Regional SAB de CV
BMV:RA
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Earnings Call Analysis
Q3-2023 Analysis
Regional SAB de CV
The company delivered an all-time high quarterly earnings of MXN 1,563 million, marking a 20% growth from the previous quarter, underpinned by solid growth in the loan book and non-financial income, coupled with controlled expense growth. A 29% expansion in the financial margin and a 20% increase in net income reflect the company's successful market penetration and cross-selling strategies. The loan book showed robust growth, particularly in individual portfolios growing by 48% and SME portfolios by 25% year-on-year. Optimized expenses aided in improving the efficiency ratio to 41.7%.
Banregio's expansion strategy resulted in a 15% loan growth, driven by a strong foothold in key regions and a dynamic labor market. A distinct customer experience contributed to this success, as evidenced by a high Net Promoter Score (NPS) of 77, the top in the industry. Hey Banco, though separate in operation, has its sights set for a third-quarter operation next year, with a strategic shift towards a more affluent customer base, enhancing profitability. Meanwhile, Emeria has built a strong community engagement, with over 1.6 million followers interacting monthly, showcasing the company's solid digital capabilities.
Net interest margin (NIM) sensitivity is pegged at around 15 basis points per 100 basis points change, indicating an inclination towards stable NIMs around 6% for the upcoming year. Future loan demand, particularly in the wholesale segment, is expected to benefit from potential interest rate reductions, with NIMs remaining resilient due to the expansion of profitable portfolios like SME and consumer loans. Reclassification of fee income has been corrected this quarter, which should normalize going forward, with OPEX expected to grow inline with inflation, around 10%.
The company is strategizing to target a more robust growth in fees and customer acquisition, aiming for an improved NPL ratio over the next 3-4 quarters. Cyber fraud incidents led to profitability challenges for Hey Banco this year, with an MXN 50 million negative impact, yet the MXN 200 million profit target for the next year remains attainable. Tax and regulatory risks seem manageable, with no significant foreseeable impact on the company's balance sheet from potential MDR rate reductions by regulatory bodies.
Earnings growth for the current year is on track, with expectations to hit the lower range of the 10-12% guidance. The company anticipates at least MXN 5.5 billion in profitability for this year. Anticipating beneficial effects from an expected rate of policy reduction, the company predicts stronger growth in profitability for the following year across both Banregio and Hey Banco segments, yet detailed guidance will be provided in the next quarter.
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Good morning, ladies and gentleman, thank you for standing by. Welcome to Regional's Third Quarter 2023 Earnings Conference Call. We are joined today by Manuel Rivero Zambrano, Chief Executive Officer of Regional; Enrique Navarro Ramirez, Chief Financial Officer; Alejandro Lobeira, Head of Strategy & Planning and Investor Relations. [Operator Instructions] Please be advised that today's conference is being recorded.
I will now hand the conference over to your speaker today Manuel Rivero Zambrano. Thank you, and Please go ahead.
Good morning, everyone. Hope you and your family is healthy and well. We appreciate everyone's participation today. This quarter we observed solid growth in our loan book and non-financial income bear with control expense growth, these factors have contributed to impressive income growth and improved efficiency ratio.
Our quarterly earnings have reached an all-time high of MXN 1,563 million indicating a 20% growth quarter on quarter. This accomplishment is faster by our continuously gaining market share, resulting in an expanding portfolio and a productive cross-selling strategy that has impacted our non-financial income sources growing at a remarkable double digit rate. As Mexico economy is currently undergoing a period of increased dynamism, we are poised to capitalize our distinctive capability, ensuring sustainable growth and enhanced profitability.
Our geographical expansion and infrastructure development, digital capabilities, exceptional services and deep market insights have consistently deliver exceptional results, allowing us to expand our customer base and maintaining high cross-selling levels. As a result, the financial margin for the third quarter expanded 29% with a net income increase of 20%. Our strategies to gain market share and a solid credit demand resulting in an increase of the total loan book by 20%. Most dynamic growth has been observed in the individual's portfolio at 48%, and the SME portfolio at 25% year-on-year.
We continue growing the number of clients now standing at robust 1.2 million. The significant growth is fueled by our streamlined commercial strategy, exceptional customer service and a notable increase in our cross-only index which has resulting in an increase of our non-financial income by 15% for the insurance income surging by 42%, trust business by 49% and cards and merchant fees by 43%.
Additionally, the core deposit base increased 21%. Our efficiency ratio has improved to 41.7%. We have effectively moderated the rate of expense growth by implementing strategies that will produce more profitable growth with an emphasis on productivity. In the following quarters, we are anticipating an improvement in our efficiency ratio as our expansion plan has producing very good results in the short term. We're comfortable continuing our expansion plans in both platforms.
Now let's move to the performance of the individual platforms. Banregio consistently delivers exceptional results as we expand our geographic reach and enhanced our commercial infrastructure while preserving a distinctive customer experience and a strong profitability. We have experienced an expansion of loan growth reaching a 15% increase. We attribute the increase to a surge of investment in the regions where we have a strong foothold as well as a robust labor market translated into a more demand of goods and services. We expect this trend to continue in the following years and long growth could accelerate even more if rates decrease in the following quarters. Continue investing in increasing our sales force as well as capabilities to continue having competitive edge and gaining market share.
The retail segment long growth saw a very dynamic growth with an increase of 22% on our individual portfolios as well as our SME portfolios growing at a very dynamic rate of 19%. This is a result of our efforts of cross-selling and our expansion plan have translated into very productive growth. As we continue to gain market share, we remain confident that our expansion plan will produce highly effective branches that will deliver growth in deposits, a lower cost of funding and higher margins. Banco's biggest differentiator is its quality of service, which is reflected in is high net NPS at 77 highest on the industry by far. Unique 360 degree strategy follows for tailor-made solutions for both businesses and individuals focusing on high quality customers and cross-selling. This success is reflected in an increase of 8% in our client base, 22% expansion in core deposits and coupled by the search in customer activity demonstrated by the 11% increase in credit card transactions and 17 increase in debt card transactions.
Loan growth has been accompanied by better than industry standard NPL ratios, particularly the individual portfolio which has a NPL ratio of 2.7% in our commercial with an NPL of 3.1%. All of this results in a better than market financial results, financial margin and an amazing increase of 23% year-on-year. The NIM of 6.1. Operating expenses through 7%, achieving an efficiency ratio of 34.5%. We expect the expansion plan to remain expenses growth of Banregio between 9% and 12%.
Moving forward we expect NIMs to remain resilient in the upcoming quarters due to the expansion of our profitable portfolio such as the SME and consumer loans across Banregio as well as an optimization in funding mix achieved by reducing high cost deposits, notably government checking accounts and repricing of our securities portfolio yield. We had an excellent performance in asset quality, maintaining an NPL of 1.3% in a cost of risk from 0.6%. We expect these levels of credit quality and risk of credit to continue during the next quarters.
Moving on to Hey Banco, we continue on our path to operating separately for Banregio and plans are on schedule with a target to initiate operations in third quarter of next year. Mention before our focus is on having a very good profitability ratio from the beginning of operations of Hey Banco. We're committed to the strategies of organic client growth and cross-selling to our satisfied customer base as well as a shift to only land to the formal and mass affluent market is redefined the strategy promise to enhance profitability as it translates to lower cost of acquisition, lower operating costs, higher volume loans and deposits does increasing customer lifetime value. Lifetime value of our cost of acquisition has improved from 59 to 534 quarter-on-quarter. Our goal is to conclude this year with a strong [ clientele ] of 700,000 as purely highlighted our strategy focus has pivoted towards catering to more former and mass affluent customers.
We firmly believe that prioritizing organic growth and targeting a more resilient customer base will foster a more productive expansion in producing very profitability for Hey Banco. For financial results, due to the growth for a loan book financial margin has grown impressive growth of 118% reaching MXN 227 million and a NIM of 8.4%. Optimizing marketing expenses have led to a decrease in acquisition cost of MXN 12, holding an impressive lifetime value over cost of acquisition of MXN 534 an MPS of 64. While total expenses grew 36%, the efficiency ratio improved to 80%. We maintain our efficiency initiatives as we would lead to less cost of growth during the next quarters, improving our cost-to-income ratio even further. As we continue to expand, we maintain our position in as the 6 largest merchant in Mexico. [ Hey Banco ] continues to grow at accelerated base with average monthly billing of MXN 10,442 million, an increase of 17% year-on-year in POS.
Emeria on the other hand, has not only expanded but deepened the connections with our communities, amassing a formidable community of over 1.6 million followers across all platforms. More impressively, this followers are actively engaging, leading to over 3.0 million monthly interactions. Looking ahead, we are citing new features line up, adding a membership with cost to access the rewards program and better pricing in investments and adding more benefits. This will help to increase our fee income. We also integrated [ Hey Coins ], a reward program aiming to incentivize the product usage, enhancing the customer interactions and deepening our commitment to digitalization the back office to produce even better results in our efficiency ratio.
To conclude, I would like to mention that the Board has approved convening of a shareholders meeting to seek an approval for a second dividend payment. We remain firmly committed to deliver sustainable value to our shareholders. As of regional guidance, we maintain the one that we are provided on January conference call as we are confident that we continue to outperform the market and excel in our financial results.
To move forward, we will continue to redefine our operations and explore new opportunities always committed to our strategic goals. We have strong confident that Regional will keep delivering a strong financial performance during the coming years, sustaining distinguished profitability and exceptional asset quality. Thank you very much. We appreciate any questions.
[Operator Instructions] First question comes from Eric Ito.
I have 2 questions here. The first one is regarding loan growth. So you mentioned that loan growth could accelerate depending if rates decrease. So my question is what can we think about 2024 about loan growth and also if you could give the breakdown on the different segments of consumer commercial loans as well. And my second question is regarding, if you could recall us, the NII sensitivity to interest rates and what can we expect for NIMs on a consolidated basis for 2024? So maybe we can maintain this around 6% NIMs as the lower interest rates are offset by more consumer loans. Can we think about that?
Yes, Eric, thanks for your questions. About the second question about the NIM sensitivity. It's around 15 basis points per 100 up or down on the total loans NIMs. On the total NIM or the full NIM, the official one is lower and it will depends on the size of the repo business and more precisely of the investment securities portfolio. As you can see in it has grown out from MXN 50 billion to MXN 60 and right now is going down. We are repricing and improving the yield on that business and that's why we are always focused on total loans NIM and the sensitivity is 15 basis points or 16 between 15 and 16, they're 100 increase or decrease.
In terms of long growth for next year, the portfolio that is more sensitive to the interest rate will be the wholesale portfolio, right? So definitely we're going to see more increase on more demand as projects will have a better return when into exceed. So not so much. I think in terms of the consumer portfolios, I think now the portfolios are growing at a good pace. I don't think there's very sensitive to the interest rate. So definitely it will impact as we have most of our -- in Regional, most of our, portfolio is on the commercial side and the wholesale, so definitely we'll see a pickup there. I don't want to pay a percentage as of right now. So in a sense, I just want to give you an idea that as we go further in terms of if the economy continues to expand and things will see in terms of the inflation, we could see a pickup in terms of more loan demand in the wholesale business.
If I could make a quick follow up just to understand if you guys expect your names to remain at this around 6% or do you see more downward pressure for next year?
For the next year specifically, we expect them remain stable around 6%. As we expect our decrease in the second half of the year, then the average TA should remain close to 10%. Say that we'll see pressure if the reduction of the policy rate is higher and in 2025 we expect another 200 basis points, then we'll see the impact more on 2025. Definitely, we have a pressure downwards because we have a very similar sensitivity up and down on the average TA that's important is not the final one, is the average one.
Next question comes from Tito Labarta.
A couple questions. Also first on the fee income, there was a decline in the other fees just to understand, if you give some color, what happened there? Should that normalize next quarter or is this a new base on that, the other fee income line? Then second question in terms of provisioning and remaining relatively stable, we did see a little bit of a pickup in the MPL ratio and as you grow more in retail loans, how should we think about the cost of risk from here?
About other income, we noticed that we were presenting wrongly and we corrected this quarter an interest that comes from the deferral of what we call, I would say the translation literal months with interest when we allow our customers to split the payments in 12 or 24 months that income, that interest was being registered as commission and we make the reclassification this quarter and all the first quarter and second quarter that were MXN 51 million were reduced on that line and then move to interest. For the next quarter, should be right, should be an interest. And we have seen an increase on that interest mainly in Hey as we are allowing the customers to do the referral, the deferral payments in the app. I don't know if that was clear Tito.
Just to make, so this is the other fee income line that was 169 in 2Q and fell to 87. That was because of that reclassification?
Yes. And there should be around 120 if you normalize.
So going forward and normalize is closer to 120?
Yes.
And then the second question on the cost of risk and asset quality.
On the -- can you repeat -- remind me?
Just how to think about the cost of risk. I mean, asset quality's doing fairly well, a bit of a pickup, but if you're growing more in retail should we see a pickup in the cost of risk from here or?
No. We are seeing the highest level. we have seen 2 impacts. The one is in with the change of the methodology last year, provisioning for Stage 2 launch is higher than used to be before. And in Banregio we have higher Stage 2 launch in that level of MPL -- well, it's not a still MPL, it is due and both in Hey and Banregio we have a deterioration in credit card in consumer. You'll see also on the split on the quarterly report. And we changed since March then in June, our risk appetite, we are being more selective in our credit scoring model. But we'll see still another quarter of MPLs in consumer that as you know, is a very small portfolio and then an improvement for first quarter of 2024. We still maintain our guidance of 0.8 to 1, and right now we are on the high level around 1% of credit risk annualized.
Our next question comes from Ernesto Gabilondo.
Can you hear me?
Yes.
Yes, Ernesto.
I have 3 questions from my side. the first one is on OPEX growth. We have seen that you and some other Mexican banks have been investing in hiring commercial bankers to take advantage of the near sharing expected opportunities. And these with the expectation of higher credit demand in the next years. Also we have seen these years there have been a lot of investments in branches and technology.
So just wondering how do you see OPEX growth this year and how should we think about it for the next year? Then my second question is on Hey Bank. Manuel mentioned some introduction lines about the business but wanted to hear a little bit more about the strategy. It seems that you are focusing on profitability versus client growth. And this is not of all as active clients have slowed down recently. So considering this a profitability focus that you continue to see around MXN 50 million in earnings for this year and around MXN 200 million for next year.
And how feasible do you think you can get to those numbers? And also related to these have you getting any concern about New Mexico requesting for a digital banking license? And then for my last question is related to your earnings growth for this year. Now if running the numbers, I think it was around 12% the earnings growth for the first 9 months. So you're wondering if you are keeping your guidance, or it could be some of risk and looking to next year, if we can think of a same pace of growth, or it could be even a little bit higher. And if that's correct, what will be the drivers behind that?
Well, in terms of the second question in terms of Hey Banco strategy, definitely we are focusing on profitability. We're focusing on being more productive and being more efficient. You can see that the efficiency ratio has been developing, which is, we're very happy for that. As we continue going forward we, as we said, we shifted for more loan growth in terms for formal markets and a more affluent market which is a mass affluent, right? So you can see that the lifetime value has increased and lifetime value or cost of acquisition has increased, right?
So we're very happy for the results and we will continue developing our core strategies to have a more dynamic growth in terms of customer growth. Definitely more focus on volumes and more focusing on margins and which obviously will translate into better results. We just rolled out. Tomorrow we're rolling out the membership programs. We will deliver more fees and this will create a more profitable operation. Sadly we had some episodes of fraud in terms of our credit card.
And sadly we're not going to be able to reach the MXN 50 million in terms of profit this year. But we definitely took care of that and we've learned a lot. And obviously that as right now we're going to be as we said, shifted for a more formal market. So that will produce an NPL ratio of a bettering NPL ratio probably in the next 3 to 4 quarters, right? So when we reach in the third quarter of next year, we will reach at a point where we are targeting a profitability even above or trying to target a profitability even above what Banregio has.
So definitely making sure that things go that way, right? So fixing in terms of pricing, better performing in terms of customer acquisition having more robust growth in terms of fees and producing obviously better results. Nubank definitely think the strategy. I mean, did they notice that having a bank is something in Mexico that it's needed? We knew that already many years ago, and that's where we have this point already. I think the challenge here in Mexico is the infrastructure that you have to build from then on forward, because not only that you have a bank, you have going to be able to have a better infrastructure for your customers, for example you have to have, for example, connections to the to the ATMs machines that you have to have an x amount and you have to have an association with other banks.
So there will have to invest not only on building the bank, but then on adding more infrastructure to have the same customer service that we are having right now. So good for them. But I think I mean the customers are going to receive a better service probably 3 or 4 years from now, which obviously has for us is it produces a lot of time to continue growing at a good pace. And them being able, I guess, to do credit cards of MXN 2,000 or the average that they have. In terms of the growth as we said, loan growth. And I don't know if you're asked the loan growth or the income growth, but I think the loan grown has, as I said, we think the wholesale market will accelerate as yields, as interest rates continue to see or hopefully see next year at the end.
And that will produce a more dynamic growth in terms of load. We're not saying a very exponential growth, but definitely we could see a more robust growth in terms of wholesale. In the OPEX growth in Hey Banco, we as I said, as we halted the increment in the developers and in a sense, we've already reached the capabilities, the technological capabilities that we need in order to serve the market digitally. We are now focusing on the back office and making sure that we digitalize the whole thing and being much more productive. And so in a sense, the expense growth there should not be that much. Obviously there's a small staff that we have to build up in Hey Banco to start operations like treasury, the tax. There are some of the aspects that we need to start operations. It's not going to be a very high increase. Definitely we could see some something there.
And then the expansion plan of Banregio, which we are as we know, growing around 15 to 20 branches per year. And that's our plan. It's producing good results. We have seen very good results from the market. We are very optimistic about how things are going. And as we continue developing our capabilities in terms of service, in terms of products, in terms of knowledge of the market and our digital capabilities, we're very confident that we can gain market share. As you know, Mexico economic population is growing at 8.5% rate. So there's definitely pretty good market growth.
And the labor market is very dynamic right now. So there's an increase intake in more demand in retail products. So we are very happy to have all the capabilities needed, and we're sure that it will produce good results. It shouldn't translate to an efficiency rate deterioration in our efficiency ratio because of the amount of branches as a percentage of the total is not so much. And it's producing, as I said, very good short term results. And I think those are all the questions.
The last one, in terms of your expectations for earnings growth for this and next year?
For this year, we are online for guidance. We're not going to change it. It's very close. It's 10 to 12. As you mentioned, we were last quarter aiming for the 10. Right now it looks like we're aiming for the 11 or 12, but we'll be in that range. We're not changing the guidance, and we feel comfortable that we'll achieve at least MXN 5.5 billion profitability. That is the 10%, the lower range.
We know that the last quarter has more earnings usually that's why maybe we can reach the 12, but in that range. And for next year, it'll depend mainly on there are many moving parts, but mainly on the rate that we already talk about the policy rate reduction. But as Manuel already also said, we have great expectations of growth both in Banregio as well as in Hey. Then all-in, we expect a better growth on profitability, but as you know, we don't guide until the next quarter.
Perfect. And just to follow up in 2 things first, OPEX growth. So you mentioned now that now on Hey, you are focusing in the back office, the expenses growth going forward should not be too much, but also you recognize that you need to do some investments in treasury, the expansion plan of Banregio. So how should we think about OPEX for next year in line with inflation? And it'll be above inflation, just to have like an idea. And then in terms of Hey, as you mentioned it's unlikely that you will deliver the MXN 50 million this year because of the cyber fraud, but actually you're seeing that it could be a good year next year. So do you continue to see the MXN 200 million for next year?
Well, we're not achieving is the MXN 50 million positive this year. Again, if you roll the numbers will be like MXN 50 million negative. We'll not manage, even though this quarter was profitable, it is not as profitable as we were expecting. Then say that the MXN 200 million for next year is very achievable as we already have profits this quarter. And we'll have on the last one. If you know the numbers is 23 this quarter profits.
Correct. And in terms of the OPEX question?
In terms of the OPEX, no, it's definitely above inflation as we basically have all the expenses indexes, contractual or factual the increase then that's our base plus the effects that you already mentioned. But we're aiming to around 10% maybe not lower to 10%, but not high things like the last 2 years.
And just last question. Some investors have been saying that there are some concerns of potential tax or regulatory risk after what happened to the airport. So we wanted to hear from you if there's any noise on the sector? From what I have heard I believe the Antitrust Commission in Mexico is proposing to the Mexican Central Bank to reduce the MDR rates especially on the clearing part. So the part of e-global Empresas. So I don't know if you have heard anything on this and if there could be a potential impact on your side?
Yes. No for taxing, no, we've not seen anything. In terms of the banking association, we've not had any, talked with anyone in terms of that. In terms of the fees, definitely there's a motion by the [ confessor ]
in terms of the government that has to review. And this happens normally. And we think that it will not be very material.
Anyways, in terms of the fees that will generate probably it will impact more in terms of the rewards programs that bank have, right? So those are the ones I think that will hit the most customers in a sense if things go south, probably things in terms of the impact would be more so in the rewards program of credit cards than any other thing. So I think that the main impact will be on customers not necessarily on the bank's balance sheets.
Next question comes from Olavo Arthuzo.
I have a quick more specific question on Hey Banco because we noted on Slides 19 and 20 that this is the second consecutive quarter that the bank recorded decrease in the number of customers. And also this quarter we saw a decline in the total deposits of Hey Banco. So my question is, what does explain this trend, especially related to the reduction in the number of clients?
And if you could please add Nubank in Mexico to this question that would be also a very, very important to us. Because Nubank recently launched their Nucoin and we noted that this accelerated the onboarding process, and they also started to offer some personal loans in Mexico. So in few words wouldn't a bank be related to this is low down on Hey Banco or this is low down the number of clients and the decline in deposits of Hey Banco as well are all related to something else? And what would be the reasons? This is it.
Well, the main reason is that we've not hiked the industry that we've been customized, right? So our main competitor is a platform in the government that's called Cetesdirecto, which you can invest in Cetes. Digital customers are very [indiscernible] able to do so, and to open an account in Cetesdirecto and invest their money there at 11%, right? So we have for our Hey customers, that's a rate of 10%. So in a sense that we've not hiked that rate because we are not interested in doing so.
And the other thing is, as we are focusing on more former clients and more mass affluent customers, obviously the credit card authorization percentage declined. And that's so translated into a low customer growth. And another thing, obviously it's the impact that the ad spending had. So what we seen is that the ad spending for accounts, this is very low level accounts compared to what we've seen in terms of our customers referring us clients. So we are most focusing on referral programs, right? And the other thing is, we saw that our customers have a lot of business with other banks in terms of loans, for example.
So a strategy that's focusing on cross-selling, as we said, will produce and is producing better results in terms of productivity, what's in profitability, which we are aiming to do. So to be very profitable in the exception of Hey Banco in the third quarter. So Nubank, I think, I mean, they're definitely a competitor for sure as any other, right? So in the sense, I think that the main competitor for us is BBVA, Banorte, Santander, HSBC, Citibanamex, which they have the more -- in terms of more customers, and they have a pretty bad service, right? So Citibanamex NPS is very bad and HSBC is even worse.
So they have a large customer base, and those are chartable, right? Because we have an MPS of 65. And obviously, I mean, that takes a little bit of time to convince in our more organic growth, but we're focusing on being very profitable. I think in the terms of as I said that the market is expanding, I think there's been for many. I think having more consciousness on the market in terms of a digital solutions for many, I think creates a better a better understanding of our offer. And I think in the sense that is positive and in terms of marketing perception of a digital bank being able to use what we've done, right?
In terms of the product that we have compared to the others, it's quite amazing what we've achieved. I mean, we have more than 50 products that we can offer to individuals and again, to sole proprietors and small businesses. So no one has that level of products and obviously of channels. So they have more than 10,000 ATMs they can withdraw money without any costs. Nubank has zero ATMs with zero cost, you know what I mean? It's just like, they have an account. Well, yes, but customers have to pay MXN 25 to or Nubank has to pay MXN 25 to their customers each time they are getting money out of their ATM, which obviously is very unproductive, right?
So in a sense, we're very comfortable that we have a very high, our offer is very valuable and is much valuable than any other in the market and even compared to the one that open bank we think that they're going to produce even [indiscernible], right? So we have a very good advantage. We're very comfortable with it. We've learned a lot in terms of frauds, in terms of risk assessment and being able to really make sure that the bank has to a better ROE than Banregio, right? Because that's our main objective in terms of creating a bank that has a more operating leverage because of our expense structure, right? So being able to have an offer that customers can consume by themselves should use in better pricing for them as we've seen, lower commissions, higher interest that’s in there, but obviously producing great results in terms of financial, I'm sorry, and efficiency ratio and profitability.
Our next question comes from Ricardo Buchpiguel.
I have 2 questions on my side. First, can you please explain if there is any level of overlap between the clients from Banregio and Hey targets, especially now that you are more focused on the affluent client niche, and is the plan moving these clients show Hey, since you expect to have a higher profitability there? And for my second question, what should be the main products for Hey now that you are more focused on for the clients, especially to allow another OE suppressing the Banregio level already in third quarter 2024?
Can you clarify the first question?
The first question is whether there is any…
So the amount of checking account that Hey Banco compared to Banregio is 4 times more in Banregio, the average. So you have in a credit card is 3 times is more. So it is much bigger even that aren't our target right now. And obviously customers that want a tailor-made solution will have to go to Banregio, right? So that's how it is in terms of self-service Hey Banco is our best option, right? So that's the main difference. And obviously, customers which are more complex, it's more difficult to really make sure that we have an easy digital solutions for them, right?
So many times a relationship manager is needed in order to produce the amount of deepness and knowledge of the customer that we need in order to say tailor-made solution. In terms of the main product is definitely the account for sure. I mean, we have even a children's account, which is producing great results. We have an account for foreigners living in Mexico. We have an account that migrants can open from the United States. So definitely the account is -- it's a very easy product to continue and the onboarding is so easy to do and definitely very happy to continue developing more solutions in terms of the account.
We're rolling out more things and more terms of payments and things that will engage more with customers. So definitely the account everything in credit, as we said, we are focusing quality customers and in terms of personal loans and credit cards, it's a cross-selling strategy that we're focusing on, not anymore an open market guided by digital platforms. That's something that we're not searching for. I think most of the digital banks there out there are focusing there, I mean, it's fine. I guess for them, not for us.
Perfect. And just a quick follow up here. You mentioned the account is an important product for your affluent client base in Hey. What ways you can monetize this client with this product, right? It's mainly through deposits. So you can have perhaps even on a lower cost of funding and therefore you monetize there, or are there essentially other fees that you can charge for these clients?
Yes, definitely. So definitely obviously the fees that we generate through the debit, but then we have obviously the cross-selling of credit and insurance products, which we roll out more seriously this quarter. We're looking to partner up, which of or others to create more diverse products and being more aggressive in terms of offering and promotions in insurance. And obviously we sell mutual funds and we sell capital markets to our customers, which are more affluent. And definitely there's a fees that generate from there.
Next question comes from [indiscernible].
Congratulations on the earnings. Just quick question on your the Banregio business in Mexico, we see good growth for Mexico City area. How is the quality evolving there? Do you see any risk in terms of growing again in Mexico City area or the changes that you already implemented? They're going well. So just any color on Mexico City per se, that would be helpful? And then on the Hey Bank of Business, we are a bit surprised to see the steep decline in the CAC for the Hey Bank customers. I see on the side that it's now MXN 12 or MXN 99 last quarter. So if you could shed some light on what led to this steep decline in the CAC that would be very helpful.
In terms of the growth of Mexico City, yes we have had 14% on retail banking. And around 16%, I don't see the exact number here in the wholesale. In wholesale, we have always had a good MPL. We have had some specific large customers. In fact, still the largest customer that we have wrote off is from Mexico City and one from Tijuana that we have already talked last year. But right now it's a very good quality customers, and we believe the growth could be or should be stable in that level, maybe not the 41% of SMEs. That should stabilize around 15% to 17% as the rest of the portfolios in other regions.
And we have maintain our policy of a very good credit scoring in order to approve the customers. We're not lending anymore first credit customers with no experience in the Credit Bureau. And in wholesale, we have had 2 very good deals on quality in Mexico City, and we expect that to maintain at the same level. And then this, the second one, the decrease on the CAC basically, is that we have stopped all the advertisement on social networks, all digital advertisement, not only social networks, also Google ads then all then the cost reduce it a lot is basically referrals and some promotions and events that we are the sponsors.
And that's basically the only cost that we have right now on cost acquisition and some fees, external fees to third parties that is again accounted as referrals. Referrals is not only from customer to customer, but also some what we call Hey brokers that are individuals that refer customers. And that will be it. There is almost zero the cost for advertising.
But is that not going to hurt your client acquisition, the numbers of total clients in the coming quarters? How do you plan to compensate? Like, how do you plan to reach out to customers so that you're able to gain more customers in the coming quarters?
Well, it has already impacted us, you see the degrees as we have been mentioning we're focused on more massive or mass affluent customers and with better great quality. Yes, the number of customers should not grow as fast. But we are very focused on quality and profitability, and we are focused on promotions and better referral programs, internal and external. Internal, I mean, to customers.
We have launched already the Hey Coins promotions, and we are rewarding referrals with Hey Coins. And then also we are improving our Hey Broker channel. These are not institutional brokers. These are not the large ones that we know, not to say any brand in particular specifically, but our individuals that register with us and they start promoting Hey products. We have seen a decrease from 3,000 accounts to 1,200 daily some days 1,500. And we feel comfortable with that level that there is 1,200 daily with zero cost in advertising.
Just to get your view on I understand that you're quite focused on profitability and having a good quality portfolio, and that has been the DNA of Banregio, which has worked tremendously well, but if you look at your competition, if you look at someone like a Nubank or what probably they will do with venue. The focus is more on getting customers and then gradually cross-selling and attaining profitability after you gain some amount of scale. So it seems like that is not the focus of Hey Bank, or the focus is more on quality and profitability, which is what you've done with Banregio and not so much on gaining scale. Is that a fair description?
Yes. It's a fair description. We used to have the other focus and we move very quickly from 100,000 to 600,000. And right now what we are aiming is to make profitable that base and continue growing it organically.
Enrique, if I can just ask one last question. Your experience of growing so fast, going from a 100k to 600k and also targeting some lower income customers in the process where you had some experience of fraud, could you just elaborate on what your experience has been, especially growing with these lower income kind of customers? What kind of difficulty that you faced which is why you're kind of backtracking a bit right now?
Yes. As Manuel mentioned, we have learned a lot, and we have been changing our onboarding process, both for credit cards as well as for accounts, debit accounts. And what we have learned is that we decided to start requesting more stronger, not more stronger evidence or proof of life.
That is what is called on the digital onboarding for all the lending and even for the debit account, even though the law requires a lower identification process for the Level 2 account, we improve the level of identification and proof of life with the video and with the in -- what we call the voting ID. Then it is what we have learned.
We have to be more careful, even though you can open many Level 2 accounts and you can do a massive campaign for new credit cards. Chances are that many of these customers will not pass the new credit scoring calibration that we did. Then we prefer to go for referrals. Our main assumption is good customers, good refer other good customers. Then in summary, it's very expensive to spend a lot of money attracting new customers that are not going to become profitable.
Next question comes from Yuri Fernandes.
Just on Hey here. The company was founded in 2017, and it became a personal in 2018, right? And I don't think it were easy years. You have a pandemic, the big license, but do think Hey is where you wanted had to be 7 years later, because be totally transparent with you, I see you changing the strategy sometimes, sometimes growth, a lot of times profitability, but nowadays I look to Hey and all those answers in the previous questions, and I look and I say, well, this is Banregio. This is like a client from Banregio.
So my question is, how do you really see Hey like, should you have done things differently? Is the market much more competitive than you thought? And I don't know, maybe what are the things you like? What are the things you celebrate about this? Because honestly, I see asset quality disappointed a little bit. I see growth disappointed a little bit, and I do believe you put a lot of love and energy in these initiatives. So like, I don't know, is isn't it better to focus in Banregio and just consolidate Hey inside Banregio? That's my first question, and then I can ask a second one.
Sorry to disappoint you, Yuri. Thank you for your questions definitely. Well, in that sense, we are very happy to introduce MXN 10,000 million deposits. As I said, we're not hiking interest rates, so we are not going to have more customers because of that reason. Obviously, we don't need it because we start growing loans later on. So that's the main focus, and you see that in terms of the margins that are incrementing more than a 100% year in year, right? So in that sense, we're pretty happy for that. Definitely if we don't produce a better profitability than Banregio, that wouldn't make any sense, right? The thing is Hey Banco is nothing for the short term, right? So I'm a shareholder of Regional, my family has been a shareholder of Regional. We want to maintain that.
We're from long term, we don't manage things for a quarter basis, right? So in that sense, we're very happy for our digital platform, more so that we learned so much that when we implement that infrastructure on Banregio, it will produce a lot of good results, right? So Banregio is still operating on another app, another platform and it doesn't have many of the cool aspects of the brand, of the solution, sorry, not the brand of the solution, which is probably the main aspect is the cross-selling part of it, and obviously the usage of the app that will produce more checking accounts, right?
So in that sense, we are very optimistic that all the investments we've done in Hey Banco, all the learning that we've done in Hey Banco, being able to do so in those customers of Banregio, which are around 600,000, will produce much better results in terms of service, in terms of more usage, right? So in that sense, we're as the second part of why we are very happy for Hey Banco is that we as a group produce the best solution out there in terms of the digital aspect, right? So in that sense, definitely very encouraged to do so, and there would be the market has sort better recognized that we are the leaders, and for sure that obviously translates into a more dynamic and a sustainable growth in the future.
We've sadly had the pandemic and obviously that translated into us needed to cost cut and being able to reduce profitability in the short term as we were very blunt in terms of expense growth. So those are the areas that we definitely, we couldn't even that talk with your authorities in an easy matter because things were obviously the main aspects of the authority was focused on is not digital digitization for the other market, right?
So that sadly, those 2 years were not very good in terms of regulation for digital solutions, right? So I mean, can even, why invest if the product is not there, right? So now things are in a different path. Right now, the authority is much more enthusiastic about this. And if for sure, we think that the opportunity is still there in terms of the mass affluent that is being served with Citibanamex, with HSBC type of banks, which definitely have a very bad service, and them obviously are also targeting those customers that are very, very healthy and in terms of margins and volumes, right? So yes, Nubank is getting here, [indiscernible] is getting here. Open Bank we nailed, definitely those are but the main aspects of the main competitors are the big banks, which are obviously the ones that have the more volume of customers.
No, super clear Manuel, and again, I think you have it, it's great. So I hope all the best for Hey, and I hope you execute as you have been executing very well for Banregio. If I may a second question on your funding. We see your time deposits growing way faster than the deposits. And this is a trend in the industry, but it seems that Banregio now has been growing faster time deposits than the industry, right?
And demand deposits are decreasing a little bit more. Is this a strategy you are looking for? I don't know, more stable long-term funding? What is the rational on your deposit, needs of time deposits growing? I know you have rates, but again, the industry is growing the time deposit a little bit below your 50% over year. So just want to understand if there's some push for you to more stable, longer term kind of deposits?
No, it is not the strategy. We have seen 2 effects in demand deposits. Obviously we'll prefer to have more demand deposits and we are funding the growth of the assets with time deposits. As you know, we have been talking for many quarters that we have excess of deposits. This excess is in purchase agreements. And when we need to fund the growth of a launch, basically we convert purchase agreement, 2x deposits, then that's the impact that you see and that's why it's growing faster than the competition. That's the main reason.
And also in the demand deposits, we have deposits in dollars. Then when we do the conversion, the dollar-to-peso with the peso appreciation or dollar valuation if you can see at 17, 17.8 it looks like a reduction on deposits. The deposits in dollars are stable, around MXN 900 million. Even they grow, they grew last quarter. But the conversion to pesos is not helping. But that amount but the depreciation or the appreciation of the peso. I don't know if I was clear. It's not a strategy to say we're going to grow 50%. No.
The strategy is to grow the loan book, and we keep pushing our bankers to gather more demand deposits. We have done some cash management strategies to increase deposits, demand deposits. In Hey, we're launching payroll in Banregio. We have relaunch our payroll payment for companies focus more on the company than in the deposits of the company than in the deposits of the individuals. But both are welcome, it's the opposite, that we are focusing more on the demand deposits.
Our next question comes from [ Rafael Lima ]. Our next question comes from [ Anand Bawani ].
First question on Hey Banco, you spoke about 1,200 customer acquisition per day. So the monthly run rate would be around 36,000. So would it be fair to say that the 1 million original target that we had now happens by the Q3 of next year?
Yes. It will be not met with this focus that we have right now on more profitable customers and with no advertisement, as Manuel mentioned, when we had an advantage on price, on the rate we grew very fast, and then we should wait for the reduction of the TA also, he mentioned that our main competitor is Cetesdirecto or the other competitors that price close to the Cetes the time deposits.
And then the short answer is yes, we will be around 30,000. And not all of them maintain their active status. We have been very transparent on that matter to just report active customers because we could say we have 2 million customers or 2 million accounts open, but if they don't transact we are not here for that number because also we dilute all the KPIs. Then we are presenting customers that have transact in the last month. Then some of them open the account and maybe never deposit or some of them, open the account and deposit and then stop using it if we reject the credit card. That's the behavior that we have seen. These are not net new customers are just new customers.
Noted. And from a medium term perspective, with this change in strategy on Hey, what is the plan for spinoff and is there any expectation of loan book in Hey before it get spinoff?
Sorry, I couldn't understand the second part. Loan book?
Is there any a particular size of Hey's loan book at which you might revive the spinoff plants?
Sorry. Well, I will answer the first part. We're working right now, our main objective for the next 12 months will be to ensure that Hey Banco start operations as an independent bank from Banco Regional and then after that, we will request the permission to move Hey Banco from Banco, from Banregio Grupo Financiero to Hey Controladora and then we'll evaluate the fact ability to a spinoff.
But the initial spinoff from Banco Regional to Hey Banco is already working. The second part of the question is still don't understand. What we're going to do is to spinoff all the customers from Banco Regional to Hey Banco that are already on Hey Banco that have opened the account or the loans through the app, and are already registered on the systems of Hey Banco.
Noted. And my last question on growth expectations over the next 12 months, which regions do you see to be growth drivers? Because over the last 12 months, we have seen Novalian has done lesser growth than other regions. So over the next 12 months, what should be our expectation?
We're still expecting to a lot of growth on the north and the west and the center. Mainly the regions that are benefited both from the nearshoring, but also from all the USMCA agreement, free trade agreement. And for the size, we have still expectations on Mexico City. It is still the largest market in Mexico, then we're still investing in more bankers then that should be, and Novalian will continue growing, but as the base is larger, the percentage is not the same pace of growth.
Our next question comes from [ Barry Cohen ].
There's a couple of points of clarification. I may have heard wrong, but I thought earlier in the discussion, you were talking about 700,000 customers and then 1 million, I'm a little, I just want to get some clarification what your target was for next year in Hey?
Yes, the number is 700,000 for this year. But we have a guide for next year, maybe it was on the elaboration and on the number of new customers, but as I mentioned, these are new customers are not net new customers. And we don't have a guide for next year. That's it. The number for this year will be 700. There is 100,000 more in this last quarter.
That's great. So can you maybe help us maybe then understand, because somebody brought up some of the account attrition that took place, and I know you were talking about a shift in how you look to acquire customers. Can you kind of like pencil out a couple of different things? Like how much was just kind of like natural attrition that takes place in the account base? How much of it was charge off and how much of it was due to like, fraud related charge off? So like if we could parse out like what the causations of attrition work, that would be helpful?
Like 1/3 we believe is related some sort of fraud or and yes, and our processes of anti-money laundering that we have improving more aggressively with that analytics and all the accounts that we don't like or do not comply because it's not that we like or not like, do not comply with the anti-money laundering processes are close or can sell then will be like 1/3. And the other 2/3 are regular attrition for customers that decided not to continue using the account or were rejected on the credit side.
And then I'd like to just kind of go back to like some much earlier questions about like, and I'm going to like frame it as NII trajectory. You've had an a very strong earning asset growth this year and I suspect the 4 quarter, given that it's your strongest quarter, you should continue on that trend. So only about half of the earning value of that margin has come through this year, right? Because you're going to earn on averages through your balance sheet. Can you kind of like walk us through like how far down would rates have to go to offset kind of the rollover of earning asset from this year plus kind of like your expectation for loan growth? Because looking at the forward curve, it would suggest that you should have a very strong NII year still in 2024, but you really haven't like, said anything about it. So could you just kind of maybe walk us through the puts and takes?
Yes. We believe, or we expect, well, not the, is not the right word believe. To continue growing the launch, as we already mentioned in all the segments by the relative size, the wholesale is still the largest portfolio. And as you know, in the wholesale market, most of our loans are variable index at TA. We don't have an exact number and we'll do the calculation to say how much the rate should go down. But if you reduce the rate, and we have already said our sensitivity there is 15 basis points per 100, 100 decreases that will be the mix. But in the opposite, we will have a higher or faster growth of loans especially in large customers that are still waiting to do investments and then appropriate cost of funds. And yes, Alejandro notes that the repricing is in 3 months. But I don't know if I understood your question correctly.
That's okay. We, I don't want to waste other people's time. We could always dive into like in more detail if it wasn't that obvious what I was asking. But I do want to ask one thing about capitalization ratios. I mean, it's stable year over year and actually up over the second quarter which is great because you've shown like significant asset growth. But I'm curious, when you look at actually your risk-weighted assets, you had much lower credit risk migration in your RWA assets, I think like a 9% roughly year over year, and which is demonstrably less than your risk asset growth. But if you had a lot of migration on operational risk like, and I guess even in market related risk, what do you think drove the differences between those categories of RWA risk?
It is excess funding basically.
So you're referring to like a repo side of the equation, is that what you mean?
Yes. The repo side that grow to MXN 60 billion. That will require more market risk assets.
Since there are no more questions on behalf of our senior management, I would like to thank everyone for joining the call. We look forward to speaking with many of you in the coming weeks. If additional questions arise, please don't hesitate to reach out to Alejandro on our Investor Relations team. Thank you for your interest in all. Have a good day. Thank you everyone. Thank you for participating.