Banco Santander Mexico SA Institucion de Banca Multiple Grupo Financiero Santand (BSMX) 2019 Q4 法說會逐字稿

Greetings, and welcome to the Banco Santander Mexico Fourth Quarter 2019 Conference Call. (Operator Instructions) As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Hector Chavez, Managing Director, Head of Investor Relations. Thank you. You may begin.

Thank you. Good morning, and welcome to our fourth quarter 2019 earnings conference call. We appreciate everyone's participation. By now, everyone should have access to our earnings press release and the presentation for today's call, both of which were distributed before the market opened today and can be found in our Investor Relations website.

Presenting to -- on our call today will be Hector Héctor Grisi, Executive President and CEO; Didier Mena, our CFO; and Rodrigo Brand, Executive General Director of Public Affairs. Following the review of our fourth quarter and full year results, we will be happy to answer your questions during the Q&A session.

Before we begin our formal remarks, allow me 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 could be beyond the company's control. For an explanation of these risks, please refer to our filings with the SEC and the Mexican Stock Exchange.

Hector, please go ahead.

Thank you, Hector. Good morning to everyone, and good afternoon to those of you in Europe. Thank you for joining our earnings call this morning. We had a very solid fourth quarter, despite a challenging economic environment, both domestically and abroad. Our loan portfolio expanded in line with Mexico's banking markets supported by retail segments as well as our government loans. Also, we continue attracting individual deposits while further enhancing our ability to cross-sell products. Although the economy has remained stagnant, our asset quality improved year-on-year, thanks to our prudent growth strategy and a strict organic origination criteria. Net interest income, along with higher fees, drove our core earnings, while market-related income was higher-than-average in the quarter, despite an uptick in our efficiency ratio and a substantially higher effective tax rate, we delivered solid net growth -- economic income growth with ROI and ROE relatively stable for the year.

But before discussing a detailed evolution of the quarter, as we normally do, I would like to spend some time sharing with you the results of our investment plan, which we effectively executed over the past 3 years, and we are wrapping up this cycle. We are pleased with the results, even though we still have much more ground to cover to transform our bank from an operating and cultural standpoint, we have reached a point where we have closed a significant technological gap versus our peers and we have laid out their foundations to continue building a stronger and more profitable brand and franchise in the country.

Please turn to Slide #4. As we have noted on earlier calls, we have reached the end of the third and final year of our investment program, which started in 2017 and was aimed at strengthening our franchise and positioning the bank to boost profitability while also becoming more client centric.

As you might recall, the investment targeted 3 key groups of initiatives. More than 50% was allocated to the transformation of our distribution network and upgrading our technology as we reorganize our business to drive innovation and invest in infrastructure. We have been enhancing and digitalizing our processes and operations, while also investing in providing higher-quality customer service but at a lower cost by, for example, redirecting certain transactions to lower cost channels like mobile. 1/3 of our investments were focused on initiatives to strengthen customer acquisition, transactionality and loyalty. This included the Santander Plus loyalty program, the Santander Mexico credit card and the payroll attraction project. The rest of the investment plan was targeted at new market segments, mainly financial inclusion and our financing, as well as the distribution of third-party insurance product to our middle-market clients and operating leases.

Let me give you some more details in the next slide on where we stand after completing these investments. In Slide 4 -- sorry, 5, you can see the main items where 53% of the investment program was direct, mainly in enhancing our IT capabilities, digitalizing the bank and improving our distribution network infrastructure. A key initiative was launching our digital factory with its strategic partners and employing an agile methodology to digitize the bank operations and upgrade platforms and processes. According to the factory, works alongside fintechs and companies like MasterCard, Accenture and IBM to allow Santander customers to do almost any banking transaction from their smartphones as well as digitalizing -- digitizing our own internal processes.

The development of our digital offering by our factory is centered on digital products and our mobile channels, such as SuperDigital, a fully digital account, which addresses non-bank clients or digital natives who prefer bypassing a bank branch. Near the end of the fourth quarter of 2019, we had over 376 -- 600,000 of these accounts. Our mobile app, SuperMóvil, has been enhanced over the past few years with over 100 functionalities and features that improve our digital customer experience. These futures include face ID access; cardless cash withdrawals; customized personal saving plans; the programming of direct debit, contactless payments through smart watches and managing credit card clarifications of unrecognized charges.

Bancos de Mexico CoDi's payment system is embedded in our app and we even offer customers instant money transfers through WhatsApp and other messaging platforms, regardless of whether they already have an account with Santander or not.

This service called Santander TAP has more than 100,000 enrolled customers with more than 0.5 million transactions in its first 7 months of operation.

Our Super Wallet app was designed for managing credit and debit cards by lowering the blocking and unblocking of cards at any time, checking balances in real time, making contactless payments, generating credit card PINs, keeping track of and paying with reward points. Later in the year we will launch an [Puntos single] app, which is being developed here in Mexico and will be used across Santander group subsidiaries.

We have also made important improvement in terms of digital customer onboarding processes, which has allowed us to significantly reduce account opening time and returning customers for immediate cross-selling opportunities. We also updated our call center system and CRM, which now provides us with better tools to cross-sell and improve our customer service.

In addition, investments in data analytics and quality enhancements have been key to boosting customer acquisition, attracting more payrolls and cross-selling more of our products, all of which is crucial to strengthening customer loyalty and increasing revenues.

Regarding our distribution network capabilities, the bank reached 1,093 full-function ATMS, 10x what we have 3 years ago, getting to our network market share in ATMs. In addition, 73% of our traditional ATMs are new. That is 5,782 ATMs over the past 3 years. We are also completing the rollout of our new ATM platform.

By identifying more than 800 micromarkets in Mexico, we were able to tailor our branches accordingly to each micromarket's needs, allowing better customer service. A total of 541 branches, which is almost half of our branch network, have been transformed into the SmartRed format over the past 3 years.

This model promotes the use of digital channels and self-service. In terms of incentives, which will transform our distribution network model, whereby branch managers are responsible for the branches' own P&L and cost of risk. Among the innovative formats that we are introducing in our first Work Café in Mexico, a co-working space for both clients and non-clients, which is in its 2 months of operation, has shown an NPS of 92%. We are replicating this format elsewhere in the country as it has been implemented in other geographies of the Santander Group, given its success in terms of the strengthening relationship with the existing customers and giving more visibility on Santander's broad portfolio of financial services.

We also opened 5 Agile branches, a new format which specializes in transactions, offering a personal and self-service experience with extended service hours and with a maximum waiting time of 15 minutes.

In addition, we are in the process of opening 50 digital kiosks, called Islas Financieras, in 39 cities across Mexico. All these locations, customers are offered personalized assistance for using digital channels.

Investments in our infrastructure includes opening 10 new corporate centers throughout the country.

Please turn to Slide 6. I would like to highlight here that we are very satisfied with the success of these investments with regard to the current composition of our retail customer base. As you might recall, we launched several initiatives aimed at attracting new customers and strengthening the loyalty of existing ones.

Among these initiatives, let me highlight our Santander Plus loyalty program, which as of December 2019, has enrolled 7.2 million customers, with 53% of them new to the bank. We have attracted 1.3 million net new payrolls in the past 3 years, 36% more than in 2016 and almost 560,000 of those were opened in the last 12 months. This level of new payrolls is almost twice the number of payrolls that a medium-sized regional bank has. In turn, our Santander-Aeroméxico co-branded credit card has more than 1 million cardholders, as the fourth quarter of '19 with 32% being new to our bank.

And finally, our low-rated Hipoteca Plus mortgage is allowing us also to attract more loyal customers. In 2019, 77% of new mortgage loans were linked to the Hipoteca Plus.

These initiatives allowed us to reach 3.2 million loyal customers by the end of 2019, twice as much compared to what we had prior to implementing our loyalty strategy and investment plan. Not only do we have more loyal customers, but the penetration level of loyal to active customers has increased by almost 12 percentage points from 21% in 2016 to 33% in 2019. And more importantly, the share of individual demand deposits has expanded by 610 basis points to 34% of our total demand deposits, contributing to a better mix that will help reduce our funding cost. Digital mobile customers are more loyal, enjoy a better customer experience and also are more cost-efficient to serve.

Accordingly, our investments and effort to further digitalize our customer base and build loyalty led to 3x increase in digital clients, which reached 4 2 point -- 4.2 million by year-end in 2019, while our mobile customer base expanded more than 4x to 3.8 million in the same period.

Mobile monetary transactions by individuals now account for 87% of total digitally -- digital monetary transactions for individuals, up from 57% back in 2017. Even though most of our investment initiatives are focused on the retail segments, Santander continues to consolidate leading positions in Mexico key commercial banking segments, such as SMEs and middle market as we aim to become 1 of the top 3 players in corporate and investment banking in the country. During 2019, in terms of volumes operated we consolidated our leadership by ranking #1 in project finance, ECM, M&A and ETDs, and #2 in local DCM.

We have launched several initiatives aimed at our commercial customers, such as new electronic banking services designed for large companies and SMEs. This new service is available to smartphones and tablets. Further, we have reduced the approval time for SME loans from 48 hours to 60 minutes. Together with Santander Plus like loyalty program designed especially for SMEs and individuals are commercially active. As you may also remember, last quarter, we announced the commercial alliance with CONTPAQi, a leading company in accounting software for SMEs. Together, we plan to develop financial products that meet SME-specific needs and to offer credit based on the transactional information.

Finally, let's turn to Slide 7. Let me comment briefly on 2 of or projects launched in the past 3 years that are evolving quite nicely. With regard to Santander Mexico's financial inclusion programs called TUIIO, we have opened 85 TUIIO branches in 18 states by the end of the fourth quarter of '19 serving more than 105,000 customers.

The total loan portfolio stood at MXN 261 million, which implies more than MXN 1 billion of loan origination. We are very proud of this program, which serves mostly women, but it is effectively contributing to financial inclusion of Mexico on bank population.

Since TUIIO began operations, more than half of these customers have used ATM and/or have obtained a debit card for the first time in their lives. We are planning to continue leveraging the technology to provide more products and services to this segment.

Another point I would like to highlight is our auto loan business. Through Super Auto, we are working with 7 -- 657 dealers and more than 100 automotive groups nationwide. We have established alliances with Peuguot, Suzuki and KTM, which have positioned Santander Mexico as their main financial partner along with personalized offers for the customers.

As of December of 2019, this loan portfolio totaled over MXN 2.2 billion. We've also successfully launched our commercial alliance with a leading insurance broker, allowing to offer P&C insurance to our commercial customers and complementing our existing offer of insurance products.

And finally, even though progress in developing our leasing products has been slower than we expected, we have a team working full-time on the product and should have it market-ready shortly.

To conclude this review, I wish to emphasize that even though we have completed our 3-year investment program, Santander Mexico remains committed to being the primary bank of growing number of loyal and retail customers to ongoing enhancement to our product offerings and to do term optimization of processes using the latest technologies. In order to accomplish this, we will continue investing as an integral part of our ongoing operating activities. I hope this gives you a clear and complete understanding of what we have accomplished during the past 3 years.

Now let me turn the evolution of our business during the fourth quarter. Then Didier will review our quarterly results in more detail.

Looking at Mexico banking system on Slide 8. System-wide loans further decelerates by the end of December, growing 4% year-on-year, a level we have not seen since March 2010, immediately after the financial crisis of 2008, 2009. Commercial and government loans drove the quarter's dynamic with a 2.9% and 4.1% year-on-year expansion, respectively.

On the other hand, year-on-year growth in consumer loans accelerated, growing at around 5% among the lowest growth since 2015. System deposit growth decelerated further to 4.5% year-on-year from 5.2% in the prior quarter amongst slowest since 2014. The market soft performance was in response to a challenging year, impacted by conditions of uncertainty, originating both locally and abroad.

For 2020, our expectations are more constructive. The approval of the USMCA by the U.S. Congress and in Mexico and the launch of the infrastructure program here should contribute to a picking up in private investment.

In turn, this is expected to drive economic activity, spur a recovery in the construction industry and strengthen loan demand in the corporate sector. We also expect the consumer to remain resilient on the back of employment growth, growing real wages and high levels of consumer confidence. As the government begins its second year in office, a normalization of government spending should also result in better liquidity conditions for SMEs and for private consumption. Accordingly, we expect GDP to expand by almost 1% this year. Given that inflation expectations remain stable, we forecast a 3.6% for 2020.

And as I said, we'd likely maintain a commodity monetary policy, we anticipate Banxico will lower rates by 75 basis points through the year, reaching 6.5% by year-end.

Now turn to Slide 9 for an overview of Santander loan performance. Our loan book expanded by 2.3% quarter-on-quarter and a 4.5% year-on-year, finishing this year slightly above our 2% to 4% revised guidance for 2019. This higher growth level was supported by the solid performance of our retail segments, particularly mortgages, credit cards and payroll loans, together with a robust pickup in government loans by contract. By contrast, SMEs and corporate loans contracted slightly. Importantly, high-margin loan segments expanded almost 4%, accounting for around 53% of our loans and almost 70% of net interest income from loans.

Please turn to Slide 10 for details on our retail loan performance. In consumer loans, our strategy continues to focus on payroll loans of our unsecured personal loans, by leveraging our strong position in the middle market and SME segments. Payroll loans expanded 11% year-on-year. Since we began focusing on driving payroll loans in the first quarter of '17, this segment contribution to consumer loans has increased 53% to 62%. Further, we gained almost 170 basis points in market share. Personal loans in turn declined nearly 10% year-on-year. Credit card loan growth decelerated to 6% year-on-year from 70% in the third quarter. Credit card usage remained strong at 11%, although an increasing percentage of customers continued to pay their balances in full in line with market trends.

The solid performance in retail lending was mainly driven by our strategy of cross-selling products to our payroll and Hipoteca Plus customers while also supporting the assets' quality and good levels of profitability.

Finally, mortgage loan growth was up over 7% year-on-year, even after the sale of the MXN 1 billion non-performing loan portfolio in January. Organic mortgage origination remained strong at 12% year-on-year compared with 11% growth for the industry. This represents the fifth consecutive quarter of exceeding market growth in mortgage origination. Our relatively strong performance in this category was mainly driven by Hipoteca Plus, which accounted 65% of total mortgage origination in this quarter and 77% for the full year. And in addition to cross-selling credit cards, as I mentioned earlier, we're also tracking quality lines to Hipoteca Plus to cross-selling more financial products and services and thus expanding our share of wallet.

Turning to Slide 11. Commercial loans expanded 3% -- 3.3% year-on-year. The solid performance in the middle market launch and government trending was partially offset by the slight contraction in the SME and corporate segments. While government loans were driven mostly by public sector companies, corporate loans fell over 1% year-on-year due to economy's weak performance during this year. In turn, SMEs contracted 1.5% year-on-year. On a sequential basis, the pickup of our -- in our commercial book was mainly driven by government loans, which increased 17% quarter-on-quarter.

Moving to deposits on Slide 12, we continue to focus on increasing deposits from individuals relative to corporate deposits. Individual deposits were up 10% year-on-year as we continue making headway in attracting and retaining retail clients. This was the 12th consecutive quarter in which individual deposits expanded at a faster rate than corporate deposits. High interest rates continue to support individual term deposits, up just 11% year-on-year and growing 10 percentage points faster than corporate term deposits. Overall, individual deposits grew 350 basis points of share in total demand deposits and 210 basis points of share in total [time] deposits. This brought individual deposits to 34% of the total deposit base, up from 31% in the 4Q in '18 and 27% in the 4Q of '16, when we started to focus more on the profitability of Santander deposit base.

In contrast, corporate deposits, which are, in some cases, now -- we now forego contracted 4.7% year-on-year. The contraction in corporate deposits was concentrated in a handful of clients with significant amounts. In sum, total deposits declined slightly year-on-year, also slightly below our guidance range of 0% to 2% growth. Sequentially, our deposits increased just over 1%.

Before I turn the call over to Didier, who will review the capital position, P&L and full year 2020 outlook, I would like to put our fourth quarter and full year performance into context. Although Mexico's economic environment has remained challenging, we nevertheless continue attracting greater number of individual customers. As I discussed at the beginning of the call, we are very satisfied with the investments we have been making to drive customer loyalties and digital transactions, which are paying off in terms of customer acquisition and with our profitability in the middle to long term. Now that the cost of our 3-year investment plan are designed, and we have a stronger franchise in place, we are confident that we can maintain the profitable growth momentum in the coming years, and in a business environment that we will consider to be more supportive. Thank you for your kind attention. Didier, please proceed.

Thank you, Héctor. Good morning, everybody. Turning to Slide 13. We maintain a sound funding position, with net loans to deposits at 100% and liquidity coverage at 159%, well above the regulatory threshold of 100%. We remain very comfortable with our debt profile with manageable debt maturities. Our capitalization ratio decreased 52 basis points sequentially to 16.4% and reflecting the dividend payment we made during the quarter, while core Tier 1 capital was down 40 basis points to 11.9% and Tier 1 stood at 13.1%.

As you can see on Slide 14, net interest income increased 3% year-on-year. This performance was supported by steady growth in retail loans, mainly credit cards, payroll loans. Further, we will stay focused on profitability across the balance sheet. For the full year, net interest income expanded by a solid 8.1% year-on-year driven by higher interest rates on average throughout the year and by loan volumes. Interest income from the loan portfolio was up nearly 3% year-on-year with net interest margin contracting 5 basis points. For the full year, our net interest margin expanded 14 basis points to 5.61%, benefiting from a 40 basis points expansion in the average benchmark interest rate.

Moving down to the P&L on Slide 15, we continue generating solid growth in net fees, up just over 2% year-on-year. And choosing credit cards were the main contributors to fee growth, driven by strong cross-selling to our mortgage and payroll customers and by sustained high usage levels, respectively. For the full year, net fees increased by 7.1% year-on-year driven also by these 2 segments as investment banking, investment funds and cash management contracted slightly on softer market dynamics.

Turning to Slide 16. Growth in gross operating income was just above 11% year-on-year driven by a positive performance in all areas of our business. Core earnings accounted for 94% of gross operating income while trading gains increased above our historical average levels of MXN 600 million to MXN 800 million for a second quarter in a row. Declining interest rates in unappreciating peso together with improved client trading activity supported market making gains.

On a full year basis, we posted a strong performance with gross operating income up nearly 10%.

As you can see on Slide 17, we again delivered healthy asset quality with improvements across the board, this despite the challenging economic conditions we have been referring to. Loan loss reserves remained stable year-on-year, reflecting a healthy loan book. Sequentially, loan loss reserves were up 8.6% as provisions for consumer loans have a seasonal effect due to the Buen Fin that happened in November.

For the full year, loan loss reserves increased 2% year-on-year, below the expansion rate of our loan portfolio. NPL ratios also remained healthy with total NPL ratio improving by 8 basis points year-on-year at 2.28% overall, is in line with system levels. Similar to the third quarter, improvements in mortgage loans and credit card NPLs more than offset a 52 basis points increase in SMEs, NPLs, which reflect weaker economic performance. However, at 2.42%, these NPLs remained at low levels. Also remember that in 4Q '19, Nafinsa guaranteed for SME to increase to 68% of the SME loan portfolio, up from 52% in the second quarter of last year. Commercial loan NPLs in turn register a 6 basis points year-on-year improvement.

This brought cost of risk down 12 basis points year-on-year to 2.6% in the quarter, well below our guidance range of 2.8% to 3% for the year. Sequentially, cost of risk also showed a slight improvement down 2 basis points.

Now please turn to Slide 18. As we completed our 3-year investment plan, administrative and promotional expenses increased 12% year-on-year and 5.7% sequentially. Specifically, we recorded higher depreciation costs related to the investment programs and higher personnel costs related to efficiency programs that we implemented during the quarter. For the full year, costs were up 10% year-on-year at the low end of our guidance range of 10% to 12%. In the near term, execution of our operational transformation program continues to impact our efficiency ratio, which rose 58 basis points year-on-year to 47.2%. For the full year, these ratios stood -- grew 23 basis points year-on-year to 45.4%.

Turning to profitability on Slide 19. Profit before taxes performed well, up 17% year-on-year for the quarter and 14% for the full year of 2019. Net income increases slightly over 7% year-on-year to MXN 4.9 billion, while our effective tax rate increased 688 basis points year-on-year. This resulted in an 8.9% increase in net income for full year, which was MXN 21.3 billion. The result lies above our guided range of 5% to 7% increase. And despite a much higher effective tax rate of 25.6%, 354 basis points higher than previous year and an overall weaker business environment. Return on equity was 14.8%, 30 basis points below the year-ago level and down 135 basis points sequentially. For the full year, ROE remained relatively stable, contracted slightly by 5 basis points to 16.1%.

Turning to guidance on our next slide. As we have been noting during this presentation, we're pleased to have made or exceeded our financial targets for the year, particularly given the still challenging macro environment. Also very pleased with the quality of our results and with a robust core earnings growth, especially considering that we ended the year with an effective tax rate slightly above our guidance range, owned to lower-than-expected inflation. Although we fell slightly below our target on the positive front, the result was due to our heightened focus on prioritizing retail deposits over corporate deposits, a strategy that we will maintain in 2020. Note that total individual deposits increased 9.6% year-on-year. Altogether, healthy growth in our retail loans coupled with a reduction in cost of risk, effective cost control and robust market-related income generated a solid result in the face of a much higher effective tax rate. Before moving on to Q&A portion of the call, a brief discussion of our guidance for full year 2020 would follow.

We're expecting annual growth in our loan book between 5% to 7%. On the back of slightly higher GDP growth, we're assuming 0.9% year-on-year. As we expect this slight pickup in government spending and private investment that we also anticipate. Total deposits in turn are expected to expand between 2% and 4% as we continue to focus on reducing our cost of funds by attracting more demand deposits from individuals and SMEs while trimming the cost of our corporate deposits. We expect asset quality to remain stable with cost of risk in the 2.7 to 2.9 percentage range, which includes the one-off impact of implementation of internal models for the mortgage portfolio. Please note that we are awaiting authorization from the regulator to implement this month.

In terms of costs, we're anticipating 2020 expenses to increase between 5% to 7% as amortization and depreciation charges from our 3-year investment plan will continue affecting total costs.

With respect to Santander's effective tax rate, we expect it to lie between 26% and 27%, slightly higher than last year. Taking all this into account, we forecast net income to grow between 3% and 5%.

In summary, we continue executing our strategy with focus and discipline. By significantly enhancing the breadth of our products, digital offerings, distribution network and the overall customer experience, we continue attracting individual deposit at a solid pace while further strengthening customer job loyalty. In addition to facilitating and driving the cross-selling of products, we have built a much stronger franchise in what continue to be challenging economic and market conditions.

Before concluding our remarks, I would like to reiterate that our company shares remain part of Mexico's IPC index with an average trading volume of $6 million per day, which includes our trading volume in the ADR. And most importantly, we remain committed to direct and proactive communication with the financial community and to maintaining a high level of disclosure, transparency and access to Santander's Mexico's management.

We're now ready to take your questions. Operator, please go ahead.

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

Congrats on the success of all of your transformation initiatives. Two questions, if I may. On your guidance, there's no mention about net interest margin. And so curious to hear what you expect in 2020, given the decline in rates, what will that mean for your name, are you going to see a compression, what size? And two, on trading income, clearly a point out of the curve this quarter vis-à-vis recent trends, can you walk us through how that should pan out over the next quarters? Is this a new sustainable level? Is this a one-off, what you think is a more normalized level for the next year?

Jorge, regarding net interest margin dynamics, you might think that there are several forces that, on one hand, definitely put significant pressure to our NIM. And basically, the most relevant one is, as you rightly mentioned, the reduction in the reference interest rate. We're expecting that, as Héctor mentioned, 75 basis points contraction in interest rates. If these reductions in interest rates happened in the first 3 meetings of the Board of Directors of the Central Bank, then the average reference rate will be close to 6.61%. And that will be very similar to what we saw in 2017, just as a reference.

On the other hand, the positive things that will help us mitigate this reduction in the reference rate are the following. First, the continuous expansion of our individual demand deposits contribution to overall demand deposits. We're also focusing, and I would say, very recently on monitoring the cost of deposits from SMEs and mid-market companies and large corporates. Thirdly, Santander Mexico has paid our depositors in these segments much higher than our peers and then the system. So with discipline and focus, we are expecting that the cost of funds to come down. So this will also help us mitigating that impact. And also, there's something quite important to comment regarding the contraction that we saw in the fourth quarter of '19 in our NIM. That was mainly associated with the acquisition of investment in securities we bought, investment in securities with fixed rate in order for us to compensate for the potential decrease in interest rates in the coming years. So that implies a negative carriage for the quarter. So that's why we said decrease sequentially was so significant. Throughout the year, when these decreases in interest rates start materializing, we'll start benefiting from the actions that we took in the quarter. So all in all, we think that NIM either will be stable or there's a chance according to how all these things might evolve that we might see even more expansion or small contraction.

But we think it's going to be relatively flat, which I think is positive news with a potential 75 basis points contraction in interest rates.

And then on your second question, if we take a look on historical perspective, this quarter, structure related income contributed 6.5% of our gross operating income. The average since we became a listed company is 4.2%. So we don't expect these levels to be recurring. Not only this year but in the coming years. We think that, as we have discussed for several years, the range that we think is sustainable is something around MXN 600 million to MXN 800 million on a quarterly basis. So yes, it's above average. For the full year, it's actually slightly below the average that we've seen since we became a listed company. For the full year, it's just stayed shy of 4% of our gross operating income.

(Operator Instructions) Our next question comes from the line of Ernesto Gabilondo with Bank of America.

My first question is on your expectations for cost of risk. As you mentioned, it's coming higher than in 2019 in light of the additional provisions for the recalibration of the mortgage portfolio. So when do you expect to recognize the MXN 600 million, MXN 700 million in the P&L? Do you expect to be recognized gradually in each quarter? Or do you see a potential window at the end of the year, if the regulator allows you to adopt IFRS 9 before 2021 and then pass the impact through equity?

Ernesto, I think that we have no option to make this a gradual impact to our P&L. As soon as the CNBV approves the internal model, then we need to make the provisions on the following months. So -- and it's uncertain when we will have that authorization. We think that as we discussed in our earnings call last quarter that we were expecting that to happen last quarter. It didn't happen. We expect that to happen in both, but it's not under control. It might be the case, I think there's a very low probability that the CNBV to not approve this year, and we might end up not making these charges through our P&L. But it's completely binary. As soon as we get approved, then the following months, we will need to make the provisions.

Perfect. Understood. And then for my second question, I remember that in the last conference call, you mentioned the possibility of a special dividend. We saw the fourth quarter results and the common equity Tier 1 ratio decline a little bit. So how much do you think would be the amount you will be considering to pay a special dividend, and if you're analyzing a more aggressive buyback program?

Regarding the dividend, you might recall that we changed our dividend policy. So in the past, we used to pay 50% of our earnings, okay? A 50% payout ratio. Then in anticipation of an accelerated loan growth, which is not happening, but that was the main idea. We changed the dividend policy so that we could dividend out the excess of certain level of core Tier 1 ratio. We defined that at around 11%, okay?

Since we changed the dividend policy, our core Tier 1 ratio was below 11%. So we continued paying 50% of our earnings. Now for the first time -- no, for the first year since we changed the dividend policy, we are surpassing an 11% core Tier 1 ratio, okay? So that is allowing us to propose to our shareholders and the proposal will be made. It's typically made on an annual basis in April in the shareholders meeting to increase the dividend payment because of this excess capital that we have. Our proposal implies a payout ratio that is slightly above 70%, okay? At least if it's approved in the shareholders meeting at the end of April, it will be paid at the -- in May, as it historically has been the case. So you probably recall that we made 2 dividend payments throughout the year. We already paid 50% of the earnings we achieved in the first half of last year. So the second payment of the -- associated with 2019 results will take into account the 50% of the second half 2019 earnings. And on top of that, the excess dividend, that would get us to a 70% plus of payout ratio. So that's on the dividend. The other question was on top of the specialists, what was it?

The buyback.

Buyback, yes. Since the tender offer was announced, we have not been active for obvious reasons. We understand we are very conscious about the reduction in liquidity since the tender offer was completed. So we've been very quiet on our buyback program. So we will monitor liquidity. And if it makes sense, we will definitely buy more shares. But we -- we're mindful about liquidity.

Our next question comes from the line of Jason Mollin from Scotiabank.

So, Santander Mexico has been emphasizing its focus on retail clients. We saw a lot of that in this presentation, specifically growing faster in loans to individuals than in loans to companies and government and prioritizing retail deposits over corporate deposits. Can you talk about the competition in the retail lending in terms of rates. I mean you're very competitive on the mortgage side, but also on the deposit side. We aren't hearing from many banks that they're looking to follow very similar strategies to offset margin pressure as well as interest rates come down. And then as part of that, if you can just talk about where Santander Mexico sees the lending cycle for mortgages, credit cards and consumer, and how do you view the risk that consumers will roll over at some point and we could see a material increase in delinquency.

Okay. Jason, let me tell you, I mean, in terms -- I mean, the market is quite competitive in Mexico. Now if you take a look at what's been happening, there are a couple of medium-sized banks that are basically trying to grow very aggressively, not just their deposits but also the loan portfolio. So you have a couple in the middle that are basically trying to gain ground. Some of the other banks, basically, I mean, have been more conservative in terms of how they have grown their portfolio, and they're basically reaccommodating the capital allocation in some ways. And we are basically doing the same.

We are concentrating on ourselves in the sectors that we believe there is less delinquency, there is also less probability of the cost of risk to come up, and where we could have basically better returns. So in that sense, we're trying to be a niche player, if you allow me the term -- given the size of the bank, but we're trying to move really fast in what we believe is going to happen in the market in the near term. The market is very dynamic in terms of what's going on due to the fact of the economic conditions in the country and outside of Banxico as well. So we have done that very quickly. We have a meeting every couple of weeks to decide exactly how do we price our deposits and also how we price loans given that. And we're going to be -- we're going to continue basically to grow on payrolls and to focus ourselves in deposits. The most important thing we need to do is to increase our demand deposit base. I don't know if that answers correctly your questions, but the competition is quite hard.

In terms of how do we see the lending cycle, I think it has been pretty healthy and going to continue to be like that. If you remember in my presentation, I said that, for example, in credit cards, our clients are basically being very concerned about how to manage that. And they're basically trying to pay down the balances as much as they can. If you basically see, I mean, even though they use their credit card more, they're basically paying us better parts of the balance every single month. So that's why the credit portfolio has not grown at the same pace. If you see the growth of -- invoicing is around 11%, but the growth in the portfolio is around 5% to 6%. So that basically tells you a little bit what the consumer is thinking about. In terms of the other portfolios, the only portfolio that we saw a little bit of or we had a little bit of concern was direct consumer loans, which we basically stopped doing and concentrated on payroll loans, which basically had less type of involved risk. So in this type of market, I believe you need to adapt, you cannot basically attack the market in the same way. You have to be smart about how you do it, but we don't think that the lending cycle is in any way in a bubble or that people are very leveraged. I think that there continues to be room to grow.

Just complementing on what Hector mentioned, Jason, I would encourage you to look at the latest financial stability report by Central Bank, in which they break down by income level, how the performance of asset quality. And I agree fully with what Héctor is mentioning. However, if you look at low-income individuals, you get to see a slight deterioration in those income levels. And our exposure to low-income individuals is very limited. So I think that those players that have a larger exposure to that segment, I think that they will have a more challenging year than others than are not that exposed to this segment.

That's helpful. Maybe just a comment on what you said about increasing the individual segment of the total demand deposits as a percentage of everything you have in your fund, but you mentioned 28% contribution in 2016 and improved to 34% in 2019. What's the outlook for that or the targets for 2020 and beyond?

Look, I mean as, in that way, we're going to be as aggressive as we can to continue to grow. I mean our main goal is basically to be at the same level our competitors are, our main competitors. As you understand, I mean, we always have had less individual clients compared to our peers. And this is basically what we need to focus to be completely balanced versus them in terms of our funding cost. One of our main concerns always has been the funding cost in which we are slightly higher than our competitors because of the mix of deposits that we have. So if you ask me, that's our main task this year. What we have done, which is a slight change in which Didier Mena being CFO, he's also the Chief Investment Officer of the bank in which he's going to take care of our capital allocation, of our cost of funding and we're going to take a really close look at how do we basically decrease our cost of funding versus our competitors. So that's the main task we had for this year.

And just complementing on that. Just to give you a reference, Jason, if you look at 2 of our relevant peers, one of them has this metric in which we are at 34%, they have it at 44% and the other one has it at 49%. So we will obviously not achieve that this year, but I think this is something that will be achieved through time. And we are focused on that.

Our next question comes from the line of Alonso Garcia with Crédit Suisse.

It's actually a follow-up on cost of risk. I mean this MXN 600 million to MXN 700 million in national provisions for the mortgage portfolio this year would represent around less, actually, less than 10 basis points increase in your cost of risk, but your cost of risk guidance suggests a 20 basis points increase at midpoint from 2019 levels or 30 basis points to the high end of the range. So my question is what are the other drivers behind your expectation of higher cost of risk this year? Is it basically a function of mix with more individuals in your loan portfolio mix? Or are you -- do you have some concerns on any specific segment of your portfolio or any specific sector of the economy.

Alonso, I think that the current segment that faces more headwinds in terms of cost of risk, in my opinion, is SME. Improvement activity is being stagnant. They are highly exposed. They are more vulnerable than companies that are larger. So I think the -- that's the only probably segment that we are monitoring very closely. And we think that there is a chance that the cost of risk would go up in that segment.

Our next question comes from the line of Carlos Gomez with HSBC Global Asset Management.

Carlos Gomez, your line is live. Are you on mute?

Our next question comes from the line of Natalia Zamora with GBM.

Congratulations on the results. When I saw your guidance at first, I started to be rather conservative in terms of the cost of risk. But if I understood correctly, you mentioned your customers’ guidance for the year includes a one-off. Could you please elaborate on this?

Yes, Natalia. It's basically the one-off that we are expecting that is associated with the approval of our internal risk-based model from the CNBB takes into account the MXN 600 million to MXN 700 million. So it's basically adding that to our ongoing or business as usual, loan portfolio, okay? So yes, it takes that into account.

Okay, okay. So that's the approval you were talking about, which you said would be binary, the one you said could be -- could arrive this year.

Our next question comes from the line of Yuri Fernandes with JPMorgan.

I have a question regarding debit cards and credit cards payments in Mexico. If you can tell us how big this line is for Santander Mexico, like if there is any way we can see like how payment is important? And I have a follow-up regarding -- actually a question regarding Facebook. I know you have a partnership with WhatsApp in Mexico, but days ago, the company announced the...

Sorry, Yuri, can you repeat your question? Sorry. You broke up a little bit, and I couldn't hear you. Could you repeat the question?

Okay. Sure, sure. The first one is regarding how big payments like credit card, debit card transactions are for Santander Mexico. If you can give us a number on that. And the second question is regarding Facebook, perhaps moving to make payments in WhatsApp. If you see this as a threat, if you're concerned on that. I know you use WhatsApp and you have like -- you can make transfers on WhatsApp in Mexico. But if WhatsApp per se started doing transfer, if this could be a risk for you, like for any revenue line for Santander.

No. Yuri. Probably one thing to take into account is that Mexico is one of the countries where the use of cash is huge. 80% of the transactions are done in cash and if you break it down by amount, those that are below USD 25, equivalent of USD 25 or MXN 500, 95% of them are done in cash.

So even though taking this into account, the credit card business is relevant for us. And actually, if you look at fee income that's the line item that is growing faster, not because of an increase in the overall balance, not because of -- we have increased fees but because of the usage of the credit cards of our customers. Also it's worth you looking at the financial stability report because there's a trend in broad market in which the credit card customers are paying more -- their balance in full. The percentage of clients that pay their balance in full is increasing. So you have -- you cannot assume that the credit card payments are not growing fast enough just by looking at the dynamics of the loan portfolio. Transactionality has been picking up quite nicely for us. I think that the payments business is very relevant for us, not because of the payments per se but because of all the information that we can get out of what our customers are doing through what they're paying. So definitely something that is of a strategic focus for us.

I think that the Santander TAP, that is what we are using through WhatsApp for our customers to make transfers between them. It's working quite nicely. And it's, the customer experience is fantastic. And it's very important to mention that one of the characteristics of this feature is that you don't need to have a Santander account to receive a payment. So you usually need -- if you want to make the transfer, you need to have a Santander account. But it's up to the person that receives the transfer, whether they get it in Santander account. If they don't have it, they can open one digitally. They can deposit that in any account in the system and in any debit or credit card. So it's quite convenient. And as was mentioned in the call, we have now close to 100,000 clients involved in Santander TAP, and we think that the adoption will grow faster in the coming quarters.

Our next question from the line of Carlos Gomez with HSBC Global Asset Management.

My question is regarding the costs. You have already completed your investment program, yet you are still projecting another 5% to 7% increase for next year. Can you guide us as to what we should expect for the next 2 to 3 years in your expense lines, whether at some point, we should see the investment to get off, and therefore, the total level of expenses to decline? And second, did you increase depreciation 28% this year, is that the line that you expect to continue to see and what is the average life of the assets that you are depreciating?

Okay, Carlos, thank you. I mean in terms of the investment program, even though we have finished the extra MXN 750 million, we're going to continue to be very aggressive investing in the bank in mainly 2 areas. I mean I think IT is going to be one important part in which we're going to be increasing the amount of money we put in there. Also in terms of the digital platform, we're going to continue to invest in it. The way we are going to do it also is in a more -- or in a smarter way. If you remember my presentation, I told you that we're going to come out with a new app early this year, probably by half of the year, we're going to start trying sometime in a month or so. And this app is going to be used for the rest of the group. So Mexico is developing that. And we are also -- there is -- for example, we are developing also a global platform for acquiring, and that's being developed in Brazil, and we're going to use it over here. So what's going to happen is we're going to come out with new products while we're working together with the other banks of the group. And that's basically just to tell you that the way we're going to be managing investments, and we're going to continue to grow. In terms of net numbers, I'm going to ask Didier to basically give you an idea. But the idea is basically to be very disciplined about how we grow the cost in the bank. We're going to be in a normalized situation. And the important part where we were behind in terms of the number of ATMs and some other things. I think we are already where we wanted to be. Also we're going to be very smart about how we put in more branches and infrastructure. We're going to continue to change into the SmartRed format, but we're going to do it less aggressively over the next few years. And in terms of other investments in new products, we're going to continue to develop that. And -- but we're going to be much more in line with inflation, I think, for the next few years.

Regarding depreciation and amortization, Carlos, these lines have been increasing. It was close to 8% of our total expenses in 2017, and it's roughly 10% now. We think that this will continue expanding faster than the overall expense base as a consequence of the investment program. There's a range of the amortizations that happened, I would say, the vast majority between 3 and 4 years, others go all the way to 10 years. All the investments that we've done in the corporate centers, we have invested in 10 corporate centers throughout the country. So that -- those investments, we have to amortize them for the longer term. But we should expect depreciation and amortization, so let's say probably, go all the way to probably 12% of our total expense rate during the next few years.

That's very clear. And Didier, since you are on the line and you are in charge, how satisfied are you with development of retail deposits? And are you on plan, behind plan or ahead of the plan that you had a couple of years ago?

That's a fantastic question, Carlos. I think that we're happy with the progress that we've made. But there's -- we still have a significant way ahead. There are 2 things that we're working on. One is the mix. And the mix, the evolution is quite positive. But still, we are 10 percentage points below one of relevant peers, 15 percentage points below the other relevant peer. So the gap is still significant. That's on one front. And I think that we've made, in my opinion, significant progress. Unfortunately, this takes a lot of time. So we need to continue remaining focused on attracting and retaining retail clients. I think that the investments that we make go pretty much in line with having the capacity, the right infrastructure and the right service quality to make that possible. On the other hand, we have the cost of deposits, the pricing.

And as mentioned, historically, we have paid more to our depositors. We're focusing on that so that we can converge faster to the cost of funds of the system and of our peers. So we think that the combination of those 2 things will make it possible that during the following 2 to 3 years, we can make that happen.

Our next question comes from the line of Brian Flores with Citibank.

Just a quick question on your guidance on loan growth. Could you elaborate a little more at the segment level? And particularly, at the dynamics you're seeing in the government segment.

I think that we have a very solid dynamic in terms of individual loans. And the single most relevant product within individual loans is mortgage loans. And mortgage loans are growing slightly below the market, and that's because of the impact of our execution, the loan portfolio acquisition that we made few years ago. Our origination rate is growing slightly above market at 11%. So we think that it will either be at high single digits or low double-digit growth rate in mortgages. We also expect that the -- to continue gaining market share in payroll loans. And that's a consequence of our focus in attracting and retaining more payroll accounts. So it goes pretty much in line. Our growth in payroll accounts last year was close to 13%, and our growth in payroll loans was close to 11%. So it goes pretty much in line one with the other. We were starting to gain slightly market share in credit cards. We think that, that will continue growing 5% to 6% year-on-year.

Now on the corporate side, I think that we should probably expect a softer growth on individual loans, and that's because of the exposure to economic activity. And within corporate, SMEs are -- should continue having a soft performance. We think that mid-market companies are more resilient than SMEs. And the 2 segments that will continue to be volatile and depending not only on our underwriting criteria but overall market trends, it's both corporates and government loans. Corporate is just to highlight a couple of things. In the first half of last year, there was a high volatility in the market that they had corporates, large corporates tapping into banks to provide their financing need. With the capital markets being less volatile in the second half, then that's why we saw more activity in corporate issuing the debt and prepaying some of their bank facilities. Okay? So depending on how the market evolves this year, when the DCM market started very strong, on a very strong foot this year, we might see corporate here being, I would say, stable or with a potentially slight contraction. And government loans, I think they're pretty volatile in it.

Just bear in mind that we have exposure in this segment, not -- not because of the loan, per se. It is because of the businesses that are associated with lending to these customers, and particularly, the payroll business associated with these customers. So even though we do look at it on a product basis, margins are slightly seen. When you take into account the business that comes with these customers, then it has a significant profitability. So this segment is highly competitive. We will remain very aggressive in the relationships that we currently have. And we're very cautious with those relationships that we don't have, and it represents an investment in terms of our business.

There are no further questions in the queue. I'd like to hand the call back to Hector Chavez for closing remarks.

Thank you, operator. Thank you, everyone, once again for joining Santander Mexico on this call. As always, we wish to maintain an open dialogue with you and there's a standing invitation to visit us in Mexico. If you have any additional questions, please don't hesitate to call us or e-mail us directly. Have a great day.

Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation. You may disconnect your lines at this time, and have a wonderful day.