrey Elliott – Autonomous

Ernesto Gabilondo – Bank of America

Thiago Batista – UBS

Rafael Frade – Citi

Jason Mollin – Scotiabank

Alonso García – Credit Suisse

Nicolas Riva – Bank of America

Tito Labarta – Goldman Sachs

Carlos Gomez – HSBC

Andrés Soto – Santander

José Luis Cuenca – Citi

Yuri Fernandes – JPMorgan

Tomas Lozano

Good morning. Sorry for the delay. I’m Tomas Lozano, Head of Corporate Development, Investor Relations and ESG. Welcome to Grupo Financiero Banorte Third Quarter Earnings Call. Our CEO, Marcos Ramírez will provide an overview of the inflation and effect on the right environment here today, as well as the main results for the group, including the positive trend in downward NII, controlled asset quality and the continued recovery on insurance claims.

On the ESG side, we want to thank you all of you for your valuable feedback and comments which has helped Banorte to rank in top positions into well regarded rankings, most socially responsible bank according to Newsweek and Statista and most honored bank in Mexico according to institutional investors. You will find our quarterly update in the earnings call deck. After our CEO’s presentation, Rafael Arana, our COO and CFO, will provide details of the main financial results of the group, including the ongoing impact of high 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 2 of our conference call deck, you will find our full disclaimer regarding forward-looking statements. Thank you. Marcos, please go ahead.

Marcos Ramírez

Thank you, Tomas. Good morning everyone. Thank you for joining our call today. The third quarter of the year presented resilient results for the Financial Group navigating through a challenging global economic environment. Nevertheless, economic activity in Mexico continues to show good performance and is expected to continue for the remainder of 2022. GDP in Mexico has been driven by the recovery in private consumption supported by greater mobility, remittances at historically high level, better employment conditions along with increasing export activities despite the potential disruptions in the global supply chain.

Our economic analysis team is holding its annual growth estimate of 2.1% for the year 2022, although recognizing a more challenging scenario towards the end of the year and the next driven by the potential global recessions including that of the United States as well as persistent inflationary pressures and a more restrictive global monetary policy. However, it is safe to assume a self-lending for the Mexican economy, considering that it has not yet reached pre-pandemic levels in the sense we believe that Mexico could grow around 1% in 2023 despite a moderate recession in the United States supported by increasing nearshoring activity.

Inflation remains as one of the most important challenges for most of the economies. With annual inflation in Mexico reaching 8.7% in September, our economic analysis team has revised upwards its forecast to 9% from 8.1% for the year 2022, anticipating at turning points by January 2023 at 5.4%. With this background, we expect further tightening of monetary policy. Thus we recently adjusted our forecast of Banxico’s reference rate, expecting it to end 2022 at 10.5% with turn out rate of the current restrictive cycle at 11% in the first quarter of 2023, suggesting more tightening monetary conditions for at least the next 12 months. On the political front, Congress is expected to continue to focus on the economic package for 2023. On the legislative agenda attention is still on the initiative to reorganize the National Guard under the Ministry of Defense.

Moving now to the bank’s operation. During this quarter, we have strengthened our commercial teams to increase our presence and competitive business to attract potential customers. Banorte is constantly searching for ways to attend the needs of the Mexican market, and these times are ours to take always with a responsible approach towards risk and profitability. Moreover, as you might have heard, Banorte was recently granted the banking license for the constitution of its digital bank. This is an important milestone in proposing our vision for the year 2023, which is to be the number one financial group in Mexico doing banking in a digital world. We are aiming to capitalize on all the strengths that we have consolidated in more than 120 years of banking and provide Mexican users with 100% digital, personnel, CP and secure solution.

We will continue to work with the financial authorities to comply with the regulatory process and certifications until it starts operating in the market. In the upcoming months, you will receive an invitation for our Investor Day, where we will go through our current corporate strategy and at one of its three pillars we will share all the details about the digital bank. We are working on the general business plan and different scenarios with all the product lines. The operation will be at a fully digital native bank with a competitive process structure that will enable us to transfer benefits to our customers.

Additionally, it’s important the focus of the business will be on profitability although we will have KPAs related for digital bank, we will be basically focused on ROE, ROA and net profits. In the same line and align with our strategy of promoting hyper personalization, innovation in the digital field and the search for alliances that approach us to different customers, during the quarter our Banorte tech digital ecosystem was launched for the tech Monterrey University community of around 89,000 individuals in 25 campuses across the country. This app exclusively for tech students, staff, and alumni, allows an easy and secure access to highly transacting financial products and services along with availability of the campus ecosystem within BR. Lastly, the adoption rate of our digital channels continues to rise and most importantly customer satisfaction – satisfaction in the use of these channels does have relevant improvements. Our mobile banking reached an MPS of 82.7 in the quarter, 9.1 points higher.

Diving into the financial results for the quarter, Slide number 3, the resilient performance of the group was supported by the dynamic credit demand, some on the mix, there is some fee activity, something that’s been below inflation still better than expected with metrics and assumed this balance sheet. Starting off with profitability, Slide number 4, ROE improved more than 400 basis points on a year-over-year basis on the back of a solid performance across most of the business lines. Nevertheless, it continues to be pressured by insurance results, which are gradually reaching the pandemic levels. On the Slide number 5, NII from the loan portfolio increased 8% quarter-over-quarter, partially incorporating the effects of reference rate increases during the first nine months of the year. Non-interest income decreased in the quarter as a result of extraordinary expenses from the insurance company, registered in other income in this case expenses and lower trading fees.

Zooming into POS this Slide number 6, they remain flattish in the quarter on higher [indiscernible] through the external sales force. With accumulated figures, we continue to grow fees at double digits driven by a strong electronic banking fees, higher advisory and restructuring in commercial and government portfolios and more dynamic transactions in consumer products aligned with the recovery in private consumption. POS transactions had a seasonal effect during the quarter due to the hot sale in May, 90% a steady growing trend to digital and physical means.

Moving now to Slide number 7, we see a very healthy expansion in the loan book. Corporate loans were partly affected by prepayments, but the yearly comparison is expected to continue growing from the market that fix financing in dollars, which is already around 12%, 13% of our loan book. Commercial loans are gaining traction and this trend is expected to continue for the rest of the year as we benefit from the nearshoring operations, especially for the manufacturing industry, an increase our exposure in low risk profile data mix. The government book was also impacted, but the payments from different states in the quarter, but we are not expecting deceleration in the book for the year 2022. The consumer portfolio, Slide number 8, displays a strong quarterly expansion and a record annual volume increase in the portfolio. Evolution of payroll and credit card loans rely on good consumption dynamics driven by higher mobility, unemployment conditions.

Auto loans are recovering as supply shortages start to normalize and we expect good performance in this segment going forward. Mortgages presented on a remarkable annual growth during the quarter of 10.2% held by business approach we have had during the origination process where we prioritize customer lifetime value over short term margin gains. Going forward, this segment is expected to be resilient during the rising rate cycle as we increased our personalized offerings. However, we might see some moderation and increase in demand at sustained rate above, let’s say 10%.

On Slide Number 9, asset quality continues to perform better than expected. NPLs remain resilient during the quarter with delinquency indicators for each product within the expected levels. Currently, we don’t foresee the duration that can represent [indiscernible] in any industry or geography. However, we do expect a normalization of risk metrics as we increase our share in riskier segments such as the consumer products.

Analyzing the results by subsidiaries, Slide Number 10 during the quarter, the bank was slightly impacted by higher operation expenses and provisions. Nevertheless, with accumulated figures, it continues to expand on the back of solid NII, asset quality, expense management below inflation levels and expanding loan book showing significantly high levels of ROE about 24%. As Padilla mentioned, we are constantly analyzing different alternatives to optimize capital and maximize value to our shareholders.

We ensure business results are gradually recovering with good premium expansion and COVID-related claims decreasing to almost pre-pandemic levels. Operating results show continued growth, especially in bank-assurance. The brokerage sector show a quarterly reduction driven by lower transactionality. The Annuities business improved during the quarter, driven by business expansion offsetting higher reserves from inflationary adjustments. As for pension funds, the business was still impacted during the quarter by the fee cap imposed by the regulator, along with evaluation impact of higher rates in the Forex long-term investments.

Nevertheless, different initiatives to control expenses were started during the quarter and will continue for the rest of the year, aiming to partially mitigate these extraordinary affectations.

On the Slide Number 11, we provide greater detailing to insurance showing an increasing business training to normalization by the first quarter of 2023 and lower claims. COVID-related claims have almost reached normalization in all portfolios, health and life claims continue cease, while output and damages are increasing hand-in-hand with mobility.

Moving on to Slide Number 12, we continue to see good operating and profitability metrics at joint venture with Rappi. We are enhancing our unit economics and increasing the number of cards issued along with various activity for corporate users.

Shifting gears to ESG, Slide Number 13. I would like to highlight that among many other initiatives we have been working on measuring our Scope 1, 2, and 3 carbon emissions and doing things to align with climate initiatives such as the Net-Zero Banking Alliance. I also want to express our gratitude to all our stakeholders for the valuable guidance which has been used in the design of our corporate strategy in which ESG partners are at the core. This has given us the opportunity to be recognized by relevant international publications where Banorte has been awarded top tier positions among several well regarded banks.

As a final note regarding the materials bank released early today, Banorte is no longer participating in the bidding process organized by Citigroup.

I will also like to inform that we will call for shareholders meeting seeking approval by dividends and/or buybacks. As I have mentioned in the past, we are always looking to maximize our shareholder value. Banorte has a life of its own. And we will be taking the most out of the opportunities ahead for us.

With this, I conclude my remarks and now Rafael Arana will walk you through the financial results for the third quarter of the year. Rafael please go ahead.

Rafael Arana

Thank you. Thank you, Marcos and welcome all. And thank you for your interest in Banorte. So we’ll proceed to go for the different issues that we think are relevant on the financial roadmap. I think the best one is that Banorte continues to have a very strong balance sheet. As you can see in the capital numbers and on the liquidity side, we are really happy with the way we have been controlling inflation. Inflation, as you know, is peaking out close to 9%. The cost that we have been able to manage is around 8%, 8.1%. Maybe at the end of the year, we will be having 8.2%.

You know that the digital transformation is ongoing in Banorte at a very fast pace. We have a motto now in Banorte as you know, that Banorte is the “Bank in Minutes” because you can onboard and do transactions and relationship with the bank in a very efficient and a very fast pace. Marcos has just mentioned the JV with Rappi and the digital bank is already on the move. So all the basic paths that we defined in 2018 that Banorte was to pursue on the evolution of the bank is now full in motion.

The next part of the slide, what you can see is there a very strong net interest margin, 6.7% for the group and the bank 6.3%, with a very, very strong expansion from one quarter to the other and converting to net interest margin. And what is also relevant is that the cost of funds continue to be something relevant. For us we know we still have the room to improve on that, but if you look at the pace of growth on the funding side, you will see you slight – a bit ahead of the presentation we are experiencing a very strong growth in the demand deposits and the mix continue to improve to 73 demand deposits and 27 bank deposits. This is we have been providing notes a very strong growth on the margin side, but the most important thing taking into account that we have a very good tailwind on the rates. The fact is that we are getting the margin because the inventory of loans that we have has been performing extremely low. So by applying the new margin and the funding cost to a very, very strong dollar growth and peso growth, we are really having a continuous expansion in the margin and we expect that to continue for the remainder of the year.

If we talk about the capital numbers and it is already reaching the 23.0% and the Core Tier 1, 14.7%, well above the requirements of the TLAC and that needs to be reached by the regulator and by the banks, Banorte is already in full compliance of that part.

If we move to the next slide, we will go in the different elements of what we just mentioned. The NIM of the bank, as you can see, continues to expand at a very, very fast pace. The same goal for the NII. Sequentially, you can see that 30% is growth in the NII on a year-to-year basis. The expansion for the quarter for the net interest margin plus 71 basis points and the net income that you can see, this is slightly down from the first quarter is basically concerned by the trading goods, that is getting much more normal rate of pace and not at a really extraordinary numbers that we have in the second quarter.

The return on equity of bank that is already reaching the 27% furthermore continues to be a very positive surprise for the market. I think it’s based upon all the elements that we just mentioned about the loan growth, the funding, the services, the expense control, all the elements are really pushing the general activity of the bank at a very fast pace. And you have to take into consideration that the numbers that we want to run the bank from core Tier 1 is from 12 to 12.5, and we are well above the numbers of that, in addition could also benefit when we start moving dividend from the bank to the Group the internal facilities of the bank which we need to expand.

Return on assets also continues to grow in the right direction. This as you have seen the expansion on the consumer book continues to be a very, very strong lever for this number. And the return on equity for the book that is already for the quarter above the 19%, will end the year above 19% for the year.

If we move to the next slide that describes in a much detailed way the evolution of the need for the bank and for the group. You see already that the phase of change has completely accelerate on that, based upon what you just mentioned, the funding, the good returns on the book and a very good return on the expense side.

If we move to the next slide, the asset quality continuous, as Marcos mentioned, we are –result of all the things that we have been doing in the past about the modeling, the recovery unit. And what we have seen is that now it’s trending at 1.4 when we describe exactly the elements that move that are extraordinary elements, not really recurring ones. Some of them are basically related to commercial loans that are really on the process to be sorted out. So that number should also start to trend again further along with that we see in this quarter.

The provisions that you see, a slight pickup on the provisions and then I also will ask Alejandro to go on this a bit, it has to do with obviously the rate on the face of growth of the consumer book. But nothing that we think this is trend or anything that is related to any part of the group. Our exceptional parts that are on the rate of solving the commercial loans and the face of growth of the consumer book is required a bit more position that expected to grow, as you have seen on the growth, the consumer book is showing a double-digit order on the consumer book, but the car loans that by the end of the year will be also in double-digit.

Gerardo Salazar Viezca

Sure Rafael. Good morning to everyone. I will tell you that, remind you that payroll loans that Banorte held at 20.8% market share, increasing 33 basis points in the first three quarters of 2022. That grants us as the second largest lender in this credit side on the Mexican banking system. And I will tell you and assure you that the main reason that provisions are going higher in payroll loans are due to growth. We still have very good sound practices, banking for principles. The first one is establishing an appropriate trade risk environment for this type of product and everything else in the loan book.

Second, operating under some trade granting process, third, maintaining an appropriate trade administration measurement and monitoring process. And last, the fourth one is ensuring adequate controls of our credit risk. So we feel very comfortable with these provisions and with the growth that payroll loans has been experiencing and all the consumer loan.

Rafael Arana

Thank you, Gerardo. And then as you can see the write-off rates and that’s also a question that always comes how much you still hold on the extraordinary provisions are close to 1 billion or they are still on the book to be used as needed in the coming months or quarters as needed. If we move to the next one, the funding cost study has been also something that we have been looking very closely to improve. As you can see, the trend is a good trend for the Banorte, but we still have, as I mentioned before, room to improve. The mix is on the right direction.

Also the growth on demand deposit that I mentioned to you, 16% for the year, 2% for demand deposit. So we are expecting these numbers to go down, the cost of funds for the remainder of the year because the large inflows of the deposits come at the end of the year. So that will also push the cost of funds down.

If we move to the next slide, please. The sensitivity on the book that’s always been something that they are not responding very closely, we are still at Ps 1.21 and on the dollar book. So basically we are reaching a steady state on both of expenses. It’s a good story in a very challenging environment.

We are below inflation and we are also advancing as many expenses for next year looking – try to look as much as we can, prices for the next year. We expect inflation, we expect the growth rate of the expense line be low inflation that is obviously helping us on the cost to income ratio that is now reaching the 37.1%. We understand that the cost to income ratio has to do because the acceleration of the revenue side, because of the margin expansion that we have on all the other good revenue sources that we just described.

But the controlling expenses has been extraordinary type for the bank. At the same time that we increase substantially the potential on the sales side for the commercial, for the SMEs and for the branch network, so we are managing to be ready for expanding the growth, controlling costs based upon – that we’re getting on the revenue side. The bank and capital ratio as you see continue to expand even though the face growth of the book has accelerating, but we are still below our limits to continue to provide capital for the bank. So we are in a very good position on the capital numbers.

As I mentioned to you, we usually like to run to the bank from 12 to 12.5 on the one. We are relevant that and the total cap is 23.20% after the call that we did on the 81 on the past months. The liquid ratio is now trending to the normal numbers that we have is around 160.

Remember that we usually manage the liquidity ratio from 135 to 160. We are reaching these numbers now. I think we are becoming much more efficient on the management on the liquid side. And the leverage ratio, as you know, we are the least leveraged bank in the market. So I also would like to guide you to an adjustment that we just announce for the guidance, the long road. Now we see the long road moving instead of five to seven to seven to nine.

The NIM expansion from 25 to 35, now we are putting a number arranged from 85 to 100. The NIM expansion, the same 115 basis points, the expense grows 79 to 8.4. The efficiency ratio from 37.5 to 38.5

I think there’s room to improvement on that, but that’s at this point in time, that’s the normal that we have. The cost of risk trending to the normal rates because of the rate of growth and pace of the consumer group to no. 1.3 to one from five tax rate, the same numbers, basically the net income. Now we’re moving from 40.5 to 42 to 44 to 45.4 billion. And the return on equity for the group from 18.7 to 19.2 and the return on assets to 2.2 to 2.3. This is now the guidance that we commit to the market to comply by the end of the year.

Tomas Lozano

With this, I conclude my remarks. Thank you, Marcos and Rafael. Now we’ll continue with our Q&A session. [Operator Instructions] Before beginning the Q&A, I would like to remark that as it was disclosed to the public through a natural event, I’m not saying no longer participating in the process of Banorte group. In light of the program and in view of all confidentiality undertakings, no further information in connection with such transaction will be provided. And therefore, we will not be responding to any question in such regard.

We are now ready to start the Q&A session. Thank you.

Question-and-Answer Session

A – Tomas Lozano

We will start with Ernesto Gabilondo from BofA. I think Ernesto has connection issues. We’ll move to Geoffrey from Autonomous. Geoffrey, please unmute yourself.

Geoffrey Elliott

Hello, can you hear me okay?

Marcos Ramírez

Yes.

Rafael Arana

Yes.

Geoffrey Elliott

Great. Thanks very much for taking the question. You finally got the digital banking license, which I know is something that you’ve been working on for a long time. Can you give some detail around the investment that is going to be needed to build out the digital bank? Does that flow into OpEx? Does it flow into CapEx?

And clearly the long-term goal is to get the efficiency ratio down, but is there a possibility that the efficiency ratio has to go up in the near-term to facilitate some of that investment? Thank you.

Marcos Ramírez

Geoffrey, we’re saving that for next month, we will – Banorte and you will see everything, but let’s see what we can say Rafa.

Rafael Arana

Geoffrey, follow-on as Marcos said, as you know, we have just getting the license on that. And I think it’s – we are really refining all the numbers to be ready for that. Obviously, there’s already the capital and different things, but I – we’d rather please wait for the – for when we go to the Investor Day, when you will have a full view of exactly how the bank is going to be funded, how the capital is going to be working, but we expect about the process those things ratio, how the evolution of the bank.

So it has been very recent that the license and we are working all the issues to finalize that process and remember that we are still on the review of the last five of the authorities to grant to finally say the gold for bank. So we’d rather wait for that on the Investor Day.

Geoffrey Elliott

Understood. I mean is there any color you could give around what you are doing right now? Are you hiring people? Are you moving people out of Banorte into the new entity? What sort of activity is going on right now? I guess more on the commercial side so that you’re ready to launch this as soon as you’d like.

Rafael Arana

Thanks, Geoffrey. Yes, we have in the process that that that we have been through and the authorization that we receive at the end of last month implies that we have all the processes and all the regulation for the new bank documented. So we already have a platform that is a platform, I mean technology and operations and processes in place. That will give us the efficiency that, that you were mentioning and we will show you later in the Banorte Day.

We have all the strategy based on data, all the platforms that we’re going to use and all the data, obviously the repositories are empty, but all the data that we’re going to use and the engines, the risk engine, the personalization engine, the empowerment vans that we are creating. And we also have an app, the – a mobile lab and a complete customer service application.

So all of that is ready. People is in place. So it’s not that we are launching a paper bank, but it’s everything that the – that is needed. It’s in place now. We are going to certify that what is in the binders, it’s really operating. So that’s the next steps with the authorities.

Geoffrey Elliott

Great. Thank you. And I look forward to the Banorte Day next year.

Rafael Arana

Thank you.

Marcos Ramírez

Thank you. See you there.

Geoffrey Elliott

See you.

Tomas Lozano

Thank you. We’ll now take the next question from Ernesto Gabilondo from Bank of America. Ernesto, can you hear us?

Ernesto Gabilondo

Yes. Thank you. Hi, good morning, Marcos and Rafa. Andgood morning, everybody. Thank you for your presentation and congratulations in your results. My first question is on dividends. We ran some numbers and we see around Ps 27 billion in excess capital at bank level. If you normalize a common equity Tier 1 ratio to 11.4 that was your internal minimum, and we see around Ps 29 billion to Ps 30 billion at group level.

So the combined in dollars is around $2.8 billion. So I just wanted to check with you is those numbers are reasonable? And if paying dividends when should we expect them? Is this something that could take place this year or next year or maybe a portion this year and most of it next year?

And then my second question is on the regionalization and reassuring opportunities. We started to see several companies moving part of their production to Mexico. I understand that banks will not be financing directly the expansion of the corporate plants, but more the supply chain related to semiconductors, computer and electric components, outer parts, electrical equipment, agro industry, plastic sectors among others. So just wondering how is Banorte preparing to take advantage of those opportunities that could be maybe taking place in the next years. Thank you.

Marcos Ramírez

Thank you, Ernesto. It seems you have run your numbers and you have some kind of some color, right? Remember winter is coming and remember the [indiscernible] is coming in some days, so we’re not so enthusiastic. Rafa, please.

Rafael Arana

Yes, no, Ernesto. Remember the 11.4 was what we mentioned that if we go to any M&A that will be the minimum capital level that we put on the Core Tier 1. But the number that we like to run the bank with, and especially at this time is from 12 to 12.5 Core Tier 1. And I think we will stick to that.

Numbers that you run on that is – numbers that you, but you have to adopt that part of the 11.4 to 12 to 12.5. The other part that is relevant about the numbers that you say is that the dividends will be called once we call for the assembly, we have the – already the granted the goal for call to the assembly.

And once we call an assembly, it is – we have 30 days for that. And after 30 days will be announced the dividend or the buyback policy for the shareholders. And we really appreciate the patience of our shareholders during this process because we know – we understand always that money is money of the shareholders.

We retain that in a way that we try to guarantee any possibility that we can compare more for the shareholders. So thank you for your patience. And we are now in full motion for the dividends on the payback as the usual the customer is processing in Banorte, but the numbers is not 11.4, the number you should be looking is 12 to 12.5.

Ernesto Gabilondo

And maybe Rafa…

Marcos Ramírez

Great. Alex, you have to talk a little bit about…

Alejandro Padilla

Sure, sure, Marcos. I will tell you regarding the second part of your question, Ernesto, that Banorte is very well-positioned in taking advantage to this trend of nearshoring, brainshoring, whatever you want to call it. I will tell you that the approaches that we are currently using are by geography by market segments and also by banking, product and service.

Currently, everything related to U.S. NTA [ph] the accounts for around 11.5% of the total loan book. I would tell you that around or insight of 11.5% of the loan book manufacturing accounts for 41%, tourism 35%, distribution and logistics 11%, transportation and other parts 9% and real estate talking about industrial parts and – 5%.

So we are trying to take advantage of this very important strategic trend for the country. And all our corporate banking, commercial banking, fiduciary services, trust services are very well aligned, trying to take advantage of that.

Marcos Ramírez

That was…

Tomas Lozano

Thank you. We will now take the next question from Thiago Batista from UBS. Thiago, go ahead.

Thiago Batista

Yes. Hi, guys. Congratulations for the results. I have one question about the profitability of the bank, with solid ROE achieving 20% for the group even considering these very low leverage that we’re at this stage. So when the bank optimize their capital? What’s the level of ROE that we can see for Banorte in coming years? So if possible to believe in the, let’s say, new to any something goes that. And my second question is about asset quality. The leverage ratio is to be close or a bit below 2% in the past. Now we are significantly close to 1%. What do you believe will be the normal level of leverage ratio going forward? You mentioned that you are expecting a right normalization of these leverage ratio. But do we have a new normal now or no – it’s possible to see the leverage ratio returning to close to 2% as in the past.

Marcos Ramírez

Start for the first one, the ROE rates will – based on the ROE will be, but this is – I don’t think the right question. What are we going to do to maintain the [indiscernible] be here for the next 100 years now. And the idea is to work in all the things that we are doing and to obtain all over the bank that we have in order to maintain a good ROE in the future and right now for the next year, it seems that the great results, I said 11% and this is very good asset quality. And the idea is, keep in mind that is not for sure forever. So we need strength to the continue to the cost control, continue with the digital of everything, continue with the canalization and then we will come around for the – I don’t know, Rafael, go ahead…

Rafael Arana

No, no, no. I think Marcos will chime perfectly. I mean, if you do the numbers I agree with you. I mean that the number of the 30 is already, it’s already there. But in fact is that Marcos mentioned, if you look at exactly what we’re doing is we’re investing – continue to investing aggressively in the digitalization of the Banorte and the spinoff that we have on the digital bank on that. But I think the most important thing is that we are strengthening all the commercial lines of the bank at the same time in order to be able to maintain whatever the rates are, are very reasonable return on equity for the shareholders.

So, so yeah, eventually you will see a very close number to the 30 at the bank level. We are pretty sure of that. But I think what you have to see is how that general equity is really obtained. And it’s obtained exactly as Marcos mentioned has to do with a very good cost of funds that needs and continue to improve a good expansion on the consumer on the commercial books.

And the most important thing is that the fact that the client relates to Banorte more and more at NPLs very, very close to the 80, 82, 87 in most of the services that we provide. So if the client like us, we have a very good cost control. If the asset group is as clean as it is and all the processes that we are delivering to the market are improving by the day based upon the customers intuitive that we have. I think the return on equity will not be depending on the future of accelerating trend on the rates. It will be more and more based upon, but the bank can really deliver based upon on this huge transformation that is ongoing and it’s already deliver extremely these reports.

Marcos Ramírez

And Thiago, regarding the second question that you have regarding asset quality, I will tell you that credit risk ratios are well under control or even better than the covers levels as you have seen them as quality ratios remain at historic low levels. And looking forward and to the close of 2022, I will tell you that we expect NPL ratios to be ranging from 1 to 1.5 and cost of risk ranging for from 1.4 to 1.6.

We have been running risk scenarios trying to measure expected losses and even catastrophic losses. In this modeling, we have been measured impacts and within changing economic financial markets and behavioral assumptions. So we remain confident, but very expectant to what might arise given some of the type of risk that you have all seen, like geopolitical and so many other types. So as a quality you can reassure that for the short-term it is guaranteed to be ranging from those levels that I mentioned.

Thiago Batista

Interesting. Thank you guys.

Tomas Lozano

Thank you, Thiago. Now we’ll continue with Rafael Frade from Citi. Rafael, please go ahead.

Rafael Frade

Hi guys. Good morning. I have two questions here. The first one is related to the guidance for – the updated guidance for 2022. So with this guidance, it implies that earnings should go down in the fourth quarter versus the third quarter. I would like just to understand if you are being conservative here, if there’s any line that potentially can impact the fourth quarter. And second question is related to insurance results, insurance and banking results. So it – you show a very strong improvement in the operational side, but in terms of premiumization impact itself year-over-year. So just to understand here, where we are in the insurance operation, as you mentioned, it’s normalization. I would like to understand if it’s almost normalized or still there are some legs here. Just understand where we are.

Marcos Ramírez

Thank you, Rafael. The first one, this part is going to be at least the same or maybe a little bit off. That’s what we’re expecting us as a guidance. So I don’t know what’s your number, but not we are going up or at least would be the same amount. So you can run the numbers and that and come find number. And the second one insurance, the premiums, yes, we have a some information that we need to give you. Go ahead, Rafael.

Rafael Arana

The fact is that, yes, the insurance business is normal – is going to normal now. You will see that fully motion on the first quarter next year, but this already happening. And also I would like to clarify something that was a concern of the – of some of the analysts that in the other income there was an additional solution for the insurance business and for the annuities business.

This has to do for two specific related issues on VAT potential claims. That is not just for Banorte for the whole system that we are anticipating that in order to be season from that. And on the annuity side, also some claims on the tax related issue that is ongoing. By the way, we already are gain the first claim for that. So I think we are in a good position, but we would like on that. So that I think is – I think it’s – everything is trending in the right direction in the insurance business as you saw on the slides that Marcos projected to do that are going up and the penetration on our client based continue to go and move on the right direction.

Rafael Frade

Ok, that’s perfect. Thank you.

Tomas Lozano

I’ll go with Jason Mollin from Scotiabank. Jason, please go ahead.

Jason Mollin

Hello, can you hear me?

Marcos Ramírez

Yes. Perfect.

Jason Mollin

Great. Congratulations on the good quarter. I have a follow-up on the cost of risk and provisionings. If I heard correctly, I believe, there’s still Ps 1 billion in excess or additional provisions that could be used going forward. I believe that number was Ps 1.3 billion in the prior quarter. So is it that you consumed that 300 of the prior amount that you have? And maybe if you can give us a little more color on the statements of an increase in provisions in payroll. Maybe to talk a little bit about that product that it’s a great market share, 21%. If you can tell us a little bit about the clients and what they’re facing and what are the risks in that portfolio. I’m imagining they should be low, but if you can help us understand where delinquency could come from or has come from in the past and could come from in the future. And the second theme I thought maybe you could provide some color on is competition. We’ve seen new entrants growing, credit card, plastics issued at a rapid pace. If you’re seeing that as a risk for the market in general and if there are segments that you think that Banorte should stay away from. Thank you.

Marcos Ramírez

Let’s start from the second one, the competition, Jason.

Francisco Martha

Thank you, Jason. Francisco Martha. I agree. We as Banorte vehicle, we are being very careful with the segments that can enter into a highly risk or a non-performing loan. So we are being very careful drawing the portfolio as much as we can, but with – but being careful. But we have the other vehicle, at least in our case, that it’s RappiCard. As we mentioned a quarter ago, we have been slowing the pace of growth because of the situation, but we are still growing very careful. We think as you are – as you imply in the question that something can be complicated for the new entrance that are giving that kind of cards or kind of credit without reviewing credit bureau or not being as preventive as we are.

Marcos Ramírez

Regarding your first question, Jason, company’s provisions were one year ago Ps 2.97 billion that was September, 2022. As of now, they are Ps 1.038 billion. You are right, it is not Ps 1.3 billion, but Ps 1.038 billion. Going forward, we are still expectant of this winter and see if this same risk factor we face in a better way or more favorable way to our business. Regarding the payroll behavior, the payroll loan portfolio, I will tell you that there are two main key risk factors, one of these being the cash management services of the payer, the companies that digitally give payrolls. Once you lose that service, the credit risk activates within each individual loan in this product. We are always monitoring what the behavior is regarding that.

And the second key risk factor is customer payroll mobility. So once it is easy to each customer to change the bank that the account receives the payroll that is a secondary factor, but it is also in our risk greater all the time. Regarding the behavior of provisions, I will tell you that the first and foremost factor is growth, I underlined that it’s growth and I emphasize that factor. And the second one is that we did open credit standards and lowered them within our risk appetite. So you can expect to see cost of risk growing in that product in the near-term. So those are the two biggest things that explain these increases in provisioning.

Jason Mollin

Very helpful. Just to follow up on the excess provisions. I understand, I think I don’t know if you misheard me, but I think I was referring to the quarter-on-quarter change in the excess provisions that I believe that from the second quarter presentation we had Ps 1.3 billion, and now as you’re suggesting, we’re at Ps 1.038 billion.

Marcos Ramírez

You’re right, Jason. It is Ps. 1.298 billion, Ps 1.3 billion like you said.

Jason Mollin

Okay. Thank you very much. Much appreciated.

Tomas Lozano

Thank you. Now we will continue with Alonso García from Credit Suisse. Alonso, please ahead.

Alonso García

Hi, good morning everyone. Thank you for taking my question. So the first one is a follow up on capital. I would just like to touch based on how front loaded or gradual do you think this process of optimizing capital would be from this 14.7% CET1 ratio to the 12% to 12.5% where you would like to run the bank plus the capital you have at the group. I mean, do you think – I mean, you already mentioned that you are going to call for shareholders for an assembly and then announce some dividends. So do you think you will optimize your capital position already with this dividend announcement? Or do you think this would be instead a more gradual process, I don’t know, for the next one, two years until you finally optimize your capital structure?

And historically, I mean, your returns to shareholders have been much more skewed towards dividends as opposed to share buyback. So I don’t know if you could provide some color on how the split going forward should be. And second, I have a follow up question on your retail strategy, specifically on the mortgage product. I mean, we have seen an acceleration to 10% year-on-year growth from 6% the previous quarter with 5% growth in 3Q alone. So my question is how are you competing in this segment? Is it through pricing? How’s your pricing strategy relative to your competitors? That will be my question. Thank you very much.

Rafael Arana

Thank you, Alonso. Let me start with the mortgage fund, Alonso. So mortgage, as you know we have the best rich numbers in the market. The second one to us is double that we have in the mortgage book. So if you look at the expected loss of the book is really, really, really low because the quality of the – of big brands that we can attract. So we have been very careful in managing the price hike because we continue to see an acquisition process that is bringing the best clients in the market.

So by taking into account the expected loss, that is extremely low, we can really manage and still be very competitive on a risk adjusted margin. Even though you see that we have been slow in the hiking of the prices. You think that you have to take into account is that usually the mortgage comes with a lot of other products at the same time. So the lifetime value of the client is exactly what we are really looking at, and that lifetime value continues to expand.

So don’t be surprised that if you see that we are sometimes the lowest in the market on the price, but you have to take into account all the issues of our margin, how do we manage the risk, and exactly at what position in the timeline we are compared to our comparators. And remember that we basically do the mid to the high end on the mortgage book.

On the second question related the normalization of the capital ratios, I think you described it pretty well, it will go from one to two years to normalize that to the 12% to 12.5%, taking into account that times are a little bit a hectic right now. So be prudent on that part. Not overly prudent, but being prudent is something that we would like to – you have always seen that in the Banorte behaviour. But you will see a trend toward that number in the coming months, Alonso.

So I think those are the two questions. And on a competitive basis take into account that I think Banorte is now able to compete in any space with any bank in any product. So that is what is really pushing up all the numbers. And the good thing is that we are coming from a very low end on the credit numbers that allow us to be, I would like to use the word picky, but picky about the type of loans that we would like to have in our book.

Alonso García

That’s very clear. Thank you very much, Rafael.

Rafael Arana

Thanks, Alonso.

Tomas Lozano

Now we’ll go with Nicolas Riva from Bank of America.

Nicolas Riva

Thanks very much. Rafael, Marcos and Tomas for the opportunity to ask questions. So my question is on capital once again, and I see a lot of questions on excess capital here towards paying back, paying some extraordinary larger dividends. But if I look at the capital structure, the excess capital is really concentrated, particularly on the AT1 bucket. So, you have roughly 800 basis points of AT1. The optimal level would be around 150 basis points. So, now given that you already announced we are not going to be buying Banamex, how should we think about this AT1? I mean, do you agree you have a lot more AT1 than you need? Does it make it more likely that you’re going to be calling the AT1s without even the need to issue more AT1s? And if you would even think about buying back some of these AT1s ahead of time. So that’s my first question.

And then the second question, and potentially you cannot discuss this at all, but on Banamex, my only question is if you can share with us the main factors that led to you no longer being in the running to buy Banamex if it was more Banorte decision or CET rejecting the offer? Thank you.

Marcos Ramírez

Start with the end. As anticipated by Tomas we’re unable to share any further information in connection with the CET1 Banamex transaction per over confidentiality undertakings. And let’s go to the – good question about the excess capital on the [indiscernible].

Rafael Arana

Nicholas, I think you have to understand that the AT1s for us is not just issue that we would like to have for the sake of have a more expensive type of instrument that they current senior because it allows us to change on liquidity purposes allow us to have a very stable liquidity base. As you know the characteristic of the AT1s, we don’t have to build up liquidity a year before that they call. So that’s one thing that proves to be very efficiently in the convenient.

The second one is that Banorte now is extremely active on the dollar book. I think we are reaching levels that Banorte was never a play on the dollar book, and now we are a very strong player in the dollar book in the market. So, we have – we are allowed to have midterm funding for those loans. So the AT1 strategic for us in a way that to build up the balance sheet on the dollar book and also to provide – and there’s always a question that people says why don’t you call – why did you call the AT1 if it was not financially wise? The fact is that we on the calls, because that’s what we say, and we will the complete one of the calls. We will not call the – because some people say, well, why don’t you call your bonds if well below par? Well, the fact is that for us is part of the structure of the balance sheet is not, and the way that we manage the balance sheet is in a very conservative way.

We don’t go up and down based upon opportunistic issues. We look about always at the structure of the balance sheet. So that’s the reason for the AT1s if you ask me, if we going to issue more AT1s, it depends on the, as you know, Banorte has always been very opportunistic in going to the market. We never go when we need – we know when we want the instrument. And I think at this point in time, the market is extremely volatile about prices. So, we are concentrating on what we have. I think we have a strong capital base and as I mentioned to you, the AT1s is a very important part of how do we compete on the dollar fund and dollar [indiscernible] for the group, and has been extremely positive for us. And remember that when some people has always tell me in the past where were you taking benefit from the equity line, and providing them to the fixed rate part. Yes, what we are returning 24% for on equity. So, I think that’s a pretty good investment.

Nicolas Riva

Okay. Thanks very much, Rafael.

Rafael Arana

Thank you, Nicholas.

Tomas Lozano

Thank you. Now we will continue with Tito Labarta from Goldman Sachs. Tito, please go ahead.

Tito Labarta

Hi, good morning everyone. Thank you for taking my question. A couple questions also, maybe first on your margin. I know you have the guidance, but just want to take a little bit longer term on the sustainability of it once rates come down, I guess first, when do you think rates could come down, any color on, I guess in inflation, and when that may start to come down and what that could mean for rates maybe towards the end of next year? And I know you have the sensitivity of Ps 1.2 billion for every 100% increase in rates. Should we consider the same sensitivity on the way down? Or is there something that you could do to reduce maybe the sensitivity on the way down?

And then, my second question is on your loan growth, you mentioned your GDP growth volumes into next year. I think you said consumer loans may moderate closer to double digits, any color –how should we think about loan growth for next year and should we expect a slow down as GDP growth flows? Thank you.

Marcos Ramírez

Let’s first see how we see the rates. And then we – what are the loans [ph] – Alex?

Alejandro Padilla

Thank you, Marcos. And thank you It is Alejandro Padilla, Chief economist. Well, what we expect is that bank might keep the repo rates at 11% for several months during 2023. However, we are forecasting that they can start cutting rates by the end of next year, maybe the coupling from the Federal Reserve, but at a very mild and cautious pace. Indeed from that 11% that Marcos was talking about that we expect in the first quarter, we think that by year end, the repo rate might reach a 10.25%. On the other hand going forward, what I think that taking into account inflation dynamics for 2023 and maybe 2024, I think that it’s going to be more story of 2024 in which Mexico can cut rates at the faster pace. But I think at least in 2023, we might think of higher rates for longer.

From the broad side as Marcos was mentioned before, we are confident in our 2.1% increased of GDP for this year. However, we think that with several headwinds in the global economy, these risks of a global recession and taking into account that maybe the U.S. will be more resilient than other regions. We think that Mexico can grow around 1% in 2023. However, we have to take into account that we might see a very different pace growth in Mexico from these states in the central and northern part of the country that are more integrated with trade dynamics to the U.S. from those states that are in the southeast part of the country. But overall, we are forecasting 1% for the GDP of next year.

Tomas Lozano

Great, Thanks, Alejandro. Yeah, maybe follow up on the NIM and the loan growth.

Rafael Arana

Yes, we will say in the next conference the final numbers of our guidance, but for now, let’s keep in mind between 5% and 7%, around that the loan growth of the next year be around that.

Marcos Ramírez

And the NIM, I think recurring, we have Banorte have improve that on the – when the rates were low and paying that an attainable, sustainable NIM should be around from 6% to 6.2%.

Tito Labarta

Great. Thanks, Marcos and Rafael.

Tomas Lozano

We’ll take the next question from Carlos Gomez from HSBC. Carlos, go ahead.

Carlos Gomez

Hello, good morning, and thank you for taking my question. Congratulations on the results, and congratulations on never having to answer question about Banamex again. Specific questions, I’m going back to your expectation for this year, again for the fourth quarter you essentially have a one of provision in this third quarter regarding the annuities and the pensions, rates continue to be up, the average rate is going to be high in the fourth quarter in the third. Why wouldn’t earnings continue to grow? I know you’re have increase guidance by 8%, but as mentioned earlier, you are still implying that that we will have a lower fourth quarter. I wonder if there is something else that we are not seeing there.

Second, your tax rate for the year I think we’re coming out with around 26%, which is higher than last year, despite higher inflation. Is that where we should expect for the rest of the year and for next year? Thank you.

Rafael Arana

Yes. The tax rate should be around 26%. And yes, there is an issue no, we are cautious. That’s what we’re talking, we working at work and let’s keep what happens [indiscernible].

Carlos Gomez

Okay, so it’s pure caution. No, no specific a reason.

Rafael Arana

No, no, we don’t see any general so far. That’s why we have the range guidance.

Carlos Gomez

Okay, very good. Thank you so much.

Tomas Lozano

Thank you, Carlos. Now we’ll continue with Andrés Soto from Santander. Andrés, please go ahead. Andrés, please unmute your phone. Okay. Now we’ll continue…

Andrés Soto

Sorry, Tomas. I’m here.

Tomas Lozano

Sorry, Andrés. Thank you for here Andrés.

Andrés Soto

Thank you. Good morning to all. Thank you for the presentation. My first question is regarding your decision not to participate in this deal. But actually this is more related to your strategic plans ahead, now how this decision changes? Are you willing to grow organically on a more accelerated way? And if that’s the case, what is going to be the role of the digital banking in this part of the strategy?

Rafael Arana

Well, as I said, Banorte has a life of its own. And we’ll be taking the most of the opportunities ahead of us. And when I say that, I mean in all the – we’re not a bank, we are a financial group. All the financial groups that we have in Mexico. In Mexico, we continue to do bank arise a lot in Mexico. We have a lot of things to do. We’re hopefully brought to the future and it’s coming for the guys that are preparing. We want to be prepared. So everything is on the table. If I may ask to what Marcos says, remember in 2018 is not that Banorte is planning the future now. In 2018, we define the path of growth for Banorte for the coming years. We short term the planning process to the – in 2023. But really it’s for the ongoing future.

And I think it’s very, very, very clear is that the fact that Banorte, the traditional bank is now almost fully digital. You can do whatever you want. You can go to the branches, you can do everything on digital. So that transformation is almost complete and will continue to be ongoing on that part. The Rappi is already in place, so that has a space on its own. The digital bank would have a very specific part that we are multi segment banks that could approach the high end and the low end at a much better cost base and benefits for the client.

But what you see is an organization that has all the capabilities in place and in fully and in full motion. And also the businesses that we have the annuities business, the insurance business, the broker, dealer, the mutual funds, all of whom have been part of this deep transformation of Banorte. So when we say that we have a rise on loan is that we’re constantly evolving from that, strong base that Banorte has. We’re never going to be still or anything like that. We will see a continuous evolution of Banorte, but the most important thing to consider about Banorte is Banorte is fully a creator of its own future. We don’t need anything else to build up on the future that will be for them.

Andrés Soto

Perfect. Thank you. And my second question is regarding the excess capital that you have at the holding company level. At my last look, that was about a $1 billion. I was – I would like to confirm is that’s still the figure or what is a new number? And also if the full purpose of this will be to return to shareholders or you are going to keep some of this money for pursuing any other opportunities that you may have.

Marcos Ramírez

The number is [indiscernible].

Andrés Soto

Perfect. And the purpose, it’s – that will be available to return to shareholders?

Marcos Ramírez

That will pump up. Yes, it is.

Andrés Soto

Perfect. Thank you so much.

Marcos Ramírez

Thank you.

Tomas Lozano

We will now take the next question from [indiscernible] from Santander.

Andrés Soto

Sure. Thank you. Thank you for the time, Tomas, Marcos and Rafael. Maybe just on the capital allocation side, no, we have seen the stock having a normal correlation with the markets, with the U.S. banks. This correlation obviously in the last month was broken, all that the stock had performed close to 11% versus the benchmark. You have other players that were also beating in the dynamics process like Grupo Mexico, and they’re performing like 14%. Not considering the copper is like flat minus 1%. So, it seems like the stock has discounted obviously a certain part of you taking out of the transaction right along the financial calls that we have seen with this rally in the stock, obviously, the price is close to the higher range of the multiple levels in the last 10 years, 20 years.

So from a treasury perspective, and maybe this question goes more for Rafael, but obviously for Marcos. From a treasury perspective, what’s going to be the structural access for deciding the capital allocation? Not today, as you said with the rally, if you divide the return on equity between the book value, it seems that you are investing your money close to 10%, 11%. If you do a dividend, no, the Mexican overnight rate is close to 9.25% and the set is when you spend 88%. So it seems for the people or investors looking for yield, the short-term treasury or the overnight seems like a pretty fair alternative. So, it seems you are in a tough decision either from the dividend side, given the funding levels or either from the buyback, given the return on equity divided by low value. So, what are going to be this structural access to return to the shareholders these 29 billion that Marcos already said? That’s maybe the first question.

And the second question is, as we had the conference call, no, the President was talking about the transaction. It mentioned that the Chairman, not Carlos Hank tried to look for him in the night just for a quick call. He wasn’t available, but he was going to be talking with him after the President’s morning call. So is this just occurred difficult, just inform about retiring from the process or should we take something from this President Carlos Hank call?

Marcos Ramírez

They can – when they have a relationship and they talk about a lot of business. So I don’t know that we are here in the meeting. And regarding the first one, it’s a tough one because as I said, I use the word approval to pay dividends and all buyback, we want to maintain both because we need to see what going the future and vice versa for the bank and what are the opportunities there. So we want to maintain open around that I don’t know…

Rafael Arana

No, yes, no, and I totally agree with you. I mean, all the time that you see the EPS accretion for the shareholder you see this dividend at this point in time I’m working on the buyback. But on a long-term basis, what’s the best deal for the shareholders? The fact is that Banorte will continue to be a strong provider of capital for the shareholders. And also that allow us to be very opportunistic in the market when we see that something could create additional value for the shareholders. I mean, the credit ratings of Banorte are very strong and we don’t have an issue on that. We see something that we like on that part.

I think as you mentioned, we always balance out the best deal for the shareholders and we understand that we have, shareholders are basically based upon growth. Other ones are basically on dividend pay-out and over the long-term on a fixed rate basis. So we have to balance all those out. So – and as you mentioned, we will always do all those calculations that we do in order to maximize each of one of those individuals that we have.

Andrés Soto

Great. And just finally a quick question, Jason, you have already discussed the provision side. You have already mentioned on the first quarter, second quarter, the yearly comparison, the quarterly comparison was beneficial on this third quarter. There was a quarter and a quarter jump of 30%, but Marcos said something important about the risk factor. So throughout 2020 Banorte was one of the state-of-the-art banks to forecast the provisions. So considering this platform, this state-of-the-art platform and what Marcos said about the risk factor to continue monitoring, would you say that throughout October, which is practically done. This risk factor has improved, should respect the provisions that we saw in this quarter to start decreasing or are we still in a weight on TMO? [ph]

Marcos Ramírez

The answer is [indiscernible] follow on that.

Rafael Arana

Yes. We’re still expectant and our job is to be proven. So there is no change. There is no improvement from this time on. And we are just as second time of what the environment could present to us.

Andrés Soto

Great. Thanks for the time Marcos and Rafael.

Tomas Lozano

Thank you. Now we’ll continue with José Luis Cuenca from Citi. José Luis, please go ahead.

José Luis Cuenca

Hi everyone. Thank you for my taking my question. Just a very quick one and sorry if you already answer it. I got disconnected somewhere along the call. Just wanted to ask if you could please remind us what is your long-term sustainable ROE?

Marcos Ramírez

First, let’s define long-term. We’re aiming, let’s say for the 20s and that’s like our model now is to have it, let’s say forever. Obviously you will see I expect the 30s and then maybe 18 something. But I think a nice sustainable worldwide recognize ROE should be that 20s and that’s our goal, let’s say in the near and long-term.

José Luis Cuenca

Thank you.

Tomas Lozano

We’ll now take [indiscernible], go ahead.

Unidentified Analyst

Thank you. Can you hear?

Marcos Ramírez

Yes thank you.

Unidentified Analyst

So, I have two questions. The first one is related to the guidance of expense group. Just trying to figure out, this is related to that you express in the press release, which is about traveling and all the type of even increasing the number of personal in the commercial force. And so looking ahead at the end of 2022, it might be in the same sense or it’s going to adjust because of the dynamics of the economics? So this is one. The second one is related about Banorte, it’s interesting the initiative so I was wondering if this type of initiative we can see with other universities in Mexico?

Marcos Ramírez

We start with the Banorte with Francisco Martha.

Francisco Martha

Thank you. Yes, you can expect that we are already reviewing with some other universities and some other institutions where we can create such kind of ecosystems.

Unidentified Analyst

And just to follow-up on this, do you have any specific target of a number of accounts or type of different products in other universities or even with Banorte type of origination or what will be the goal?

Marcos Ramírez

Yes. The same way that that we’re planning for the bank and for the three pillars of the strategy. We are not talking about products, but more than products and we’re talking about experiences. No, so the students can have an account where they can save money or they can use their money for payments and they can have a credit card and we will be launching some type of credits and depending on, if you talk about the students, the credit can be for different use. And if you talk about the teachers or the alumni, we have now close to 1,600 accounts from a number of 7,000 students. So we’re targeting not exactly – we don’t have a target and a specific target of accounts but we are trying to move away the cash and create ecosystems. So more than market share we’re talking about a share of transit as we have talked about this before.

Unidentified Analyst

Okay, thank you.

Rafael Arana

On the expense line as you can see there’s a lot of moving parts. If you look at the results, person expenses are going only just 1%, so that’s an incredible number. But if you have all the take after take into account the PTU part study, part of the personal expenses. But we can tell you that being in the situation that we are on the bank that is growing and a very active one and creating more commercial capabilities. I think we are managing extremely, extremely well and to be able to contain the expense flow and at the same time all the commercial capabilities and still invest heavy in IT, this is I think something that we are good at.

Unidentified Analyst

Okay. Thank you so much Rafael and Marcos and Tomas.

Tomas Lozano

Thank you. Now we’ll continue with Yuri Fernandes from JPMorgan. Yuri, go ahead.

Yuri Fernandes

Hi all. Thank you and congrats on the results. I have just one regarding your non-bank business. You already discussed this during the call some times, but if you can provide more call on how you see the insurance, the annuities, the broker dealer, I guess foray this is 25% of your earnings. ROEs on aggregated basis has been below the bank, so my view here is what to expect for 2023, 2024, like are you seeing what can help those units to improve the operations? I guess foray, we had a lot of regulation and you already saw a better quarter, but which one could surprise to your like? Do you see more room for insurance to surprise like; can we still continue to see better results on the insurance? Like just a general view on ROEs and growth for those units that we don’t discuss a lot in details usually? Thank you very much, Rafael and Marcos.

Marcos Ramírez

Yuri, yes, they are in different boxes and different lights now. Let’s go for a broker dealer it’s a little bit complicated because that’s a lot of volatility, but respect to have a pretty good ROE, better than the bank you know stated. The same happened with the insurance and we have good news there. Remember, [indiscernible] and now they need to go back to business and then this happens to be a very good business and we know how to do it. And now let’s talk about the foray, you know about the regulator and this is another deal totally. The heavy loss of more clients and cost control, and I think the work is over because the rates will not have the impact [indiscernible] foray. So it’s going to be another story, but at the end in the future it’s going to be also a good part of the financial group. Remember as I always say we are a financial group and we have counter cycle the insurance and then this is one of them, therefore it should be one when the rates slow down. And so we feel very comfortable of the business that we have.

Alejandro Padilla

So I think during the, in fact if you look at the returns on equity, you are looking at a very efficient use of capital in those businesses. All of them are above 20% for their foray. We know the foray has a lot of [indiscernible]. The fact that foray is going to take as you know, to double the assets on the management base upon the mission structure that happen and also increase substantially [indiscernible] have difficulty on their accounts. So that’s going to take four, five years, so you will start to see some relief after year – after the very year on that part.

But there will be benefits come from the management of the investment that we have on that part. So repo rate is a long-term issue, is a good source of dividend for us. It will become pretty active on the main income side after three years that we start to balance out the amount of money that flows into the accounts and balance out the reduction on fees. So, but at this point the repo rate as you can see on the numbers is something that is very well driven.

Yuri Fernandes

No great. So what I understood is basically the annuities in the broker, they may run and they are running very close to the ROE of the bank unit around those 2027, right? Insurance is not there yet, but I get the message is that you see these going to kind of that level and the thought is the only one that ROEs are more in line with cost of capital like it’s a more specific unit, right? Like is this summary okay, half as EBITDA you understood correctly?

Rafael Arana

No. You look at, the business is 40%, above 40%, so the return on equity of the insurance business is extremely high, is about 40%; the annuities above the 20s. I think the issue that we have on their businesses on that you have to look on tangible. You will see a much more reasonable one at this point in time the return on equity including the good really is very positive. For the annuities and the insurance business are well above the return on equity of the bank, especially the insurance business, the annuities is more aligned to return on equity of the bank.

Tomas Lozano

Rafael?

Marcos Ramírez

Rafael, financial lead.

Rafael Arana

Yes. I want give you some flavor, more flavor on what did you ask? I mean that we have a lot of opportunity to growth, in all the lines of businesses. And let me start with insurance. I mean insurance I mean the most profitable products that we sell are related to bank insurance and those are products linked to credit, but also we sell products, which are not linked to credit. So as long as the bank keeps growing as it has been, we will see there definitely a very nice growth in earnings in the future because what will happen in the past was related to COVID. But that’s something that is about to be gone quite recently, I mean, very recently. And we’re very confident that we will keep growing there and we are also developing some other distribution channels for the insurance products in the digital world. So, I think we will see there some healthy product and actually the return on equity for these lines of businesses is about 50% in insurance business. So it’s quite is much higher than what you see in the bank level.

Now, let me go to the annuity firm. The annuity firm has been performing very well. And as you know there are two lines of businesses, which are related because it depends on how many pensioners that you have, but the first business is to of course sell annuities. And we have been there the leader in the market with 46%, 47% of the market share. It depends on how the market grows, but as you may know, we expect that this market will be growing steadily in the future, mainly because the transition generation that is those workers that were, that started after – it will finish for all those workers that started contributing to the system in 1997.

So they will not have the right to be pensioners according to the previous law. So this market will keep growing and, of course, eventually this will be a very, very large number and work the main player and the other line of business is that we sell credit loans to, which are payroll loans, but with very low risk because we are – we pay the payroll. So, we have a very – we have a delinquency rates there because we pay us first and then we put the money into the pensioners accounts. So it’s a very, very, very healthy business. And also the ROE has been performing quite well. And I should tell, or I should mention that we’re expected that market to it to keep growing.

Now, regarding to the, I mean as you know, we have a reduction in the short term of 28% in the commission that we charge on the assets under management. But we also face this marketing stability that reduce the assets under management with respect to review in our budget, more or less 13%. That’s why and that’s why we’re due to those facts. I mean, we are having a like one – I would say like a 1,640 million less in terms of commissions respect to previous year, but also because we have to invest the capital of the authority in the funds according to special reserve. We have a mark-to-market hit in for that money of around the 870 million. So, what I will tell you is that taking out those effects, the result would have been double for the authority.

And I’m talking here of course, a 100% because we only own 50% of the authority. So, we will have at this point the double of the earnings that we are observing. Now for the future of course, given the dramatic production last year, hopefully we will not see such reductions as in the commissions. And therefore we expect that eventually as the asset management recover. And also it depends of course on the growth unemployment and also on wages. But we do foresee in the future that assets under management will keep growing and also with less reduction in the commissions. And also something that is coming next year is start to come next year, is that remember that contributions will rise steadily, I mean will rise for the next 10 years more or less 1% on the payroll contributions per year.

So taking those facts into consideration, I think that they will be better used for the afforded business as well. And hopefully as we spend a lot on the transfer of accounts, hopefully those will also be lower in the future and a more concentration industry and that will also help for better performance of these assets. That’s what I would mention in pensions.

Yuri Fernandes

Perfect guys, and thank you very much for all the insights and the color. Thank you.

Tomas Lozano

We will end with the final question from [indiscernible], please go ahead.

Yuri Fernandes

Hello guys. Can you hear me?

Marcos Ramírez

Yes. Very well.

Yuri Fernandes

Thanks for the call. Just three questions, just has to check in your guidance of ROE you are not including for this year any additional payment of dividend. This is the first one. The second one is, in the please continue to grow stronger in particular electronic banking what expect for the second part is for this fourth quarter. And the last one, when we see that the loans breakdown in the portfolio mortgage and consumer have been growing faster than commercials. What do you expect for the next year? These two lines growing more than commercial and corporates as was the last year. That’s all. And again, thank you for the call.

Marcos Ramírez

The first one Federico, yes the guidance for return on equity does not include any dividend payments.

Rafael Arana

Exactly. The other question, I think the mortgage and the consumer has been outstanding growth. If you ask next year we will see a moderation on the growth on the mortgage growth because as you know the increase in rates mortgages in Mexico are fixed rate. So eventually you will see that there are to look a credit for 15 years at a high rate. It would not be very up for our clients even though we have been managing the price pretty well. But I think that there will be more duration on the mortgage for the next year. The other thing is that, in some part of the country, the proper which also have been having some discounts, so that one is balance – that’s not the case all over the country. There another prices are going fast really high.

So, I think it will be a moderation for [indiscernible] this year. And the last one you could with set all the commercial fees, this will continue to expand well above loan growth. And you’ll see that the fourth quarter usually is a very high quarter of this. So that will continue to be the number more on the 13% or goes from 14% for the fee growth. But I think it will be as well based there, the loan growth.

Marcos Ramírez

Thank you, Federico.

Tomas Lozano

With this we conclude our presentation. Thank you very much.

Marcos Ramírez

Thank you all.



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