2016 was an important year for Grupo Financiero Banorte, in which we completed the first year of our 20/20 plan, satisfactorily achieving each of the goals set for this period and establishing the foundations to achieve the growth with sustainable profitability proposed in our strategic plan.

ECONOMIC ENVIRONMENT

In 2016, we experienced a challenging economic national and international environment, distinguished by some events that had seemed unlikely to happen. News focus was on the United Kingdom’s referendum in which it was decided to leave the European Union as well as the controversial presidential elections in the United States that ended in the victory of the Republican candidate. In monetary terms, the strengthening of the dollar led to a depreciation of most of the world’s currencies, most especially in the emerging markets and in particular in the Mexican peso; also the more restrictive posture in the Fed’s monetary stance caused the beginning of the cycle of rising rates.

In Mexico, despite observing the GDP’s moderate growth of 2.3%, domestic demand-related indicators reflected the greater spending dynamism of Mexican homes favored by inflation’s downward trajectory, recovery of labor market growth, increased flow of remittances and the increased offering of credit. Such is the case with retail sales, which grew 8.7% in 2016, its highest growth rate in the last 8 years. For its part, the lower dynamism of manufacturing production reflected the lower performance of the external sector in the face of a rising dollar. However, manufacturing of final goods as well as automotive production registered improved performances due to the increased competitiveness of Mexican labor.

In the monetary field, the Bank of Mexico decided to increase the benchmark rate in 2016 by 250 bp, thus favoring banking sector expectations for the coming years by leaving behind the cycle of falling rates that began in 2008 and led to historically low interest rates.

A lot of competition was also observed in the financial sector in order to take advantage of the economic environment and the growing domestic demand, so banks were very active commercially especially in the consumer loans and financial products for individuals segments. Although the Mexican stock market demonstrated little appetite for risk, there were still companies and funds that agreed to the public markets.

GFNorte continues to report record highs in net profits and further diversify sources of income, benefiting the recurrence of these. Throughout the year great growth in portfolio and deposits were obtained, +14% in each, improving asset quality as a result of a proper risk management. Operational leverage and growth strategies resulted in a relevant increase in recurring revenue and responsible growth in spending.

Diversification in Business is evident in several aspects: in terms of assets under management, at the closing of 2016, the three fundamental pillars of business demonstrating strength and balance, bank assets represented 31.2%, Trading 34.2% (including Casa de Bolsa Banorte Ixe and Operadora de Fondos Banorte-Ixe) and those related to Long Term Savings represented 34.6% (Insurance, Annuities and the Afore XXI Banorte); in terms of Net Income, the Bank contributed 71% and Long Term Savings contributed 23%.

Net Income for 2016 for the financial group totaled Ps 19.308 billion, 13% higher vs. 2015. This increase was due to the good performances of the Bank and Long Term Savings. It is important to emphasize that results demonstrated an annual growth of 14%. Regularity in revenues is a strategic factor for Banorte and in 2016 generation of recurring revenue grew by 20%.

Net Interest Income presented an annual increase of 14%, reaching Ps 54.044 billion. Service fees (account management, transfers and electronic banking services) closed 2016 with an annual increase of 16%. Brokerage revenues in 2016 recorded a 20% decrease as a result of less risk taking and the environment of rising rates that commenced at the beginning of the year.

On the other hand, the slight growth of only 5.8% in non-interest expenses reflects the strict spending control and efficiency efforts with a slightly higher inflation and the sharp depreciation in the exchange rate. With this, the Efficiency Ratio improved by 260 basis points in the year to close at 45.3%.

GFNorte’s loan portfolio performed favorably throughout the year in all its components, such that the PDL Ratio was only 1.7%, at the end of the year - substantially lower than the 2.2% reported in the previous year. We also continue to strengthen reserve coverage for non-performing loans, which was 142% at the close of 2016, higher than the 116% of 2015.

In terms of capitalization and the Administration’s commitment to maintain solid levels and encourage the confidence for our shareholders and customers, Banco Mercantil del Norte shows a 15.3% capitalization rate in accordance with the Basel III Rules composed of a Tier 1 Capital Ratio of 12.1%, and a Tier 2 Capital Ratio of 12.7% and supplementary capital of 2.6%. In 2016 Banorte was designated a Grade II Multiple Banking Institution of Local Systemic Importance by the National Banking and Securities Commission, (“CNBV”), which highlights Banorte’s relevance in the Mexican financial system.

In 2016, Return on Equity (ROE) of the Group was 13.9%, 65 base points higher than in 2015.

The financial group’s subsidiaries generated excellent returns on capital with outstanding performances by Insurance with 46.0% and Annuities with 29.8%. Grupo Financiero Banorte’s Return on Assets (ROA) was 1.57%, increasing by 10 basis points over the previous year.

DISTRIBUTION CHANNELS

2016 was a year of consolidation and growth seeking profitability in providing services for more than 12 million banking customers. At the close of the year, the branch network consisted of 1,092 Banorte branches, 83 Ixe Preferential Service Centers, 20 Inter National Bank (INB) branches and 16 SME Centers.

On the other hand, alternate channels are turning into more points of business and not only for consultation. We concluded the year with a correspondent network of 24,312 contact points, 7,756 ATMs and 151,948 Point of Sale terminals (POS). Of the total monetary transactions carried out on all the channels, 82% was made through channels outside the branch, i.e. 757 million monetary transactions were conducted in the year; of which 13% were performed using the internet and the use of mobile banking increased by 53% to 13.9 million monetary transactions, the reason for which we continue to add more functionality and better services to these channels.

With a vision of continuous evolution in digital banking, Banorte recently signed an alliance with the global consortium R3 seeking to deploy innovative technologies such as the “blockchain” database to strengthen payment processes and records and make them more efficient; the use of cryptocurrency and the trading of stock, among others.

SOCIAL RESPONSIBILITY AND SUSTAINABLE DEVELOPMENT

At Grupo Financiero Banorte, we are committed to the environment, our community and our country, so we continue to strengthen our social responsibility and sustainable development program through which we support initiatives for improvement in the areas mentioned. For this reason, together with past awards, in 2016 we were included in the Euronext-Vigeo EM 70 Index, which recognizes 70 companies in emerging countries with the most advanced sustainability practices. Moreover, GFNorte was included in the STOXX Global Climate Change Leaders Index, thus becoming the only Latin American institution to be included in the index. Likewise, we were also selected to participate in the Sustainability Index. TSE4Good Emerging Index, London’s stock exchange also included us; we are the only Mexican financial institution present in the Top 10 companies in Latin America of the index. Finally, GFNorte was recognized by Alas20 as a leading company in sustainability.

We are proud to have been awarded “Bank of the Year 2016 in Mexico” by the prestigious The Banker publication; GFNorte was awarded first place by Alas20 in the category of leading company in corporate governance; and Institutional Investor magazine ranked GFNorte for a seventh consecutive year among the top Management and Investor Relations Teams of Latin American banks and Mexican companies.

At Banorte we have the firm intention of becoming the best financial group in Mexico and for Mexicans through our “20/20, Perfect Vision” strategy focusing on our investors, customers and employees, having concluded the first of our five year plan with strong achievements in each of the metrics established for its follow-up.

The joint effort continues to focus on all of our projects to deliver the best services in a working environment that drives creativity and continuous improvement of processes and products, results and profitability.

I would like to thank our more than 22 million customers for their preference and trust, in addition to our 4,000+ shareholders and national and regional directors for their invaluable support. Finally, I would like to recognize and appreciate the commitment and effort of our more than 27,000 employees for their contribution and dedication to the transformation with a vision to the future of Grupo Financiero Banorte.