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Good morning. My name is Melissa, and I will be your conference operator today. At this time, I would like to welcome everyone to the First Quarter 2018 Conference Call. [Operator Instructions] Thank you. Mr. Manuel Rivero Zambrano, CEO of Banregio, you may begin your conference.
Good morning. Welcome to our Conference Call for Banregio's First Quarter Results of 2018. Our financial margin grew 16.4% and our NIM was 6.4%. The efficiency ratio was 42.5%. The last 12 months return of average equity was 19.8%. Our total loan portfolio and our core deposits grew 10.2% and 17.9% year-on-year, respectively. The nonperforming loan ratio was 1.8%. On profitability. The net income at the end of the first quarter of 2018 was MXN 745 million. The NIM of total loans was 6.9% and the ROAA was 2.6%, a 12 basis growth year-on-year. Of the growth, our time and demand deposits grew 25% and 9% year-on-year, respectively, and our shareholders' equity grew 10.6%. And risk and asset quality, the nonperforming loans ratio was 1.8%, and as of January 2018, the capital ratio for Banco Regional de Monterrey was 14.8%. Following, I will highlight some items of the first quarter 2018 financial statement. On the balance sheet, you can see that the operational leasing increased 17.7% compared to last year. And the coverage ratio was 1.3x the nonperforming loans. Our consumer loan portfolio increased 26% and our mortgage grew 15%. Our core deposits increased 18% year-on-year. In the income statement, you can see the financial margin grew 16% year-on-year. Commissions and fees decreased 1% and insurance and FX fees grew 20%. The non-interest expense increased 17% year-on-year. As of growth by region, Nuevo León grew 12.6%, Mexico City 10% and Jalisco 12.4%. And in total, our remaining locations grew 10.3%. As of asset quality by-product breakdown, our commercial loan portfolio had a nonperforming loan ratio of 1.8%. Mortgage NPL ratio was 2.2% and other loan -- nonperforming loans ratio was 0.8%. Our consumer loans NPL was 2.5%. As for capitalization, Banco Regional de Monterrey, 14.8% and [indiscernible] 13.3% as of February 2018. Banregio versus the [indiscernible] system. Banregio had a better performance against the system at December 2017. Banregio's ROE was 19.6% superior to that of the system of 15.8%. The NPL ratio of Banco Regional de Monterrey, as of December 2017, was 1.7% versus 2.1% of the system. Thank you. We appreciate any questions.
[Operator Instructions] Your first question comes from the line of Ernesto María Gabilondo from Bank of America Merrill Lynch.
I have 3 questions from my side. When we look to the quarter, we saw limited NIM expansion as funding costs are going up. And net fees show practically no growth. So I just want to know, how do you see both lines behaving through the year? My second question is about asset quality. We saw lower provision charges and the NOIs cost of risk at 0.6% of average loans while the loan reserve coverage ratio. So how do you think the cost of risk should be evolving through the year? I believe it was abnormally low during the quarter. So I don't know, it should be trending up to the guidance of 0.8%. Also, how do you think about the level of the reserve coverage ratio? And finally, how should we think about the new structure of the holding regional. I think you have talked about the possibility to have the bank and organic niche in business. I think at the beginning, it could be organic and then you might explore an acquisition. And I think there could also be a subsidiary related to Fintech and technology. So is it a structure we should think about regional and when are you planning to create new subsidiaries?
Thank you, Ernesto. The first, I think it's -- I'm going to go from backward. Regional, the main purpose is to add flexibility, the same flexibility as international banks have in Mexico. Right now, we have nothing planned, so if I had something -- if we have something we should lay out, we should let you know in advance. In terms of the cost of risk, we do have the same outcome for the year, we're not changing it. We do think that the cost of risk should remain at the levels as we guided. And this quarter was a bit above our expectations, lower of our expectations. But we think it should converge to our guidance. It depends, obviously, on the economic environment and how the last part of the year and how the NAFTA is going to play out. Right now, we think NAFTA is going in a fairly positive way and there's a lot of noise politically in the United States and in Mexico. So it's difficult to have color on where is the stance. But we think the outcome will probably be a neutral one or a positive one in most of the industries. And as our exposure to foreign -- well, to [ materials ] or to companies that export a lot is very limited. We think that that exposure, that risk should not be that negative to our customers. In terms of the NIM expansion, I think we're going to stay at the same levels we have at right now. The cost to funds, yes, we have a little bit of pressure on some banks, for example [ Bank Norte ] had announced big promotions and that has pushed a bit in terms of competition. So that, in a sense, I think the NIM should -- the NIM expansion is, as you said, should not be as much. But our NIM is way above that of the system, it's way above that of our peers, probably a full 100 basis points. So I think our NIM is a very healthy one and it should remain that way. In terms of the fee income, we did have an extraordinary income in fees in our leasing company last year. So that generated MXN 30 million, MXN 40 million more last year. So if you normalize that, you should be able to see that we have been able to have a sustained type of business that we have. And normally, that is a very seasonal product. Sometimes you can get more rents and sometimes it gets less rents, so it has -- in a sense, it should remain in a steady growth between 10% and 15% in a normalized way.
Thank you, Manuel. A follow up on the NIM. Do you think competition is coming from the lending side or the funding side?
Well, I think in terms of -- I think it's in terms of both. There's -- if the economic environment is not very positive, the competition will remain, trying to lower the margins. We have not seen something further, in terms of competition, in terms of lending. We have not seen -- the banks have gone more aggressive in terms of lending. And as I said, in terms of funding -- and because, I think, as Manuel said, it's promotion, I think that's one that puts pressure on the cost of funds.
Your next question comes from the line of Carlos Rivera from Citigroup.
My first question is regarding loan growth. So just if you could comment a little bit more about the most recent trends. I mean, 11% growth is within the guidance but within the lower part. So just thinking if you are still a little bit cautious on the smaller segment. In the last conference call, you mentioned that you are a little bit cautious on the loans below MXN 15 million. And if you have seen any changes, probably in the trends in April. I mean from the macro side, we have seen probably a little bit better outlook for the NAFTA renegotiation. Of course, in the national level there's still uncertainty with regarding the presidential election. So just if your outlook for loan growth has changed a little bit. And my second question is regarding the capitalization levels. We saw a bigger dividend payout ratio, I calculate about 35%. So much higher than what you have paid in the past. So how should we think about the payout ratio going forward? Is the 5% just like a one-off because the loan growth has been lower in the recent past? And regarding these, what would be the level of the Tier 1 ratio that you feel comfortable with? You closed March with 14.8%. So is that the level that you feel comfortable with, or you feel comfortable with that lower level? And in that 14.8%, is there any provision ready for the payment of dividends?
Carlos, thank you for your questions. Yes, as for the loan growth, I think we should see a bit of increment throughout the year, in terms of loan growth. As you said, we have to play it by -- see how the economic environment plays out in the second part of the year, post NAFTA agreement and post elections. There's a lot of uncertainty, and you can imagine that businessmen are obviously, very keen on trying to get their -- to be very productive about their investments. So I think that our guidance still remains and it will, obviously, depend on how NAFTA and how the political environment plays out. And in terms of capitalization ratio, the levels are [indiscernible] our risk committee is comfortable, it's at levels of -- the lower part is 12.5%. Obviously, we are above that so that's why we were very eager to implement the payout ratio. Obviously, we think that if the economic environment continues to be better, as it has shown, loan growth should go up and that will obviously require more capital. I think that outcome will probably happen and -- but if not, the payout ratio will remain at a higher level that we had in the past. I don't think it will remain probably that high. But yes, to some level that we feel comfortable in order to maximize our ROE and give our investors the best return that we can manage.
Okay. Just a question there on the capitalization. The high level that we see, 14.8%, does that already consider a provision for the, I think, almost MXN 1 billion dividend? And was that dividend considering the -- in the 19% to 20% ROE guidance for this year?
Yes, it was considering the ROE guidance and the 14.8% was of the February data. So it is the -- it should go down to 13.6%. So we're talking above our limit, yes.
Your next question comes from the line of Eduardo Rosman from BTG.
Just a follow-up on the funding strategy, right? Because I know that Banregio has a very high NIM, very healthy and much above peers. But some of your competitors have been able to expand NIM exactly because of the funding. Actually, because it seems that they are indeed being a little bit more aggressive on lending rates but they have been able to improve funding and this is helping them to expand them. So just wanted to know if there is something different that you can do in order -- some, maybe a marketing campaign or eventually expanding through different regions, if there's anything that you believe you can do that could improve your funding costs in any material way? Or if no, that's part of the game and this pressure in terms of, let's say, competition for funding, they might start to ease once interest rates in Mexico start to come down? So just wanted to know if you can elaborate a little bit on the funding theme.
Yes. Well, thank you. Well, in terms of funding, what we've been able to do in terms -- we've, as you know, we've changed our image, we changed our products. We've simplified our checking accounts. We're investing into using more digital -- our digital channels to be more market ready, more easy to use, more simple. We are implementing our POS clients. We are implementing our bankers in government -- for the government in terms of not for lending, but only for funding. We are implementing our promotions for -- in terms of marketing and social media. So we are doing a lot of things to better our cost of funds and incrementing the number of clients we have in checking accounts. And I think we're producing very good results and we should, I think, be very optimistic that Banregio's products, branches and digital channels are -- will produce better results in terms of checking accounts, incrementing our volume and lowering our cost of funds. That overhaul, as you know, it's going to take a little bit more time, and we think we are very optimistic that that outcome is going to be very positive. And in terms of lending, there could be a bit of pickup in the NIM because as you know, the small business lending, we did stop in some geographies, because we did not like the risk. And now we want to be more positive on growth in small company loans, and that should allow us to implement our business loans into -- for small companies, and therefore, helping the NIM. Our mortgage, our credit card, and our loans for consumers are growing at a very fast rate, 20% to 25%. And that, obviously, helps us retain our customers and help in -- to be more efficient and have been more profitable for clients, and we're very keen on those because you can see the nonperforming loan ratio that we produced on those loans is very low because that's the cross-selling to our medium to medium-high income families. So that's going to be, I think, one that should remain our NIM -- higher NIM. But it all depends on how the medium business lending continues. So I think that there're 2 positive things that could help us remain our NIM or even increment a little bit more.
Your next question comes from the line of Yuri Fernandes with JPMorgan.
I had a question on expenses. They are running a bit above the guidance you provided in the previous call. I guess, it was 14% to 15%. I know you have this new branch strategy, but just wanted to make a follow up here. If you remain confident with the guidance, or you should expect higher expenses during the year? And on my second question I have a follow up on Ernesto on cost of risk. Again, it was very low this quarter, 0.6% and you keep your 0.8% guidance for the year. But my question is, should we see this running more close to 0.9% and 1% in the coming quarters so that average for the whole year remains at those 0.8%? And are you seeing any pressures on asset quality here, because your new [indiscernible] was much higher this quarter. We see much higher interest rates in Mexico, some slowdown in the economy. So is there any risk on asset quality here [indiscernible] ?
Yes, that's the reason we guided 0.8%, because we thought, we anticipate it was going to -- I anticipate high book to bills, a bit more NPLs. It hasn't yet, so in a sense, we are very optimistic for that. But -- and that's why we guided the 0.8%, because we did -- thought that the high interest rate would impact the NPL. So in a sense, it has not happened yet. So -- and we think in all of our units, in all of our segments, we are producing very good NPLs. So hopefully, that remains to be the case.
But 0.8% is the average for the year, right?
Yes. Yes. And the expenses should remain as we guided, that's 15%. The main driver for this expense rate was we invested in mainly our -- in cybersecurity in trying to implement to -- for broad and for risk assessment. So I think those expenses are good investments and we should remain to do those. And but I think it should converge, I've guided as 15%.
Your next question comes from the line of Gabriel [indiscernible] from UBS.
I have a question, mainly regarding competition among other banks. I just wanted to see, how are you feeling this competition? Are you feeling maybe any pressure from larger banks who want to go into the same segments as you?
Well, as -- we've not seen any other as we -- the only other competitor that we added last year was Banco [indiscernible] and that's the only other participant we've been able to see additional to the other banks. But BBVA, Norte, Santander have been [indiscernible] as normal as they have ever been. And we have not changed, we have not been able to see any difference.
[Operator Instructions] Your next question comes from the line of Martin Hernandez from BBVA.
I was wondering if you could give us more color on the provisions this quarter. I was just wondering like if you could give us more breakdown in this line. Was it due to that exceptionally low provisions to adjust a flat quarter on loan growth? Or was it due to our releasing provisions?
Martin, this is Enrique Navarro. In terms of provisions, as you know, it's privileged information from the [indiscernible]. During the previous quarter, first month, January, we even released provisions. That was part of the collection effort also as some of the loans were repaid during that January. You can see the trends on the growth quarter-on-quarter, see it's flattish, as it's all the first quarter, so it's very seasonal, the growth. But also, you can see in our quarterly report, the number or the proportion of customers with the rating A1 and A2 is increasing, and we have increased in the two streams. We recognize we have more NPLs that are the D and E customers. But also, we are improving the number of and the proportion of A1 and AB -- A2, sorry, that they require less provisions. We have done a lot of effort also, within the quality of the file, the quality of the collaterals that also impact and benefit the provisions. That was the main reasons it was lower than expected -- or that guided, not unexpected, because we are working on that. We are expecting to improve the cost of risk with all these actions. But as with the NPL formation, and you can see it in the -- from 1.7% to 1.8%. At some moment, we will go back to the average that we guided around 0.8%.
Your next question comes from the line of [indiscernible].
We are also seeing in the P&L that fees and commissions are decreasing a little bit. We don't know if this is something seasonal or it has to do with any kind of a change or regulation.
No. Again, Enrique Navarro. There are different lines in -- we probably talk about pure leasing or in general, the leasing-related income that last quarter, first quarter of 2017 was higher because speed of recoveries from DCC, the acquisition that we did in 2015-2016, the merge. In the other lines, you can see that in FX and insurance fees and point of sale, merchant point of sales are increasing. But this is related to the checking accounts or transfers are very flattish and that's why the whole mix, it looks very, very flat year-on-year. We don't see anything changing on the regulatory point of view or within our internal efforts. We expect some recovery in the second quarter.
And there are no further questions at this time. Mr. Rivero Zambrano, I turn the call back over to you.
Well, thank you very much for participating in this quarter's conference call. Thank you for your questions. We obviously -- if you have any further thing, please let us know. Thank you.
Ladies and gentlemen, this concludes today's conference call. You may now disconnect.