Banco del Bajio SA Institucion de Banca Multiple

BMV:BBAJIOO

Earnings Call Transcript 2019-Q2

[Operator]

Good morning, everyone, and welcome to the BanBajio's Second Quarter 2019 Earnings Conference Call. My name is David, and I'll be your conference operator today. Yesterday, BanBajio issued its quarterly report. If you did not receive a copy via e-mail, please do not hesitate to contact us in New York City at [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 are Mr. Carlos de la Cerda, Executive Vice Chairman of the Board of Directors; Mr. Edgardo del Rincón, Chief Executive Officer; Mr. Joaquín Domínguez, Chief Financial Officer; and Mr. Alberto Guajardo, Investor Relations Officer.

I will now turn the call over to Mr. Guajardo. Please go ahead.

[Alberto Meléndez, executive]

Good morning and thank you all for the opportunity to discuss our results for the second quarter. First of all, I would like to welcome Mr. Edgardo del Rincón, who recently assumed the CEO position at BanBajio. Mr. del Rincón will further strengthen areas in which he has a proven track record of expertise and experience, such as technology, consumer and digital banking. At the end of the presentation, we have also provided additional information about his career and experience prior to joining BanBajio.

Before I begin with my presentation, I will briefly comment on the current economic conditions in Mexico, which as you know are quite challenging at this time. On the international front, there has been general market volatility due to uncertainty caused by worldwide commercial differences, together with a signing of our renewed USMCA trade agreement. In a domestic context, economic variables show certain weakness as a result of the uncertainty generated from inconsistent economic policies. There is a generalized sentiment of a weaker-than-expected performance of economic activity and of a further deterioration of its balance of risk.

Additionally, despite the public finance discipline, the cancellation of projects and the contraction in the government spending are factors that we believe are weakening overall private investment. This is reflected in the slowdown in the country's economic performance and the uncertainty impacted growth and results for the banking system obtained as of May.

In line with that, we have decided to update certain lines of our guidance. It is important to highlight that both the original and the revised guidance does not consider any adjustment in the reference rate. I will only refer to the main lines that have been updated. We have reduced our expected loan growth to a range of 8% to 10%. We have increased the growth rate of deposits and now expect an increase of 14% to 16%.

NIM could be in the 5.5% and 5.6% range, while revenues net of reserves are now expected to grow between 12% and 13%. We are reducing the expected level of expenses to now grow between 11% and 12%.

Finally, our target for NPL ratio is now below 1.2%. I will like to highlight that the reduction in the expenses growth will offset the decrease in the revenue growth, allowing us to maintain our efficiency ratio and the returns level as well as net income. Asset quality will continue to be an important strength.

Let me now begin with a brief summary of our results for the quarter. Net income for the quarter reached MXN 1.4 billion, representing a 15.4% increase. Total revenues rose 8.6%, and financial margin grew by 10.1%. ROE was 19.1%, and ROA, 2.4%. NIM was 5.5% during the quarter. Our efficiency ratio remained flat with second quarter levels for last year, standing at 43.8% at the close of the quarter. The total loan portfolio rose by 11.1% to MXN 176 billion at the end of the quarter.

Company loans, which represented 83% of our total loan book increased by 12.2%, reaching MXN 146.3 billion. Total deposits reached MXN 149.3 billion, 16.3% higher than the MXN 128.4 billion registered a year ago. Our NPL ratio was 0.84% at the close of the quarter. And finally, the coverage ratio was 175.3%.

Moving on to Slide 4. During the quarter, total revenues grew by 8.6% to MXN 3.7 billion and by 13.2% for the 6-month period to MXN 7.3 billion. This increase during the first half of the year was a result of a 14% increase in the financial margin line, which in turn, was positively impacted by higher volumes and interest rates as well as the 8.9% increase in the noninterest income line. It is also important to highlight that in 2018, Easter week took place during the first quarter of the year as opposed to during the second quarter in 2019, resulting in fewer operational days for comparative purposes.

In Slide 5, we can review the net income performance. As we can see in the chart, net income during the quarter stood at MXN 1.4 billion compared to the MXN 1.2 billion registered in the same year ago period. For the 6 months, the net income reached MXN 2.8 billion, representing an increase of 18.6% when compared to the MXN 2.4 billion recorded last year.

Moving on to Slide 6, where we can see that as a result of our continuous earnings growth, we posted an 85% EPS increase since our IPO and 23% on a year-on-year basis, reaching MXN 4.64 in the second quarter.

In the Slide 7, you will see that our net interest margin for the quarter was 5.5%, a contraction of 12 basis points when compared to the 5.6% recorded in the second quarter of 2018. This contraction is mainly explained by 2 factors. First, the MXN 2 billion dividend payment paid in May 10 that was replaced with interest bearing liabilities; and second, a higher growth in deposits compared to loans.

On Slide 8, we can see the performance of our efficiency ratio. It came in at 43.8%, in line with that recorded during the second quarter of last year, but well below the 49.6% average that our peers recorded during the April and May 2019 period, which is the most recent publicly available information. For the first 6 months of 2019, our efficiency ratio was 43.3%. That compares positively to the 44.2% registered during the first 6 months of 2018.

Slide 9 shows our total portfolio loan growth during the period, which increased by 11.1%, reaching MXN 176 billion at the end of June. As in the past, BanBajio continues to outperform banking system growth, which posted an increase of 8.3% as of May 2019 on a year-on-year basis. During the quarter, company loans reached MXN 146.3 billion, increasing by 12.2%. Our SME segment continues to grow at double-digit, posting a 15.1% increase year-on-year, reaching MXN 48.5 billion at the end of June. This segment represented 28% of our total loan portfolio.

On Slide 10, you will see that our NPL ratio stood at 0.84% in the quarter compared to the 0.95% recorded in the second quarter of last year, and also compares positively to the 2.16% recorded for the system as of May 2019. On the other hand, our NPL ratio adjusted for write-offs was 1.68% during the quarter compared to 1.27% recorded in the same period of last year and also positively compares to the 4.5% recorded for the system as of May 2019. Our coverage ratio was 175.4%, down from 200.1% from the second quarter of 2018. This ratio also compares positively to the 148.2% recorded for the banking system at the close of May 2019. Furthermore, the cost of risk at the close of the quarter declined to 0.37%. As a result of a practically unchanged balance of our loan book during the second quarter compared to the first quarter, the required loan loss provisions represented a lesser amount.

On Slide 11, we can see how we have been consistently creating additional reserves to those that are required by the regulation. Additional provisions at the end of June amounted MXN 361 million, that in addition to the MXN 2.2 billion, totaled MXN 2.6 billion.

Moving on to Slide 12. Total deposits grew by 16.3%, while for the system, the growth was 7.1% as of May 2019. As you can see, our cost of total funding for the quarter was 5.7%, slightly higher than the 5.2% for the banking system.

Moving on to Slide 13. We see that our capitalization ratio on a preliminary basis at the end of June 2019 was 15.74%. The contraction versus the first quarter is totally explained by the MXN 2 billion dividend payment that was paid in May.

Finally, on June 7, Fitch Ratings upgraded our national long-term ratings with an outlook stable. This ratings upgrade was driven by the improved profitability that has sustained our capitalization metric despite our high business growth in relation to our peers. Additionally, the company's control asset quality through the economic cycle and good funding and liquidity profiles also contributed to the upgrade. The current rating actions already considered the downgrade of the Mexican Sovereign Ratings that took place on June 5, 2019.

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 Ernesto Gabilondo with Bank of America.

[Ernesto María Gabilondo Márquez, analyst]

And well, I have 3 questions from my side. And we have seen deposits outpacing the loan portfolio growth. So just want to know if this is part of your strategy to mitigate a potential interest rate cut? Where do you see the Central Bank rate for this year? And what are the strategies? Are you considering to mitigate a potential reduction in the reference rate?

And my second question, when looking to your new guidance, you're expecting lower expenses grow this year. So could you elaborate on how do you expect to reduce this growth? Would it be because you will not be opening branches? Or because you are postponing some investments?

And my last question, if we consider the same amount of net income that you delivered in the first half to the second half of the year, I think we are already in the midpoint of your guidance. So don't you think your implied net income growth guidance of 8% to 12% seems kind of conservative, especially when banks have better seasonality in the second half of the year?

[Joaquín Domínguez Cuenca, executive]

Yes. This is Joaquin Dominguez, Ernesto. I will answer the first question. Is -- the growth in deposits, of course, they will help us to reduce the impact in the sensitivity for the decrease of the interest rates, but is not exactly the strategy, the reason of the growth is not exactly the strategy. It is just a matter of a good performance of the sales force. And in one hand, and in other hand, the substitution that we have for the dividend payment with liabilities. But at the end of the day, it results that it reduced the sensitivity to the interest rate reduction. Was it clear?

[Ernesto María Gabilondo Márquez, analyst]

Yes, perfect. Well, just how much is it reducing the sensitivity?

[Joaquín Domínguez Cuenca, executive]

It's reduced about 2%.

[Ernesto María Gabilondo Márquez, analyst]

And the other questions?

[Operator]

And we'll take our next question from Adriana De Lozada with Scotiabank.

[Unknown Executive]

No, no, no. One second, Ernesto still has 2 other questions.

[Unknown Executive]

No worries.

[Joaquín Domínguez Cuenca, executive]

In the case of the lower expenses, what we have done is -- as we used to do in the past, is to be with a very strict discipline, if it's sustainable, exercising the expenditures. So we have been able to reduce the expenses, and we will be able to phase an additional reduction at the end of the year. We didn't open all the branches we expected at the beginning of this year, so we are saving in that trend. And also, we are making a weekly review of all the different concepts of expansions, and we see that we will be able to maintain a lower expenses as well really during the first semester.

[Edgardo del Rincón Gutiérrez, executive]

Let me -- maybe complement, Ernesto. In any case, we are not compromising our investment that we are doing in technology and digital, no? So the transformation continues, and the rest of the line of expenses are showing some opportunities during the first semester, and we are making, of course, an additional effort to be able to deliver the guidance. Let me maybe answer your third question about net income, Ernesto. You're right. Normally, the second semester is better for the banking industry, but it's also mainly during the fourth quarter, no? So what we see is that we can deliver our drivers based on the new guidance, no? But that will be reflected mainly in the fourth quarter. So that benefit in net income, additional revenues, et cetera, will be showed mainly during the beginning of 2020.

[Operator]

We'll now take our next question from Adriana De Lozada with Scotiabank.

[Adriana De Lozada, analyst]

And congratulations for your results. I have a question on loan growth. First, the new guidance, if you can give us a sense of how you see it versus the system growth, do you think there's a possibility of losing market share. Just give us a sense of the different segments and -- versus the system growth?

Second question would be on NIM, you note that you don't include interest rate cuts in your guidance. So if you can give us a sense of the reduction? Is this coming from higher funding costs, lower yields or both?

[Carlos De la Cerda Serrano, executive]

Adriana, this is Carlos de la Cerda. The one -- our main objective is that we -- even though we are watching a deceleration in the market as a whole, we are still confident that we will be able to outperform the market because the segments that will do grow are the segments who are [ backward ] where BanBajio has a particular strength like the modern sector of our business of the greenhouses and the modern agriculture in the Northern-west part of Mexico and Bajio Central region. So we believe that even though the economy as a whole is decelerating, we have a niche, we have a competitive advantage in the sectors that will grow. So we believe today that the market will grow between 6% and 8% in the -- for the rest of the year, for 2019, and our growth will be between 9% and 11%. And 9% and 10% -- 8% to 10%. And this is so because of what I just mentioned, that because we believe that the sectors where we are strong will grow more than the market as a whole.

[Adriana De Lozada, analyst]

Great. And on...

[Edgardo del Rincón Gutiérrez, executive]

Yes. In the case of NIMs, we calculate the potential impact of a reduction of the interest rate. And what we have calculated is that for 25 basis points of reduction in the period, we could have an impact of MXN 7.5 million each month in net income.

[Adriana De Lozada, analyst]

Okay. But I believe your guidance doesn't include that, but you still...

[Edgardo del Rincón Gutiérrez, executive]

That's correct.

[Adriana De Lozada, analyst]

Guiding for lower NIM and is that lower NIM excluding the cut coming from higher cost of funding or from lower yields or maybe a mix of both?

[Edgardo del Rincón Gutiérrez, executive]

Yes, it's a combination of higher cost of funding and lower growth in loans.

[Operator]

We'll take our next question from Claudia Benavente with Santander.

[Claudia Benavente, analyst]

So if you take a look a little bit in the past, even under a recessionary environment, BanBajio can post fairly stronger loan growth. So I was wondering if you have sort of a measure of the sensitivity to loan growth. Or what would be the sort of the loan growth that we could expect if interest actually starts falling? That's it.

[Carlos De la Cerda Serrano, executive]

If credit starts falling -- Claudia, this is Carlos. The -- we don't foresee interest -- a tier cut for the rest of the year. But if it happens, it will probably happen close to the end of the year. And therefore, it won't have a very strong impact in our projections for loan growth. We are basing our expectations in increasing our promotion in the strong segments that we see that will keep growing for the rest of the year. As I was mentioning, especially the Agro business segment, we are working to -- in our Credit committee, we are watching very few investment projects financing loans, except for the Agro business sector. In the Agro business sector, we are watching a strong investment trend. And that is one of our main competitive advantages. That is why we believe that we will be able to outgrow the market. And in any case, the impact of any interest rate cut, we will feel it next year, not this year.

[Claudia Benavente, analyst]

But I'm not talking like from the net interest margin perspective per se, but I'm talking on -- from the loan growth because at the end, maybe if interest rates falling, you can have a stronger demand from a loan growth perspective. So maybe you can fully compensate if you start growing more heavily, that's sort of the sense that I wanted -- you build customers from that. Given, since the overnight, the spending rate is maybe too high and maybe they can have an -- you can see stronger volume if the overnight rate starts falling.

[Edgardo del Rincón Gutiérrez, executive]

You're probably right, if the interest rates goes down, we will see a marginal increase in loan demand from the market. But again, I think if this happens, we will feel it fully next year over this year.

[Joaquín Domínguez Cuenca, executive]

And it will depend also on how the different variables in the economy develop during the rest of the year. For example, if the UMC trade is signed, there will be positive news, and we will have some certainty about these borders and foreign commerce. So even if the interest rate does not reduce, probably we will expect acceleration in the loan growth if there is some certainty around commerce, for example. So there is a lot of variables around the market. And it's quite difficult to measure and to provide a precisely guidance about loan growth. What we can say is that we are really very focused on maintaining the asset quality, as you can see the results we deliver for this quarter. So the main focus and -- is around the asset quality.

[Claudia Benavente, analyst]

Perfect. I just have one more follow-up question, and it's regarding the growth on demand deposits? Because I know that you were doing some marketing campaigns that involve paying higher cost for the demand deposits -- sorry, for the deposits. So I was wondering, what are you trying to do with that? Does [indiscernible] loan growth? What's the purpose of that?

[Joaquín Domínguez Cuenca, executive]

Okay. Yes, we did a very success campaign that just ended at the end of the July. And we had a very amazing result. We were focused mainly on low-cost deposits that will be reflected during the third quarter because the campaign end at the end of June. But -- and we are expecting to have a good results with the campaign for the next few quarters. But we were a success with the campaign.

[Operator]

We'll take our next question from Manuel Gonzalez with Signum Research.

[Manuel Gonzalez;Signum Research, analyst]

My first question was regarding the cost of funding, I mean it was answered partially, but do you see it like a concern that cost of funding is slightly above the system? And does this has something to do with development bank loans? And my second question is about the consumer loans. I mean, they're growing at a really healthy pace. So I was wondering if you had like a strategy of focusing to consumer. I mean it's not focusing, but like to giving more focus to that segment.

[Joaquín Domínguez Cuenca, executive]

Okay. Well, yes, talking about the cost of funding, the main impact is one sharp impact that is the substitution of the dividend that was a kind of funding source without cost, substituted by cost for the [ ideal ] rate. So the second part is that, as a result of the campaign that Claudia asked before, weak growth in both segments, in low-cost deposit and high-cost deposits. But that growth is a very healthy growth. The point is that we invest that growth, not in loan growth, we invest in [indiscernible] or government papers. So we are not expecting increasing more the cost of funding. We will -- we just -- we're expecting to maintain that cost and even we are expecting that we could reduce a little bit the cost of funding for the rest -- for the rest of the year.

[Edgardo del Rincón Gutiérrez, executive]

About your second question about the Consumer business, of course, BanBajío is very well known for the success with companies, no? In all sizes of companies, we are doing very well. And I believe what we are doing in our business is really best-in-class in Mexico. The opportunity, of course, is the consumer business. And in order to capture this opportunity, we will continue investing, as I was saying in our transformational technology and digital, but also developing that infrastructure and risk management tools. So we can really take this opportunity. So this will allow us in the future to better serve our customers in all segments, in branches, but also in the rest of the channels, mainly digital channels. And as Joaquin was saying, of course, this without compromising our core business, that is companies, no?

[Manuel Gonzalez;Signum Research, analyst]

Okay. Just one quick last question. About trading income, you had a very positive quarter. Would you say we could expect the following quarters to be this healthy in that segment, in trading income?

[Carlos De la Cerda Serrano, executive]

In which -- sorry, we didn't get your question.

[Edgardo del Rincón Gutiérrez, executive]

Can you speak louder because it is very difficult to...

[Manuel Gonzalez;Signum Research, analyst]

Yes, yes, yes, it was about trading income. I see there was a good growth, a very solid growth. And I was wondering if we could expect to see some similar growth in the future quarters.

[Joaquín Domínguez Cuenca, executive]

Yes. Part of the strategy we talked in the conference at the beginning of the year is that we were going to make an important effort, trying to increase the sales force with clients. During this semester, the uncertainty allows us to improve the volume of trading with clients in order to provide them derivatives and FX services, and that increased the FX income. The important thing in this income is that it's not on a speculative position, and it's not a market trading daily basis. It's based with clients' trading increase. You got it?

[Manuel Gonzalez;Signum Research, analyst]

Okay. Yes, yes.

[Carlos De la Cerda Serrano, executive]

And also, we do not take a reduction in the income generated by FX since the volatility of the market increases the volume of trade, not decreases it, increases it. And yesterday, we were talking with a director, and he was telling us that he expects a very strong second semester in his speciality, in FX and trading.

[Operator]

We'll take our next question from Neha Agarwala with HSBC.

[Neha Agarwala, analyst]

Sorry to follow up again on loan growth. Just to quickly understand the decline in the loan growth that we have seen, what -- how much is that a factor of demand and how much of that is a factor of supplier being cautious from the underwriting perspective? My second question is that you just had a new CEO on board. How is the transition going? And are there any strategic priorities that have been defined by the bank? And my last question is on the new CoDi platform that is being tested. What position is Bajío in that respect? Have you aligned yourself with the CoDi platform? And what are the opportunities that you see for the bank?

[Carlos De la Cerda Serrano, executive]

Loan growth is both the result of a market deceleration, and it's very noticeable, but also of our very cautious approach to the loans that are being presented to us in the credit committee. So both things are resulting in a slower-than-the-forecasted growth in the loan segment. But yet again, we are growing faster than the market anyway.

I believe the transition for the new CEO, I'm Carlos De la Cerda by the way, is going very well. I'm going to give the -- I'm going to ask Edgardo del Rincón to talk about it a little bit.

[Edgardo del Rincón Gutiérrez, executive]

Yes, thank you. I only had 2 weeks in the bank, no? My first day was the 1st of July, no? So I'm having meetings with all the teams and reviewing the strategy with Carlos and the different teams, no? And I believe the opportunity we have is great. What I think is that our strategy in the future should be to leverage in our growth even. That is the most important strength, no? So all the relationship with companies is great. And what we are doing is very good. But we have important opportunities to further develop, for example, cash management, derivatives, FX, insurance. What I mean is not interest income, no? And to have a more integral, let's say, relationship with those companies, no? In addition, we will start developing our consumer business, of course, no? That will allow us to improve our mix, for example, in deposits, no? And to have an increase as well in other lines of revenue like this, no? In any kind of environment we face, we will continue promoting, of course, to have very good asset quality, no? That will be my answer. I don't know if that answers your question.

[Carlos De la Cerda Serrano, executive]

Related to CoDi, we are part of the banks that are participating in this new initiative. And we will be ready when initiative is expected to start operation in September of this year. And we are part of the small number of banks that are already prepared for doing so.

[Neha Agarwala, analyst]

And what opportunities do you see from the adoption of CoDi for the bank?

[Edgardo del Rincón Gutiérrez, executive]

I believe the opportunity is inclusion, no, to -- I mean to increasing numbers, the number of customers that we as an industry are serving, no? As you know, [ bankalization ] still is an opportunity for the Mexican banking industry. So that is the main opportunity to bring new customers new to the industry.

[Neha Agarwala, analyst]

Okay. One last follow-up. Just to confirm the numbers that you mentioned, a 25 basis point decline in the policy rate would impact your net earnings by MXN 7.5 million each month.

[Carlos De la Cerda Serrano, executive]

Correct, correct.

[Joaquín Domínguez Cuenca, executive]

Each month, yes.

[Carlos De la Cerda Serrano, executive]

Each month, it's correct.

[Operator]

We'll take our next question from Miguel Dávila with Itau.

[Arturo Langa, analyst]

This is actually Arturo Langa. Just 2 questions. First, and I apologize for this, but I missed some of the line items on the guidance. Would you be so kind just to run through -- very fast through the changes in guidance, again, if you may? And my second question would be how is management thinking about the share price performance? And especially in terms of valuation, for example, I -- we see that in terms of, for example, price, earnings, Banco del Bajío is commanding a below peer average valuation in spite of having better results than other listed Mexican banks. So I was wondering if this is a sense of maybe frustration or something that catches your attention. And if so, how are you thinking about this? And how do you do justify this discount relative to other banks?

[Edgardo del Rincón Gutiérrez, executive]

Arturo, you mentioned you're Arturo, right? Not Miguel.

[Arturo Langa, analyst]

Yes, it is.

[Carlos De la Cerda Serrano, executive]

Arturo, this is Carlos De la Cerda. If you study our new guidance, the lines that we have that were changed are basically the result of one main variable that we think is slowing down, and that is the loan growth. Since the loan growth is getting slower in the system as a whole in the country, the revenues and the NIM itself have changes. So everything is in the loan growth -- on the loan growth basis. So what we are doing is that we are controlling carefully with a lot of discipline the operational expenses, and we think we can compensate.

We would like to give a very good and positive surprise if we grow more than what we are expecting right now. And that could happen because of the cyclical part of our business, the agricultural cycle of otoño-invierno begins in October. And we expect a very strong performance from our bank in that sense, but that will be a positive surprise. But the changes that you are seeing in the guidance are based on that single factor. And also, since our deposits are growing more than expected, that compresses the NIM a little bit, but we expect good results for the second part of the year.

Now I'm going to give you my personal view of the price share. Since BanBajío is the best bank in Mexico, I think it is way, way underpriced. But that's my personal opinion.

[Operator]

We'll take our next question from Enrique Mendoza with Actinver.

[Enrique Mendoza Farías, analyst]

I am aware of your revised guidance of expenses growth. But thinking about any case of lower-than-expected growth in net interest income, how much space of maneuver do you have to keep cutting expenses to mitigate either lower margins or lower loan growth? And can we expect lower growth, in which segment, in personnel or in administrative expenses? I have 2 other questions, if I may, a follow-up regarding cost of funding. Could you elaborate on the campaigns that were successful to deliver stronger growth in low-cost deposits? And what did you make to achieve that? And the third one regarding CoDi operations. How relevant do you expect CoDi operations to become for your electronic transactions and in the perspective of when compared to your growth in fee income?

[Joaquín Domínguez Cuenca, executive]

The first one, in case of the expenses, we did a deeply exercise row-by-row, concept-by-concept revising rents of our branches, rising cost of traveling, cost of paper, every single concept. And we revise with the whole team of the people in the bank. So it's a very realistic exercise that we did, and is all along the different lines of expenditure where we are taking a reduction as well as in the cost of [Foreign Language] personnel expenses, administrative expenses and some investment in branches and offices. So we are very confident that we will be able to reduce the expenses. In the case of the cost of fund -- yes?

[Enrique Mendoza Farías, analyst]

Excuse me, I'm considering your revised guidance, but just trying to figure out how much the -- how much space of maneuver do you have to cut the expense further in case of lower-than-expected growth from current expectations? I mean how fixed are your costs in order to address deeply -- in case of a deeply [ robust ] situation?

[Carlos De la Cerda Serrano, executive]

This is Carlos. Enrique, it is very important to notice that we are not saying that we will cut expenses from the actual level as of today. We are guarding the expenses growth, and we are very certain that we can cut expenses -- the expenses growth by, I don't know, by an amount very close to the lost revenue that we will see if the loan portfolio behaves as we are seeing it. So one thing will compensate the other. But we won't reduce the cost from the level that we have today. We will reduce that what we -- that we believe that the growth of expenses was going to be in our original guidance. And that could be in a range between MXN 250 million and MXN 280 million more or less, which is the lost revenue that we can see. That's the reason why we believe we can maintain the net income objective and the ROE objective. And as I was mentioning before, we would like to give a very positive surprise in that regard.

[Joaquín Domínguez Cuenca, executive]

But as Edgardo mentioned, we will not put the investment on this transformation, even if we do not have technology, even if we do not get the growth as we are expecting in the loan side. Talking about the campaign of cost of funding, we were successful because we have a very diversified and very deeply base of clients, mainly companies that already work with us, and we incentivize the sales force in order to be very, very close with our clients. And also as a result of the improve we have had in our digital platform, we invite our clients to manage -- or increase the manage of their treasury with us. So we have very good result. And is -- at the end of the day, the success of the campaign is due to the deeply relationship and the good service quality we have with our clients.

[Edgardo del Rincón Gutiérrez, executive]

About CoDi, Enrique, this is Edgardo, very difficult to forecast as it is something totally new, no? Based in the smartphone penetration Mexico has that is above 90%, I mean some would say it's even above 95% of our population with a smartphone. And based in the experience in other countries like India, that is mainly the main place, but several other countries mainly in Asia, what I see is that maybe at the beginning, the success will be mainly based in what, I mean what we as an industry and all the players in CoDi will do to engage customers, not new clients, as I was saying, new to the industry customers, no, to really [ bankalize ] those, that people. So I believe it's going to take a while, no, but based in the smartphone penetration and the experience in other countries, it could be a very good success in the future.

[Enrique Mendoza Farías, analyst]

That's very, very interesting. But how relevant could it be? I mean do you expect it to be more than 2% or 3% of your electronic transactions or a volume that should be relevant in order to forecast the changes in the fee income structure or in deposit growth?

[Edgardo del Rincón Gutiérrez, executive]

It's going to be similar to new -- I mean what we have seen, for example, no, let me put an analogy here. What we have seen, for example, in Uber, Uber Eats, Rappi, et cetera, is many transactions, no, but the ticket is really, really, very small, no? I think something similar just happened with CoDi. Very difficult at this moment to forecast what percentage of our income will be, no? But the main driver will be the beginning to include as many customers as possible.

[Operator]

We'll take our next question from [ Carlos Arneja ] with Evercore.

[Unknown Analyst]

I have a quick question, and it's regarding development banks and how important they are from BanBajío, that's, well, my first question, to develop the relationship and if something has changed during this [ first ] month of administration with it?

[Carlos De la Cerda Serrano, executive]

Carlos, this is Carlos. As you can see from the history of BanBajío, the development banks have played a very important role in the growth of our funding for the loan portfolio. We have been using the development bank's funding mainly for long-term loans because even though we lose a little bit of margin, we believe that's a better strategy for our liquidity and for our long-term funding. It's very important to have the security of having the funds when you're making long-term loans. And we are making long-term loans, especially in the agro business and the industry as general sectors.

But also, the part of the guarantees that we can get from FIRA, from Nacional Financiera, for Bancomext, and we share the risk of the operations. Not only we share the risk of the operations, but we have a better profitability since we utilize the part of the loan that is fully backed by the development banks, doesn't require as much capital as a regular loan that is just without any guarantee. So if you utilize less of your capital to back up that loan, you will have a better profitability on that loan. So they have been -- the development banks have been a very important part of our strategy, and they will remain being the -- as important as I mentioned.

Now we are exploring some other alternatives for funding, not for guarantee. We will remain using the guarantees part of the development banks. But we are analyzing if we are -- if we can issue some long-term debt in the market to replace funding at a better cost from the development banks. We will make that decision as we see it -- as we see how the market develops.

[Operator]

We'll take our next question from Iván Gálvez with Credicorp Capital.

[Iván Gálvez Shoobridge;Credicorp Capital;Analyst, analyst]

I have 2 questions. The first one is regarding the capitalization ratios. I couldn't hear during the call if you talk a little bit about it because I had some issues with the line. But maybe I wanted to understand why they go down this quarter. And the second question is regarding the NPL. I believe you had like a 90 days NPL of 0.84%. And I wanted to know why your guidance is in 1.2%. Why are you being so conservative? And I also wanted to know if you want to retain your asset quality or your loans quality. How are you going to compensate a possible down in the rates at the end of the year through loan growth? Those are my questions.

[Carlos De la Cerda Serrano, executive]

Okay. Regarding to the capitalization ratio, in April, we paid MXN 2,000 million on dividends.

[Edgardo del Rincón Gutiérrez, executive]

MXN 2 billion.

[Carlos De la Cerda Serrano, executive]

MXN 2 billion. That's in May. That reduced the -- in that amount, the capitalization ratio was reduced to 15.43%. And since we generate net income during May and June, we increased to 15.73%. So as you can see in our guidance, we are expected to have our capitalization ratio at the end of the year pretty close to 15.7%. So the reason was the dividend payment during this quarter.

[Iván Gálvez Shoobridge;Credicorp Capital;Analyst, analyst]

Okay, okay. And on the loans, I mean what's your strategy if there is downfall in the reference rate at the end of the year?

[Carlos De la Cerda Serrano, executive]

Well, the strategy was, and we are running on that, is making important efforts to improve all the noninterest income services. We are making important efforts on bancassurance. There is a trading income and other services that are provided with the platform in our branches in order to increase the noninterest income and reduce the sensitivity. NPL ratio?

[Edgardo del Rincón Gutiérrez, executive]

In terms of the NPL ratio, as we have been doing, the -- our NPL ratio is very low. We actually believe it is one of the best in Mexico. But in our guidance, we'd rather be conservative since we see some risks associated with the economic downturn that we are watching. So just for -- we don't have any particular worry about any big case or something like this that we think we could -- that could affect us. We are just being generally prudent in that.

And what we are -- the 1.2% NPL ratio that we are putting in our guidance is half of what we think the market will show by the end of the year. So we -- what we are stating with that goal is that we will remain being one of the best in class in asset quality in Mexico. But we probably and very probably won't go that far out. Probably we will get to 1% if the economy deteriorates a little bit more, but 1.2% is just for the sake of being prudent, and it's half of what we expect the market to be.

[Operator]

[Operator Instructions] No further questions on the line at this time.

[Alberto Meléndez, executive]

Thank you, David. Thank you. Thank you all for your interest in the company, and we look forward to speaking with you in our next conference call. Have a good day, everybody.

[Operator]

This does conclude today's program. Thank you all for your participation, and you may now disconnect.