Grupo Financiero Banorte, S.A.B. de C.V. (GFNORTEO) Earnings Call Transcript & Summary

Good morning. I'm Tomas Lozano, Head of Corporate Development, Investor Relations and ESG. Welcome to Grupo Financiero Banorte's Fourth Quarter Earnings Call. Our CEO, Marcos Ramirez, will provide an overview of the main results for the quarter and the year, including the market dynamics that favor loan growth and deposits, the tailwind from the rate environment in the country and the gradual recovery of our non-bank subsidiaries. On our ESG slides, you will find the most relevant updates on this project. And I would like to highlight the completion of the first stage to quantify the carbon emissions of the most intensive sectors in our loan portfolio. You may refer to the medium and long-term reduction targets in our sustainability webpage. After our CEO's presentation, Rafael Arana, our CFO and COO, will provide a closer description of our NIM dynamics, the rationale behind our cost structure and our capital ratios. He will also present our expectations for this year's guidance. We will then up -- open up the session for any questions you may have. Please note that today's presentation may include forward-looking statements that are subject to risks and uncertainties, which may cause actual results to differ materially. On Page 2 of our conference call deck, you will find our full disclaimer regarding forward-looking statements. Thank you. Marcos, please go ahead.

Thank you, Tomas. Good morning, everyone. I wish you all a successful New Year. Thank you for joining us today. We closed the year with a strong quarter, marked by expansion across most of our business lines with an evident recovery in sectors that were hurt by the pandemic and sound performance at the bank. This is supported by accelerated loan growth during the quarter, solid asset quality and a well-oiled machinery that has allowed us benefit from the positive rate environment in the country. Despite that challenging and uncertain global environment during 2022, the Mexican economy performed better than initially anticipated with GDP growth for the year ending close to 3% on the back of a consistent recovery in private consumption and increased activity in the export sector. For 2023, we expect moderate economic activity as we incorporate the effects of a potential global recession. However, we believe that these headwinds will be partially offset by the initial benefits of the near-shoring activity, along with increased external demand, private consumption and government spending. Therefore, we have revised our GDP growth estimates for the year to 1.5% from the 1.0% previously forecasted. Regarding monetary policy, we expect Banxico to have [ one last 50 ] basis points hike in February, taking the reference rate to its peak to [ 11% ] for a few months, and then start the cutting cycle towards the fourth quarter of the year to end at 10%. This tightened policy together with stability in the pesos valuation are expected to have a positive impact on inflation during the year. After peaking in the fourth quarter of 2022, inflation is expected to remain somewhat sticky during the first half of the year and gradually bring down during the second half to end close to 5%. On the political front, attention will center in the trading agreement resolutions regarding automotive, electrical and agricultural matters. Moreover, June, we will have elections for 2 governorships in the State of Mexico, Ocuilan. On the legislative agenda, discussions in Congress regarding reforms to secondary electoral laws will continue. And in March, the Lower House will elect a new President of the National Electoral Institute's General Counsel [indiscernible]. Overall business results on Slide #3 describe a solid balance sheet. We're prepared to take the most out of the rate cycle in Mexico. On the loan side, we reached double-digit growth in our portfolio, further supported by continuous efforts to reduce our funding costs. Moreover, the structural changes at the bank are keeping asset quality below historical averages, while economic recovery has kept a more dynamic fee activity. Starting off with profitability, Slide #4, net income shows a consistent quarterly evolution, yielding an accumulated 30% increase for the year. ROE improved almost 400 basis points on a year-on-year basis, reflecting an expanding performance across most businesses, which is also reflected by a solid return on assets. Our non-banking subsidiaries are gradually recovering their contribution to these indicators as we will see further ahead. Moving on to the top line results of the group on Slide #5. Net interest -- net interest income has had a positive trend during the year and particularly during the fourth quarter as interest rate hikes has been gradually incorporated into our portfolio and strengthened by a sound deposit mix and a diligent loan insurance across most of the product lines. Non-interest income was also supported by a strong fee income from banking operations, offsetting inflation-related impacts in our annuities' technical reserves. Altogether, total revenues show solid quarterly and annual increases. Zooming into this Slide #6, they show a 7% sequential expansion, driven by higher seasonal activity in the quarter. With accumulated figures, these have double-digit growth, led by a strong electronic banking fees, higher advisory and structuring fees in commercial and government portfolios and higher domestic demand for consumer products. Digital and physical POS transactions had a seasonal boost during the quarter, driven by retail events in November, such as El Buen Fin, which is Black Friday and Cyber Monday. However, there was positive momentum for this throughout the entire year as mobility was fully restored in the country. Moving now to Slide #7. We see a strong expansion across the loan book, which exceeded our expectations, reaching an aggregated 12% growth. During the quarter, it was primarily led by a record high expansion of the commercial portfolio, which is expected to continue as near-shoring operation gradually materialize in the country. Emphasizing for this, we are currently strengthening our commercial teams in the north and central regions of Mexico, where most of these opportunities will be located. The government book had a strong quarter with a good credit demand from federal, state and municipal governments. Corporate loans were affected by prepayments, but continue to benefit from the dollar loan market, which currently represents 30% of our loan book. The consumer portfolio on Slide #8 displays a strong quarterly expansion and a record annual increase. The evolution of payroll and credit card loans has been driven by good consumption dynamics and has been particularly accelerated by the adoption of our digital offerings through the mobile app, the web and other service -- self-service channels. Auto loans continue to recover as supply shortages start to normalize. And mortgages continue to expand with a particular focus on high-time value customers, which will bring long-term profitability for the group. On Slide #9, asset quality during the quarter and the yield continues to exceed our expectations. The quarterly increase in NPLs responds to isolated cases and does not represent any industry-wide or geographical trend. In fact, some of these cases are expected to normalize within a few months. It is worth mentioning that we have made structural changes in our origination and collection processes to account for behavioral changes in our customers' approach to credit, particularly as they have a higher adoption of our digital channels. Analyzing the quarter's results by subsidiary, that's Slide #10. The bank results were impacted by higher extraordinary expenses that will strengthen our future operations, which we will review in detail later on with Rafael. Nevertheless, with accumulated figures, the bank continues to expand on the back of solid NII and asset quality as well as a stronger lending and fee dynamics, maintaining an ROE above 24%. As part of our commitment to our shareholders, we will be analyzing different alternatives for capital return throughout the year. The insurance business continues to recover with good premium expansion and COVID-related claims normalizing down to pre-pandemic levels. And car insurance claims increasing also to pre-pandemic levels as mobility is fully restored in the country. The brokerage sector show a quarterly reduction driven by lower interest income. The annuities business had an impact during the quarter, resulting from a [ year-long ] market contraction and inflation adjustments in technical reserves. As for pension funds, the business is still impacted by the pickup imposed by the regulator at the beginning of the year, as you remember, on top of the valuation effect of higher rates in its long-term investments. These effects will slowly be offset by an increase in assets under management brought by a gradual increase in employer contributions from 6.5% today, up to 15% over the next 7 years. On Slide #11, we provide greater detail into the insurance business performance, showing the -- a steady growth in premium origination, together with a gradual normalization to pre-pandemic levels in claims. Moving on to Slide #12, we are proud to have reached the second operating year of our joint venture with Rappi, accomplishing the operating and profitability targets initially set. We will continue with the steady growth in digital credit cards with a strict risk control and a continued focus on profitability. On Slide #13, our obsession with listening to our customers' voice and putting them at the core of every project has still very positive results in our Net Promoter Score, NPS, across all channels. We know there is still a lot of work to do, but we are on the right track to achieve a 90-point score and beyond. Shifting gears to ESG on Slide #14. I would like to highlight that during the quarter, we completed a relevant project to quantify the carbon emissions of the most carbon-intensive sectors within our loan portfolio. We have set medium and long-term decarbonization targets for those sectors, following international guidelines and standards in compliance with our commitment with the Net-Zero Banking Alliance. You may refer to these targets in our sustainability webpage. As a final note, I am happy to announce that we have already set the date for our Investor Day, which will take place on March 28 in New York City. We look forward for sharing with you the details of our most recent digital advancements, which are already transforming the way we do business with our clients in the digital world. You will soon be receiving our invitation with all the details on the venue, time and format, and I hope to see you all there very soon. Now I will leave with Rafael Arana, who will walk you through these positive results in our NIM, a more detailed expansion in our expense structure, and as you know, our new guidance for the year. Rafael, please go ahead.

Yes. Thank you. Thank you, Marcos, and thank you all for being at the call. Let's go through, I would say there are some questions about what's the behavior of the expenses and what are the main performing and what's some potential outlook for the -- what's going on for the interest rates and the effect that we will have on the NIM. As you can see on the slide, we have, I would say, very basic issues that are presented there. We continue to have positive operating leverage at the bank. The cost-to-income ratio and the group continues to go down, 38% is the cost-to-income ratio. And I think it's difficult at this process that we are living on the economy to really concentrate in just one metric like would be the expense line. I think we need to look at the revenue side and also look at the cost line and try to always be positive on the operating leverage. So that's basically what we are doing at Banorte. So when you see the cost-to-income ratio at 38% compared to the last year, you see a very, very strong evolution in the right trend. We continue to, as Marcos mentioned, to be very aggressive on the transformation on Banorte and the subsidiaries, Rappi and also [indiscernible]. And I think we can consider now Banorte really a digital bank with branches and you will see that on the Investor Day that we will present you the evolution that we have at Banorte and the results that we are achieving with our clients. On the -- basically, I would say that it's important to make a difference about -- because there were some concerns about some analysts that say, well, the evolution of the NIM hasn't been so strong. I think you have to consider the evolution of the NIM at the bank and the evolution of the -- on the NIM at the group. The evolution of the NIM at the bank continues to be very positive. And you have to remember that the lag effect of the interest rates hike, it really take us around 6 months to fully take the benefit of the hike. And you get immediately the, I would say, the effect -- the negative effect on the liability side. So we see a very positive growth on the net interest margin for the bank for the coming year -- for this year. And also, you will see a more balancing net interest margin for the group, because you have to remember that many of the group on [ their foray ] on the pension company and the annuity company and even in the insurance company at a lesser level, we have to bear out the effect of the inflation and that on the positions that we hold on that and the same on the broker. So -- but we see a very positive movement for the NIM for the bank. The capital ratio continues to be very strong, 22.9% and the core Tier 1, 15.2%. This is before we [ finalize ] the dividend for the bank to the group. There will be a reduction that we were very close depending on the time of the dividend payment, very close to again to the 14%. If we move to the next slide, you will see the evolution of the NIM and also the return on assets and the effect that that's having on the return on equity. The net income of the bank, you see a reduction in the fourth quarter, and basically, that has to do with decisions that we took concerning the expense line and also advance some of the projects that were very close to the -- to finalize the benefits on the IT side to accelerate the amortization and capitalization of those projects. If you strip that number out, the number in the fourth quarter will be very close to the MXN 10,000 [ million ]. But I think it was a very positive measure that we took and it will be beneficiary for this year. The return on equity of the bank, as you can see, it reaches 24.6%, on that part, if you normalize the net income, that return on equity for the bank will be well above the 25%. The return on assets for the bank is 2.3% coming from 1.8%. So we continue to see a good evolution. Our main goals were to be close to 2.2%, now we are at 2.3%. And you can see the evolution on the graph to the right-hand corner that the NIM of the bank accelerates pretty strong on a quarter-to-quarter basis. Some people say, well, if the interest rates are reaching the 10% and maybe we were reaching the 10.5%, what will be the effect of the margin? You have to consider that lag effect of the 6 months that goes, that will be very positive when the hike in the interest rate stops because you still have around 6 months more of benefits of the rates, and you will get immediately the benefit on the liability side once the interest rates start to go down. So we are very confident about the net income of the bank. If you see the net income on a year-to-year basis for the bank, it was above the [ 23% ], but I think this is quite positive concerning all the issue that you have on the funding side, on the liability side and on the asset side and the lagging effect. If we move to the next one, please. Here, you see a much more detailed graph that shows the trend and how is the acceleration part of the margin. You see a big jump in the second quarter from 5.6% to 6.3% in the third quarter, then to 6.7% on that part. What we feel confident about the continuous evolution of the margin is that the funding costs that you will see on a slide that I think it's [ 2 slides ahead ], we continue to be positive on the reduction on the funding costs. We understand that the liquidity issues that are not just in Mexico but all over the place eventually will move demand deposits to time deposit and put pressure on the funding cost. I think we could manage that, where we have been able to manage in the past. The NIM of the group is having a slower pace. As I mentioned before, because of the position that you hold on the insurance company and the annuities company and on the pension and on the company -- pension company, but still will be a very positive number by the [indiscernible]. If we move to the next one, the asset quality, Marcos also touched on that. But what we have been very efficient in managing of the balance sheet and also on how to use the potential benefits of the margin is that we have not been able -- we have not been using those benefits of the margin to really pay for provisions that usually come under this cycle that you have a hike in the interest rates and you have a pressure on the cost of risk, that hasn't been the case for Banorte. You see a small tick on the -- from the -- in the third quarter to fourth quarter, but basically, is what we call good provisions because of the growth of the portfolio. As Marcos mentioned, with a portfolio on the payroll growing above 22%, and credit cards, 15%, and most of the consumer book are growing at double-digit numbers based upon the way they use their provisioning lines is a very good uptick. And basically also on the commercial side, specifically to cases that are well under control, but they affect the bid on the cost of risk, but nothing -- we don't see a negative trend in any of the portfolios. On the write-off rates, you see that has also been very steady, nothing really above the line that we have seen in the past months. And the credit provision, as I mentioned before, based upon the growth of the portfolio has been extremely positive. On the next one, please. The funding cost, as I mentioned before, continues to be a goal that we have to continue to drop the funding cost in order to support the expansion on the margin. Even though if the interest rates start to go down, I think the funding cost tells a good story, because the mix on the demand deposits is now reaching 74% and 26% among the time deposits. So we see a good trend there that -- and that will be a strong support for the evolution of the margin whatever the interest rates on that part. So good trend on the funding costs. As you saw, demand deposits grew close to 16% for the year, overall growth on the funding side, 12%. So well above the -- very close to the asset side. So we see a good trend on the funding side, the transactional banking on the corporate is supporting a very large inflow of funds also on the government side. So we continue to be very positive for the funding side for this year. Next slide. Also a recurring question is how the sensitivity is really happening at the bank? You're seeing pesos, MXN 1.2 billion for each 100 basis points and in the dollar book, [ $1 billion ] for the dollar book. So we continue to be very asset-sensitive and taking very good care of the balance sheet and position the balance sheet also for an eventual drop in the interest rates. If you move to the next one, please. The expenses that obviously is a relevant question for the market. We have to split the expense growth in what is recurring expenses and what was the extraordinary expenses. The recurring expenses will -- if you look at in detail of the information that we provide to you was [ 5.3% ], the recurring expenses and extraordinary expenses account for MXN 1.5 billion. Also, you see on the graph to the right on the bottom side, really, the pace of growth of the recurring expenses has been very controlled and below inflation on that part. The extraordinary expenses, the rationale for the extraordinary expenses are 2. The first one is that based upon the dynamics that we observe on the commercial side, on the SME side, we decided to strengthen the position that we have on the commercial side, on the SME side. And we hired more than a 1,000 bankers to accelerate the market -- and capture the market that we see an opportunity there based upon everything that is going in Mexico. And I think we were underrepresented on the commercial side and on the SME side against one of our peers. Now we feel very confident. Now you see the expense. But this year, you will see also the benefits of that expense that we paid in the last year. So we are very well positioned as we see for the growth that we are experiencing in the commercial book and on the SMEs. And we are now very well represented where basically the growth is happening in Mexico. So we will be also in detail, as I mentioned before, another part of the extraordinary expenses is accelerated that we did on the IT side. And also relevant to notice is that Banorte is to finalize the migration of the data centers that we currently have. I think we are moving to a top of the line data centers to have resilience. Right now, our operating capability is at [ 99.9% ]. We want to conserve that. We have to be a top of the line on the data centers. I think we will achieve that by the first months of '24, but we are already in the -- in full migration of the data centers to the new standards that we are having for Banorte. That has also created additional expenses, but I think is a good expense that will be there for the future and allow us to have top of the line data centers and capability on the IT side. So the expenses were not really expenses that were really non-productive at all. I think they are very productive expenses and the recurring expenses are well under control on that part. Another issue that you have to remember, you know that because you can -- we can follow that is that usually, the effect of the inflation has a lagging effect of 1 year, and that has been the story for Banorte for the -- not just for Banorte, for most of the companies. So I think we are well positioned to have -- continue to evolve to a more positive cost income ratio in this year and in the coming years based upon all the digital efforts that we are putting at the bank. If you see the split about staff and back office and staff and the sale part of the group, 80% is really devoted to the business and 20% is devoted to staff on the back office. So I think we have a very, very well balanced, and that's the result of all the technology that we have put in place for managing the operations and the growth of the business. So in a much -- if you -- if we also move to the liquidity coverage ratio, you see a drop on the liquidity ratio. It has to do with the rate of growth that we experienced on the asset side. But also it's clear that liquidity, not just for Mexico but all over the world, will be pressure on the -- on this year. That's why we have concentrated a lot on the [ funding ] side on that part and taking very good care of the relationship that we have on -- especially on the wholesale banking that is basically the ones who requires the big tickets on the asset side, I think we are very well positioned for those companies. And we have a very disciplined view about where to put our capital is where the relationships can grow, we don't see the -- not just in the present and not just go for the tickets, but go for the relationship, and also that's the reason on the consumer side. The capital ratio continues to be very strong, well above all the TLAC requirements that we have. And as you have seen in the past, our leverage ratio continues to be the most deleverage ratio in the market. If we move to next one. What was the result about the guidance that we gave you at the beginning of the year. And it's important to notice that, as you remember, we changed the guidance as we saw that the evolution of the market was better than expected, and maybe that would be the case also for this year. The loan growth, we anticipate 7% to 9%. We achieved 12%. The NIM expansion was in range, 90 basis points. The bank expansion was also in range, 110 basis points. The expense growth in the recurring side was positive, not on total because of the decision that we decided to invest on the business and on the IT side. The efficiency ratio is in line what we guide. Cost of risk is also in line. Tax rate, the same. Net income at the high end of the guidance. The return on equity for the group at the top of the guidance, and the return on assets for the group also at the top of the guidance. So that was the result of the guidance that we achieved. You have to remember as I mentioned that we changed the guidance as we saw the evolution of the market. And I think it will be the same case for this year, even though there's a lot of uncertainty about what will be the potential recession in the U.S. or what will be the evolution of the market. But Mexico continues to be I think very well positioned to capture the evolution of what's going on in the market. I will now move to the '23 guidance. The loan growth we anticipate based upon what we mentioned, GDP growth was 3% last year. We see GDP this year growing 1.5%. So loan growth is 6% to 8%. The net interest margin [ 6% ]. This is the average number for the year. And for the bank will be very close. And in some months, you will see that the NIM of the bank will be well above the 7%. On average, we are putting 6.7% to 7%. Recurring expenses will be 7% to 8%, and the total expense grow to 11% to 13% because of the lagging effect that I mentioned to you. But the efficiency ratio will continue to go down, and we will have a positive operating leverage on the group. The cost of risk, we are moving a bit, 1.6% to 1.8%, because we continue to see good evolution on the consumer side. Tax rate, 24% to 26% as unusual. Net income from MXN 50.5 billion to [ 15 points ], MXN 52.5 billion. The return on equity close to 21% for the group and for the bank, very close to the 30% return on equity for the bank. The return on assets are reaching above the 2.4%. That would be a very positive number for the history of the group. And as I mentioned to you, the GDP from 0.5% to 1.5%. If the GDP pushes over to the 1.5%, we will adjust the loan growth and the consequential numbers that are affected by the loan growth. The inflation at the end of the year, the inflation will be very close to 5.5%. Maybe there will be a discussion with our economist, but he has been very precise on adjusting the numbers for the inflation. The rates, we see an average rate of 10.75%, that will continue to be through the year, that will be the effect through the year on that part. There will be some pressure on the funding side, but I think the asset side will continue to be very positive because of the asset sensitivity that the bank have. With this, I conclude my remarks. And as Marcos mentioned to you, we see the Investor Day on the 28th of March. And the Investor Day tries to answer the questions that many of you have post to us, how is the dynamics in Banorte that Banorte is achieving the resource on a continuous upward trend on that part. And that's exactly what we would like to show to you live on the Investor Day, how really Banorte operates and how do we really address the market and the client. Thank you very much for your time. And now we move to the Q&A now.

Thank you, Marcos and Rafael. [Operator Instructions] We are now ready to start the Q&A session. We will start with Ernesto Gabilondo from Bank of America.

Congratulations in your results and in your double-digit net income growth guidance for the year, which I believe already includes the new investments. My question is on that, on the new investments, we noticed your OpEx growth guidance of 11%, 13%, is considering 2% related to [indiscernible] and I think 3% related to the IT investments and the commercial hirings. I understand that the investments represent an attractive opportunity for organic growth. But when should we start to see these investments translating into revenues, especially in [indiscernible] as we have seen that the focus in the digital transformation, I think globally and in the region has changed to profitability versus client growth and also the monetization is coming from having more digital deposits and digital loans. So I would like to hear your thoughts on that?

Ernesto, thank you very much. Yes, your numbers are perfectly right, as we are reading out on the same numbers that you have. Remember, we are running the bank and we are changing the bank. And that's why we are separating these 2 because we want to be a progressive bank and show you how it moves. And right, our main focus always is profitability. It's not -- we are a bank that we need to give that, and we are not this kind of [indiscernible], so -- with this profitability. And we are expecting, let's say, in 3 years to see the results of all these investments. And we showed you clearly where the money is going and all these. But all these comes with accountability. We are not sending money and see next what's happening. We are very careful on what we are doing. Rafael, do you want to say something?

No, no, no. That as Marcos mentioned, the 3 years for the renewal, the hiring of the people will be producing results this year.

Perfect. And just last question on dividends. We continue to see this high common equity Tier 1 ratio. So just wondering on what should we expect in terms of the dividend policy and the buyback for this year? To my knowledge, you haven't used so much the buyback that you announced last year. So just wondering your expectations on that?

Thank you. 50% minimum, and let's see how it goes. But we are sort of committed, let's say, that to Board, 50% minimum.

And buybacks will be same amount?

Yes, the buybacks are -- as we have discussed with you, are present, and we are analyzing every single day...

Opportunity.

The opportunity and how do we make a mix of our dividends. But as Marcos mentioned, the dividend will be 50%. And in addition to that, we are looking to ways to reward the investors in the best possible way.

He said way -- ways, no waste, ways.

And -- but remember that our guidance for core equity Tier 1, both Jose Marcos and Rafael disclosed in the previous conference call, we will be getting there eventually. So I think that can give you an idea of the total amount that Marcos and Rafael are referring to.

And remember one thing, Banorte doesn't have a parent company. So we need always to be very prudent with the capital numbers and with the liquidity numbers. So we are never saying no to reward more than the 50%. But if you look at the world, the world is not in steady state. So we like to be prudent and opportunistic when we see the ways to reward the shareholders. But I think the best way that we can reward shareholders is to really take very good capital and the returns of the capital. And as you can see, for the returns for the bank very close to the 30% and return on equity for the group above the 20% and maybe very close to the 22%, I think with this level of capital and with -- and the level of leverage that we have, I think we are very prudent. We're -- we like to return as much capital as we can to our shareholders. What we know and we understand that we are living in a not very predictable world as we speak.

And remember the TLAC, Rafael.

I missed it.

We were talking and talking about the TLAC, and now this year, we will start to increase our refinancing capital. So everything is there.

We'll now take the next question from Ricardo Buchpiguel from BTG.

Congrats on the results. Just a quick question here. Can you please explain what are the exact headwinds that are impacting the annuity business? And when exactly should we see the -- this pace of recovery? And also for the insurance business, is the structure there fully normalized post-COVID in terms of the claims?

Thank you, Ricardo. Please go ahead, Tomas.

Yes. No, thank you, Ricardo. I think it's important to look at these 2 businesses on a separate basis. And if you look at annuities as you asked, the actual net income year-to-year increased 36%. However, remember that part of the, let me call it, negative of the numbers are on the technical reserves and the positive is in the NII. So that's why you need to see this in a consolidated basis. On the annuities, there was a reduction on the reserves for 2 main factors. The first one is a decrease in the business that was generated. This is not only for Banorte. The industry had a reduction of 14%, plus related to the inflation dynamics, you also have a reduction there on the reserves. So to put it shortly, the pension company, the annuity business is growing profitability, 36%, and I think it's better to see this on a separate basis.

Can you refer to the pages?

Yes. You can see this on Page 24, you can see the insurance, and on Page 26 of the report, you can see the income statement for the annuities company. But let us know, and if you want, we can connect to see this into further detail.

No. Very clear. Just a quick follow-up. Moving forward, should we see then a recovery on this annuity income line because you wouldn't have the impact on inflation or this impact should still have a lagging effect and impact the next few quarters, what should be the dynamics?

Thank you. I think this year, we will continue to be positive, for instance, on the net income growth for the company. Now we will continue with Tito Labarta from Goldman Sachs.

Question on loan growth. I saw your guidance for the year, but I was hoping if you give a little bit more color sort of by segment, right, seeing good growth on both the consumer side and the commercial SME side, which you mentioned you're investing in? Should those be the segments that continue to drive growth? Any color you can give on sort of the loan growth by segment?

Hold on, we have it right here. And yes, it -- yes, as I said, it's -- the [ neighborhood ] is different depending on where -- the mortgage around 8% to 10%, credit card, 16% to 18%, auto loans, 10% to 12%, payroll is 9% to 11%. These are consumer credit rating. The meaning of all this, this is 10% to 12%, the consumer, because some -- commercial -- then commercial, 9% to 11%, corporate 5% to 7%, and government 1% to 3%, that's why the total goes to 6% to 8%. So it's very important this because we are going to go in the places that we want to grow. And remember, it's a different [ animal ], different NIMs, different everything. But the average goes 6% to 8%, but the composition is totally different. We are forecasting all this. We hope we can achieve it.

Great. That's helpful. If I can ask one follow-up, more, I guess, on the impact on asset quality right because your cost of risk is going up, I think because partly because of the mix, but NPLs continue to be very much under control. Any concerns there or when do you think NPLs kind of normalize from where we are today?

Well, we will say [indiscernible] prepandemic year. Please, [indiscernible].

Yes, yes, Tito, this is [ Carlos Gonzalez ]. I will tell you that perhaps you're referring to a small bump in provisions, but that small bump is not a new driven event. We -- they do not constitute a trend or a person to a idiosyncratic-type risk. That is -- this is not a workout case to explain it. This small bump is seasonal growth mainly in credit card, payroll and government loans. The loan portfolio as a whole also increased in the last year. We continue to increase recovery rates, increase write-offs and overall, control origination, managing, collection, practices and execution. If you see cost of risk, the historic average throughout the life of Banorte is 2.2%, 2.2%. And prior to the pandemic, if you take an average cost of risk from December 2017 to March 2020, you will see that the historic average is almost 1.97% or 2%. So cost of risk should increase, but there is no even 1 or 2 events that can explain it as of now.

Yes, Tito, and remember the dynamics that we had on the growth as Marcos [indiscernible], I think it's extremely positive. When you see numbers on payrolls, 22% credit cards above 15%, car loans fully recuperating, the mortgage up also double digit, obviously, you will have a different pattern on the provisioning line, but not because you have bad risk, it's because you are growing in a very positive way the consumer group.

That's clear.

We'll now take the next question from Jason Mollin from Scotiabank. Jason, go ahead.

Congratulations on the strong quarter. I guess since some of my questions have been addressed. I wanted to talk on the strategic side about the initiative you mentioned to strengthen the commercial teams in the center and north of Mexico. And that you mentioned adding 1,000 bankers. And the headcount, I guess, has gone up just for the banking sector brokerage and SOFOM, I guess it includes the long-term savings employees. That was up 700 plus in the year 2022 and over 1,800 since 2020. If you can talk about how you stack up in that business, what kind of loans are you planning to offer in this segment? How should we think about that business? Sounds like a pretty big investment from my side. And then the second question would be talking about the payroll lending business. It's growing quickly. It's a reasonable size of the portfolio these days. And I did notice an uptick in the stage 3 payroll loans, actually quite high, 19% quarter-on-quarter and 60% year-on-year. If you can tell us what's going on there on the asset quality in that segment and perhaps talk about why people with payroll-deducted payments were seeing some issues? Are they losing their jobs? Is that the main driver?

I will start the second on the payroll. Rafa, please?

Yes. Jason. As you can see, the expectation for the growth in the payroll loan this year comes down to 12%. We haven't seen any weakness on the job market. On the contrary, continues to be quite strong. But we are prudent about where we want to keep on growing the payroll loans. I think we have to wait and see. I think the starting of the year is very positive on the economic side. But obviously, when you grow a portfolio like payroll loans or any portfolio above the 20%, you have to expect that even if you have a very good origination process, just the provision in line because on day 1 that we have to put on the book will create uptick on that part. We haven't seen any weakness really on the payroll or on the job market, but we are very --- we are being prudent in a way that we're reducing at half the level of growth on the payroll book. I think that's -- I don't know, Miguel, if you want to join.

Yes. I would just add that non-performing loans ratio for payroll loans are still below pre-pandemic levels. And every business line, segment and product, credit product, is still below pre-pandemic NPLs.

Yes. I think Jason if you look at a payroll loan book on an average for the years, you are around the 4.4%, 4.2% on NPLs. Right now we are 3.4. So we're still on the right part of the trend. But it's a product that we have to wait and see how the job market goes. It's going pretty well as we speak, but we are prudent. That's why we are reducing the pace of growth to half.

Just remembering, this product registered a robust performance of 3.3% quarter over quarter and an impressive 22.5% year over year growth. In terms of asset quality, [ NPLs ] we saw a 40% deterioration, but that corresponds for a [ growth factor ].

Yes. And the other part [indiscernible].

As you know, everything -- the genesis of all this is near shoring. We are hoping that a lot of companies will come here. Mexico is a -- it has a lot of Mexico, so we know where we need to go. We have a lack of banqueros de relacion [indiscernible] with another banks. So we need to close that gap and then we want to continue and maybe grow more because we see a lot of business coming in the next month or years, no. We are not going to grow from 0 to 1,000 in 1 month. As soon as we see that 100 people is there and they are working, we will commit with more and more and more. The name of the game here is accountability, no. The areas that they are asking for these people, they need to give us back in the numbers, and we will continue with that. But the numbers show that we need to grow in PMS, we need to grow in all the [indiscernible] and a little bit in the big company, so we have a [indiscernible] employees that we are closing and hopefully we are growing and you will see that in the numbers at the end of this year and at the beginning of the [indiscernible]. But it's not that we're going to hire right now 1,000 people. We will start little by little accountability and growing and growing and growing and maybe we see that the numbers show that maybe we will need around 1,000. That's why we're saying this.

Should we think about these kind of loan -- these kind of bankers -- sorry, go ahead.

No, no, go ahead, Jason. Please go ahead.

My question is I'm thinking like should we be thinking on some metrics like these bankers are in the commercial side, like they could have 30 clients per head, they try to have 50 clients, and then they're growing an average portfolio of I'm not sure what amount, like what segment you're really targeting there, and what is that -- what could be the growth related to these hires? Is that the way to think about that business that you needed the bankers in order to have the relationships and grow the commercial portfolio?

Exactly right. We manage the corporate and the commercial banking as a full relationship bank, so we are not selling credit. We are selling the full relationship. And that requires that people needs to be present with the companies all the time, not for the credit or for the transactional banking or the derivatives, for everything. I think it's quite important that the relationship side of the corporate and commercial banking in Banorte is very, very strong. We don't drive by credits. We drive by relationships on that. And that's why we need the people to be there with the companies that are being put in place, the new ones, the ones that we were absent from because we lacked the size and the presence in some parts of the country or the country is moving quite aggressively now.

Is this headcount where you are today, is that reflecting what you believe you need or do you think you could even go higher going forward?

No, no. I think the analysis was on a region-by-region basis, on a very detailed how the competition is present, especially one competitor, and how we compare to that. So no, I think it was a very detailed, and we got very specific metric as you mentioned, Jason. How many relationship by banker we need to have. And another thing that you have to take into consideration that part of the expenses that we put in place in December is the severance payment, and the severance payment usually goes around, let's say, 500 people to 600 people. So the 1,000 people that we are putting on the business side have been compensated in part by the severance that we have on a year-to-year basis when I was referring to the numbers of the [indiscernible].

That's very helpful.

Now we will continue with Rui Fernandes from JPMorgan.