Regional S.A.B. de C.V. (RA) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen, and thank you for standing by. Welcome to Regional's First Quarter 2025 Earnings Conference Call. We are joined today by Manuel Rivero Zambrano, Chief Executive Officer; Enrique Navarro Ramírez, Chief Financial Officer; and Alejandro Lobeira, Head of Strategy and Planning and Investor Relations. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker, Manuel Rivero Zambrano. Thank you, and please go ahead.

Thanks. Good morning, everyone. Thank you for joining today's call. I sincerely hope you and your families are well. We're pleased to report strong first quarter results for Regional, highlighting continued progress towards strategic objectives. Consolidated net income reached MXN 1,628 million, reflecting stable growth and underscoring a disciplined approach to managing profitability. Our ROE stood firm at 20.58%, demonstrating an underlying strength of our business. On margins, although the net interest margin decreased slightly versus the last quarter, the decline was much less than the cut in the benchmark rate, demonstrating the resilience of our portfolio and funding strategy. The NIM remained healthy at 6.55%, and we continue to focus on defending profitability through a better loan mix and a strong deposit base. Our efficiency ratio rose slightly to 40.4%, reflecting ongoing investments aimed at enhancing operational capabilities and strengthening our market positioning. Noninterest expense have been stable over the last 4 quarters, considering a 4.6% inflation rate. Administrative expenses increased versus first quarter of 2024, primarily due to network branch expansion and sales-related costs, including higher investments in advertising, increased transaction activity in the acquiring business and the addition of 200 new ATMs and 20 branches. This category increase is also explained by technology projects and software-related costs aimed to improve customer experience and customer security. These expenses will stabilize during the next quarters at the current levels. Other taxes, mainly VAT, rose because of higher spending and higher investment. Rent and depreciation expenses as well as personnel expenses went up to the branch network as we opened 20 branches during the last 12 months. Total net interest expenses are expected to stabilize between MXN 1,800 million and MXN 1,900 million per quarter, supporting growth while maintaining efficiency levels. Our loan portfolio and leasing segments continued to perform robustly, growing 12% year-on-year, driven by a 16% expansion in business lending. Core deposits increased steadily by 13%, fueled by a 40% rise in term deposits and a 10% increase in checking accounts, reflecting strong customer trust and market confidence. Nonfinancial income also showed solid momentum, growing 14% year-on-year. Key contributors included TPVs, insurance and foreign exchange fees. Notably, payment-related fees surged 45%. Insurance income rose 31% and market-related revenues increased 21%. These results reinforce our success of our diversification strategy and our ability to scale complementary business lines and strengthening revenue resilience beyond traditional banking. Looking ahead, we are optimistic of our ability to sustain growth, drive operational efficiency and deliver long-term value to our shareholders. Now turning to Banregio, while we continue to see a strong trajectory, reflecting both strategic expansion and operational excellence. Our branch expansion strategy is progressing well with particularly favorable responses in key regions such as Nuevo, Jalisco, Mexico City, a statement of our targeted marketing optimization efforts. Additionally, we upgraded the digital platform of Banregio, the same as Hey Banco's technology that continues to drive engagement and satisfaction and will drive cross-selling strategies that will enhance our portfolio mix. Operational excellence remains central to Banregio's strategy. Our efficiency ratio stood at 38.9% this quarter, highlighting effective management and prudent expense control. Meanwhile, SME and retail segments continue to show sustained growth, reinforcing our commitment to support business and individuals alike. Loan growth was particularly strong in Wholesale segment with corporate loans 13% increase and medium-sized growing 10%. Personal loans also 12%, demonstrating by the diversified approach of growth. And on the funding side, checking accounts grew 10% and term deposits by 14%, further strengthening the stability of our funding base. Risk management remains proactive. The cost of risk and nonperforming loans ratio stayed within target levels, reflecting sound asset quality and effective controls. The comprehensive cost of risk remained near 1%, primarily driven by specific corporate and midsized cases transitioning to Stage 3. Most of these cases are isolated and are expected to resolve over the medium term, reaffirming our robust risk management framework. Meanwhile, mass market portfolios, auto SMEs and consumer segments are showing notable improvements. Our capital coverage ratio also remains strong, providing a solid buffer to safeguard financial stability. Customer satisfaction continues to be high, reflecting in constantly strong Net Promoter Scores, underscoring our commitment to delivering exceptional services and building long-term relationships. In summary, Banregio remains well positioned to capitalize the future growth opportunities, maintaining stable profitability and enhance our shareholder value. Moving to Hey Banco. We continue to see strong strategic execution and positive momentum. Net income reached MXN 47 million this quarter, making a significant milestone for Hey Banco as we achieved breakeven ahead of expectations. This achievement reflects the positive shift in our trajectory driven by a 32% increase in financial margin, a 21% rise in nonfinancial income. Growth was particularly strong in Hey Pago, 43% and insurance products, 26%, highlighting our ability to diversify revenues and maintaining disciplined expense control, while operating costs rising just 9%, well below revenue growth. Our loan portfolio expanded by 4%, powered by 27% surge in business loans, reinforcing our leadership in the SME segment. Importantly, the credit portfolio mix improved significantly, shifting towards high-quality and higher lending segments, which not only enhances profitability, but also strength our long-term risk profile of the bank. Additionally, the credit quality improved as evidenced by 38% reduction in provisions, while the cost of risk remains well controlled and within our strategic targets, further reinforcing our profitability and risk management capabilities. Our funding base remains stable with traditional deposits showing resilience, performance supporting our asset growth and liquidity position. Customer loyalty continues to deepen with a Net Promoter Score of 64, reflecting a strong emotional connection with our customer base and robust brand positioning. Operational efficiency improved as well, reflecting our continued focus on disciplined growth and sustainable profitability. Our operating leverage strengthened the expense growth at showing a slower pace than revenues, which bodes with well and future net income resilience. On the payment side, Hey Pago continues to deliver great results, total billing rising 31% year-on-year. Importantly, our customer acquisition and cost to serve metrics remain well below industry average, reflecting the strength of -- and efficiency of our business model. This favorable position provides ample room to continue investing in customer growth initiatives while maintaining healthy profitability ratios. Looking ahead, we see significant opportunities to continue scaling Hey Banco Hey Pago further, enhancing operating leverage and continue our structurally profitable growth platform. In addition, we are preparing to -- on becoming upcoming migration of customers currently served under Banregio to Hey Banco, which we expect to materialize during the next quarter. This transition will further accelerate the growth of Hey Banco's active customer base and strengthening the brand positioning. In summary, the performance of Hey Banco reflects our disciplined execution, customer-centric focus and operational strength. We are confident that this momentum will position us to continue growth and long-term profitability. Looking for a broader picture, we reiterate our full year [indiscernible] guidance, expecting solid and sustainable growth across key metrics through the remainder of 2025. We anticipate continued strong momentum in our wholesale segment at Banregio, driven healthy corporate and midsized business demand as well as ongoing strategic initiatives to capture new opportunities in target industries. We remain confident that our disciplined growth strategy and robust risk management will support steady performance and position us to deliver on our financial objectives of the year. In closing, we are confident positioned to capture future growth opportunities and deliver sustainable value to our shareholders. Our disciplined management sound risk practices and clear strategic vision place us on an excellent position to navigate the evolving landscape and capitalize on emerging opportunities. Thank you for your continuous trust and support. We now are open the call for questions.

[Operator Instructions] Our first question comes from Brian Flores with Citi.

I have two on my side. The first one is, if you could elaborate a bit on the asset quality trends. You mentioned the cases are isolated. So I just wanted to understand what are you seeing into April? And you mentioned there are no pressures in 2025 guidance, but would it be reasonable to expect maybe if conditions are not the best to see a trade-off between growth and asset quality, if necessary? And then the second point is we just saw what happened with Banregio and Banorte, right? And I think on Slide 7 here in your presentation, you show LTV, CAC and LTV measures for both Hey and Banregio. And it's very interesting because both are very similar. So I just wanted to understand why does it still make sense for you to keep them separate as brands? And not maybe just lever the infrastructure efforts you have made to maybe merge them both as I know you're migrating from one to another. So that would be very interesting.

Brian, thank you for your questions. I will start with the asset quality. Yes, as you can see in the conference call presentation. Most of the deterioration came from the wholesale segment. And in the wholesale segment, there are 2 large cases and some medium-sized cases that are fully identified. We have collaterals. We have real estate collaterals on them, then we don't see this as a trend. We have identified one more to ask about April. Then when you see CNBB data from April, you will see one more medium, large customer, not as big as the 2 original ones. . That's the reason we don't see deterioration. Obviously, as the cost of risk is 12 months accumulated, we expect around 0.9%. That is the upper range of the cost of risk. If you're seeing the relevant figures slide is mainly on Banregio, not this year on Hey Banco. I don't know if I answered the trend, quality and the asset quality.

Just maybe a quick follow-up because it was the final part of the question is if you see still some pressures maybe, as you say, in April, the rest of the second quarter, would it be reasonable to expect maybe a lower growth to balance with asset quality?

No, in terms of growth, in both, we see positive the reduction of the policy rate. We could see it negative for NIM pressure, for margin pressure, but we see it very positive for the easing for some customers in their monthly payments as they have in the variable rate, it will be reduced. Then -- and also for growth, that is your question, we see positive. If the rate goes down, it will be reflected in our rates. We have already reduced rates for leasing and for -- and the variables automatically, then we expect some growth with the raising of the rates. Then we will -- in short, we will maintain our guidance, all of our guidance, but specifically talking about loan growth, the 10% to 15%. Right now it is 13%. Obviously, some of this guidance will go to the lower end.

No, super clear. And then maybe on just the digital strategy, it would be very interesting.

So the information we gave you at Banregio, it's wrong. It's completely wrong. So the information you're saying it's not true. So your statement, it's not valid interest of cost of acquisition, sadly, would incorporate most of the costs in Banregio.

Okay. But then maybe from a, let's say, a bird's eye view, maybe more strategic, then should we understand that the offer you're making in Hey Banco is complementary to the offer you're doing at Banregio. So maybe no cannibalization maybe 2 strategies -- sorry, a 2-side strategy in terms of attacking different segments? Is this what we should understand?

Yes. So as you know, Banregio is well positioned for a more robust clientele, obviously a higher-income families, businesses, et cetera and Hey Banco is much more lower. Although we're not on the base of the pyramid like Nuevo or Compartamos, right? So Bancostec or Kopin, we are in -- targeting a medium low income, which is, I think, very -- I mean it's not serve correctly. The NPS in other banks is quite low. The cross-selling index in those clients, then inside of Banregio, we have some of them, it's pretty low. So what we're doing in Hey Banco is producing great results in terms of the NPS and in terms of customers buying more products very easily. So in that sense, we're very positive of how the middle-income families are evolving in Mexico. We are very positive on that trend as income continues to rise on those families, and we see that they're buying more and more products. And I think being digital or not, I mean it's secondary to how the offer is positioned, right? So as we're not obviously having branches that allows us to create a better pricing for customers, and that's allowing us to sustain growth, right? So right now, our focus is to continue growth on credit. So we have MXN 3,000 million or MXN 4,000 million, able to continue growing. That's our main source of will drive income further, obviously, will drive ROE further obviously. And we are focusing more on business lending or auto lending and those type of things that have a more robust NPL ratios, obviously, much better quality, right? And because we're looking ahead in terms of 10 years, right? So we're managing the bank because we know that there are going to be harsh economic conditions, and we don't want to be overexposed to consumer lending, right? So I think that's pretty dangerous. And we are diversifying a lot, and we are having a lot of great growth in terms of business lending, as you can see. And we are very happy for the growth. And it's completely different segments on Banregio. We're even more exposed in Mexico City, which is great for us. And in that sense, we think that we're still very well positioned to continue growing as we're focusing on our net income as we're focusing on having a leverage that continues adding to the NIM. And we're very happy with the NPL ratios that we have. We are very happy with the -- how things are going operationally. And as we said, I mean, we, as you know, are very -- we like to manage our capital pretty well, and we like to have dividends as well, and we want to continue Banregio growing as well. And so in that sense, making profitable the operation of Hey Banco was very important at this moment. So in that sense, we're very happy with our results, and we're very patient with things and things are going well. The brand was well positioning, it has a lot of strength. It has a lot of engagement through social media and through the events that we have. And it's gathering a lot of momentum. I think it's pretty is pretty good. And even the authorities are very happy for how things are going. And in that sense, we can speak with other institutions because of their -- I don't know what they're thinking and what their main objectives are in that sense, for us, it's very complementary. Banregio's clients and Hey Banco's are particularly very different. And as Banregio is very small compared to the others. I think that's the main difference that we have, right? And the other thing is that we've learned so much in Hey Banco, so, so much. And now that we are translating that technology to Banregio, it's going to produce great results in terms of security in terms of cross-selling index, it's going to be, I think, amazing. And in that sense, we're very happy to be able to really make sure that we have innovation and even sustain an NPS that's much better than the average of the industry. And obviously, those customers are even worse of the average. So you can imagine that we are delivering a very good service to clientele that were not served correctly, right? So in that sense, we think that Banregio will flourish in terms of cross-selling, in terms of fraud, in terms of security, which are our main objectives at the moment in Banregio. So I think in the digital strategy overall, we're very happy if things are going. In terms of expenses, we stopped acquiring new developers 2 years ago. So expenses will, I think, see or at the beginning of next year. We will continue seeing a small hike in technology, but very small. And then I think we're going to go in terms of -- we should go even a bit lower next year because of the ramp-up that we had in terms of the investment made in doing Hey Banco, right? So but the trend will continue to go in downward because most of the technology has already been made, right? So the bulk of the -- we're not going to do a new app, we're not going to do a new web. We're not going to do that. We're just like bettering it and making sure that we continue to make a better experience, right? So in that sense, we're very happy. And the other thing is that technology allow us to create experiences that we don't -- are not able, right? So in terms of -- most of customers in Hey Banco have a low literacy rate. So how we can make the technology better for them to take more credit and take more value out of the platform. And that's what we're working on. And I think as we worked very hard on making the product convenient and making the product to be able to buy it digitally. I think that's the first step. And now the next step is how can we evolve the experience in making sure that clients have more confidence in buying more credit and more value out of the platform. Because much of the clientele and even the smaller -- the medium income families, have a good income, but sadly, that are not confident enough to further the relationship with any bank, right? So that's the main issue that we -- I think we should address in the next 18 months, right? So I think it's going pretty well. and we're very happy of how things are evolving. We're clearly very ahead of the rest, very, very well ahead of the rest, and we're happy about that. So yes.

Our next question comes from Ernesto Gabilondo from Bank of America.

I have 3 questions from my side. The first one will be on your NIM expectations. And for that, what will be the level of interest rates that you're assuming for the end of 2025 and 2026? And what would that imply for your NIM? Should we think that the loan portfolio growth should be at a higher pace when compared to the NII growth? And then for my second question is related to OpEx. As you mentioned, OpEx came at a high pace. During the quarter, you have already mentioned some depreciation costs and the opening of some branches. However, considering the expected economic slowdown. Is there room to control OpEx in your remarks, we're expecting OpEx between MXN 1.8 billion, MXN 1.9 billion per quarter. I believe that is around 10% growth for the year. So I just want to double check that. And again, if you see there is an opportunity to reduce OpEx growth. And for my last question, is on Hey, congrats that you have reached the breakeven point. So I want two questions actually on that. First, just to clarify, if the CAC of Banregio is the only data that is wrong in your presentation? Or is there something else? And my second question is, if we can expect like an ROE target or how much could Hey could be contributing of the consolidated earnings in the future?

I would start with OpEx with expenses. Thanks for the congratulations. It took a lot of effort. Yes. As Manuel mentioned in the message, we expect it to stabilize. If you see the -- and certainly, in the table, there is only 2 -- 2 quarters or 3 quarters. But in the quarterly report in the Page 37, 38, you see the next quarters or the past quarters there are MXN 1.7 billion -- MXN 1.7 billion and MXN 1.9 billion. And with all what we have done mainly on the personnel-related expenses, we have controlled the increase of new employees. And we could see even some red auction along the year. In the rest of the items, as Manuel mentioned, it will not grow anymore, but it will not go down. All in all, you are right. We expect between 10% and 12% growth of total expenses. And the room that we have is mainly on nonrelated to sales or to transactionality expenses. I don't know if that answers the OpEx and expenses question?

Just a question in terms of your branch openings. So how many did you open in this first quarter? And how many did you expect to open throughout the year?

Sorry, that was an update because we have an update in the summaries. It looks like we opened 20 in this quarter. No. We opened 20 in the last 12 months. In this specific quarter, we opened 3 or at least we registered them to the CNBB. But we are planning the 20 that we mentioned at the beginning of the year. We already have started 7, and we are doing contracts and all the process for the other 10. Then we open 3 and then we are working on 7 for the next quarter and then another 10 in the second quarter then will be 20 more or 17 more.

So regardless of a potential economic slowdown, you continue to open branches?

Yes, until we have a more clear path because we have -- as long as we maintain our breakeven between 12 and 18 months, and the payback between 30 and 36 months, then we see them as part of a longer strategy then just this year strategy. Then in terms of NIM, I will move to the first question. We have seen that the NIM has behaved as we expected. And as we have been guiding the contraction of this 150 basis points of reduction in the policy rate led to a 20 basis points total NIM reduction. And 23 basis points reductions in loans NIM. We expect further reductions than initially our budget. And for that reason, also part of the NIM guidance, were done considering the final policy rate to be 8.25 or the TA 8.5. Right now, we believe it will go below that level. But the sensibility stays, we expect a good second half in terms of investment securities portfolio that is MXN 46 billion right now, along with leasing and mortgage that are an auto that are all of our fixed rate that will be maintained at least for 1 year, the securities investment rate and the other ones are longer term. That will help to hedge or defend the NIM at least in the second half of the year.

So all in, how should we expect about the correlation of the NII growth when compared to the loan growth?

It should be lower as we have seen right now. But -- not -- we haven't done the calculation. We will do it. We have the sensibility in terms of basis points, but we can do it very quickly and share with you. I don't have a number right now with me in terms of the growth of the net interest income versus the growth of loan portfolio.

Okay. Okay. But understood.

Okay. And finally, in terms of that is wrong in the quarterly -- on the conference call presentation is also the -- we will review all the data because we change...

In that slide.

Only on the slide.

The review is going to be only that slide.

Yes, yes. That slide.

Okay. Okay. And then on your Hey potential targets in terms of ROE or how much could be contributing to the consolidated earnings?

I think if we continue growing at the pace we are. I mean, as I said, if we like grow the MXN 3,000 million that we still have -- or MXN 4,000 million, and we have a NIM of loans at 7% or 8% more rich, I mean, it's like 8%. You cannot imagine how things are going to be evolved. We think we're expecting more income. I think we should stand, I think, around an ROE of 15% probably at the end of the year. things move ahead. As we continue to ramp up, I mean, we continue investing in some areas and in advertising, et cetera. And in terms of the percentage, I think, in the short term, we will be evolving at 10%, I guess, around -- I mean I will say, in the next 3 years, right? So it's evolving, right? .

We're very happy about how things are evolving. And I think if things remain stable as we are right now as we expected. I think in that sense, we will continue to drive the profitability even further.

And when do you expect -- has profitability to be at the same level of Banregio or even to be above Banregio's profitability, I don't know, in 5 years? Or what will be the time line for that?

Yes. I think it would be in the mid -- I mean, 3 to 5 years.

Our next question comes from Olavo Arthuzo with UBS.

Actually, it's just a follow-up on Brian's question because a couple of macroeconomists and recently, the IMF, they are now considering a recession in the country. But last week, some of our competitors did not change the guidance and same today as Regional. And thinking about your large portion of commercial loans and the balance sheet in case considering also the possibility of policy rate going down around 3 percentage points this year to something around 7%. So what am I missing here that would explain why the bank has revised some metrics of the guidance this quarter? And if you could just share with us if the bank Regional is assessing possible guidance revisions for the next quarter, that would be also very helpful to all of us.

We're definitely open, and we talked about at the Board meeting. But at the moment, we are not seeing any weaknesses in that sense, we're thing -- we're talking with our customers and still they're optimistic about their -- about their -- how things are panning out. And I think you have to see about the consumer economics which are driving most of the growth, right? In one sense is the rhetoric and the other is how things are panning out. And in that sense, definitely, we're very on the lookout, and that's -- as you know, we're always very prudent in that matter. And if things change, we definitely would do it. But at the moment, we think it's responsible to do so. Things are evolving at the moment.

Our next question comes from Tito Labarta with Goldman Sachs.

I have a follow-up, I guess, on your outlook for asset quality and also, I guess, provisioning to some extent. I mean, you mentioned you 2 specific cases, and I think you have collateral. But just given a little -- some of the uncertainty related to tariffs also on the prior question with slowdown in Mexico. I mean, could there be some deterioration later on in the year? And also asking because I mean the provisioning levels did come down a little bit. And if you look at your coverage ratio fell to around 150%. So what gives you comfort that there shouldn't be any issues in asset quality particularly given all the uncertainty in Mexico globally? And what gives you comfort to be reducing your coverage in this environment? And what is the right level of coverage? How do you think about it? Just to understand what the outlook could be and any potential risk from an asset quality perspective?

Yes, Tito. We don't see a general deterioration. And in fact, if you see in the slides of the quarterly -- in the conference call, sorry, I opened the wrong one. In the conference call presentation in the slides of Banregio there is the larger portfolio. In terms of NPLs of the small businesses and auto and consumer and mortgage versus December or fourth quarter, there is a slight deterioration, but versus the same -- the same quarter of the last year most of them present improvement, except for the consumer, that is the credit cards, mainly that it has shown some deterioration from 2.6% to 3% then we feel comfortable in all this portfolio, there is MXN 42 billion all the ones that are included on our retail banking. And in the wholesale, we present this aggregated is where you can see the high gas deterioration for these 2 large and on medium. In fact, we are more worried about some of this medium because sometimes we will lose visibility for their size until they are deteriorated. The large ones, obviously, there is committee for work out and there is a collection department for large customers. There is a lot of following a lot of security in terms of collaterals. That's the reason we don't see a pressure generalize in all the segments for the -- not for the second quarter, neither for the last part of the year. As Manuel mentioned in the answer to lab we have to consider also our relative size and that we have been very good selecting customers and the share repeating that we can still do because of our size is not the same being the 3% of the market to grow 10% with good asset quality than being the 15% or BBVA that is 30% of the market. We can still manage to do so.

Also, we need to remember that 1.4% NPL, it's lower than the historical average for Banregio, for Regional. That number usually is around 1.6%, 1.7%. So even with this increase, we're still really on the pretty good shape.

Remember, we used to guide less than 1.8% or even less than 2%. Obviously, that makes uncomfortable some people because if right now is 1.4%, less than 2%, sounds like there is a lot of room to deterioration. That's why we decided to move the guidance lower. But the short answer will be, yes, we expect a little bit more deterioration but not something drastic above 1.5% or 1.6%. No, we don't see it either with specific cases or in the retail segment.

Okay. Makes sense. And just thinking on the coverage ratio I mean, it's lower, but if I do look a little bit further back, I mean you've operated around 130%, maybe 140% in the past. Is that maybe the right level to think about in terms of where you feel comfortable with the coverage ratio?

Yes. Obviously, we will love to have more. But as the provision methodology that we follow is the one that is defined by the regulator, by the CMBB we don't have room to do additional provisions that the ones that are specified in the methodology. Then it's not an indicator that we can manage or control. Obviously, the higher the better, but we don't feel uncomfortable with this 1.5% of this quarter.

Our next question comes from Juan Dominguez.

Can you hear me?

Yes, Juan.

Yes, Juan.

I just have a follow-up on NIM. I understand that you have a sensitivity to rates, and there are also some effects to mix, right? Your wholesale grew a lot more than your retail and your time deposits grew more than demand deposits. But I'm just wondering, how are you seeing competition, right, especially in your floating book for wholesale and SMEs, how are competitors behaving at the margin? Are you seeing a more benign environment for spreads? Or on the opposite, you see more competition for the best clients out there given the turmoil?

Are talking about loans I understand...

Yes, exactly. The spreads on your credit book? Yes.

No. In wholesale, there is -- there has been a lot of competition in the last 2 to 3 years. We haven't seen any specific bank to be more aggressive than the other ones. Usually, the BBVA and Banamex have lower rates comparatively and that has happened historically around 25 bps. In some cases, evolve in some cases, below. But no, we haven't seen a change in dynamic. But there is competition. There is always when there are new loans or new projects is difficult to find ourselves along usually, the customers, they require at least 3 or 4 banks to price the loan -- the new loan. Then we don't see any change yet. Obviously, if the loan in the system doesn't grow as we expect 5%, 6%, 7% at least, that competition will be for the same customers. And maybe at the end of the year, we could see pressure on price. But right now, we haven't seen it either on price or either on reduction of the loan book. The prepayments that we have seen is more customers that have liquidity that are postponing their new projects for the uncertainty, and they prefer to prepare the loans, but it's not because they are moving to another bank is just because they have liquidity, excess of liquidity, and they prefer to prepay.

Just a couple of quick follow-up. In previous periods, where you have a lot of volatility in the macro environment. What normally happens in those cases, you see a spread enhancement or a spread decrease pretty much. I'm just wondering, right, there is more risk. So you would think that the spreads should go up. But also everybody is after the same client, so spreads should go down. So just trying to understand what's the equilibrium between these 2 forces?

They maintain very stable. What we have seen in the last 2 periods, there is [ 8 ] and COVID, is that some of banks, they change their policies, their acceptance policies, then there is less competition in that sense. We try not to move up or down our price unless our specific cases, very specific cases, customers that have been with us many years. Then for us, it is very stable. At least, we haven't changed that since 2016, that it was the last time that we did some changes when the first Trump's period. Since then, we decided not to do drastic change thinking on the environment. We maintain the same policies. And basically, the same pricing on the variable side that is more than half of our loan portfolio, [ 62% ], as Alejandro said.

Our next question comes from Pablo Ordóñez from GBM.

Congratulations on the results and for reaching this important milestone at Hey Banco. My question is regarding your retail banking portfolio. Can you comment on what should we expect ahead for this loan portfolio? What are the growth drivers? It seems like the outdoor loans growing at 16% year-over-year continue to grow very fast. Do you think that these are sustainable ahead? We have seen several quarters at the industry level outperforming the rest of the industry. And also for your SME portfolio, what dynamics are you here? What type of growth rates should we expect? And do you think that this segment could be more sensitive to a potential [indiscernible]?

Yes. In terms of the auto and consumer portfolio, we expect it to continue growing -- as we mentioned -- as Manuel mentioned in the note, we have already implemented the technology that we developed in Banco we implemented in Banregio, then we expect additional cross-selling through the app. And through the technology in general, it's not only the app, the app is the face to the customer, but are also the AI models, the data analytics behind it. And then we expect this especially consumer loans, both credit cards as well as personal loans and auto to continue growing at these levels, mid-teens. That is above market, but again, relative size matters. In the SMEs plus leasing, that is the small business portfolio. We will look to go back to 15% is part of the answer that I didn't provide to Ernesto. The branch network expansion is based on more bankers, both for the preferred segment or the affluent segment, but as well as small businesses. That's the main driver in the small businesses. In auto and consumer is -- we are open, it's cross-selling through bankers, cross-selling through technology, and it's new customers that are attracted to the branches through all the below the line or any type of advertising that we do around the new and existing branches, not only the new ones. Mortgage is the one that we see with lower growth, we feel comfortable with the 10% to 11% as we are not willing to go down in rates right now. We maintain the rates mainly stable even with all the increase of the rate then we will try to maintain them even with all the decrease of the rate.

And a quick second question. On the folding side, deposits continue also to grow at the mid-teens level. Do you expect any type of slowdown ahead? Are your customers more price sensitive to rates? Or what type of dynamics should we expect ahead for your core deposits?

For the core deposits, specifically on the preferred banking and in general, we are growing, as you said, 14%, 16% in time deposits. We don't see this reducing as we have been paying for many years, not only Hey, but also Banregio. In the preferred banking, very good rates compared to traditional banks and even to some of the new neo banks close to the then it's a very attractive rate for preferred banking and with all the service and the advice of our bankers, private and preferred bankers, that we have. That's the main driver for the growth there.

Our next question comes from Alejandro Levin.

I have a follow-up question on expenses. So first of all, you already mentioned, right, that you have a, I mean, sort of invested upfront in early 2025, right, in the OpEx line, noninterest expense line with a jump of 17% year-on-year, right? But the rest of the year should be relatively stable in peso terms. You mentioned a range, right? So just sort of recapping right? Because if the loan growth remains resilient and margins remain resilient and asset quality remain resilient. If you can contain OpEx for the rest of the year, you can still reach your guidance, right? So I'm just want to make sure what your thoughts are on this sense, right? So let's say you maintain stable OpEx for the rest of the year between MXN 1.8 billion, MXN 1.9 billion, right? So then the year-on-year growth begins to decline from 17% to maybe 10% to maybe high single digit by the end of the year, right? So in that case, you could be in a good position to still reach guidance? And then my second question is on other operating expenses. It's a small line, what still everything comes, right? So we also saw a jump of over 20% year-on-year and sequentially in other operating expense. I also want to take a look at what your thoughts are on this, if this can remain stable or maybe even decline the rest of the year?

Can you repeat the second one, which other line?

Yes. It's other operating income, which, in this case, is other operating expense of around MXN 300 million [indiscernible].

Thank you for the clarification. I am moving just -- and in fact, it's exactly the same page.

Exactly.

Well, in terms of expenses, you are right, in this space, there is the [ 8 ]. It doesn't show -- first quarter is MXN 1.5 billion, in first quarter '24. But if you see second and third, is where the real increase started this investment and increase in investment that we talk. It was mainly on third quarter that is shown in full in fourth quarter. Then that's why we are confident that we can maintain between MXN 1.8 billion and MXN 1.9 billion for the next quarters, there are parts that are variable, mainly for the end of the year, all the transactional related costs. But the ones that are not transactional related like the investments, both in technology or branches or assets that are depreciating or amortizing, that's the ones that are not going to change. And also, if you see the line of taxes, there is VAT mainly eve Mexico VAT is very low in the first quarter also 62. The next quarters are 97 or I don't have with me the 4 quarters together, but it's above 100. Then that should be around the level. We are not doing new big or larger investments than we did last year. That's why we are confident that should be maintained in that range. I will move to the up. I don't know if I was clear with noninterest expenses.

Yes, understood.

And yes, to say 10% or 12%, we prefer to see 12%. Either way, we still can achieve the 10% lower range of profit profitability increase in the guidance. I have seen some place -- some reports with 11% to 16%. I want to clarify that is 10% to 15%. And this -- we consider very achievable the 10% at least, and we are aiming, obviously, higher. The other line is important also. There are 2 changes that we did. The main one is the line that is called asset sales is all the foreclosed assets, but we are presenting it net. And last year was only the income from the sale, then it was a very positive number on the asset sales. I'm very negative in the last line that other income expenses. Then we net debt it -- I don't know if you know if not, I will explain quickly. When you foreclose an asset and you maintain it in your books 1 year, you have to adjust the value 10% every year. And in the fifth year, you have to fully depreciate it or adjust to 0. Then the negatives that you see there is this 10% that every year, we have to adjust to these assets. And when you see a positive, that means that we sold a specific asset or assets or a collection of assets that in the sum is higher than their value books higher than the adjustment. So that that's a very -- you will see a more regular number. And the other one in the last line that is -- well, EPA moves with the traditional -- with the core deposits, sorry, Spanish is capital Regional with core deposits, that is 14% year-on-year and 2%. It will grow as we grow the we already talked that we expect similar numbers of 14%, around 12% to 14% of growth in deposits in core deposits. And the one below data aggregates a lot of items, but the largest one in this quarter is the CVA and DVA and the credit expected risk for our derivatives and investment securities portfolio used to be intermediation section. But as we changed the presentation just to show the FX fees on the intermediation section, these valuations and more than evaluation is the risk adjustment with the volatility and the reduction of the rates, they are evaluated is like a provision, it's not like it's a provision of risk for derivatives and investment securities. Once we sell the security or the security reach maturity. It's reversed or if the conditions in the market change. What I am trying to say in short is it should reverse that negative provision around MXN 60 million in this quarter.

Our next question comes from Andres Soto with Santander.

My question is regarding your capitalization level and your dividend outlook you have traditionally distributed a second dividend in the second half of the year based on loan growth and capitalization level of evolution. When I look at your capital ratio, it is right now at 14%. It used to be 15% a year ago. So I was just wondering how likely is for you to distribute this dividend and more generally speaking, where do you want to be in terms of capital considering the uncertain macro outlook for Mexico? .

Yes. Andres, with being -- we will have -- today, we will hold a general assembly today in the afternoon. where we will propose, and we hope they will approve the shareholders with approved dividend is MXN 4.6 per share, that is around MXN 1.5 billion total amount of the dividend. That's, as you mentioned, that's the first half of the dividend as we did the last 2 years. We don't know what is going to happen, and we will have to wait for October to decide if we are in position, both on capitalization index or loan growth, all the variables that we have to consider. But this first part, we will pay -- and the capitalization index will move to 13%. But there is a large but our consideration is that we capitalize in the last -- in the fourth quarter of 2014, MXN 1.4 billion to Hey Banco. In fact, if you check Hey Banco already appears on the CMV data it only has MXN 1.462 million. And it's everything in securities right now as we are waiting for the migration of the customers. Once we do the migration of the customers that are around MXN 9 billion of loans, the Banco Regional capitalization index will increase 1% back, then it will be 14% around June or July, depending the approvals to do the migration. That's a level that we feel very comfortable even with all the uncertainty 14% is 2% above our risk. How do you say [Foreign Language]. Our internal risk level metric or goal is above 12%. And the regulatory 1 or compulsory 1 is 10.5%. Then with the 14%, we feel very comfortable. And even though you will see a 13% temporarily as long as we migrate the loans from Hey Banco to the Hey Banco subsidiary that is already active.

Our next question comes from Neha from HSBC.

Just a quick one. Could you tell us the exposure you have to the agriculture sector and real estate sector? And on the demand for SME loans, with the uncertainty in the macro and the tariffs, do you see any -- how is the demand for loans? And how do you see that evolving in the next 6, 9 months? Congratulations on the results.

Agro business is around 14% of the commercial loans. That would be 15% of the total loans, yes. But obviously, we -- it's a very diversified agro, we...

Yes. Many companies, we are not going to the primary sector. It's mainly agro business or industrial agro both for local consumption as well as export. And we haven't seen a reduction on demand in any segment. We haven't seen an increase either. And what we have done is we have reinforce our specialized department. We had a very good department for real estate, and we are building a similar, very good department for agro specialties, in different regions of the country, then we are generating our own demand through this special bankers' focus on agro business. If you remember, we have talked about diversifying the port portfolio. Agro business is one of the lines that we want to increase our participation plus to recover what we used to have in manufacturing and maintaining services and real estate that are our main sectors.

Since there are no more questions on behalf of our senior management, I would like to thank everyone for joining the call, and we look forward to speaking with many of you in the coming weeks. If additional questions arise, please don't hesitate to reach out Alejandro and our Investor Relations team. Thank you for your interest in Regional, and have a good day.

Thank you, everyone. Thank you for participating.

Thank you.