Banorte pushes hard towards 20% ROE


Rob Dwyer
Published on:

Bank’s new digital platform delivering quick revenue growth; capital optimization makes the bank a potential dividend play.

Banorte’s recent third-quarter results confirm the bank is the outperformer in the Mexican market and that even the uncertainty surrounding the North America Free Trade Agreement could not take the gloss off its success story.

In late October, CFO Rafael Arana revealed that Banorte achieved its best-ever efficiency ratio – coming in at 40.4%. This result reflects tight cost control after recent capex spending that is now producing strong revenue growth. 

If it maintains this momentum, which has seen its return on equity (ROE) in the third quarter hit 18% (within striking distance of management’s target of 20%), the bank is set to overtake BBVA Bancomer as the most profitable in the country. 

“Nafta and elections pose risks that are hard to price in and, as a result, could lead to weaker lending activity and major volatility in FX and stock performances, but none of that stops us reiterating our positive view,” says BTG Pactual’s equity analyst Eduardo Rosman. “Sure, the stock isn’t cheap, but the trends for its results remain very favourable, leaving us comfortable with our buy rating. At the end of the day, we shouldn’t overlook the fact that the ROE expansion story is still playing out.”

That ROE expansion is also feeding through to make Banorte attractive as a dividend play. Having built up internal capital, the bank is contemplating paying more special dividends, worth as much as Ps10 billion ($520 million) in 2018. 

If this happens (in addition to its forecast regular dividend of Ps9.3 billion), it would see the bank’s total payout ratio hit 83%, equivalent to a dividend yield of 6.3%.

The foundation of the recent strong performance – net income is up 10% quarter on quarter and 25% year on year to Ps6.22 billion – is the recent investment in its digital platform. 

Banorte has implemented an IBM Watson platform throughout the group, which initially raised the bank’s capex to the highest in the sector (comparable only with BBVA). 

The bank is now able to use real-time analytics to drive increased sales of new products to its existing customer base; using its ATM network and online banking to cross-sell insurance, payroll loans, credit cards and auto loans.


Banorte also has a pension fund (Afore) with 9 million clients, of which only 600,000 are clients of the bank. The bank’s use of IBM Watson will improve this cross-selling penetration and is the central plank of the bank’s strategy to hit ROE of 20%. 

Credit Suisse notes that “there is room” for the bank to advance profitable products such as payroll loans and auto loans: Banorte’s payroll-loans-to-payroll-deposits is 76.8%, below competitors such as Santander Mexico and Banamex. According to Credit Suisse’s recent earnings report: “This indicates that there is room for the bank to continue gaining share of wallet among its existing base of payroll account holders.”

That advance can already be seen. Banorte’s loan portfolio grew by 12% year on year in the third quarter, with consumer loans outperforming expectations and compensating for slightly below-forecast corporate credit growth. 

The segment is the higher-margin one, which led to a 60 basis point year-on-year expansion in net interest margin. Banorte’s management expects to be able to continue this in the coming quarters, albeit at a slower rate as Mexico’s base interest rate is not expected to increase further.

Meanwhile, the bank’s operating expenditure actually fell quarter on quarter (-1%) and only increased 1% year on year, showing the bank is very well placed to deliver operational leverage in 2018. 

“Opex performance during 3Q will make market participants more comfortable on management’s ability to achieve guidance for opex growth of 6% to 7.5% in the year, which for 4Q17 implies 1% sequential growth for the high end, or a 2% sequential decline to achieve the low end,” notes Credit Suisse.

Banorte’s strategic focus on building growth from its existing customer base is also helping protect margins by avoiding competition with the other banks

The risks

The main risks to the impressive momentum seem to be those that could blow the Mexican economy off course, notably next year’s presidential election and, more likely, an unfavourable end to the Nafta negotiations.

However, despite the fact that recent Nafta talks revealed a big gap between Mexico and Canada’s negotiating positions and that of the US, there are some strong causes for optimism. 

Marcelo Carvalho, head of emerging market research at BNP Paribas, is in a camp that sees through the increasingly belligerent tone that came out of the fourth round of talks. 

“Our base case remains that cooler heads will ultimately prevail and that Nafta will end up being modernized, rather than terminated,” says Carvalho. “After all, posturing and brinkmanship are not uncommon negotiating tactics. We still believe that a win-win-win solution is both possible and desirable. If national self-interest prevails, Nafta should prevail.”

His comments point to the fact that while Mexico runs a large trade surplus with the US, this is concentrated in a few sectors and it runs a big deficit in sectors such as refined energy, plastics and maize.