MESSAGE FROM THE
CEO
This is my first annual report on Grupo Financiero Banorte’s business as CEO. I would like to thank the Board of Directors for their trust in appointing me to lead this group; it is a responsibility that I assume with great enthusiasm.
As already mentioned in the reports of Dr. Guillermo Ortiz Martinez and Lic. Carlos Hank Gonzalez, we have made a generational change in the Chairmanship of the Board of Directors. We thank Dr. Ortiz for his years of contribution and welcome Lic. Hank as the Designated Chairman of the Board of Directors, whose appointment is subject to ratification by the Shareholders’ Assembly to be held in April 2015.
In 2014 the economic environment remained challenging for both national and international economies. Economic growth expectations for the major economies and emerging markets were constantly being revised downwards during the year; in Mexico, for example, the GDP grew 2.1% annually having been brought down from 3.4% by policymakers and market participants alike. Decline in economic growth was partially due to the impact of the Tax Reform implemented in January 2014. This undoubtedly generated a greater tax burden for companies and individuals, implying substantial changes in corporate tax planning that led to a slowdown in productive investment, only occurring in the last months of the year. Also, during the year domestic demand did not grow, and domestic consumption remained flat from 2013. The external sector reacted favorably as the year progressed, resulting in high growth rates in both manufacturing and exports. On the monetary front, The Mexican Central Bank surprised the market by cutting in 50 basis points the reference rate, adding further pressure to the banking system as it operates in the lowest interest rate environment in history.
In the competitive landscape, the financial sector remained very competitive despite moderate economic expansion and low interest rates. The Mexican capital market remained highly liquid throughout the year and with a broad level of appetite for risk. Many companies took part of their financing requirements from the market, or refinanced in the capital market therefore prepaying bank loans. In the loan market, competition was also strong, pricing down loans despite low interest rates. In the Afore sector where retirement savings are managed, competition remains intense to promote retirement savings accounts switchovers between Afores. This competition is reducing transparency and competitiveness in the sector and is based on misinformation to workers. In the Annuities companies’ sector, changes in the annuities’ assignment scheme have also led to increased price competition, in detriment to the companies’ profitability. Yet despite this very competitive environment, GFNorte was able to react responsibly ensuring profitability on chaotic growth and also seeking to establish long-term relations with our clients. We were able to achieve positive growth in all our businesses, and in some specific cases we also sought to outgrow the market with more quality to secure our market share.
During 2014, GFNorte continued developing its strategy to increase value for our shareholders, to provide better value and service to our customers and be a better place for our employees to develop their potential and thereby strengthen our position in the Mexican market. Also, we continued with the construction and implementation of key projects that will allow us to transform our retail business into a business with better cross-selling, improved customer service, increased productivity from the sales force and to take advantage of the client base to develop and improve our banking relationships with them.
GFNorte was able to reach an all-time high in reported net earnings and the diversification of its profit sources.
In spite of the challenging economic environment, GFNorte was able to reach an all-time high net income and also to improve its diversification of earnings. Good growth in deposits and loans was achieved. Recurring revenues also increased. Capital ratios are stronger. Asset quality remains adequate and in control. Market share was maintained in the third position in the banking system. The Afore remained the largest in its sector.
2014 was also a year of accountability. Acquisitions and mergers carried out in the past have begun to generate added value for the Financial Group, which is evident in the diversification of the Group’s businesses and earnings. Through organic growth and various mergers and acquisitions, assets under management have increased from Ps 712.4 billion in 2010 to Ps 2,039.2 billion in 2014. In terms of diversification of assets under management, at the end of 2014 the Banking Sector represented 30.1%, the Brokerage Sector 35.9% (including assets managed by the Casa de Bolsa Banorte Ixe and mutual funds), the Afore 29.7%, while Insurance and Annuities companies managed 4.2% of the assets managed by GFNorte.
Regarding the operating performance, the Financial Group’s accumulated net income for 2014 reached maximum historical levels, rising to Ps 15.23 billion, 13% higher vs. 2013. This increase was mainly due to the 13% growth in total income vs the 5% increase in operating expenses, generating a positive operating leverage and thus, offsetting higher provisions which increased by 25% and a higher effective tax rate, which meant an additional expense of Ps 2.11 billion, representing a 59% increase versus 2013. It is important to note that Operating Income registered a 19% YoY growth.
When analyzing the different elements of the results, Net Interest Income presented a 14% annual increase of Ps 44.1 billion, mainly due to the 12% growth in net interest income and loan origination fees; as well as by the decrease in funding costs.
Non-interest income increased 10% vs. 2013 to total Ps 16.23 billion due to: (i) a 15% growth in service fees due to better business dynamics reflected mainly in higher fees from electronic banking, consumer loans, account management and fund transfer revenues; (ii) a 29% growth in trading income due to valuation gains of Banorte and Casa de Bolsa Banorte Ixe titles, as well as the positive results in FX transactions, and (iii) 1% increase in Other Operating Income (Expenses); which offset the (77%) decline in income from real estate portfolio recoveries.
We have been consistently improving our efficiency ratio and our cost structure. The Efficiency Ratio for 2014 was 48.5%, coming down 3.6% from the prior year. Noninterest Expenses grew 5% vs. 2013, in line with the annual inflation in Mexico, 4.08%. This important improvement is due to the fact that throughout the year we maintained disciplined management of recurring expenses, and still managed to strengthen business areas, extend operational infrastructure and make required investments in the Group’s strategic projects.
Accumulated net income during the year reached historical highs
13%
higher with respect to 2013.
Provisions charged to results in 2014 totaled Ps 11.20 billion, 25% higher YoY. This increase is mainly explained by higher reserve requirements in Middle Market Companies’, increases in provisions to cover exposures to home developers who face financial restructuring, to protect the SME portfolio, and in the consumer portfolios to cover a higher origination.
At the end of December 2014, the performing loan portfolio grew 11% YoY, amounting to Ps 471.77 billion. The loan portfolio has recovered growth rates similar to levels not seen since the end of 2012 due to the gradual economic recovery and has grown above the national economy. For corporate and business portfolios, in 2014 a historic record of loan pre-payments were received; derived from the favorable conditions and liquidity that the domestic capital markets showed during the year, and many bank customers chose to refinance their loans in the market. Even so, new loan originations were gradually offsetting these effects, achieving positive annual growth. Loans to Governments grew 24% annually, amounting to Ps 118.96 billion. The corporate portfolio showed an annual increase of 6%, totaling Ps 80.46 billion, while the commercial portfolio totaled Ps 114.04 billion, a 0.2% increase YoY, this growth was affected by loan pre-payments, as well as by the reduction of the SME portfolio. Consumer loans, including mortgages, grew 13% during the year. Payroll loans increased 30% to total Ps 34.10 billion at the end of 2014, as a result of growth in the number of Banorte - Ixe payroll account holders, campaigns to promote the product and product adjustments to provide more flexibility.
Mortgages, including the Recovery Bank, ended the year with a balance of Ps 89.92 billion, 10% higher vs. 2013, with which Banorte continues to consolidate as a strong originator of residential mortgages. The credit card portfolio increased 14% annually, totaling Ps 23.21 billion, growing at rates higher than those of the industry with conservative risk standards and maintaining very good portfolio quality. All of the growth achieved in this segment is the result of better customer targeting and organic growth. The car loan portfolio balance at the end of 2014 was Ps 11.07 billion, decreasing by (3%) annually given that, there is very strong competition from finance companies of car manufacturers.
The loan portfolio has recovered growth to levels not seen since the end of 2012 due to the gradual economic recovery and has maintained a higher rate of growth than the national economy.
Grupo Financiero Banorte presented a PDL Ratio of 2.9%, (17 bp) lower vs. 2013 with a balance of past due loans at the end of the year of Ps 14.29 billion. If the delinquent home developers’ exposure is excluded, then the PDL Ratio was a healthy 1.8%. We continue to strengthen coverage for past due loans, at the end of 2014 this indicator stood at 107%, higher than the 104.6% for the same period of last year.
Banco Mercantil del Norte continues to demonstrate a strong level of equity and robust solvency. Banco Mercantil del Norte’s capitalization ratio, according to the Basel III rules, was 15.26%, consisting of a Total Tier 1 Ratio of 12.70%, a Core Tier 1 Ratio of 13.70% and complementary equity of 1.56%. It is management’s commitment to shareholders and customers to provide solidity and confidence by maintaining a well-capitalized and solvent institution, above the minimum parameters required by Mexican regulations.
During 2014, ROE for the Group was 13.2%, 99 bp lower vs. 2013; this was mainly due to the dilution effect from the equity offering implemented by the Financial Group last year. It is noteworthy that the majority of the Financial Group’s subsidiaries are generating strong ROE, as in the case of the Sofom credit card, the insurance and annuities companies to name a few. ROA for Grupo Financiero Banorte was 1.5%, 5 bp vs. 2013 due to growth in net income as a result of a better asset mix, mainly the growing proportion of assets in the consumer segment, and good profitability in general.
The results presented by the Financial Group’s subsidiaries and their contributions to earnings in 2014 according to their percentage of participation by business sector were: Banking Sector excluding Afore XXI Banorte, and considering Banco Mercantil del Norte, Banorte - Ixe Tarjetas and Banorte USA reported profits of Ps 10.53 billion, 2% lower vs. 2013, contributing 69% of GFNorte’s earnings; Brokerage Sector comprised of Casa de Bolsa Banorte Ixe and Operadora de Fondos Banorte - Ixe, reported accumulated profits of Ps 931 million, an annual increase of 43%, contributing 6% of GFNorte’s earnings; The Long- Term Savings Sector comprised of the Afore XXI Banorte, Insurance and Annuities, totaled Ps 3.22 billion, 64% higher vs. 2013 and contributing 21% of GFNorte’s earnings; the SOFOM and Other Finance Companies Sector, comprised of Arrendadora y Factor Banorte, Almacenadora Banorte and Solida Administradora de Portfolios, registered profits of Ps 573 million, a 58% increase over 2013, contributing 4% of the Financial Group’s profits. The holding company presented a loss of Ps 18 million in 2014.
Regarding banking infrastructure, Banorte - Ixe presented significant advances in the development of all contact channels with clients in order to maintain closeness, offer comfort and flexibility when a customer requires banking service. At the end of 2014, more than 13 million customers were served in the bank through 1,269 branches (159 of which are Ixe branches), 7,297 ATMs and 162,352 POS terminals. INB had 20 branches operating in the state of Texas as of that date. Our correspondents’ network grew to 5,336 contact points through the chain of 7Eleven stores, Telecomm-Telegrafos, Extra stores, Soriana, Grupo Control with “Del Sol” and “Woolworth” brands and NetPay. In addition, at the end of 2014, we had 16 SME centres throughout the country.
At the end of 2014, more than
13 million
clients received service
through 1,269 branches.
The number of customers who performed transactions over the Internet grew to more than 1.8 million, 18% higher vs. 2013, carrying out more than 800 million (monetary and non-monetary) transactions, representing an increase of 17% over the same period of last year. As Internet and mobile are more and more becoming the preferred transactional channel for clients, Banorte will continue improving our electronic banking system so clients can conduct more operations with greater ease and convenience.
In addition, the number of mobile banking transactions increased to more than 43.5 million, an annual growth of 97% and the number of mobile tokens was more than 208,000 units, increasing 95% vs. 2013. Similar to electronic banking, rates of growth and adoption of mobile banking exceed previous numbers by far. We are sure that mobile banking will become our clients’ preferred method of contact with their bank and therefore we will continue to add functionality and services that are useful to customers.
As you all know, for several years now, Banorte has been committed to our environment, communities and country. We have a solid program of social responsibility and sustainable development through which we support causes and initiatives seeking to achieve improvements in how we live, our environment and help people. In 2014, GFNorte was included for the first time in the Dow Jones Sustainability indexes, “DJSI”, thus becoming the first Mexican financial institution to be included in this index. This distinction establishes us as an institution that in addition to being financially solid and profitable is also committed to the planet’s sustainability. For this reason, many investors who focus on investing in companies with a strong commitment to sustainable development may see GFNorte as a safe, committed and profitable investment vehicle.
Also in 2014 Millward Brown ranked the top 30 most valuable companies in Mexico through the report BrandZ, in which Banorte was ranked as one of the top ten most valuable companies in the country; and the most valuable in the financial industry. This recognition of our brand in Mexico, and by our clients is without doubt the best recommendation letter that we have and therefore we remain committed to maintaining our name, which is our brand.
La firma Millward Brown, en su informe BrandZ, incluyó a Banorte como la marca más valiosa de la industria financiera y también dentro de las diez marcas más valiosas de México.
In April 2014, Grupo Financiero Banorte was included in the OTCQX30 index, comprised of the 30 most relevant ADRs in the market, in terms of market capitalization, volume and liquidity, being one of only two Mexican companies included in this index. The inclusion of our ADR Level 1 in this index will provide it with greater visibility and liquidity. Without a doubt, this event is a sign that our stock is recognized and widely accepted by foreign investors.
During the year, Grupo Financiero Banorte has received a number of awards and mentions in different fields. In December, Banorte was recognized by The Banker for the second time in a row and the 7th since 2005 as the “Best Bank in Mexico 2014”. Also in December Grupo Financiero Banorte was honored by LatinFinance, the specialized in banking and capital markets magazine as the “Best Bank in Mexico and Latin America”. In February, Operadora de Fondos Banorte Ixe received the 2014 Morningstar Award, in the category of Best Aggressive Mixed Fund in Mexico. These awards are just one example of the commitment and dedication that Grupo Financiero Banorte’s employees have for the creation of value for the different groups of interest and Mexico to help with our effort and dedication to economic and social development.
Finally, on behalf of all of us at Grupo Financiero Banorte, we thank our more than 24 million customers for their preference and trust, allowing us to manage assets of Ps 2.04 billion on their behalf. I would also like to acknowledge my appreciation for the commitment and efforts of our over 27,000 employees for their contribution and dedication to the Group’s transformation, and to our more than 4,000 shareholders and national and regional advisers for their invaluable support, even more their trust that we will continue to consolidate Banorte - Ixe as the strong Bank of Mexico.