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Edited Transcript of BBAJIOO.MX earnings conference call or presentation 30-Jan-20 4:00pm GMT

Q4 2019 Banco del Bajio SA Institucion de Banca Multiple Earnings Call

LEON Feb 8, 2020 (Thomson StreetEvents) -- Edited Transcript of Banco del Bajio SA Institucion de Banca Multiple earnings conference call or presentation Thursday, January 30, 2020 at 4:00:00pm 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

* Brian Flores

Citigroup Inc, Research Division - Senior Associate

* Claudia Benavente

Santander Investment Securities Inc., Research Division - Research Analyst

* Ernesto María Gabilondo Márquez

BofA Merrill Lynch, Research Division - Associate

* Gabriel da Nóbrega

Citigroup Inc, Research Division - Research Analyst

* Jorge Kuri

Morgan Stanley, Research Division - MD

* Manuel Gonzalez

Signum Research - Former Senior Securities Analyst

* Neha Agarwala

HSBC, Research Division - Analyst, LatAm Financials

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Presentation

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Operator [1]

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Good morning, everyone, and welcome to BanBajio's Fourth Quarter 2019 Earnings Conference Call. My name is Leo, 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 your forward -- 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 now I will turn the call over to Mr. Guajardo. Please go ahead, sir.

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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 welcome to BanBajio's fourth quarter 2019 earnings conference call. In the fourth quarter, we continued to deliver strong financial and operational results. We met most targets in our revised guidance, and in some cases managed to reach the high end of the range, reflecting our commitment to our shareholders and investors by increasing our shareholders' value.

On Slide 2, you can see that we summarized key results for both the year and fourth quarter. The variation shown represents the changes from the same period in 2018. Net income for the quarter reached MXN 1.4 billion, representing a 2.5% increase. Total revenues rose 7.7% while financial margin increased 3.1%. ROE was 18.1% and ROA 2.3%. NIM was 5.6% during the quarter. Our efficiency ratio stood at 43.7% at the close of the quarter. The total loan portfolio rose by 5.8% to MXN 180.2 billion at the end of December. Company loans, which represented 83% of our total loan book, increased by 7.4%, reaching MXN 148.6 billion. Total deposits reached MXN 148.7 billion, 11.1% higher than the MXN 133.9 billion registered a year ago. Our NPL ratio was 0.94% at the close of the quarter. And finally, the coverage ratio was 155.1%.

Moving on to Slide 3. During the quarter, total revenues grew by 7.7% to MXN 3.9 billion and by 10.8% in 2019 to MXN 15 billion. These increases are mainly the result of the strong performances in the noninterest income as well as net interest income despite the reduction in the reference rate. While net interest income grew 3.1% in the quarter, the growth in the noninterest income was 33.4%. As you can see in the chart, noninterest income as a percentage of total revenues represented 18.8% in the fourth quarter compared to 15.2% a year ago. This is the result of our continued effort to strengthen the relationship with our customers by putting additional emphasis in order to promote and increase business lines from a diversified source of revenues that are not linked to changes in the reference rate.

On Slide 4, we can review the net income performance. As we can see in the chart, net income during the quarter grew 2.5%, reaching MXN 1.4 billion. In 2019, net income reached MXN 5.6 billion, representing an increase of 10.6% when compared to the MXN 5.1 billion recorded last year. It is important to mention that as a result of a lower-than-expected level of inflation during 2019, which was actually below the 3% level, we posted a higher effect in income taxes. Nevertheless, and despite these undercuts in the reference rate, we were able to post such increase in net income on a yearly basis. Banco de México started an easing cycle in the second half of 2019 with 4 cuts of 25 basis points each. And as you may remember, for guidance purposes, we did not take those reductions into account.

Moving on to Slide 5. You can see that we posted an 87.8% EPS increase since our IPO and 10.6% on a year-on-year basis, reaching MXN 4.72 in the fourth quarter. Our ROE continues to be above the 18% level while ROA was 2.3%.

On Slide 6, you will see that our net interest margin for the quarter was 5.6%, a contraction of 16 basis points when compared to the 5.76% recorded in the fourth quarter of 2018. This contraction is mainly explained by the reduction in the reference rate already mentioned and the dividend payment that took place in May 2019.

On Slide 7, we can see the performance of our efficiency ratio. It came in at 43.7%, slightly higher than the 42.9% reported during the same period of last year, but well below the 50.5% average that our peers reported during the October and November 2019 period, which is the most recent publicly available information. For the full year, our efficiency ratio was 43.3%, which positively compares to the 43.5% registered in 2018.

Slide 8 shows our total portfolio loan growth during the period. In spite of large prepayments of some corporate clients registered during December, we were able to post an increase of 5.8%, reaching MXN 180.2 billion. Total amount of prepayments was approximately MXN 4.7 billion. Loan growth could have been approximately 8.6% if these prepayments would not have taken place. During the quarter, company loans reached MXN 148.6 billion, increasing by 7.4%. BanBajio continues to outperform banking system growth, which posted an increase of 4.7% as of November 2019 on a year-on-year basis.

On Slide 9, you will see that our NPL ratio stood at 0.94% in the quarter, the same of that recorded during the fourth quarter of last year and also compares positively to the 2.24% recorded for the system as of November 2019. On the other hand, our NPL ratio adjusted for write-offs was 1.62% during the quarter, and also positively compares to the 4.55% recorded for the system as of November 2019. Our coverage ratio was 155.1%, down from 187.4% from the fourth quarter of 2018. This ratio also compares positively to the 146.5% recorded for the banking system at the close of November. Furthermore, the cost of risk at the close of the quarter was 0.54%, slightly lower than the 0.61% recorded during the same year ago period. For the full year, our cost of risk was 0.49% compared to the 0.57% recorded in 2018.

Moving on to Slide 10. Total deposits grew by 11.1% while for the system the growth was 4.6% as of November. As you can see, our cost of total funding for the quarter was 5%, practically in line with the one recorded for the system as of November 2019, which includes big and traditional banks. Important to mention that we were able to reduce our cost of total funding by 50 basis points as a result of an improvement in our mix of deposits. Demand deposits, which bear a low cost, went up from a 31% share during the fourth quarter of last year to 33%, reflecting an improvement in the mix of total deposits.

On Slide 11, we see that our capitalization ratio on a preliminary basis at the end of December 2019 was 16.13%. It is worth noting that 99.9% is Tier 1.

On Slide 12, we compare our 2019 results to our guidance. In general terms, we were able to maintain results within guidance in practically all lines. Regarding our efficiency ratio, it was better than expected as a result of the increase in total revenues and the cost control program implemented at the beginning of the year. Cost of risk was also on the positive side, standing at 0.49%. Net income was on target with our guidance. In terms of profitability, our ROE was 18.6%, standing at the high-end range of our guidance.

Now on Slide 13, we disclose our guidance for 2020, which is based on our estimates of GDP between 0.5% and 0.8%. The reference rate is expected to be 6.5% at the end of June, and inflation is 3.45% for the year. With this, we aim a loan growth in the range of 8% to 11% while our expectation for the system is between 5% and 6%. We expect deposits to grow in the range of 9% and 12%. NIM is expected to be between 5.2% and 5.3%. Noninterest income could continue to grow positively between 20% and 25%. Operating expenses could be similar to the one registered during 2019 in the range of 9.5% and 10.5%, resulting in an efficiency ratio below 47%. Net income could be in the range of MXN 5.3 billion and MXN 5.7 billion, while ROE is expected to be in the range of 16.7% and 18%. We expect a capitalization ratio in the range of 14% and 15%. As has been the case in previous years, if we see that the economy performs better than expected, and market conditions improve, we will revise our guidance as we move forward.

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) We'll take our first question from Gabriel Nóbrega of Citibank.

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Gabriel da Nóbrega, Citigroup Inc, Research Division - Research Analyst [2]

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I'd actually like to talk about your NIM guidance. At the midpoint, it implies a reduction of around 35 basis points. So I wanted to understand, do you not believe that as you continue to improve year-over-year loan mix growing ever more in consumer loans that you could maybe offset the interest rate reduction? And also, could you remind us what's the average maturity of your assets? And I'll ask a second question afterwards.

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

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Let me start, Gabriel. Good morning, everyone, and thank you for being here. We are planning to continue growing, as you said, the consumer business and the retail business, in general. As you can see, the loan growth in the consumer business is -- I mean we are getting more speed. We were growing in 2018 in the 20s and we ended 2019 growing more than 42%, and that is the idea. The idea is to continue developing the infrastructure and that could -- I mean we should be able to continue increasing the speed of growth that will, in the future, of course, improve the mix of deposits, but also we should develop more fixed rate loan portfolios, like, for example, payroll loan that is already growing more than 60% during 2019. And we have many opportunities on that regard. That will improve, of course, the margins and our level of NIM. But the impact that we are facing expecting 3 more cuts in the rate of 25 basis points during the first semester, that is the main source of impact in the NIM. I don't know, Joaquín, if you want to complement?

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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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Yes. Even we are growing faster in fixed rate loans, it is still a small portion of total loans portfolio. So it's very difficult to find or to see compensation growing in the fixed loan rate part of the loan portfolio in terms of the total loan portfolio. However, we have reduced the sensibility that we have guided before. What we are expecting for the next year, for 2020, is that for each 1,000 basis points of change in the reference rate, the net interest margin would reduce 25 basis points -- 22 basis points. 22 basis points is the new sensitivity we already calculated.

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Gabriel da Nóbrega, Citigroup Inc, Research Division - Research Analyst [5]

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All right. That's very clear. And as for my second question, it's actually on asset quality. Ever since you guys made the IPO at the beginning of 2017, you have run a more conservative coverage ratio, maybe close to levels of 200%. However, when we look at your guidance of 150%, this is clearly a shift from what we have been seeing over the past 2 to 3 years. So could you just maybe talk about this -- some shift? And do you expect this to be a comfortable level even if you see an uptick in your NPL ratios?

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Edgardo del Rincón Gutiérrez, Banco del Bajío, S.A., Institución de Banca Múltiple - CEO [6]

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As you know, we have been outperforming the market not only in loan growth, but also in asset quality, and we are planning to continue doing that. So the level of NPL -- I mean, we don't see any deterioration in any loan portfolio today. So we are planning to keep very good quality in our assets. And we feel that the level of coverage we have today is a good level, and we are planning to continue with very similar levels during 2020.

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Carlos De la Cerda Serrano, Banco del Bajío, S.A., Institución de Banca Múltiple - Executive Vice Chairman of the Board [7]

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This is Carlos. I would like to add what Edgardo just said that I would like to remind you all that we talk about this in a few reports back that during good times, the bank was very conservative and we used to create more provisions than what strictly by regulation needed. And that's -- what we see today is a macroenvironment more challenging. So we are not planning to create additional provisions to what we strictly need. If good times come again, I don't know in 1 or 2 more years, you will see one more time that our policy to create more provisions than necessary. This is a countercyclical policy -- strategy that works very well because allow us to write-off from the balance sheet bad loans that we know we can recover, but in a very -- in a few years, not right away because there is a lengthy judicial process. So for the next year, we will keep creating the provisions that the regulation order us, not one thing less, but we won't be creating more provisions than necessary.

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Operator [8]

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We'll take our next question from Jorge Kuri of Morgan Stanley.

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Jorge Kuri, Morgan Stanley, Research Division - MD [9]

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My question is on banking fees. I'm not necessarily sure that your guidance is for banking fees per se or just noninterest income, including trading. But anyway, that number, I think, it's 20% to 25% growth. Can you just walk us through how you get there, especially in an environment where activity is low, your guidance for volume growth is pretty subdued. And overall, 0.5% to 0.8% GDP would suggest limited banking activity and hence, ability to charge fees based on volumes. Now you may be thinking about raising prices, et cetera. So I'm just trying to get exactly what is the path for you to get to that number that you're guiding for? And related to that, how do you think that will be received within the regulator and Congress in this environment where there is hypersensitivity to banking fees in Mexico?

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

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The level of noninterest income for the bank today is lower than 19%. That is much lower than big banks with bigger consumer business, as you know. So even though we have been growing from less than 14% in that required of 18% to 19%, it's still a level that we can improve. So the idea is to have a deeper relationship with our customers today, mainly companies. And that is really the source of the increase in income of this nature. I mean reviewing several lines, we are growing very well in trading, as you know, but all the transactions are with customers. That is important to notice. Also, we are growing very well. For example, in the current business, billings are growing more than 20% in our case. So we are gaining market share both in debit cards and credit cards, and that is an additional source of revenue. Insurance fees and income are growing very well as well, close to 20%. So several lines are growing very well. So we've seen that we can continue with this trend, as you saw, the fourth quarter, which showed a growth in net interest income of 33%. So we should be able, I mean, to deliver the guidance that you saw.

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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 [11]

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Let me add in terms of trading income. The trading income is not a result of valuation. It is the result of a deeper relationship with our clients. We increased the number of operation of FX sales and also as well as derivatives. A few portion of our clients or loans used to contract derivative hedge. So we are improving. We are training our sales force, and we are informing our clients about the benefit to use derivatives to hedge the risk. So we see still a big potential for sales as well on FX and derivatives. In general terms, we see that with different complementary products we still have a lot of space of growth, improving sales for bancassurance, trust and other services related with consumer. And so we feel comfortable with that guidance we provide because we have the number of clients and the good relationship with them in terms to improve fee income.

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Operator [12]

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And we'll take a question from Ernesto Gabilondo of Bank of America.

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Ernesto María Gabilondo Márquez, BofA Merrill Lynch, Research Division - Associate [13]

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My first question is a follow-up in your loan growth expectations. I remember that at the end of last year, you were seeing lower demand from medium companies and corporates in your credit committees due to low business confidence. So do you continue to have the same perception or are you seeing some improvement in this regard? And then for my second question is, if you are evaluating to increase the dividend payout ratio? If yes, will it be through ordinary dividend payout ratio or would it be through a special dividend?

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Edgardo del Rincón Gutiérrez, Banco del Bajío, S.A., Institución de Banca Múltiple - CEO [14]

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Thank you, Ernesto. I could say we feel the same that -- I mean, the same comment that we made a quarter ago. Nevertheless, if you see the numbers for November, we were growing 8.4% in November. And as Alberto mentioned in the opening of the call, we received several prepayments that we didn't expect during December. Without those prepayments, the growth that we were expecting was 8.6%. So what we feel today with the trade agreement already signed that should bring more investments, mainly in the Bajio region and the North region. So that could provide some sources of growth. As well, the Agro business is growing very well. In the Agro business, we have a growth of 17% in loan portfolio during 2019. So we should be able -- I mean that sector is growing very well. And you know that we have today leadership in that business, and we are growing, as I was saying, very, very well. So we feel that we have seen -- I mean we have seen good projects, good business results from those companies. And we are -- I mean we are showing very good results. Also, the SME portfolio should continue growing very well. We are developing -- with the investment we are doing in risk management tools, we are developing several new products for SMEs that should allow us to penetrate more with loans in that segment. And of course, we have low market penetration in many states of the countries, so we can gain market share. So, I mean, the level of growth between 8% to 11% that we are providing in the guidance, we feel confident that we can reach that level. I don't know if that answered your question, Ernesto.

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Ernesto María Gabilondo Márquez, BofA Merrill Lynch, Research Division - Associate [15]

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Yes. And then for my second question about dividend?

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Carlos De la Cerda Serrano, Banco del Bajío, S.A., Institución de Banca Múltiple - Executive Vice Chairman of the Board [16]

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Ernesto, this is Carlos. Since the dynamic between the loan growth and the capital formation through net profit is taking us to increase consistently our capitalization rate, what we will do -- we don't know the specific percentage yet because we have to propose -- to make a proposition to the general shareholders meeting in April. But we are planning to propose at least a 50% dividend for the -- immediately, and it could be higher. But we still have a couple of months to observe the macroeconomic environment and our expectations for the future, et cetera. Today, this is our line of thought, larger than the year before dividend ratio of at least 50%.

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Ernesto María Gabilondo Márquez, BofA Merrill Lynch, Research Division - Associate [17]

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Perfect. Just 1 more question. What will you consider as a key risk to your 2020 expectations? Do you think your guidance for the year is already too conservative?

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

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I think, Ernesto, we believe that our guidance is realistic with what we are seeing today. Of course, the main driver of this is the economic environment, the GDP growth that we're expecting and the level of confidence in general in the business community. If that improves, of course, that loan growth could be higher. But that is also, at the same time, the main risk that we could face. With the conditions we are seeing today, we feel confident that we can reach that level of growth. If the economy improves its performance and the confidence also, the level of uncertainty improves, of course, we will review our guidance, I mean, to improve. That is the main source of risk that we are seeing.

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Operator [19]

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(Operator Instructions) We'll move next to Claudia Benavente of Santander.

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Claudia Benavente, Santander Investment Securities Inc., Research Division - Research Analyst [20]

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Maybe it's kind of a follow-up question. I was wondering, remember, like, I don't know a couple of months ago or years, you were growing your executives or bankers in the northern part of Mexico. I understand that roughly 20% of your commercial loan portfolio, it's already in the northern, like, regions of Mexico. But still, I see that there are some banks that are kind of outperforming there in terms of loan growth. So I was wondering why we are not observed -- if there is any potential to continue growing there despite the USMCA. So what are the opportunities or what you're missing there that could -- where we could see a stronger loan growth, especially in the Northern Mexico where GDP is growing like at 2% significantly above the rest of Mexico? So some color there, I would appreciate it.

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Edgardo del Rincón Gutiérrez, Banco del Bajío, S.A., Institución de Banca Múltiple - CEO [21]

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We have been continuing increasing our infrastructure in the north region, not only in Nuevo León but also in the northwest part of the country, Sinaloa, Sonora, Baja California, et cetera. And we are growing well in that region -- I mean as well as in the Bajio region. So we don't see a lower level of credit demand in those regions, and we have been growing well. So we don't see really a difference in growth between Bajio and the north part of the country, Claudia.

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Claudia Benavente, Santander Investment Securities Inc., Research Division - Research Analyst [22]

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But even beyond, like, I understand that, especially in agriculture, you'll be growing very heavily in the Bajio region.

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Edgardo del Rincón Gutiérrez, Banco del Bajío, S.A., Institución de Banca Múltiple - CEO [23]

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Of course.

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Claudia Benavente, Santander Investment Securities Inc., Research Division - Research Analyst [24]

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So if you're saying that you're growing roughly at the same pace, maybe what I'm wondering if there could be more opportunities in the northern part of Mexico taking...

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Edgardo del Rincón Gutiérrez, Banco del Bajío, S.A., Institución de Banca Múltiple - CEO [25]

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Of course, the level of opportunity is higher. For example, in the Bajio region, when you see the information from the CNBV, our regulator, at the level of November, that is the latest information and you see the commercial portfolios, BanBajio is already a leader in several space of the Bajio region. That is the case in Guanajuato, Michoacán, Aguascalientes and San Luis Potosí. And by the way, we are very close to reach leadership in Querétaro. So, of course -- I mean, we still have opportunity in Bajio, but the biggest opportunity, of course, is in the north in Nuevo León with the same information, the level of market share that BanBajio has today is only a little bit above 3%. So of course, the opportunity in the north is much higher than the opportunity we have in Bajio because of market penetration.

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Claudia Benavente, Santander Investment Securities Inc., Research Division - Research Analyst [26]

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And 1 last question, it's a follow-up question as well. I see in your guidance that your capitalization ratio could reach 14%. So basically, that would assume that you expect your payout ratio to -- that could increase to 70%. Does that make sense?

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Carlos De la Cerda Serrano, Banco del Bajío, S.A., Institución de Banca Múltiple - Executive Vice Chairman of the Board [27]

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Yes, it is.

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Edgardo del Rincón Gutiérrez, Banco del Bajío, S.A., Institución de Banca Múltiple - CEO [28]

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Yes, that was answered by Carlos already. So we are expecting to propose at least a level of 50% payout ratio.

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Claudia Benavente, Santander Investment Securities Inc., Research Division - Research Analyst [29]

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Yes. And I was only wondering like the cap -- if the 14% makes sense to have an implicit dividend payment of 70%.

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Carlos De la Cerda Serrano, Banco del Bajío, S.A., Institución de Banca Múltiple - Executive Vice Chairman of the Board [30]

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Yes.

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Edgardo del Rincón Gutiérrez, Banco del Bajío, S.A., Institución de Banca Múltiple - CEO [31]

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That would be the case.

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Carlos De la Cerda Serrano, Banco del Bajío, S.A., Institución de Banca Múltiple - Executive Vice Chairman of the Board [32]

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It could be the case. I mean, as I mentioned before, if there is no negative news that could make us more cautious, we will propose to the general stockholders meeting a large dividend payout ratio, at least 60%, but probably could be higher than that because the rate of net profit that we are generating will take our capitalization rate up again. Because if we meet the guidance of loan growth, we will be growing by probably between MXN 1 billion and MXN 1.5 billion of loans per month, and that's much lower than the rate of net profit that we are generating. So our capitalization rate will grow again, no matter how much dividend we pay.

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Operator [33]

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Our next question is from Neha Agarwala of HSBC.

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Neha Agarwala, HSBC, Research Division - Analyst, LatAm Financials [34]

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Just following up on the capitalization. Do you plan to issue any Tier 1 instruments to replace the amount that you pay out as dividend? Second question is on NIM sensitivity. You have been able to lower the NIM sensitivity from close to 35 basis points to 22 now. How are you doing it? What are the levers that you're using to reduce your NIM sensitivity? And my last question is that, you mentioned that you had a cost control program for 2019. Should we expect a similar program for 2020? What are the measures that you are taking to control cost given that this 2020 will be a tough year from a revenue generation perspective?

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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 [35]

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Thank you, Neha. Regarding the first question, we are not planning to issue any bond or capitalization note to supply the dividend base. Anyway, we already have approved program of MXN 50,000 million of bonds if it's necessary in case of liquidity depending the loan growth. But no issue any instruments of capitalization. We are not considering that in our guidance.

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

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Regarding the second question posed was about the sensitivity, I mean you already explained about it, 22 basis points, no?

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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 [37]

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Yes.

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

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Very good. Regarding expenses measures, of course, we will continue with a lot of discipline in expenses. Nevertheless, as we said in the last calls, we have been investing in technology, mainly in digital banking, in tools for data analytics, risk management tools and, of course, cybersecurity and we will continue with that program. Basing that -- I mean those are the fundamentals we need to continue growing and getting more speed in retail banking, but also will provide many tools to provide better customer experience to our customers in all the segments. So that program will continue, and that is the main reason why in the guidance we're providing a growth in expenses of that level. That is the main reason. But that we'll pay in the future, improving, of course, the attraction of new customers, individuals, SMEs and companies. And also improving, as I said at the beginning, the mix of deposits, the loan growth, et cetera. So we will continue during 2020 with those investments.

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Neha Agarwala, HSBC, Research Division - Analyst, LatAm Financials [39]

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If I can follow-up, are you capitalizing these investments or expensing it each year? And then on NIM sensitivity, you have reduced the NIM sensitivity, but what are the levers that you are using to reduce the sensitivity? I saw that your low-cost deposit grew much more than the total deposit. So I believe that is one area in which you're improving your funding mix. What are the measures are being taken at the bank?

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Edgardo del Rincón Gutiérrez, Banco del Bajío, S.A., Institución de Banca Múltiple - CEO [40]

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So as you saw in the information, we were able to reduce, importantly, the cost of funding to the level of 5%, almost equal to the -- I mean to our peers, to the average of the market. So that is mainly because of the mix in deposit. That is the main reason. And that should continue improving. And also what we are doing is improving noninterest income, as Joaquín already explained, in really all the services we provide to our customers. So that is a high priority in 2020 and beyond to continue deepening the relationship with our customers and providing more services that will allow us to increase our fee income from those services.

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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 [41]

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And the expenses, of course, at the end of the different development projects on technology, we are capitalizing the expenses.

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Neha Agarwala, HSBC, Research Division - Analyst, LatAm Financials [42]

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And what is the term for amortizing these or what...

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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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Neha, could you please repeat your question?

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Neha Agarwala, HSBC, Research Division - Analyst, LatAm Financials [44]

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Over what period are you amortizing these expenses? And if you could give us a rough sense as what is the amount in 2019 that we capitalized relating to the technology investment?

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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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The period depends of the kind of investment. If we are investing on hardware, for example, it's between 5 to 10 years of depreciation. In case of development of software, it's pretty close to 4 years, 4 to 5 years.

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Operator [46]

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We'll take our next question from Brian Flores of Citibank.

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Brian Flores, Citigroup Inc, Research Division - Senior Associate [47]

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Just a quick follow-up on the IT development. Could you elaborate a little more on the usage of your digital banking applications? And also, now that it has been implemented for some months, any information on the usage and adoption would be very useful.

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Edgardo del Rincón Gutiérrez, Banco del Bajío, S.A., Institución de Banca Múltiple - CEO [48]

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Thank you, Brian. If we consider all the transactions of the bank, mainly monetary transactions, 46% of those transactions are done through electronic banking or mobile, et cetera. About -- the value of those transactions account for about almost 96% of the total value of the monetized transactions and about 70% of our customers are using a digital tool. Also, what we did recently, we made an important reengineering in the process of onboarding. And from all the new accounts we are opening every day, every month, a very high percent, as close to 90% of those customers, are more since the beginning with the digi -- I mean, active in a digital tool. I mean it could be BajoNet or BajioNet Movil. So that will allow us to continue increasing the digital users. And at the same time, Brian, we are -- part of the investment, we are developing a new electronic banking web that is already in production. By the way, we are today in a pilot, internally, friends and family, but it's -- I mean it's ready right now, mainly for individuals, and we are developing during the following months all the functionality for companies. So we should be able to roll out in the following months, maybe at the end of the third quarter, fourth quarter new tools in web that will allow us to improve significantly customer experience in digital channels.

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Brian Flores, Citigroup Inc, Research Division - Senior Associate [49]

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Okay. And in terms of CoDi usage, have you seen any pickup in that?

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Edgardo del Rincón Gutiérrez, Banco del Bajío, S.A., Institución de Banca Múltiple - CEO [50]

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The use of CoDi is relatively small compared with our expectation in generally within the financial sector. What we are doing today is developing the Phase 2 for CoDi, that is for companies, to provide -- I believe, it's important for the market to provide acceptance for CoDi not only for P2P transactions, person-to-person, but also P2M, person-to-merchant. I think that, that could be the main answer of the financial sector to provide more transactions and being -- I mean putting CoDi much more attractive than today. So we're seeing some transactions, but not really -- I mean, really a small compared with what the financial sector, in general, and we as well were expecting.

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Operator [51]

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We'll take our next question from Manuel Gonzalez of Signum Research.

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Manuel Gonzalez, Signum Research - Former Senior Securities Analyst [52]

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I have a question about the sensitivity of the tax rate. How are you going to improve your income interest if you expect 3 cuts in the reference rate?

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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 [53]

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Sorry, Manuel, we barely heard you.

(technical difficulty)

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Manuel Gonzalez, Signum Research - Former Senior Securities Analyst [54]

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Can you hear me?

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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 [55]

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The tax rate sensitivity is related with inflation not with the reference rate. Approximately, for each 100 basis points of change in the inflation indicator, the effective rate change also 100 basis points.

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Manuel Gonzalez, Signum Research - Former Senior Securities Analyst [56]

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Okay. In that case, if you expect an inflation of 3.5%, the effective tax rate will be 26%?

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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 [57]

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It would be about -- will be no higher than 26% of effective tax rate.

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Operator [58]

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(Operator Instructions) We'll move next to Adriana De Lozada of Scotiabank.

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Adriana Sanchez De Lozada, Scotiabank Global Banking and Markets, Research Division - Associate [59]

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You mentioned previously that you were launching new initiatives at the beginning of this year. I believe you mentioned one of them already, but can you please clarify? Is it on the digital side?

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Edgardo del Rincón Gutiérrez, Banco del Bajío, S.A., Institución de Banca Múltiple - CEO [60]

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Yes. I was talking mainly about new loan products, mainly for SMEs. The one we are launching during next month at the end of February is a loan product that will allow us to provide loans to merchants in the acquiring business. Based on billings of those merchants with us, that will allow us not only to increase loans but also to increase loyalty of those merchants with the bank and to increase, of course, deposits with those merchants. That is one of the products we are planning to launch in the following weeks, really.

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Operator [61]

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(Operator Instructions) And it appears that we have no further questions at this time. I'd be happy to return the call to Mr. Alberto Guajardo for any concluding remarks.

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Alberto Guajardo Meléndez, Banco del Bajío, S.A., Institución de Banca Múltiple - Director of IR [62]

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Thank you, Leo, and thank you all for your continued interest in the company, and we look forward to speaking with you in our next conference call. Have a good day, everybody.

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Operator [63]

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Thank you. This does conclude today's BanBajio's Fourth Quarter 2019 Earnings Conference Call. You may now disconnect your lines, and everyone, have a great day.