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Good morning, everyone. Thank you for standing by. Welcome to Regional's First Quarter 2023 Earnings Conference Call. We are joined today by Manuel Rivero Zambrano, CEO of Regional; Enrique Navarro Ramírez, CFO of Regional; and Alejandro Lobeira, Strategy and Planning and Investor Relations Officer of Regional. [Operator Instructions]
I would now like to hand the conference over to your speaker today, Manuel Rivero Zambrano. Thank you, and please go ahead.
Good morning, everyone. I hope you and your family is healthy and well. We appreciate everyone's participation today. We're satisfied with the results of Regional for the first quarter of 2023.
Our results were mainly driven by a stronger credit demand, better loan mix, solid growth of our nonfinancial income, particularly performance of fees related to cards in our merchant acquiring business, which continues with this expansion as well as the increase in our deposit base, both digitally and in our -- and through our branches.
Our commercial portfolio has kept outpacing the system growing at a compound rate of 9% during the last 5 years compared to that system of 4.7%. And we expect this trend to persist in the following years. Our footprint is well poised to benefit from the recent rise of foreign direct investment in the region.
Regional's net income for the first quarter reached MXN 1,187 million, delivering an ROA -- ROE of 20.9% and an ROA of 2.5%. The financial margin expanded for the seventh consecutive quarter, reaching MXN 2,904 million, with a 20% year-on-year variation. The margin was mainly driven by a higher policy rate expansion in our higher-margin loans and our successful strategies to maintain double-digit growth in our deposits.
The NIM for the first quarter was 5.7%. And the NIM of total loans was 7.5%. Our loan-to-deposit ratio reached 105%, while our CASA ratio stood at 54%. Our portfolio keeps showing outstanding quality, maintaining an NPL below historic levels at 1.2% and a quarterly cost of risk of 0.8%.
As a result of the normalized provisions, we were abnormally low in the first quarter 2022 with our release of MXN 49 million. Nonfinancial income keeps expanding at accelerated rate with our merchant acquiring business expanding 32% year-on-year and on the other hand, the growth of the income from insurance grew 17%.
Without leasing nonfinancial grew by 15% year-on-year. Total revenues for the quarter amounted to MXN 3,083 million, presenting a year-on-year expansion of 9%. Operating expenses grew 19%, reaching MXN 1,585 million, mainly driven by our great headcount, well greater headcount, technology investments and Banregio's expansion, which is allowing us to serve a broader client base to our new branches, executives and ATMs. Additionally, the volume of our cards and pay business keeps showing at a fast pace, which drives related to expenses. The efficiency ratio for the first quarter stood at 44.4% for Regional, showing a year-on-year contraction of 111 basis points.
We maintained a very strong capitalization ratio at 15.3% as of February 2023, generating an excess of capital of 329 basis points compared to our internal limit of 12%. During the quarter, the total loan portfolio of Regional delivered an 18% growth, which was led by SMEs and consumer portfolios, which keeps growing at double-digit rate. The North and Western regions of the country have experienced higher economic activity due to the foreign direct investment inflows as well as to 6 zones that are expected to keep expanding in the following years.
These regions have led the demand in our loan portfolio presenting great growth. Our commercial efforts have shown excellent results in Banregio and The SME portfolio increased 35%. Credit demand in Mexico City and Nuevo Leon led the expansion growth with 52% and 19%, respectively. Within this segment, time deposits expanded. On the other hand, the wholesale portfolio had a loan growth of 18%. Deposits keep increasing at double-digit pace, expanding 13% year-on-year, while time deposits grew 6%.
We expect the trend in deposits will continue during the next quarters, which will benefit Regional to further improve its margins. We are certainly experiencing the benefits of reinsuring in our credit demand. As the regions where we have a greater presence, the North, the Western and Central regions of Mexico are well poised to experience stronger credit demand. Although, we expect this trend to foster foreign investment and credit expansion in Mexico for the next 10 to 15 years, the main industries that have led demand so far are real estate developments, logistics, construction services as well as consumer credit driven by growing workforce as well as higher income growth.
We will continue to seize opportunities by proactively analyzing market trends and new business verticals while maintaining a permanent assessment on quantification of the potential risks. On the other hand, our technological approach is a key differentiator of our business model as we seek to redefine the customer experience through online and off-line integrations.
It is important to mention that we're partnering with Apple and Microsoft to strengthen the development of team capabilities, which will result in increased functionalities and customer engagement for the long term, helping us to leverage our operations even more as well as we continue to automate repetitive work or work consumers and customers interact that are very demanding.
Hey keeps attracting new clients as our acquisition strategies keep delivering high-quality growth. This quarter, we improved our investment yield for Hey customers. And we launched the multi-red alliance of ATMs with more than 9,000 ATMs where our customers can transact without costs. Moreover, I am proud to announce HeyGPT, a AI-powered chatbot with the objective of providing customer information about our products, financial advisory and loan quotes as well as customer assistance.
This will think, over time, we'll generate great results for customer engaging, cross-selling index and a better NPS and as we surpassed 684,000 active clients and deposits reaching MXN 10,290 million and an outstanding growth in loans at MXN 8,462 million.
Our cross-selling resulted in 1.8 products per client and the cost of acquisition stood at MXN 210. And the lifetime value was MXN 5,977 with a lifetime value over cost of acquisition of 28x and a better NPS at 66%. Hey Banco maintained an accelerated growth, the pace -- the transaction volume and an average monthly billing for the quarter 1 was MXN 9,186 million. And the number of POS reached 42,400 increasing 70% year-on-year, allowing us to capture a solid base of deposits as well as a high volume of data that will reflect into a more efficient operation.
Our focus on Hey is to capture highly profitable clients, more than number only client growth, allowing us to accelerate the company's profitability, at the same time, building a solid customer base for the long term. The best example is our Hey Pro clients, which now account 80% of our total active users. These clients have a lifetime value of 4 times higher than the traditional customers and 2.6 cross-sell and index.
Our objective is to keep strengthening our long-term capabilities, expanding our customer lifetime value to our differentiated offer, which, while reinventing the retail experience. We are rolling out our personal loans as well as a payroll service for our SME businesses, which will further and accelerate both client growth and lifetime value.
As the credit demand has increased significantly during the first quarter, the contract keeps attracting new investments. We are dividing the dividend into 2 payments during the year with the first part being paid in May and the second part being evaluated based on the credit demand in the second -- in the fourth quarter of this year.
Our intention is to maintain the flexibility to handle the accelerated growth pace. And we are expecting during 2023 and the upcoming years without compromising capitalization levels while ensuring a sustainable growth.
To further clarify on the impacts of the reclassification of leasing loans, there was a nonrecurring income of MXN 608 million and is comparable to the nonrecurring loss of fees generated through our leasing line, which decreased by the same amount, affecting the calculation only of the NIM.
Additionally, due to the best practices we have decided to open the line debit type balance from the repurchase agreements before it was expressed in the memorandum accounts under collateral receipts and net balance and now is expressed in the balance sheet in the asset -- with the asset and liability, both affected in the same proportion.
In conclusion, we are proud of Regional's first quarter 2023 results. Our efforts have been reflected in strong loan growth and asset quality, outstanding growth in core deposits. And that has allowed us to constantly assess our growth opportunities, great performance of our nonfinancial income line and promising results in our digitalization efforts.
We are confident in delivering results consistent with our guidance of 2023. And we will be able to scale our capabilities while the country is well positioned of years of foreign investment inflows and a distinguished customer service. We'll maintain Regional as a leading financial institution in Mexico. Thank you very much. We appreciate any questions.
[Operator Instructions] Our first question comes from Ricardo Buchpiguel.
I have 2 topics I wanted to ask. First, since the beginning of the year, we saw a 75 bps increase in the reference interest rates. And why we didn't see a major pickup on NIM as we saw in your presentation? And in fact, NII grew less than the portfolio even looking quarter-over-quarter. So I wanted to understand what are the other factors involved here that would explain this trend? I understand that there is, factors like the mix of interest -- is the timing of probably repricing. So if you could provide more color here would be helpful.
And also connected to this topic, I wanted to ask what's your expectations should the NIM evolution in the following quarters, right, if you should see like a more linear improvement towards the guidance that you set in Q4 or a spike in a specific quarter, right?
And also another topic, we understand that nearshoring looks like a big opportunity here for Regional, but still hard for us to tangible how big it is and for how long its effects less if it's a conversation about more loan demand for the next couple of years or could we talking about like in the next 10 years, right? So if you -- if possible, if you could provide an update on that view with more tangible data that you have been gathering as you have been seeing the effects of nearshoring will be helpful.
Ricardo, about the interest expenses, basically, there are 2 effects: One, as you mentioned, is the mix in cost. If you see some customers have moved -- taking advantage of the rates from checking accounts or to plus or to time deposits. And that obviously is a little bit more expensive.
Also, in order to retain some customers, we have improved the rates. And as Manuel mentioned in one of the slides, we increased the time deposits in 8% to 10%, to pay 10% to the Hey Pro. Also, there is an impact on the repo business that we are recognizing this MXN 13,000 million additional part of the repo business, that used to be presented net and in the memorandum accounts and that is affecting the NIM. That's basically the factors that have impacted the interest expense in the first quarter.
And in the second question, we are expecting an improvement in the margin, in the total NIM, as we are -- first of all, we are renewing part of the repo business, all the securities investments that are right now. We are renewing every -- while, they are invested around 1 year, then, every year, we are rolling up all the securities investment with a new pricing that will improve the NIM.
Also, we are changing positively in the interest income, the mix. As you can see, we are growing 40% -- more than 40% consumer lending. And we are growing outer lending that have better margins and better interest income and small businesses also. Then, further in the next quarters, we will be -- we will see an expansion of the NIM along the next 3 quarters.
And along -- and the second question, what we think about the trend? For sure, it's a trend of the long term. So it's a long-term cycle that was altered from renegotiating the treaty and then when AMLO, reached the presidency, we did hold there.
So right now, we do see that as investors see the clarification of the treaty and things done in a very efficient way. We think this trend will continue and the integration between United States, Mexico and Canada will be more so in the future. We've seen the type of companies reaching here our home state, for example, in Nuevo Leon, which are the best of the best.
And that's for sure has created a very different ecosystem and providing more and more attractiveness to our region and for sure, integrating more with the South states of United States for sure. So Texas, California, for sure, our main partners and will integrate, I think, even more so in the future.
So this trend for sure will continue. I mean we've seen this since 1994 when the first treaty came upon. And you can see the trend since then and it's been very positive. I mean, Mexico right now reached escalated 2 places in the international foreign direct investment charts.
And that, for sure, it trends tells you how we can see that in the future. We had that place before. And I think now we're going to be able to maintain that level.
Very clear. Just a quick follow-up here. Related to the nearshoring, how you guys have been determined the right levels of investments and personnel and et cetera, for this opportunity given as it happens, you'll see mainly more loan demand and you naturally hire more accordingly?
Or it's something more planned previously based on an estimation or something like that?
No. I mean we have all the workforce needed. I mean we're incrementing our workforce for sure, in some areas, that we see more demand. And we see in other industries, for example, that we were investing more in terms of agro business, right?
So bankers more related to that segment that have more knowledge and more reach. But then, again, the amount of personnel that we have, it is, for sure, the right needed to continue the demand. It is not a demand that I think it's pretty aggressive, right? It's not something that is from one -- it's not volatile, right? It's compounding, right?
So it is not -- we're not expecting a 30% growth in loans, right? So we're expecting a moderate, obviously, growth at a good, solid, long-term one that obviously depends more on long-term drivers rather than short-term ones, right? So in that sense, that's what you see in -- that's how you see the balance sheet, right?
So you see how checking accounts are decreasing, right, because people are more efficient with their money and getting it into on demand deposits. But in the sense, obviously, you should see a decrease on loans, and you're not seeing that, right?
So you're seeing an increase in loans. And outside of Hey, Banregio is achieving this growth because of that reason, because you're seeing the inflow of foreign direct investment that is impacting many of the industries and the regions where we already were investing, right?
So that's where you see the pass-through most immediately, right? And more so that we are not in government lending and we're not in corporate lending. And you see that in the medium-sized businesses that you see in the medium and the big where you see most of the growth. And obviously, the consumer part, which obviously has been a pretty hot market here in terms of the lowest levels of unemployment.
And obviously, that's fueled by all the remittances that hadn't been obviously growing at a very good pace, because of the overheated market in United States, too. So that's creating a pretty positive effect in consumer trends.
And obviously, that creates more demand on consumer credit. And I think that will remain so as we have a positive flow of people into the workforce, right? So we have around a 3% -- 2.5% increase of people into the workforce per year. And obviously, that generates a good positive trend there.
Our next question comes from Olavo Arthuzo.
And actually, I have a quick one. I really wanted to understand and basically have your updated view on this sustainable ROE for Regional on a consolidated basis.
But I also would like to hear your opinion about further dividend distribution given the current tier 1 ratio above 15% because you mentioned the schedule for distribution this year. But thinking about a share buyback program or even a higher payout ratio for the next year, I just wanted to hear your thoughts on this linking to the sustainable ROE that you're expecting.
Yes. So as I said in the conference call presentation, we're dividing the dividends into -- for instance to further understand how the market is moving. So if we see a further increase on demand of loans, we for sure will benefit that driver and continue investing our excess of capital there.
So we're hopefully having that loan growth that we are expecting. But if not, as we said, we are evaluating a second dividend. But obviously we'll translate into the same payout ratio that we have this year. So in a sense, what we're trying to make is it's a different approach and being able to smooth out the impact on the capitalization ratio and for sure making the right decision in terms of the loan growth that we are probably expecting to have, right?
So I think it's not a bad thing. It is the thing that we obviously would love to continue to invest our money into further out our reach with clients and having a greater market share that we think that we are able to do so.
But then again, if not, that will have -- then we will have the second dividend. And that obviously will impact the ROE, right? Now, in both, in terms of net income growth, we're expecting, as we said, the guidance, the same guidance that we have. And we're maintaining that guidance. And we think that we're going to be very able to do so.
I mean we did had a pretty good loan growth and more as Enrique said in terms of consumer loans, auto loans and mortgages and personal loans, which need in the rules of the CNBV. The amount of reserves that are those portfolio need are more are bigger than the typical commercial loan that we have.
So in that sense, that was you see an increase in reserves and hindering our net income growth for this quarter, right? So we don't think that we're going to grow credit card loans at a faster pace for the following quarters.
We did hinder a little bit more to the quality customers. So we're aiming for a more quality customer in credit card. So probably we're going to see not the same increase in the portfolio in credit cards for the next quarters. It will have a good growth, but not at the same pace, because we're aiming as I said to more customers.
So reserve is probably there in terms of that portfolio will not be as high. But the other portfolios that we're growing at a faster pace, as I said, auto loans, which we love because it has a collateral, right, or mortgages will generate more reserves.
So that will definitely be something that it will impact the net income. It's not bad as you see the NPL ratio. It's at the best that we have in many quarters. It's been -- it has an understanding result. And for sure, we are very proud for that because as -- what you saw in the pandemic. We are an institution that is well focalized on quality customers and that's why we have such a lean operation. And in that sense, we want to maintain that strategy.
Okay. Okay. But just to summarize, do you believe that the current level of your profitability is sustainable or guess other words yes. But I just wanted to understand what you could guide us as a sustainable ROE? Could we take this current level? Or do you believe that?
Yes, 2020 would be something -- yes, 2020 seems pretty fair, yes.
Our next question comes from Ernesto Gabilondo.
I have 3 questions from my side. My first question is also a follow-up in your net income guidance. It is running below your implied growth for the year. So just wanted to know how comfortable you feel to be more at the mid high end of the range. And I agree. Now, one potential key driver is loan growth and is likely to be supported by the nearshoring.
But what should be another line that could be improving in the next quarters? For example, OpEx came at a high growth. So I understand that you are investing. But I don't know if there is some room to see also some deceleration in that line or in another line that could make us think that we can see the net income more at the mid to high end of the range.
Then, my second question is a follow-up on NIMs. We have seen other banks that are starting to reduce the sensitivity to rates. So can you remind us how much does that changed of 100 basis points, representing millions of pesos after taxes today? And to what extent the sensitivity can be reduced? And how long do you think it can take?
And my last question is on, Hey. Just if you can give us some color on how much is Hey representing of Regional's net income? And how much should be representing for the full year?
Ernesto, in terms of the net income, we are experiencing a decrease, I think, in expenses in some of the lines of the expenses in terms of headcount for the next 18 months.
In terms of developers, for example, we've already think that we have 100% of what we need. Probably in the next 24 months that number will decrease, because we've already invested most. And we've changed multiple in terms of the experience customers have on the front end part.
So in that sense, we will see some items going down, for example, other thing would be in terms of digital marketing we've lowered our expenses almost in half. So that in terms of Hey Banco. So that will definitely to be a line that you will see impacted in the short term as well as some of the rewards that we give clients that we are only giving rewards to Hey Pro claims from now on.
So sure that's some items of the expense that will continue going down. In terms of -- for example, all the items related to more sales, for example, more POS investment in terms of the machines that were give clients or new cards that we give clients to, although that we charge it, you're going to see it in expense.
So you're going to see the expense and the income. So you will continue to see some items of the balance sheet growing at a faster pace because of the increase in the volume of transactions, right? So and that's where we wanted to divide the information and let you see how Banregio is achieving a great efficiency. And Hey is lowering -- being more efficient quarter-to-quarter and being able to see the increase on the financial margin and obviously, the expenses growing as well, right?
So different points of both banks that one is more in the consolidating part and one is starting and growing. And in that sense, that's what you're seeing expenses growing at that first. And we expect to have a more leverage operation this year. And for that part and that's we have seen how we have been very successful in growing loans.
And we think for that reason that we will going to be profitable when Hey Banco has its license probably at the end of the year, right? So being -- it's not going to generate a lot of profits in compared to Banregio, we think MXN 100 million, as we said in the past. And it's going to reach in a very efficient manner.
The number of clients, we still have -- we don't want to change the guidance. We do have our -- as we just rolled out the payroll services for our SME clients. And we are in talks with different banking service customers or that we have probably will generate a greater growth there in terms of clients.
But the Hey is growing more at a very organic pace. And it is growing at a very good pace. We all be investing on Google and Facebook, right? So -- or a huge investment there. So we will continue to further the growth. The most important part for us in terms of, Hey, is being able to have a very profitable operation since the inception of the bank and being able to generate great growth.
I mean, as you can see, the financial margin grew in terms of pesos grew outstandingly. I mean it almost grew 300%. And for sure, we want to continue. We will continue growing, I think, in that sense, as we've reached a very stable loan-to-deposit ratio, right?
So in that sense, we're pretty happy with the result. I mean we will prefer to other probably bank with x number of clients that not being able to reach that profitability because we have a lot of clients that are not producing great lifetime value.
So we want to reach the 1 million customer mark with the best base possible, right? So the best NPL, the best NPS, the best NIM, the best everything, right? So as you know, we want to excel in every line, not only in just one that doesn't make much sense anyways.
So in terms of the next questions about the NIM, sensitivity, in terms of?
This after tax. Yes, after tax will be around MXN 140 million per every 100 in the policy rate, 100 movement up or down. And we have a very similar sensitivity as the one that we have expressed of 16 basis points per 100 or 4 basis points per 25 bps movements.
And if your question is directly to if we are hedging in some way, not, we're not hedging. We maintain our swaps around just for the very limited portion of the mortgage, for the fixed loans, for the mortgage mainly.
But in terms of hedging, on the opposite way, no, we're not doing hedging. We maintained our sensibility. And as we mentioned, we are growing fixed rate loans like mortgage and auto that will help a little bit to reduce the sensibility in the future.
Yes. And also, as you can see, Hey has a better NIM. And as Hey start gaining more weight on rationales portfolio, that will help us to support the NIM.
Okay, excellent. And also, you were mentioning at the beginning that you have seen some of the clients moving from taking accounts to time deposits. So I think that it's also like a natural hedge considering that those should benefit under any seen cycle, right?
Yes. When the reduction of the rates came, we will adjust the rate that we pay to the time deposit customers.
And just a follow-up on this. So today, it's MXN 140 million after tax for every 100 basis points. But if we move before like we started to see this higher interest rate environment, how much was that sensitivity just to compare it to what was like a level of a more normalized interest rate?
No, it has not moved a lot, Ernesto. Obviously, in the amount as the asset base has changed, the amount of MXN 140 million could be less. But it's not because the sensibility, because the mix has been maintained in terms of the proportion of checking a variable.
The 2 main items that moved this sensibility is checking accounts with 0 cost interest because that doesn't move either way. And the variable rate loans, that hasn't changed a lot between 70% to 72%, depending on the point of time that you measure it, even though the loan book has grown more than 20% in the last 2 years, in the last 18 months.
The proportion is maintained because, again, also the auto, the leasing and the mortgage has been growing at the same pace.
And just last question on this. So in SMEs, in Corporates, the commercial loan book, you are charging DA plus certain basis points. Are you fully repricing the -- for example, I think in the past, you decided not to transfer all of the basis points to the client and you helped them a little bit in terms of the basis points. Are you following the same strategy or not?
No, not. This time, we are fully repricing as is packed in the contracts. At the end of the month, we have 2 different types of repricing. But generally at the end of the month or at the end of the next 2 months is re-priced with the current year. Some customers, we renegotiated the conditions, but it's case by case and it's the full contract. It's not the mechanics or methodology of repricing.
And then just on Hey, on the last question, how much do you think can it represent into Regional's net income this year? How much could it represent in the next coming years?
For this quarter, I'm sorry, we didn't put it here. Hey including Hey Banco results is negative, it's minus MXN 59 million. You can calculate if you do all the mathematics in the slide that we are presenting from margin loss nonfinancial minus expenses. And for the full year, we expect to be still low with all the changes that Manuel presented like MXN 100 million out of the MXN 5.5 billion. But for the next year, we expect it could be more than 10% of the net income of Regional.
Next question comes from [indiscernible].
Could I go back to the question on the guidance, I was not very clear about it. If you look at the first Q numbers and do a run up for the year, even adjusting for seasonality, we are not reaching the -- even the lower end of the guidance that you provided of about MXN 5.5 billion. What is going to change? I know you mentioned that NIM this quarter was a bit weaker and that should expand in the coming quarters. But how about provisions? Should provisions remain at these levels or that should increase? What would be the driver for you to reach the guidance that you provided apart from slight NIM expansion in the coming quarters?
My second question is on Hey Banco. I think the bank is doing quite well. But you're now seeing more competition in Mexico. For instance, Nubank has been quite active in rolling out its credit cards and is targeting more the younger population. Do you cross paths with players like Nubank or is it more with the clients of, say, not the digital bank? What would be your digital -- competitor on the digital banking side in Mexico and how are you positioned versus them?
Nisha, in terms of the guidance, if you remember, as I am seeing your report, we guided 10% to 12% increase in profit for the full year. And the main reason is because we knew that we had this release of provisions in the first quarter. Then in our budget that was included. Our guidance for provisions or for cost of risk is still 0.7 to 0.9%. This quarter was 0.8%. It's just in the middle.
We expect to maintain that level of provisions around 0.7%. We expect, obviously, the being optimistic, the lower range. And the growth in the loans, as Manuel mentioned when he explained the dividend in answering the question about nearshoring. We expect higher growth in loans. We guided 10% to 15%. And we are expecting to be in the upper range of 15%.
That mix and the NIM expansion that I explained with the renewal every quarter of the -- on the securities investment there is the asset side of the repo business and the nonfinancial income. If you saw this quarter was a very difficult quarter for FX. It's even split that we have a reduction of 5%.
But March, you can see in the CMB data, well, you cannot see. You can see January and February, but March was a much better month. We are opening new exchange Banregio exchange branches. And we are increasing our activity on FX mainly and that will be other lines that will improve.
And Manuel also mentioned some reduction -- not reduction, but decrease and the increase. So reduction on the pace of increase on the expenses, something that we haven't mentioned. But in February, then, February and March are already impacted. We apply it a general increase for the -- for our employees.
In average, it was a 6.4% of increase. Then, that will not happen again that already happened in February. And it will be maintained that increase. The [indiscernible] lines are mainly that the fourth quarter, as you know, by seasonality is always bigger. Both because the loans will be increasing along the years, but also all the transactional and nonfinancial income that is collected or associated in the last quarter, even with the [indiscernible] and Christmas.
Okay. That will be in terms of why we expect the -- at least the 10% to be achieved in the full year.
And for the second question, in terms of competition for Hey Banco. So we've definitely seen a lot of movement in terms of digital offerings. And I think this is a very positive thing in terms of client being conscious about and being able to have a more clear understanding on the digital offerings that the market has.
I think that is a very positive trend. And it helps us, obviously, in terms of gaining more reconnaissance from clients. So that is, I think, one very positive thing. The negative part would be that the cost of the ad words in terms of Google and Facebook will clearly be more expensive.
So that's what we're shifting on trying to be generating the client growth on organically, completely organically or most of it organically, right, so trying to generate most of the organic growth. We already halted the expense on Google and Facebook. We've reduced it significantly.
So in that sense, we still are seeing organic, good organic growth, better churn, better activation, quality customers in terms of loan applications. So we are comfortable at this moment and being able to generate quality customer growth, not only customers that come and go, right?
So as we said, we're here for the long term. That is -- it is a very positive trend. We're seeing that as technology continues to develop. We see more opportunities to have an operating leverage for the near future.
So we see more. We see that we're going to be more able to have more employees per customer -- customer per employee. So that I think, will be greater on in the future, more so than we expect I think.
And I think that is a very positive thing. And that's why as we continue to see that the advancement of the new banking license is about to reach. We want to get to that point in a very profitable manner.
In terms of what the offering is and something that we want to clarify it. Nubank mostly serves credit cards around MXN 2,000 average. Our average credit card is MXN 50,000. So it is pretty different. Our average year -- the average client has around 35 years old. So it is not 20.
So it's not we're not investing in trying to give cards to people that are not in the system. So our main target is -- our main objective is funds that are pretty badly serves in other banks, right? So underserved in BVA or Norte or Santander that really -- obviously, it is -- the pricing for us is different.
And obviously, the clients that we cater are digitally native and are pretty much more efficient in terms of their operations. And that's why we are going to be as efficient as well, right? So I wouldn't say that new ways are competitors. Obviously, there are competitors in terms of debit cards. Their debit card just roll-out.
Obviously, they don't have the infrastructure needed. For example, they cannot go to any ATMs without the cost, right? So it is a different debit card for customers. And but for sure, it is something that it is moving. I mean, OXXO has already said that is further expanding their financial products.
And in that sense, we see more strong competition. But then again, I think that we have a great branding. We have a great customer understanding. We've already invested 100% of what we needed. So for sure right now, we think we are the best to continue to execute and being able to gather all the efficiencies of the technology and being able to have a greater NPS with our customer base.
And so I think the trend of all generating more market share will continue. And -- but we don't have to do that sacrificing NPL ratio. We don't want to sacrifice it, growing the OpEx without recent, right? So we want to be, as you know, as well, very prudent and very clear understanding on our profitability that's -- that are, as you know, our main driver, right?
So in that sense, we are happy for the competition that where they're coming in. I think it is a very positive thing. And there's going to be different impacts. But I think for us to continue growing at the pace that we are achieving, I think we're not that concerned really.
I mean, we're finishing and they're just starting. So in that sense, we are in a very different pace.
Our next question comes from Yuri Fernandes.
I have a question regarding your cost of risk. I would like to understand how much is somewhat driven by loan growth, especially on Hey, you're growing Hey volumes by 2x versus last year. So that's the first question.
And also how NPLs will behave? Because looking to the Hey NPL on this slide on relevant figures, we see Hey running with 0.7% in NPLs. I think growth may be helping the NPL ratio here. But given the mix on auto loans, credit card, my question is -- how do you expect to Hey NPL to move up in the future?
Like what would be the level for this to stabilize? Or if you believe it is such a low NPL, it's somewhat sustainable. So that's the first one, like cost of risk and Hey NPLs.
And I have a follow-up on margins. I think there were many questions on margins. And I think Enrique already explored like some explanations on funding, like maybe you reducing a little bit the spread for some clients.
But it's still, when we look to the NIMs and we add up the leasing figures to the NII, because I think there was an important reclassification last quarter. So when we add leasing to the NII, your NIM was somewhat down year-over-year or somewhat stable despite the mix and despite higher rates.
So again, I would like to understand a little bit more like what drove this kind of NIM pressure this quarter because it was -- for me, it was a pretty big drop. And I still don't understand. I don't think -- I don't know, like funding, yes, it explains part of this. But the mix because of Hey is in your favor, right? So I struggle to understand your NIM pressure this quarter.
First, in terms of NPLs on Hey, you are right, its -- obviously, is increasing the loans and it's not a stable portfolio and it will continue growing. As you can see, we grew the portfolio from MXN 3 billion to MXN 9 billion, MXN 9.4 billion.
And mainly, we have that is pressing the cost of risk that also you can see here in the slide that we are presenting that is 5% for Hey, 5.3%. And it's mainly on the credit cards, because, as you know, the credit card generates provisions for the line -- for the total line independently of the users of the line.
That's what is explaining the increase in provisions in Hey as we are growing the loans. We don't expect a deterioration as time goes by. We have 4 main lines in Hey of growth. It's not in this slide. But you can see in the slides that we presented. The ones that are very, very healthy is, small businesses and mortgage is close to 0 or in fact, it's 0% of NPL right now.
And in auto, we have a lower NPL than in Banregio by the growth. I understand there is the effect of the growth. Right now, it's 0.3% NPL. And in credit card is around 2.6%. And we are working to improve that level of NPLs for credit card.
Probably we'll hike a little bit in credit cards, but then it should go down.
Exactly. It could go a little bit higher as we open and we recalibrated the model in this quarter. Then, you will see that in the next quarters, but it will go down. And in the other 3 products, we will maintain all the factors that have us this very good quality asset portfolio, both in the origination, the fraud prevention and the collection.
The 3 of them are very well put in both in Hey as well as in Banregio. In terms of NIM, if [indiscernible] remove one, we try to explained with this slide, but it looks like it's not being self-explanatory. In the left side, we have the margin as it was reported every quarter of the fourth quarter.
What Manuel mentioned on the presentation, on the conference call presentation at the beginning of the call, it was the difference, the MXN 680 million that is noted between the increase in the interest income and negative on the net leasing.
On the right side, we are normalizing the income statement as if we have made the change prior on the January 1, 2022. That's why we present different figures. The ones that you see on the left are the ones that are impacting are presented in the previous reports.
Then, you are right. The movement of the MXN 6.5 billion from pure leasing to financial leasing or lending, because it then goes to the loans line in the financial statements is improving the margin, because leasing has a better margin than most of the loans.
And also, we have to consider something that we -- I have already mentioned, the MXN 30 million of repurchase agreements or collaterals, as is reported now for transparency is increasing by 8% the asset.
And these are a business that is a very low margin between the 2 lines. I don't know if that explains?
No, that's super clear, Enrique. In this slide is actually helpful for me. I guess I missed this slide. And just a final one on Hey, do you plan to keep growing at this pace? I know it's very underpenetrated. You are invested there, like but what is, your expectations for the loan growth only in Hey?
Yes. So we definitely will see an increase and that's our plan. So our plan is to continue growing loans at this pace. As we are rolling out personal loans this following month and payroll services on June. So in that sense, we think that we will continue growing at a faster pace, in a more profitable manner and being able to cross-sell more loans.
So the main aspect is that we don't want to be a credit first, right, in terms of consumer lending. So in terms of personal loans and credit cards, we don't want to be their first -- we don't want to reach them as credit first, right? We want to try to be -- and to have a customer base that has more deposits as that's what we started growing deposits first and then loans and so being able to cross-sell more.
Obviously, in our -- in terms of mortgages and small business loans and auto loans, the clients that we serve are credit first. But only customers that are already have a clear understanding of how to repay a loan. So we're not serving what we call no hits or thin file. So no thing filed, no, no hits. So we're reaching clients that have already the experience of being able to understand the risk that they're taking and to understand the margins.
Something that's really happening is, for example, CARDIS. So the French company that they had a huge operations here in Mexico, they are divesting. That's what I understand. And I think other companies that we have, that we understand that many are not growing at the same pace.
So we see many companies not growing at that pace because of probably some -- they don't have the same appetite and we are growing at a very good pace. So the nonfinancial entities here in Mexico are the ones that are -- so the big financial companies are not lending that much, I don't know why.
In that sense, we are well poised to continue growing at a good pace. So that's where we see a market share growth in terms of auto loans in the system. So in that sense, I think with that trend will continue.
Our next question comes from [ Shane Matthews. ]
Just wanted to understand, in the normalized business audited financial statements, the slide that you showed, does that also normalized for the changes done in accounting for the reports? Or does it only normalized for the change in leasing income accounting?
It's only for the leasing as the repo margin has already been included. The repo -- obviously, the repo that is in -- that used to be always in the balance that are the investment securities.
And that's what we are trying to clarify that part of the repo business is that we buy investment securities from government bonds and then will repo to our customers. In this case, is someone else bought the security and is repo to us. And then we'll repo that repo. It's a kind of confusing. But it's very similar with the difference that we don't have the original paper or the original bond in our balance.
That's why we were being previously presenting net. But the margin is already included. That's why you don't see a change in the margin for that reason is mainly the one that changed in the financial margin is the impact from the leasing business.
Just to see if I understand this correctly, the change in repo accounting does not affect the P&L. It only affects the gross and net margins in the balance sheet?
Yes. The repo change is only in the balance sheet, yes.
And just to understand the loan growth a little better. So we see that the pace of interest income growth in absolute terms has slowed down a little bit. But we see strong growth in the loans for the last 2 quarters.
Did we have to reduce the pricing of the loans in the core business of wholesale loans in order to grow these loans? How was the interest rate pricing of the loans behaving? And if you could also share remind us the fixed vis-a-vis variable rate loans and the repricing frequency of the fixed-edited loans that we get?
Yes. The pricing policy has not changed maybe the mix and I don't have the exact numbers between large companies and small companies. But it's moving faster in percentage. But maybe not in -- in average weight because as you know, we have 2 large businesses, wholesale and retail.
And wholesale is still pricing around TA plus 3.5. Then, we haven't changed the rate policy, but maybe the mix in the growth is affecting. We will give more color. It's a good question to to split by size and by active rate. In Hey, not, in Hey, basically, as we have mentioned, is mortgage, small businesses and auto business.
If you could also tell us about the -- which of these loans are fixed at rate loans and which are variable rates?
No. We haven't changed the proportion even though we're growing faster mortgage auto, leasing that are the 3 main lines that are fixed rate. We have also increased the growth in variable rate is around 70% to 72%. Also, we will communicate in our page the exact proportion.
And my final question, if I may, is -- so we saw some changes in our accounting policy last 2 quarters. So we saw leasing and in fourth quarter last year and repo this quarter. Any other accounting change that is being contemplated that we might see in 2023?
No, no, no. There is one that -- in order to be very transparent and I understand that we will publish next Friday, the annual report. And tomorrow, we have the general assembly. And we will make public the results disseminated by our auditors.
There is MXN 40 million in the balance that is very small comparing MXN 145 million. If you remember last year, we had reclassified all the rents with the IFRS 9 with the international financial norms. We had to recognize a liability for all the rents that we have signed, all the branches and we rent every single building that we have.
We don't own our own branches. And then, in the -- during the process of the auditing, we recognized that we had to increase the liability by MXN 40 million. It's under small disclosure. It's again, only on the balance. And that will be all that finished with all the change to IFRS 9.
Next question comes from Jose Cuenca.
Really just a follow-up on the sensitivity. If you could just expand a little bit more on why you are deciding not to actively or more proactively hedge. Maybe, I don't know, maybe it's not economically feasible for you guys, not really sure. I just wanted to understand that part because the other things have been already very clear, very a lot of details. Just the rationale behind the decision to not hedge more actively?
Well, in a sense, we're -- the liquidity that we have -- the excess liquidity that we have, we invested in short term in order for us to further on being able to loan and being able to hedge that way, so hedged naturally to our loan and to our client base. So that's what -- we're a commercial bank and that's what we are aiming for and that's what we do.
In that sense, that's how you should be able to hedge in that sense. So being able to generate more long-term loans, being able to generate more profitability with our clients and being able to cross-sell more loans that will generate more financial margin increase, in that sense, being able to win them.
As you're being able to see our ROE in low interest rates environment, we've been being able to reach good profitability levels. And in that sense, we think that we will continue having a good profitability in terms of ROE when the environment in terms of interest rate changes, right?
We are expecting -- we are not expecting a lot of hikes. We see like a more neutral level in terms of -- further on in the short term and thought, but then again, probably a lowering of the interest rate at a slower pace. And in that sense, being able to generate more financial margin growth, even so that the interest rate continues to go hiking down because we don't see it drastically coming down in the short term, right?
So it's going to be a more gradual effect. So we're going to see a full year with high grades this year and probably then continue to decrease on next year, right? So we do have a lot of good positive things in terms of growing loans. We see that the -- as I said in the beginning of the conference, we see a long-term cycle that started probably 12 months ago or a bit more.
And we think that that trend will continue as we talk to the best. So in that sense, a profitability that will come probably from loan growth and being able to generate more market share as we will poise to do so, right? So I don't know if I gave you more color.
Our next question comes from Gilberto Garcia.
I was going to ask about the sequential NIM trends. But the slide that you showed was careful understanding the extraordinary impact. I know this was by design or it was a last minute addition. But this slide is not in the presentation that you uploaded. Anyway, my question is on like looking at -- looking forward -- I guess the starting point from NIM should be what we saw this quarter. And I guess just being aware of the noise of the fourth quarter with the reclassification.
But this first quarter did not have any additional extraordinary reclassifications, right?
Answer your question, Gilberto. And apologies, it was not by design. We decided to make public this slide in the night as we saw the reports yesterday and the questions.
We thought originally that we had explained. And obviously, we didn't explain very clearly, last quarter, because the main movement was done in December. Also being very transparent, answering the second part of the question, yes, it was still during the audit process.
As you know, we closed in December. And then we start all the auditing. We reclassified MXN 500 million more during the January of leasing. That's the only and the one that we have been mentioned about the repo. That's and in terms of considering from now on is the first quarter, as you see, the first quarter is not normalized. It's already normalized. It's including the MXN 6.4 billion of leasing in the lending side in the loan portfolio and should not be any more movements.
We already closely out it. And tomorrow, as I mentioned in -- after the general assembly, we will make public the report and the audited statements, financial statements.
And then, secondly, on interest expenses. Do you believe that following this increases in the rates that you pay are due now on, let's say, more competitive basis or do you believe or expect that there could be further increases on those deposits.
We are very competitive right now. The only way there are further increases, I will split Banregio and Hey. In Hey, we will maintain the 10%, even though if there are further increases or if we decide to change, we will communicate.
But it's fixed. In Banregio is moving with the increases the cost of funding; in time deposits is a percentage of the tier or a percentage of the sets that these are treasury ones that are very close to. If the rate increase the insurance worries. If the rate increase, the Banregio time deposits will increase in a portion, but the Hey not, I don't know if I was clear?
Our next question comes from Andres Soto.
My question is a quick follow-up on the spin-off process for Hey Banco. I would like to understand, I understand this depends on the license. But in terms of the operational separation of the entities, how are you doing is all the additional costs already reflected in the rational numbers? Or we should expect additional cost pressures based on de-synergies from this spin-off?
And also, if you can remind us what is the capital levels that you intend to allocate to this subsidiary?
So in terms of the capital that we expect to split, it is around MXN 1,500 million. It is the capital needed for the loans. And we expect to have 18 months from now that we -- I think -- we think that we're going to be able to pursue to split the banks definitely. We expect to have the banking license approved this year. But then you have 6 months to begin operations.
So in that sense, that's what you -- that we expect around MXN 1,500 million of capital needed for those loans that we will have at that moment. That will require that capitalization and that level of capital.
In terms of the OpEx, we do have some hiring to do in terms of audits of lawyers and compliance, but that's it. That's probably -- that's -- it should not be much. Definitely, it will be something, but not much. And in that sense, that would be the only part that we are missing out of the hiring.
As I said, the developers that we have right now, for example, that is -- most of the headcount is already invested and it's not -- we don't expect to grow even further. So the only part that would grow is the commercial part and the ones that are -- and only asset for compliance and regulatory purposes, right?
And still -- capital, but now talking about rationale. You mentioned the possibility of a second installment for the dividend by November, depending on growth. I'd like to understand what is the metric that you are looking at? And if you look at your guidance for loan growth, 10% to 15% this year, at the high end of the range, will you be able to distribute dividends? Or what is -- where you thought or what is the capital ratio that you see us as a limit for deciding on this additional dividend?
Yes. It will not depend only on the capitalization ratio that we had at the moment. It will depend on how we see the next year going on. So we see a further demand and we see a further increase in dynamism, which we probably have, then, definitely we would consider to allocate capital for loans, right?
If not, if we don't see that effect, we'll definitely consider doing it. That not only looking, as I said, on the capitalization ratio, so trying to look a bit further. So that's why we split into the dividend. So we're going to have more color in the future and being to allocate capital in a very efficient manner.
So if we don't have use for that capital, definitely, so we're going to have that dividend going on. And if not, then, it will be because we're seeing a more dynamic growth in terms of loans and in terms of big economic activity in the region.
Since there are no more questions, on behalf of our senior management, I would like to thank everyone for joining the call. If additional questions arise, please don't hesitate to reach out to Leandro in our Investor Relations team. Thank you and have a good day.
Thank you, everyone. Thank you for participation.