Banco del Bajio SA Institucion de Banca Multiple

BMV:BBAJIOO

Earnings Call Transcript 2020-Q1

[Operator]

Good morning, everyone. And welcome to BanBajio's First Quarter 2020 Earnings Conference Call. My name is Leo, and I will be your conference operator today. Yesterday, BanBajio issued its MD&A report and presentation. For a copy of the report or the webcast presentation that accompanies this call, please do not hesitate to contact us in New York City at area code [phone].

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 BanBajio is Mr. Carlos De la Cerda, Executive Vice President of the Board of Directors; Mr. Edgardo del Rincon, Chief Executive Officer; Mr. Joaquin Dominguez, Chief Financial Officer; and Mr. Alberto Guajardo, Investor Relations Officer.

And now I would like to turn the call to Mr. Guajardo. Please go ahead, sir.

[Alberto Meléndez, executive]

Good morning. And welcome to BanBajio's First Quarter 2020 Earnings Conference Call. Before we get into the results for the first quarter, I would like to start by recognizing that this is an extremely challenging time for all of us, and our thoughts and sympathy are with our customers, employees and particularly with those that have been affected by this sanitary crisis, which I will refer to as COVID-19 throughout my presentation.

COVID-19 already generated unprecedented negative impacts in all matters. We have responded rapidly with all necessary measures in order to provide a safe environment for our employees and customers. Some of them include the mandatory use of face mask in all of our offices and branches, daily monitoring of body temperature of all employees, new work stations with recommended distance from one another, sanitizing stations at main entry points and the continuous use of antibacterial gel.

A program of temporary branch closures was evaluated and approved in accordance with the phases of evolution of the pandemic and the institution's own plan. Currently, of the 308 branches, 203 of them remain open, representing 66%, and we have about 43% of our people working from home. Under current circumstances, being able to perform electronic transactions remotely or from home, takes more relevance. Digital channels provide us with self-service solutions and give us the opportunity to carry out a large number of transactions without the need to go to a branch, which is why we have invited all our customers to make use of them.

On March 31, the banking commission issued a couple of recommendations in order to strengthen liquidity for the financial institutions with the objective of be in a better position to absorb potential losses as a result of the pandemia and have enough resources to provide support to our customers. These recommendations are the no payment of dividends for the 2019 and 2020 fiscal year as well as buying back financial institutions' own shares.

As you know, on Monday, we held our Annual General Meeting in which, among other things, and following the recommendation of the banking commission, it was decided to put on hold the payment of dividends for the time being until we have more visibility of the evolution of the crisis. Also, the buyback program was approved in the same amount as previous year. That is MXN 1 billion for the period of April 2020, April 21st.

I would like to take this opportunity to thank you and thank our customers for your ongoing support. Wish you and your families the best, and please stay safe.

Now getting into the details of the quarter. On Slide 2, we summarize key results for the quarter. The variation shown represents the changes from the same period in 2019. Net income for the quarter reached MXN 1.2 billion, representing a 12.2% decrease. Total revenues rose 1%, while financial margin increased 0.3%. ROAE was 15.4% and ROAA, 2%. NIM was 5.3% during the quarter. Our efficiency ratio stood at 45.8% at the close of the quarter. The total loan portfolio rose by 7.2% to MXN 188.4 billion at the end of March. Company loans, which represented 82% of our total loan book, increased by 5.9%, reaching MXN 153.7 billion. Total deposits reached MXN 160.5 billion, 15.5% higher than the MXN 139 billion registered 1 year ago. Our NPL ratio was 1.15% at the close of the quarter. And finally, the coverage ratio was 134.7%.

Moving on to Slide 3. Our total loan portfolio posted an increase of 7.2% in the quarter, while the banking system grew 4.4% as of February 2020, which is the most recent publicly available information. During the quarter, company loans reached MXN 153.7 billion, increasing by 5.9%. On the other hand, our total deposits posted an increase of 15.5%, while for the system, the growth was 5.4% as of February. Demand deposits, which practically half of them bear no cost, grew 25%, while time deposits, 4.5%.

On Slide 4, you will see that our NPL ratio stood at 1.15% in the quarter, slightly higher than the 0.92% recorded during the same period of last year. And also compares positively to the 2.23% recorded for the system as of February 2020. Our NPL ratio adjusted for write-offs was 1.49% during the quarter. And also positively compares to the 4.59% recorded for the system as of February. Our coverage ratio was 134.7%, down from 173.2% from the first quarter of 2019. Furthermore, the cost of risk at the close of the quarter was 0.67%, up from the 0.3% recorded during the same year-ago period. We continue to post much better asset quality ratios compared with our peers.

On Slide 5, we summarize the actions taken as a result of the COVID-19. I will not go into the detail of this as I already explained them at the beginning of my presentation, but the end result of this important institutional effort is that as of today, we have 0 positive cases registered among our employees.

On Slide 6, we show a breakdown by segment of our estimate of participating loans in the relief program as well as those who have already adhered to the program. Right now, MXN 22.6 billion are part of this program, representing 12% of our total loan portfolio. This number might increase to around 40% at the end of the registration period.

Moving to Slide 7. While we recognize that the first quarter may not yet be representative of what it may come in the future and the challenges we are facing as the COVID-19 crisis continues to unfold around the globe are unprecedented, we have decided to withdraw our 2020 guidance until we have more visibility. We will provide you with an updated guidance when we determine we have enough information to do so in a responsible manner.

In the meantime, we will continue with our prudent and conservative way of doing business, always focusing on asset quality. I would also like to highlight that the following analysis is not intended to be a guidance. It has been prepared for modeling scenarios purposes. For this presentation, we decided to go with the worst-case scenario.

Here we list some of the premises considered to prepare a stress scenario for 2020 and 2021 in order to have more sensibility about the potential impact in our capitalization level, linking the expected GDP with a nonperforming loan by economic sector.

The assumptions we have considered are: GDP decline of 9%; a steady increase in NPLs beginning at the end of the relief program; an aggressive creation of reserves to maintain a healthy coverage ratio; TA declining to 4.5%; loan growth of 8% and 6% for 2020 and 2021, respectively; and loan portfolio broken down by level of risk or exposure.

On Slide 8, in accordance to what we believe are the segments more affected by the COVID-19, we have segmented our total loan portfolio by what we consider to be as high to low risk under current conditions. The high-risk segment currently has an NPL ratio of 0.90% with a coverage ratio of 144.7%. The medium risk segment currently has an NPL ratio of 1.23%, with a coverage ratio of 111.6%. Important to mention is that in all risk segments, we have a high level of collaterals.

Moving to Slide 9. We now list policies imply in the exercise. These are: higher generation of reserves during the months of their relief program, no dividend payment, strategic focus of the sales force to maintain asset quality and one-on-one contact with our customers, incentivizing deposits. Assuming the scenario already described, we can determine the hypothetical impact in our nonperforming loan, reserves, cost of risk and capitalization ratio with the objective of evaluating the impact of the crisis, which is far from over.

On Slide 10, you will be able to see the evolution under this stress scenario of our nonperforming loan portfolio and reserves, allowance for loan losses and cost of risk, coverage and NPL ratio and the end impact in our capitalization ratio. The results indicate that even under this stress scenario, we maintain capital sufficiency and our capitalization ratio does not go below the 14% level.

Moving on to Slide 11. We now list the conclusions resulting of running the stress test. I will not go into the detail of them, as you already have them in the presentation. But the end result of this is that even in the worst-case scenario, we maintain adequate levels of capitalization and a healthy coverage ratio. The bank is prepared and well positioned to face the potential negative effects that this sanitary crisis will have, not only this year, but most likely for the next couple of years.

In summary, figures included in the stress test scenario are not a guidance. They are just a reference of the possible impact under a really negative scenario. The bank has been able to maintain a strong liquidity position, and we don't foresee any change. The bank and its fundamentals remain solid. We have the capacity to heavily create additional reserves well above those of normal times. And even so, we do not expect to post losses. And our top priority has been and will continue to be to preserve asset quality. As soon as we have more visibility on the macro conditions, we will provide you with a new guidance.

With this, I conclude my presentation. Thank you very much for your attention, and we are now ready to take your questions. Please, operator.

[Operator]

[Operator Instructions] We'll take our first question from Brian Flores of Citibank.

[Brian Flores, analyst]

A quick question on the Slide #7, in which you classified the credit risk. Could you elaborate on the criteria for this classification? And if I may, regarding the NPL ratio, would you be allowed to make additional provisions? Or would you need specific permission from CNBV?

[Edgardo del Rincón Gutiérrez, executive]

Thank you, Brian. Good morning, everyone. This is Edgardo del Rincon, and I hope you all and your families are very well.

The criteria, one is the one that is described there. This is a very negative scenario. And just a quick disclaimer, this doesn't aim to show BanBajio estimates of indicators. It's just a stress test scenario.

As you can see in Slide 7, we are supposing a GDP decline of 9%. That will have an impact, of course, in payment capacity part of this crisis, what is impacting is sales and cash flows in our customers and will impact per payment capacity for sure. We believe that the NPL pickup will start after the end of the relief program. That will be at the end of this year, 2020, but the real impact will be more in 2021.

We are also putting a really bad scenario for the rates, that is TIIE declining to 4.5%. That is not what we believe today. We believe today, rates could come to something between 5% to 5.5%. But we wanted to express more to see the results of this analysis.

Of course, we are supposing loan growth for the capital use of that loan growth. And also, what we did is -- the asset quality of BanBajio is really very good, but there are some sectors that will be more impacted by this pandemia than others. So we made an analysis sector by sector, and it's what you can see in Page 8.

So today, our asset quality remains very good. But as you can see, we segmented our portfolio based in that analysis. For example, in the high risk, we are including, for example, hotels and restaurants. That is a sector that is very well impacted today. So that is the analysis that we have been running. We are happy that the end result is that BanBajio can report always very solid indicators, and we can be very well prepared when this crisis is over. That is why we wanted to share with you this stress test scenario.

I don't know if that answers your question.

[Carlos De la Cerda Serrano, executive]

There is another -- hi, Brian. This is Carlos De la Cerda. You ask about the capacity of the bank to create higher provisions and if that is allowed by the Comision Nacional Bancaria. Well, I don't know of any restriction by the Comision Nacional Bancaria for us to create as many provisions as we consider necessary or convenient. So our decision is to accelerate the creation of provisions. Since we believe that the most important impact in the NPLs will take place next year, not this one, because of the regulatory allowance for 6 months and so forth. So we believe the NPLs in the system, not only in the bank, in the system, will accelerate after that period concludes. So we are planning to accelerate the creation of provisions, and we don't know of any regulatory impediments to do that.

[Operator]

[Operator Instructions] We'll go next with Neha Agarwala of HSBC.

[Neha Agarwala, analyst]

My first question is in the stress test, you have the loan growth at 8% for this year. And that is in a very bad situation. So in a best-case scenario where the GDP does not decline as much, should we expect double-digit loan growth or is that too high? And what is your view in terms of originations this year?

My second question is on NIM sensitivity. You previously stated it to be around 22 basis points. Has there been any change in that?

My third question is on support to the SME sector from the government. The administration has not been very supportive of taking debt and then helping the economy in the current crisis. Do you think the SME segment is receiving sufficient help from the government? And how long do you think the SMEs can survive if the lockdown lasts for 2 months, 3 months or 4 months? When do you think this becomes unbearable for the SME segment and the defaults rise?

[Edgardo del Rincón Gutiérrez, executive]

Yes, thank you. Let me answer your first and third questions, and I will ask then Joaquin to talk about the sensitivity, your second question.

The loan growth of 8% is an assumption of the stress test scenario. Our main focus will be asset quality and not loan growth. Of course, we will take any opportunity of growth with quality. And we will try to support with liquidity, our customers. Let me take the opportunity of this question to talk about the objectives of the bank going forward for the following months.

The number one of the bank is, of course, to focus on asset quality. That has been a very strong focus for BanBajio always, and we will continue with that. And we are very proud of the asset quality we have, even when you compare to peers. So we will continue with that focus in asset quality.

Second, and to answer your third questions, we need to be there for our customers. We understand very well the importance of our customers for the Mexican society, employment, et cetera, especially SMEs that is our core business. And as such, it is crucial for BanBajio to support them and provide the right liquidity. And of course, we are doing with all the news that the support the government is providing is not enough, we will try to be there for them.

Number three, we will take care of our coverage ratio. As Carlos was stating, we will start building provisions above our regulatory needs. We think that is important today. And it's better today to have an excess in reserves that you can always return that value to earnings if we don't need to use them.

Our objective number four is liquidity. We haven't had any problem in our CCL. Actually, today is 120%, a very good level. But we will incentivize customer deposits and mainly demand deposits. I mean that will be always important.

And number five, regarding our investment, we will continue giving high priority to our digital transformation and those initiatives that have an impact in customer experience. That will continue to be an important priority for us. And we will continue with those investments. And of course, we will delay or cancel other initiatives that doesn't have an important impact in that matter.

And with that, I will ask Joaquin to answer your second question.

[Joaquín Domínguez Cuenca, executive]

Hello, everybody. Well, we maintain the same sensitivity in change in [ fee ] rate concerning the margin in 22 basis points. However, it's important to mention that circumstances are changing. We have observed that some other banks have increased the interest rate they are offering to the savers, and we think that could really have an impact in the whole Mexican system, increasing the spread -- talking about cost of deposits. And also, we think that this increase will be in the same manner, in the asset side. So we expect to maintain the sensitivity, but in both sides, assets and liabilities with a higher spread.

[Neha Agarwala, analyst]

Very helpful. If I can just confirm, in terms of cost of risk, we can see an impact in the second quarter itself as there's no regulatory parameters that stop you from making provisions despite increase in NPL?

And secondly, have you made any changes in the variable pay parameters for your relationship managers, which help them focus more on asset quality rather than growth?

[Edgardo del Rincón Gutiérrez, executive]

Very difficult to listen to you. Can you repeat that question, please?

[Neha Agarwala, analyst]

Okay. Firstly, I just wanted to check that we can see an increase in cost of risk in the second quarter itself, and you will start making provisions despite seeing an increase in NPL later on?

And the second thing, have you made any changes in the variable pay parameters for your relationship managers that could increase their focus on asset quality?

[Edgardo del Rincón Gutiérrez, executive]

Let me insist. What you saw in the stress test is a hypothetical scenario. So what we are doing, all the customers that are having problems in cash flows, in sales, et cetera, we are inviting them to the relief program. That's why we think the pickup in NPLs will start at the end of this year, but more importantly, in 2021.

That is what is happening, or you can see that already 12% of our loan book is already adhere to the program. And that we think that we are going to be at the end of the registration period, close to 40%. So of course, that will have an impact in different segments, this crisis. But the relief program will help -- I mean provides a very good window up to 6 months for those customers. So the pickup in NPL and cost of risk will be more important at the end of this year and next year.

Regarding reserves, as Carlos was saying, nevertheless, we think that it's important to take advantage of this period of the relief program and start building reserves provisions above our regulatory needs, so we can be very well prepared with a very good coverage ratio when the NPLs really start picking up.

[Neha Agarwala, analyst]

But if I look at the coverage ratio, since you have no regulations stopping you from making provisions, we did not see any increase in coverage in the first quarter?

[Edgardo del Rincón Gutiérrez, executive]

You mean in the fourth quarter of 2019 or 2020?

[Neha Agarwala, analyst]

In the first quarter of 2020, we have not seen any increase in coverage.

[Edgardo del Rincón Gutiérrez, executive]

No. What you saw in the first quarter is a slight decrease in coverage ratio to 134%. What you will start seeing going forward, starting the second quarter that is starting, is an increase in coverage ratio. We will start building reserves starting this second quarter.

[Neha Agarwala, analyst]

Okay. So you will provide in terms of provisions a little bit more than what you need?

[Edgardo del Rincón Gutiérrez, executive]

That's right. We will start building reserves above our regulatory needs to be prepared for a pick-up in NPLs and cost of risk in 2021. That is the strategy, right.

[Operator]

We'll take our next question from Gilberto Garcia of Barclays.

[Gilberto Garcia, analyst]

I hope you and your families are doing well and healthy. I had a couple of questions.

First on the development bank, have you been in conversations with them about what their objectives and priorities will be given this situation?

And the second question is on the -- your plans to grow on the consumer segment, is it reasonable to assume that those will be paused for the time being while you focus on weathering this situation?

[Edgardo del Rincón Gutiérrez, executive]

Yes. Thank you, Gilberto. Yes, our relationship with development banks is, as you know, really important.

We are the #1 bank for FIRA and an important player for both Banco Mex and Nafinsa, and not only the funding but the collaterals they provide to us in our portfolio are really important. And that will continue -- I mean we are continuing that relationship, and we are in very close communication with them.

And in our decisions in the credit committee that -- I mean that support of those collaterals and how we build those portfolios, I mean, not only with real collateral, real guarantees, but also with the support of the development banks that provide you with the opportunity to recover in case of a past due loan, really fast -- that collateral is really important. So we give a really high importance and value to that relationship with development banks.

And your second question was about the consumer. The consumer, I mean, strategy, what I can tell you is that the quality we have today in the consumer portfolio, that is really small, you know, it's about 1.4% of our total loan book is very good. As it was completely developed during the years as a cross-sell strategy to our customers, mainly in the SME segment. I mean the credit card portfolio is really good and is still behaving very, very well. But of course, we are offering all of them -- I mean we're inviting them to the relief program in case they need it.

In the coming months, of course, we are -- we have been very careful in our credit policy. So -- our approval rate will diminish. I mean we already did that last month. So what you will see is that we won't grow as we were planning. We will be very careful, and we, at the same that we are doing in our commercial book, we would look for very good growth with the right asset quality.

Of course, we continue to report a very good growth in the consumer portfolio, 41%. That was part of the growth mainly in 2018 and in 2019, so that new customers in different portfolios, mainly personal loans, payroll loan and credit cards continue to provide growth. But that, for sure, will diminish in the following quarters.

[Operator]

[Operator Instructions] We'll move next to Natalia Zamora of GBM.

[Natalia Zamora, analyst]

Thank you for the stress test under the worst case scenario. It is very helpful so we can have a wider viewpoint on the situation.

I understand we can expect guidance once there is more visibility. And actually, my first question, is a follow-up to one of Neha's questions. Under a base case scenario, what are you seeing in terms of cost of risk and NPL levels? Maybe you could provide a number or a range for -- both for this year and for 2021.

And my second question is just to clarify the capitalization levels reached through the stress test in the presentation. I assume there's no dividend payment next year either?

[Edgardo del Rincón Gutiérrez, executive]

I mean we are not providing a guidance exactly because there is no clarity today about the different impacts we can have under these base case scenarios. So that's why what we've seen is that we could provide, we believe, could be at the end of the second quarter. But that will depend on how the situation really evolves. So I rather not provide what we think in terms of NPL and cost of risk under this scenario.

As I said, we think the real impact would be in 2021, not this year, because of the relief program that really helps customers. We have been very close to our customers, having a direct communication to them. I can tell you that we gather direct feedback from them. And I can tell you, 3 different segments. A big portion of customers that think that -- I mean they can navigate very well this situation, and they don't have or they don't expect a significant impact because they continue selling or they have the capital or liquidity to face this situation for several months.

Another group think that the relief program will be enough for them. So they can navigate the situation, but the relief program is really helping them.

And a third segment that today is just a few cases that already believe they will need a restructure when the relief program ends. But of course, we will continue to monitor the situation through direct and constant communication with them, with our customers. And this most likely will evolve in the following months.

So I insist difficult to provide today a view about our expectation in NPL and cost of risk that is the 2 main indicators that are difficult to forecast today. That's why we'll rather wait a few months to provide a new guidance once the situation is more clear and we have a better visibility.

[Carlos De la Cerda Serrano, executive]

Natalia, this is Carlos De la Cerda. Just to expand a little bit on what Edgardo just mentioned, I would like you to note that in our worst scenario modeling stress test, we chose the worst one, the worst scenario, based on what happened in the 2009 crisis in the world and in Mexico. And in that scenario, the decrease in GDP, the increase in NPLs, the cost of risk grew by a certain percent, as Edgardo has the past figures.

But in this scenario that we are modeling, we went above that. So this is a very, very pessimist scenario because what we wanted to find out, and we are happy to mention that we did find out, is that the bank has sufficient capital to remain solid even after that very bad, bad scenario.

Could you please, Edgardo, mention the....

[Edgardo del Rincón Gutiérrez, executive]

Yes. Natalia, the cost of risk for BanBajio in 2009 reached 2.37%. And as you know, under this scenario, the highest level of cost of risk is 2.5%. So it's even worse than 2009. It's really a very negative scenario, but as Carlos is saying, the results are very positive. What we want is to position the bank very well in capital and reserves, so we can face the situation, but also be prepared to grow when this crisis is over.

[Natalia Zamora, analyst]

Okay. Perfect. That's clear and very helpful.

And in terms of my second question, so we can -- these worst-case scenario stress tests assumes there's no dividend in 2021?

[Edgardo del Rincón Gutiérrez, executive]

Yes, that is an assumption. As Alberto said during the presentation, that was a conversation during the general meeting, and the decision is to postpone. So we will follow the recommendation of the CNBV, but we could change our decision once we -- once again, once we have more clarity about the situation and how deep this crisis really is.

[Natalia Zamora, analyst]

So the dividend for this year and next year isn't totally canceled yet? It -- maybe [ it's deferred... ]

[Edgardo del Rincón Gutiérrez, executive]

No, that was only an assumption for the stress scenario in order to see the capital levels during the crisis. But that is not a decision as Alberto said.

[Operator]

We'll take our next question from Ernesto Gabilondo of Bank of America.

[Ernesto María Gabilondo Márquez, analyst]

My first question is on loan growth. We have been seeing some SMEs and corporates withdrawing the approved credit lines from the banks. So I just want to know if that has been the case in Banco del Bajio? And if you are focusing in your own client base or if you are granting new loans for new projects.

And then my second question will be on provisions. Just -- I know that most of our analysts have been asking you about this, but just to think about the evolution of the provisions considering that there will be a relief program and that if you applied for it, I think you are not allowed to create provisions. But I just want to know what will be the evolution if all the portfolio of Banco del Bajio is subject to the grace period or you are only considering some segments?

And if it would be reasonable to think the cost of risk could be your stress test scenario and the base case considering that we are likely to have an unprecedented recession.

[Edgardo del Rincón Gutiérrez, executive]

Thank you, Ernesto. Regarding loan growth, what we saw in the first quarter and you can see that very clearly in the presentation is that -- I mean we really didn't grow during January and February. That is very clear. And you have the information from the CNBV as well for January and February.

So the real growth during the quarter was in March. We have an important pick-up. And yes, a lot of companies looking for liquidity. But also many of the projects that we are financing, having the level of maturity, let's say, to end the projects. But we saw an important demand mainly in the last couple of weeks of March that continue at the beginning of April for a few days.

But it's not anymore the case that what we are seeing and we believe that the measures announced by the Central Bank are providing order and a good level of, let's say, frankly, that confidence to customers. So we think that -- I mean that level of demand will still continue growing a little bit, but not really as we were at the end of March. Of course, that has an impact in revenue during the quarter. You saw that we posted a small increase in revenue, and that is the main reason because that didn't have a real important impact in our average loans during the quarter. So the growth was at the end of the quarter.

Regarding provisions, we don't know about any restriction to go above the regulatory needs and the situation of the loan book. So I mean that's why the level of provisions are different by bank, and that is on a strategy that every bank can define without any problem. So we will start creating provisions in the second quarter.

And even during the relief program, the criteria as seen by the CNBV is providing more flexibility in order for demand to have more, let's say, capacity. But we have the levels of capital that allow us, as the stress test scenario is very clear, to even create provisions and remain with a very good level of capital. So we have, let's say, our own situations, allow us to create provisions without any problem.

And I believe your last comment was regarding cost of risk. What was exactly, Ernesto?

[Ernesto María Gabilondo Márquez, analyst]

Yes. So just to -- I know that in your presentation, you incorporate a stressing scenario for the cost of risk. So considering that we are likely to face an unprecedented recession and there are analysts talking about minus 8% to probably more of the GDP this year. So would it be reasonable to think of the cost of risk in the stress test scenario as a base case? Or do you think it could be lower than that?

[Edgardo del Rincón Gutiérrez, executive]

I mean, as we said, this is -- what we believe today is the worst-case scenario. And that is even higher to what we face in 2009. I believe something that plays well in favor to us is the mix of the loan book. Our consumer portfolio is small. Today, a big percent, as you know, is commercial loans. Our customers that we know very well and very good quality in everything they do. And also, the level of collateral we have is really, really high.

So we think that we can navigate the situation. And our base case scenario is not a GDP decline of 9%. We think it could be a little bit better, but we have a lot of trust in the quality of the decisions in every loan that we approve.

And by the way, I believe you asked as well, if we continue seeing new projects. The question is, yes, we have less demand for new projects, but we continue to see. We continue having, let's say, our regular activity, and we are open to new projects. Of course, always looking for the right customer and the right asset quality, but we continue to do that.

So let's say, our expectation is to be below the cost of risk that we are showing in the stress test scenario? Yes.

[Ernesto María Gabilondo Márquez, analyst]

Perfect. And then just 2 other questions. The first one is how much of the loan portfolio is backed by the development banks such as NAFIN and FIRA?

And then my other question is if you can provide us what is the exposure to riskier sectors? Some banks have been providing the exposure to payments and suppliers, to real estate, to construction, to air force, to airlines. So if you can give us any color on that, I think will be very helpful.

[Edgardo del Rincón Gutiérrez, executive]

Yes, of course. The total loan book that is in which we have collateral with development banks is close to MXN 37 billion, 3-7. And let me give you some color about the main sectors in which we are. For example, hotels and restaurants account for 1.4% of the total loan book. And construction is account for 13.5% of the loan book. All these numbers are at the end of March.

Let me talk about mainly the main segments. Commerce activity, retail, et cetera, is 16%. By the way, we are considering in medium risk. Manufacture is 14.2%. Agriculture, that is an important segment for us, is 8.1%. Those would be the main -- of course, in government, that are mainly state government, account for 6.4% that we don't see any issue.

So those are maybe the main segments in which we are investing, Ernesto.

[Ernesto María Gabilondo Márquez, analyst]

And as you mentioned before, you are expecting to create expected loss provisions on those sectors, right?

[Edgardo del Rincón Gutiérrez, executive]

Yes. That will be a strategy, let's say, across the board. And what we want is to have a very healthy coverage ratio going forward until the end of this crisis.

[Operator]

We'll go next to Miguel Davila of Itau.

[Miguel Dávila, analyst]

Sorry to ask this again, you might have said it on the previous question, but I couldn't hear quite well. You said you're assuming a reference rate of 5% to 5.5%, and you're assuming on your worst-case scenario, a rate of 4.5%. So what would be your base case on GDP decline if your worst-case scenario is asking for a 9% decline?

And finally, if I can ask it, so what would be the odds of -- or what probability would you assign to your worst-case scenario happening in 2020?

[Edgardo del Rincón Gutiérrez, executive]

I mean very difficult to give that probability to the worst-case scenario. You know that all the analysts has been reviewing. And many of them are providing a range. You saw recently was BBVA published that is something between minus 6% and minus 12%, depending on the fiscal support that the government can provide. That is, today, something that we don't know. So it's very difficult to give a probability to any scenario. I believe nobody knows very well the size of the length of the lockdown. And also, we don't know how really the country will open the economy. Of course, we believe it's not going to be a big bang. It's going to be a gradual open maybe by sector, but we really don't know. So very difficult to apply a probability to any scenario.

Regarding rates, because this is a stress test scenario, we decided, I mean, to include as a premise for that scenario, a really low rate, to really see how the capital of the bank evolves during that stress test scenario. And as we said, we are happy because the results are very solid and we can be very well prepared even in this very negative scenario.

What we believe is that, I mean, the market is already stunting following a decrease in rates in May or June from the Central Bank. That is very possible that will occur really soon in the following couple of months. So something between 5% to 5.5%, as I said, seems to us a reasonable level of the rate for the rest of the year. But that will depend also. That will depend in how deep this crisis really goes. So I mean, we apply a small probability to that rate of 4.4% that is in the stress test scenario, but it is possible.

As you know, the decisions other countries are taking regarding rates. In Europe and in the U.S., it's difficult to forecast that.

[Operator]

[Operator Instructions] We do have a follow-up from Brian Flores for Citibank.

[Brian Flores, analyst]

I know we're very close on the time, but I appreciate you taking my question. So just a follow-on on Ernesto's question. You mentioned government is about 6.4% of the portfolio. And during this last quarter, we saw a big increase on a year-on-year basis. Could you just give a little more detail on what you're seeing in that segment? And what do you expect going forward?

[Edgardo del Rincón Gutiérrez, executive]

Yes. What we saw is really an increase. One of the loans that we provide to one state was doing in the first quarter, and the rest, a couple of more loans was really, let's say, at the end of the -- I mean during 2019 and after the end of the first quarter. That's why you can see an important increase in percentage. We are talking about MXN 14 billion that account for 6.4% of the total book -- sorry, MXN 12 billion. So that is what we have. And of course, the collateral are really important, are very well established, and we don't foresee any risk in those loans because are very well structured.

[Carlos De la Cerda Serrano, executive]

All of those loans are guaranteed by Participaciones Federales. And as you know, there has not been one single case of one of that kind of loans to non performed in the history. So we believe those are very safe high-quality loans that help us to generate income with a very, very low risk.

[Brian Flores, analyst]

Okay. So besides this particular one state, basically, the appetite for credit is as usual, right? It's normal.

[Edgardo del Rincón Gutiérrez, executive]

Right.

[Operator]

We'll take a question from [ Ricardo Buchbukel ] of BTG Pactual.

[Unknown Analyst]

First, I wanted to know how you guys looking at competition and funding.

And also, given the falling interest rate and higher risk, how you guys see NIM behavior looking forward.

And also, I wanted to know if you could give us some color on how the postponement of payments that you're doing will be accounted.

[Edgardo del Rincón Gutiérrez, executive]

What I'd like to say about competition and funding is that it was a particular period, probably a couple of weeks at the beginning of April that we saw that some signs that support of the money market started to close operations with a higher spread that we have observed, about 50 or 60 basis above the normal spread. We think that, that happened because the big banks already saw the potential use of the nondisposal lines and that makes pressure under the cost side.

The last week, we saw that there was a relaxation of that situation. We are operating right now in more normal cost of deposits. So we think that that was a very particular moment at the beginning of the April and end of March.

[Alberto Meléndez, executive]

And before the Banxico...

[Edgardo del Rincón Gutiérrez, executive]

And before the Banxico facilities in order to create more normal behavior with all the banks -- all around the banks. So we are not worried about that. As we mentioned before, we have a CCL very healthy, very comfortable, really close in a range between 110 and 120. So we are very comfortable with that.

In terms of rates down going down, what is important to say is that even we are very sensitive, we are one of the most sensitive bank on the downsides of the interest rate. We are also the most healthy one. So what we are expecting is that we will be able to compensate or more than compensate the negative impact due to the lower level of interest rate with a lower -- in terms of comparison with our peers with lower cost of risk. We are seeing in the worst-case scenario that our cost of risk will be pretty close to the cost of risk that already some of our peers have. So we consider that the participation in the results of the cost of risk in comparison with the negative impact in the net interest margin can be pretty well compensated.

[Operator]

I'd be happy to turn the call over to Melanie Carpenter for any webcast questions.

[Melanie Carpenter]

Thanks, Leo. I want to just say we received several questions from the webcast, and we appreciate that. Most of them have already been answered.

But we will take one that we received from David Carmona of SURA, in which he says, which sector do you foresee that you will reduce or eliminate new credit originations going forward?

[Edgardo del Rincón Gutiérrez, executive]

We are not really eliminating any segment. As you know, this is a decision with a case-by-case and every case is different. And we took into consideration -- I mean the stockholders of those companies, the previous experience, the relationship with the bank, the management, and of course, how positive the project can be.

Of course, today, there are several segments, let me -- as an example, hotels. In hotels, the percentage of rooms that are today occupated by customers is really small. We have seen a few hotels with levels really, really small. Some of them are really closed. Some of them with percentage between 1% to 10%. So really, really small. So we are not eliminating, but today, we are -- actually, we are not seeing any new case for someone that would want to invest in hotels. But we are not closed to any segment, to any sector. But what we are doing is being very cautious and very careful in all the decisions we are taking and really seeing case by case, all the new projects of our customers.

[Melanie Carpenter]

Excellent. So I think that concludes the question portion. So Leo I'll just -- I'll turn it back to Alberto Guajardo who's going to give some closing remarks, gentlemen.

[Edgardo del Rincón Gutiérrez, executive]

Thank you for -- this is Edgardo del Rincon. Thank you for all your questions and your participation during this call. And we hope really that we all remain well as well as your families. Thank you very much.

[Alberto Meléndez, executive]

Thank you, Melanie, and thank you, everybody, for your continued interest in the company and looking forward for our next conference call. Have a good day, everybody.

[Operator]

This does conclude today's BanBajio's First Quarter 2020 Earnings Conference. You may now disconnect your lines. And everyone, have a great day.