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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 Regional's Second Quarter Results 2018 Conference Call. [Operator Instructions]
Mr. Manuel Rivero Zambrano, you may begin your conference.
Hello, and good morning. Welcome to our conference call for Regional's Second Quarter results of 2018.
Our financial margin grew 13.9%, and our NIM was 6.4%. Our efficiency ratio was 42.5%. In the last 12 months' ROE was 20.3%. Our total loan portfolio and our core deposits grew 9.5% and 18.1% year-on-year, respectively. The nonperforming loans ratio was 1.9%.
On financial highlights. Profitability. The net income at the end of the second quarter of 2018 was MXN 1,565 million and the NIM of total loans was 6.8%. The ROAA was 2.7%, a 17 basis point growth year-on-year.
On growth, our time and demand deposits grew 29% and 5% year-on-year, respectively, and our shareholders' equity grew 16%. In terms of risk, asset quality was 1.9%, and as of May 2018, the capitalization ratio of Banco Regional de Monterrey was 13.8%.
Following, I will highlight some items of the second quarter of financial statements. In the balance sheet, we can see the operational leasing increased 19% compared to last year. And our coverage ratio was 1.2x the nonperforming loans. Our performing loan portfolio increased -- and the consumer loan portfolio increased 28%, and our mortgages grew 15%. Our core deposits increased 18% year-on-year.
In the financial margin, you can see a 14% year-on-year growth, commissions and fees 5% and insurance and FX fees grew 26%. The noninterest expense in total increased 15% year-on-year.
On total loans by region, we can see that Nuevo León grew its loan portfolio at 9%, Mexico City at 7% and Jalisco at 11%. In total, the remaining locations grew 11%. In terms of asset quality by product breakdown, you can see that commercial loan portfolio had a nonperforming loan ratio of 1.9%, mortgage 1.9% and auto loan at 0.8%. Our consumer loans NPL ratio was 2.2%.
In terms of capitalization ratio, Banco Regional de Monterrey had a 13.8% and [indiscernible] Banregio ratio 14.1% as of May 2018. And Banregio versus the banking system, Banregio's ROE is well superior to the system, compared to the system, of 15.7%.
The cost of core deposits was 4.7% versus 3.7% of the system, and the NPL ratio of Banco Regional de Monterrey as of March 2018 was 1.9% versus 2.2% of the system.
Thank you very much. I appreciate any questions. Thank you.
[Operator Instructions] Your first question comes from the line of Carlos Rivera from Citi.
My first question is regarding loan growth, so 9.5% year-over-year. Just wondering if you could comment a little bit if you're seeing a pickup in demand already, I mean, especially after the more friendly tone from the new administration. I know it's early, only a few days in July, but just wondering if you are seeing any of this, especially since the guidance for your full year indicates potentially up to 13% loan growth. And if in this tone, you could comment if any of that is coming more from the small-company side or more from the medium business segment? That will be my first question. And my second question will be related to the leasing income, to operating leasing. We saw a significant pick up on the net income generation there, about MXN 210 million. I remember that in prior conference calls, I think they've been guiding for a new normal of around MXN 170 million, MXN 180 million. So just confirming if this new level is sustainable and what is driving the stronger performance this quarter.
Well, thank you, Carlos, for your question. In terms of loan growth, we do see a pickup at the second quarter of the year -- sorry, in the second part of the year. We have had a, I think, a good growth, but not to the extent that really we're comfortable with. I think as you said, now that the -- as things dissipate with the elections, I think people are going to be more optimistic. We do see some seasonal growth normally in the second part of the year. We do normally have and experience that type of growth, as you have seen in the past, and we're not changing our guidance for this year in terms of loan growth. We do -- we are growing our mix in a very good rate. I mean, the mortgage is growing at a good rate. Consumer, auto loans are growing at a very good rate with great performing loans ratio. I mean, if you see that growth there, you can see that it's with the input or mix in terms of -- in reaching our NIM. And I think that's going to be a good growth of NIM in the future. We're not -- we are growing both the small and medium-sized companies, more medium-sized companies. Small companies are coming back, and we're very optimistic about this in the future. In terms of the leasing income, I think the normalization would be around MXN 180 million to MXN 190 million. That's an approx number.
Okay. So if I could just follow up then on the stronger result on the leasing part this quarter. What was driving the higher number this?
Carlos, yes, it was, as you remember, we mentioned that we immigrated our systems in the fourth quarter of 2017. And we were having, I think, some operational issues in terms of recognizing income. The access or the extraordinary income in this quarter is recognizing income that we didn't recognized that we collected that we didn't recognize in the last 2 quarters. Right now, we are more stable. We are not having any issuance problems or collection problems. We are fully immigrated to the new system. Then we should see a more regular income for the next quarters. Summarizing, it was the recognition of the income of collections that we were not able to match in the last 2 quarters, in the last quarter of 2017 and the first quarter of 2018.
Your next question comes from the line of Ernesto Gabilondo from Bank of America Merrill Lynch.
My first question is a follow up in loan growth. I believe you have been very conservative in some states, given NAFTA, elections and the volatility in the peso. So can you elaborate in which stage were you more cautious and if there was any sector in which you were concerned? And then my second question is on deposit growth. I have seen you grow in more than -- you have been growing more in time deposits than in checking accounts. So I just want to know if you expect this trend to continue or if you are doing a plan to strengthen the retail deposit base. And for my final question is on the expenses line. We have seen it has been growing at double digits, and I think it's related to some IT investments. So if you can elaborate on which are those investments? And what do you expect to see the OpEx growth in the next quarters. When do you expect to see again single-digit growth in this line?
Ernesto, can you repeat the second part of the question? I was taking notes on loan growth.
Yes. The second question was related to the deposit growth. You have been growing more in term deposit rather than in checking accounts. So I don't know if you are doing something different to strengthen, again, the retail deposit base or checking accounts rather than the term deposits?
Okay, Perfect. Thank you for your question, Ernesto. Yes, on loan growth, we do -- I think what we experienced in the first part of the year was that the demand was not that profitable for us. You see that slow demand generates less margins, and we think that the risk that we were taking was not that rewarding. I think some banks did growth more, definitely, yes. I think that it could be some part of -- the geographies are playing or the industries they are at, but we're not seeing any geography that's really growing more than any other. I think now that trend is going to change, for sure. I think most people delayed many projects. And I know that's for sure, because as businessmen, we were very cautious about the elections. It's almost change, and I think most are more relaxed. So we had our board meeting yesterday and that's the tone we're having. So I think that's going to impact on our loan growth in the medium term -- in the short-term. In terms of deposit growth, yes, we do have had a better -- I think it's a better marketing strategy in our demand deposits. Although, we are growing our demand deposits in medium and small companies at a very good rate, we did had some government's checking accounts that were not -- that we knew we're not going to have for the first part of the year. So we don't -- as you might expect -- as you already have seen, we had not had hits on our NIM, because those are -- were not that very profitable. Those checking accounts were more expensive than the norm. So I think in the second part of the year, we're going to see a bigger pick up on checking accounts, and I think that's going to be good for our NIM, basically.
Okay. And on my final question on the expense line?
Yes. Well, in the expense line, we've been able to invest in terms of a lot of security and controls. As you might know, cybersecurity is a good threat, a very nice threat that we have to mitigate. As banks, we are working on a, I think, a better plan. And as you might expect, I think that those -- our expenses are growing at a faster pace, and that's not going to change in the near future. We are -- we for sure know that the bank is in a very well position. And in terms of compliance, we are investing. And we have been investing a lot, because of -- our cost of compliance has gone up in terms of -- for example, in terms of money laundering regulations has been more under than we want, and that's incrementing our cost. We don't see that going further. We are not expecting that we should invest more in terms of compliance issues with that expenses. And we are growing in terms of technology. We're growing more and more of our developers. And you -- we're preparing a piece in terms of our channel optimization strategy, and I think that's going to be explained a little more in detail soon. I think what's -- it's best for us to keep us -- keep you informed on what we're doing in terms of our channel optimization strategy. And we've been changing -- our branches seem to have more orange color, and we're changing the way we work inside our branches, we've been changing how we're selling, where we're investing in CRM and NPS software. So we're changing our products. We're doing it more attractive. So those are the types of investments we're doing in order for you to see a more robust cost of funds, a more cross-selling, more noninterest expenses, income and definitely a more robust bank. We know that our brand is very good, and we need to invest in creating a way to have better cost of funds very -- in a very manageable way. You can see our efficiency ratio is, it's a very -- it's in a very good number, it's 42.5%. We're very comfortable with that, and we think that we're managing the bank in a very efficient way. Our profitability has not -- I mean, it's not been hindered. Quite the contrary, it's increasing. And so we're happy how the investments are going to go in the future. So we're going to send some material soon so we better communicate our strategy on channel optimization. Hope that clarifies your question.
So with this channels optimization and transforming the products, should we continue to see double-digit OpEx growth in next quarter? When do you think it should be normalizing more to single digit?
Ernesto, we don't expect to see single digit. We haven't seen single digit growth in expenses in the last 2 or 3 years. This year was especially difficult in terms of inflation. The inflation was 7%. Then basically, in February, we recognized an increase of 7% in all the employees' income plus most of the rents, all the rents on property. We aim to go back to the 12%, 13% that we used to have in previous years. But until the next years, we -- for the next 2 quarters, our guidance is around 14%, 15%. We believe we will stay there. Now this quarter was 16%, but if you see along the year, our full year will be around 15%. But going back to 1 digit, we don't see it in the short-term.
Your next question comes from the line of Frederic De Mariz from UBS.
Two follow-ups and a question. A follow-up on the funding, Manuel, you've mentioned that you were expecting a pickup in checking accounts for the second half. I just wanted to know why. Is it simply seasonality? Is it because the activity should be higher? Or are you doing something specific at the branches maybe in terms of incentives? So that's the first question on funding. Second question, you mentioned the channel optimization, I just wanted to make the theme a bit broader with fintech, and we know you've been looking at this in details. Anything new? Anything you'd like to share with us in terms of opportunities or new products that you find relevant? And then the third question on competition. You touched on the theme very quickly earlier. Can you just mention, are you seeing anything different from the other banks, either the large banks or the smaller ones, the medium-sized ones?
Fred, Thank you for your questions. Well, In terms of funding, yes, part of it is explained by seasonality. We've done a lot in terms of creating the best environment for checking accounts to grow. And as we said, there's some segments that are growing at a very fast pace, and we're very comfortable on saying that the second part of the year is going to be a better number in checking accounts. In terms of the fintech, yes, we are very excited about how the things are panning out. I mean, the fintech law has been passed, and now this government is aiming to get it out after -- I'm sorry, before going -- changing governments. So I think that's a good thing for the ecosystem in terms of creating the best environment for fintech growth. Right now, in the short term, nothing -- we're not doing nothing, I mean, we're not buying something irrelevant. We're obviously doing things ourselves. And that's part of the thing we want to explain in terms of the channel optimization, part of it is the explanation of our mobile strategy and what we're doing for our medium-sized companies. The things would create a lot of benefit. I mean, most of our transactions for medium-sized companies are online, and we know for sure that we have to invest to create better liquidity for our medium-sized companies. And I'm sure that's going to impact the growth on checking accounts, for sure. In terms of competition, well, I mean, there's a lot of action, as you already know. I mean, Sabadell, Bajío, BBVA, Scotiabank, Banorte, those are our main competitors. We've seen some a little bit more aggressive than others, but I think in a sense, you can see as a system, it's growing at a very -- I mean, low single digits and -- I'm sorry, high single digits. And I think that number is going to change in the short term. Sometimes, the banks are growing at a faster pace than others, definitely. I think that's part due to risk appetite.
And that's very helpful. On this front, do you see that they are more aggressive on the distribution? Or do you see that they're also putting pressure on the rates and on your margins for the ones that are more aggressive?
We're very cautious about -- in this environment, about taking low-margin, high-risk type of loans, because that's not our style. So we were very cautious about the low demand, high -- low prices. We were very cautious about taking risk. I think right now, the environment is going to be more relaxed, and that's going to be very good. I mean, you can see the economy, it's already picked up a bit. So I think that signal that's a bit good. And obviously, I think the next play would be obviously the NAFTA between [indiscernible] and Trump, let's see when that pans out. But in the short term, we do see a pickup in terms of loan growth.
Your next question comes from the line of Claudia Benavente from Santander.
The first thing, do you feel like any synergy of maybe working with other bank in terms of their technological processes that you have to invest due to the investment in biometrics and money-laundering, new requirements that have been mandated? And my second question is regarding consumer loans and mortgages. They have been growing heavily with respect to the average loan growth. So I was wondering what has been driving that and if that growth is sustainable.
Thank you, Claudia. Well, in terms of the synergies, we do have projects with other banks. In terms of the compliance of new law of identity, we're not planning to create a synergy with other bank. I think that project is going to be more efficient if we do it ourselves. That's, I think, for a moment, we're obviously analyzing the other option, but I think for now, that's going to be our best bet. And I'm very -- we're very excited about that piece of regulation that passed. I mean, identity fraud in the whole system, it's quite high. And obviously, that helps a lot in terms of growing in the consumer arena. We have had a very good experience in growth, with very low risk in our consumer, our mortgages and our auto loans for our families. We're very comfortable on how we're doing that. And I think that's growth that's very solid and should continue in the short term. And I think it's going to be a more interesting part of our business, that's in the medium term. So I think that, that growth should not stop in the short term, no.
Your next question comes from the line of Neha Agarwala from HSBC.
My first question is a bit on the Mexico business. We saw there was some deceleration in asset quality for the small and medium businesses. Is that coming largely from the Mexico portfolio? And when do you start -- when do you expect to see a pickup in Mexico loan portfolio specifically? And my second question is on your rebranding. How has the feedback been from consumers -- from the customers so far on the rebranding and the new name for the business?
Thank you, Neha. In terms of Mexico City, yes, we do have had a lower growth, and yes, we do expect it to be a better growth in the second part of the year. We did a bit of cleaning in our portfolio. We didn't like some of the loans we took in the past, and we just got rid of some risk that we're not comfortable with. So most of the loan growth we didn't had in Mexico City has been because of we were risk-averse mainly. And in terms of the rebranding, it's going great. I mean, the best thing, we're very excited about it. The team is very, very excited about the project, and it's producing great results. I mean one of the best, I think, we could be. Our NPS, our Net Promoter Score, has gone up drastically, and that reflects for us the customer's -- the customer experience. And that's going to be impacting, for sure, the checking account increase and obviously, the cross-selling that we could do to clients, when they have a bigger NPS. And digitalizing their clients, I think, have been -- we're growing in terms of app users in a very fast rates, and that, for sure, for us is very exciting, because that, obviously, we're aiming to be their #1 bank. And we do know that they have to have the best channels, the best services in order to have that business with us. So we'll have more on this in the short term, and I think you'll see the results very soon.
[Operator Instructions] Your next question comes from the line of Lawrence Rosenberg from MacKay Shields.
I was just wanting to ask about credit quality. I know your credit quality remains very strong versus the broader industry. However, the NPL ratio has been ticking up the last couple of quarters, and your NPL coverage has been coming down. So I was just wondering, should we assume from that, that you believe that the NPL ratio should revert and start going down? Or can you help us understand maybe why you've been comfortable seeing the coverage ratio come down while NPL ratio has been going up?
Thank you, Lorenzo. Well, in terms of quality, yes, we've seen a pickup, but those were more mainly hiccups on our medium-sized company loans. As you see, the coverage already has gone down because the credit quality has gone up. So that's the main reason why our coverage is -- got lower. And we can't do anything on our reserves. It's a very strict methodology, and we cannot do more and we cannot do less. If you do, obviously, less, you're going to -- you get sanctioned, and that's not a good thing. We're very strict on how we follow the methodology. So what you see is the law completely abide -- I mean, in compliance. But in terms of how we're going to see that in the next part of the year, I think the cost of risk should be 0.8%, approximately, for the whole loan portfolio.
Okay. Okay. And for my second question, on Slide 12, you show your geographic diversification. And you had been -- you had shown in 2013 to '15, a very nice diversification away from Nuevo León, but that has obviously kind of stalled in the last 2-or-so years. And I'm just wondering, a, why has that been the case. And B, now that there's some more political stability and hopefully, economic stability, would you see that diversification continuing now?
Well, yes, I think diversification will continue. I think that the thing with Nuevo León is that it has a very strong growth, and it's obviously growing at a faster pace than most of our neighbor states. So it's difficult to diversify when your home state is growing at a very good pace. I mean, it's a much better portfolio than any other geography in Mexico City -- I mean, in Mexico, the whole Mexico. I mean, it's the best growth, the best NPLs. And I mean, the productivity in Nuevo León is quite different from other parts of Mexico, north in Nuevo León. But I think, yes, for sure, we're diversifying more and more, not even in our medium-sized company loans, where our checking accounts, our deposits are growing in a very good manner outside Nuevo León. So we're very comfortable on our geographic expansion. And I think as we do our channel optimization better, I think that trend will continue.
Longer term, do you have an idea of what percentage you would expect the other states to be as a percent of the total?
Well, I think we might go up to 70%. That would be -- yes, that would be optimal.
Your next question comes from the line of Marlon Medina from JPMorgan.
So FX fees were high this quarter. Is there any particular reason for that, I mean, [indiscernible] productivity or something like that? And do you have any view on the normalized level for it?
Well, we've been having a great -- I mean, we're -- we have been investing a lot in growing our FX infrastructure to serve our clients, and we're very comfortable in how things are panning out. We think that business is growing at 25% in a normalized manner. We do -- are expecting a very good close of the year. And I think how things are panning out, 2019 is going to be a better year.
There are no further questions at this time.
Well, thank you very much, everyone, for participating in our call. Any further things, please let us know. We will sure pass the pieces, as we said, up the optimization channels. And anything, please let us know. Thank you very much.
This concludes today's conference call. You may now disconnect.