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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 Third Quarter 2018 Conference Call. [Operator Instructions]
Manuel Rivero Zambrano, CEO of Regional, you may begin your conference.
Hello, and good morning. Welcome to our conference call for Regional's third quarter results of 2018.
Our financial margin grew 12.7%, and our NIM was up 6.4%. The efficiency ratio was 42.7%. The last 12 months' ROE was 20.1%, and our total loan portfolio and our core deposits grew 8.7% and 16.6% year-on-year, respectively. The nonperforming loans ratio was 1.9%.
On financial highlights. In the profitability, we can see that net income at the end of the third quarter of 2018 was MXN 2,336 million. The NIM of total loans was 6.8%. And our ROAA was 2.7%, a 14 basis growth year-on-year.
As of growth, our time and demand deposits grew 25% and 5.7% year-on-year, respectively. And our shareholders' equity grew 16%.
As of risk, in August 2018, the capitalization ratio of Banco Regional was 14.2%.
Following, I will highlight some items of our third quarter result of the 2000 (sic) [ 2018 ] financial highlight -- financial statements. In the balance sheet, you can see that the operational leasing increased 21% compared to last year, and the coverage ratio was 1.25x the nonperforming loans. In the performing loan portfolio, you can see our consumer loans grew 28%, and mortgage grew 13%. As of deposits, you can see we increased 17% year-on-year.
In the income statement, the financial margin show the 13% year-on-year growth; commissions and fees, 11%; insurance and FX grew 27%. The noninterest expenses increased 15.6% year-on-year.
The total loan by region. Nuevo León grow its total loan portfolio by 11%; Mexico City, 2%; Jalisco, 4.5%; and in total, remaining locations grew 10%.
Asset quality by product breakdown, we can see that the commercial loan portfolio had a nonperforming loan ratio of 1.9%, well below that of the system. And our mortgage NPL ratio was 1.8%. And the other nonperforming loan portfolio is 0.8%, well below that of the market. Our consumer loans portfolio is a great performance of 2.4%.
As of capitalization, we are at 14.2% as of Banco Regional and Start Banregio as 14.8% as of August 2018.
Banregio had a better performance against the system. Banregio's ROE is 20.3%, superior to that of the system of 16.1%. Our cost of core deposits was 4.8% versus 3.8% of the system, and the NPL ratio of Banco Regional de Monterrey was 1.9% versus 2.1% of the system.
Thank you very much. We appreciate any questions.
[Operator Instructions] Your first question comes from the line of Ernesto Gabilondo from Bank of America Merrill Lynch.
Three from my side. The first one is in terms of the NIM. We saw strong growth in time deposits of 25% year-over-year, outpacing the loan growth of 9%. However, we think that the NIM expansion was kind of limited because of that growth in the time deposits despite we have the increase in the interest rates recently. So I would like to know your strategy in terms of NIM. And when do you expect to see the first cut to interest rate? Then my second question is in terms of asset quality. We saw higher NPLs. I think there was points by the SME segment. How comfortable you are with interest rates at 7.75%? And if you see them getting to the 8% at some point. I don't if you are detecting lower credit demand, asset quality duration because of this. So any insight about your strategy. And how do you think will be the growth going forward? I don't know. It may be more to the medium-sized companies to protect loan growth and the asset quality. And finally, my last question is on noncredit-related revenues. We saw a modest leasing operating revenue and a loss in other income. So if you can elaborate on what will be your expectation for the leasing business next year and why there was a loss in other income will be very helpful.
Thank you, Ernesto. Thank you for your call. Definitely, we've -- our NIM, as you know, we have the highest NIM of the public traded banks. We have our NIM at 6.5%. The next would be 6%. But we have the highest NIM of the public traded companies -- banks. And for sure, we're very comfortable at saying that we're not expecting -- even if rates go down, we're not expecting our NIM to go -- we're not asset sensitive as other banks do, so we're not expecting our NIM to go down as much if interest rates go down next year. So for every 100 basis points, we're expecting only 14 basis points of movement in the NIM. So you can see we have the highest NIM, and we believe that we were higher than any other public traded company bank. So we're very comfortable with our NIM. We even think that if rates continue to be in this -- in north part of -- in the highest part, in this level, 6%, 7% even, will be good for us as we continue to reprice our medium- and long-term loans, which obviously correspond much of the asset-sensitive things. In terms of Mexico City and credit risk, definitely, as you pointed out, we have had some issues on small company loans in Mexico City. We have had this problem for some time, and we are addressing it fully with -- very committed to continue growing in Mexico City. We've already implemented various plans in order to increase our growth in the most productive sectors, real estate logistics. We have been able to develop great relationships with clients in Mexico City in those sectors, and we will continue to grow. We do expect Mexico City, in even Jalisco and other regions, to continue growing at phases that we bought in the past. In terms of the other income, we do expect our leasing to be -- to increase. We did, as you know, had one-off last year, so that's what you see a slight decrease there. But it's not -- I mean, our business is growing at a very fine rate of 15%, which is -- even some at 20% in terms of leasing for small fleet. So we're very comfortable in saying that next year, we will continue growing around 12% to 15%, our pace in leasing with a very high quality and a very -- great margins compared to those of the medium-sized company loans, very similar to those of the small company loans. So we're very comfortable with that type of growth, which is producing great, great, great results. In terms of other income, I mean, you can see that we've been able to really pump up insurance, FX, derivatives, trusts. So we're growing. That's why you see much of our expenses our -- that are tied to sales and bonuses are because of this reason, that we are growing so much in noninterest income. And we have, obviously, to pay bonuses. We have to pay for other expenses to continue growth there. So in terms of noninterest income, we've been able to really grow the business. We've been able to grow in the medium-sized companies, with small companies, within the big groups, and we're very happy that we can still continue growing that business. I think those are your questions.
Yes. Manuel, just a follow-up in terms of the loan growth. I don't know if you can anticipate something for next year. How do you see...
Definitely. As I said -- yes. Sure. As I said, we expect our individual side of the business to continue to grow the same pace. So you've been seeing our growth, which is a very high quality growth as we are mainly focused on our deposit rates, on our high quality clients. So as you can see, we've been evolving that business very well and growing at a faster pace and producing great, great results. And in business loans, we're expecting around a higher growth than we have right now. So it turns to around 12% to 15% for loan growth to -- so -- to the full year of next year. So it's a much faster growth, definitely. So we're very comfortable in saying 12%, 15% should be something that we should achieve if the economy continues to grow as we've seen.
Your next question comes from the line of Yuri Fernandes from JPMorgan.
Manuel, I had a question, a follow-up actually, on the volume side on the loan growth. On business, actually, you are growing about 7%, 7.5%. This is almost half of the system base. And I know, like, you have been more conservative here for elections. But looking to some regions, we saw Jalisco and Mexico City declining quarter-over-quarter. So my question is, is this continues to be you be more risk-averse and also because of those asset quality issues you mentioned in Mexico City? Or are you seeing competition getting more aggressive, and that's the reason you are being more rational and potentially losing market share in those regions?
No. I think -- thank you, Yuri. Thank you for your questions. Mainly, the main growth that the industry saw was more in the corporate and the larger companies, which are segments that we own or participate much in. Our board, as you said, as you already know, we're very risk-averse. Obviously, NAFTA, definitely elections really hinder confidence in our -- in the business community. So we were prudent. And obviously, I think being prudent from time to time is something one should -- must do. And right now, we are more confident with speaking with clients and are more upbeat for the next part of -- I mean, for next year. I think if things continue that way, we should obviously perform as we have been able to do in the past. Our competitive advantage still remains. So definitely, we're on, I would say, as -- at -- we expect a higher growth interest for next year for companies and individuals.
Okay. And my second question is regarding asset quality on cost of risk. And I knew, like, you are still in line to your guidance of 0.8% for this year on cost of risk. This quarter was slightly higher, but the first half was very good. My point is more going forward. Should we start expecting maybe your cost of risk getting closer to 1% as rates are such -- in a such high level and economic activity is not as robust as in the past? Because my main concern here for you is that every 20, 30 bps increase in cost of risk plays a big impact on your ROEs, right, at such a level that any increase matters. So my point is, for '19, should we work, which may be not a bad credit cycle but some worsening on cost of risk for not only you but for the industry as a whole?
No, I don't expect it to be that much. No, I don't see any further deterioration in the system. Obviously, if rates hike 200 basis points, we're talking about different rationale, but we're not expecting hikes to be that much. Definitely, the hike that we have had has contributed to NPLs in the system for sure for every sector in every -- I mean, I think it's fair to say that. We don't expect a further increase as much. So in a sense, that should be -- give you confidence. We're not expecting to be -- to have -- in our budget, we don't -- for sure, are not expecting 1% for next year. We believe we're going to be at the same budget that we did. We believe this year, we are going to remain on budget. We are the bank with the lowest cost of risk in the system. We have the lowest cost of risk in the public traded companies. So you have the advantage of being in the most prudent and most -- in the lower risk. We have had some problems in Mexico City definitely in small company loans. Most -- some very prevalent, which obviously are not part of the risk assessment in credit. But definitely, we are very positive that we have had great experience in Mexico City, too. It's not obviously something bad. Definitely something to care for it. And we're more confident we're going to produce better results in -- as we continue with more confidence for the next year. We have had even -- Mexico's economic performance is better in terms of flat to -- compared to 2 years. So it's -- I think, in a sense, if we see a sound government budget for next year, we're going to see better results in the rates of performance.
Your next question comes from the line of Gabriel Nóbrega from Citibank.
I have a question regarding efficiency. During the quarter, we actually saw that it deteriorated a little bit. I just wanted to understand more. I understand you already have said that the higher personnel expenses, which actually increased around, I think, 22% year-over-year, was mainly due to your higher noninterest margin. So is this deterioration in efficiency mainly attributed to these higher bonuses, which you had to pay out? And also, looking forward, what can we probably expect for your efficiency? And I'll make the second question afterwards.
Yes. Thank you. In terms of the -- of how the accountability of -- we did a mistake there. It was not 22%.
Yes. We noticed we did a mistake in our quarterly reports in the opening of the expenses. It says in the -- we will do the replacement of the report in the Bolsa Mexicana. It says MXN 531 million. It should be MXN 500 million. But also in the second quarter, it says MXN 450 million, and it should say MXN 479 million. This is related to personnel that doesn't have a long-term contract would also run on the finance contract. It's people that in Español called honorarios that is short-term contracts, the -- were cataloged on the administrative and promotion expenses. We will replace the document. The mistake is in the Page 10 of the quarterly report. The aggregated numbers, 9 months, 9 months, are correct. And you should see, soon, the split between compensation and administrative corrected. It's -- as we mentioned, we have 11% more personnel. We're now 4,500 employees in Banregio and Regional entities, but we have had a 7% of increase on the payroll. Plus, as we mentioned, a higher bonus was mainly in the nonfinancial income. That's the main explanation. In terms of the future for the guidance, okay, for the -- how do we see the efficiency ratio, we usually guide below 45%. We know we're very far from. But we don't see it reaching 43%. We know that quarterly, it's 42.7%. But in 9 months, it's at peak, 42.4%, and we believe we will be around that level for the full year for the -- not only for the last 3 months but for the full year ending in 2018. And for 2019, we still don't have guidance, but we see it in our budget, very similar levels.
Yes, definitely. We're very happy with our results in terms of how our projects of transformation, in terms of our branches and our digital transformation has had. I mean, we're just -- we bought Salesforce. We bought Oracle ERP. So those are one-offs. You're going to see some volatility here and there in terms of expenses. But we're going to be on budget for this year, and we even expect next year to have lower growth for expenses in both sides. So in a sense, we have been investing a lot in being more productive, being more efficient. We still believe that we have had -- the number of branches we have is still -- I mean, there's a lot of room to grow there without growing in much more number of branches. We still have a lot of work to continue for the productive -- in those branches. We still have a lot of projects we've invested in intelligence for business intelligence. We've invested in risk intelligence. So we've continued to further the relations as we have with our clients. So you can see that our investments are going to produce obviously better results in terms of allowing ourselves to be -- to have more, well, operational leverage and for sure allowing the bank to continue further and being more and more productive each year.
All right. That's very clear. And actually, I have a follow-up relating to this. I saw in your press release that you have included alternative channels, where the, if I'm not mistaken, the e-banking segment has accumulated around 37 million transactions this year. Could you just guide us through what is your digital strategy and how do you expect it to move forward?
Definitely. I mean, the -- one of our main strategies is to continue further the relationship we have with our medium-sized clients. 70% -- 77% of our transactions of our medium-sized companies are done through digital channel. So we are -- for sure, know that if we continue to further the amount of tools we give our clients, that's going to be very, very positive for our checking accounts' growth in medium-sized businesses. So for us, it's very important to continue that growth and to continue further the tools that we give our clients. So for sure, we're very confident for that. In -- for our individuals, we're -- we have releases every 15 to 1 every month in our app, and we're adding -- the main aspect right now is to help people get onboard in our branches. So we're putting our digital vests to help people get onboard the app and being more productive and having a better cross-sale product that we've been even trying to sell products digitally, which we have had great results in, cross-selling products to our clients digitally. We have just one-click buy for credit cards, for example. And it's giving us great results, and definitely something that we're very confident is going to produce results very, very, very quickly. It's already, I mean, growing at a very fast pace in terms of the amount of users we got onboard, and people are very, very happy with the usability of the tools. And definitely, the thing we're interested about digital channels is the amount of checking accounts that we have in order to produce this. I mean, our checking accounts are growing at a very good pace. We have had some institutional investors and high-yield government checking accounts that have not grown, which are -- but we're producing our medium-sized companies' checking accounts. The growth there is 16.7%, which is great. And in terms of our branches, it's 17.6%. So our branches are continuing to growing at a very fast pace of checking accounts, and we're very happy worry about it. It's mainly to -- for these reasons and for the reasons that we have a way superior system -- service on that of the system. So we're happy about it, definitely.
Your next question comes from the line of Gilberto Garcia from Barclays.
A follow-up on Mexico City and Jalisco. Are the issues you are facing there related to a particular sector of the economy or is it more general?
Yes. It's more general definitely. But it's more -- it's based on small companies.
[Operator Instructions] Your next question comes from the line of Claudia Benavente from Santander.
So I have a question regarding the strategy. For example, if I take a look on a per state basis, I can see that new hires have been mainly concentrated in Nuevo León and in the lower extent in Mexico City. So I was wondering if at the end -- like, these are, first of all, loan officers and if they are giving the loans to the other states from Nuevo León. Any color there would be appreciated.
Claudia, thank you for your question. I just didn't hear that as well as I should. Your question is about the amount of people we have in Nuevo León compared to that of Mexico City?
No, no, no, the new hires, the people that you have been recruiting throughout the year. I see that the new hires have been mainly concentrated in Nuevo León and in a lesser extent in Mexico City. So I was wondering if, first of all, these are loan officers and if they are providing loans to other states from Nuevo León considering, I understand, your strategy is to focus on [ Michoacán ] as well and Mexico City.
No, no, no. Claudia, I'm taking a lot of -- no. I don't know. Maybe you are seeing the CNBV as we are based in Monterrey, and most of our IT and technology departments are -- and security and control, all the headquarters are here in Nuevo León. Most of the new hires are here in Nuevo León. That's the main reason. In terms of bankers, we have not changed the proportion. We have not increased the new hires in Mexico City for bankers. Basically, we have been replacing the ones that are not performing well, but not increasing. That's the reason we are hiring more in Nuevo León, but it's not in number of bankers. And the other reason, in terms of -- that is bankers for the medium-sized businesses. For branches, yes, we are hiring more in Nuevo León. But right now, it's because we are doing the overhaul of the EMAS, the new logo, the new brand for Nuevo León. And next year, we will do the rest of the country. We already started in Jalisco. The new model requires a better service and more bankers per branch, and you will see an increase in that proportion next year.
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. Any further questions, please let us know. We will be happy to answer them. Thank you. See you for the next.
Ladies and gentlemen, this concludes today's conference call. You may now disconnect.