Banco del Bajio SA Institucion de Banca Multiple

BMV:BBAJIOO

Earnings Call Transcript 2022-Q4

[Operator]

Good morning, everyone, and welcome to Banco del Bajio's Fourth Quarter 2022 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 BanBajio 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 fourth quarter of 2022. As most of you already know, the industry adopted IFRS 9 in 2022. As such, we have incorporated those effects and their impact to improve the comparability with 2021. All the information of the industry used on the presentation is from CNBV data as of November, which is the most recent publicly available information.

Without any further ado, let us start the presentation.

On Slide 3, we would like to describe some key ratios recorded in the quarter and their trends. First off, the quarterly net income was MXN 2.6 billion, an increase of 67.5% year-on-year. The ROE for the quarter stood at 29.2%. Revenues accounted for MXN 5.8 billion, an increase of 60% year-over-year. The NIM reached 6.8%, increasing by 214 basis points against the fourth quarter of 2021. The efficiency ratio stood at 32.4%, improving by 18 percentage points against last year as reported. The loan portfolio expanded by 12.6%, with company loans expanded by 14.1%. Total deposits grew by 12.7%, with demand deposits continue outperforming other sources of funding. The asset quality remains at very sound levels with the NPL ratio at 1.2% and the coverage ratio at almost 1.9x. The preliminary capitalization ratio totaled 14.7% by December end, decreasing quarter-over-quarter as a consequence of the accelerated loan growth.

In Slide 4, we can observe the 2000 results against the guidance. As shown in the table, BanBajio met and even surpassed most of its targets. The ROE stood at 21.5% as net income was MXN 8 billion, representing an increase of 67% against 2021. On the same note, revenues expanded by 41%, while expenses grew less than expected, resulting in an efficiency of 37.6%. On the asset quality side, all metrics remain very strong, as shown in the cost of risk, NPL and coverage ratio. We surpassed the expectation for loans and deposits growth despite the excess prepayments throughout 2022 with a very sound expansion in the second half of the year. Hence, the capitalization ended the year a little below the guidance given the accelerated growth in the loan portfolio.

We are very proud of the track record of BanBajio since the IPO of delivering on most of the guidance it provides to the market, contributing to both the credibility and the transparency of the management team with its current and potential shareholders.

Moving on to Slide 5. We would like to emphasize some key indicators from our digital transformation strategy. Monthly active users of our digital platforms are growing by 26.5% year-over-year, with individuals growing by 36%. In terms of transactions, our clients are growing the total number of transactions by 34%, with the mobile channel being the most dynamic, growing by 61%. As of now, 73% of the transactions at BanBajio are drawn to self-service channels. We expect investments in digital to continue attracting new clients and increasing the engagement with the existing ones.

During this start of the year, we will roll out to the general public end-to-end digital account opening journey on the mobile app, which will be a Level-4 account, allowing our clients to have higher transactional amounts compared to the other digital accounts we see available in the market today.

On slide 6, our total loan portfolio reached MXM 225 billion, an increase of 12.6% compared to the fourth quarter of 2021. We have seen a sustained recovery in loan demand throughout most of the second half of 2022, coming from a broad base of clients in diverse industries, while geographically, the Bajío region, Mexico City and the North are the largest contributors. The company loan portfolio is growing at 14.1%, which is now faster than the industry’s most recent data point of 11.9%. Also, the Agro business portfolio continues to show a sound expansion at 12.7%. The chart on the bottom left shows the composition of BanBajio’s portfolio as of December, as you can see Companies represent 82% of the portfolio, with corporates being 55% and SMEs being 27%.

Government represents 10%. Financial Institutions represent 4%, and both Mortgages and Consumer loans represent 2% each. For this year we maintain the expectation of continue growing in our core segments, although, we could see a deceleration in the industry given the prospects for modest economic growth in 2023.

On slide 7, we can observe the evolution of the consumer loan portfolio, which is growing by 38.2% against the fourth quarter of 2021. As we mentioned in previous quarters, the bank invested in the talent and the right tools to accelerate the expansion of these portfolios. As of now, we hold a robust platform with underwriting capabilities in non-assisted channels, risk analysis on parametric engines and always on cross-sell campaigns. We continue to tap at our existing client base, around 70% of the origination of consumer loans at BanBajio 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 in 2023 we included personal loans. It is important to mention that we have managed to accelerate the growth of these portfolios with a remarkable asset quality, better than the industry standards, as shown in the charts with the NPL ratios of the credit card, payroll, and personal loans portfolios at 1.6%, 2.5% and 0.8% respectively.

In slide 8, we would like to highlight BanBajio's outstanding asset quality. As you can see on the upper-left chart, NPLs have stood on very sound level of 1.19%, which compares lower to the industry's most recent data point of 2.11%. In the upper-right chart, we can see the NPL ratio adjusted by write-offs, which has been maintained at very sound levels. The chart on the bottom right shows the evolution of the cost of risk, which is stood at 91 basis points for the quarter. The coverage ratio remains elevated at 1.9x, which remains higher than the industry's ratio of 1.5x. For 2023, we could see some normalization on the cost of risk, as last year was an outstandingly low level for the industry. We maintain our conservative stance with the additional reserves in the balance sheet given that we could see a deceleration in the U.S. economy later this year.

Moving on to slide 9, total deposits stood at MXM 208 billion, an increase of 12.7% compared to the fourth quarter of 2021. We would like to highlight how demand deposits continue to show strong growth. However, as the portfolio expanded rapidly, we have also increased other sources of funding, as demonstrated by the expansion of repos and interbank loans of 23% and 15% respectively. Going forward, we intent to grow the deposit franchise of Banco del Bajío as much as possible, however, the share of deposits against the total funding will also depend on the prospects for loan demand.

On slide 10, we can observe the evolution of our funding structure, which has been a key driver in the improved profitability profile of the bank. We have been successful on continue to attract demand deposits to the bank, especially those at zero-cost, which are provided mainly by individuals and SMEs. Our star DDA account Cuenta Conecta, continues to grow double-digit at 20.4% against December of 2021. On the chart above, we can see how we have been able to increase consistently the share of demand deposits in the mix of our funding, particularly those at zero-cost, increasing their share in 4 percentage points in the last two years. Moreover, we have been successful in improving the cost relative to TIIE for our most sensible sources of funding, as shown in both the cost for interbank loans and time deposits. The total cost of funds as a percentage of TIIE continues to improve at 53% of TIIE. We continue to close the gap in the cost of funds for larger peers in the industry.

On slide 11, we can observe the evolution of our margins, which stood in the fourth quarter at 6.82%, representing an increase of 214 basis point year-over-year. The expansion comes from the improvements in the mix of assets and liabilities, which accounted for 54 basis points of the improvement, as well as the re-pricing of rate hikes, that accounted for 160 basis points of the improvement. Going forward we expect no additional hikes from the central bank and cuts in the second half of the year, resulting in an average Banxico rate of 9.55% for 2023. We estimate our ex-ante sensibility to rates, considering the current mix of assets and liabilities, to be around 34 basis points of NIM per every 100-basis point change in the benchmark rate, which would represent an increasing inflow of around MXN 960 million of revenues, and MXN 604 million of net income for a full year.

In slide 12, you will see the performance of BanBajio's revenues, which grew 60.4% compared to the fourth quarter of last year, adjusted by the IPAB fee reclassification. Net interest income expanded by 61%. Non-interest income increased by 57%, as we saw a non-recurring income from the sale of foreclosed assets that more than offset the IPAB fee expense in other operating income. If we normalize for the non-recurring assets sale, the fees deferral, and the reclassification of the IPAB fee; the pro-forma non-interest income would have been MXM 831 million, a growth of 50% against 2021. We are seeing good trends in non-interest income, as you can see on the chart on the bottom right.

Net fees posted positive growth year-over-year as reported for the first time in 4 quarters. Looking at the performance of non-interest income, the pro-forma credit commission posted an expansion of 140% as credit demand improved. Also, revenues not related to the portfolio continue to grow as part of the cash management initiatives, as shown in the growth of POS, interchange, transfer, electronic banking, and FX trading growing by 26%, 24%, 20% and 14% respectively. Going forward into 2023, we expect revenues to continue expanding double-digit, as NII would be boosted by growing productive assets as well as margin expansion, while non-interest income accelerates against last year as the effect on fees deferred dissipate and the cash management initiatives continue to boost fees and trading revenues not directly related to the loan portfolio.

Moving on to slide 13, we can see the performance of our efficiency ratio. It came in at 32.4% for the fourth of 2022, improving 18 percentage points year-on-year as reported, and by 14 percentage points when adjusted by the IPAB fee reclassification. Our current ratio stands as best-in-class both in the Mexican system and among international standards. In the fourth quarter, expenses grew by 10.6%, with the comparable base the fourth quarter of 2021. For 2022, total expenses grew by 14.4% against 2021 without the IPAB fee. Recurring operating expenses grew by 7%, while expenses related to revenues increased by 21%. For 2023, we expect expenses to continue growing double-digit as we continue to invest in digital and expand our footprint with people and branches. However, we maintain the expectation that revenues will outgrow expenses and therefore will have an improving efficiency ratio below 35%.

In slide 14, we can observe the evolution of net income for the past 3 years, from 2020, when the COVID crisis started, and up to 2022. We are proud to announce that both the fourth quarter result of 2.6 billion, as well as the 2022 result of 8 billion are respectively record profits for BanBajio, with growth of 67.5% and 67% respectively. We expect that in 2023, net income will continue to post a sound expansion. On to slide 15, you will see the evolution of the profitability metrics of BanBajio. As shown in the charts, the quarterly ROAA stood at 3.4% and the quarterly ROAE at 29.2%. Both metrics reached their highest level since the IPO as consequence of the strong results and in the case of the ROAE, a more adequate capital position after the dividend payments made during 2022. On a per-share basis, the fourth quarter EPS stood at MXM 2.18, which represents an annualized earnings yield of 15%, computed with the average stock price for the fourth quarter.

Moving on to slide 16, we can see the preliminary capitalization ratio as of December of 2022 of 14.7%, of which almost all is TIER 1 capital. The capitalization level decreased against past years as a result of the dividend payments of MXM 9.3 billion or MXM 7.79 per share that were distributed in May and in August; and because of the strong portfolio expansion in the second half of 2022. Lastly, in slide 17, we introduce the guidance for 2023. The macroeconomic assumptions used are the following: Average Banxico rate of 9.55%; GDP growth of 0.5% to 1.5% and the inflation rate around 5%.

We are forecasting loan growth to be from 6% to 8%; deposits growth from 8% to 10%. Net interest margin from 7% to 7.4%, with NII expanding from 32% to 35% and fees plus trading income growing from 16% to 20%. Expenses growing from 17% to 18%, and the efficiency ratio below 35%. Cost of risk from 60 to 80 basis points, while maintaining a coverage ratio above 1.5 times and NPLs below 1.50%. Net income from MXM 10.4 billion to MXM 10.6 billion, an increase of 29% to 32% against 2022, and an ROE from 24% to 26%, with a capitalization between 14% and 15%. In summary, the fourth quarter and full year results reinstate the sound fundamentals of the bank and the solid balance sheet. We will continue with the strategy of BanBajio towards 2025 with focus on creating value for all stakeholders. We are pleased to announce that we have met and even surpassed most of our targets for last year and we maintain our compromise to deliver on the guidance that we provide for 2023. With this, I conclude my presentation and we can open the call to the Q&A session.

[Operator]

[Operator Instructions] Our first question comes from Ernesto Gabilondo.

[Ernesto María Gabilondo Márquez, analyst]

Ernesto Gabilondo, from Bank of America. Congrats on your results and your '23 guidance. My first question will be on NIMs for '23 and '24. We have seen the bank has been significantly benefiting from higher rates. But when do you see an easing cycle? And when do you think you can start reducing the NIM sensitivity?

Also related to the same topic. In the scenario that interest rates go up to 11% this year, that is what some analysts are expecting, but then falling to 7.5% in '24, that will imply an important reduction of around 400 basis points. So if I put down to your sensitivity, that will be around 140 basis points NIM pressure in '24. So under this scenario, what again will be the measures that you can be implementing to mitigate a potential impact of 140 basis points? What level do you think it can be reduced, I don't know, by 1/3, half of it? Any color on to what extent the NIM sensitivity can be reduced, I think, will be very, very helpful.

Then my second question is on your sustainable ROE. Again, once we start to see a normalization in the interest rate, is a probability that the earnings could be contracting in '24. So where do you see the sustainable ROE of the bank?

[Edgardo del Rincón Gutiérrez, executive]

Thank you, Ernesto, and good morning to everyone. We have been working on that, and that is the main reason of the different investments we have been doing in the digital transformation, in data, in building all the different organizations.

Let me give you some aspects of this. The idea, Ernesto, is continue improving, of course, the mix of deposits. That is bringing a lot of value to the bank. We are coming from cost of funds of 75% of TIIE, and we are now in 52%, 53%. And the idea is to continue improving that. That is bringing not only more Conecta accounts, but also is bringing an important growth in active customers. We are growing at this moment 9% in customers, and that is bringing a growth in transactions of 17%. And the amount of those transactions, we are growing by 21%. And more important than that, that is bringing also more fees and is providing us more opportunity to cross-sell.

Also, we have been working in improving the mix of loans. You saw already in the results that we are growing 38% in consumer portfolio, and we are planning to continue with important growth in that portfolio.

During 2021, we made several pilots of parametric loan offers to SMEs with very good results. Those pilots -- I mean we rolled out that new credit policy, let's say, in 2022. And we end -- at the end of December, we already had a portfolio of MXN 1.2 billion. That is important, of course, because not only bring more profitability of that relationship with that SME, but also the margin are larger than the regular loan in SMEs.

In noninterest income, as you know, we have been working and investing heavily in Bajionet, our electronic banking platform, and actually with very good results. And our cash management strategy is bringing also very good results. Our goal is to grow noninterest income at least twice the growth in the loan portfolio. Actually in 2023, we delivered that. Actually, it was close to 3x. So over time, with all different structural changes in the revenue mix, that will reduce the sensitivity and also are bringing new sources of revenue that are important.

In noninterest income, for example, everything that is related to the acquiring business interchange as a feature of debit and -- debit cards and credit cards. Those sources of revenue are growing above 30% and actually with very good efficiency ratios.

So about your second question, the ROE -- the sustainable ROE. We think that with a normal inflation, let's say, between 4% and 5%, the Banxico's rate should be between 6% to 7%, and a capitalization ratio around 14%, the ROE for the bank should be between 20% to 21%. I think with that, I covered several of your questions. I don't know if you want to mention, Joaquin, about the asset liability.

[Joaquín Domínguez Cuenca, executive]

Thank you. In terms of asset liability, we already designed several hedge structures in order to reduce the sensitive to interest rate changes. Right now, we consider it is not the appropriate timing to implement them. However, we are ready to execute them as soon as we consider convenient. Within this strategy, we are expecting to reduce 10 basis points sensitivity.

[Ernesto María Gabilondo Márquez, analyst]

This is very, very helpful. Just one last question on the dividend policy. The bank continues, as you pointed out, well capitalized. So where do you see the dividend policy this year?

[Carlos De la Cerda Serrano, executive]

Ernesto, this is Carlos De la Cerda. As we mentioned in the last year, we feel very comfortable as long as we are within a range between 14% and 15% ICAP rate, capitalization rate. Right now, we are at 14.6% -- 14.7%, and it will grow from today to the beginning of May, that's when we expect to be paying out the dividend from last year's profits. It will be probably over 15-point something. So we believe we will put under the shareholders meeting consideration a dividend of 60% of last year profit. And our capitalization rate will remain above 14% after we pay the dividend. That's where we are standing now.

[Operator]

We're going to move on to the next question from Ricardo Buchpiguel.

[Ricardo Buchpiguel, analyst]

Ricardo Buchpiguel from BTG Pactual. Congrats on the solid results. I have a few questions here. First, can you please comment how do you see the outlook for loan growth in the coming years, looking beyond this year, especially with the thematic of the nearshoring? And what do you believe would be key to happen for this scenario that you're believing for loan growth should take shape?

And for my second question, could you also talk a little bit more about the investment that you are doing on the bank's digitization that would increase the OpEx this year, but also could yield some results for the strategy that you had just mentioned, the previous question?

[Edgardo del Rincón Gutiérrez, executive]

Thank you, Ricardo. This is Edgardo del Rincon. Maybe to talk about the scenario we are seeing for the following years, let me start by saying how we delivered a result of 12% -- 12.6% growth in loans during 2022. The main activities in which our customers are working, that represent the loan growth. The bank have an important role. But in companies, including SMEs, we grew MXN 23 billion during 2022.

In the Agro business, we grew a little bit more than MXN 3 billion, MXN 3.1 billion. In retail companies, we grew MXN 6.5 billion. Of course, companies of different sizes. In manufacture companies, we grew MXN 5 billion. And in real estate, mainly industrial real estate that is related to near shoring, MXN 5.3 billion. And that growth was mainly in the Bajio region, in the metropolitan area and in the north of the country.

From this growth in companies of MXN 23 billion, MXN 15.5 billion were with companies that didn't have a loan with us at the beginning of the year. And that is -- that for us is a great news. From those new customers in loans, of course, many of them did have a relationship with a bank, passive relationship with DDA account, investments, different line of products. From that growth, MXN 9 billion came from corporates, and we are talking about 166 customers with an average loan of MXN 54 million. And MXN 5.7 million came from SMEs, 580 customers with an average loan size of MXN 10 million. So as you can see, the growth that we have in companies is very well diversified. So we are very happy with this because that means we are having the ability to bring new customers, but also to grant a loan to them, both in SMEs and the corporate segment. And of course, the consumer lending, that is still a small portion, is 2% of the total portfolio. That is growing at a very fast pace.

So going forward and in the guidance for '23, we are putting a range between 6% and 8%. And the reason behind is because we are considering GDP grow between 0.5% and 1.5%. And normally, the loan growth is a multiple of that GDP growth. Of course, we will try, as always, to grow faster than the market and to gain market share. So we will try, of course, to over-deliver. Let's see the conditions of the economy and investment, '24 would be a unique year because of the election, that brings normally uncertainty in the market. So let's see how the market develop, but we will try always to over-deliver and always to grow faster than the system.

[Carlos De la Cerda Serrano, executive]

This is Carlos De la Cerda. I would add to the data that Edgardo just provided us that in that 6% to 8% loan growth that we are forecasting, we are taking into consideration a few prepayments -- important prepayments from the government sector that we already know that they are trying to restructure their total debt. And so -- but the margin -- even though those loans are of extremely high risk quality, they are also of extremely low margin. So what we are -- we decided to not participate in those processes. And we have to substitute those loans with new smaller loans with a much higher margin rate and much higher potential for cross-sell. So even though we are getting those payments, we're still considering that we will grow close to 8%, but with a much better mix of loans, with much better margins, and in my opinion, creating more value for the franchise.

[Edgardo del Rincón Gutiérrez, executive]

Regarding, Ricardo, your second question about the investment in digital, we will continue investing in the following years. And I think that is something that we continue always, not only in the digital transformation, I mean, in electronic banking, let's say, Bajionet web and the app. But also, we have opportunity to bring technology, for example, to different internal processes that could impact customer experience, operational losses that we can operate in a better way, et cetera. But actually, we are very happy with the investment we are doing because we are already seeing very good results with several business line like fees, for example, that we are growing more than 20%, and the total noninterest income is growing during 2022. I mean, they collected, not the one that were recognized because the new accounting criteria, accounting rules, but the actual noninterest income collected we are growing about 35%, which is great.

And without the investment that we started doing several years ago, it -- I mean, it would be very, very difficult. So we need to continue improving customer experience. And the digital transformation and all the investments we are doing is very important with that -- I mean, for that goal.

[Ricardo Buchpiguel, analyst]

Very clear. Just a quick follow-up. Are you seeing also some increase in competition for this loan demand after the end of last year and beginning of this year? Have been hearing other banks also commenting about increasing headcount for loan officers. And I imagine it's the same situation if you -- by your speech in the presentation. Just wanted to hear your thoughts on the matter.

[Edgardo del Rincón Gutiérrez, executive]

Yes. I mean that is very clear, and it's happening. But I believe the business model we have, the way we treat our customers with a banker that is really close to them, understanding very well their needs -- I mean, a sense of that is all the new customers that we grant alone during '22, more than 750 new customers in loans, is a very good indicator that we are doing well in the arena, competing very well. We are not competing with price, we're competing with very good service, with -- I mean, being really fast in defining the loan structure for a customer. And we are having opportunities even in improving that. So I believe we are -- we have been able to compete very well and attract new customers, and we will continue doing that.

[Carlos De la Cerda Serrano, executive]

I'd just like to add to Edgardo's comment that we are very strong in the region that we -- in the regions of the country that we consider are showing the higher growth potential, both for the near-shoring opportunities, but also -- it's traditional that the central and northern part of Mexico grow faster than the rest of the country. And we feel very confident with our position -- our positioning in that area. And also in the specific sectors that are growing, as you know, the Agro business sector shows a great potential. The sector is exporting most of their production, and we are very strong in that sector. So we feel confident that we have very opportunity -- every opportunity to outgrow our competition.

[Operator]

Our next question comes from Luis Yance from Compass Group.

[Luis Yance, analyst]

Happy New Year. Congratulations on the good results. It's like you're getting used to very amazing results quarter after quarter. And based on your comments, it looks like that will continue. So congrats on that. A few questions, I guess, follow-ups on that. The first one on the loan growth potential going forward. Perhaps we can -- if you guys could elaborate a little bit further on this near-shoring potential. What are your clients sort of telling you? And in your view, when do you, as a bank, should start seeing accelerated demand coming from that? If you could share with us perhaps, I don't know, certain numbers, percentage of loans that could be related or could be positively impacted by that. Anything you can share on that front would be great.

[Edgardo del Rincón Gutiérrez, executive]

Thank you, Luis. And yes, we have seen already loan demand for near-shoring for industrial real estate. As I mentioned previously, we grew during 2022, MXN 5.3 billion. So that portfolio should be today between MXN 12 billion and MXN 13 billion. So -- and we are continuing to see loan demand with several players, both in Bajio, in the North, but also in the places close to the metropolitan area, Hidalgo and Mexican State, et cetera. So that trend will continue. We have very good customers that are trying to grow with this opportunity, and we are ready, I mean, to serve them. So yes, in the loan growth that we are planning for '23, we're including this opportunity. And as we said, we will try to outgrow the guidance, but we already have several prepayments that we know will happen in the coming months. Nevertheless, we will replace those prepayments with the opportunity we have mainly with the small and large companies.

[Luis Yance, analyst]

Great. That's good data to have. And I guess my second question goes into NIMs. Again, taking your guidance into account, looks like 120, 160 basis point expansion, but you also have a conservative view in my mind in terms of what the average TIIE would be for this year. But even if I take your guidance, it looks like, I don't know, based on your sensitivity, about 60 basis points coming from -- of the margin expansion coming from just rates and perhaps another 60 basis points from mix, which is quite impressive given that you already did kind of similar last year. So on the mix portion, could you talk a little bit about -- I know you've mentioned a few things, but how much of that is actually coming from improving even further your funding costs?

How much is kind of the mix with loans that you mentioned? And whether this kind of 50 basis point improvement in NIMs from mix that we saw last year and that we might see this year, how much longer can you continue like, for example, the TIIE -- your cost of funds relative to TIIE has been coming down, you mentioned 53%. How much further can it go down? And what other things could you do?

[Edgardo del Rincón Gutiérrez, executive]

I mean, you are right, Luis. The average reference rate from Banxico that we are considering in our guidance for 2023 is 9.6%. That could bring a TIIE of 9.85%, something like that. And we know that the consensus today is a little bit higher than that. And yes, that they knew about the first data about inflation, was not as expected. So what we consider is that the inflection point for inflation globally and in Mexico should be in, I mean, in the following months. We consider that, that could happen in the middle of this year, and that could bring opportunity to the Central Bank to start lowering rates during the second semester end-to-end 2023 in levels of 9.25. We know that the consensus today is higher than that. Of course, with the sensitivity we have today, the rate is higher than this. We have an opportunity, an upside risk, let's say, in our plan for 2023.

And what we are doing also, as I explained previously, we are working and is delivering very good results in improving both the mix of deposits, but also the mix in loans. And that will continue. But also, together with this, we are trying to grow in new customers as fast as possible. And that is happening in -- have been happening for many years. So considering that maybe in your model, we should -- I mean we are considering that improvement in the mix of deposits and loans, and that will bring additional opportunities of revenues for the bank in the coming years.

[Luis Yance, analyst]

Great. And in terms of the hedges you're planning to put on your mind, what's the potential timing for you to do that? Perhaps second half of this year as you see that inflection point you mentioned? Or you could actually postpone it if you see data that suggests that it's an environment of rates higher for longer?

[Joaquín Domínguez Cuenca, executive]

Okay. We do not have right now an answer specifically talking about the correct timing, but we are ready to execute, and we will see how is the evolution of the main economic indicators. So -- but there is a chance to start in the first half of the year probably.

[Luis Yance, analyst]

Okay. And my last question on -- is on asset quality. We haven't talked much about that. Perhaps if you could comment a little bit what drove that spike in cost of risk in the fourth quarter. And as I look at your guidance, does that assume you release some reserves in case you already see a spike in delinquency? If you could share with us. And how much additional reserve you still have there as a potential offset and whether we should assume that gets released gradually throughout the year?

[Edgardo del Rincón Gutiérrez, executive]

Yes, Luis. The cost of risk in the fourth quarter, it was related totally to the loan growth. Important also the growth in the consumer portfolio that you know the reserves that are required are higher than in the case of companies. So it's completely related to the loan growth. But important to say that we don't see today any deterioration, even the early indicators that we are seeing in all the different portfolios, not only companies, but also credit cards, personal loans, et cetera. Everything is in very good shape. Actually, we are very happy with the asset quality that we are delivering. So we don't see any operation in any portfolio. So it's totally related to loan growth.

[Luis Yance, analyst]

Okay. And the additional reserves you still have there, could you share with us how much they are at the moment?

[Edgardo del Rincón Gutiérrez, executive]

Today, Luis, we're talking about MXN 1.7 billion, a little bit more MXN 1.7 billion. And in the plan for this year, we are not considering releasing additional reserves. Of course, if we have a case above the -- let's say, the plan of cost of risk, we could use some of those reserves in case of any deterioration of any portfolio. But that opportunity is not included in the plan.

[Operator]

Our next question comes from Jason Mollin.

[Juan Recalde, analyst]

This is Juan Recalde from Scotiabank. I have 2 questions. The first 2 questions on deposits. The first one is related to the expected growth and the second one related to expected cost. So in terms of growth, we have seen strong total deposit growth in 2022 and even stronger in demand deposit growth. So how do you see demand and time deposits growing next year? Do you think that demand deposits can continue outgrow time deposits in 2023? So that's the first question.

And the second one would be related to the deposit cost. When we compare the deposit cost versus the change in the TIIE, so the deposit cost grew around 200 basis points year-on-year in the fourth quarter, and the average TIIE was close to 500 basis points higher. So in 2023, how do you see deposit cost rising versus rate?

[Edgardo del Rincón Gutiérrez, executive]

Yes, Juan. What we are doing is grow as fast as possible in demand deposits with 0 cost. Let me give you some data. During the fourth quarter, we opened 19,000 new Conecta accounts. Those -- that number of accounts is similar to the number of new accounts that we opened, for example in 2019, that we opened a total of 20,000 new accounts. So today, we are opening in a quarter, the accounts that brings, for example, of course, new customers, the accounts that we were opening the whole year, 3 years ago. That's the reason behind the growth in demand deposits with 0 cost.

And we will continue with that strategy, of course. Last year, we opened a total of 78,000 new Conecta accounts, and we are planning to grow that double digit during this year. So the improvement in the mix of deposits will continue. And we -- I mean we are considering improving also because today we are in 53% of TIIE, continue improving that going forward.

Very difficult to tell you the cost because that will depend on the loan growth. For example, in the fourth quarter, we needed to grow a little bit more in repos and other sources of revenue to have the right liquidity to grant those loans, that loan growth during the fourth quarter that it was really important. So -- but that strategy will continue because it's the base to bring new customers and to growing transactions and fees, et cetera, as I explained earlier. So very happy with the results we're having with Conecta account, and that will -- that strategy will continue.

Also, during the following months, we are going to release the new digital platform that is a journey to open an account, that is a journey that is 100% end-to-end digital. That could bring an additional opportunity, and we are planning to release that technology to the public in the following months.

[Operator]

Our next question comes from Carlos Gomez-Lopez.

[Carlos Gomez-Lopez, analyst]

Carlos Gomez from HSBC. Congratulations, like everybody else, for both the excellent Q and excellent results. I'm going back to the rates -- and I want to verify that I understood correctly. In your assumption, you are assuming that there are no further hikes and that we have rate cuts in the second half of the year. I think that is correct. And as you said, that is certainly lower than what the market is expecting. I want to understand if -- is that something that you really expect? Or this is really conservatism on the part of the bank -- well, that's undershoot the rates, and if they end up being higher, well that is better for us. So I want to understand the reason why you project such low rate.

The second is given how extremely profitable the SME segment has become with this high level of rates, and assuming that it is somewhat permanent, have you seen more activity? Have you seen either the large banks or new players coming into your segment and start to compete here? Or is it too early for that?

[Edgardo del Rincón Gutiérrez, executive]

Thank you, Carlos. Regarding your first question, yes, we are not completing any additional hike. And we are -- our assumption is that Banxico rate should be a start a cycle -- declining cycle in the middle of the year, starting in July to end -- at the end of this year in 9.25%. So we note -- could sound today and more with the inflation rate that was announced yesterday, a little bit conservative, yes.

But it's what we are planning to do with. We don't want to consider a high-rate environment because we think that in any moment, maybe May, June, et cetera, we could start seeing lower inflation. And that will give the Banxico -- the Central Bank the opportunity to lower rates. Today, the real rate is high. And we see an inflation rate that started lowering in 7%, 6.5%, et cetera. That will bring the space to the Central Bank to start lowering rates.

About competition in SMEs, that is -- I mean every bank is trying to touch that opportunity. We are competing very well, and we are attracting new customers. From all the new accounts that we are opening, that is in 2022, I said, 78,000, 50% those are SMEs. So we are growing in the number of SMEs that we are attending in the bank importantly. So yes, we are seeing important competition, but we are having very good results. Joaquin would like to complement.

[Joaquín Domínguez Cuenca, executive]

Just to complement, something that we want to give you as a message with this guidance is that we do not only depend on the interest rates. So as well as we do not expect that height of interest rate, what we want to show you is that we are able to increase the profitability with the noninterest income strategies that we have already talk about.

[Carlos Gomez-Lopez, analyst]

Okay. That is very clear. But again, going back to my initial statement. If rates end up following the path that is forecasted in the market, which, as you said, is higher than yours, if that were to happen, then your actual result will be higher than your current guidance. Is that the correct interpretation of what you're saying?

[Edgardo del Rincón Gutiérrez, executive]

That is correct. If rates are higher, the sensitivity that we showed in the presentation, I mean, will impact positively the results of the bank.

[Carlos Gomez-Lopez, analyst]

Okay. So we should take this as a kind of as a floor, if indeed the path of rate is the one that the market is pricing, instead of the one that you are using.

[Edgardo del Rincón Gutiérrez, executive]

Very good.

[Operator]

Our next question comes from Jose Cuenca.

[Jose Cuenca Gonzalez, analyst]

Jose Cuenca from Citigroup. Have 2 quick follow-ups. Just to confirm, I think you were saying earlier that you know all the initiatives that could contribute to solid results as rates go down, one of them contemplates, of course, focusing on fees, continuing to be strong. So if I heard correctly, I think you were targeting fee growth -- I think -- sorry, noninterest income growth, at least twice that -- twice as high as the growth of the portfolio. But just wanted to confirm if that is correct. And when do you see that happen? Do you see this happening already? Or is this something that could bear fruit a little bit further down the road? If you could clarify on that would be very helpful.

And my second question -- just wanted to piggyback a little bit on the SME competition. Obviously, quite impressive what you're doing in order to increase the number of customers and so on and so forth. So even though you touched a little bit on these aspects, would like to hear a little bit more, for example, if a new SME customer comes in, why would they choose Bajio over what certainly seems to me a very, very good competition from both smaller and larger peers in the SME segment? So if you could elaborate on that would be really, really helpful.

[Edgardo del Rincón Gutiérrez, executive]

Yes. Thank you, Carlos. That's right. And in terms of noninterest income, the idea is to grow twice at least the loan portfolio growth. The results you saw are impacted with the new accounting policy that we released in January last year. So fees that we -- that before we were recognizing at the moment that they were collected, today we're recognizing them in the -- let's say, the cycle of the loan. So that is impacting the noninterest income as reported during 2022. But the noninterest income, the total that is collected during last year, we grew 35%. So we are already at that level, at least twice. Actually, it was almost 3x. We grow in noninterest income with a level of growing the portfolio that was 12%. So that is the idea, and I think we can deliver that in the following years, and that will bring a new structure in revenues. That is important.

Yes, the idea -- I mean, today, we have a relationship with close to 140,000 SMEs today. From those, about 8,500 have a loan with us today. And we grew importantly during 2022, a number of customers, SMEs with a loan because of a new parametric offer that we have been doing that I talked about that have today an average ticket of MXN 1.1 million. And 100% of those loans are cross-sell. And so our customers that we know, we know their flows, their activity in the account, in investments, et cetera, that we are granting a loan. Many of them is one of the, I believe, the competitive advantage of BanBajio comes from Agro, the Agro business. And that is bringing very good quality of customers to the bank, but also other activities, of course.

I believe the perception in the marketplace for BanBajio is that is a very good bank for SMEs, not only because of the loan offer that we have, but also the cash management products and the treatment, the personal treatment that we have with all the customers. We are -- that's why we are growing the number of bankers because it's important for us to have the capacity to really know very well our customers, and our people can have the time to understand very well their needs. And I think that is also something that is unique for BanBajio and is working very well. And that's why so many new customers that we are granting a loan in SMEs.

So -- and actually, that is the main reason why we are growing in new branches. Many of those new branches in the places that we are opening those branches are, cities in which we didn't have a presence before, and it's because we have already a loan portfolio in those places, mainly related to the Agro business as well. So we are taking advantage of those opportunities. And the breakeven point in those new branches is going to happen really soon because we already have customers there. So I don't know if that gives you some color about your question about SMEs.

[Operator]

Our next question comes from Andres Soto.

[Andres Soto, analyst]

This is Andres Soto from Santander. I have a question regarding dividends vis-a-vis the outlook for ROE and loan growth. I agree that loan growth seems -- outlook seems conservative. So to me, your outlook for dividends -- because if you are -- you will be running at an ROE of 30% over the next couple of quarters, and we'll be growing your loan portfolio just by 7%, what will be the reason for you to keep on accumulating capital? So my question is, is this guidance, assuming that there is an upside risk for loan growth, and you will be using that capital for growth? Or in the end, we see loan growth at this high single-digit level, you will end up considering distributing extraordinary dividends?

[Carlos De la Cerda Serrano, executive]

Andres, this is Carlos De la Cerda. In the 60% dividend payout that we are planning for this year, we are considering that the rate at which the bank will be generating profits allow for a loan growth of well over MXN 6 billion a month. That just won't happen. I mean, the loan growth would need to be, I don't know, 20% or 30% -- 20% a year or something like that. And that won't happen. Actually, what we think is that the capitalization rate, even with considering the dividend will keep growing, and we will finish the end of the year close to 16%. So if for any reason and in any future year, we believe that the loan growth would be so strong that we should consider to decrease the percentage of the dividend payout, we would do it because that's our business, to make our bank bigger and stronger. For this year, we think that it's a pretty safe assumption that even with the 60% dividend payout, the capitalization rate will remain growing up at any loan growth that we can foresee in the near future.

[Andres Soto, analyst]

Perfect. And my question was exactly that. In the end, you will have some room for extraordinary dividends. So it is what you also have in mind that there is a space for extraordinary dividends in 2023?

[Carlos De la Cerda Serrano, executive]

In this moment, we are not considering an additional dividend to the 60% dividend that we're planning to. In case that the capitalization rate would be much higher than 15%, we would discuss the possibility to pay out an additional dividend because we don't see -- I mean, we don't think that an excessive amount of capital would be necessary.

[Operator]

Our next question comes from Pablo Ordonez from GBM.

[Pablo Ordonez, analyst]

This is Pablo Ordonez from GBM. Can you listen to me?

[Luis Quiroz Hernandez, executive]

Could you speak up?

[Pablo Ordonez, analyst]

Yes, can you listen to me?

[Edgardo del Rincón Gutiérrez, executive]

Yes. Go ahead.

[Pablo Ordonez, analyst]

Congratulations on your excellent results. I have a follow-up question on your funding costs and your funding mix. As you mentioned, your Conecta accounts have been very successful in growing the zero-cost demand deposits. However, in the fourth quarter, we also saw that time deposits are growing faster than demand deposits. So I have a couple of questions here. Are you seeing that your other corporate clients are becoming more sensitive to interest rates they receive? And in this context, how much room for improvement do you see on your funding costs as a percentage of TIIE, particularly in your medium term? And what is your assumption on the funding cost on your long-term or medium-term ROE target of 20% to 21%? Any color on this would be very helpful.

[Joaquín Domínguez Cuenca, executive]

This is Joaquin Dominguez. What we saw in the last quarter in growing faster in time deposits is due to the faster expansion of loan growth that we saw. So what is important to understand is that the behavior of the loan growth determinates the behavior of the time deposits. As well as we need to fund the loans, we execute some treasury strategies in order to cut the time deposits to be able to fund the loan growth. So it's not for a structural trend. It depends of how is the behavior of the loan. And if you saw a reduction of the loan growth, we will continue as we are expecting as our strategy to grow faster in demand deposits. But it's just the way as we manage the treasury.

[Pablo Ordonez, analyst]

Okay. Very helpful. And regarding my second question, what is your funding cost as a percentage of the interest rate on your -- what is your assumption in your long-term target of 20%, 21%? Can you give us some color on that? .

[Joaquín Domínguez Cuenca, executive]

Well, the way as we projected, is maintaining the last funding structure. So at the end of the last quarter, we had 40 -- almost 55%, 53% of cost of funding as a percentage of the TIIE. So we maintain that structure for the '23.

[Operator]

Our next question comes from Gilberto Garcia.

[Gilberto Garcia, analyst]

This is Gil Garcia from Barclays. I had a question on loan growth in the quarter and then a couple of quick follow-ups, if I may. You obviously had very strong growth across the board, including your core segment. I was a little surprised to see such strong growth in financial institutions, it seems a couple of billion pesos compared to the previous quarter. Could you comment on what drove this strong growth? .

[Edgardo del Rincón Gutiérrez, executive]

Yes. Gilberto, thank you. We have several financial institutions that are related to the Agro business and also some important leasing companies that have a very good presence countrywide. So I think the growth that we saw -- and in the Agro business, we had an important seasonality in the fourth quarter. So that is the main reason of the growing financial institutions.

[Gilberto Garcia, analyst]

Okay. That's clear. And then on -- a follow-up on your NIM sensitivity. Your expectation for this year is a little bit lower than the average that we saw in the fourth quarter, but you're still projecting a rather sizable improvement in the NIM. You talked about the measures you're taking to reduce your sensitivity and the improving mix. I just wanted to confirm -- just in addition to those 2, there is an element of a lag, right? When the rate goes up and when your customers start paying a higher total rate. Is that correct? And if so, can you comment on what that lag is?

[Luis Quiroz Hernandez, executive]

This is Luis Quiroz speaking. The lag is very quick, as you see -- as the portfolio is in variable rate. The repricing is in less than a month. And also, the deposit is very similar. So in a quarter, the lag that you will see is by the time the interest rate is high or is lower by the time the quarter ends. But the lag it takes for the customers or for us to start paying to the deposits -- to the loan is very quickly. So there is no lag in the 2023 or there is no sizable effect from the lag of the repricing in both the portfolio and the deposits.

[Gilberto Garcia, analyst]

Okay. So then it's fair to say that the bulk of the improvement you're guiding for is from the improving mix and from the measures to reduce the sensitivity, right?

[Luis Quiroz Hernandez, executive]

As of now, the guidance that we released to the market has this improvement in mix, as you mentioned correctly, but there is also an improvement due to the sensibility, which is positive -- still positive. And it's considering this current sensitivity that we have right now of 34 basis points.

[Gilberto Garcia, analyst]

Okay. And then my last one, if I may, on competitive dynamics. You talked about how you're not going to fight on prices. And so I was wondering if you had any thoughts on the announcement last week by Banorte about adding about 1,000 new bankers and whether that has some impact on your loan growth guidance for the year, which seems a little bit modest, I guess, compared to what other banks have said so far.

[Edgardo del Rincón Gutiérrez, executive]

Yes. Thank you. We have been doing that already. We have been reinforcing, for example, the organization in the metropolitan area that I think we talked about in the last -- in the latest call. We've made an important investment with a larger organization with a new regional director in the Mexican state, reinforcing both the organization at the senior level, but also the commercial organization and the number of bankers.

Also, during 2022, we reinforce also the consumer organization in all the different regions in which we operate, that we are talking about 14 different regional directors. So we'll reinforce that, and that is bringing the right number of bankers. And in many cases, we are growing in that regard during 2022.

Also, of course, because of the level of growth that we are having in consumer lending, we have been reinforcing different areas like customer service and collections and the origination area in the corporate facilities, and in general, growing the number of bankers in different regions. So the total growth in headcount for BanBajio last year, it was about 370 colleagues -- new colleagues in the bank.

So I mean we hear about the announcement of Banorte, and I think we have the right size and capability to compete very well.

[Operator]

Our last question today comes from [Juan Patino].

[Unknown Analyst]

I want to ask you about the some -- few questions. The first one is related to -- I want know what initiatives or projects you have developed or what measures you have taken in terms of diversification of the credit segments of the company and maybe geography? For example, what percentage do you expect that consumer credits represent in your loan portfolio in the near future. And the second one is, how do you evaluate the health of the consumer in Mexico?

[Edgardo del Rincón Gutiérrez, executive]

Thank you, [Juan]. Yes. I talk about the -- all the different strategies that we are, I mean, executing for the past few years to change the structure of loan of the loan portfolio, not only with consumer, but also growing faster in SMEs, in the new parametric loans that we have been executing in the last couple of years. So I don't want to repeat that. But the idea is to continue growing a very fast pace the consumer portfolio. Today, that portfolio is 2%, and we will try to grow up to 5% of the total portfolio in 2025. And we are including in that, not only the consumer portfolio, but also the Parametric loans for SMEs in that 5%, because it's activity we didn't have before. So this is something really new for BanBajio. So I think we can grow in those portfolios at least 25% annually without any problem.

Regarding geography, our main growth is coming from the Bajio region in which we have, of course, a very good presence, but also in the north of the country, in general, both in northeast and the northwest, but also in the metropolitan area. We are growing very well in the metropolitan area, including not only Mexico City, but also the state of Mexico, Hidalgo and Morelos, we are going very well in that sense in that geography. So we will continue with this strategy, bringing -- improving, let's say, the loan portfolio and having different sources of revenue. And the idea, of course, is not only growing in loans, but really building a stronger relationship with those customers with cash management products, et cetera. And so that is the idea.

[Unknown Analyst]

And the health of the consumer in Mexico?

[Edgardo del Rincón Gutiérrez, executive]

Yes. Thank you. In our case, more than 60% of all the new accounts, for example, in cars, personal loans and payroll loan, is cross-sell. So those are our customers that, first, they open a DDA account, a Conecta account, and then once we know very well the behavior in the account, but also the credit history of those customers, now we have all that information, we cross-sell our products. So that's why the NPL you are seeing today in all the consumer portfolios of BanBajio are much better than the average NPL that we are seeing in the system. That is the main reason. And we are planning to continue with that because we are growing very well in new customers. So the capacity to cross-sell will continue growing.

Until today, in the system, we don't see any important deterioration in the system as a whole. That would be different player by player, but in our case, our -- one of the main pillars in our strategy is to continue having very good asset quality in all the different loan portfolios that we are doing -- that we are working on. So that includes, of course, companies and what we call Banca Empresarial and SMEs, but of course, it's the same strategy for the consumer portfolio.

[Operator]

Thank you. We have not received any further questions at this point. So that concludes our question-and-answer session. I would now like to hand the call back over for some closing remarks to Luis Quiroz.

[Luis Quiroz Hernandez, executive]

Thank you, everyone, for connecting. Happy start of the year. We will see you when we report the first quarter results. You may now disconnect.