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Good morning, ladies and gentlemen, and thank you for standing by. Welcome to Regional Third Quarter 2024 Earnings Conference Call.
We are joined today by Manuel Rivero Zambrano, Chief Executive Officer of Rational; Enrique Navarro Ramírez, Chief Financial Officer; and Alejandro Lobeira, Head of Strategy and Planning and Investor Relations.
[Operator Instructions] Please be advised that today's conference call is being recorded. I will now like to hand the conference over to your speaker today, Manuel Rivero Zambrano. Thank you, and please go ahead.
Good morning, everyone. I hope hearing you and your families are healthy and well. We're pleased with our third quarter performance as our loan portfolio continues to outpace industry standards, and our profitability steadily rises. Our project keeps delivering solid results by seizing opportunities presented about Mexico's economic expansion, [indiscernible] trends, a robust labor market and a favorable demographic conditions. These factors offer a distinct opportunity for sustainable growth, enhanced operational efficiency and profitability at new heights.
Regional has seen a significant surge in our loan portfolio while maintaining exceptional asset quality. We continue to optimize our balance sheet by reducing our securities investment portfolio and nonfinancial revenue continues to grow at double-digit pace.
Quarterly earnings of Regional have shown steady growth with a net income for the quarter reaching MXN 1,604 million, marking a 3% increase year-on-year. Our return on average equity expanded by 83 basis points year-on-year. reaching 21.7%. Regional reported a strong 30% year-on-year loan growth, outperforming by the banking sector of 12% growth as of August.
Core deposits increased 11% year-on-year compared to the sector's 9% expansion. The financial margin expanded by 12% year-on-year and 4% quarter-on-quarter, underscoring our consistent progress in profitability. Our cross-selling strategies have effectively boosted our nonfinancial income, which has been notable 40% year-on-year increase. FX fees rose 37% year-on-year, and card and merchant fees by 15% and insurance fees by 11%. Our efficiency ratio remains below 40% threshold, standing at 39.5%, year-on-year contraction of 223 basis points. This reduction in the efficiency ratio reflects a strong revenue growth outpacing operating expenses.
Banregio continues to expand its geographical footprint, opening two new branches to support our goal of delivering a distinctive customer experience while enhancing efficiency. Our target remains to establish 20 new branches by the end of the year. Banregio's loan portfolio saw a 14% year-on-year increase, core deposits surged by 11% year-on-year and our last 12 months efficiency ratio contracted by 120 basis points, reaching 36%, reflecting our commitment to operational excellence.
We had 23% quarter-on-quarter wholesale banking increase in time deposits and 22% quarter-on-quarter in SMEs. This reflects our strategic approach to optimize funding cost while maintaining healthy NIMs. While this has temporarily impacted our CASA ratio for the 4.5%, we remain confident in our ability to maintain strong margins given our focus on asset quality.
Our branch expansion plans remains on track with 22 new locations in the last 12 months. For 2025, we plan to open 20 new additional branches. While operating expenses grew 19% year-on-year, this increase reflects the strategic investments in our expansion and digital capabilities. We expect expense growth to be in the low teens in 2025 as we capture operational efficiencies in the year.
In our retail segment, the preferred banking portfolio decreased by 3% year-on-year, while the SME portfolio expanded by 40% year-on-year, underscoring our commitment to supporting small businesses. Under [indiscernible], its long-standing trajectory of the sectional service quality reflected by the leading -- industry-leading Net Promoter Score of 83 as of March.
The bank maintains outstanding asset quality with a nonperforming loans ratio improving by 11 basis points year-on-year to 1.2 and a cost of risk of 0.5.
Regarding our consolidated cost of risk, currently it stands at 1%, slightly above the guidance range of 0.7%, to 0.9%. This temporary increase was driven by specific commercial cases and [indiscernible] provisioned, and we expect to return to our target by the end of the year -- by the first quarter -- sorry, by the first quarter of 2025.
Hey Banco is consistently refining its loan portfolio for profitability. Our strategy targets high-quality customers rather than the mass market approach, focusing on formal individuals and business to enhance our customer base. This approach has led to a more streamlined and profitable client base, reducing both acquisition and operational costs.
Currently, active customers stand at 540,000. In the second quarter, Hey Banco cost of risk was 7.7. We expect this ratio to [indiscernible] by the end of the year, driven by improved credit score model and enhanced collection strategies. Our strategy prioritizes a balanced mix between individual and business segments to drive sustainable growth. For individuals, we have calibrated our credit and card model and are now prepared to continue growing, focused on a more formal mas [indiscernible] segment than in the past. This shift positions us to capture high-quality growth compared to our competitors.
On the business side, Hey Banco's 2024 focus remains on small businesses and sole proprietors where we have built a robust portfolio totaling MXN 1,350 million. This balance segment focuses key competitive advantage over our digital peers, supporting our goal to maintain superior asset quality, while enhancing our offering for both profitability and resilience.
The financial margin was MXN 182 million with our net interest margin over the last 12 months of 7.2. Hey Banco's efficiency ratio has increased 69.3%, a 12% year-on-year improvement, reflecting our successful strategies to operate more profitability without compromising customer experience.
Regarding case active customer base decreased to 528,000. This reflects our strategy while -- it reflects our strategic shift from rapid growth to profitability. We're focusing on higher-quality customers and expect to see improved metrics as we implement enhanced credit score models. Our target is to reduce [indiscernible] cost of risk from 7.27 to 3.8 by the end of the quarter.
Hey Pago's monthly billing expanded by 21% year-on-year, reaching MXN 12,027 million, while affected affiliations growing by 1% year-on-year. We continue to invest in growth strategies to strengthen our position in the payment industry.
In terms of brand and awareness, our efforts to continue to deliver strong results as a media has reached 2 million followers across all platforms, allowing us to engage effectively with our community in ways that traditional banks cannot.
Our commitment to maintain robust long-term financial results marked by sustainable profitability and a stunning asset quality. The growth outlook for the coming years remains promising, while the notice increase in loan demand across sectors, including agro business, manufacturing, logistics, commerce and real estate. We are dedicated to consistently enhance shareholder value by delivering results that expects industry's average. We aim to maintain our position as a profitable leader, demonstrating resilience across economic sites.
We maintain our [indiscernible] loan growth guidance for 2024, currently tracking at 30% year year-to-date. Given the strong pipeline in the commercial and SME segments, coupled with near-shoring opportunities, we're confident in achieving the midrange of our target.
For 2025, we expect to provide detailed guidance in our next earnings call, but preliminary indicators suggest continued robust growth opportunities.
Thank you for your continued trust and support as we strive for achieve sustainable and value for all stakeholders. Our objective for January remain unchanged as we believe in our strategic initiatives to continue to increase shareholder value.
Thank you. We appreciate any questions.
[Operator Instructions] Our first question comes from Olavo from UBS.
Hi, guys. Sorry, can you hear me?
Yes.
Yes. Yes.
I would like to understand a little bit more on the dynamic of Hey [indiscernible] in terms of active customers and also loans. I mean the base of individuals decreased once again after it rebounded in the second quarter. And in this quarter, the loan book remained flat. And as we could see the credit card portfolios on [indiscernible] trend since the end of the last year.
So my question is basically to know at what extent this performance in terms of clients is indeed related to the portfolio, the risk or linked to competition from both new commerce and other traditional banks in Mexico? I'm trying to understand because if you tell us this contraction in the number of clients of Hey Banco is related to the risk the additional client or some current clients not marginally accretive anymore, I believe, I think. So any color on that would help.
Well, thanks, Olavo, for your question. As Manuel mentioned previously that in the portfolio side, we are a growing bank. We reduced it, and we improved our credit policy and credit analysis and collections on SMEs. Then as you can see SME is growing back. And in auto and credit card, we are applying in our credit scoring models all the lessons that we learned during the last 2 years, both in the greater scoring models, prevention fraud models, plus collection models and teams. We have increased the team, and we have provided them with better tools.
That's the reason we are just relaunching, starting to grow slowly with pilot testings of the new models. We are not right now in a mode of growth massively. As Manuel mentioned, we are focused on higher income, more quality customers, both on the deposits as well as in loans.
And as we have mentioned, we have stopped the expense on marketing than -- we are not right now going massively on marketing efforts on -- I don't know how to say in English, pauta. We used to have a lot of digital publicity advertisement. And right now, we have very limited one.
We are we have more deposits than we need right now, then we feel comfortable with the size and we are preparing for the start of operations for Hey Banco as an independent bank in the first quarter of 2025. We have been advancing with the testing, with different authorities and we are very close to start independent operations starting next year.
Okay. So just a follow-up on this. So as we've mentioned that you feel comfortable with the current customer base. So should we think that Hey Banco will run roughly with the same number that we saw in this third quarter along the next year? Or do you guys think there is opportunity to increase this customer base? Or any comment on that would help.
No, no, no. Obviously, we want to grow the base once we are operating as an independent bank from Banregio and we can perform the migration of the customers that has been already advised. If you are customers of Hey Banco, you should have received an invitation explaining what will happen in the next months. Then after that, we will start and when we feel comfortable, as I mentioned, with our new credit scoring models and all the testing that we are doing right now with larger polls, every time, every month, we will resume marketing advertisement. And we want to continue growing faster, but until that maybe second quarter of 2025.
Okay. I was about to ask. So during the second half of the next year, that would be, right?
Yes.
Our next question comes from Brian from Citi.
Two questions. The first one is, you mentioned you're still seeing strong opportunities for growth. And I think
[Audio Gap]
Can you hear me here?
Yes. But we didn't hear the question. Can you repeat it, porfa, please?
Sure, sure. Sorry. No, team, the first one is you mentioned that you see continuous and very strong opportunities for growth. And I think the consensus view from economists, right, if we take a look at surveys from any -- even the Central Bank, we are seeing maybe a slowdown in economic activity. So just wanted to understand if you, particularly, are still seeing strong demand in the double-digit range for maybe this year and then 2025? And then I'll ask my second question.
Well, yes, we do see still strong growth. We definitely are seeing the economic data as all of you and we are always on the look out for more information. Our clients are now obviously worried about the new government, and that's normally what happens when a new government stands in. I think that's a period of normal circumstances that it takes, I think, more time to digest.
I don't see -- but in the real economy, things are going well. You can see in the labor market. Obviously, you can see a bit of slowdown there, but still we're at full employment, and this still has -- the investment still has strong growth, and that remains true.
And obviously, if economic performance deteriorates, we will not be able to grow at that pace. But as things are right now, we are confident that when you say that, yes, we can still continue growing because of various reasons. One is the geographies that we are in, the segments that they were in, that still our presenting good growth, and that's obviously -- other segments that we're not in, for example, cross-selling credit cards to our customers, right? So that is something that we didn't have in the past, but now we have, or any other portfolio that we might go in the future, for example. We're aiming to go more into payroll lending, and that's going to be a good quality growth there. Obviously, not that huge, but what I'm saying is we'll still have, as a group, opportunities to continue growing, just developing our client base more, right?
So still, there is an opportunity to continue to grow differently than the industry because obviously, we're aiming to these opportunities particular to us that we can take advantage of, right? So in that sense, we're confident that we can continue growing in that way if the economic conditions obviously are in favor.
No, super clear. And then just maybe a quick follow-up on Olavo's question, right? Because if you can remind us like what are the plans. You're starting independent operations, as you say, in the first quarter of next year. I know at some point, there was a mention of spinning off these operations like -- can you remind us like or refresh us a bit on what are like the midterm plans for Hey Banco? How should we envision this? And then if maybe this is like a fluid situation that you're evaluating things, what could be the drivers at which point you could feel comfortable saying, okay, we'll spin this, I think it's ready or not, right?
Right. So the first thing would be to have the operational done first, right? So we need those operation to be done. We are focusing on that at the moment, which is a good amount of effort that we have to take advantage.
But then going forward, definitely, we are aiming to grow much more rapidly. And we definitely think that we have the best experience for customers. As you can see our -- the amount of products that we have compared to the others are quite different. Our offer is much more robust. It goes for individuals, for sole proprietors, for small businesses. We have all types of debit, credit products, which obviously the customers take advantage of. Small business loans, auto loans, insurance. So in stock -- so equities are -- so there's a lot of products that customers can buy. So we have a lot of ample opportunity to continue making profitable the operation. That's our main focus for next year, which is obviously the first thing we have to take care of. And then going on further, having a more rapid growth.
The thing about is, we are very confident that the retail segment in Mexico continues to be developed. It's still very under leveraged. It's still growing at a very fast pace. We have ample room there to grow. But things need to be -- I don't want to say it's low, but we have to really take care of things first, in order to produce the best results, right? So we are a bank that focuses on quality growth. And that's the main focus always because we are not only interested in thriving in good economic conditions, but also in the bad ones, right? So we are mainly focused on quality growth, and we've been able to achieve it.
Obviously, we had hiccups in terms of the quality, but that always gives us the advantage of recalibrating our models and being able to make sure that the growth is efficient, and it's, obviously, for the long run. So we are really making sure that we have that in place, and we continue, very confident that the segment in Mexico is going to be able to thrive because retail segment is still at a very good place in Mexico. There's a lot of opportunity for growth.
Super clear. But just on the potential spinoff and the plans to divest or move this to the...
Well, definitely, that's going to be an opportunity that we could be -- Obviously, when we have all the things in corporate separate, so that would be one of the opportunities that we have, definitely. [indiscernible] sadly in Mexico right now -- are not at the best point right now. So I mean that's something that we -- that obviously hinder, right? So we're going to be in the lookout, right, for sure.
Now, Regional has a lot of money to continue growing, which we definitely don't need equity to run. But definitely, I mean it's -- if we are open to the opportunity if someone drives once and it can drive a faster growth rate, right? So in that sense, we're happy for the moment. But as I said in the past, we want to maintain our dividend policy. We want to maintain Banregio growing. So in that sense, we are trying to manage the equity at its highest point of level, right? So we are trying to deliver the best results, obviously. But definitely, our aim first is to maintain good capital acquisitions in Banregio. Continue growing Banregio and develop as it should, and obviously trying to maintain our dividend yield as good as it has in the past and being able to continue to -- with being able to produce results with quality in the short term. Is that the only way we have to manage? No. I mean, we see competitors do it differently. And do we respect that? Definitely. But we don't think this is the only way, for sure.
Super clear. And if I may, just a very final one. I understand you don't make any changes to guidance. Can you repeat us the main lines of the guidance in case they are all reiterated?
Sure, yes. We guided for a loan portfolio, 12% to 17% for the full year 2024. For deposits, core deposits, 10% to 15%. For the MIN -- the NIM, sorry, the net interest margin, 6% to 6.4%, that we will be above that. For profits, net profit 12% to 16%; ROE, 20% to 22% for the full year. NPLs below 1.8%, that we are now at 1.2%, we will be lower.
Cost of risk, 0 7% to 0.9%, and efficiency ratio of 40% to 42%. That's the official guidance. And occasionally, we mentioned the parts by expenses, 10% to 15% in the low teens moving. We hope one single digit, but we have never guided less than 2 digits. That's it.
Our next question comes from Ricardo from BTG.
Ernesto Gabilondo from Bank of America. Manuel, Enrique and Alex.
No, no, no lo silencios. Yes.
Can you hear me?
Sorry for that [indiscernible]. Yes. Sorry, Ernesto. Please go on. Sorry for that.
No worries. So my question will be a follow-up in your loan growth. So if we assume a GDP growth of around 1% next year, how should we think about the loan growth at a consolidated level? And then if you can break it down by segment, you were already talking a little bit about the cross-selling opportunities in the consumer segment, in payroll and credit cards. But if you can break it down, how much do you expect? Like high single digit or low single digit in the corporate and how much in the consumer loan book? Just to understand how are you seeing the dynamics for the loan book next year.
Yes. Roughly in the corporate and -- well, corporate talking about medium and large companies, we don't do large corporates or government. We expect double-digit, but low 10% to 12%. On the small businesses and consumer, we, as Manuel mentioned, we see many opportunities, both in Hey as well as in Banregio. Then consolidated, we expect more than 20% in retail and small businesses, considering both Hey and Banregio. That will be generally a mortgage similar to this year between 10% to 15%, low teens. There is still demand and our loans also more than 20%, including both leasing. Leasing also more than 20%, similar to this year. We see opportunities. There are no -- at least not two players anymore. We have been grabbing some opportunities. Yes.
Yes. Overall, the loan portfolio, double digits?
Overall, yes. It is very similar to this year, maybe starting at 10%, but yes, double-digit definitively.
Excellent. Excellent. And then my second question is on asset quality. So as you mentioned, cost of risk was at 1% of average gross loans, modestly above your guidance range. You were also saying that you expect to return to these levels of 0.7%-0.9% in the first quarter of '25. So how should we think -- we should end 2024 in terms of cost of risk? And given that you will be going into higher exposure into the consumer segment with Hey and with Banregio, how should we think about this cost of risk to be more at 0.8%-0.9%?
Well, this year, we still are aiming for the 0.9%. That is the upper limit in the guidance. But as you have seen the whole year has been 1%, then maybe we'll be between 0.9% to 1%. As Manuel mentioned, the specific cases on commercial lending has been fully provisioned in this quarter. And we also anticipated some write-offs in Hey, and we expect a good quarter for the last quarter of the year, for Q4.
And for the next year, say that we're expecting, again, between 0.7% to 1%. We don't see an increase on provisions. As I mentioned, we are growing back exposure in credit cards and personal loans. We will continue with auto, but auto is a very neat portfolio with very high quality. And that new exposure is with the new models and with the new collections and fraud prevention models, then we don't expect again, cost of risk that high that we have in 2023 or the beginning of 2024.
Perfect. Perfect. And then in terms of your net income growth guidance, when we do numbers and analyze the first 9 months, I think the growth trend is around 13%. I think your guidance was between 12% to 16%. Usually, the last quarter is the strongest one in terms of loans, NII and fees. So it would be reasonable to expect the mid- to high end of the net income guidance range?
Yes.
Perfect. Perfect. And then my last question is on Hey. As you mentioned, you're having like minor losses in the last quarters. And I just want to double check that do you expect Hey to break even in 2025? And then how much is generating Hey Pago? And I don't know if Hey Pago will be also part of the spin-off.
No, sorry, I was trying to understand the question. Yes, Hey Banco and Hey Pago will be in the same company. The spin-off -- there is not a spin-off in terms of -- out of Regional, the spin-off from Banco Regional to Hey Banco include Hey Pago and yes, right now, they are in breakeven together.
Okay. So that means Hey Pago is already profitable and including Hey Banco, they are profitable?
Yes.
Okay. Perfect. Excellent. And just last question, sorry, sorry. In terms of the dividend, we noticed it was approved yesterday. It was the second payment?
Yes, yes. Thanks for the question. Yesterday, it was approved, the second payment of MXN 1.25 billion is around MXN 3.8 per share. And it was approved by the Board. And today, we already published the call for the general assembly for the 19th of November.
Our next question from Ricardo with BTG.
I have just one on my side. In the review of our local newspapers, you guys mentioned that Regional has a plan to expand its branch network by around 40% by 2028. So with this in mind, could you please comment in which regions you should concentrate this expansion? And what would be the OpEx impact in the following years, given this strategy?
Yes. In terms of the expansion, we will maintain it. We are expecting to close this year with around -- with 22, not around, with 22 new branches for the full year. And for the next year, a very similar number. Between 20 to 25. We are not pushing new branches just for the sake of it or because they are in the budget. We are selecting very carefully each location, analyzing the surrounding market.
In terms of cities, regions, last year was focused on Mexico City and Monterrey or Nuevo Leon because it's not only the City of Monterrey or all the metropolitan area. This year, the focus was Guadalajara, in general Jalisco, but mainly Guadalajara metropolitan area. And some in the north, we opened Mexicali, Tijuana.
Remember that the focus is to reinforce and consolidate the regions where we already have a presence. For next year, we are planning to continue Mexico City, Guadalajara and some on the Bajio Son, mainly Leon. We have started two already to that I am including in the '22, but we will continue the Bajio Son. And that will be it and some scatter in other regions, but that will be the focus for next year.
In general they are the three largest cities and reinforcing all the -- all the regions. This year, we opened Hermosillo. New, new ones is mainly one or two in Colima, Tepic, where we didn't have a presence. But that are the exception. The rest are in regions where we already have a presence.
Very, very clear. And with this opening of branches kind of in a similar pace from this year, should we expect OpEx to grow also in a similar place from what you're seeing so far this year? Or should we see some deceleration?
Lower growth, but not -- as I mentioned in the previous question, we aim for single digit, but considering that inflation will close around 4.5% it will be difficult to achieve it. Then the low teens similar to this year. The growth of OpEx, mainly based on the -- as Manuel mentioned at the beginning, on the expansion for Banregio and consolidation and all the IT expenses and some promotions.
This year, also, we increased the presence of the brand, Banregio brand, in all the cities that we are expanding we turned 30 years old. We have our anniversary, 30th anniversary on September then we did some on promotions, and we will maintain the presence of Banregio locally in the regions where we already are.
Our next question from Tito with Goldman Sachs.
I guess, a couple of follow-ups, if I may. Just -- I mean, you sound fairly confident on the outlook for next year. I mean, just given some of the uncertainty in the market, I mean, the market seems a little bit more concerned, not specifically Banco Regional, but just Mexico in general following the Mexican election, judicial reform. You have U.S. elections next week that may create some more uncertainty.
So I guess, what do you think could be the downside risk to this double-digit loan growth that you think is doable for next year? Do you see any risk to that, that can materialize? Or -- yes, what could they be?
And then second question, in terms of your capital. You're very well capitalized. You said you're continuing your dividend policy. But is there room to increase dividend? I mean stocks trading, your book value, would you do buybacks? What's the right capital level that you would like to operate with? And are you holding capital, maybe giving some of the uncertainty in the market?
I will start with the second question. Yes, as I mentioned, we will continue this year, and we are expecting next year with a similar -- we don't like to call dividend policy, but with the same behavior, splitting the dividend in 2, between 40% and 50% of dividend payout.
Say that with the growth that we expect on loans, we feel very comfortable above 12.5 is our expected risk level, but we are maintaining very close to 14 or above 14 exceptionally could go a little bit lower, but we feel that, that's an adequate level balancing returns as well as being prepared for any uncertainty in the future.
And for the loan growth, well, which we see and we saw on the [ CMBB ] data and Banco de Mexico growth of the market of 12% for the commercial loans or for businesses in general. And we are confident for the regions that we are growing. We are still seeing investment, as I mentioned in previous conference calls, the investment in Nuevo Leon and Tamaulipas and Coahuila that are the closest places, but in all the country, in the regions where we are participating, the West and the Northeast and Northwest, there is still an investment. I don't know if you know, maybe Tesla is not coming, we don't know yet. We will have to expect for the elections. But Volvo started a new plant and Kia started expansion for electric vehicles. And also, we have to recognize our relative size. We have around 3% of the market or 5% in the segments that we participate. Then -- at most, yes. Then we still believe we can grow. And as I mentioned on the split, in the large customers, we see around 10% to 12%, where we expect more growth is in the small businesses and consumer that is a huge market yet there to address.
Great. That's helpful. Just one follow-up on the capital again. But more at what point would you consider buybacks? I mean, particularly just given where your stock is trading?
No. We have our buyback program active but is buying and selling. We are not holding the stocks or accumulating them at the moment. We haven't think about -- and we yesterday talked with the Board, and we decided it's not the moment to do similar to other competitors that we know that they only buy and hold.
As we do still see opportunity for growth in terms of the loan growth. I mean one of the main aspects for loan growth, obviously, is in the interest rate. So we continue to see the interest rate seed for the next year that we expect 8.5 and 2026 is going on further, that would drive the appetite for loan growth much definitely. We've seen it in the past, and definitely, right now, people are getting -- you can see the growth that we have had on the time deposits and that tells you how people are behaving at the moment. And obviously, people are holding their money. The bank is paying good -- and the inflation has seeded already. So they are very comfortable. So when the interest rates seed 2025-2026 and further, that should drive a much more appetite for loan growth.
Definitely, we're not -- as you always know that we are not very eager for risks that we don't know how to control. So right now, the NPL ratio is at a very good pace. I mean very good at 1.4%. And definitely, we -- it's something that we look out for as a culture, as a bank, as an institution. And we're confident that the portfolio is very solid and that the growth that we're adding up is at our -- what we have already. So in that sense, we're comfortable in saying.
And if things change, definitely, we will change modes, right? So at the moment, things look steady and being able to talk to our customers and feeling the same way gives me the confidence to continue saying that.
Our next question comes from Mija with HSBC.
Just quickly on Hey Banco first, what is the rate that you're paying for the deposits currently, especially given that you mentioned that you have a lot of deposits which you've not been able to deploy in the right kind of loans that you aim for? So what rates are you paying? And what is the trajectory that we should expect?
And second question is on asset quality. We saw some one-off cases that led to higher provisioning requirement so far this year. You expect a lower cost of risk in the fourth quarter. What is the expectation for next year? Do you see any other cases that could arise requiring higher than average cost of risk? Or should you go back to the more average normalized cost of risk levels for 2025?
Yes. In terms of credit risk for Regional, we expect to go back to 0.7% to 0.9%. That is the average that we have had. Specifically for Hey Banco, we don't expect an increase again in cost of risk. Obviously, it's higher. As Manuel mentioned, we are aiming for 2.8% to 5%. Right now, we are close to 8% that we consider very high for Hey Banco, even though it's consumer lending or small businesses. We can maintain below 5% with all the changes that we have been doing during this year, reconfigurating all the -- calibrating the models and changing the collections procedures.
Sorry, we are paying 10.5% and 12.5% in 28 days term deposits -- time deposits. That's the highest one, and we are not paying on demand deposits. That's basically -- and the difference is if you are Hey Pro, you can access the 12.5%. And if you are not Hey Pro, it's 10.5%.
Would you consider bringing the rates down further given that you already have a lot of deposits?
Yes, yes. We are -- we have already made a decrease of 50 basis points with the previous Central Bank decisions, and we will continue doing decreases on the next reductions and obviously monitoring the market.
Our next question comes from Yuri with JPMorgan.
I would like to follow up on deposits, but this time on the Banregio side. I guess, Manuel already mentioned that time deposits are growing faster. And indeed, when we look here to wholesale, there was a big increase quarter over quarter for time deposits, 23% quarter over quarter for wholesale and some 22% for the SME banking.
So it seems our clients are looking for time deposits. Not sure if this is some kind of promotion, is the bank trying to attract this kind of deposits, is the lower rate environment? So if you can comment why we are seeing the shift on -- not to say a shift because demand deposits, they -- on a year-over-year, they are still doing fine. But I would like to understand if this could have some pressure on margins and funding costs? That's one. And two, just on fees. It was an overall good quarter, but I noted cards and merchant fees down. And when I go to, Hey Payments, things are fine, right? Number of clients, volumes. So what happened with cards and merchant fees to explain the small decrease this quarter?
In terms of time deposits, customers are becoming more conscious on the cost of money, then we see some migration from customers from checking accounts to time deposits. Say that checking accounts is growing at the same pace of the market, around 6%. And as you can see in our report in Page 13.
And retail segment is growing 15% in checking accounts.
Sorry?
The retail segment is growing 15% in checking accounts.
Retail segment is growing 15%.
So the larger companies are the ones maximizing.
Exactly, the large customers, they are the ones maximizing the return.
And obviously, you see more repayments in loans. So that obviously -- you have to take that into account, obviously.
No. Perfect. How much are you paying for the wholesale funding on those time deposits?
It's around 10% in time deposits.
85% of the. . .
Was there an increase in the end of the quarter? Because when I go to your funding cost that you provided in the press release, I think your average funding cost is unchanged, right? It's 6.7%so just trying to understand if the increase in time deposits may be a pressure for the coming quarters?
No. If you see in demand deposits reduced versus the previous quarter, I don't have here the previous quarter, but I saw yesterday the number, and that helped. If you remember, we paid in demand deposits only in very large customers, mainly institutional customers. And that part was reduced on the portfolio of demand deposits, and that helped.
Enrique, regarding the fees. Like what was the [indiscernible] cards?
No. It was mainly on the cards. A little bit on payments. But as you said, if you see the mix, what growth more was the large customers in Hey Pago. Then the mix reduced the income, but it was mainly in cards, both in transactionality. We reduced the number of transactions year-on-year mainly because we are writing off and the reduction that we have talked about in Hey in the number of customers and number of credit cards, the portfolio of credit cards. Then year-on-year and even quarter-on-quarter, we noticed a reduction.
And also on promotions, we stopped some promotions that when you pay monthly installments without interest, it's a promotion where you register a fee that you negotiate with the merchant. We reduced some of these promotions in this quarter, but we will be -- obviously, for the Buen Fin, that is called Black Friday promotions in Mexico and for Christmas, we will go back to have this type of promotions. But we call it in Spanish, meses sin intereses.
Our next question comes from Pablo with GBM.
Congratulations on the results. My question is regarding your financial margin, your net interest margin. We observed a very solid quarter with a margin expansion to 6.5% despite the Central Bank starting scorings cycle. So can you comment on what are the dynamics for this margin? Are you seeing higher spreads on the interest rates of loans that you are charging? And also thinking on the next year, what type of sensitivity should we expect for each 100 bps of change in the Central Banking interest rate?
We expect still the same sensibility around 13 to 16 basis points per 100. But why the difference is because we have been reducing the securities investment portfolio from MXN 63 billion to MXN 43 billion this quarter. This portfolio works as a hedge, natural hedge, including also all the fixed rate loans that we have, all the leasing, all the auto, obviously, all the mortgage are fixed rate, then we maintain the same sensibility.
What helped this quarter is the time to the repricing. It takes between 1 to 2 months to reprice the loans. And very similar to the deposits, time deposits, that the average is 90 days, between 28 and 90 days is where most of the deposits are time deposits. And for the next year, we expect that depending how many reductions and how many basis points the Central Bank reduced on the policy rate to maintain a similar sensibility, maybe less, depending how much we can reprice deposits relatively to the policy rate.
Since there are no more questions on the call of our senior management. I would like to thank everyone for joining the call, and we look forward to speaking with many of you on the coming weeks.
If additional questions arise, please don't hesitate to reach out Alejandro and our Investor Relations team. Thank you for your interest in Regional and have a good day.
Thank you, everybody.
Thank you.