Banco del Bajío, S.A., Institución de Banca Múltiple (BBAJIOO) Earnings Call Transcript & Summary

Good morning, everyone, and welcome to Banco del Bajío First Quarter 2025 Results Conference Call. My name is Leanor and I will be your coordinator today. [Operator Instructions] Before we begin the call today, I would like to remind you that forward-looking statements made during today's conference call do not account for future economic circumstances, industry conditions, company performance and financial results. These statements are subject to a number of risks and uncertainties. Joining us today from Banco del Bajío is Mr. Carlos De la Cerda, Executive Vice Chairman of the Board of Directors. Mr. Edgardo del Rincon, Chief Executive Officer; Mr. Joaquin Dominguez, Chief Financial Officer; and Mr. Luis Quiroz, Investor Relations Officer. As a reminder, this video conference is being recorded. For opening remarks and introductions, I would like to turn the call over to Mr. Luis Quiroz. You may begin.

Good morning to everyone, and welcome to Banco del Bajío's conference call for the first quarter of 2025. On this conference call, we will talk about quarterly results, the evolution of the main trends and dividend payment approved at the AGM on Wednesday. All the information used throughout the presentation about the industry is from CNBV data as of February, which is the most recent publicly available information. Without any further ado, let us start the presentation. On Slide 3, we would like to briefly describe some key ratios recorded in the quarter. The loan portfolio expanded 10.8% with company loans expanding by 12.3% underlying a better-than-expected behavior in loan demand. Total deposits are growing by 10.5%, showing important sequential growth in the quarter. Regarding the asset quality, the NPL ratio stood at 1.5% and the coverage ratio at 1.35x while the cost of risk continued its trend to a more normalized rate at 85 basis points. The preliminary capitalization ratio stood at 15.7%, yet it is expected to decrease next quarter as a consequence of dividend distributions. Quarterly net income was MXN 2.5 billion, yielding an ROE of 21.3%. Revenues accounted for MXN 6.4 billion, increasing slightly despite the pressure on the NII from lower rates as noninterest income show important growth this quarter. The NIM was 6.3%, and the efficiency ratio stood at 37.4%. On Slide 4, we would like to emphasize some key indicators from our digital transformation strategy. In this slide, you can observe the evolution of the transactions at BanBajío. In the chart above, you can see the number of transactions on the different channels, observed how in 2020, we had more transactions done in branches than in digital channels and how it has evolved with branches even decreasing in absolute terms compared to 5 years ago and how on the other hand, digital transactions are now by far our largest channel. The chart below paints a similar picture, but with amounts transacted on each channel. The total transactions have growth at an impressive compounded rate of 21% over the last 5 years. On the same time, transactions in Bajionet increased by a multiple of 3.3x while branches have only grown by 30%. Moreover, Bajionet now accounts for 82% of all the amounts transacted compared to 64% at the beginning of 2020. The increase in volumes and transactions made through our channels are a reflection that the digital strategy is bearing fruit and that clients are more engaged with BanBajío. This becomes evident when you see how transactions have increased compared to the growth of active clients at a CAGR of 6% over the last 5 years. This evolution should be supportive of continuous growth in deposits and noninterest income. In Slide 5, the total portfolio reached MXN 268 billion, an increase of 10.8% compared to the first quarter of 2024. This quarter, we continue to see good trends in company and consumer loans, while we saw contraction in mortgages. It is worth mentioning that this evolution continues to be supportive of the yield of the portfolio as the bank is growing in segments with better margins. We have seen some resilience in loan demand standing right now in the upper part of guidance despite the decline in GDP growth expectations for 2025. Total deposits stood at MXN 260 billion, an increase of 10.5% compared to the first quarter of 2024. During this quarter, we saw good growth in customer deposits. We are going to provide more detail about the funding structure and its trends in Slide 8. On Slide 6, we can observe the evolution of our consumer loan portfolio which now accounts for MXN 7.2 billion, and it is growing by 17.6% against the first quarter of 2024. As we have mentioned in previous quarters, we see the consumer loan portfolio as a strategic asset to diversify our business. We have managed to grow this portfolio with a remarkable asset quality, better than industry standards. As shown in the charts with the NPL ratio of payroll loans at 2.37%, credit cards at 2.83% and personal loans at 1.66%. In Slide 7, we would like to highlight BanBajío's asset quality. As you can see on the upper chart, our NPL ratio stands at 1.52%, while our NPL adjusted 2.62%. Both ratios compare far better than the industry standard. The chart on the bottom right shows the evolution of the cost of risk, which has stood at 85 basis points for the quarter, continuing the trend towards a more normalized level. The coverage ratio remains strong at 1.35x. Even though that we have done a cleanup in the balance sheet over the past quarters, we continue to hold MXN 763 million of additional reserves in the balance sheet. Moving on to Slide 8. Total funding stood at MXN 315 billion, an increase of 11% compared to the first quarter of 2024. During this last quarter, we saw a good inflow of deposits, especially from demand deposits, which grew 6.9% quarter-over-quarter. Within the funding mix, we see how the overall mix of client deposits against institutional funding has remained stable. However, we see how in the last 2 years, demand deposit with costs have gained relevance against zero cost deposits, reflecting on the competition we see in the market for corporate treasuries. The funding mix now is comprised of zero cost demand deposits at 18%, interest-bearing demand deposits at 23%, time deposits at 42% and institutional funding at 17%. On Slide 9, we can observe the evolution of our margins. The NIM for the first quarter was 6.3%, contracting by 68 basis points year-on-year. The year-on-year contraction comes as a result of the sensitivity to rates accounting for 39 basis points of the reduction and a negative impact on the mix, which accounted for 29 basis points. We estimate our ex-ante sensitivity to rates considering the current mix of assets and liabilities to be around 21 basis points of NIM per every 100 basis point change in the benchmark rate, which will represent an impact of around MXN 739 million of revenues and MXN 465 million of net income for the full year. In Slide 10, you will see the performance of BanBajío's revenues, which grew 0.3% compared to the first quarter of 2024. The financial margin contracted 2.8% while noninterest income increased by 25%. Fees and trading income grew strongly in the first quarter by 20.5%. The bank continues to make important progress in businesses like cash management fees, trusts and POS fees growing at 22.3%, 19.2% and 11.7%, respectively. Moving on to Slide 11, we can see the performance of our efficiency ratio. It came in at 37.4% for the first quarter of 2025. BanBajío's efficiency ratio stands strong against the industry. The first quarter, expenses grew by 10.3% year-over-year, which is consistent with the lower part of guidance. We continue to make efforts to bring down expense growth, and it is a priority for this year. However, the bank continues to invest in some key initiatives such as branch openings and some upgrades to the infrastructure. On Slide 12, you will see the evolution of the profitability metrics of BanBajío. As shown in the chart, the quarterly ROA stood at 2.7% and the quarterly ROE at 21.3%. On a per share basis, the first quarter EPS stood at MXN 2.09, which represents an annualized earnings yield of 18.2% computed with the average stock price for the first quarter. In Slide 13, we can see the preliminary capitalization ratio as of March of 2025 of 15.71%, of which almost all is core Tier 1 capital. The capitalization level increased compared to previous quarters as a consequence of healthy earnings accumulation. Lastly, on Slide 14, we presented dividend payments that were approved in the Annual General Meeting on Wednesday. The distributions are up to a 50% payout of 2024 earnings which will take place in 2 installments, one in May and one in September, both for MXN 2.7 billion or MXN 2.25 per share. Adding up the 2 distributions will account for MXN 4.49 per share equivalent to a yield of approximately 9.6% computed with the most recent stock price. We anticipate the capitalization ratio will stand close to our 14% target right after the dividend approval. To conclude, we are pleased to share the results of the first quarter. We remain vigilant of the evolution of the Mexican economy. As of now, we maintain the same guidance we provided back in January. We had some positive trends, such as better-than-expected growth in loans, deposits and noninterest income. Yet there are many uncertainties about the economic variables coming from internal and external factors. Once we have more clarity about the evolution of the drivers in the coming quarters, we will make the necessary adjustments. With this, we conclude the presentation, and we can open the call to the Q&A session.

[Operator Instructions] Our first question comes from the line of Brian Flores.

This is Brian Flores from Citibank. I have 2 quick questions. So the first one is on asset quality. We saw the NPLs picking up. So just wanted to see if you could elaborate a bit on what is happening? Is it isolated cases? Is this a specific sector of the economy that is being affected? And then how should we think about this going forward? Luis just mentioned you're maintaining your guidance, but do you see pressures here on the cost of risk? And then the second one is on NII sensitivity. I think in Slide 9, you mentioned as of December this was around 20 bps per 100 bps change in TIIE. This is about MXN 465 million in net income. Just wanted to know if this has changed over the first 4 months of the year because I know your guidance was prepared with perhaps higher rates than what we could be seeing in year end.

Regarding asset quality, Brian, we saw a better trend during the first quarter. We continue to have a few cases, of course. But we are seeing, let's say, a better trend. This is still above the regular level that we used to have during the first semester of '24, for example, or before that. Also, the mix of the portfolio is improving little by little as we gain an additional mix in consumer portfolio. So the new level of cost of risk will be higher than the previous one. Of course, asset quality remains as a top priority for us, especially in this environment of uncertainty. During the first quarter, we asked our bankers to personally visit every client with loan exposures above MXN 100 million, $5 million. We are talking about more than 700 customers. It was a very good exercise. We gained insight into their plans for the year, but also risk perceptions and views at that moment on potential tariffs and how they are planning to manage such scenarios. These conversations not only allow us to provide timely support to our clients but also help us to identify new business opportunities. We are clearly also being more prudent in origination and we are focused on structuring deals with stronger collateral schemes to ensure more certainty going forward. So given all the above, we maintain our expectation to remain within guidance for asset quality. Luis will answer the question about sensitivity.

Brian, this is Luis Quiroz speaking. About the sensitivity, remember that the management right now is focusing on changing the sensitivity profile longer term with some strategies as basically diversifying our sources of revenues and also diversifying our portfolio mix. But these strategies, they take time. So last year, we did a more short-term strategy where we increased the duration in some bonds that we have here in the bank. We acquired MXN 10 billion of longer-duration bonds. The duration for this exposure is almost 6 years, and the yield we managed to lock in was 10%. The sensitivity compared to last quarter decreased a little bit because during the fourth quarter, we received a lot of cheap deposits. That was normal because of the seasonality. Normally, by the end of the year, we receive a lot of deposits. And these deposits start to leave the bank in the first months of the year. It's also normal, and we see this every year. And because of this change in the mix, where these cheap deposits, they came in December and they exited the bank throughout the first quarter, the sensitivity decreased a little bit. We continue to be very vigilant of how the yield curve and the expectation of rates is changing. We continue to analyze if we could do something additional of these short-term strategies to manage the sensitivity. But honestly, the focus of the management is on those longer-term strategies of diversifying revenues and diversifying the mix of the portfolio.

Perfect. Very clear. So also the guidance range for NIM so far is maintained, this is what I understand, right?

We are maintaining the guidance, Brian. But we are also clear that the consensus of the analysts is today at lower rates than the original plan. Our plan was built with a GDP growth of between 1% to 1.5% and rates coming down to 8.25% at the end of this year. And the new scenario is more close to -- to GDP growth close to 0 to 2.5% and rates coming down to 7.75%. Under that scenario, I mean the latest reading of inflation was higher than expected. So we have doubts about -- we believe that there is no clarity about the following decisions of the Central Bank. But given that scenario, the NIM would be a little bit lower than today, getting to 6.1%.

Our next question comes from the line of Ernesto Gabilondo.

My first question will be a follow-up on this NIM and NII growth expectation. As you were saying, market is already expecting more interest rates cuts than originally expected. Some already are assuming a 7% interest rate by the end of 2026. So how should we think about this on your NII growth and NIM evolving during this and next year? And what will be your assumptions, the ones that you are working in your model for the interest rate for this and next year. And then I have a second question in terms of expenses. In your remarks, you were mentioning that this year, focus would be in cost control discipline. But also, you mentioned you will still do some investments related to branch opening and infrastructure. However, given the potential economic slowdown in Mexico, can you elaborate in ways where you can see some room to mitigate part of the impact by reducing expenses?

Yes, of course, the current environment of declining interest rate is natural to see some pressures on margins. What we expect for this year, I mean, we are with the market -- with a market consensus to be around 7.75% at the end of this year and get to 7% at the end of '26. We made an exercise even looking to scenarios for '26 and for '27, declining the Banxico rate in '27 lower than 7%, even getting to 6%. Under that scenario, and let's say, with a reasonable behavior of the drivers, I mean, low -- growing a little bit more the loan portfolio because normally, under that scenario of lower rates, credit demand improves. We can see under those scenarios that in all cases, our ROE is in high teens. So we are I mean, we're very glad with that scenario, and we feel that profitability of the bank will continue to be a very, very good compared with our system. That is what we are expecting. I believe there is still a lot of uncertainty, both in Mexico and globally. The interest rate outlook, we believe is still unclear. But in this context, we believe that it's prudent to maintain our current guidance, as Luis was mentioned during the presentation. We have some positive plans, and we know we will have some pressures on margins. But still the outlook and the geopolitical behavior, I mean, could change at any moment. So given that uncertainty, we decided to maintain the guidance and wait a little bit to have more clarity about those.

Ernesto, this is Luis Quiroz. Another important thing to bear in mind is the expectations for rates have decreased for 2025, but they have been very stable for 2026. So in that sense, what will happen is we could see some additional pressure in the NIM for 2025, but the expectation for 2026 remains almost the same. I mean the market has not changed the terminal rate, the expectation for the terminal rate. As Edgardo was mentioning, we have run several scenarios to see how margins and how the ROE will evolve. And we are confident that even with rates a little below the terminal rate that the market is forecasting right now at 7%, we can maintain the profitability in the high teens levels.

Regarding expenses, Ernesto, our full year guidance is between 10% and 12%. We are on track to be within that range. In the first quarter, expenses grew 10.3%. We are managing very well headcount. We are not growing headcount. At this moment, only in those branches that we are opening and some -- and a few positions of the bank. We are trying to manage that with a lot of discipline. But we need to continue growing transactions. As you saw in the presentation, we need to continue investing in infrastructure, in technology, but also in cybersecurity. But in parallel, as you mentioned in your question, we are securing our branch expansion strategy. We are planning to open 15 branches this year. That is adding in expenses, a little bit less than 1%. It's 0.8%. The additional growing expenses because of branches, new branches, but we are getting to breakeven point very, very fast in a few months, and that is additional revenue for the bank. So we are planning to continue with that strategy. So with that, cost control is a top priority also. And it's part of the strategy to support the efficiency of the bank. We fully expect to be within the guidance, but we are trying to manage to be in the lower end of the range.

Our next question comes from the line of Tito Labarta.

It's Tito from Goldman Sachs. My question, I guess, is on your loan growth and just sort of the overall outlook. I mean, I understand all the uncertainty from some tariffs and everything. And -- but I mean, the economy has already kind of slowed yet, I mean, you still see yourselves and even the system still growing at a fairly healthy pace. And I understand the need for caution, just given again, the global uncertainty, everything going on. But I guess, why do you think things have been so resilient? And if maybe some of this uncertainty settles down a little bit. I mean do you think the trends can continue to be as healthy as they've been? Or is it just a matter of time for the trends to catch up to sort of some of the uncertainty and things should slow down significantly. Just to get a sense of like how much of this uncertainty has actually materialized? And how much is still sort of waiting to happen. It'd be interesting to get your thoughts.

To be honest, we are surprised by the continuous trend in credit demand during the first quarter, and that continued in April. So we are in the upper end of the guidance range. Given the outlook for very low or even flat GDP growth, one would normally expect credit demand to weaken. However, a decline in interest rate environment could help to sustain or even boost the activity. So we feel -- until today, we feel comfortable with the guidance and we expect to maintain a very healthy and disciplined loan growth. To provide you with more -- a little bit more detail. The growth that we're having year-over-year is driven mainly by new clients. So over the last 12 months, we added 970 new commercial borrowers, which account for MXN 18.6 billion. That is an average loan size, slightly below MXN 20 million. So the ability to attract new and high-quality customers and relationships is very important for us, and that is supporting a lot of that growth. So I mean we are growing year-over-year a little bit more than MXN 26 billion. So this 18.6% of new borrowers is an important percentage of that growth. So that -- I mean, we are growing but not with the same customers. We are adding more customers that are mainly coming from our competition.

Great. That's helpful color. Maybe just one follow-up. I guess, in terms of these new borrowers that you're adding, how has that trend evolved throughout the year? Do you see any slowdown in adding new borrowers? Or has the pace remained fairly steady over the last 12 months?

Not really, Tito, we continue to see the same trend. It's part of the goals of the bankers both in Banca Empresarial and SME bankers. So we continue to see a good trend affecting customers and looking for a better service.

Our next question comes from the line of Ricardo Buchpiguel.

Ricardo Buchpiguel from BTG Pactual here. First on noninterest income. Could you please comment what has been driving your strong trading income in Q1. And what should we expect going forward? Just want to have a sense if there was any one-off that particularly helped Q1, and we should exclude that moving forward. And you also mentioned in your previous question that you have been doing more on new clients to drive the year-over-year performance on your loan portfolio. Can you comment more about the profile of these new clients if they are coming from any particular region where you have been putting up more branches. Which type of bank have you been stealing these clients if it's more incumbent banks and which one in particular? And any information on that would be helpful.

Ricardo, this is Luis Quiroz. Regarding noninterest income, we are seeing very good trends in different business lines. So we are very positive about the evolution of this. However, it is also true that during this quarter, we had a positive valuation from some bonds that these bonds they were not classified as hold to maturity. So the change in the rates, the rates that decreased during the first quarter, we had a positive valuation of around MXN 80 million that helped the trading income. Regardless of this, we are seeing very positive trends. So the outlook remains very positive in our view. Remember that we are going to have some tough comps for the second and the third quarter. Since last year, we sold some shares of Visa and Mastercard. So it is reasonable to expect a deceleration in the second and the third quarter. However, we are seeing very positive trends on the day-to-day business.

Selection in the...

In the overall, in the comparison, but they're still very good growth, expecting sequential growth.

Regarding your question, Ricardo, about new borrowers and where are they coming from, they are coming really from all the banks, let's say, from the G6 and also from other banks smaller than us. In terms of regions, we maintain our leading market share in commercial lending in the Bahia region. That means we're growing, I mean, at least equal to the market in the Bahia region. And we are seeing very strong growth in the Mexico City metropolitan area and in the north of the country, particularly in Nuevo León. So these results are very good, and they are across the whole country.

Our next question comes from the line of Marlon Medina.

This is Marlon from JPMorgan. My first question is on the line of the other operating expenses. And here, we saw that there was a sequential decline. And looking to the table, it seems to be related to a recovery of legal expenses. I don't know if you could dive a little bit deeper on that. What is it related, et cetera? And my second question is a follow-up on loan growth. You mentioned it's growing well across all regions. But are there any specific segments or industries where you're seeing better demand or like alternatively, any industries where you are seeing a deceleration?

Marlon, regarding the other operating income, remember that the most important part of that line is the IPAB fee. We will have to pay more IPAB fee as we grow in deposits, that is natural to expect. And again, I mean, during the second quarter, we saw very good sequential growth in deposits. They were in treasury deposits. So they were on the more expensive side of the deposits. But the trend was very good, and that also has its repercussions in terms of the IPAB fee that we have to pay and it is reflected on that line.

Regarding your question about the activity of the segments in which we are growing. The main contributors have been wholesale and retail trade, transportation, manufacturing and real estate. Within real estate, the growth is driven by both new housing projects and industrial developments. So those are the segments in which we are seeing additional demand and growth. Regarding the expectation for the rest of the year, it should be normal that loan demand to decrease a little bit because of GDP. But with the activity that we are seeing until today, we are expecting to get at the end of this year to be within the guidance that we provided.

Next, we have a follow-up question from Brian Flores.

Just another quick one here on dividends. As you mentioned, you approved a 50% payout on 2024 net income. However, this is a decrease, right, from the 60% payout you saw last year. Of course, we're in different parts of the cycle. But I just wanted to understand if you could elaborate a bit on the logic behind this decrease on the payout ratio.

Brian, this is Carlos. Yes, I would say that this year, we decided to go for a 50% payout ratio, which we consider we the normal situation in -- in the next few years, depending on the loan growth and the risk asset quality associated to the system, we will pay out between 40% and 60%. That range would be our normal decision. This year, we went for a 50% payout ratio because we believe that there are a lot of uncertainties in the economy, and we didn't want to decrease our capitalization rate below 14% to wait for the economy to have more clarity. So we will be monitoring what happens with the economy, with the loan growth, with the risk associated with the asset portfolio to decide whether we stay with this 50% or we pay out a little bit more by the second semester or we just stay like this. And every year will be between that range, 40% and 60% depending on how we see the economy going.

[Operator Instructions] Our next question comes from the line of Anand Bhavnani.

I'm from White Oak. When we think of the credit cost, do you believe there is a risk to the upside or downside from the current levels?

Not really, Anand. We feel comfortable with that with the level that we have today and with the guidance that we provide to the market. Of course, we have been monitoring a lot the portfolio. And also, as I mentioned, we decided to visit all the customers, more than 700 customers with exposure above MXN 100 million. And that was a very good exercise and provide us with very good insights from customers. So we are monitoring that and it's very, very possible that we will visit them again in the middle of the year. So we continue very close to our customers, to be ready to support them. So with all the information we have today from the portfolio and customers, we feel good about the guidance.

We have not received any further questions at this point. So that concludes our question-and-answer session. Thank you. I would like to hand the call back over for some closing remarks.

Thanks, everybody, for connecting. If you have any further questions, feel free to reach us through an e-mail or a meeting request. We will see you all in July when we report the second quarter. Thank you very much.