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Banco del Bajio SA Institucion de Banca Multiple
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Good morning, everyone, and welcome to BanBajio's Second Quarter 2020 Earnings Conference Call. My name is Nikki, and I will be your conference operator today.
Yesterday, BanBajío issued its quarterly report. For a copy of the earnings report or the webcast presentation that accompanies this call, please do not hesitate to contact us in New York City at (212) 406-3692.
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 BanBajío is 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.
And now I will turn the call over to Mr. Guajardo. Sir, please begin.
Good morning, everyone, and welcome to BanBajio's Second Quarter 2020 Earnings Conference Call. We hope you and your families are doing well.
Before I begin with my presentation, I would like to take this opportunity to thank all our employees for their continued support and the tremendous effort they have put in order to maintain our operations as normal as possible under these challenging times. Of the positive cases registered among our staff, none of them are in a critical condition, and they are all recovering well.
In these unprecedented times, it is important that we all come together to support all those impacted. Our thoughts and sympathy are with those that unfortunately have been impacted by this terrible virus. We are fully committed to doing our best in order to preserve the safety of our employees and customers, while at the same time, providing support to our customers by helping them to manage these difficult times, the duration of which still remains uncertain.
It has been over 3 months since this health crisis started, and we still don't see an inflection point in the number of people being infected nationwide in Mexico. Even though certain businesses are gradually resuming operations, there is much uncertainty regarding the future path of the economy.
As we mentioned in our previous conference call, beginning in April, we started to build important additional reserves on a proactive basis, and we will continue with that throughout this year. Our monthly results give us the capacity to build such a level of reserves. However, we feel comfortable with our strong capital and liquidity position to weather these adverse times and what may lie ahead.
I would like to start by highlighting some key ratios that, under current circumstances and according to our previous conference call, take more relevance. We have always been known as one of the banks with the best asset quality of the system. In this regard and given this complex economic environment and challenging business performance, we will put additional emphasis and focus on preserving these ratios through proactive and preventive measures.
One of them is an important amount of additional reserves that we started to build since this second quarter. We have consistently maintained industry-leading asset quality and an outstanding risk profile compared to the rest of the banking system. As of June, we posted an NPL ratio of 1.03%, less than half of that for the system, which as of May stood at 2.41%. NPL adjusted for write-offs was 1.57% as of June, lower than the 1.68% registered during the same period of last year, while in the case of the system, it was 4.66% as of May.
Coverage ratio of 185.2%, which also compares favorably to the 149.7% for the system. A capitalization ratio of 16.1% as of May, which is the most recent publicly available information, highlighting that the Tier 1 portion is approximately 249 basis points above the one for the system. Important to mention that in our case, our CET1 portion is 100% and does not have any perpetual bonds or Tier 1 instruments.
Liquidity coverage coefficient of 142.36% as of June, representing 1.4x the minimum regulatory requirement. And an adequate level of efficiency ratio of 46.7% compared to the 54.6% for the system for the April and May period, representing a difference of 791 basis points.
It is important to highlight that during the quarter, we created MXN 556.5 million of additional reserves for a total of MXN 963 million for the period.
On Slide 2, you will see updated figures for the relief program, which consists of the deferral of interest and principal payments for up to 6 months with no impact on the customer's credit bureau. As we mentioned during our last conference call, our original expectation was that approximately 39% of our total loan portfolio could adhere to this program. The original expiration date for submitting the request expired at the end of June. However, the Mexican banking commission extended this period by one month and will now expire on July 31.
Moving on to Slide 3. Our total loan portfolio posted an increase of 4.7% in the quarter, while the banking system grew 7.7% as of May 2020, which is the most recent publicly available information. During the quarter, company loans, which includes financial entities, reached MXN 161.7 billion, increasing 4%. And this moderate growth is mainly the result of a stricter origination process focusing on asset quality. Given that there is a high possibility that the economy will continue to be deeply impacted by this situation, we have added stricter levels of analysis for the origination process in order to preserve our asset quality as the main driver.
On the other hand, our total deposits posted an increase of 9.6% during the quarter, while for the system, the growth was 14.5% as of May. Demand deposits, which practically half of them bear no cost, grew 6.4%, while time deposits grew 8.5%. This lower increase is the result of our decision to forgo certain corporate clients in order to maintain a low funding cost.
On Slide 4, we see our net interest margin for the second quarter compared to that of the same period of last year. NIM posted a decrease from 5.51% in the second quarter of 2019 to 4.77%. There's an impact of 53 basis points as a result of the reduction of 245 basis points in the average TIIE, 13 basis points as a result of the extraordinary increase in our cost of funding and 8.6 basis points given the deferral of the debt service for customers that are part of the relief program. All of these factors have resulted in a decrease of 74 basis points in our NIM as of June. Two other nonrecurring factors that are impacting the NIM are the extraordinary increase in the cost of funding seen in the entire banking system, for which our sensitivity was 5.2 basis points. And for the deferral of the debt service for customers, the sensitivity was 3.54 basis points.
Considering our balance sheet structure as of June, the sensitivity expected for the remaining of the year is 25 basis points for each 100 basis points of change in the tier rate. Additionally, the negative effect by the reduction in the reference rate was MXN 440 million that were compensated by the MXN 249 million for the 9.7% increase in productive assets volume, resulting in a reduction of the noninterest income of MXN 192 million.
Moving on Slide 5, you will see that our efficiency ratio stood at 46.7% in the quarter. Our operating expenses decreased by 0.9% when compared to the second quarter of last year, but on a quarterly basis, the decrease is 4.2%. And since last year, we implemented a permanent cost control program at all levels of the bank, preparing ourselves in advance for a year that was expected to be challenging. We are either canceling or deferring projects that we consider nonessential, not putting at risk the important progress in our digital and technological transformation.
In this regard, we continue making upgrades to our existing platforms by adding new features. We are currently in the testing phase with a group of employees of the bank that we call friends and family for the new capabilities of our web and mobile platforms. And we expect it to be fully operational and available for our customers by September of this year. However, the migration of existing users from the current platform to the new one will be carried out in blocks, hoping to conclude with individuals during the fourth quarter of this year, while in the case of companies, it will be in the first quarter of next year. Under these circumstances, being able to practically make all banking transactions through digital channels becomes a key differentiator.
On Slide 6, we highlight our strong relationship with the different development banks that provide both funding and guarantees. Both of them were included in the relief program, allowing us to maintain them perfectly matched. 19.5% of the total loan portfolio has development bank guarantees, while 20.7% of total funding comes from those type of institutions. Additionally, 16.9% of the funded portion of development banks participated in the relief program. It is worth noting that recently FIRA, the one that is related to the agribusiness sector, increased our credit line from MXN 40 billion to MXN 50 billion, demonstrating that we are the bank with the strongest relationship and activity with these type of banks.
Finally, on Slide 7 we include a revised guidance for this year. Even though at this time the visibility for the performance of the economy is still limited, we are providing a revised guidance for 2020 in line with our expectation for the economy and the decision that we took in creating additional reserves for a possible deterioration in the NPLs. We are assuming a decrease in the reference rate to reach a level of 4.5%.
As we have mentioned in the past, we have the capacity and possibility to outperform the banking system. Under current conditions, we think it is possible to achieve a level of growth for loans in the range of 4% to 7% and deposits from 10% to 12%. We are expecting a reduction in net interest income between 10.5% and 11.7%. However, noninterest income could grow between 2.5% and 3%. As a result of different cost control programs, our expectation for the growth in expenses could be either flat or 2%.
In terms of asset quality, we expect an NPL ratio below 1.6% and a coverage ratio between 180% and 200%. This level of coverage ratio is due to the creation of additional reserves for the remainder of the year. In that sense, our expectation for total reserves impacting the income statement for the year is approximately MXN 2.9 billion, 4.3x higher than of last year.
Net income for the year could be between MXN 2.8 billion and MXN 3.2 billion, while ROE could be in the range of 8% and 10%.
In summary, we are preparing ourselves for next year, a year that we expect to reflect the deep impact of this economic crisis for the whole banking system. Our strategy is clear: to maintain the best asset quality ratios by having an ever more detailed and stricter origination process and to keep expenses under control, and maintaining our strong liquidity position. Additionally and on a proactive basis, we are creating important amount of additional reserves well above the ones required by the strict evaluation for each individual loan, in order to be prepared for the possible impact in the economy that may be a result of this crisis. We are confident that we have taken the appropriate decisions to better face next year's conditions. Therefore, once this crisis is over, the bank will remain in a solid position with a high level of capitalization to undertake a robust growth when we see a more favorable economic environment.
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 Instructions] Our first question comes from the line of Ernesto Gabilondo with Bank of America.
I have 3 questions. The first one is on provisions. So after this quarter and considering your new 2020 guidance, do you think that you have already reached the peak of provisions this quarter?
And then my second question is on the relief program. I believe 31% of the total loan book has been already restructured or is on this relief program. But how much of this 31% do you think would be at risk? And which are the sectors that have been more affected? Are they restaurants, hotels? Any color will be very helpful.
And finally, my last question is on your noncredit-related revenues. I saw that you're expecting growth up to 3% this year. So can you explain what will be the drivers? Is it a recovery in fees or to continue offering derivatives and FX products to clients?
Thank you, Ernesto, and good morning, everyone. This is Edgardo del Rincón. Remember, Ernesto and everyone, that we talked about stress scenario during the report of the first quarter earnings. In that scenario if you remember, we were talking about let's say, the more complex scenario was a decrease in GDP of 9% and the reference rate from the central bank is 4.5%. We are really there. During the last few weeks, we have seen new forecast from different analysts and banks talking about GDP contraction between 9% to 11%, more or less. And we are in agreement with all the analysts that expects an additional contraction in banking corporate in August of 50 basis points. So we're going to be there in terms of the rate by next month.
So we are following what we said in that call related to being prudent and start creating additional provisions ahead of the regulatory requirements. And we have started to do that in April, and you saw the numbers for the second quarter. As Alberto was saying in the presentation, we expect total provisions to be around MXN 2.9 billion. That means that we will continue creating provisions for the rest of the year. This is let's say, a conservative strategy because it's very difficult to know the level of deterioration of the portfolio that we will have.
And as we said a quarter ago, that NPL deterioration will be mainly until 2021, until next year. Because most of the benefits of this relief program will end in October to December period. Because people, even during July, have the possibility of enroll in this relief program. Now you know that the CNBV decided to give until the end of July the possibility for customers to enroll in this program.
So we will continue creating provisions, and that's why the new guidance is having that level of coverage ratio and that level of net income. So that is the main reason, and we want to be as prepared as possible because we expect -- not for us, we expect for the whole system because of the contraction in the economy and the intensity and how long it's going to end -- I mean how long it's going to take for this pandemic to be over. So we are expecting a deterioration in 2021 for the whole system.
As you know, we have been one of the banks with the best asset quality when you compare our numbers with banks with similar activity than BanBajío. We are one of the best, if not the best, in terms of asset quality. So we expect to remain like that, but we want to play conservative. Remember that any provisions that we won't use, we can restore that money to profit at any moment. So we decided that. So we are acting exactly like we said in -- 12 months ago.
Related to your second question, the relief program, it's not 31%. It's 28% of the total book by the end of June. But remember that during July, people -- our customers can enroll. But we are seeing much less activities. So we don't expect to grow the amount in an important way during July. So how much is going to be in risk is very difficult. What we see in more risk maybe is PMES. But we feel, Ernesto, that we can be less impacted than the rest of the system because of several circumstances.
Number one, our payments are of a very good size. Remember that our average loan size is really high compared to the industry, is about MXN 4 million today in launch. So it's a very high level compared to the industry, that is closer to MXN 1 million. In many cases, we have guarantees and we have collateral. So almost -- more than 90% of the portfolio in PMES has a collateral. And also, our NPL ratio today of -- I mean, and during the last, I don't know, any quarters. During the whole history of the bank, our NPL ratio in PMES is half of the industry. So we believe that level of quality in loans and the level of collaterals we have and we have been very close to our customers of course, we think that the level of deterioration will be less than the industry. But of course as I said, we expect deterioration not for our portfolio for the whole system because of the situation.
So I will ask Joaquín to answer your latest question.
Yes. The drivers for the noninterest income growth is that mainly commissions that comes or as related to the use of debit and credit cards. We saw in the last month an important recovery in that commission. And we are in a conservative mode, expecting that we will be able to maintain and increase a little bit the level of commissions we collect the last month. And also, we are expecting to increase the operating income based also in the results. We already got last month in terms of FX and derivatives mainly related with FX. So we are expecting that we will be able to recover in those main drivers.
Our next question comes from Ricardo Buchpiguel with BTG Pactual.
And we will move next with Jason Mollin with Scotiabank.
Hello, everyone. Thanks for the presentation, and I really appreciate you guys putting out your expectations as best as possible in this environment for 2020.
Related to that guidance, I wanted to see if you can elaborate a little bit on the economic backdrop. You mentioned some market economists, I guess, talking about minus 9%, maybe minus 11% real GDP growth in 2020. What are you expecting? I mean what is the base case scenario here for 2020, 2021? You talked about Banregio monetary policy rate of 4.5%. What are the dynamics that are driving this scenario would be my first question?
And my second question is a follow up. I thought also the disclosure was very good on the interest rate evolution -- sorry, the net interest margin evolution. You showed a small impact from the relief program, and you talked about the deferral of interest on loans. What is the structure of this program? Is the interest that's not being accrued, is being deferred for -- is it 6 months that's tacked on to the end of the current maturity, or maturity pre-COVID?
Thank you, Jason, and thank you for your comments. What we are expecting, the criteria, let's say, for this scenario for 2020 is the contraction of the economy between 9% to 10%, and the reference rate to go to 4.5% starting in August and stay in that level for the remainder of the year. That is what is -- what we are expecting in that scenario.
For 2021, it's very difficult to forecast anything, but we expect a recovery mainly because we're going to compare with a really bad year. So that recovery, the analysts are talking between, let's say, 2% to 4.5% recovery in GDP, let's say, for our customers. But we're starting to see to give you some color of what we have seen for example, in the Bajío region in which we have our main activity. And you know that we have leadership in commercial loans in many of the states of the Bajío region like Guanajuato, Michoacán, San Luis Potosí, Aguascalientes et cetera.
We are starting to see a good recovery in the activity in several of our clients. On one hand, for example, the agri business is having really marginal impact because of the pandemic. And many of our customers are behaving really very well. Remember that we are very well positioned in that segment. And what we are seeing, many of them are dedicating a big percentage of their production to export. So they are having a good impact and we are seeing -- we are continuing seeing even investments in those customers to continue growing and taking advantage of this opportunity.
On the other hand, this region has a very good -- is very well positioned. And we expect that the new trade agreement between Mexico, Canada and the U.S. will provide a good incentive and clear rules, that will have a positive impact in investment, employment, et cetera. So we are really well positioned to take advantage of that scenario. Of course, with a recovery in the GDP, we can expect better numbers, and we want to be as prepared as possible when we see a more positive economic scenario.
That's why we believe that playing conservative and taking care of our capitalization ratio, liquidity and be well prepared with a good size of reserves, we'll have the bank -- I mean we want the bank as solid as possible, so we can take advantage of that possibility and continue growing. And we have been doing above the market always. So that is what we are planning to do, and that is what is -- I mean, in the guidance that we are providing is considering that strategy and being as prepared as possible for 2021.
For any scenario, we are going to have customers that will -- I mean, even customers in the worst-case scenario, mainly in small PMES, what we are going to see in that system is customers that won't recover from this situation. We believe that in our case, that is going to be just a few cases, because of what I said before related to PMES. We want to be as prepared as possible. In any condition, in any activity that we see positive environment, we will be ready to support that segment and those customers.
Yes. Regarding to the -- Jason, it's a pleasure to hear you. And regarding to NIM analysis, the cost of the relief program is a cost of opportunity and is calculated on base of the interest and the capital that was deferred for 6 months. It's only the portion of interest and capital that was deferred.
Okay. That's very helpful. Just a follow-up on this expectation. Clearly, you mentioned many times, there is a lot of uncertainty. We saw the President of the Mexican banking association, a former colleague of mine, say yesterday I think, that the economy is opening more slowly than expected. Is growth is expected growth, the recovery coming key to this base case guidance? Or is this -- you -- I mean I commend you in the past since your IPO, really your guidance, I've -- I just saw -- this is more of my interpretation. But you really beat your guidance until this recent period. And you suspended guidance. I mean your guidance was typically something you laid out, you met it, you upped it the guidance going forward. How should we think of the guidance? And what are the risks? Is the risk mainly that the economy doesn't recover as quickly as your base case scenario?
Thank you, Jason. And for us, our credibility is very important with the market and with [ all of you ]. So we believe that this is guidance that we can deliver during 2020. With what we know until today and the latest forecast for the economy, we believe this is a guidance that we can deliver. Very difficult, of course because of the uncertainty that you mentioned. To talk about 2021, we will work on that at the end of the year when we have more data. Because I mean with what we're seeing in the activity, what we are seeing with our customers, this is a guidance that we can deliver, and we don't foresee any issue in that delivery. So we want to continue with that probability.
Carlos?
Jason, this is Carlos De la Cerda. I would like to add to what Edgardo just mentioned, that we are pretty confident that we can deliver the results that we are posting in this guidance. Because even independently of the economic recovery, there are certain sectors in which we are very strong, that are already growing. For instance, the Agro business we are having clients asking for medium-sized to large loans to put up technology in their business, like in [ Bernadeto ] like greenhouses and so forth. And also, there are some sectors like the state government that will need help, will need some loans. These are very safe loans since we have as a collateral, the federal participations. And we are strong in that sector, too.
So some sectors independently of the general economy size of the recovery are still growing. There's many, many clients that are exporting with the exchange rate that we have today are doing a good business. So we are focusing on specific clients that are not affected negatively by the pandemic and economic -- general economic situation. And that is why we are very confident that we can deliver.
We don't see -- we don't have a certainty of what will be the size of the recovery in the fourth quarter this year or in 2021. As we mentioned, it can be between 2 and 4-point-something percent. But independently of that, we are narrowly focusing our attention into clients that can -- that are still growing in this environment.
That is very helpful. I appreciate the color.
Thank you, Jason.
And we will go next with Gabriel Nóbrega with Citibank.
I actually only have one question. I would like to maybe further understand how closely are you working with your clients to understand if they're going to default, if they're not? I imagine that these times, loan officers must be very close. And also, if you could give us an update of how the loan classification is looking. Because I know that you usually look at the loans on the red, yellow and on a green basis. So if you could update those metrics would be very helpful.
Gabriel, sorry, but we couldn't hear you well. You can speak closer to your phone, please?
No, sorry. Is this better now?
Much better. Thank you. Thank you. Much better.
Okay. Okay. Sorry. So my question, it's actually regarding how you guys are working closely with your clients. So I want to maybe further understand what strategies are you using to understand when the client isn't going to default. Because obviously during this situation right now, the loan officers must be very close to your clients. And also, if you could give us an update of how your loans are categorized? Because I know that in the past, you usually have red, yellow and then green loans. So if you could just give us an update, that would be very helpful.
Thank you. During the last few months, Gabriel, we have been very close to our customers, of course, all with medium and large amounts of loans in the different activities. And we continue with the same strategy of having a very good analysis of different segments and different sectors. And as I said before, we are happy to see, in many of our cases, even in those customers, which sectors are more affected some recovery, some recovery in the activity. Of course, it's difficult still to say when they will recover completely That is going to happen for sure in the following months.
So -- but the communication with our customers is very close, both in what we call Bank Empresarial, let's say, bigger companies and of course with PME. We have continued with all our executives in a very close communication with them, but we continue. And of course in any decision that we're taking in our credit commission, we are very focused in the impact that all our clients are having because of the pandemic. We are asking for the latest financial numbers, the more recent information, so we can see what happened with those customers during the second quarter with the pandemic. We are considering that as a key factor for considering providing new loans and liquidity to our customers.
As we said during the presentation, asset quality today is for us one of the main drivers, and we will continue to focus on that. And it's exactly what we are doing. So the analysis we provide in the first quarter is evolving. I'm calling the, what we call, the [indiscernible] is evolving, and we continue classifying those customers in those segments and being in continued communication with them.
And our next question comes from Ricardo Buchpiguel with BTG.
Can you hear me?
Very well.
Can you hear me?
Yes. Go ahead. Okay. Thank you.
I have some questions. First, I noticed that your OpEx guidance is much lower than the previous one, and you mentioned a cost control program. I wonder if this lower OpEx growth can be sustainable for the -- looking forward and looking at 2021? If you could give us some color for this line, that would be very good. And you mentioned that the retail program, the digital initiative is on track should be launched in November. And how this would impact the OpEx line?
And for my second question, I want to know that what was the main contributors for the good fee income performance that you did in this quarter? And how can we see it behaving looking forward?
And for my final question, I want to understand a little better why do you believe that NPL should pick up, should be a high with this relief program, it's possible that we see NPLs only reaching its peak in 2021.
Thank you. Related to expenses, as we have been saying in the last calls, maybe the last a couple of calls, we have been reviewing, number one, all the different projects and giving higher priority to the -- what we consider the more important projects in our digital transformation. And we are about to release both the web and the mobile app, so we are happy with that.
But we have been canceling or deferring other projects that we consider are not essentials. We are not considering new branches. Just a couple of cases in which we will have -- we have already commitments. Other than that, we are not considering, for example, new branches. And we have been very conservative in payroll, et cetera. So that's why you see our OpEx growing -- I mean, even decreasing.
And for the rest of the year, for the whole year, we expect to be in the mid of the range that we are providing in the guidance.
So we feel confident that we can deliver that level of expenses. And given the scenario, having the best efficiency ratio that we have been one of the best in the system in that regard, we consider that as part of the drivers that we want to be really very, very focused, together with asset quality. So we will continue with that cost control for the rest of the year.
Regarding digital. In digital as we said in the presentation as Alberto was saying, the -- let's say, the new electronic banking solution and the new app for individuals is ready, is today available for all our employees. We have many of our employees using that technology already. And we expect to start migrating our customers, individuals to that new technology starting in September. The migration will be in blocks, but we are -- we feel confident by the beginning of December, we will end with that migration.
At the same time, we are releasing during the following months, new functionality mainly for companies. That will be ready by the fourth quarter, and we expect to have that migration of customers during the first quarter of next year. So we are very happy because it's really a very good functionality, we think, will improve customer experience dramatically.
Our volumes in digital are growing very well. Of course, the pandemic is helping in that regard. But our volumes are growing both in transactions and amounts more than 50% in digital. So with this, we feel that we will increase the engagement and the stickiness of customers with that digital -- with those digital solutions. And that will have in customer experience and could have an impact in time in the level of OpEx once we migrate transactions from high-cost channels to low-cost channels like digital.
Regarding the impact in NPL in 2021, as we said before, it's very difficult. What you should expect is that BanBajío will continue with one of the best asset quality in the market. We expect as we said, a deterioration in the whole system. This is an important crisis. So it's an important contraction in GDP, even higher than the crisis of 28 -- 2008 and 2009. So it will have an impact. It's impossible to say other things. What you should expect is that Bajío will be very well prepared and will continue delivering one of the best asset quality of the system.
I would like to add that it is -- I agree with Edgardo. It is extremely hard to predict to what level will the NPL index will grow. But in our stress test, what we did was to see what happened with the NPL in 2009, in the crisis of 2009, so we could have an idea of how bad could our loan portfolio get in NPLs terms if something similar could happen. And then we added a bit more so in a worst-case scenario, the very worst-case scenario that we can see, we are today in the 1%, 1.03% NPL ratio. We think it could get next year as high as 4%. And we are taking steps to prevent -- to creating additional reserves today so we can get to our worst level in that stress test.
This is not our forecast. It's just a worst-case scenario, we could get to the worst-case scenario with 100% coverage ratio. So that's our main strategy. We are very -- we are being extremely prudent, but we think it is worthwhile. Because as Edgardo mentioned a few moments ago, if probably the NPL ratio won't get as high as that and we will have excess reserves, it is very easy to turn around those returns and take them back to profit. So we are favoring the prudent approach for the rest of the year and 2021 until we had more visibility of how the actual results will be.
And we will go next with Neha Agarwala with HSBC.
I have a couple of questions. First, of the clients that have entered the relief programming, which are the main sectors and regions where you see some concentration in these clients?
My second question is on the impact to NIM. In 2019, you had about 5.6% margins. Now you're expecting almost 4.4%, 4.5%. That is a decline of at least 110 basis points. The average rates would be down, say, 300 basis points. Previously, you mentioned your NIM sensitivity is 22 to 24 basis points. So could you explain why the -- why is your expectation of NIM contraction 110, 115 basis points for this year? Is it just the rates? Or are you seeing any impact from the reprogramming of loans, which will hurt your margins as well? And I'll ask my second question later on.
Sure. Regarding the relief program, I mean, the -- in terms of regions, the bigger participation is coming from Bajío, of course Guanajuato mainly, Occidental from Guadalajara and Jalisco, and also from the north region, Nuevo León. But that is exactly correlated to the size of the portfolio we have in those regions.
So in terms of regions, we don't see a concentration really even in terms of activity. Of course, in [indiscernible] that is a segment that is impacted. And will have a delay in sales. Yes, we have a large number of those customers enroll in the relief program.
Remember also that this was a very good benefit to customers that all the banks were, including us, we were including that those messages in different advertising, social media, call center, statements, et cetera. So even we saw many of good customers with, let's say, less impact on the pandemic or marginal impact that were enrolled. They decided to enroll because it was a good benefit.
So we don't see really a concentration, but we see a few activities, of course like anything related to entertainment, hotels, restaurants, housing, et cetera, a large portion of those activities enroll in the program. But related to region, the -- we don't see really a concentration. It's really correlated to the size of the portfolio we have in the different regions.
And Joaquín will cover the question about NIM.
Regarding NIM, in fact, the expected NIM of 25 basis points already -- we already consider the impact of the cost of opportunity of relief program, and also a little increase in the cost of funding. Not as high as we saw on April, that was one-shot increase in cost of funding in the whole system. But we are seeing that some big banks, I don't know exactly the reason why, they are starting to pay higher interest rates to some clients that they didn't use to pay that high.
So we are considering that there is a slight increase in the cost of funding. Even with the development banks, they also adjust a little bit the spread -- the cost of funding of development banks. So we are expecting a slight increase in the cost of funding. That's the reason why we are increasing the sensitivity of the NIM for the next month.
Understood. And with the reprogramming, if I understand correctly, you are not charging any additional interest for the installments that have been delayed. And these installments will be collected…
That's right.
At the end of the loan period.
That is the criteria from the CNBV for all banks. So we are -- we continue charging the regular ordinary rate that we have in our agreements with customers, but we can now charge an additional cost because of the deferral of the payments. So that's why we are including -- yes?
So if you're not charging additional interest, then effectively your loan yields are going down. Is that also reflected in the lower margin expectation for this year?
Yes, indeed.
Okay. It doesn't…
That's why, Neha, that's why we wanted to include a NIM analysis in the presentation. And I believe it's very clear how big the impact from the -- I mean, from the PA coming down 245 basis points, how much is because of -- we are seeing bigger cost in the market. Mainly that happened mainly in April and in May. Several banks may be with liquidity issues, having -- trying to have as much deposits as possible to cover their needs. That didn't happen really in June, but that was an impact that we saw mainly in April and in May. And also a small impact coming from the relief program that is very clear in that slide.
Yes. It's indeed very clear. And in fact we, have some questions regarding the cost of funding increasing. Because it seems counterintuitive that with rates going down, with the cost of funding rise. But I think you explained it very clearly that some banks are increasing the rates that they're providing to depositors.
Yes.
So that has shown some pressure.
Yes. That is a good opportunity for me to comment also. And we talked about in the first quarter call, we made a campaign to increase deposits with customers with very good results. Actually, in June, just in June, we were able to increase deposits by MXN 6 billion coming from customers. And we -- what we did is to replace high-cost deposits with those deposits from customers. And we will continue with that effort. We feel very comfortable with the liquidity position that the bank is having today, 142%, much higher than the requirement that is 100%. And we will continue with that strategy. Having a good position in liquidity is important, and we are planning to continue with that effort to increase deposits from customers for the rest of the year.
One last question on the guarantees that you mentioned. You mentioned that 90% of the loans have collateral. What is LTV for these collaterals? And how much do you expect? Do you generally get the entire amount when you sell the collateral? Or is it generally at a discount? This is based on your historical experience that you might have had.
We couldn't hear you well. You said how -- what percentage of portfolio -- the portfolio -- the loan portfolio has a collateral?
No. That you mentioned was 90%, more than 90% loans have collaterals.
Yes
Yes.
For the PMES. What is the LTV for these collaterals? And historically, if you had to sell or make use of any of these collaterals, were you able to recover the LTV? Or was it more or less than what you had anticipated at the time of taking the collateral?
Yes. The loan to value that we try to get is at least 1.5x. And I believe in most cases in our customers that we have a property, let's say, normally is the asset that we are financing. Normally, it's at least 1.5x. So normally, our loans are very well covered by collaterals.
And have you historically had to use any of these collaterals?
Yes, of course. Yes, of course. It's very common in the industry, not because of the pandemic. If -- I mean there is always customers that had bad results and that we need to actively try to collect. And those collaterals help a lot.
And so what have your loss rates been in such cases where maybe the collateral hadn't been enough to pay the loan?
It's difficult to say because it depends customer by customer. What I can tell you is that the normal process is that we recognize the nonperforming loans of that loan. And we collect, but we need to do several legal activities. And we can -- it can take months sometimes more than one year to recover because normally, we need to take the time for that legal process and then sell the asset. So it can take a time. And you can see in our statements always a recovery coming from that activity. That is regular business activity for banks.
And our next question comes from Piedad Alessandri with Credicorp Capital.
My question is specific of the NPL flow. You report on your results and the movements in NPLs during the quarter. And we see an extraordinary amount in payments of NPLs offsetting the slight increase in new NPLs. Could you give us a bit more details on those payments? And what are the -- what do you believe they come from?
Yes. Let me give you an example. During May, for example, we saw about a little bit more than 300 customers in the [indiscernible] portfolio that with loans past due and with the right criteria, let's say, to be enrolled in the relief program. What we have been actively doing is contact those customers and have a very close communication with them. What we saw from those customers is more than 50% decided to pay and continue without, let's say, the benefit of the relief program. That's why we saw a decrease in NPL from May to June. And about 30% of those customers decided exactly to enroll in the relief program. Remember, the criteria was that by the end of February, those loans should be…
Current.
Loans should be current. So they had that criteria, let's say, but they didn't Ask to be enrolled. So we actively get contact with those customers, but many of them decided to pay. So that's why we have been in very close communication, I believe. Our level of the portfolio that is enrolled is, let's say, important, but I believe is going to be in the average of the industry. And even we can have several other players with a higher number as a percentage of the portfolio. But we think that the recovery that we saw from May to June, in many cases, our customers decided to pay. And in other cases, they decided to enroll in the relief program. So that's the main reason you saw an NPL ratio decreasing from May to June.
And we will move next with Claudia Benavente with Santander.
I have one follow-up question on the NPLs. Basically, if we keep unchanged -- if we keep with the coverage ratio at 100% and include all the reserves that you create and intent to continue creating, the NPLs would go up like to a little bit more than 2.1%. If you believe in a worst-case scenario that the NPL ratio may reach up 4%, that means that you would need like extra 3 billion in additional reserves. So I was wondering if you can help me a little bit more with some more color there.
Yes. Just remember, Claudia -- and thank you for your question. The comment from Carlos related to the 4% is on a stress scenario. It means as we said, when we presented the stress scenario a quarter ago is the worst-case scenario, and we consider what happened with the portfolio during the crisis of 2009. And we add additional spreads to that scenario, okay? So we want to be as covered as possible.
So in this guidance, what is included is MXN 2.9 billion in provisions. The original plan at the beginning of that year, let's say, without any idea about pandemic, it was 1.1. So yes, we are building important additional reserves to have coverage ratio as high as possible, standing today in 1.85x. But we want to continue with that level as it is in the guidance.
And of course, if we are starting to see during 2021 that, that NPL ratio start deteriorating, we will continue during next year having additional provisions to be at least at 100% coverage in NPLs. That is exactly the strategy.
And we will move next with Brian Flores with Citibank.
Just a quick follow up on the guarantees. I wanted to know if you have any plans to increasing from the current 19% that you mentioned. And also, if you can explain a bit the mechanics? Because I know having guarantees from development banks usually carries across from the loan ROE. So if you could explain a bit on the mechanics, that would be very helpful.
Yes. We have guarantees from NAFIN, from Bancomext, from FIRA. And I can tell you, maybe we have -- I mean they have more than, I don't know, more than 20, 25 different programs with different costs. So I mean the cost could be from 0.5% of the size of the loan of the guarantee, maybe to 2%. But I mean there are a large number of different programs.
And the mechanics to collect, once the -- there are very clear rules with all those development banks. Once the loan is a nonperforming loan is basically -- I mean we can collect immediately. And that is working and has been working for years really, really very well.
That's why for us that activity with development banks is so important, not only in terms of guarantees, but also in terms of funding. We are very proud of what we are doing, for example, in the agri business. And for example with FIRA, we grew during the last 12 months 20% our guarantees with FIRA. And we -- our market share with FIRA is 22%. So by far, we are the largest bank with FIRA. And that reflects our focus in the agri business that by the way, the NPL of that business is much lower than 1%. So we are very proud of that business and the quality we have in that business.
So it's very easy to collect the guarantees from development banks. The mechanics and the rules are very clear, and we have very good people managing all those programs with very good quality.
Okay. So if I understand correctly, is this something you would expect to increase as a percentage of your portfolio? Or are you comfortable at the current level?
I mean for us these are regular activity. And we try, in many of the cases, to add guarantees from development banks. It's very common in the -- I mean that's why we feel confident. Between the collaterals we have and the guarantee we have, we feel that the quality is very good. So we will continue with the same strategy, trying to add guarantees in those cases that could apply to those different programs of development banks.
And we will take our next question from Carlos Gomez with HSBC.
All of my questions has been answered.
We'll move next with Thiago Batista with UBS.
Very brief here, 2 more follow-ups. One, on your worst-case scenario, you presented the worst-case scenario, I think, 3 months ago. After these 3 months, the worst-case scenario is still the same? Or the situation has become worse or better than what you thought in your worst-case scenario?
And the second one in terms of cost of risk, I don't want a guidance anything like this. But when we look to your worst-case scenario most of provisions or anything -- the cost of risk increased a lot in 2021 versus in 2020. This is true for your base-case scenario. So in your base-case scenario, the cost of risk is also higher in 2021 versus 2020.
Yes, and thank you, Thiago, for your question. Regarding the stressed scenario, when we prepared that scenario, maybe the average of the market, all the different analysts were expecting a contraction between 5% to 7% at that moment. So we thought that the 9% contraction in GDP was really a worst-case scenario. But I mean in the last few weeks, we have seen different analysts talking about a contraction of that level, and some of them even higher. So we think that what we call at that moment the worst-case scenario, it could be in terms of the economy the base-case scenario today, not only about the contraction in GDP, but also about the rate from the central bank. So we are there. So we are following.
But what you saw in the stressed scenario a quarter ago, we are following that scenario today as the base scenarios. That is the criteria we use to develop our forecast for the rest of the year and the new guidance we are providing to you. So that is what is embedded.
We don't have -- I mean, difficult to talk today about 2021. We could -- we would like to have more visibility and really start working on those scenarios for next year, and I mean really in the fourth quarter once we have more visibility. Do you want to add something, Joaquín?
Yes. When we -- in the last quarter, when we presented worst-case scenario, we were estimating that the percentage of loans adhere to the relief program was pretty close to 40%. The data we have collected now is 26% just talking about commercial loans, and 28% -- 28% talking about commercial loans and 26% talking about the whole loan portfolio. So this is a good news. Even the scenario, economic scenario has been getting worse in the internal numbers, we are seeing that we are more healthy than what we expected at the beginning of the crisis. So one thing probably is not exactly a compensation, but we have good internal NIMs in terms of asset qualities.
[Operator Instructions] We have a question coming from the line of Enrique Mendoza with Actinver.
I know that it has been a large Q&A session. I have 2 questions, if I may. First of all, I want to congratulate you extensively for the disclosure you are making of how it would look both for the balance sheet and also for the income statement in case of the special criteria for the relief program has been applied. In this sense, just to better understand and take better advantage of that information, my question is if I understand correctly, the past due loans this have increased from MXN 1.9 billion to MXN 5.7 billion. And the balance sheet provisions, which have increased from around MXN 3.50 billion to MXN 6.5 billion. If that is the case, is the difference between the 2 explained by the collateral that you have? On the other hand, there is also a small MXN 30 million change in interest income that I would like -- I would really appreciate if you can tell me with that accounting registries?
Thank you, and thank you for your comment. Yes, we have been trying to be as transparent as possible and provide with a new guidance in the stressed scenario the better data to the market. That number is really something difficult to say how much from the relief program will be a nonperforming loan in the future. As we said, before, the expectation is for the NPL. I mean the end of the relief program for the customers will be between October and December. And it's very difficult to forecast who is going to pay, who is not going to be able to pay even in any portfolio, in a commercial loan, in PMES, in consumer loans, mortgages, et cetera. So that number is really very difficult to forecast.
We are going to be very close to our customers. And we believe that at the end of this year, the latest months of this year and also the beginning of 2021, we are going to have, I mean, big activity in restructuring loans with customers and providing them liquidity tenor, trying to add guarantees, et cetera. So that will be a big, big activity for us and for banks, for the system in the following months.
So nevertheless, we expect a deterioration in the NPL not -- as we said, not for us, for the whole system. Because of the contraction of the economy, this situation is really, is really bad. So in any case, the NPL ratios will increase. Difficult to forecast to which level we will get. We have been providing you, I believe, very good color about the expectation and comparison with the latest crisis that is included the stressed scenario. And that's why we are acting as we are doing. We are giving high priority to growing the portfolio but with very good quality.
Number two, to increase reserves as we have been mentioning, and that will continue in 2021 for sure. A big, big control in cost, and we will continue with that. And also to have the level of capitalization as high as possible in a very healthy level. So we can be as ready as possible for any scenario, a deterioration of the loan portfolio, but also e see the conditions in the economy, and we start growing faster and taking advantage of the well position, I mean, the very well position that the bank has in different regions of the country. And with those customers, we will take that opportunity. So I hope that helps to clarify our position.
Okay. Okay. And if I may, my second question is regarding deposit and the recent evolution. What is behind the decline in demand deposits when compared to March balance? And what are you expecting for the next quarters?
And my last question is, if the problems -- given the problems faced with Banco Famsa's liquidation, are you expecting an increase in contributions to the ESOP or insurance deposit agency?
Okay. Regarding to demand deposits, it comes from some corporative clients that maintain demand deposits in dollars. So due to the increase of the cost of funding, some of these clients moved to another bank that pays higher interest rate to them. That liquidity, providing for that corporate clients, do not affect the margin and the liquidity of the bank. We have the policy to classify those big clients in terms that our liquidity or the equilibrium in our funding or in our cash flows do not affect the treasury. So we do not have any problem to leave those clients with high interest rates to move to another bank. So it was one-shut case, but that didn't affect the liquidity and also didn't have an impact in the net interest margin.
And the other question?
But regarding the evolution of deposits for the rest of the year, in the guidance, we are saying that we will grow between 10% to 12%. To get to that level at the end of the year with the level of deposits we have today, it's only MXN 3 billion increase. So we see no problem to that level of increase in deposits, and it can be even higher. And we will be -- as I said, we will continue with the effort to increase deposits from customers and manage better the mix of deposits to decrease as much as possible because of funding. So we will continue with that activity. The liquidity is very good in the bank, but we will -- if we can expand that level, we will do it.
The important thing is that we do not have the pressure to maintain high cost of funding. We have capacity and the ability to manage the liquidity with a lower cost of funding.
Okay. I'm assuming that the vast majority of the MXN 3 billion increase that you are expecting in deposits may come from time deposits. Am I right?
It could be demand deposits. It could be time deposits. We have been doing that in the last quarter, the campaign I mentioned started in May and covered also June. And the results were very good. So we will continue with that effort. But yes, our deposits that are coming mainly from customers, and we expect to replace with that increase in deposits, high-cost deposits, coming from other sources.
Okay. Perfect. That's very helpful. And regarding the question of the increase -- or potential increase in contributions to ESOP, are you really expecting a change in pricing or the relative amount contributed to the agency of ESOP? Are you expecting a hike in the cost for the SG&A expenses in this regard?
No. We don't expect that. And we haven't heard anything about it. And we have been talking in the bankers association about that situation and what happened with funds, et cetera, but we don't expect any increase in that cost.
[Operator Instructions] And it appears that we have no further questions at this time. I will now turn the program back to Mr. Alberto Guajardo for any closing remarks.
Thank you, Nikki. And thank you all for your continued interest in the company. And we look forward to speaking with you in our next conference call. Have a good day, everybody.
And this does conclude today's conference. You may disconnect your line at any time, and have a wonderful day.