Banco Santander Mexico SA Institucion de Banca Multiple Grupo Financiero Santand (BSMX) 2018 Q4 法說會逐字稿

Good day, everyone, and welcome to Banco Santander Mexico's Fourth Quarter 2018 Earnings Conference Call. Today's call is being recorded, and after the speakers' remarks, there will be a question-and-answer session.

I'd like to turn the call over to Mr. Hector Chavez, Managing Director, Head of Investor Relations, who will make some opening remarks and introduce today's other speakers. Please go ahead, sir.

Thank you. Good morning, and welcome to our Fourth Quarter 2018 Earnings Conference Call. We appreciate everyone's participation today. By now, everyone should have access to our earnings press release and the presentation for today's call, both of which are distributed -- were distributed before the market opened today.

Speaking during today's call will be Didier Mena, our CFO, as well as Rodrigo Brand, Executive General Director of Public Affairs. And following their review of the fourth quarter results, they will be available to answer your questions during the Q&A session.

And before we begin our formal remarks, as always, let me allow you to -- remind you that certain statements made during the course of this discussion may constitute forward-looking statements, which are based on management's current expectations and beliefs and are subject to a number of risks and uncertainties that could cause actual results to materially differ, including factors that may be beyond the company's control. For an explanation of these risks, please refer to our filings with the SEC and with Mexican Stock Exchange.

Didier, please go ahead.

Thank you, Hector. Good morning, everyone, and good afternoon for those to you in Europe. Thank you for joining our earnings call today. It is customary for Héctor Grisi, our CEO, to participate in our quarterly earnings calls. He's representing our bank at an event today that will be attended by the Prime Minister of Spain, Pedro Sánchez, who is visiting Mexico. On his behalf, I send you his regards.

As we executed the second year core strategy to become a client-focused organization, our performance continued to improve across our business areas. The focus of this strategy remains the operational and digital transformation of our bank. In addition to driving client loyalty, we continued to expand higher margin loans and achieved an eighth consecutive quarter with double-digit growth in retail deposits. We're also closing the year with healthy asset quality. Our cost of risk ratio reflects cautious lending, as we anticipated a slowdown in economy going into the end of the year.

Net income increased 11% for the year while return on equity improved 40 basis points to 16.2%, the third consecutive year of ROE expansion. We achieved this despite the deterioration in deficiency ratio due to our strategic initiatives and to a trading loss stemming from market volatility throughout the quarter that was triggered by the cancellation of the new airport in Mexico City.

Importantly, we met or exceeded our financial targets for the year. This was accomplished even as market-related income was almost MXN 1 billion lower than in 2017 as a result of very volatile and difficult market conditions.

Before discussing the details of our results, let's look at key trends in Mexico's banking system on Slide 4. We saw a slight pickup in loan growth with total loans increasing close to 11% year-on-year. Commercial loans remained the main driver of lending growth in Mexico, ranking nearly 13% year-on-year. By contrast, while still expanding that -- a healthy 7%. Consumer loans posted the tenth straight quarter of slower growth, which can be attributed to higher interest rates and inflation. Deposit growth maintained its momentum with total deposits increasing just over 10% year-on-year. Growth in demand deposits remained moderate at just under 6%, reflecting a preference for term deposits, which have grown almost 20% during the year.

On the regulatory front, [early this month,] President López Obrador, hosted an event that was attended by the Governor of Mexico's Central Bank, the Finance Minister as well as the Head of Mexico's banking association. The purpose was to announce strategies for the development of the Mexican financial sector. In our view, the event was a positive development. The government and the Central Bank are working together with Mexican banks with a goal of implementing initiatives that benefit foreign customers or financial institutions and continue to increase the financial inclusion in the future.

With respect to Mexico's economy, we expect a future [innovation] in 2019 and an accomplished international and domestic environment. With annual GDP growth slowing down to 1.5% from 2.1% in 2018 and annual inflation decreasing to 3.9% from 4.8% last year. But consumption remains supported by the country's tight labor market. We're seeing some initial signs of an economic slowdown.

The external sector should follow U.S. manufacturing, which is expected to regenerate this year, while investment remains weak, impacted by uncertainty, surrounding domestic policies, external environment and the USMCA. Considering lower anticipated inflation, high retail interest rates and expectations that the Fed will take a more cautious stance, we expect Mexico Central Bank to lower its benchmark rate by 25 basis points to 8% by the end of the year.

Looking at Santander Mexico on the Slide 5. We posted another quarter of solid loan growth, up nearly 11% year-on-year and above our 7% to 9% 2018 guidance range. This higher growth was supported by a solid performance in our high-margin segments, particularly in mid-market, SME and payroll loans as well as selective loans to corporate and government entities, prioritizing profitability. Lower margin loans, in turn, increased 13% and a nearly 9% increase in mortgages, significantly above the 1% growth achieved in the segment during 2017. I will provide more details later in the presentation.

Please turn to Slide 6 to review our retail loans in more detail. Starting with mortgages. Growth in this segment continued to pick up in the quarter, reaching 9% year-on-year. Organic growth was even higher at nearly 12% and above the 10% increase posted by the industry. Hipoteca Plus continued to drive our mortgage business, representing 53% of mortgage originations in the fourth quarter of last year.

Our credit card business reached a stable 3% as customers continued to pay their balances in full but credit card usage remains strong, up 15% year-on-year. Importantly, as a result of closing certain upper-market channels early last year, the quality and profitability of our credit card portfolio continued to improve.

In consumer loans, our strategy to drive payroll loans aligned with the goal of expanding our retail deposit base continues to deliver good results. Payroll loans were up -- are above 12% doubling market growth. This has allowed us to increase our share of this market segment by 78 basis points during the last 12 months. Payroll loans now represent close to 60% of our total consumer loans up from 55% in 2017.

We're also seeing good traction in our auto loans portfolio that have closed agreements with several leaderships during the quarter. We originated over MXN 500 million in auto loans over the last 12 months, bringing this portfolio close to MXN 750 million and expect these good dynamics to continue.

Having completed the second year of implanting the client-centric initiatives of our strategy, we saw further increases in loyal customers, up 23% year-on-year. We also continue to grow digital customers, up 38% with digital transactions increasing their contribution to total transactions by 5 -- by 400 basis points to 14.8%.

Mobile customers increased 61% with mobile transactions accounting for 75% of digital monetary transactions, up from 57% from 2017. These results reflects the progress that we continue making on various strategic initiatives to improve the client experience by transforming our distribution network and infrastructure, boosting customer acquisition, cross-selling, building loyalty and having launched new businesses.

During 2018, we operated over 300 branches under a new layout that promotes the use of digital and self-service channels and contemplated individual P&L as well as new management tools. We also launched Sucursal Agil, a new branch model specialized in low-value transactions and offering dynamic service and shorter waiting times. We also added over 500 new full-function ATMs, reaching over 800 and up in operation. And we plan to continue expanding our network of these type of ATM across the country.

Our digitalization strategy also allows to us introduce enhancements to our apps and operate our digital-process system platforms. We also attracted 600,000 net new payroll accounts and launched new products such as auto financing, distribution of third-party insurance products to mid-market companies and continue to expand TUIIO, our financial-inclusions programs.

As shown on Slide 8, our commercial loan books stand strongly up 13% while maintaining our focus on profitable lending. Loans to SMEs and mid-market businesses expanded by 8% and 12%, respectively. Note that over 50% of our SME loans are currently guaranteed by [financing] which reduces our risk exposure to this segment. As we selectively pursued corporate and government business to acquire federal accounts among other objectives, our loans in this segment also increased. Corporate loans increased nearly 14%, while government loans were up just over 21%. On a sequential basis, however, we saw loans to corporates and government decline by low single digits.

Please turn to Slide 9. Total deposits increased over 7% during the last 12 months. For individuals and SMEs, deposit expanded 13% and 10%, respectively. The growth in these types of deposits continue to be encouraging. It demonstrates that our strategy to attract and retain retail clients, which includes acquiring more payroll accounts is gaining additional traction. As I noted earlier, rising interest rate continue to make term deposits more attractive. Term deposits by individuals increased over 21% compared to only 9% increase we saw in demand deposits. Individual demand deposits increased the contribution to total demand deposits by 110 basis points year-on-year while individual term deposits increased their contribution to total term deposits by 280 basis points in the year. With this, total individual deposit now represent over 31% of total deposits.

Combined with increased deposits by corporates, term and demand deposits grew 11% and 5%, respectively. We continue to successfully capitalize on our leadership as a commercial bank to further penetrate Mexico's retail banking market, while capturing more share of the SMEs and mid-market segment where lending is more profitable for us as well. We're finding more opportunity to expand payroll accounts by selectively targeting business in the corporate and government segments too.

Center to our strategy to become a leader in profitability [means] developing the culture of quality among all of Santander Mexico's employees. This and for the digitalization, our bank's services and products will significantly enhance each and every customer's experience. The ultimate goal of which is to strength their loyalty and make us their primary bank.

Let's move to Slide 10. We finished the year with a solid funding position with net loans to deposits at just over 95% and a liquidity coverage ratio of 143.3% as compared to the regulatory threshold of 90%. Our debt profile remained sound. There will be -- there will not be any significant amount of debt maturity until 2022. Our capitalization ratio is 15.9% down slightly from 16% in the prior quarter. Our Tier 1 capital growth 16 basis points to [12.33%]. And our core Tier 1 ratio stood at 11%.

Please turn to Slide 11. Our net interest income increased strongly over the last year, up 17%, primarily due to a nearly 16% increase in net interest income from our expanding loan portfolio and bolster by a 24% increase in income from investments and securities.

We are benefiting from a higher interest rate environment in addition to our emphasis on higher-margin loans.

Net interest margin in the fourth quarter of last year increased 12 basis points year-on-year reaching 5.44%, but declined sequentially from 5.66% reported in the prior quarter. The sequential drop in NIM is mainly attributed to strong expansion of interest-earning assets, namely margin accounts, securities and [repos], which more than offset increased interest income. For the full year, our net interest margin increased 6 basis points to 5.47%.

Moving on to fees on Slide 12. We generated a nearly 8% increase in net fees. This despite lower investment banking fees that reflects soft deal flow in the market during the quarter. Cash management fees grew less than 1%, mainly due to lower income from charges and payments. By contrast, credit card fees continued to perform well driven by higher usage.

As you can see on Slide 13, gross operating income grew just over 10%. We delivered strong core earnings growth up nearly 15%, but this gain was partially offset by market-related losses of close to MXN 400 million reported in October when the financial market reacted strongly to the cancellation of Mexico City's new airport. At the time, low levels of liquidity exacerbated the market volatility. While we posted penetrating results in the last 2 months of the year, this was not enough to offset the loss in October. For 2018, market-related income was down close to MXN 1 billion and year-on-year contraction of 33%.

Please turn to Slide 14. Across all key metrics, asset quality remains at healthy levels. Loan loss reserves for the quarter were up almost 3% year-on-year, mostly as a result of increasing provisions for nonperforming loans in the mortgage and portfolio are expected to be sold during the first quarter of this year. Loan loss provisions for consumer loans also tend to be higher in the second half of the year due to the (inaudible) specials in November.

Note that in the third quarter, we provisioned 100% of the expected loss of a specific project finance corporate loan. We continue to monitor our loan book closely and do not expect to have any additional provisions in the near future. Importantly, for the full year, loan loss reserves declined almost 4% compared with loan portfolio growth of 11% in 2018. NPLs, in turn, dropped 18 basis points year-on-year to 2.36%, reflecting our prudent risk management across all segments. NPLs improved across all segments with exception of mortgages, which remained impacted by the deterioration of our floating rate mortgage product, which represented 6.8% of our total mortgage portfolio. Cost of risk for the quarter fell at 16 basis points to 3.43% and reached 3.18% for the full year below the low end of our guidance range for 2018.

Now please turn to Slide 15. As we continue to make progress with operational transformation program, our administrative and promotional cost increased by 12.30% year-on-year at the mid-range of our target for 2018. It was mainly due to higher administrative expenses resulting from the cost related to our investment program. Higher administrative expenses were partially offset by lower personal expenses reflecting lower provisions for bonuses. This, along with the trading losses in the quarter, resulted in 143 basis points increase in efficiency ratio, which reached almost 45% in the quarter and 43.5% for the full year.

Moving on to profitability on the Slide 16. Fourth quarter net income increased 2.4% finishing the year up 11% at the high end of our full year guidance range. As we explained earlier, the strong growth in net interest income was partially offset by the trading losses incurred in the quarter.

Also impacting income was a higher effective tax rate, which rose 600 basis points year-on-year to almost 20%. Note that effective tax rate for the full year grows over 200 basis points. Net income before taxes increased 14.1% for the full year. Return on equity decreased 86 basis points to 15.2% for the quarter mainly driven by lower market-related income and a higher tax rate but increased 40 basis points for the full year reaching 16.2%. As I noted earlier, this was the third consecutive year of ROE expansion even while implementing our investment plan.

Turning to Slide 17. As we discussed during the presentation, we're pleased to report that we met or exceeded our financial targets for the year. This was achieved even as market-related income came in at almost MXN 1 billion lower than in 2017 as a result of very volatile and difficult market conditions. Against this backdrop, we're very pleased with the quality for results and our robust core earnings. Even if we ended the year with an effective tax rate below our guidance, note that taxes increased by over 200 basis points compared to losses reported in 2017. In 2016, when we've started our investment program, we have achieved 180 basis points of expansion in ROE, which reached 16.2% for 2018 despite the temporary deterioration in our efficiency ratio.

Before moving on to the Q&A session, let's comment on our guidance for the full year of 2019. For this year, we expected annual growth in our loan book of -- between 7% to 9%. Despite economic slowdown anticipated for 2019, we still expect it be -- to grow 1.5% and inflation to decline. Moreover, under volatile market conditions, corporates are most likely to resort to bank's financing. Consumer confidence remains strong which, together with strong employment, should support loan growth and stable asset quality. Total deposits, in turn, are anticipated to expand between 7% to 9% as we continue to focus on attracting more deposits, mainly in the individual and SME segments.

For 2019, our full year guidance for cost of risks is 3.1% to 3.3%, 200 basis points lower than our 2018 guidance. However, note that new accounting rules require banks to report recovery from provisions in the provision accounts, whereas previously recoveries were booked in other income. This change in accounting were reflected in our first quarter of 2019 results and is expected to result in a 30 to 40 basis points decrease in our cost of risk. Net of recoveries will foresee cost of risk of 2.8% to 3% in 2019.

In terms of costs, we're anticipating expenses for the full year to increase between 10% to 12%, as we proceed in the last year of our 3-year investment plan. With respect to our effective tax rate, we expect it to be between 24% and 25%. Taking all this into account, we expect net income to grow between 5% to 7%.

That concludes our remarks. We're now ready to take your questions. Operator, please go ahead.

(Operator Instructions) Our first question comes from Jorge Kuri with Morgan Stanley.

Can you talk about -- I know you just provided the guidance for 2019, so sorry, I'm jumping to 2020. And I'm doing that because this is the last year of your 3-year investment program. And I was wondering how fast can ROE go up in 2020 versus the 16% that you reported in 2018? Your guidance for 2019 roughly assumes -- implies, sorry, also around 16% ROE. So with expenses decelerating significantly hopefully in 2020, and the benefits of all of the things you've been doing over the last 3 years in terms of efficiency and gaining deposits and gaining market share in high-margin asset products. How -- where do you think ROE could be, 2020, 2021, as you reflect the full improvements from your 3-year program?

Jorge, thanks for joining the call. Let me share with you the sensitivity analysis that we did to understand indeed full impact of, let's say, reaping all the benefits of this not only investment plan, but strategic plan as well. The business plan has a 3-year intense program or the time. And the strategic plan definitely will take a little bit longer than that. So for these numbers, what we did is assumed the -- how many clients we need in order to -- for our deposit needs to be not as the best-in-class in the market that is Bancomer. Bancomer, close to 42%, 43% of our demand deposits come from individuals. For us, that's close to 29%. So by reducing that gap, we need many more millions of deposit of [weaker clients], okay? So assuming that we have that increased deposit base and we have the capacity to cross-sell retail loans for that customer base at, say, penetration levels that we currently have. And then, we normalize the expenses because expenses will not continue to grow in at the pace that they have been growing over the last 2 years. And let's say fully spaced in because there's another important function here that clients take some time to have an impact in our profitability. According to our analysis, clients that have been 5 or more years with us are 4 to 5x more profitable than clients that have been less than a year with us. And the boost in profitability that we see per client happens between years 3 and 4 sees clients stronger. So we're in mind that we launched our loyalty program Santander close to May of 2016. So really the first wave of new customers, retail customers, came in, in the second half of 2016. So if it takes 3 years for us to start benefiting from this increased profitability per client, that takes that -- those clients -- we'll start benefiting from increased profitability in the second half of this year and that trend will follow. So taking into account, let's say, a full-fledged impact of profitability per client then the ROE expansion that we're achieving 600 basis points. Now what -- when what -- when we can expect that to materialize, I think that will take at least 3, 4 more years for that to happen. Once our expenses start trending down from being at single digits then I think that we could start achieving 50 basis points expansion on ROE and then once the benefits of these customers start flowing through our P&L, we should start to see ROE expansion of close to 100 basis points a year, okay? So probably the first few years after we complete our investment plan, we're expecting ROE expansion close to 50 basis points. And then in years 3, 4 and over, it’s probably 100 basis points expansion. So that's how we're obviously assuming that there benign market conditions in Mexico, okay?

Our next question comes from Jason Mollin with Scotiabank.

(foreign language) My question is related to the operating environments you just mentioned that assuming that there's no adverse conditions. I mean, for 2019 and maybe for 2020, what kind of operating environment do you expect for banks? Is it more of the same? Should we be expecting changes in fee -- in how fees -- in regulation regarding fees? What can you tell us? You have slower economic growth expectations for this year versus last. You do have a small decrease in rates, but rates will be much -- will be at a higher level for longer. If you can just talk about how you see us under the Mexico's operating environment? And how your guidance fits into that?

Absolutely. Good to hear, Jason. I think that we are in quite volatile environment. There are plenty of -- a lot of [neutrals] that complement each other. I think that from a macro perspective, we are witnessing a slowdown. And that's quite consistent with how we have seen that new administrations take some time to understand how things work. And we saw that in the last 2 administrations coming into power, okay? And also, there are some external conditions that have some headwinds in that regard. From a let's say regulatory perspective, just to mention about if you know what has happened each month, as mentioned in our remarks, we saw very positive -- the conference that the Central Bank, the finance ministry, the Mexican banking association leaving the presidents of all them together to make some announcements that I would say that are positive or neutral to the financial sector, okay? There was nothing this cost in fees 3 weeks ago when they met and made this announcement.

However, a couple of days ago, Senator Monreal, the one that reports say has putting these banking fees issue on table mentioned again that this is something that he would like to pursue. The new (inaudible) in those sessions -- the session in Congress starts tomorrow. So he was conveying that he's willing to [mostly go] forward.

However, yesterday, after the Mexican President met with the President (sic) [Prime Minister] of Spain. He mentioned again that he is not expecting or pushing for changes in the regulatory front or the financial sector for the first 3 years of his administration. So I think that for all of us in some cases it's confusing that the same party was different -- parties of MORENA have different views. Now having said that, I think that we all understand that [Andres] has a quite strong character, so I wouldn't bet against what he say, okay? So I would probably think that is most likely that there would be a benign environment at least for the first 3 years and that any potential noise that comes from [defending] of Congress would probably be avoided or would be somehow mitigated.

So that's for my understanding. We have Rodrigo Brand here with us that probably has also good understanding of these dynamics.

Thank you, Didier. Just to answer to what you mentioned I think it's important to understand that we have new political actors. And we all, the market participants, are trying to understand how they are conducting in this new environment. So I agree with what Didier said. And I think -- from the banking association's point of view, I think the most important development in the last couple of weeks and have been trying to move the discussions in terms of fees and commissions to the Minister of Finance instead of being discussed with legislators.

So let's see how this evolves. But nevertheless, I think this is a completely new environment, and we could temporarily expect a lot of news I think from different anchors in terms of the banking sector, et cetera. Of course, this news could never materialize. They would have some noise in the next couple of years, but we have to adjust to this new reality again, so I completely agree with Didier that the President has been very clear, he has a very strong mandate and a very strong control over his party. So I think this will help to [send me right] in the market.

Our next question comes from Ernesto Gabilondo with Bank of America Merrill Lynch.

My question is on the PEMEX downgrade. Yesterday, Fitch mentioned that Mexican banks had exposure to the sovereign could wage on ratings. And they calculated some strength and values under a potential one notch downgrade of the Mexican sovereign rating. So from your point of view, should one notch downgrade be relevant or not? What is the probability that you are signing to a potential downgrade of the sovereign rating? And if that happens, what could be the implications for your business? And my second question is on the financial inclusion. How are you planning to leverage the bank into digital transformation to tender low-income segment of the population? Do you think that the new [code] [QR] could be reduced to 2 year? Do you think that loans could be offered at more competitive levels based on lower sales force costs for the technology?

A higher net of -- regarding the PEMEX downgrading, I think that ratings from PEMEX and the sovereign have been quite in the same direction over the last few years. I think that probably what the market is expecting is stronger action from the federal government, regarding PEMEX. I think that at least we have the latest information. I think the probability of a downgrade for the sovereign is relatively low. I think that has to do with the [tools] have quite robust budget under I would say credible or reasonable assumptions. There are quite a few that we can discuss, whether we think they're -- those would be achievable or not. But overall, I think that it was quite well put together, the budget, without the primary surplus. So the levels at which debt to GDP were Mexican stance is relatively sound. Or when you compare it to other emerging market economies, I think that we have certain leeway in terms of even increasing slightly our debt to GDP and still be with the same rating. Now I think that if there is fiscal deterioration in the country or in the government budget, definitely that will trigger a potential downgrade. But do not see that happening soon. I think that if the rating agencies at least at the sovereign level are given the benefit of the doubt to the current administration. And I think it will be a matter of how the government executes this budget and whether they have the capacity to get the tax revenues that they were -- that were planned and control the expenses.

Now on the financial inclusion. We are quite happy with the progress that we've made. As you probably recall the idea behind this financial inclusion program, TUIIO, is about having social impact. We started by having a very similar product to the existing -- to demand that prevails in the market through group lending. But we have already started doing different things. All loans are dispersed through a debit account. For most of our clients, the first debit account product that they have is the one that we provide. Clients are starting to make the loan payments through their mobile. So we're somehow teaching them to use technology so that there's no need for the sales force that we have to go and meet with them on a weekly basis. So yes, we're starting to see those benefits. I think that what the Central Bank is working on, what they announced early this month, of course, that would be a fantastic launch implemented and probably most of the 2-year clients will benefit from that. We already have developed our own platform that is consistent with key guidelines that the Central Bank is working on. So -- and we're actually -- we're going to be launching in a few weeks a pilot test with 2-year clients using this QR codes. And it's going to be quite -- and I think that the impact could be significant in terms of financial inclusion. It's a way of -- for this segment of not having cash, not having the capacity once you have a bank account to make payments through your mobile-pay phone. So yes, the interest rate at which we started these programs is below the average of the market. And as mentioned when we launched this initiative, any potential benefits or synergies that we achieved through the technology, we were planning on passing them to our clients by additional products and services. We're also launching a pilot test on individual loans for TUIIO. I think that the banking system in Mexico has been -- has moved relatively slow in terms of products and services offered to loan to individuals. Group lending continues to be the prevailing product in the market that I -- and I think probably we're the only country in Latin America that, that continues to be the case. So I think that the future of financial services for low-income individuals has to move to individual loans. We're going to start testing that -- we've actually launched a pilot test over the last few months, and we're analyzing the [evolution] of that -- in that program.

Our next question comes from Mario Pierry with Bank of America.

Didier, just wondering if you can provide a little bit more color on your loan growth guidance that you gave of 7% to 9%? Which segments are you more excited about? Also when we look at your loan growth, it seems like you've been growing more on the lower-yielding segments, especially government loans, you mentioned, right? That the strategy here is to gain payroll accounts. But I was wondering if this change in mix could impact your net interest income growth in '19?

Mario, I think that there is some within our loan portfolio, we have strategic segments, which we are quite focused on. In that way I would say -- I would put mid-market companies, SMEs, payroll loans and now mortgages. All of the first 3 are high yielding loans. Mortgages, the product is not high yielding, however, what we're seeing with the Hipoteca Plus is that clients are quite profitable. And I will expand on that lately, okay? Later, sorry. So we should expect -- we're expecting loan growth to be quite strong in mid-market, SMEs and payroll loans. And this would probably be at the high end of the guidance or even above the guidance that we provided. Now mortgages, I think that it's picking up pace nicely. We've done some profitability analysis not on the product but on the clients that we're attracting. Because one of the key features in this Hipoteca Plus product is that in order for us to give the best mortgage rate in the market, you used to be a or become a loyal customer to us. So you need to have your payroll accounts, credit cards, insurance products with us. So once you analyze the entire performance of those new clients that are coming in, new profitability is quite nice.

So even though on a product basis, it's not that profitable. It's a low-margin loan. When you take into account all the additional fees basis that these clients bring to us, it's quite profitable. So not necessarily a significant growth in mortgages, the leaseback need necessarily because of the deposits that will bring, that will come through having the payroll account of these [new] customers and also with the credit card that these clients will need to have in order for them to achieve the best mortgage rate in the market, okay? Then what is volatile and we have said that, along the way, over the last couple of years, these large corporate and government loans. Over the last couple of quarters, you know the performance in 2 segments have been quite strong. Those 2 segments actually they computed for us to keep our guidance last year, and we have had the capacity to have good transactions, profitable transactions, in these segments. What is important for us is that we will only grow these new loans in this segment if it is profitable. The merger of Banorte and Interacciones, I think that reduced one aggressive player in the market. So we've got some capacity to wins -- to get to win some customers in this area, okay? But it could be that if we need to not find profitable transactions in the segment, then loan growth should not be that strong in this arena. And bear in mind that competition in this front is quite aggressive. So I would say that the, let's say, strategic payment for us as SMEs, mid-markets and payroll loans should grow faster than the other segments, credit cards. What we're seeing there is a higher percentage of our clients paying down their small balance. However, you know credit cards usage have increased 15% to 20% over the last year. We are not expecting a significant growth in credit cards. So I think that it'll -- the volatility that we've seen in corporate -- large corporates and government loans are the ones that could bring some noise in terms of whether we exceed or not our guidance of loan growth for this year.

Our next question comes from Gabriel Nóbrega with Citi.

Looking at your cost of risk guidance, I realized that you're expecting it to actually stay in the same levels as you achieved through 2018. So here, I just wanted to maybe get more of a feel of what you were seeing in terms of NPL trends, specifically across your loan book for individuals given that you will -- you have the end strategy of actually improving your asset mix. And also, on the fact that, that 2018 can maybe be a lower year in terms of economic growth for Mexico?

Gabriel, I think that what we're expecting in terms of asset quality, it's -- as you rightly mentioned, it's something similar to what we achieved for 2018. And that has to do with -- we're still -- even though there is a slowdown in -- on GDP. As we're expecting GDP growth to be around 1.5% down from 2% last year, the labor market is -- continues to be quite strong. So as long as employment continues performing at those levels, we don't see a significant deterioration in asset quality. And specifically in individuals. So as long as that's the case, we think that cost to operate should be in line to what we achieved last year.

All right. So if you just allow me a follow-up here. If we maybe could expect employment to begin to come down as the economy could maybe deteriorate further, do you believe there could be maybe upside risk to your cost of risk guidance?

That could be the case, and we should monitor that continuously. We monitor that very closely. So again, that would be -- we think that employment could trigger or slowdown or contraction in employment could have an impact in asset quality [directively].

Our next question comes from Carlos Gomez with HSBC.

And it's actually a follow-up. Again, your guidance is relatively conservative compared to some of your peers. And perhaps, you have mentioned this earlier and I missed it. What is the main driver for this conservatism? You said you expect it to be lower. Is it mostly that you're concerned that the economy may not perform well? That you are concerned that you're [slicing on feature]? Or any other reason that may put your revenue targets in question or just want to be sure that you're going to comply with the guidance? And perhaps, you're pressing the upside?

Carlos, I would say that rather than -- maybe with the conservative guidance, I would say a realistic guidance. I think that we're still entering a third -- or third year of our investment plan. So that puts for sure some pressure on our expenses. And that, obviously, limits the capacity of providing an upside for this year. However, I think that we're quite optimistic in the sense of in doing the right things for the medium- to long-term value creation for the bank. So yes, there are some trade-offs that over the last few years we have made quite clear that there is some short-term pain that we have to go through in order for the bank to achieve a more sustainable and higher profitability in the future. So we have the expense-based growth, let's say, productivity for sure. And we have some kind of uncertain environment that the potential slowdown economies -- how that could trigger the slowdown in loans and deposits. I think that the interest rates at the levels that they are right now, I think it provides a comfortable cushion for Mexican banks overall. So I think that it has to do more with being very clear that we are still not -- we have not completed yet our investment plan that the benefits of these plans -- of this plan are not immediate, take some time. And basically, it's just being very clear and a prompt about the dynamics that we're seeing as a consequence of our investment plan, Carlos.

(Operator Instructions) And our next question comes from Manuel Parra with Barclays.

Just going back to your loyal clients. And I see you deployed your strategy that have its changes, such as the new payroll loan rules and now the potential increase in digitalization with [coding]. Wouldn't these changes promote competition? And could they have any effect on the 4 to 5x higher profitability expectations from loyal clients?

Manuel, in terms of -- if you are talking about (inaudible) and the potential impact of that onto our loyal customers, I would say that probably the benefits that the group or the financial system would get from (inaudible) is more from those guys that are not [bankerized] yet, okay? So that will increase the number of banking clients in Mexico. There are quite as much mobile customers in Mexico than banking clients, okay? So I think it has to do more with increasing the size of the pie than really having an impact in the clients that are already targeted by the (inaudible) Mexican banks. Now however, for those customers that have already access to the system, user experience is critical. So part of this loyalty performance that we've got has to grow with our increased capacity of having digital channels available for our clients and an enhanced customer experience, okay? So definitely, if you don't have as a bank, a compelling value proposition or value offered to the clients, I think it's going to be difficult for any bank to succeed in this environment.

So for it's -- for us, it's -- we have it very clear that in order for us to continue attracting and retaining retail customers, we have to excel in terms our digital offering. We are quite pleased with the performance of both the growth in digital customers, the growth in our loyal customers and how they are using more digital channels to transact with us. So clearly, digital is very relevant for us and for any competitor in the market. And let's say, the new payment platform that the Central Bank's developing, I think that, that will increase the pressure on the bank and will definitely benefit the entire system because financial services is not only about payments. So those clients that are not in the banking system already and start -- or joined the banking system through payment, they'll definitely need other services. So once they have that capacity and start using these platforms then I think that all of the banks will benefit from that.

Ladies and gentlemen, there are no further questions at this time. I'll now turn the floor back to Mr. Hector Chavez for closing remarks.

Thank you very much for joining Santander Mexico on this call. So we should maintain an open dialogue with you, and you are welcome to visit us in Mexico. If you have any further questions, please don't hesitate to call or e-mail us. Have a great day.

Thank you. This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.