Grupo Financiero Banorte SAB de CV

BMV:GFNORTEO

Earnings Call Transcript 2020-Q4

[Tomás Lozano, executive]

Good morning. I am Tomás Lozano, Head of Investor Relations, Financial Intelligence and M&A. My best wishes to all of you in this new year. Welcome to Grupo Financiero Banorte's fourth quarter earnings call.

Today's presentation may include forward-looking statements that are subject to risks and uncertainties, which may cause actual results to differ materially. We ask you to take this into consideration.

I would like to thank you for answering the survey. The information you provided is very useful for us in order to improve our presentation and information. We are adopting this new platform and more efficient communications.

Our CEO will provide highlights of the second partial lockdown in Mexico and the measures that have been implemented at the group to face these new challenges. He will guide us through the main financial results, and we'll provide an update on our main ESG initiatives. Then, Rafael Arana, our CFO [indiscernible] further detail on quality and will provide financial and operating results. To conclude our call, we'll give you some [indiscernible]. Thank you.

Marcos, please go ahead.

[José Marcos Ramírez Miguel, executive]

Thank you, Tomás. Good morning, everyone. I wish you all a safe and prosperous 2021 and thank you for joining our call. The fourth quarter of 2020 was marked by recovery, but different sectors in the economy adapted to the new normal and buy optimism are whole as the COVID-19 vaccines proved to be successful and now distribution was put into action.

Unfortunately, this increased activity unleashed a new wave of contagion and partial lockdowns were once again announced in Mexico City and in other states of the country during the last weeks of December. The daily number of new cases have surged, and death tolls have suddenly reached a new high, hospitals [indiscernible] are at full capacity, forcing activity to take a step backwards.

However, this does not mean that we are back to where we started in March of 2020. We are definitely better prepared than before to cope with this situation, both as a society and definitely as a financial group. Business across different industries have come up with new and creative ways to stay ahead of backlogs. Some reinventing the business model and some others still fully adapting to this new normal.

Restaurants have increased home delivery and adapted their venues to make them take out timely. Many of them comes and go into digital apps such as Carape and Uber Eats, enabling them to take online orders to their growing customer base.

Many retailers have strengthened their online shopping facilities and now offer in-store or pickup services.

At home, most of us have overcome the learning curve and are now well-versed in video calls and remote teamwork. Therefore, productivity will not be compromised again for most businesses.

At Banorte, we have also become stronger and have remained closer to our customers through enhancement in our mobile app, which provide more ways for our customers to fulfill most of their banking needs with less dependence in our branch network and promoting the use of our digital channels to new and existing customers alike. Rafael will provide more details on our digital initiatives in a few moments.

On the macro level on Slide #4, there are also several counterweights that will help Mexico and Banorte to weather this continued challenge and foster growth. Our most recent GDP growth estimates points to a 4% recovery in 2021. The new fiscal stimuli announced by the U.S. government is expected to fuel its economic recovery and also help its closed commercial partners. Manufacturing supply chains linked to the newly revised North American Trade Agreement will ensure steadily export demand for this sector. Moreover, the U.S. near-shoring strategy has both increased foreign investors into Mexico and away from China.

Stronger U.S. economy will consequently translate into stronger remittances, which fortunately did not stop during 2020 and are a key driver of economic activity for our country. In the domestic front, Mexico Central Bank has sufficient leeway to increase monetary stimulus, if required. Our economic analysis team forecast a 50 basis point to cost in the reference rate during the second half of 2021.

Furthermore, the government has announced a 15% minimum wage increase in 2021, which will also fuel economic activity during the year. All together, these measures should outweigh the challenges brought by the second wave of contagion and by other relevant events during this year.

In June, Mexico will go through midterm elections for Congress and several state governments. This is why we have heard and will continue to expect regulatory noise and different political players try to stand out throughout their political race.

As of today, some regulatory initiatives have been postponed, such as the one related to the U.S. dollar buybacks by the Central Bank and some others have not seen traction whatsoever, such as some isolated efforts to lower fees or regulate interest rates for financial institutions.

From the bank perspective, we have also implemented immediate actions to tackle with these new challenges. In order to guarantee a safe environment for our customers and employees, we have instructed that all business areas that have been working from home to continue to do so until further notice. Cost and communication regarding preventive measures and close monitoring from our medical staff as to ensure timely treatment and isolation of suspicious and confirmed cases.

In light of the new lockdowns, we will make a more efficient use of our branch network in the most affected cities, increasing the number of shifts and lowering the staff in our branches. We will also temporarily close a reduced number of branches in locations where all other nearby branches may absorb customer traffic without compromising availability and compromising operation.

Moving to Slide 5. From a balance sheet perspective, we decided to shield it from the effects of the COVID-19 by announcing, as you know, an additional $2.4 billion provision charge, totaling $7.3 billion in additional provisions during the 2020. Similar to what we did in the second quarter of 2020, out of the $2.4 billion that were rated in December, $2 billion were booked at additional loan loss provisions and $0.4 billion were used to fully write off certain commercial and credit capital portfolios that were already partially provisioned. With these measures, we intended to concentrate the effects of the pandemic in our 2020 results and to have a stronger balance sheet and a normalized cost of risk during 2021.

Have we not used parts of our additional provisions to write off existing portfolios, the total amount of provisions will have been close to $25 billion, well above the 3-year average.

Moving on to Slide #6. In order to better understand the sufficiency of our loan loss provision state, I would like to show you the breakdown of our loan portfolio and the degree of expected loss associated to each segment.

As you can see, our largest portfolios have a relatively low expected loss. And our consumer portfolio, which naturally entails a higher rate, is well diversified by product type with credit card accounting for roughly 1/3 of this portfolio. Our commercial and corporate portfolios have a similar profile with SME customers, which currently the highest expected loss within this portfolio, accounting for 11.2% of the total commercial and corporate segment or 4.7% of the total loan's portfolio. Last, but not least, our government portfolio, which accounts for 20% of our total loan book, has historically had the lowest expected loss.

On Slide #7, net income for the quarter totaled MXN 10.5 billion, which includes the effect of the additional provisions booked during the fourth quarter. Excluding this effect, recurring net income amounted to MXN 35.6 million, up 1% versus our 2019 results.

Regarding profitability indicators, these were consequently affected by provisions. The group's ROE totaled 14.8% for the year and with recurring results, 17.1%. ROE for the bank totaled 16.7% and 20.6% when using recurring results.

On Slide #8, we look at the main revenue lines for the group, where I would like to highlight the solid net interest income growth during the year despite a 300 basis points decline in the reference rate during the period and the adverse conditions brought by the pandemic.

Fees on Slide #9 has relevant quarterly rebounds, driven by a more dynamic economic activity. Holiday shopping and seasonal sales during the quarantine boosted transactions during the quarter, with POS and mobile leading growth and getting to a solid 16% quarterly increase in net service fees.

Regarding loan growth in Slide #10, despite the more conservative risk policy across our portfolio, the main growth drivers for the quarter and the year were mortgages and auto loans. Our commercial and corporate portfolios also had a solid performance as several customers use liquidity lines to overcome the segment dynamics in many relevant sectors during the low months of the pandemic.

At the end of 2020, the vast majority of our relief programs came to an end with better-than-expected results. Rafa will provide more detail on these programs. Regarding asset quality, NPL numbers were temporarily low during the life of their relief programs. And as expected, they have already started a gradual increase over day normal average pre-COVID-19 level. However, cost of risk is not expected to peak during 2021 as all this impact of additional provisions was registered in 2020.

On Slide #11, we can see the loan growth effects on market share by product in 2020. Market share base for our total loan portfolio was driven by sound performance in commercial and corporate as customers in these segments use liquidity lines to meet their operating needs. As mentioned before, mortgages and auto loans were also essential components of our growth strategy, with a more selective risk criteria in our unsecured products such as credit cards and payroll loans.

On Slide #12, I would like to highlight the benefits of business and diversification within the financial group. Our nonbanking subsidiaries accounted for over 34% of the group's net income during the quarter. And accumulated results for the year were also relevant. The insurance business was impacted by higher claims in the life and health portfolios during the fourth quarter. However, it benefited from lower out of lines as traffic reduced during the lockdowns. The sound performance of the annuity portfolio was primarily driven by the acquisition of the SURA portfolio, as well as viability and cost control strategy implemented during the year.

[indiscernible] benefited from the market effect in each asset valuations. Moreover, it increased its assets under management by 4% during the quarter and by 15% over the year.

As mentioned during our last conference call, on the Slide #13, you will find the most relevant updates regarding our ESG initiatives for the group. On the environmental side, Banorte received awards for its collaboration with one of the most relevant reforestation projects in the country called Reforestamos Mexico, as well as for its participation in a sustainable mobility initiative in Mexico City and Monterrey.

On the social arena, we are proud of our participation in more than 68 financial education workshops to over 6,500 beneficiaries across 15 states, covering relevant topics such as financial awareness, family finances, savings, digital banking and investments. We have added an ESG appendix at the end of this presentation with additional details on the quarter evolution of our sustainable finance loan book evaluation and our project evaluation under the Equator principles.

With this, I conclude my remarks, and now Rafael Arana will provide further insights into our loan relief programs, new evolution and will walk us through our 2021 guidance. Please, Rafa, go ahead.

[Rafael Victorio Arana de la Garza, executive]

Yes. Thank you very much, Marcos, and thank you all for being on the call. I would like to run some specific issues that has been of concern to our investors and noise about what's exactly the situation that we are facing concerning the relief programs, the clients that are out of the relief programs and all the initiatives that we are taking in order to guarantee that we provide as a guidance for you.

As you can see on the slide that we are providing, we basically under a very specific actions to continue to provide the sufficient strength to our balance sheet, to our income statement and also to be quite prudent on the loan growth, but at the same time, to have a reasonable loan growth. So the loan growth, as you can see, and Marcos just provide you the information, we were able also to gain market share in most of the products. The net interest margin on the book, as we can see in a minute, continue to be quite resilient. The capital numbers continue to grow and be a strong as they can be, well above our peers on also in quantity and quality of the capital expenses are well under control, and I will run you into some specific issues about expenses that we did in the fourth quarter of '20.

But I would say that overall, I would say that the balance sheet continues to be as strong as it can be. The capital base continues to grow. These expenses are under control. And the provisioning and all the release programs that are mostly done by now, confirm us what we basically did on the second quarter of '20 about the provisions, additional provisions that were more than enough at that time. What we really consider when we see the second wave during -- especially Mexico City and other parts of the country, that it will be prudent for us to raise another number of provisions, not because we saw that there was an immediate need to do so, but we need to manage risk. And at that point in time, we see that the risk was increasing, especially we expect to have some lay on some of the companies in January and February, so we anticipate that based upon on the second wave.

So moving into the next page. I would say that the relief programs are really behaving much better than expected. As you can see now on the numbers that we are basically done on the relief programs. Basically, the initial numbers of 630,000 clients are -- that joined the program, 99% of those have finished programs of the nonpaying accounts, and I'm talking about accounts is around 11 -- from 10% to 12%. But what is relevant to see is what this really means compared to balances and what this really means compared to the overall sides of the loan book of Banorte.

If we compare this 10% to 12% of balance -- against the balances is 6% of the balance of the clients that joined the program, if you transfer that into balances, it's only 6%. And if you consider this 6% compared to the overall size of the loan book, it's 1%. So the relief programs prove to be quite efficient to temper out deterioration of the pandemia and also to support our clients through the cycle. So this is mostly done, and now we are basically working with that 6% balances that we need to keep working with them through the collection department. I think we are doing a pretty good job also there, providing the right relief to our clients. And also building up the additional provisions that we need to do so.

So there were some concerns about what we needed to raise additional provisions was basically as a precaution, not because of the provision that we build on the second quarter was not clear enough based upon what we see and the information that we currently have. But I think it's better for us based upon that, we don't know exactly the lockdown on some of the cities will stay. But we found also is to what Marcos mentioned that the second lockdown is, in a way, much better managed by companies, by clients, by everything. So activity has obviously reduced a bit, but not as in the first one.

So we are quite surprised about SMEs, the behavior of SMEs. Basically, the main deterioration that we have seen, as it was expected, and that was the way that we build the provisions on the second quarter was related to basically credit cost. But as you know, is usually the product that you share with other banks and where the risk could increase easily through the cycle. So very good numbers on the relief programs, the 1% to the total loan book, 6% of balances and 10% to 12% on number of clients.

Another issue that we have been following very closely with our investors and analysts is, what's the behavior of the margin? And also, what's the increase of the margin on the loan book, and what's the behavior of the cost of funds compared to our peers.

As you can see in the graph to the left on the blue lines, basically, we continue to drop the cost of funds at a faster pace that are -- than our peers. I think we still have room to go further down on this, and we will push out in '21 to continue to reduce the cost of funds at least around 20 basis points.

When you see the net interest margin of the loan portfolio has moved from 8.2% to 8% compared to a decrease in rates of close to 242 basis points, so I think has been a resilient portfolio based upon the fact that we have close to MXN 300 billion in a fixed rate portfolio that has behaving quite strongly through the cycle.

As you can see also on the graph to the right, we continue to modernize the pricing on the yield on the portfolio quite efficiently. If you compare the decrease in the rates from 11.8 -- 11.9%, that was the peak, to 9.3%, we have increased also the yield over the portfolio compared to the reference rate, almost 206 basis points. So I think that has been, in a way, the results where you see the mean of the portfolio. This is because of the margin of the pricing of the portfolio and also on the fixed rate part of the book.

When you look at the NIM, and we have been separating the NIM of the group and the NIM -- and the net interest margin of the bank. I think the reference rate, as I mentioned it to you before, is dropping 260 basis points. The group NIM reduced from 5.6% to 5.3%, where you have the insurance, the pension company, the annuities. But when you look at the bank's NIM, that is really our main concern when you see the effect on the rates and how you are really managing your pricing on the yields. The bank NIMs continue to be extremely resilient at 5.8% in the second quarter, in the third quarter and the fourth quarter based upon what I just mentioned in the past slide. So the NIM continues to be steady. We will talk about a bit in a minute about what's our projections for the next year. And it's important to separate the NIM of the group and the NIM of the bank.

Yet another good story is the reduction in the sensitivity on the balance sheet due to the extremely good work about the treasury, the risk people, the market guys and everything that is related to planning and in accounting. So we have been reducing the sensitivity from 100 basis points to -- that was close to MXN 1 billion at a point in time to a close to half in the fourth quarter of '20, and we continue to work on that. And I think we continue to see good potential and continue to reduce the sensitivity of the balance sheet.

The expense line, and I'd like to be very clear about what's happened on the expense line through the year. As you know, we commit the expense line to be around 4.8 by the year-end. But based upon the issues that we saw in the market and that we would like to accelerate what we usually do every year and generally, we accelerate the productivity process that we have every year that usually goes around 5% of our personal expenses. We started that in December, so we increased the cost line by MXN 460 million. That is basically for the severance payments that are going to happen through last December and through January. But expenses control, we consider that's going to be a key element in '21.

And we also see that the personnel expenses where you see the drop to 4.1 is basically due for what I just mentioned about that increase in the severance -- in anticipation of the severance payments. The remaining are related to basically all the expenses related to the operation of the bank. Nothing relevant. And we also are reducing a lot of the expenses related to physical assets that we have. That also will have an impact for the next -- for this year in the reduction of expenses in range and occupancy rates in many of the buildings.

The capital of the bank continues to be quite strong. You see a reduction from, let's say, quarter to the fourth quarter of -- from 21.1% to 20.2%, basically is the effect that we have on the extraordinary provisions. But as you see, the capital -- the core capital of the bank continues to grow nicely to 13.7% to 13.9%. We are not leveraging the capital at all of the company at all. So we are the least leveraged bank in the market.

And compared to the regulatory ratios, we are well above those, and we are not taking any waivers or temporary waivers concerning our capitals.

The dividends that we have mentioned in the past for '19 are fully funded at the group level. So that is hurting us in a way the return on equity at the group. And we expect to be able to pay the dividends of '19 in the first semester of '20. We need to work with the authorities in that. And I think we have proved that we have enough capital and we continue to grow our capital base. And if possible, we would also like to pay a portion of the profit of '20 in the same year. The payout ratio, as you know, for '19 was 50%, and the payout ratio that we were going to present to the assembly for '20 will also -- will be around 50%.

The liquidity ratio that has also, in a point in time, we have always have a concern about liquidity ratio because we know it's expensive to drive high liquidity ratios we're doing in here to rise that because of the conditions of the economy. We raised that to 194. I don't know if you think it's too high. So now that we have all the liquidity lines in place and the economies is becoming much more stable, you will see in the coming quarters, our reductions to normal to the -- to the liquidity ratio, that it will be on the ranges from 135 to 145. That also will help our net interest margin in the coming months.

Now I would like to move into the guidance. And I know that there has been some concern about it. And in this time of a difficult process, what's the issue to grant the guidance. But I think we commit to the Board yesterday, our budget for the year. And I think since we've committed to the Board, now we have to commit to the market at the same level.

The loan growth, we expect to have a loan growth around 6% to 8%. We continue to see good growth in the mortgage group in the car loans book. Credit cards will regain its growth from a minus 8 to where it will regain its growth to 3%. We continue to see good growth in the payroll loans, not that we know exactly which companies are going to be more stable, so that's going to be a growth around 4%.

Commercial. Commercial will be around 6%, the corporate around 2% and the government book will grow 2% for an overall growth of 6% to 8%. With a good mix and with a solid growth and taking good care about the origination.

Then in contraction that we had talking here basically is concerning the bank. So we basically see a potential reduction of 5 -- 15 to 30 basis points. As you know, we have been telling the market that our goal was 5 85 and then ongoing to have around 5 65 to 5 70 on the net interest margin. I think it will be achievable because of all the issues that we are taking, and all the actions taken into the -- to reduce the cost of funds.

A very good issue on the -- on also -- on the NIM is that the strong growth that we have in demand deposits for last year also help us to accelerate the drop in the cost of funds and to sustain our margins for '21. Expense growth, we see 3.5% to 4.2%, with inflation rate around 4%. As I mentioned to you, part of this expense to growth is based upon the advances that were in the fourth quarter for the expense line to have a clean start for the year. And we're also working in a very diligent plan to have shared services integrated some of the back offices that were not fully integrated into the central teams that will allow us to have an additional reduction through the year.

The cost of risk, we see 2.1% to 2.3%, going back to normal. On the cost of risk, it's very important to note that you will see through the year ups and downs on the cost of risk based upon the sequence where you see the growth in the NPLs. And then you start applying that we charge-offs to lever look the numbers. And also, you will see a reduction in the coverage ratio that right now is at record levels based upon all the additional provisions. And that number should go down again to the 135, so please bear with us through the year that you will see ups and downs on this number with a number that we're talking here is a number that you should see changing through the cycle. And by the end of the year.

You will see right now, like, for instance, in credit cards, you can see NPLs jumping around 7.8 and you will start doing the charge-offs through the first quarter and turn that number down again to the 5.8 addition number. This is quite important because when you see that our cost of risk is 0.8 and then jumps to 1.1, then there are some concerns with some analysts that say, well, the cost of risk jumped 27%. I don't think that's the right way to see it because what you have to compare is to the normal and the normal is 2.2. This is basically in a way tainted by all the relief programs and things like that and more of the additional provision.

So -- but we are talking here is going back to the normal on the cost of risk through the cycle and through the year. Tax rate will stay as we have been 26% to 27%. The net income number, MXN 33.5 billion to MXN 35 billion, return on equity from -- for the group from 15% to 16%. And this is considering already the paying of the dividends. This is quite important to note the return on equity for the bank is from 18% to 19%.

GDP, we are considering a rate of growth of 3 to 4 , inflation 4% and the reference rate stay at 4%. If we see any drastic changes in any of the basic numbers, like the reference rate or inflation, we immediately will go to the market and advise any movement that we see on each of the guidance that we are giving to you. I think not many people were -- are comfortable for us to give a guidance, but I think it's -- this is our duty to, once we present to the Board to have the same information by the Board to the market.

[Tomás Lozano, executive]

Thank you, Rafael. With this, we conclude our presentation, and now we're ready for Q&A.

Let me quickly give you some comments on the logistics. Please raise your hand on the platform, and we will unmute your audio. Questions will be automatically ordered on the first-come first-served basis causing this and myself will be calling the name of the person whose turn is next.

If there are any technical difficulties, please let us know by using the chat. Thank you. We are now ready to start the Q&A session.

We will start with Ernesto Gabilondo from Bank of America.

[Ernesto María Gabilondo Márquez, analyst]

Can you hear me now?

[Tomás Lozano, executive]

Perfect. Thank you, Ernesto.

[Ernesto María Gabilondo Márquez, analyst]

My question is on asset quality. We saw the NPL ratio that went up as relief programs started to impact the 90 days past due. And in the last conference call, you were expecting the NPL ratio to deteriorate to around 2.2% in the second quarter of this year.

So given the NPL deterioration of the quarter and the potential impacts of the second wave, do you continue to see the peak at those levels? Or do you think it could be higher? And do you expect the reserve coverage ratio returning to the 135 that you mentioned in the second quarter?

[José Marcos Ramírez Miguel, executive]

Thank you, Ernesto. We feel very comfortable with our numbers now and up to date. I will ask Rafael.

[Rafael Victorio Arana de la Garza, executive]

Yes, I'll start, and I will ask Rafael to go on. I think to be precise about -- this is going to be on the second or the third quarter, Ernesto, based upon the last events of the -- it will be -- and I think a lot to ask about -- to be precise. What we can really commit is that the NPL ratio and it will be around the numbers that I just mentioned to you, and the cost of risk will be exactly on the guidance that we are giving. I think there will be some movements based upon this lag that we have seen based upon the second wave is going to be up in the second quarter and the third quarter. But we don't see that it will have any effect of the final number that we are committing to you.

And thank you for your question because I think I need to go back again to this to say, look, there's moving parts here. I think the overall trend that we see on the NPL and on the cost of risk is exactly what we anticipated on this. We have created additional buffer on the latest provisions there will be. But we are confident to reach the numbers that we will just give to you. I don't know if it's going to be exact in the second quarter or on the third quarter, but that will be the number for the year.

I don't know, Rafael, if you want to...

[Unknown Executive]

Yes. Sure, Rafa. Ernesto, I will say that we are, as always acting on metrics as much as we can. We have been following such factors as the GDP decline, the duration of the economic downturn, the peak of unemployment rate and so many factors, among others. We strongly believe that we are committed to a long-term perspective. However, some significant wild cards remain such as the emergence of the second wave, as you know, and the size of this second wave, the lockdown duration, the containing strategy successes, the impact of the fiscal or monetary stimulus and also therapeutic drugs and vaccine deployment advances.

So if you take that into consideration, what we have tried to do return provisions and with the level of the PDL ratio is to do a smooth transition between expected pluses and unexpected losses.

Regarding expected losses, they are already budgeted for 2021. And regarding -- or with respect to unexpected losses, we know we have enough capital to encounter tail risks such as a black swan type of risk. So if you look into consideration, the expected losses, we see that the provision default has increased, as you all know, exposure at default is the same. And also the board remains to be seen, but we expect it to be a bit higher than before. But all the loan portfolio has performed so very well as Rafa and Marcos have said regarding, for example, mortgage portfolios, autos or car loans and payroll loans, et cetera, that we remain very confident that the PDL ratio will perform within the interval that Rafa mentioned for cost of risk, for example.

So I would tell that these rationale behind the general provisions that we made on December is to provide clarity and visibility to all stockholders and stakeholders, both everyone involved in the Banorte business model.

In a nutshell, what we're trying to do is to be prudent, cautious and sensible with respect to the situation we're seeing. So we are providing priority and a market signal to the markets regarding these general provisions and the future behavior of the PDL ratio and the cost of risk. So we are very confident that we are performing within the interval that Rafael was just mentioned.

[Rafael Victorio Arana de la Garza, executive]

And in addition to that, Ernesto, [indiscernible] looking at the numbers that -- of the general numbers that we see on a collection on a daily basis, but we are looking at collections for January of '21 is the numbers that we are looking at the collection that we were having before the pandemia. So it's clear to us that the portfolio is leveling out exactly as we have before the pandemia. It seems that all the release that was provided to also our clients and now the level of activity that we are seeing in the market is really providing us the confidence to give you the numbers of the cost of risk.

Some people said about the extraordinary provisions in December. Let me tell you that basically, what that part of the provisions are is to assure you that those numbers will be achieved.

[Tomás Lozano, executive]

Now we will take our next question from Thiago Batista from UBS.

[Thiago Bovolenta Batista, analyst]

I have two questions. The first one about the guidance of ROE. When you look to your ROE guidance, it seems that you are considering a lot of payments of dividends. I know that Rafa, you already talked a bit about dividends in '21. But can you comment on how -- what are you expecting? So when do you believe, we'll be depot to pay dividends -- sorry. When we believe it will be possible to resume the dividend payments, if it's only the payments of the earnings of '19? Or if you can assume that some of the '20 earnings should also be paid, so if you can talk a little bit more about on dividends?

And the second question about the 6% of loans of the relief program does not resume the payments. Those loans are already in the NPL ratio? Or are you guys renegotiating those loans? So how you are approaching the clients that has not resumed the payments on the credit release program?

[José Marcos Ramírez Miguel, executive]

Thiago, the first one, to be honest, we still don't know but we are pushing and talking with the authority. We are getting closer. It seems that it's going to be, I hope during this first semester, but we still don't know, but it seems that we are getting closer. It seems that we're seeing now the pieces of -- we are -- it's going to be soon, but we cannot issue.

And the second one, please, Rafa?

[Rafael Victorio Arana de la Garza, executive]

Yes. Thiago, as Marcos said, we know that the U.S. banks and some European banks are now being allowed to have dividend and also buybacks will be announced pretty soon. So I think based upon the capital numbers that we have, I think we have a good story to go to the authorities and have those payments of dividends to happen on the first semester of '20. We still need confirmation from the authorities, as Marcos said.

And also, we will ask also to be able to pay if not all, a portion of the net income of '20 in the same year of '21. That will be our goal because we are just building up capital and that is just sitting there on that part.

The other thing that you mentioned about the release, and that is quite important to notice is that, that 6% that you see is being actively managed by our recovery unit, I think long before those clients start to become noncurrent, we started to work with them really on a very preventive basis once we see the flows on their accounts or the usage of the credit card. So what we do basically on those restructurings is we build up the provisions. We put on down the provisions, and we start working with them in order to be able to provide to them enough space for clients that they just need only space and time to regain and be back on their feet.

Let me give you an example. If you have a client that has a mortgage and has been paying for 8 years and suddenly have an issue with the reduction on the payroll, we work with them, on them and try to keep them current in a way. We restructure the loan. We extend the payment loans. We put down the provisions, but we are working actively in that 6%. That 6% is not a loss. That's very important to consider, okay?

[José Marcos Ramírez Miguel, executive]

I will add to what Rafa is saying is that we have several restructuring schemes, and we also take into consideration several risk segments. And that makes a tremendous difference regarding what the solution for those loans is going to be like payment discounts, like interest payment elimination, interest payment reduction, interest payment deferment, term increases and so forth. We do not have one size fits all type of restructuring here, even though this is retail credit. So please take that into consideration.

[Rafael Victorio Arana de la Garza, executive]

And also, I would like -- and this could be -- sound a little cocky about this, but we have, by far, the best collections unit in the market. We have been proving that for the last 22 years. And the way these people have anticipated working with the risk people, the product people in order to provide to each client at the specific program that they need as it has been outstanding.

[Tomás Lozano, executive]

We will take our next question from Geoffrey Elliott from Autonomous.

[Geoffrey Elliott, analyst]

Maybe just very quickly on the dividend, to clear that up, and then I've got a more detailed one. Can you tell us what assumption you put into the ROE outlook? I guess the ROE is, in part, a function of what dividends you're going to pay out?

[José Marcos Ramírez Miguel, executive]

Rafa?

[Rafael Victorio Arana de la Garza, executive]

Yes. The payout ratio that we have been saying for '19 is 50% and the payout ratio for '20 is 50%, also that could be a space for also an extraordinary place if it's feasible for that, that's the assumption that we are putting here.

[Geoffrey Elliott, analyst]

Got it. And then on the productivity initiative and the charges that you took in 4Q, can you give us some more detail on what the changes that you're making there, how you're going to improve efficiency going forward by taking these charges?

[Rafael Victorio Arana de la Garza, executive]

Yes, happy to do so. So let me give you exactly what we are doing now. As you know, Banorte is a very well diversified financial group. So we have the annuities company, the insurance company, also the leasing and factory. And in a way, we have been working a lot in the -- at the bank level to integrate and reduce costs and costs and costs. But now we are moving also into those companies by integrating all the back-offices functions to the already existing functions at the bank. So all the HR company to 1 unit, all the fines, all the -- basically, HR, everything, security, a lot -- some of the issues in technology are also coming into the central units, fraud prevention, everything is coming to a centralized unit. So we are integrating everything into our shared service type of operations. That I think we can move from the current 5% reduction in expenses that we gained to that MXN 460 billion -- million on December. I think we could rise that to maybe 2 percentage points more based upon these shared service initiatives.

[Tomás Lozano, executive]

We will take our next question from Jorge Kuri from Morgan Stanley.

[Jorge Kuri, analyst]

Thanks for the detailed guidance. Very helpful, especially [indiscernible]. My first question is on the margin sensitivity. In your slide, page -- Slide 19, it shows that, on a quarter-on-quarter basis, it's been increasing from 428 in the second quarter to 561 in the fourth quarter. What explains that increase over time? And how will you reduce that number going forward? How much of this is just hedges that expire? And then eventually, you get the full impact, but just trying to understand your comments that you can actually get that number to come down further. That's my first question.

Second question is on fees. And I know you already did a lot by providing guidance on so many metrics, but if I can ask, what's your view on fees, which was not included in the guidance number? Down last year evidently because of what happened, but how rapidly do you think it can recover? And at what level is sort of like a mid- to high single-digit a reasonable number for this year?

[José Marcos Ramírez Miguel, executive]

Thank you, Jorge. Rafa, please go ahead.

[Rafael Victorio Arana de la Garza, executive]

Yes, Jorge. I think it's quite important the question that you asked about the sensitivity. The numbers that you see basically has to do with valuations and with the movement on some of the positions that we have in pesos or dollars. So I think the number that you should be looking at is a sensitivity around MXN 500 million that number should be there. There's a potential improvement on that number based upon -- because the funding part, as you know, the deposit sides basically are a part of a natural hedge that we see -- that we have. Since last year, we have a very strong growth in demand deposits, as you saw, 22% overall growth in funding was 13%, but demand deposits grew close to 22%.

As you know, we provide that information to the authorities based upon the how stickier deposits are and based upon specific models that we have in different tranches that considers and becoming an natural hedge. So the more we increase that numbers in each of the buckets, we have an additional natural progress on that. Also, as you mentioned, the cost of hedges has gone down quite substantially on that. And the number that we think that we should aim based upon the size of the balance sheet and based upon the speed of the potential decreasing in rates is around MXN 500 million. So I think that would be a very good number to achieve. Maybe we can reduce that based upon this funding strategy that I just mentioned to you. But I think that would be the number for you to go.

The other thing that you asked about the fees, if you remember the graph that Marcos shows you on the fees side, we see already a recovery in the fourth quarter on the fees. So the fees that you should look for this year is from 7% to 9% fee growth based upon the numbers that we have on the last quarter.

So I think the most important part on the fourth quarter and the third quarter was that we finally recover from the decrease that we had in the first semester, and we have a very strong recovery.

If you look on a quarter-to-quarter basis, it goes up to close to 16% growth on the fee side. So I think these are digitalization of the economy and the position that we have by being the most -- the #1 acquiring on digital transaction is allowing us to keep pushing fees up. So I would say that that's basically -- and I can give you a very -- also how efficient we are doing the balance sheet coverage with cost on the hedging cost of the balance sheet when we were talking in the -- like for instance, in '16, it was around 60% of the balance sheet was covered -- was hedged with cost. Now we have 2% of the balance sheet hedged with costs.

So I think what you can see, I'm happy to provide to you and to all this table. We have been able to really manage the balance sheet in an extremely efficient way, not just because of the cost of hedging the balance sheet and the sensitivity, but also the margin for the balance sheet that we have in '16 was 11.2% of the margin on the balance sheet.

The margin that we currently have on the balance sheet in '20, based upon all the reduction in rates and things, is 11.3%. So I think we have been doing a very good job in managing the balance at about this and the sensitivity on the balance sheet.

[Jorge Kuri, analyst]

If I may add a follow-on question, sorry. Your year-end reference rate, 4%, if we end up at 3.5% or 3% for the end of the year, how much can you still manage the balance sheet so that you get, maybe closer to that minus 30 basis points or you would really have to rethink the NIM contraction to higher levels than what you have?

[Rafael Victorio Arana de la Garza, executive]

I think that's the million-dollar question. But I think the fact that the reduction in the funding side will also be quite aggressive. And the size of our fixed rate portfolio, I think we can stick to the number that are -- even though if we see an additional reduction in that. Because I think the reduction will happen in the second quarter of the year -- in the second semester of the year. So on the other side, I think we will be close to the 4%.

[Operator]

Now we will take our next question from Jason Mollin from Scotiabank.

[Jason Mollin, analyst]

Again, on dividends, you mentioned 50% payout ratios in 2019 earnings and 50% in 2020 earnings, which -- it's not far from our estimate in the 40% range. But in the guidance, you also mentioned you incorporated these payments for the 2021 ROE. So I'm imagining that, that probably the timing of that, do you have both of those payments in the first semester? Or are they spread out more evenly during the year in this calculation?

[Rafael Victorio Arana de la Garza, executive]

So I think the first one, Jason, the '19 payout, we expect to happen on the first semester as soon as the regulator will allow us to happen. And the second one, the portion of '21 -- of '20 in the third or maybe at the beginning of the fourth quarter.

[Jason Mollin, analyst]

That's helpful. Also on the regulatory front, how does Banorte assess the risk and the impact of potential interest rate caps and fee limitations? Do you think this will be part of the discussion during the midterm elections?

[Rafael Victorio Arana de la Garza, executive]

Okay. But we have to be very, very -- I think noise will continue to be there, because I think it's a very popular thing to talk about, interest rate caps and -- but the fact is that there's a very simple way and a discussion about that, that really has been turning down all these initiatives. Competition in Mexico is extremely aggressive. And I think you can see that on the mortgage book, on the car loan book how aggressive the market is. You can also easily see that on the government book, how the spreads have been going down on the government book. And the same happens on the corporate and the commercial.

So I think that if they try to do anything compared to the interest rates, they will eventually disappear the midsized banks that doesn't have a strong funding base. And so I think that will be very bad for already an extremely aggressive competition in the market.

On the fee side, there has always been the saying that Mexico charges more than other parts of the world. We have presented those numbers to the authority, and those numbers are well below when you compare us to any developing market and also on developed markets.

So I think that noise is quite popular. It will come a lot through based upon the elections. But I think reality is that competition shows that interest rates are where they need to be and fees are moving down based upon the fact that the digital economy is taking over and you are basically changing physical fees by digital fees that are already below the physical ones.

So I honestly don't see any reason for that. And believe me, that will put a lot of pressure for some of the midsized banks based upon the funding -- on the funding base of those.

[José Marcos Ramírez Miguel, executive]

Having said that, we will have and we'll continue to see regulatory noise, because the political players try to expand out to their political race. But Gabriel Casillas wants to talk about this. Gabriel, go ahead, please.

[Gabriel Casillas Olvera, executive]

Thank you, Marcos. I believe that what Marcos and Rafa mentioned, Jason, it's the most important part. Competition is the key factor. However, let me just mention again, remember that we have been talking about how AMLO, our President has been sticking to what he wrote in his books. The book he wrote before the elections, The Exit, that's the title. And the other one towards a moral economy.

I mean he has been speaking to reps all the time. Even during the worst recession since 1932 last year, he sticks to a plan: fiscal austerity, social programs, and the infrastructure programs has been envisioned. So in this context, we do not expect him to really -- I mean, separate from what he has pointed out in his books. And he didn't mention anything about putting any caps on interest rates.

So I think we're back again on what we have been saying that we can hear a lot of noise, as Marcos and Rafa mentioned, from legislators, but none of these initiatives will go through as long as they are not part of AMLO's program. So I think this is 1 thing that could -- that despite the noise, we could be very comfortable with.

[Operator]

We will take our next question from Alonso Garcia from Crédit Suisse.

[Ricardo Garcia, analyst]

My first question is on asset quality and provisions. I mean you have a 6% already ratio in your repo file portfolio, only 1% of total loans. And you mentioned in your report that you have -- in the fourth quarter, you have only used 14% over the MXN 5 billion of additional provisions that you have created.

So I'm just wondering if you could be overly conservative on this front. And if you think that at some point in the year, a release of provisions could be probable or if that's completely out of the question in your view? I know it's early to -- probably, but I just wanted your thoughts on that point.

And my second question is, if you could comment on your sustainable ROE for the group. And what would be the timing for converging to that level?

[José Marcos Ramírez Miguel, executive]

Thank you, Alonso. Rafa, please take this.

[Rafael Victorio Arana de la Garza, executive]

Alonso, as you saw and this happened in the U.S., when you saw the reports of all of the large ones in the U.S. but they start releasing the provisions that they anticipated on that. I think the way we have been working on this, and this is working with other recurring units and with risk, is that we are just using the provision, the extraordinary provisions for the COVID deterioration of our program. And up till today, as you say, it's just a portion of that. If the portfolios continue to perform in the way they have been performing up to today, we see that maybe we need more than enough and a potential release of provisions could happen through the cycle.

I don't know exactly what will be the number, also when that will happen. But I think based upon what we are looking at and based upon what we see on January on the collections department, I think that's a possibility, yes. Basically, what we did on the MXN 7 billion provisions and charge-offs that we anticipated is to pay upfront the cost of risk for '21 in order not to think '21 with any remains of '20 uncoded. That's basically -- but that's a possibility. Yes, Alonso, that's a possibility.

The sustainable ROE for the group. And I think we -- you see that we will release our new guidance for '21 to '23 that will be coming pretty soon. And -- but I can anticipate you that we see the bank on a sustainable ROE around '23 around -- from 19% to 20%. And I think the group should be from 17.5% to 18.5% recurrent ROE around that point in time.

[Operator]

Now we'll take our next question from Yuri Fernandes from JPMorgan.

[Yuri Fernandes, analyst]

Good morning, everyone. I also have 2 questions. First one on expenses. You mentioned in the call also that part of the increase in personnel expenses was related to some severance package that you should implement in December and January. So my question is, if you're anticipating major decrease in branches, employees, like what is the call for 2021? I'm pretty sure this is in the expense guidance, but just on these more qualitative discussions.

And also, if you can discuss on expenses for the quarter, we saw professional fees, rent and amortization growing very quickly on a quarter-over-quarter and year-over-year basis. If you can provide some more color why that happened, that would be interesting as well.

And my second question is regarding fees. It's clear. The guidance for 2021, the 7% to 8% you mentioned. But for the quarter, specifically, we saw the inter change fee cost line. So the fees you pay, growing very quickly, growing like 25% year-over-year. And it's not clear for me, what is the line on the revenues that is offsetting those costs, I guess, electronic banking services maybe is the line that should be reflecting the increase on your card transactions.

But my point is, was any change on interchange fees in Mexico, why expenses are growing slightly higher than revenues?

[José Marcos Ramírez Miguel, executive]

Rafa?

[Rafael Victorio Arana de la Garza, executive]

Yes. Let me go to the last one, because I think it's quite important. What we have in the fourth quarter is basically a very strong pickup on our car sales and the mortgage sales. And on that, you have to pay fees based upon that origination process because many of those happen right at the dealers and right at the -- where the houses and buildings happen. So -- because there was a very low activity in the second quarter, you see a big pickup on the third and a very important pickup on the fourth. And also most of the payments that were due also, and that will move to '21, we are already paying '20 in advance for that in that part.

So that's basically -- we see that offset on the origination fees based upon the -- basically on the mortgage side and on the car loan side, that was basically where those -- see those 2 numbers move is basically when you take that on the returns on the margin that you get on that part. And on some of the fees that you collect from the clients on the mortgage side and on the car loan side. But the fact is that we never anticipate such a large pickup in that part. And we also anticipate some of the payments that we see on the trends that we usually pay in 30 days or 45 days, we anticipated in December.

So that's the first one. In the fees, if you go down into the fees, you will see that a very strong pickup on the fees, what we call the transactional fees that are coming basically from the digital POS and some from the physical POS from the activity on the credit and the debit card. And also on the transaction of bank -- banking on fees coming from remittances. So I think we have a strong pickup on that part.

But on the cost side, it's basically that pickup in the origination that happened at the end of the year and some anticipation that we have.

On the branch network, I don't think -- as you know, we haven't had any growth in the branch network for the last 2 years. And we will relocate 32 branches this year, but we will close 32 branches also. So where we see a reduction in expenses is on physical assets range that we used to have in very -- I mean, the size of occupancy rates for our buildings is going down at least 40%. So that will be a part of the expense reduction that we will see through the year.

And we are also looking at -- as you know, we did a leaseback on some of our buildings on the past. We are also looking to see if we repurchase those because of the price that we see now on the market and the benefit for us based upon when we leaseback those buildings.

But that's basically it. I don't see that happens in the branches. So the professional fees basically has to do related to all basically origination, collections, restructuring that's happening in the fourth quarter. And remember that usually, in the -- fourth quarter do end up closing all of the groups. And they were -- because of also on the pandemic delay in some of the collections and some of the invoice presentations that happened through the year. So I think the fourth quarter is -- it was a strange quarter on that -- on those lines. But what I can say you is that on the fee page, it was based upon the activity that we have on the car loans and on the mortgage and also on the credit and debit cards, but basically for building up the business. And we anticipate also some of those payments to the dealers and to the brokers in the mortgage houses to anticipate some of the payments in general.

[Yuri Fernandes, analyst]

So I guess like the bottom line here, if I may summarize, is that you anticipate a lot of expenses. It's not only about loan loss provisions, but on the fee side, on the expense side, things have been much more behaved in 2021?

[Rafael Victorio Arana de la Garza, executive]

Exactly, right. Yes, I think we wanted to plan as much as we can in '20 for '21.

[Operator]

We will take our next question from Carlos Gomez from HSBC.

[Audio Gap]

[José Marcos Ramírez Miguel, executive]

Rafa, can you take the first one?

[Rafael Victorio Arana de la Garza, executive]

The first one, basically, I think -- and thank you for the question, Carlos, because as I told some of your colleagues, it's difficult to see the exact conversions of the numbers. But what you should see is when we are trending to the normal, and the normal is the 2% to 2.1%, 2.2%, I think you will see that on -- trending to that number. So when you see that the NPLs go to 1.8%, don't think that we have double the deterioration of the portfolio. It's basically that -- basically, we are going back to the normal numbers that Banorte has been running for the last 4 years. I think that's the key message from your question.

When that will...

[Audio Gap]

No. It doesn't have to do with the allowances from the Central Bank or the GMBD. I think it's just the dynamics of the loan book that is showing, Carlos. But I think you will see in the second quarter, a lot of conversions to these numbers on this part.

And what you mentioned about that we reduced the charge-off process, we reduced that only for the SMEs that we reduced that from the 19 months to the 9 months. But that already happened in the second quarter of '20. So now the SME will not be any bubbles building up on the balance sheet.

And this is quite important to remind all of you is that we are not using any relief programs from the regulators. We are providing a very specific program for our clients -- for each of our clients. But based upon the numbers that we have, because we would like to have provisions when we need to put down the provisions and not in a way to delay the buildup of provisions. So we are basically using our own models and our own policies to build up the provisions and the NPLs and the charges.

[José Marcos Ramírez Miguel, executive]

And Carlos, talking about the Rappi association, we are very happy. They have 15 million clients. Actually, they have 9 million clients that they make at least 3 transactions per month. And I will ask [ Paco Martha ] who's on line to give us more color about that. Paco, please go ahead.

[José Francisco Martha González, executive]

Thank you, Marcos. Thank you, Carlos. Yes, we are moving forward with the Rappi alliance. As you may be aware, in December, we launched the waiting lease for the credit card. And as of yesterday, we had 120,000 customers looking for the credit card, and we will open up to the -- we will open it to the market next week before the end of the month. And obviously, we will process and -- simultaneously, these 120,000 applications.

And in parallel, we also launched last week a program that we call the RappiContigo, Rappi with You, to help the small restaurants and the back kitchens that are having some trouble during the pandemic within Rappi. And it's a loan program with 200,000 -- MXN 250 million in loans. And as of yesterday, we had 310 restaurants or applications in the waiting list, and we will process them also during next week and the following weeks.

So we are moving forward with those 2 products as today, and we will be integrating more products as we move forward. Thank you.

[Operator]

We will take our next question from Luis Yance from Compass Investments.

[Luis Yance, analyst]

Thanks for taking my questions. I mean most of them have been answered. But I guess, 2 follow-ups on something you guys mentioned. The first one is on the sustainable ROE for the group that you mentioned, perhaps in the 18% range, that's -- when I compare that with what you plan to achieve this year, the 15% to 16%, it's almost 300 basis points improvement over the past 3 years that you're expecting.

So just wanted to understand, broadly speaking, what would be the drivers for that improvement? Because based on what you said on the OpEx side, you seem to be pretty efficient, and you're going to get some additional rewards this year. But going forward, whether it's coming in that -- from that direction, is it just because you're expecting interest rates to normalize much higher? So if you can share with us what's the assumption behind there and perhaps just an improvement on that side. Is it on the fee side? Just to get a sense of how should we think about the biggest drivers for that improvement in the medium term.

[José Marcos Ramírez Miguel, executive]

Thank you, Luis. Rafa, please go ahead.

[Rafael Victorio Arana de la Garza, executive]

Yes. Luis, I think your question is key to understand the evolution of -- as you know, when we launched the 2020, we basically said that we will double the net income that we did in 2 years before, and there was specific numbers for ROE that was 20% that we achieved that in '19 before the '20. And basically, a lot of those were related to efficiency, investing in the technology and also increasing the value per client. I think the key element that we see by pushing forward the numbers, is that the value per client that we increased on this 5-year program that was at 2020, we more than doubled the value per client. And we know that we have all the analytics in place and the multichannel and the evolution of the digital or the linkage with the Rappi and the new evolution that we have in the digital. And also with our strong position that we have now in corporate and commercial. I think we will continue to expand the value per client at a very fast pace. That's one of the main levers.

The other one is, as you can see this year on the guidance, revenue is growing below the expense line. So the expense line that is well controlled at 4%, but the revenue that we have basically projected for '21 is close to 2%. So we have an imbalance there that we have to correct that pretty quick. And we would like to really push that forward to this year in order to regain again the rate of growth well above the expense line.

So most of the businesses and the evolution of the mix of the portfolio is providing also a sustainable rise on the profitability. But also, I would like to guide you to the numbers of the architecture of the group. If you see the -- how the annuities business is behaving like growing net income 51% for the year and with a very strong return on equity around 25%. You see insurance business around return on equity of 40%. Even though they have a tough year because of the pandemic and the acquisitions that they needed to do because -- to cover those costs. And the authority is staying around 15%. I think it's going to be tough for the pension company to grow above the 15%. But I think the annuities company, if you look at the annuities company, it is coming close to be at the same size of the pension company.

And that's a pretty good story, because we are growing that business pretty fast, and we can increase the return on equity on that. Also, the broker-dealer is above the number that I just mentioned on a recurrent basis. The bank is already -- if you look at what happened with the bank last year when we build up the provisions and we reduced the return on equity for the bank drastically towards the -- in the next month after we did the provisions, we see a very strong pickup in the third quarter for the bank that was already close to 19%.

So we don't see any issues at the bank because we will continue to grow the client base, the profitability of the clients. Distribution are becoming much more less expensive based upon digital. So we can reach a lot of new clients now with -- on a very efficient way. But also I would say that the bank and also the businesses that I just mentioned to you is where we see this evolution of a sustainable return on equity for the group.

The main issue that we do see at the group level is the goodwill that we have been afforded that is a very large goodwill that is just sitting there. If you go to tangible, we are already there.

So we don't see really that we have any issue to really regain that number based upon the size of the business, the quality of the business and also how fast we can really continue to increase the profitability on a client-by-client basis.

[Luis Yance, analyst]

Rafa, that was very helpful. And let me ask last you the last question on provisions. I mean you've talked a lot about it. But when you did the first round of additional provisions in the second quarter, the start was -- that was enough, right? And then we get the second wave and you decided that it was prudent to add a little bit more.

So I just wonder, as we go through this year, there's still clearly uncertainties around there, is that there going to be a third wave. Are we going to have a much longer lockdown period in the center of the country than what you have projected there. So just wondering how much cushion right now, you do have to accommodate, let's say, the lockdowns take a month longer than you expect or if GDP growth is not 3% to 4%, it's at 2.5%? Not major deviations, but a little bit here and there, would that probably require another round of additional provisions? Or are you seeing for those small deviation from what you're expecting, you're comfortable with what you have and you have enough cushion to maintain what you're seeing as a more normal cost of risk for the year?

[Rafael Victorio Arana de la Garza, executive]

Luis, I think we feel comfortable with this number. And what is important about your question is, Alonso also was mentioning about, if there's going to be a release of these extraordinary provisions. If things get longer, the lockdown or the second wave stays longer than it is, I think the issue is that we will consume more than anticipated, the extraordinary provisions. But I don't see, honestly, any need to build out more provisions right now.

I think the fact is how much we can release, not if the size of the provision is good enough.

[Operator]

We will take our next question from [ Edson Morgia ].

[Unknown Analyst]

Did you hear me?

[José Marcos Ramírez Miguel, executive]

Yes. I can hear you.

[Unknown Analyst]

Thank you for taking my questions Marcos and Rafa. I have 2 of them. The first one is related to your guidance on the loan portfolio. Because yesterday, an event from Fitch, Fitch is expecting that consumer loan as an overall in Mexico will grow around 5%. So I was wondering if you can give us more color about -- if you are in the same way as Fitch, or are you going to be more careful about this consumer growth portfolio for 2021?

And the second one is related that historically, from not only in the United States, but in Mexico, when this crisis used your core, there is a consolidation in the industry. So I was wondering if you are expecting to buy, I don't know, a portfolio from other institution, or if you are watching opportunities in the market.

[José Marcos Ramírez Miguel, executive]

I will start for the second one, Edson. Yes. Yes, we mainly see a consolidation in the industry the way we see in the world and it's going to happen in Mexico. And our duty is to watch what's going on and then go to the Board and to all the instances. And if this makes sense, to provoke a meeting. But it's not in our main driver on it. We need to be careful and see what's going on, and that's our duty.

Our objective now for the year 2023 is to go along and to give these numbers. And talking about the first one, the guidance of the loan portfolio, Rafa, was it 5%?

[Rafael Victorio Arana de la Garza, executive]

Yes. I can -- in a way, I take the growth that we see on the consumer. We see on the consumer, on the mortgage book at 10%, maybe a little bit higher than that, the 10%. We see on the car loans, 7%. We see on the payroll loans a rate of 4%. Credit cards, also 4%. And corporate and commercial will be around 3%. And the government book will be 2%. So if you see this, we are, in a way above what Fitch is mentioning in some of the portfolios.

And what is -- has to be considered is when they say 5% -- and let me put you an example about credit cards. We -- last year, credit cards was down close to 6%. So when we say 4% growth this year, it's really a big push for the year. So we see the commonly moving I would say slowly, but in the right direction. And it's unfortunate what is going on because of all the issues concerning the pandemic and the plateau that -- the COVID plateau has reached in Mexico. But honestly, the country is moving. There's a lot of will to keep on moving on this.

And really, the main issues are happening outside the banking sector. Because, as you know, the banking sector really basically deals with our formal employment. And in formal employment, companies have to try to keep as much as they can the number of employees and things. But on the informal economy, the hit has been very, very hard.

But this is really happening outside the banking system. The banking system, in a way, if you look at the numbers last year, minus 10% GDP growth, and you see a loan book for Banorte close -- if you take away the government book, above the 8%, it's quite difficult to understand. And also when you see the revenue growth and whenever we think -- but the fact is that the formal sector continues to be diligent and trying to overcome the situation the best that we can. But on the informal economy, the hit has been very well.

[Operator]

Now we'll take our next question from Jorge Henderson from Santander.

[Jorge Henderson Cubillas, analyst]

So I have 2 questions. The first, you already provided guidance on loan growth in the segment actually right now. And you mentioned some growth will be coming from mortgage and auto loans and the rebound in credit card. But what I would like to get is more in-depth detail on your target asset mix. A bit on the rationale on this for 2021 and also for the medium term. Like do the targets to gain or lose loan exposure on specific segments?

And the second question, you mentioned on your press release that during 2020, mobile transactions in your mobile app increased 44% year-on-year. Do you see this trend accelerating even more for 2021? Could you share what growth do you expect on this?

[José Marcos Ramírez Miguel, executive]

To start for the second one, the mobile transactions, I will ask again, [ Paco Martha ] to give us more color about that. Paco, go ahead, please.

[José Francisco Martha González, executive]

Thank you, Marcos. Yes. Well, the mobile transactions, we had a ramp-up during the year, more than 70% increase in the transactions. As you may be aware, we moved out -- we created where we enable more functions and more services in the mobile while up. So we were able to let the customers to stay safe and stay in their houses. And we saw the transactions moving towards the digital channels. The web channel stayed the same way. The transactions all around the bank increased and mainly the bank -- the mobile ones were increasing more than 50%.

[José Marcos Ramírez Miguel, executive]

Thank you, anything else, [ Paco ]?

[José Francisco Martha González, executive]

No. Thank you.

[José Marcos Ramírez Miguel, executive]

Rafa, the loan growth.

[Rafael Victorio Arana de la Garza, executive]

Yes, Jorge, I think if you look at the loan growth, and it has to do with what market makes and has to do also with the size of provisioning is that the current mix that it looks in a way weak on the consumer side, because 50% of the total book is on the consumer and is only 15%. But it's proven at this point in time not because we -- I would love to go to the consumers to go around 18% to 20%. That would be a very balanced loan book when we reach that number with the consumer.

I would say that the mortgage book will stay around the 20% as we see. I think we will see a bit of increase on the corporate, on the commercial, not a lot more. Because we are very close to our fair market share there, that is the 16%. But we see a continuous evolution and reaching out to the fair market share in the credit card that we gained market share last year, and we have been gaining market share. But we are well below the position that BBVA has close to 30% or CD around 26% to 27%. We are reaching the 11%.

So the moves that we are aiming to grow when I talk about numbers in the consumer from 18% to 20% is to keep increasing the payroll loans portfolio that is a portfolio that we can continue to grow easily for the coming years. Also, the credit card that we have right now is a very, very loaded car with our benefit services, digital origination, everything. So we see an increase in market share there. We already gained market share last year, but not at a very fast face. The fast pace will come from car loans, payroll loans on this part, basically. That would be the big pusher on the acceleration of that. And also on the mortgage side that is separated from the consumer, I think we'll stay at around the 20%, 21% of the overall mix. But the key fact is that the payable loans and the car loans and the credit card will continue to push us up to the 18% to 20%. That is our desired number on the consumer.

[Operator]

We will take our next question from Gil Garcia from Barclays.

[Gilberto Garcia, analyst]

Can you give us any guidance on your expectations for the insurance technical results for the year, which have been rather volatile over the past quarters?

[José Marcos Ramírez Miguel, executive]

I will ask Fernando Solís to answer all that. Fernando, please go ahead.

I think he's having some technical difficulties.

[Fernando Soberón, executive]

Can you hear me?

[José Marcos Ramírez Miguel, executive]

Yes. Yes. Go ahead.

[Fernando Soberón, executive]

What I was -- we have been seeing in the last -- past year, the change in the results, as you mentioned, were due to technical results and mainly due to the loss ratio. Actually, what happened with the book is that we experienced due to COVID in the -- after taxes and increase in losses, you need to call it in life of and medical expenses, around 1,043 -- MXN 1,433 million, that was a very important hit. And also it was partially compensated in the loss ratio in car insurance. There, we have a benefit of MXN 635 million.

If you take those things into account possibly the fact that we also have nonrecurrent income due to the fact that we did not pay dividends either, actually, the book would have been growing in terms of net income, 15% from 2019 to 2020. So actually, those are extraordinary effects that probably will put on this book.

Those are the main explanations. Otherwise, due to normal terms, if you take out these extraordinary effects, we would have experienced a 15% increase in net income. Now what will happen next year -- or this year, say, of course, this year, we are also expecting a [indiscernible]. And actually, we're thinking that perhaps the range will be that. As you know -- but we have been a bit dependent on how fast the vaccination takes place in the Mexican population.

We do not see that we will have enough people being vaccinated, 70% -- 65%, 70% from the first 3 quarters and perhaps not for the full year. So this year, in terms of COVID, we believe that the impact will be even higher. Of course, this is something that, hopefully, will eventually pass, and we will recover our normal rate of growth in net earnings after that. So that's explained mainly due to this factor.

[Operator]

[Operator Instructions] And the next question will come from Tito Labarta from Goldman Sachs.

[Daer Labarta, analyst]

Just a follow-up on your margin and perhaps it's related to the last question, also the impact that the insurance has on the margin. But on the guidance that you gave, the 15 to 30 basis point reduction, is that at the bank level? Because I just want to understand at the group level, right? I mean margins fell like 30 basis points and has been sort of steadily falling on a quarterly basis. So just to get, I guess, at the group level, do you think that margin has bottomed now? Could it fall another 30 basis points, the year-over-year reduction would be a lot greater than that 15 to 30 basis points guidance you gave. So I just want to be able to reconcile the bank margin and the group margin and how that should evolve, particularly, I guess, on a quarterly basis to get to that full year guidance?

[José Marcos Ramírez Miguel, executive]

Thank you, Tito. Rafa, please?

[Rafael Victorio Arana de la Garza, executive]

I think -- Tito, thanks for the question. The number that we are mentioning is just related to the bank. I think the group, as you mentioned, has bottomed up already. I think that number has -- is going to be there in that part. So it's basically the bank.

[Operator]

We will take our next question from Victor Galliano from Barclays.

[Victor Galliano, analyst]

Just a quick one from me. On the margin again. Looking at that Slide 17. Really, you've done a tremendous job on your cost of funds versus your main peers, but it looks like that's now largely done. Do you think there's any risk, I mean, thinking glass half full for 2021, certainly, the second half of it? As the economy recovers and as demand grows, that you will see your main competitors beginning to compete more aggressively for deposits and core funding?

Where do you see the risks aside from the -- aside from obviously your hedging to this -- to your margin from the liability side.

[José Marcos Ramírez Miguel, executive]

Thank you, Victor. Rafa?

[Rafael Victorio Arana de la Garza, executive]

Yes. I think quite with the risk, we still have room for this. The way we have been evolving on the funding side is that, first, we needed to take away all the required market funding that we needed in order to fund the Interacciones assets. That was done in the third quarter of last year. So as you say, that was a big portion of that.

But still, we have, for specific accounts, that are related to 2 things because we needed to build up liquidity fast. We also pay in some -- for some accounts close to reference rate or below reference rate, well below market funding, but we needed that to immediately increase the liquidity at our part. That liquidity is not needed anymore. So that will be also a fact of how can we also continue to reduce the cost of funds.

And also, as you saw last year, our growth on time deposits was slower than the market because we let go some of those funds because our demand deposits were growing 22%. We don't expect 22% growth this year on funding. We expect 11% growth. But 7%, we're expecting demand deposits without cost on that part.

And when you see the compression on the reference rate, that is also taking away some of the big numbers that were in the past when the rates were around 7%, that everybody was looking for the 7%, 7.5%. When you are dealing in a world that reference rate is getting close to 4%, 3.5%, I think sensitivity growth also goes down. And it's more related to efficiency, ease of use and location when you can get the benefit of funding.

Also, the payrolls, we will continue to grow payrolls pretty fast, and that's a very important source of funding at a very low cost. So even though that was, as you say, a big push on the funding side, we still see room for going down on the cost of funds around 20 basis points more. That's our goal for the year.

[Operator]

And our last question will come from Brian Flores from Citi.

[Brian Flores, analyst]

Rafa, you mentioned that you saw positive surprises in the performance of the SME portfolio. Can you elaborate on why do you think this is happening? And how do you see them going forward?

And the second is a quick follow-up on the guidance you provided for the closing segments. I only caught up the last 2 portions. And I don't know if you could repeat this.

[Rafael Victorio Arana de la Garza, executive]

Yes. Why we are on the SME? The first issue is that it's 4.7% of the total book. The second issue is that 47% of those are under Nafin guarantees. And the third most important one is that of the 420,000 SME clients, 29,000 of those have loans with us. Of those, we have contacted every single one of those. We know exactly what's the position of the company if they close, if they are in a slow movement stage, if they are regaining its growth. They expect to regain its growth, and we have talked to every single one of them and know the situation. We have visited on a one-to-one basis.

And you see on the SME, what is the key element of the SME, the entrepreneurial vision of these people and the resilience of these people, basically what they need, most of them, is just a little more time to go back on their feet, but they are more than willing to take on pushing forward. So that's what Gerardo was mentioning about going on a one-to-one basis and create a specific program for them.

So we will continue to see -- obviously, 12% of the SME that reached the relief programs are not paying because they are even closed, so they are back on that. But that was expected on that. We were expecting a much important number on that.

So 12% is, for us, good enough based upon the size of the crisis. So I think the resilience of the entrepreneurs, the support that the bank has provided them, the Nafin guarantees, the size of the SME portfolio. And we are not, in SMEs, related to tourism or things like that or restaurants. Our exposure there is extremely low on that part. It's basically SMEs that are linked to either supply chain, so other type of business.

But I'm very positive with a surprise about the behavior of the SME. And on the guidance on the -- I will repeat on the mortgage book, 10%. The car loans, 7%. The favorable loan, 4%, the same that the credit card on that. The corporate and commercial, around 3% and government book around 2%. You can get a range from that of 1, plus/minus 1 on this.

[Operator]

Thank you very much for your interest in Banorte. With this, we will conclude our presentation. Thank you.

[José Marcos Ramírez Miguel, executive]

Thank you very much.