Banco del Bajio SA Institucion de Banca Multiple

BMV:BBAJIOO

Earnings Call Analysis

Banco del Bajio Posts Strong Q3 2023 Performance

Banco del Bajio reported a prosperous third quarter in 2023, with net income surging by 30.6% to MXN 2.75 billion and revenues climbing 29.6% to MXN 6.2 billion. The return on equity (ROE) reached a robust 28.3%, and the net interest margin (NIM) improved by 106 basis points to 7.2%. The bank's loan portfolio expanded by 8.6%, driven by SME and commercial loans, while total deposits grew 11.8%. The digital strategy also proved effective, with monthly active users of digital platforms increasing by 26%, showing enhanced customer engagement. Assets showed quality with a non-performing loan (NPL) ratio of 1.3% and a coverage ratio of 1.7x. The bank foresees an additional revenue impact of about MXN 810 million for every 100 basis point change in the benchmark rate, hinting at a strong leverage to interest rate movements.

Robust Earnings and Revenue Growth

The company exhibited a strong financial performance with the quarterly net income reaching MXN 2.75 billion, marking a 30.6% surge from the previous year. Revenues also witnessed a notable increase, totaling MXN 6.2 billion, which is a 29.6% year-on-year uptick.

Impressive Return on Equity and Digital Growth

An impressive return on equity (ROE) of 28.3% was reported for the quarter. In a digital-forward pivot, monthly active users of their platforms grew by 26% year-over-year, and 79% of all transactions occurred through rental self-service channels, marking a significant improvement from 69% over two years.

Loan Portfolio Expansion and Efficient Asset Management

The loan portfolio expanded by 8.6%, driven primarily by SMEs and commercial loans. Company loans outpaced the industry, growing 10.8% year-over-year. A robust consumer loan portfolio increased by 43%, signifying confidence in the bank's risk management and cross-selling strategies.

Stability in Asset Quality

Stable asset quality is illustrated by a non-performing loan (NPL) ratio of 1.3% and a strong coverage ratio of 1.7x. Additionally, with an NPL adjusted ratio of 1.77% and an NPL ratio stable at 1.35% quarter-over-quarter, the bank continues to outperform industry standards.

Funding and Capitalization Advantages

The preliminary capitalization ratio stood strong at 16.9%, and total deposits saw an 11.8% increase. The bank's funding strategy remains competitive despite industry-wide cost of funds increases.

Noteworthy Margin Improvement

The net interest margin (NIM) stood at 7.2%, an increase of 106 basis points from the prior year. Margin improvements were primarily due to asset mix changes and beneficial repricing from rate hikes.

Solid Efficiency Gains

The bank achieved an all-time low efficiency ratio of 31.6%, improving by 5.6 percentage points against the previous year. This is indicative of the bank's operational effectiveness and cost control.

Distributed Earnings to Shareholders

For the second half of 2023, a significant extraordinary dividend has been approved, amounting to MXN 1.35 per share. This distribution is part of a total payout representing 80% of the 2022 earnings, emphasizing shareholder value.

Guidance and Strategic Outlook

Looking forward, the bank's capitalization and loan growth strategies are tailored to maintain robustness amidst the political shifts in the next year. The bank anticipates loan growth to be in the range of 8% to 12% for 2024, depending on market conditions, and plans to maintain a healthy payout ratio consistent with the current year.

Earnings Call Transcript 2023-Q3

[Operator]

Good morning, everyone, and welcome to Banco del Bajio's Third Quarter 2023 Results Conference Call. My name is Daniela, and I will be your coordinator today.

[Operator Instructions]

Before we begin the call today, I would like to remind you that forward-looking statements made during today's conference call do not account for 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 Rincon, Chief Executive Officer; Mr. Joaquin Dominguez, Chief Financial Officer; and Mr. Luis Quiroz, Investor Relations Officer.

As a reminder, this video conference is being recorded. For opening remarks and introductions, I would now like to turn the call over to Mr. Luis Quiroz. Mr. Quiroz, you may begin.

[Luis Quiroz Hernandez, executive]

Good morning to everyone, and welcome to Banco del Bajio's Conference Call for the Third Quarter of 2023. The information used throughout the presentation about the industry is from CNBV data as of August which is the most recent publicly available information without any further ado, let us start the presentation.

On Slide 3, we would like to briefly describe some key ratios recorded in the quarter under trends. First off, the quarterly net income was MXN 2.75 billion, an increase of 30.6% year-on-year. The ROE for the quarter was 28.3%, revenues accounted for MXN 6.2 billion, an increase of 29.6% year-on-year. The NIM stood at 7.2%, increasing by 106 basis points against the third quarter of 2022, the efficiency ratio stood at 31.6%, improving by 5.6 percentage points against last year and standing in an all-time low in the history of the bank.

On the year-over-year comparison, the loan portfolio expanded by 8.6% and by 10.4% when excluding government loans, total deposits grew by 11.8%, the asset quality remains stable with the NPL ratio at 1.3% and the coverage ratio at 1.7x. The preliminary capitalization ratio stood at 16.9% by September end. Moving on to Slide 4. We would like to emphasize some key indicators from our digital transformation strategy.

Monthly active users of our digital platforms are growing by 26% year-over-year with individuals growing by 35%. In terms of transactions, our clients are growing the total number of transactions by 25% with the mobile channel being the most dynamic, growing by 48%. As of now, 79% of the transactions at BanBajío are rental self-service channels, improving from 69% in only 2 years. We expect the investments in digital to continue attracting new clients and increasing the engagement with existing ones.

On Slide 5, our total loan portfolio reached MXN 230 billion an increase of 8.6% compared to the third quarter of 2022. This quarter, we saw an expansion of the portfolio coming primarily from SMEs and commercial loans, while mortgages contracted. Company loans continue to grow faster than the industry at 10.8% year-over-year compared to the industry's most recent data point of 7.1%. Total deposits stood at MXN 225 billion, an increase of 11.8% compared to the third quarter of 2022. During this quarter, we saw good growth in customer deposits. However, interest-bearing demand deposits were the fastest growing. We are going to provide more detail about the funding structure and its trends in Slide 8.

On Slide 6, we can observe the evolution of our consumer loan portfolio, which is growing by 43% against the third quarter of 2022. As we mentioned in previous quarters, the bank invested in the talent and the right tools to accelerate expansion of these portfolios. As of now, we hold a robust underwriting platform with risk analysis on parametric engines and always on cross-sell campaigns in both physical and digital channels. We continue to tap at our existing client base. As of now, almost 75% of the origination of consumer loans at BanBajío comes from existing clients.

We expect to continue with this important rate of expansion in coming years. First, we concentrated the cross-sell efforts in credit cards and payroll loans and then we started with personal loans in the second half of 2022. It is important to mention that we have managed to accelerate the growth of these portfolios with a remarkable asset quality, better than industry standards. As shown in the charts of NPL ratios with credit cards at 2.2%, payroll loans at 2.3% and personnel loans at 1%.

In Slide 7, we would like to highlight BanBajío sound asset quality. Over the past months, we have observed a few worsening cases in the portfolio. However, we do not see a broad-based problem for a specific sector or geography in the country. As you can see on the upper charts, the NPL adjusted was 1.77%, and the NPL ratio was 1.35%, remaining stable quarter-over-quarter. Both ratios compare better than the industry standard.

The chart on the bottom right shows the evolution of the cost of risk, which has stood at 86 basis points for the quarter. The coverage ratio remains strong at 1.66x, which remains higher than the industry's ratio of 1.55x. Bear in mind that we continue to hold MXN 1.6 billion of additional reserves in the balance sheet, which were created for specific cases as well as enforcing circumstances and that we have barely used them thus far. The amount of additional reserves account for more than 50% of NPLs, reflecting the management cautious stance.

In Slide 8, we can observe the evolution of our funding structure. Since the end of the first quarter of this year, we have seen a tougher competitive environment for funding in the local banking system, with banks being more willing to pay higher on corporate deposits. We attribute this behavior to company's treasuries being more sensitive to pricing now that their cost of opportunity has risen along with interest rates. We have been successful on continuing to attract customer deposits to the bank, which continued to gain share from interbank loans standing now at 15% of total funding, while both time and demand deposits account for 82% of total funding.

During this quarter, we saw better performance of demand deposits compared to time deposits. However, within demand deposits, interest-bearing deposits have outgrown 0 cost deposits. The cost of funds as a percentage of TA stood at 59% of TA. As we can see on the bottom left chart, our cost of funds stood better than the system's average for the third quarter as both ours and the industry cost of funds have increased.

On Slide 9, we can observe the evolution of our margins, which stood in the third quarter at 7.17%, representing an increase of 106 basis points year-over-year. The expansion comes from the improvement in the mix of assets, which accounted for 9 basis points of the improvement as well as the reprice of rate hikes that accounted for 97 basis points of the improvement. We estimate our sensitivity to raise considering the current mix of assets and liabilities to be around 26 basis points of NIM, but every 100 basis point change in the benchmark rate, which will represent an impact of around MXN 810 million of revenues and MXN 510 million of net income for a full year.

In Slide 10, you will see the performance of BanBajío's revenues, which grew 30% compared to the third quarter of last year. Net interest income expanded by 29%, while noninterest income increased by 39%. We are seeing good trends in noninterest income as fees plus trading income has grown above the high end of the guidance for the first 9 months of the year. We have been focused on growing business lines, not directly related to the loan portfolio because it diversifies our income streams and will help us to partially mitigate the impact of lower rates in the future.

In that sense, we would like to highlight the performance of electronic banking fees, growing by 39%, inter-exchange fees growing 24%, trading income expanding by 22% and POS fees growing by 17% year-over-year. Moving on to Slide 11. We can see the performance of our efficiency ratio. It came in at 31.6% for the third quarter of 2023, improved by almost 6 percentage points year-on-year.

Our current ratio stands at a record low in the history of BanBajío, positioning as best-in-class in the Mexican banking system. In the third quarter, expenses grew by 9.9% year-on-year. We continue to invest importantly in the expansion of some departments at the call center and credit solutions, new branches, especially in the nearshoring regions and the digital transformation of the bank.

On to Slide 12, you will see the evolution of the profitability metrics of BanBajío. As shown in the charts, the quarterly ROA stood at 3.4% and the quarterly ROE at 28.3%. On a per share basis, the third quarter EPS stood at MXN 2.32 which represents an annualized earnings yield of 17.2%, computed with the average stock price for the third quarter.

In Slide 13, we can see the preliminary capitalization ratio as of September of 2023 of 16.86% of which all is CET1 capital the capitalization level increased against past quarters as a consequence of the capital accumulation due to strong results. Lastly, on Slide 14, we can observe the dividend distributions that took place this year. Yesterday, the extraordinary dividend proposal for the second half of 2023 was approved. The dividend will be paid out on November 6 for MXN 1.35 per share, equivalent to MXN 1.6 billion. When adding up the 2 distributions, the payout was 80% of the 2022 earnings equivalent to MXN 5.41 per share and the dividend yield computed with the average stock price year-to-date of 9%. We estimate our capitalization will be around 16.4% right after the distribution.

To conclude, we are pleased to share the results for the third quarter, and we feel comfortable to deliver on the guidance we provided to the market. With this, we conclude the presentation, and we can open the call to the Q&A session.

[Operator]

[Operator Instructions]

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

[Ernesto María Gabilondo Márquez, analyst]

Congrats on your results. My first question is on this, how this impact and was totally unexpected. So can you provide us some color on your exposure to Guerrero and Acapulco? I mean it seems not to be material as you only have one branch there, but are you planning to restructure some loans? .

And then my second question is on cost of risk. We noticed it went up to 0.9% this year? Even though we saw stable NPLs, so largely explained by higher write-offs. So can you elaborate on those write-offs in which sectors are you seeing impacts? And if you have already cleaned up those portfolios. Also related to this, would it be reasonable to expect again a cost of risk between 0.6%, 0.8% next year? And what should be the level of the reserve coverage ratio that you will be feeling comfortable?

And just a last question in terms of your earnings expectations for next year. If we continue to see rates holding higher for longer, I mean the first cut happening in June next year, how should we think about the earnings next year? And also, what will be the drivers behind that earnings growth?

[Edgardo del Rincón Gutiérrez, executive]

Regarding the first one in Guerrero, our exposure is very, very small. So for the size of the portfolio, it's really irrelevant. We hope that the conditions in Guerrero and mainly Acapulco will recover soon. But in terms of exposure, it's really a very small amount.

In terms of cost of risk during the third quarter, what we saw starting with NPLs now is some deterioration in really few customers, mainly home developers and some agro players. In all cases, we have important collaterals and guarantees. And at the portfolio level, we don't see really any negative trend. During the third quarter, and maybe you remember in the call in July, we spoke about Guerrero write-off and that we have been very conservative in write-off during 2023. So a new methodology was considered in the Risk Committee during this third quarter, and it was approved.

This write-off -- a new policy is mainly for commercial loans. So considering that, we write-off during August and September, MXN 750 million, that is really a catch-up for all '23 as we didn't have any write-off in commercial loans in the first 7 months of the year. So with this, you should expect a regular, a normalized level of write-offs for the following quarters going forward. In terms of cost of risk for '24, we consider that the level that we have been saying about the normalized level of cost of risk for BanBajío is really between 0.6% and 0.8%.

So this level of write-offs and cost of risk during the third quarter was really extraordinary because of this write-off that we did in the third quarter. For the whole year '23, we will be within that range. Also, the coverage ratio, we will comply with the guidance of being above 1.5x during the whole year. And we will keep a conservative stance in additional reserves and coverage ratio for '24.

Earnings for '24, your last questions, of course, will depend on the drivers and when the Central Bank start the cycle and of course, drivers and GDP performance for the economy. In any case, we are planning to grow our portfolios about the market speed and we will talk about our guidance for '24 when we report the fourth quarter in January.

[Ernesto María Gabilondo Márquez, analyst]

And just the last question, we have been hearing from some investors if there could be like a potential tax or regulatory risk on the Mexican banks after what happened to the Mexican airport. So just wondering if you are hearing anything? For example, the Ministry of Finance asking for having lower deductions and fiscal losses or anything that applies to you will be very helpful.

[Edgardo del Rincón Gutiérrez, executive]

Not really, Ernesto. We don't see any potential risk in the conversations that we're having with the regulators. As ABM, we don't see a risk like that really coming soon. So no, not really.

[Operator]

Our next question comes from Tito Labarta from Goldman Sachs.

[Daer Labarta, analyst]

I guess 2 questions. One on your loan growth, double digits, I think you mentioned you can grow above the market next year. If you can give some color on how much you can grow also. Are you seeing benefits already from the nearshoring? Could that increase your growth further and for how long? And then second question on your capitalization ratio, very strong even after the dividend payment, still above 16%.

Just what do you think is a normalized core Tier 1 ratio for you and factoring in what type of loan growth you might expect that given your strong profitability, you seem to have room to pay for the dividends? I know you announced one, but is there room to pay more? Or what's the right core Tier 1 ratio that you would like to run the bank with?

[Edgardo del Rincón Gutiérrez, executive]

Thank you, Tito. I will start with loan growth and then Carlos will take your questions on capitalization ratio and dividends. What we are seeing in loan growth is that it's really concentrated in a few segments. As you all saw in the presentation, financial institutions, mainly leasing companies, retail, industrial real estate, manufacturing and hydro business. This loan growing is including important prepayments, about MXN 6 billion in the government segment another MXN 6 billion foreign corporations.

The good news is that we were able to replace those prepayments with lower ticket loans, with better margins. Also, our strategy in Mexico City is working very well, and we are growing more than 20% in the metropolitan area. The SME portfolio and the consumer portfolio are growing very well, high teens in the SMEs portfolio and more than 40% in the consumer portfolio. So for the end of this year, we think that we will end in a level of growth similar to the one we are seeing at this moment.

For '24, the loan growth will depend, of course, in interest rates, GDP performance. Our expectation for '24 is that we could be growing between a range between 8% and 12%, depending on the market conditions.

[Carlos De la Cerda Serrano, executive]

Tito, this is Carlos. Basically, we -- in the Board of Directors, we have been talking for quite a while which could be at a capitalization rate that we feel comfortable with. And the answer is about 14% especially considering that our capital -- our equity is basically Tier 1 equity is basically some capital. For next year, we think that with the rate of loan growth that Edgardo just mentioned, we -- this is preliminary, of course, and that would have to be discussed and approved by the general stockholders assembly.

But we believe that we could pay out the same percentage of dividends next year than we already paid this year. I mean, with the second part that we will be paying at the beginning of November. And we also think that we will do it in two installments like we did this year.

[Daer Labarta, analyst]

Okay. Great. Carlos, and Edgardo, that's pretty clear. Just maybe one follow-up, Carlos, on that point. Just in terms of -- do you have a time frame for when you would want to get to that 14% core Tier 1? I haven't run the numbers, I don't know if you'd get there after the payment next year, but just a general guide would be helpful. .

[Carlos De la Cerda Serrano, executive]

We believe that next year, if we pay out 80% of the 2023 net profits out in dividends, we won't reach the 14%. We will be closer to 15% capitalization rate. But we also think that we have to be prudent because next year is special. It's a year that will have different risks associated with the banking business besides the usual risk. It's a political year. Several things can happen, and we feel more comfortable with close to 15% for next year. The 14% is a general guideline.

[Operator]

Our next question comes from Neha Agarwala from HSBC.

[Neha Agarwala, analyst]

Congratulations on the results. We see that the government loans and mortgages are still a drag on the overall loan growth. When do you expect that to revert probably in the coming quarters? Any color on that? Are you seeing any differentiated growth trends in any particular part of Mexico, which might be growing faster or slower than the others? If you can talk about that, it would be helpful.

[Edgardo del Rincón Gutiérrez, executive]

Thank you, Neha. What is impacting our decisions regarding government loans is really the margins we are seeing. We are seeing very small margins. So we really feel that growing in that segment is not adding value to the whole portfolio. So basically, in our view, in terms of profitability and margins and the use of capital, we feel more confident in growing the other segments, companies, the SME portfolio, the consumer portfolio, et cetera and not growing really at this moment in the government portfolio.

So that is why we are seeing prepayments in the government sector as our participation really is based in having the right profitability. So the margins in the market are very small in this moment. Regarding growing by geography, we are growing very well, as I said, in the metropolitan area, but also in the Bajío region in which we have an important market share in states of the Bajío region and also, of course, in the North, both because of manufacturing, industrial real estate and the agro business, we are growing very well, both in the Bajío region and in the North region.

So basically, those are the geographies in which we are seeing good loan demand, with the right target market base in -- having better margins and good asset quality.

[Neha Agarwala, analyst]

A quick one on the revenue side. We understand the NIM sensitivity and high rates are benefiting you. So what is the internal expectation regarding rate cuts? When do you expect rate cuts to happen in Mexico? And my second question is on the trading results. The trading results have also been quite strong last year and this year. Is part of that related to the high rate environment? And could we see that softening next year with rates going down?

[Edgardo del Rincón Gutiérrez, executive]

Basically what we are listening from different analysts and economists, it seems that we will have high rates for longer. So of course, that will impact our revenue behavior. Our main scenario is still that raise will come -- will start coming down at the end of the first quarter, but we will talk about it in January when we provide our guidance for '24. Regarding nonfinancial income, we are very happy with the results, we are growing very well nonfinancial income.

And that is reflecting. Our customers are using more our platforms and services mainly payments and collection services in Bajionet, our electronic banking FX, acquiring business, pro services et cetera. Our transactions are growing 18% year-over-year. So that is important. More transactions comes normally with more fees. So our digital transactions are growing more than 30% and total transactions growing 18%. So we are very happy with that, and we feel that we can continue going forward in the following quarters, growing high teens, hopefully close to 20% year-over-year, every quarter.

[Operator]

[Operator Instructions]

That concludes today's question-and-answer session. Thank you. I would now like to hand the call back over for some closing remarks.

[Edgardo del Rincón Gutiérrez, executive]

Thank you, everyone, and we will be available for further questions via e-mail or phone call. Take care, and we will see you next quarter.

[Operator]

Thank you very much. You may now disconnect. This concludes today's call.