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Edited Transcript of BBAJIOO.MX earnings conference call or presentation 24-Oct-19 3:00pm GMT

Q3 2019 Banco del Bajio SA Institucion de Banca Multiple Earnings Call

LEON Nov 1, 2019 (Thomson StreetEvents) -- Edited Transcript of Banco del Bajio SA Institucion de Banca Multiple earnings conference call or presentation Thursday, October 24, 2019 at 3:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Alberto Guajardo Meléndez

Banco del Bajío, S.A., Institución de Banca Múltiple - Director of IR

* Carlos De la Cerda Serrano

Banco del Bajío, S.A., Institución de Banca Múltiple - Executive Vice Chairman of the Board

* Edgardo del Rincón Gutiérrez

Banco del Bajío, S.A., Institución de Banca Múltiple - CEO

* Joaquín David Domínguez Cuenca

Banco del Bajío, S.A., Institución de Banca Múltiple - Executive Director of Finance & Treasury and Alternate Director

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Conference Call Participants

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* Adriana Sanchez De Lozada

Scotiabank Global Banking and Markets, Research Division - Associate

* Enrique Mendoza Farías

Actinver Casa de Bolsa, S.A. de C.V., Research Division - Research Analyst

* Ernesto María Gabilondo Márquez

BofA Merrill Lynch, Research Division - Associate

* Gabriel da Nóbrega

Citigroup Inc, Research Division - Research Analyst

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Presentation

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Operator [1]

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Good morning, everyone, and welcome to BanBajio's Third Quarter 2019 Earnings Conference Call. My name is Priscilla, and I will be your conference operator today.

Yesterday, BanBajio issued its quarterly report. If you did not receive a copy via e-mail, please do not hesitate to contact us in New York City at (212) 406-3692.

Before we begin the call today, I would like to remind you that forward-looking statements made during today's conference call do not account for future economic circumstances, industry conditions, company performance and financial results. These statements are subject to a number of risks and uncertainties.

Joining us today from BanBajio is Mr. Carlos De la Cerda, Executive Vice Chairman of the Board of Directors; Mr. Edgardo Del Rincón, Chief Executive Officer; Mr. Joaquín Domínguez, Chief Financial Officer; and Mr. Alberto Guajardo, Investor Relations Officer. And I will now turn the call over to Mr. Guajardo. Sir, please begin.

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Alberto Guajardo Meléndez, Banco del Bajío, S.A., Institución de Banca Múltiple - Director of IR [2]

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Good morning and thank you all for the opportunity to discuss our results for the third quarter. Total revenues rose 9.5%, while financial margin, 5%. Net income for the quarter reached MXN 1.4 billion, representing a 4.6% increase. ROE was 18.7% and ROE, 2.3%. NIM was 5.6% during the quarter. Our efficiency ratio remained flat versus last year at 43% at the close of the quarter.

The total loan portfolio rose by 10% to MXN 178.7 billion at the end of the quarter. Company loans, which represented 83% of our total loan book, increased by 12%, reaching MXN 148.6 billion. Total deposits reached MXN 150.8 billion, 13.3% higher than the MXN 133.1 billion registered a year ago. Our NPL ratio was 0.97% at the close of the quarter. And finally, the coverage ratio was 156.6%.

Moving on to Slide 3. During the quarter, total revenues grew by 9.5% to MXN 3.8 billion and by 11.9% for the 9-month period to MXN 11.1 billion. These increases are mainly the result of the noninterest income, which grew 19.7% in the quarter and 12.6% in the first 9 months.

On Slide 4, we can review the net income performance. As we can see in the chart, net income during the quarter grew 4.6%, reaching MXN 1.4 billion compared to the MXN 1.3 billion registered last year. For the first 9 months, net income reached MXN 4.2 billion, representing an increase of 13.6% when compared to the MXN 3.7 billion recorded last year.

Moving on to Slide 5. We can see that we posted an 86.6% EPS increase since our IPO and 17% on a year-on-year basis, reaching MXN 4.69 in the third quarter. Our ROE continues to be above the 18% level while ROA was 2.3%, in line with what we guided for this year.

On Slide 6, you will see that our net interest margin for the quarter was 5.6%, a contraction of 21 basis points when compared to the 5.8% recorded in the third quarter of 2018. This contraction is mainly explained by the MXN 2 billion dividend payment paid in May 10 that was replaced with interest-bearing liabilities; the 2 rate cuts of 25 basis points each in the tier rate; and lastly, a higher growth in deposits compared to loans.

On Slide 7, we can see the performance of our efficiency ratio. It came in at 43%, in line with what we reported for the third quarter of last year and also showing an improvement over the 43.8% recorded during the second quarter of this year and well below the 49.3% average that our peers reported during the July and August 2019 period, which is the most recent publicly available information.

For the first 9 months of 2019, our efficiency ratio was 43.2%, which compares positively to the 43.8% registered during the first 9 months of 2018.

Slide 8 shows our total portfolio loan growth during the period, which increased by 10%, reaching MXN 178.7 billion at the end of September.

During the quarter, company loans reached MXN 148.6 billion, increasing by 12%. BanBajio continues to outperform banking system growth, which posted an increase of 7.9% as of August on a year-on-year basis.

On Slide 9, you will see that our NPL ratio stood at 0.97% in the quarter compared to the 1.05% recorded in the third quarter of last year and also compares positively to the 2.17% recorded for the system as of August 2019. On the other hand, our NPL ratio adjusted for write-offs was 1.67% during the quarter and also positively compares to the 4.49% recorded for the system as of August 2019.

Our coverage ratio was 156.6%, down from 182% from the third quarter of 2018. This ratio also compares positively to the 146.9% recorded for the banking system at the close of August.

Furthermore, the cost of risk at the close of the quarter was 0.61%, slightly higher than the 0.58% recorded during the same year-ago period.

Moving on to Slide 10. Total deposits grew by 13.3%, while for the system, the growth was 7.9% as of August. As you can see, our cost of total funding for the quarter was 5.6%, which is very close to the 5.3% recorded for the system, which includes big and traditional banks.

On Slide 11, we see that our capitalization ratio on a preliminary basis at the end of September 2019 was 15.79%. Finally, on August 23, HR ratings upgraded our national scale and global long-term ratings, both with outlooks stable.

With this, I conclude my presentation. Thank you very much for your attention, and we are now ready to take your questions. Please, operator?

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Questions and Answers

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Operator [1]

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(Operator Instructions) And we will take our first question from Ernesto Gabilondo with Bank of America.

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Ernesto María Gabilondo Márquez, BofA Merrill Lynch, Research Division - Associate [2]

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I have 3 questions. My first question is in terms of loan growth. We have seen lower business confidence and lower credit demand in the Bahia region. However, we have seen other regions in the country that have been able to maintain strong growth, such as the volume. On the other hand, we have seen that government has distributed more resources to the South of the country when compared to the Bahia region. So do you think this is the main reason for lower lending growth? Or do you think this trend could change? And are you perceiving business sentiment improving in the region? So that's my first question.

My second question. We noticed strong consumer lending growth, but on the other hand, we saw higher provision charges during the quarter. So can you explain if that was the main reason on the higher provisions or what was behind it? And also, why did your reserve coverage ratio declined during the quarter. And finally, my last question, how do you see interest rates for the next quarter and for next year? And how do you see your NIM considering that assumptions?

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Edgardo del Rincón Gutiérrez, Banco del Bajío, S.A., Institución de Banca Múltiple - CEO [3]

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Thank you, Ernesto. Let me start with the loan growth. What we have seen is part of the environment, is less confident and less investment. As part of this, we have seen less lending demand, less loan demand.

But of course, you know that BanBajio is strong in the agro business and that business continued to grow mainly in the Bahia zone and in the North of the country. In any case, we have been able to grow more than the market. You know that the market is growing today close to 8%, 7.9%, and we are growing 10%.

What we expect in the future, for 2020, is a better environment. The consensus today is around GDP growth of 1.5%. In that regard, if we add the possibility, that is we consider really high to get a trade agreement with the U.S. and Canada and the infrastructure projects that the government will announce soon, we believe we can be very well prepared to continue growing as we have been doing for years more than the market.

So we are confident to deliver good loan growth in the following quarters. Regarding consumer lending, yes, we are accelerating the growth in consumer lending. What we are doing as part of the transformation that we are executing for a couple of years already, that includes digital, includes data infrastructure, includes developing risk management tools for the consumer business, attracting talent to handle those areas, et cetera. We have been finding good with it that we're already implementing. That's why you can see more growth mainly in unsecured lending. That includes personal loans. That is growing more than 50% year-over-year. A car that was growing in the first quarter at 12% and today is growing more than 30%. And payroll loan that is growing 50% against close to 40% that we were growing at the end of '18.

So we are finding some [with it]. But we are setting the base, let's say, in infrastructure to have a good risk management tools to really understand the risk of different segments in the consumer business and be able to really grow faster in the following years. That is not the reason of the increase in provisions. The increasing provisions is mainly related with a few cases that we are seeing, I mean, that we decided to write off according to our policies, and that is the way we have been handling in a prudent way, let's say, that the policies of write-off. The level of write-off in the third quarter was less than half the write-off that we report in the second quarter. So we don't see really a negative trend in the -- in our portfolio. The portfolio continues to behave very well. It's just a few cases that, by the way, we have very good guarantees and we expect to recover in time.

So we don't see any concern regarding the quality, let's say, of the portfolio. Why don't you comment, Joaquín, about the impact in NIM and interest rates.

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Joaquín David Domínguez Cuenca, Banco del Bajío, S.A., Institución de Banca Múltiple - Executive Director of Finance & Treasury and Alternate Director [4]

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We are expecting that there will be a couple more of reductions of the tier rate in this year and a couple more in the next year, each reduction of 25 basis points.

The impact on the sensitivity we have is that for each 25 basis points of production, the NIM will reduce 6 basis points, maintain everything constant. However, this is the worst-case scenario because we are working hard trying to improve the cost of funding in order to reduce the sensitivity. And in addition to those initiatives that Edgardo already talked about, that will reduce also the sensitivity increasing the participation of the consumer loans in the total loan portfolio.

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Carlos De la Cerda Serrano, Banco del Bajío, S.A., Institución de Banca Múltiple - Executive Vice Chairman of the Board [5]

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Ernesto, this is Carlos. I would like you all to take notice that we have been able to deliver the results that we provided in our guidance even though, in our guidance, we didn't consider any decrease in the tier rate. And we have done that through a very strict cost control, operating expenses control. And to negotiate better rates with our clients, we know that our loan growth has been only 10%, still above the system. But we have been more strict in the negotiation of the interest rates. And therefore, we have been -- and also, we have been able to generate more noninterest income. So we will be able to deliver the net income that we offered in our guidance, even though we didn't consider this, the tier rate going down as it has done.

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Operator [6]

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We'll take our next question from Gabriel Nóbrega with Citibank.

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Gabriel da Nóbrega, Citigroup Inc, Research Division - Research Analyst [7]

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During the quarter, we saw that your trading income was again very strong. Very much higher than what we have seen in the past quarters and in the past years as well. So here, if you could just elaborate a bit more and give us a bit more color as well. What happened here? And if you do believe that this could be recurrent for the next couple of quarters? And I'll make a second question afterwards.

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Joaquín David Domínguez Cuenca, Banco del Bajío, S.A., Institución de Banca Múltiple - Executive Director of Finance & Treasury and Alternate Director [8]

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Yes. Thank you, Gabriel. Well, this is a mix of components. The first and the most important thing is that we increased the number of operations with our clients as well on trading FX and also trading derivatives. Most of the increase in the income comes because we have a deeply relation with our clients.

The second reason is that during this quarter, we saw an increment in the volatility. Due to the volatility, we were able to increase the spread between sell and buy FX, and that helped us to improve a little bit more the trading income.

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Gabriel da Nóbrega, Citigroup Inc, Research Division - Research Analyst [9]

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All right. That's very clear. And as for my second question, we are seeing that cost growth continues to be high at around 10% this year on a year-over-year basis. And my question here is, as your branches continue to mature, do you believe that there could be space for this growth to begin decelerating? Or as you have brought on, Edgardo, will you begin to invest more into your digital business and your consumer business, so maybe this could lead costs to still be a bit pressured and still be a bit high?

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Edgardo del Rincón Gutiérrez, Banco del Bajío, S.A., Institución de Banca Múltiple - CEO [10]

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Yes, of course. Gabriel, the focus of BanBajio in the last years is mainly companies with great success. And we will try to do the same in the consumer business in the future. So we are saying, as I was saying, we're setting the platform in order to do that. But what you should expect is that we are going to start attracting more individuals and small companies and that will have an impact in the future in the mix of the loan growth, growing more in individuals and small companies, and also in the mix of deposits, attracting more deposits with lower cost. So that is the idea in the future to develop more, let's say, a balance sheet that is, let's say, with a bigger participation of those segments. So that is exactly what we are trying to do.

As part of the digital transformation, we are setting the pace in order to be able to attract customers not only through branches, but also in different channels as many other competitors are doing, and we're developing those capabilities. That is right.

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Gabriel da Nóbrega, Citigroup Inc, Research Division - Research Analyst [11]

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And if you may, just a follow-up from the first question. I understand that you aren't seeing big deteriorations in terms of delinquency in your balance sheet. However, the coverage ratio came well below than what we have seen in the past 2 years. So just a quick question here. Do you believe that the coverage ratio should remain at these levels? Or do you expect to maybe constitute higher provisions to bring it to the 200% levels that we saw in the past 2 years?

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Joaquín David Domínguez Cuenca, Banco del Bajío, S.A., Institución de Banca Múltiple - Executive Director of Finance & Treasury and Alternate Director [12]

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Yes. We are not expecting that will increase the cost of risk and we will still maintain an important excess of reserve is pretty close to MXN 300 million. And we -- as we mentioned in other conference, we had some provisions in excess, expecting and being cautious about some yellow cases that we already write-off. And we do not have more relevant cases for the future. So there were no change of trend.

We will maintain very similar cost of risk, as we have reported this year. And we see that we will maintain the excess of reserves in very similar levels that we already have.

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Operator [13]

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We will take our next question from Adriana De Lozada with Scotiabank.

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Adriana Sanchez De Lozada, Scotiabank Global Banking and Markets, Research Division - Associate [14]

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So you mentioned digitalization a couple of times and digital transformation. And I wanted to know if there are any metrics or specific goals that we can -- that you can share with us and specifically metrics that we can track in order to know where you're at in the process? And the second question is related to CoDi. It started operations in September, so maybe if you can give us an update of how that's going?

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Edgardo del Rincón Gutiérrez, Banco del Bajío, S.A., Institución de Banca Múltiple - CEO [15]

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Yes, of course. In some digital KPIs, for example, the level today of digital users that BanBajio has today is about 34%, but the activity is growing. To give you an idea, from all the monetary transactions that we are handling, about 95% is through Bajionet Web]. So in monetary transactions the use is really, really, really important.

And I know one KPI that we are following very carefully is how many customers that we are -- that are opening an account in our branches are ending the process with a digital, let's say, channel active. It could be the mobile, the Bajionet mobile or Bajionet Web, and that is above 90% already. We are trying to improve that KPI that we are very focused in increasing digital users in the near future.

As part of that, we're revisiting the process of all the accounts that we open for different segments in order to be completely sure that we can end the process with an active customer in digital channels.

Regarding CoDi, is less than 1 month since we launched together with the industry at the end of September. What we are seeing today is mainly customers that are linking the CoDi in the mobile app to their second account. We are not seeing yet a strong number of transactions. We are talking about more or less about 300 transactions only in these days. It's only 3 weeks. But many customers linking the CoDi in the mobile path to their checking account. I expect that in the future, you'll see more activity regarding CoDi.

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Operator [16]

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We will take our next question from [Piero Batista] with UBS.

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Unidentified Analyst, [17]

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I have 2 questions. The first one regarding the Consumer segment. You had mentioned that you expect an increase of this segment. So how much important consumer should be in a couple of years? If not wrong, consumer loans are now about 1% of the loan portfolio. So in a couple of years, how much big this can be? And my second question is a follow-up on provisions. When I look to the breakdown of revenue you did, most of the expansion occur in the mortgage business. So this -- what explained this jump in the provisions in the mortgage business? This is what a kind of a one-off? Or there is any particular event that explains this increase? I'm asking this, especially because when I look to the delinquency ratio of the mortgage, the liquid ratio of the mortgage declined in the quarter. So what explains this jump in the provisions for mortgage?

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Edgardo del Rincón Gutiérrez, Banco del Bajío, S.A., Institución de Banca Múltiple - CEO [18]

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Let me start with the first one and then Joaquín can answer the second one. About the consumer business, and let me talk mainly about individuals. Individuals are participating today with about MXN 50 billion in deposits, MXN 50 billion. But in loans is considering only unsecured lending is a little bit more than 1% of the loan portfolio, was about MXN 7 billion in mortgages. So it's still from our loan portfolio, the participation of the individuals is small, but it's relevant in terms of deposits.

As I was saying, what we are doing is setting the pace. In order to really grow the loan portfolio in individuals, you need really to understand very well the future losses, let's say, of those segments. And we want to develop a business that has a strong quality in losses that we have been doing in companies. So we are setting the pace and we're investing in talent and technology, in data in order to do that and really understand that.

However, we're already growing 37%, as you can see, as you saw in the presentation, but the base is still small. What you will see in the future is better speed, but with very good quality in the loan book for individuals.

But we have a very good opportunity as well in small business. Because we have, today, more than 115 small companies banking with us, but only 6% have a loan with us today. So we have a big opportunity to penetrate more that segment and we are in the process to do that. And in order to do that, we will not only develop the right tools, but also some new products that we are planning to launch early next year. So we are in the process to do that, but what you should expect is more growth in those segments.

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Unidentified Analyst, [19]

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Okay. Just a little clarification. You mentioned 115 small businesses, 115,000?

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Edgardo del Rincón Gutiérrez, Banco del Bajío, S.A., Institución de Banca Múltiple - CEO [20]

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Yes, 115,000 small businesses PMS that are banking with us. SMEs.

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Joaquín David Domínguez Cuenca, Banco del Bajío, S.A., Institución de Banca Múltiple - Executive Director of Finance & Treasury and Alternate Director [21]

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Okay. Regarding mortgages, what happened is that the write-off on mortgages are due that some past due loans mortgages reached 20, 18 months of past due loans. And according to the rules, when mortgage pass that period of time in past due loans, we should create 100% of reserves.

In that case, we decided to write off the mortgage. And that is the reason we reduced the NPL ratio specifically in mortgage. And -- but it's not particularly a deterioration of this quarter, is just that some mortgages in the past that were due, they already came 100% reserve, and we create -- we write off.

However, the other part, on the other hand, we are being success recovering the warranties behind the mortgages. So that is not reflected in the NPL ratio because this is just a recovery. But we are doing well in that sense.

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Operator [22]

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(Operator Instructions) We'll then next go to [Piedad Alexandri] with Crédit Corp.

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Unidentified Analyst, [23]

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I wanted to ask a question specifically about (inaudible).

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Alberto Guajardo Meléndez, Banco del Bajío, S.A., Institución de Banca Múltiple - Director of IR [24]

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Can you speak -- sorry, Alexandri. Can you speak a little bit louder, please? We can barely hear you.

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Operator [25]

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It appears Alexandri's line has disconnected. And at this time, without Alexandri on the line, we have no further questions.

I do apologize, we actually have a question from Enrique Mendoza with Actinver.

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Enrique Mendoza Farías, Actinver Casa de Bolsa, S.A. de C.V., Research Division - Research Analyst [26]

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Some of my questions are -- were already answered. But 2 questions, if I may. The first one regarding cost of funding. It has been very pleasant to see how the balance of time deposits has been growing very, very fast. And for me, it's very interesting to see if you perceive that the clients are -- right now, when the interest rates are going down, do you perceive that the clients are willing to accept lower interest rates in a way that you can keep growing the deposit volumes, but proportionately -- at a proportionately lower rates when compared to the benchmark to the tier or to the [center's] rate? And the second question is regarding dividends. The capitalization ratio has been very, very high for a while. And I wanted to know if you are seeing a higher dividend payout ratio for the future, either for temporary decisions or even in a more structural strategy.

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Edgardo del Rincón Gutiérrez, Banco del Bajío, S.A., Institución de Banca Múltiple - CEO [27]

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Thank you, Enrique. Regarding the first one about cost of funding and that ability, let's say, to adjust once this year or the said there's no paying down. Yes, a couple of times already, 25 basis points. That is, of course, a strong focus here in the bank. And until today, we have been able to adjust rates without any impact, let's say, in the level of deposits and in the margin. Of course, that will continue to be a strong focus in the following weeks, ones that we are expecting more adjustments in the rate from [Banxico].

But regarding cost of funding that you can see in the presentation is for the (inaudible) quarter 5.6% compared with 5.3% in the industry. And considering that, that 5.3% for the industry is considering big banks with, I mean, long, long history and more than 100 years with a very strong customer base in individuals and lower cost of fund in those segments. For me, it's a strength that we are very close to the average of the industry. And that will continue to be part of the strategy.

Now as I was mentioning before, attracting more individuals and SMEs is part of the strategy. And the idea is to improve a little by little the mix of deposits, so we can get better cost of funding and translate that and being more competitive in the marketplace. That is the first one. And Carlos will answer your second question.

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Carlos De la Cerda Serrano, Banco del Bajío, S.A., Institución de Banca Múltiple - Executive Vice Chairman of the Board [28]

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I would like just -- I would like to add to Edgardo's answer that also a very important strength for the bank is also that we have a lot of company clients and their operational accounts are not very sensitive to the interest rates since they are operational accounts, and that is a source of continuous growth in our deposits. And I don't see that those deposits will diminish in any way because of the interest rates. It's a very strong -- it's a very important strength of the bank, the penetration that we have with companies.

Now regarding the dividends, we are monitoring very closely the rate of growth of our capital base of our [ICAP] against the growth of the loans. And we are positive -- moderately positive about next year because of the reasons that Edgardo mentioned at the beginning. We think that the GDP will grow more next year than this one. We believe that there will be a very important amount of new projects in the economy in public investment, but also private investment, and we are ready for that also.

We are seeing the agricultural sector growing very strongly since the modern agricultural sector is very export oriented, and we are participating very strongly in that sector.

And finally, the investment in projects like new, pig farms, chicken farms, green houses, and there's a strong demand in that sector. So we think that the next year will bring a higher growth in loans, both for the economy and for us above the economy, as we always had. But if we see that the net profit and the net equity of the bank is growing at a faster rate and therefore, the ICAP is going up, we will consider an extraordinary dividend. But that's something that will happen in the near future. We will be monitoring the economy very closely to decide if we will keep our traditional 20% dividend policy or we increase it by a higher amount. We will, of course, will -- the minute we decide that, you will know about that.

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Enrique Mendoza Farías, Actinver Casa de Bolsa, S.A. de C.V., Research Division - Research Analyst [29]

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Okay, okay. That's very helpful. And if you allow me, I will ask about net fees. When considering an environment of lower interest rates and lower interest margins, net fees are key to caution the profitability and the cost-to-income ratio. Are you expecting to grow faster in net fees than the pace of loans and the pace of growth at the net interest income?

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Edgardo del Rincón Gutiérrez, Banco del Bajío, S.A., Institución de Banca Múltiple - CEO [30]

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Yes, Enrique. What we are trying to do this is to focus in the integral relationship with our customers, not only in the active part, let's say, with loans, but also, I mean, being able of delivering the rest of the products and services that we can -- I mean, to serve our customers.

Bancassurance is another part of the business that is growing very well and of course, the acquired business, et cetera. As Joaquín said already, derivatives, FX, et cetera. So there is a strong focus that with all bankers to grow in those businesses faster than the loan portfolio so we can deliver more fees and more noninterest income in the future. That is part of the strategy in the following months.

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Enrique Mendoza Farías, Actinver Casa de Bolsa, S.A. de C.V., Research Division - Research Analyst [31]

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And if you allow me, I would like to discuss the recent behavior. For example, we could see that the more significant sources of fees earned are growing very healthily. However, other sources of fee earned, of fees earned are declining. And in addition, the pace of increase of the fee space to other banks in order to use the point-of-sales and also their ATMs is growing very fast. Do you believe that the future evolution should improve in such a way that the fees earned could outpace the increase in fees paid?

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Edgardo del Rincón Gutiérrez, Banco del Bajío, S.A., Institución de Banca Múltiple - CEO [32]

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We think so. I mean the economy is not growing as fast as we should, you know that. And part of that is consumption that is growing only 1%. That, of course, has an impact. But I mean, we have been able to earn share in many of those cases now.

So for example, interchange fees are growing close to 17%. So much more -- much, much faster than the market. And we -- I believe we have the strategy to continue doing that. And that is the case of many of those cases, bancassurance, we are foreseeing more than, I mean, close to 20% growth in the future and many other activities. So we are planning to grow faster than the market.

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Enrique Mendoza Farías, Actinver Casa de Bolsa, S.A. de C.V., Research Division - Research Analyst [33]

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Okay, okay. And just to double check, if I may. When considering the pressures of investment in delivering these digital transformation and hiring talent and providing the platform for attending individual clients, it seems that the pressures that SG&A expenses are -- should stay strong for a while. Do you believe that the cost-to-income ratio can be improved during the next year when we should see lower interest margins?

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Edgardo del Rincón Gutiérrez, Banco del Bajío, S.A., Institución de Banca Múltiple - CEO [34]

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I believe the efficiency ratio that we have today is in very good level. But of course, penetrating more portfolios with bigger margins will help a bit. But at the beginning, we will need to invest. And you know that in -- because of acquisition is, of course, something important to consider. So that will come in time, what you are saying. But at the beginning, we are going to be building, let's say, the infrastructure and also increasing the cost of acquisition in order to really be able to attract those customers. So it's going to be at the beginning an investment, but of course, developing better mix in deposits and better loan growth in individuals and in SME stock. So it's going to be [a big play], but we expect this to continue in a very good level in cost-to-income ratio. So we can continue invest in developing that infrastructure and in digital.

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Enrique Mendoza Farías, Actinver Casa de Bolsa, S.A. de C.V., Research Division - Research Analyst [35]

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Okay, okay. Just to be sure to be an understanding. Are you trying to maintain the cost-to-income ratio even if you need to invest tomorrow?

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Edgardo del Rincón Gutiérrez, Banco del Bajío, S.A., Institución de Banca Múltiple - CEO [36]

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In our guidance, you can see that we're trying to be below 45%, and we are planning to deliver that.

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Enrique Mendoza Farías, Actinver Casa de Bolsa, S.A. de C.V., Research Division - Research Analyst [37]

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Okay, okay, okay. And -- but you are not expecting to erode the efficiency ratio in coming years?

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Edgardo del Rincón Gutiérrez, Banco del Bajío, S.A., Institución de Banca Múltiple - CEO [38]

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No, no, no. That shouldn't be the case.

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Operator [39]

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(Operator Instructions)

We do have [Piedad Alexandri] with Crédit Corp. back on the line.

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Unidentified Analyst, [40]

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Do you hear me?

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Edgardo del Rincón Gutiérrez, Banco del Bajío, S.A., Institución de Banca Múltiple - CEO [41]

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Yes, we do. You can speak louder, it's better, but we can hear you. Go ahead.

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Unidentified Analyst, [42]

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Okay. My question is specifically about effective tax rate. We saw an increase on effective tax rate this quarter reaching 26.5%. That's almost 1% higher than the second quarter and over 2% higher than the effective tax rate on the third quarter of 2018. I wanted to know if you have an explanation. In the MD&A, you said it was mainly because of the inflation effects. But I wanted to know if you can explain it a bit more.

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Joaquín David Domínguez Cuenca, Banco del Bajío, S.A., Institución de Banca Múltiple - Executive Director of Finance & Treasury and Alternate Director [43]

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Yes, of course. Yes, and this is correct. The expectation, as the inflation is going down, is that the effective tax rate will increase. The reason of that is that we have a lot of liquidity capital that has a cost of inflation. Our fiscal cost is not reflected in the accounted results, but for the fiscal purposes is a cost. When the inflation is lower, the cost is lower. So we cannot make a deduction of that cost. The reduction is lower and then the effective tax is higher. And the level we reported in the third quarter is really close to the level we're expecting for the next few quarters.

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Unidentified Analyst, [44]

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So to summarize, low inflation means lower deducted tax rate, and that means higher effective tax rates?

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Joaquín David Domínguez Cuenca, Banco del Bajío, S.A., Institución de Banca Múltiple - Executive Director of Finance & Treasury and Alternate Director [45]

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Yes. That's right.

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Operator [46]

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(Operator Instructions) Now I'm showing that we have no further questions on the phone at this time. I'll turn the call back to our presenters for any additional or closing remarks. Thank you, Priscilla.

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Alberto Guajardo Meléndez, Banco del Bajío, S.A., Institución de Banca Múltiple - Director of IR [47]

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Thank you very much, and we look forward to seeing you next year when we report our fourth quarter and full year results. Have a good day. Thank you, everyone.

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Operator [48]

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This does conclude today's program. Thank you for your participation. You may disconnect at any time.