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Earnings Call Analysis
Q1-2024 Analysis
Banco del Bajio SA Institucion de Banca Multiple
Banco del Bajío reported a net income of MXN 2.8 billion for Q1 2024, marking a 3.3% increase year-over-year. Revenue for the quarter reached MXN 6.4 billion, representing a 9% growth from the prior year. This growth indicates a resilient performance amidst a competitive banking landscape.
The return on equity (ROE) for the quarter stood at a robust 25.9%, while the return on assets (ROA) was recorded at 3.2%. These metrics suggest that Banco del Bajío is efficiently utilizing its equity and assets to generate profits, outperforming many of its peers in the Mexican banking sector.
The bank's total loan portfolio increased by 8.7% to reach MXN 242 billion, with corporate loans growing by 11.2% and consumer loans demonstrating a much stronger growth of 41.5% year-over-year. Total deposits also grew significantly, up 13.4% to MXN 236 billion, showing a stronger deposit base compared to the growth in loans.
Banco del Bajío maintained a solid asset quality with a non-performing loan (NPL) ratio at 1.34%, well below industry averages. The coverage ratio stands at 1.8 times, indicating a healthy buffer against potential loan losses, which reinforces the bank’s conservative risk management approach.
The bank's board approved a dividend payout of 60% of 2023 earnings, which will be distributed in two installments: MXN 4.4 billion (MXN 3.7 per share) in May and MXN 2.2 billion (MXN 1.85 per share) in September, giving a total yield of approximately 9%. Post-dividend, the capitalization ratio is expected to be around 14.6%, allowing continued growth opportunities.
The bank is seeing promising growth in its digital banking services, with a 29% year-over-year increase in digital clients. The digital platform facilitates 82% of transactions today, a significant increase from 69% two years prior, contributing to higher engagement and transaction volumes that enhance non-interest income streams.
Looking ahead, the bank aims to maintain double-digit deposit growth and continue expanding its loan portfolio. However, they anticipate challenges from the competitive environment and macroeconomic factors, including high interest rates impacting loan demand, particularly with the upcoming elections in Mexico potentially causing short-term economic uncertainty.
The bank remains optimistic, projecting revenue growth and assessing loan demand trends post-elections, with an emphasis on maintaining asset quality. They have communicated that they will provide updated guidance in the upcoming quarterly results, reflecting their responsiveness to market conditions.
Good morning, everyone, and welcome to Banco del Bajío's First Quarter 2024 Results Conference Call. My name is Anila, and I will be your coordinator today. [Operator Instructions]
Before we begin the call today, I would like to remind you that forward-looking statements made during today's conference call do not account for further economic circumstances, industry conditions, company performance and/or financial results. These statements are subject to a number of risks and uncertainties.
Joining us today from BanBajío is Mr. Carlos De la Cerda, Executive Vice Chairman of the Board of Directors; Mr. Edgardo del Rincon, Chief Executive Officer; Mr. Joaquin Dominguez, Chief Financial Officer; and Mr. Luis Quiroz, Investor Relations Officer. As a reminder, this video conference is being recorded. For opening remarks and introductions, I would now like to turn the call over to Mr. Luis Quiroz. Mr. Quiroz, you may begin.
Good morning to everyone, and welcome to Banco del Bajío's conference call for the first quarter of 2024. During this conference call, we will talk about the results of the quarter, the evolution of the main trends and the dividend proposal that was approved yesterday at our Annual General Meeting. Without any further ado, let us start the presentation.
On Slide 3, we would like to briefly describe some key ratios recorded in the quarter under trend. First off, the quarterly net income was MXN 2.8 billion, an increase of 3.3% year-on-year. The ROE for the quarter stood strong at 25.9% and revenues accounted for MXN 6.4 billion, an increase of 9% year-over-year. The NIM was 7%.
The efficiency ratio stood at 34% without much change against the first quarter of last year. The loan portfolio expanded by 8.7%, with company loans expanding by 11.2%. Total deposits grew by 13.4%. The asset quality remains stable with the NPL ratio at 1.34%, and the coverage ratio at 1.8x. The preliminary capitalization ratio stood at 16.9% by the end of March, boosted by earnings accumulation.
In Slide 4, we would like to emphasize some key indicators from our digital transformation strategy. Monthly active clients in the bank are growing by 5%. Moreover, our digital clients are growing by 29% year-over-year. Our clients are growing the total amounts transacted by 58%, with the mobile channel being the most dynamic, growing by 68%.
As of now, 82% of the transactions at BanBajío are run through self-service channels, improving from 69% in only 2 years. The increase in transactions done through our channels are a reflection that clients are more engaged with the bank and that they start to use more services not related with credit, which in turn translate into more deposits and noninterest income.
In Slide 5, our total loan portfolio reached MXN 242 billion, an increase of 8.7% compared to the first quarter of 2023. This quarter, we saw sound secular growth coming from our core segments, with companies of all sizes growing by 11.2% and consumer loans growing by 41.5% year-over-year. The chart on the bottom left shows the composition of BanBajío's portfolio as of March.
As you can see, companies represent 84% of the portfolio, with corporates being 55% and SMEs being 29%. Government represents 6%. Financial institutions represent 5%, consumer loans 3% and mortgages represent 2%. Moreover, we would like to highlight that the yield of the portfolio expanded by 72 basis points, which is faster than the change in TIIE of 41 basis points year-over-year, which underscores the change in the portfolio into lower ticket clients and higher yielding segments.
On Slide 6, we can observe the evolution of our consumer loan portfolio, which now accounts for MXN 6.1 billion, and it is growing by 41.5% against the first quarter of 2023. As we have mentioned in previous quarters, we see the consumer loan portfolio as a strategic asset to diversify our business.
However, it is important to mention that the incursion into this business line has been mainly driven by our existing customer base as almost 80% of the bookings comes from cross-selling. As such, we have managed to grow these portfolios with a remarkable asset quality, better than industry standards, as shown in the charts with the NPL ratio of payroll loans at 1.8%, credit cards at 2.5% and personal loans at 1.3%.
In Slide 7, we would like to highlight BanBajío's sound asset quality. As you can see on the upper chart, our NPL ratio stands at 1.34%, while our NPL adjusted stands at 1.99%. Both ratios excel as they stand considerably below the industry standards. The charts on the bottom reinstate the good evolution of the asset quality as the bank managed to decrease the cost of risk to 65 basis points for the quarter while maintaining an elevated coverage ratio above 1.75x. As you can see in the bottom left chart, our coverage ratio remains above the regulatory coverage as we continue to hold MXN 1.5 billion of additional reserves in the balance sheet accounting for 47% of NPLs.
Moving on to Slide 8. Total deposits stood at MXN 236 billion, an increase of 13.4% compared to the first quarter of 2023. We would like to highlight how on a year-over-year, deposits have continued to expand faster than interbank loans. Going forward, we intend to grow the deposit franchise of BanBajío as much as possible.
For 2024, we expect to continue growing deposits at double digit, a little faster than the loan portfolio. Zooming out, it is worth highlighting that BanBajío currently has a loan-to-deposit ratio of 103%, coming down from 129% at the end of 2019, ensuring less dependency of institutional funding.
In Slide 9, we can observe the evolution of our funding structure. Since the second quarter of 2023, we have seen a tougher competitive environment for funding, with banks and other players willing to pay higher for deposits. For us, most of the impact in funding has come from corporate deposits, which have gotten more expensive due to competition between traditional banks.
As we can see on the slide, deposits continued to gain share in our funding mix, standing now at 83% of total funding. However, time deposits grew at a faster rate than demand deposits. In the bottom charts, we can see how the cost of funding has increased for us and the system alike. Our cost of funding stands now at 62% of TIIE, which compared better than the system cost of funds for the first quarter.
On Slide 10, we can observe the evolution of our margins. The NIM for the first quarter was 7%, representing a contraction of 29 basis points year-over-year. The contraction comes as a result of the increased cost of funding and a higher proportion of repos in the average earning assets for the quarter. We estimate our [indiscernible] sensitivity to rates considering the current mix of assets and liabilities to be around 26 basis points of NIM per every 100 basis point change in the benchmark rate, which will represent an impact of around MXN 817 million of revenues and MXN 514 million of net income for a full year.
In Slide 11, you will see the performance of BanBajío's revenues, which grew 9% compared to the first quarter of last year. Net interest income expanded by 6.1%, while noninterest income increased by 41%. We are seeing good trends in noninterest income as fees plus trading income is growing by 16.9%.
We are focused on growing business lines not directly related to the loan portfolio because it diversifies our income streams and will help us to partially mitigate the impact of lower rates in the future. In that sense, we would like to highlight the performance of electronic banking fees growing by 26%, interexchange fees growing by 27%, POS fees growing by 14% and FX trading expanding by 16% year-over-year.
Moving on to Slide 12. We can see the performance of our efficiency ratio. It came in at 34% for the first quarter of 2024, staying practically flat year-over-year. Our current ratio stands at best in class in the Mexican banking system. In the first quarter, expenses grew by 9.1% year-over-year. We continue to invest importantly in hiring new bankers and personnel to accelerate the growth; new branches, especially in the center and northern regions; and the digital capabilities of the bank.
On Slide 13, you will see the evolution of the profitability metrics of BanBajío. As shown in the charts, the quarterly ROA stood at 3.2% and the quarterly ROE at 25.9%. On a per share basis, the first quarter EPS to a MXN 2.34, which represents an annualized earnings yield of 14.7%, computed with the average stock price for the first quarter.
On Slide 14, we can see the preliminary capitalization ratio as of March of 2024 of 16.87% of which almost all is CET1 capital. The capitalization level increased against the fourth quarter as a consequence of healthy earnings accumulation.
Lastly, on Slide 15, we presented dividend payments that were approved in the Annual General Meeting yesterday. The distributions are up to a 60% payout of the 2023 earnings, which will take place in 2 installments, one in May for MXN 4.4 billion or MXN 3.7 per share and another one in September for MXN 2.2 billion or MXN 1.85 per share.
Adding up the 2 distributions will account for MXN 5.55 per share, equivalent to a yield of approximately 9%, computed with the most recent stock price. We anticipate the capitalization ratio will stand around 14.6% after the dividend approval, which will allow the bank to continue exploiting growth opportunities in the loan portfolio.
To conclude, we are pleased to share the results of the first quarter, and we feel comfortable to deliver on the guidance we provide to the market. With this, we conclude the presentation, and we can open the call to the Q&A session.
[Operator Instructions] Our first question comes from Ernesto Gabilondo at BofA.
Congratulations in your results. I have 3 questions from my side. The first one will be on your earnings growth guidance for the year. Can you remind us how many interest rate cuts were you expecting for this year? And considering we can have a higher rate for longer, if that happens, would you see upside risks for your net income growth guidance for the year?
Then my second question is on your loan growth expectations. Given that we are ahead of the Mexico and the U.S. election, just wondering if you are seeing any delays from corporates or lower demand from individuals. What would be your key concerns towards the Mexico and the U.S. election? Are you concerned for potential higher tariffs to some Mexican exports? And also related to the loan growth question, are you monitoring a potential impact from La Niña, which I think could be positive for the agriculture sector?
And then just my last question is on your investments and your branch expansion for this year. So how many did you open in this quarter? Where are you locating them? And is this some of these branch openings are located to benefit from potential nearshoring opportunities? Or is it just to increase expansion in the specific regions?
Thank you, Ernesto, and good morning, everyone. Related to your first question about earnings and the guidance, what is in the guidance implies an average rate for 2024 of 10.15%. That means that we are expecting, at the end of this year, 9.25% from the Central Bank. It seems that today, the expectation is close to 10%. So yes, yes, we can have an upside risk. We will see the results for the second quarter, and then we'll review if we can move the guidance when we report the second quarter.
Related to loan growth, yes, we are seeing a delay in investments from several customers. What we are seeing today is more demand for working capital lines other than investment. And I -- we feel that it's not only the elections and the uncertainty from that event, but also the monetary policy with very [ high rates ] in Mexico. The cost of credit for customers, it's really very, very high.
It is important to consider that for us, asset quality is always a high priority, and we are not relaxing our credit standards in order to grow. Also, we are seeing more competition and several banks, mainly banks bigger than us, offering very low rates. In those cases where we see a low-risk customer, we are competing even with a lower rate, and we are trying to compensate that profitability with other products and services.
For the second semester, once the election passed, and we can have clarity about the -- I don't know, the federal policy that implies the new government, we feel, and it's also normal that in the second semester, we can have a better loan demand, and we can have also good growth.
The other impact mainly for the -- our customers that are many -- that are exporting is the FX rate that is really, really very low, and that is impacting the margin in many customers. So we feel that once we see a low rate environment at the end of this year and in 2025, that will imply also a much better FX rate that will impact -- will have a very positive impact in the margin that we are seeing in our customers, and that can imply also additional investments in the future from them.
Regarding the impact of La Niña and the water prices that we are seeing globally, what we saw already is mainly an impact in Sinaloa, but in the Bajío region and in the rest of the country, as we see mainly modern agriculture with very efficient way to manage water, we have not seen yet an impact. So just La Niña, if that implies more rain environment and also more water, that can have a very positive impact.
Regarding branches -- sorry, your third question. Regarding branches, yes, we are opening more branches. In the last 6 months, we opened one in Chihuahua and another one in [indiscernible] that are related to nearshoring. During the first quarter, we opened already 3 branches: one in Michoacán in Pátzcuaro, that is a place in which we already have a very good agro loan portfolio; in Querétaro; and also one in Guadalajara in Jalisco. For the rest of the year, we are planning to open 12 additional branches, mainly in the North region. So suggests we are trying to capture as much as possible the opportunity of nearshoring.
Our next question comes from Tito Labarta at Goldman Sachs.
Just one question on -- I guess, on your capitalization and dividend payouts. I mean you mentioned you'll be at 14.6% after this dividend payment, but I mean, ROE still running well above 20%, loan growth below 10%. I mean you should continue to be generating capital at a pretty healthy pace.
What would make you feel comfortable to maybe do an additional dividend aside from the 60% payout that you're already planning? Or I mean, do you really see potentially loan growth picking up more, and that's why maybe you want to keep that capital at a relatively higher level? Just to understand how you're thinking about capital and dividend payouts from here.
Tito, this is Carlos. We feel very comfortable with a 60% payout for the actual situation. But in the second semester, we will consider, according to the situation that we see, an additional dividend. As we have said in the past, we would like to have a capitalization rate between 14% and 15% that we believe is very solid, very strong. And anything in excess of that, it somehow reduces our ROE. So we will consider in the second semester, we will study the situation. It will depend on the loan growth and other factors that we might -- that might impact us. We will consider an additional dividend payment.
Our next question comes from Ricardo Buchpiguel at BTG Pactual.
I have 2 here on my side. [indiscernible] what do you expect in terms of competition for deposits in the coming quarters? As you mentioned, we saw more competition lately on corporate deposits with traditional banks, and also more recently, there was a rise in competition for retail deposits, mainly with fintech, like no banking card, playing 50%, 15% return on the deposits. So I wanted to understand what we should expect in terms of funding cost versus the reference rate in the coming quarters.
And for my second, this quarter, we saw a pretty good dynamic in terms of NPL formation indicating that it could be -- provisions could be even lower, given this level that was rich. So would it make sense for the -- what makes sense for the upcoming quarters in terms of NPL formation? And should we expect cost of risk to stay more towards the low part of the guidance, around 0.6%?
Thank you, Ricardo. Regarding the pressure that you are seeing in funding, that is happening in the whole market. As we mentioned in the presentation, most of the pressure in funding for us is coming really from corporates, corporate deposits, where the competition is really among traditional banks. We don't see there any activity from fintechs or digital banks, really. So we are playing close attention to what is happening, but it's really coming from corporate deposits.
In individuals, we are keeping and even growing deposits very well, so we don't see yet any impact coming from competition, let's say, non-traditional competition, let me call it that way. What we are confident also is that we continue growing in transactions, and that is happening because of all the digital investment, the technology that we're putting in place to improve our digital banking, and that is having an impact in operating deposits coming also from companies and also in fees.
So total transactions for the bank are growing 22%, but the digital platform, Bajionet, is growing 43%. So that means BanBajío is today more relevant for our customers, and we are very happy with that result, and we are planning to continue growing that situation so we can continue being more relevant for our clients, mainly companies.
And I would like to add, Ricardo, that the -- so far, the fintechs and our bank have very different business models, very different. I don't know a single client from our bank that takes his or their deposits to a fintech. The market -- the target of the fintechs are basically young people and are acquiring deposits that...
[indiscernible] complementary.
The corporations and the medium-sized individuals in terms of financial capacity are not taking their deposits to the fintechs because of safety reasons, and I think we are very competitive in our market. Let me complement that the transactions that we are seeing growing are mainly payments and collections capabilities in the digital platform and also payroll services.
And also, we are seeing a very good impact. Actually, the businesses that are managing the acquiring transactions with us coming from debit and credit cards in the environment. We are seeing a very good growth in zero cost deposits, reaching MXN 6 billion coming from MXN 5 billion a year ago. So we are seeing that we are growing very well in very quality transactions for our customers.
So we are happy with our results, of course, with a high rate environment, the pressure from customers trying to get a good return in deposits, I believe, is something reasonable to expect. Regarding cost of credit, yes, we are close to 2.6%. We have been saying that our regular level for cost of credit is between 0.6% and 0.8%. We feel confident with that level. We don't see any pressure today. We're growing with very good quality. And so we expect to meet the guidance. Maybe it's too soon to tell if, for the rest of the year, we're going to be in the low part of the guidance.
Very clear. And if I may, you mentioned a bit about the investments in digitalization. Could you qualify a little bit more what investments are missing to complete your goal in terms of digitalization?
We feel, Ricardo, that with the investment that we have been doing for the last 4 years, developing a completely new digital platform, I mean we are close to 100% of the functionality our customer need. Of course, competition [ exceeds ] what we are, now very focused on is in the capability, not for the customer to transact but to acquire a new service or a new product in a completely digital journey end-to-end.
So the customer can get the agreement of the, let's say, a debit card, payroll services, et cetera, in a completely digital environment. We already have more than 10 different products and services in which mainly companies can have a completely digital journey end-to-end, and we are very happy with that, but we are planning to put more products and services in that digital capability. So that is really what is missing, and we will develop those in the following quarters.
Our next question comes from [ Olavo Artuso ] at UBS.
Just a broad question, but trying to understand the digital landscape here. So thinking about your consumer credit portfolio, how much bigger it could be in the future? I mean, is there a target or a goal the bank has for this portfolio? Because I understand that a significant part of your individual clients is mainly related to the business companies that BanBajío already has some relationship. But what -- could you share with us about the bank's mindset over the open market in Mexico? And again, is there a target share for the customer portfolio over the total in the upcoming years? This is it.
Thank you, Olavo. What we are trying to do is to improve the mix and to grow, let's say, in sources of revenue. And with that improvement in mix, we are trying to improve also our margins in loans. So loans for companies will continue to be the most important part for BanBajío for a very long time. That is our core business. But the consumer business for individuals is growing very well, with very good quality compared to the system and is mainly a cross-sell activity.
So we are capturing individuals mainly with 2 sources: payroll services for companies, so we can get additional individuals working with us, but also individuals that are coming to our branches and digital capabilities to open a DDA account. And once we see the flows in those accounts, then we can preapprove a loan, and we have been very successful with that. And that is happening not only at the branch level, but also really at this moment in any point of interaction with customers. That means the call center, ATMs and Bajionet, the digital platform.
So we are cross-selling very well. So as is, it is a customer really that we know already. That is the reason why the quality is very good. So we are not offering consumer loans in the open market. Today, we're growing 40% this portfolio. I feel that we can continue with very high growth, let's say, above 25% for the last -- for the following 3, 4 years easily, and we have been improving also our digital capabilities to have that.
The goal, together with what we call parametric loans, that is also a loan with high margin, above 10% margin, is that together with the consumer portfolio, together with the parametric loans, we can [ increase ] 6% of the total portfolio by the end of next year. That is our short-term goal. Of course, we will continue growing, so that will improve our NIMs and margin in loans in the future.
And reduce sensitivity.
And reduce sensitivity as well.
Our next question comes from Jorge Henderson at Banco Santander.
I have a question regarding the reclassification you made on the first quarter -- I mean, on the first quarter of [ 2022 ] and first quarter of 2023, just to make it comparable on the financial margin and the trading gains. I just like -- I want to understand what were these changes and if we should expect any additional changes for the NIM calculation. Any additional comment that you can add there would be very useful.
Jorge, this is Joaquin Dominguez. The reclassification was due to an observation of our auditors that we should regulate the -- the effects of valuations of some liabilities in U.S. currency, such as the reserves that are accounted in U.S. dollars or some compromises that came from some contracts that we have to pay in U.S. dollars. The effect of valuation of those liabilities should be reflected in the net interest margin.
So for the future, we do not expect a relevant movements on that account. So that is for sure is that, that what you will see in the FX or in the trading income will be more being collated with the ability of the bank to improve the relationship with the clients and not external effect in terms of valuations. So we are also trying to reduce the effect of valuations, so you will not have to see important movement in the future in that concept.
And then our last question, it would be from [ Shane Mathews ].
This is Shane from [ WhiteOak Capital ]. Congratulations. I just have one question on the yields. I think quarter-on-quarter, the yields fell from 13.8% to 13.6%, so there's a 23 bps contraction. The reference rate was quite similar.
So I just want to understand, I think you alluded to this point earlier on as well that there's a lot more competition on the loan side. So is that the, let's say, major function being reflected in the yield compression? And I just want to understand how you're seeing yield evolution going forward and if there's any risks to the NIM guidance there, given you're seeing still heightened deposit competition.
Thank you, Shane, for your questions. More than competition that, of course, exists, is more the opportunity cost for customers to leave deposits in an account without any return is really high. So we have a very close communication with our customers. And they are asking, of course, to have a good return. And there is a lot of excess liquidity as well in the bank.
So during January and February, we have a few customers, mainly big corporations and institutional investors, that we were capturing with very high rates, very high cost. So during March -- and the end of February, really, and during March, we leave on those deposits as we didn't need it. Our liquidity is in very good shape.
So what we saw is an improvement in NIM coming from that decision in March. So for the second quarter, we will have the full impact of that decision. So we are expecting to have a very positive behavior of the NIM during the second quarter.
Got it. And the yield side, I think there was some quarter-on-quarter decline. Was that a function of -- I think that was my question primarily, focused on the yield, and loan yield is actually compressing quarter-on-quarter. Was that a function of more competition in the market, and -- if you capture that loan growth?
Yes. What happened is that we have one-time effect in the last quarter of last year due that we recognized an amount of commissions in the net interest margin that we didn't account in the first quarter of this year. So it was a nonrecurring impact.
Thank you, everyone. We have not received any further questions at this point, so that concludes our question-and-answer session. Thanks for all of your participation. I would now like to hand the call back over for some closing remarks.
Thank you very much to everyone for connecting. We will see you when we report the second quarter in July.
That concludes [indiscernible] call. You may now disconnect.