Grupo Financiero Santander S.A.B. de C.V. (BSMX) CEO Hector Grisi on Q3 2018 Results - Earnings Call Transcript

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About: Grupo Financiero Santander S.A.B. de C.V. (BSMX)
by: SA Transcripts

Grupo Financiero Santander S.A.B. de C.V. (NYSE:BSMX) Q3 2018 Results Conference Call October 31, 2018 10:00 AM ET

Executives

Hector Chavez - Managing Director, Head of Investor Relations

Hector Grisi - Executive President and Chief Executive Officer

Didier Mena - Chief Financial Officer

Rodrigo Brand - Executive General Director of Public Affairs

Analysts

Ernesto Gabilondo - Bank of America Merrill Lynch

Gabriel Nobrega - Citi

Jason Mollin - Scotiabank

Philip Finch - UBS

Arturo Langa - Itau BBA

Carlos Macedo - Goldman Sachs

Carlos Gomez - HSBC Global Asset Management

Gilberto Garcia - Barclays

Nicolas Riva - Bank of America, Merrill Lynch

Operator

Good day everyone, and welcome to Banco Santander Mexico's Third 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 speakers. Please go ahead, sir.

Hector Chavez

Thank you. Good morning, and welcome to our third quarter 2018 conference call. We appreciate everyone's participation. By now, everyone should have access to our earnings press release and presentation for today's call, both of which were distributed before the market opened today.

Speaking today is Hector Grisi, Executive President and CEO; Didier Mena, CFO; as well as Rodrigo Brand, Executive General Director of Public Affairs. Following their comments, they will be available for a Q&A session.

Before we begin our formal remarks, allow me to remind you that certain statements made during the call may constitute forward-looking statements which are based on management's current expectations and beliefs, and are subject to a number of risk 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 the Mexican Stock Exchange.

Hector, please go ahead.

Hector Grisi

Thank you, Hector. Good morning to everyone, and good afternoon to those of you in Europe. Thank you for being in our call today with us. Banco Santander Mexico reported a robust quarter, with sustained growth in our loan book while maintaining asset quality at really healthy levels. Our [indiscernible] spanned our retail deposit base also continued to deliver good results, with double-digit growth in individual deposits. Net income in the quarter rose 25% year-on-year, while ROE was up 122 basis points, reaching 16.7% in the quarter alone. This strong performance was achieved despite increasing costs from the ongoing implementation of our operational transformation and de-utilization strategy, which impacted efficiency again this quarter.

Moving on to the Mexican banking system on Slide 4, loan growth accelerated slightly in the quarter but still expanded almost 11% year-on-year as of the end of August. Commercial loans were the main growth driver, up 12.2% year-on-year. Growth in consumer loans continued to rapidly decelerate, up only 6.7% year-on-year. This was the slowest growth rate during the past 9 quarters due to higher interest rates and inflation. On the other hand, system deposit growth continued to accelerate, up 12% year-on-year, although demand deposit growth slowed from 8% to 12% in the prior quarter. Although the new trade agreement with the U.S. and Canada has yet to be ratified by the respective Congresses, much of the economic uncertainty leading up to this signing has been lifted. However, we expect the year to end with a moderate economic growth in Mexico and see the economy decelerating 2019 as the new administration's programs getting started. We also see the possibility of another interest rate increase before year-end as inflation remains at high levels.

Looking at Santander Mexico specifically on Slide 5, we posted another quarter with strong loan growth, up 11%, with margin loans could include the strong performing middle market and SME, as well as credit cards and consumer loans that rose almost 10%. These segments accounted for over 53% of the loan portfolio and produced close to 70% of net interest income in the quarter. Lower margin loans were up 12%, driven by selective growth in corporate and government loans along with continued improved performance in mortgages.

Please turn to Slide 6 for a detailed review of our loan book. Starting with consumer loans, our strategy of leveraging our robust commercial franchise to attract favorable accounts continues to drive more profitable payroll loans. Payroll loans increased 12%, significantly outpacing system loans, which grew about 7%. This vivid performance allow us to increase our market share in the segment by 63 basis points over the last 12 months. Personal loans, however, remain soft as we focus on further strengthening our payroll franchise. Mortgage loans posted a steady pickup, increasing almost 8% year-on-year, up from 6% in the previous quarter and 2% a year ago. Excluding the effect from the run-off of acquired portfolios, mortgages expanded by almost 10% year-on-year, exceeding market growth. However, moreover, mortgages posted the strongest sequential volume growth for a quarter over the past three years. We are particularly pleased with the good traction we are seeing in Hipoteca Plus, our customer-centered product that rewards customers who bring their whole banking relationship to us. Launched last April, it accounted for 50% of the mortgage origination in the quarter alone. In our credit card portfolio, we closed at the end of 2017 a couple of marketing channels that targeted the open market with the goal of improving asset quality in this strong product. This resulted in slower growth of 3% year-on-year. By contrast, credit card usage remained strong, up 12% year-on-year and contributing to higher fee growth.

Turning to Slide 7, we remain focused on pursuing our goal of boosting our digital channels, attracting new customers, and increasing loyalty among [indiscernible]. Some of our key initiatives in which we are making good progress include, first of all, the launch of an IL branch. This branch format is designed to reduce waiting times at cashier lines, thus providing an improved customer experience. Since its opening a couple of months ago, this branch has captured around 50% of the low-value teller transactions of our [indiscernible] branches, allowing them to concentrate on more complex operations and sales, improving service quality at the same time. SuperAuto, our car and motorcycle loan financing supported by digital origination platform that enhances the customer experience by reducing processing and approval times, this is the only digital platform in the market in which clients' quotes generated at the dealership automatically populate the loan submission file, instantly detonating the loan approval process. This product has been offered through over 300 dealerships, and we expect to continue standing in nationwide. To date, this loan portfolio exist already MXN480 million.

Supporting this growth, we also entered into an alliance with Peugeot Mexico, PGA, becoming a preferred financial partner for auto loan financing to Peugeot's customers in Mexico. We continue upgrading our new distribution network model and have already transformed 203 branches out of 300 targeted for 2018. Our new branch layout is more efficient, user-friendly, and promotes the use of digital and self-service channels. In addition, during the quarter, we completed the upgrade of our interactive voice response system, IVR, in our contact center that will allow us to handle over 80% of the incoming calls. We also continue attracting new clients, driving loyalty and utilizing our retail customer base, and we are very pleased at the pace at which we are retaining customers, with loyal clients reaching 2.4 million, increasing 23% alone in the last 12 months. Our digital and mobile customers increased by 32% and 53% respectively. These good results are driven by our unique loyalty program, which compensates our clients for their business and promotes enrollment through digital channels. We are also simplifying processes and enhancing the customer experience on that end. Finally, we continue to drive strong growth in mobile monetary transactions, which almost doubled year-on-year. Mobile transactions accounted for 71% of digital monetary transactions, up from 54% a year ago.

As shown on Slide 8, our commercial loan book was up 14% year-on-year. Loans to SMEs were more than 10%, while middle-market loans increased by close to 14%. Corporate loans rose 13% year-on-year and closed 12% sequentially. Government loans were also strong, up 21% and 17% on the quarter alone. Growth in these two market segments reflects our selective opportunities to target corporates as well as government and related entities where we can acquire payroll accounts and offer other financial products. For the full year, we maintained our guidance of standing loan growth between 7% and 9% for the year, and we continue to focus on profitable growth in a strong competitive environment, particularly in the more volatile corporate and government loan segments.

Please turn to Slide 9. Total deposits rose almost 9% year-on-year and declined slightly sequentially as some corporates withdrew deposits. We are very pleased with the continued strong deposit growth posted by SMEs and individuals, both of which rose mid-double-digits. Among individuals, demand deposits rose 13%, and term deposits increased almost 22% as we continued to make headway on our goal of increasing this [indiscernible] to retail clients. Actually, individual deposits are growing faster than corporates, with individuals increasing their share of demand deposits by 230 basis points on the past 12 months, in line with the strategy.

Supported by the high interest rate environment, total term deposit growth remained strong, standing 18% year-on-year a dynamic we expect will continue for the remainder of the year. This trend has impacted our deposit mix, with term deposits increasing their share of total deposits by 130 basis points sequentially. For the full year, we maintain our target of expanding total deposits between 9% to 11%. We'll remain focused on implementing the various strategic initiatives to operationally transform our bank and leverage our strong position in SMEs, middle markets, and corporates investment banking to continue to expand our retail businesses, mainly in the payroll business. With the goal of becoming a leader of profitability in our sector, we remain focused on attracting new retail customers as well as retaining existing ones. We expect to continue making headwind, enhancing the customer experience, developing a culture of quality among our employees, and further utilizing our banking activities and product offerings to become our clients' primary bank.

Let me turn the call to Didier Mena, who will now go over our capital position, P&L and guidance. Afterwards, we will be happy to answer your questions. Thank you very much.

Didier Mena

Thanks, Hector. Good day, everybody. Moving on to Slide 10, we maintain a solid funding position, with net loans to deposits at a healthy 97%. Our liquidity coverage ratio stood at 141%, well above the regulatory threshold of 90%. We also maintained a sound debt profile with no major maturities until 2022, and only around 26% of our debt maturing over the next three years, 3.5 years.

During the quarter, we issue a 10-year Tier 2 subordinated preferred capital note for a total of MXN1.3 billion. The parent company purchased 75% of the issuance. This transaction, the first after the Presidential elections, showed strong demand and allowed us to obtain very competitive pricing. It was also the first assets and liability management of capital securities executed by a bank in Mexico. Simultaneously, we issued a cash tender offer for our standing Tier 2 subordinated preferred capital notes due 2024, acquiring around 95% of the notes with $77 million still left standing that remain in our Tier 2 capital. Our capital allocation ratio increased 50 basis points sequentially to 16%. Our Tier 1 capital decreased 10 basis points to 12.7%, and our core Tier 1 stood at 11.5%.

Moving on to the P&L on Slide 11, net interest income increased 11% year-on-year, in line with loan growth, and 6.8% sequentially. Our focus on high-margin loans, along with the higher interest rate environment, were the main drivers behind this good performance. Interest income from the loan portfolio was up 13% year-on-year, further supported by the 50% increase in interest income from our investment in securities. Net interest margin decrease to 5.66%, 13 basis points lower than a year ago, while increasing 39 basis points sequentially. Strong year-on-year growth in low-yielding assets, such as funds available and repos, more than offset increasing interest income from higher interest rates and growth of high-margin loans. Year-to-date, our net interest margin increased 4 basis points, reaching 5.48%.

Moving down the P&L on Slide 12, our focus on increasing share of wallet continued to generate good fee income growth, up almost 9% year-on-year in the quarter. Sequentially, fees were relatively flat following very strong growth in the prior quarter. This was the strongest fee growth for a 9-month period over the past three years. Credit card fees were up 20% as we continued to experience a strong credit usage. Cash management fees were up 17%, reflecting robust transactional activity. This was further supported by good performance in insurance fees and investment funds. By contrast, lower investment banking fees reflect overall slow industry deal flow in the quarter.

Turning to Slide 13, gross operating income increased 13% year-on-year, driven by strong performance across the board. Core earnings accounted for 96% of gross operating income, while trading gains remained within historical average levels. Year-to-date, we posted strong performance, with gross operating income up 9% despite the 8% decline in market-related income reflecting strength of our core earnings.

As you can see on Slide 14, we continued to deliver healthy asset quality metrics. Loan growth reserves were down almost 3% year-on-year, but rose 17% sequentially. As anticipated in our previous earnings call, we took additional provisions in the third quarter for a specific project finance corporate loan. We expect to make some additional provisions for these loans in the fourth quarter.

Loan loss provisions for consumer loans also tend to be higher in the second half of the year due to back-to-school spending in August and September. Additionally, a lower percentage of current TC and SMEs also contributed to the higher provisions. These broad cost of risk go up 43 basis points sequentially to 3.37% in the quarter while, year-on-year, we saw a 35 basis points improvement. For the nine months, cost of risk stood at 3.10%. although below our full-year guidance of 3.2% to 3.4%, we are maintaining our cost of risk guidance given the additional provisions expected in corporate loans and seasonal effects. The NPL ratio in turn declined 11 basis points to 2.35% on a sequential basis, driven by improvements across consumer, mortgages, and commercial loans. Year-on-year, however, mortgage loans continue to reflect the deterioration of our variable rate mortgage product while commercial loan NPLs were impacted by the project finance corporate loans we are now provisioning.

Now please turn to Slide 15. As w continue to moving ahead in deploying our strategy to drive big [indiscernible] and improve the customer journey, expenses increased 14% year-on-year and almost 2% sequentially. For the nine months, costs rose 13% year-on-year within our 12% to 14% full-year guidance. In the near-term, this initiative continued to impact our efficiency ratio, which rose 60 basis points year-on-year to 42.8%, reflecting the execution of our operational transformation strategy.

Moving further down to P&L profitability on Slide 16, we reported robust net income growth in the quarter, up 25% year-on-year. Sequentially, net income declined 1.5% as higher provisions and lower market-related income more than offset strong growth in net interest income. Similarly, return on equity expanded 222 basis points to 16.7%. For the nine months, return on equity increased 78 basis points to 16.4%.

Moving on to guidance on Slide 17, given our strong overall performance to date, along with the benign environment, we are increasing our full-year target for net income. We now expect net income growth in the range of 9% to 11%, up from our prior growth target of 6% to 8%. All other guidance targets remain unchanged.

We are now ready to take questions. Operator, please go ahead.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from Ernesto Gabilondo with Bank of America Merrill Lynch. Please state your question.

Ernesto Gabilondo

Three brief questions from my side. The first question is on your expectations for interest rates. Just want to know at what level you will start to be concerned on the credit demand or in a potential deterioration in asset quality. My second question is related to government loans. We continue to see strong peso growth in this segment, and you are likely gaining market share from other banks. So I just want to know how comfortable are you in this segment, considering what is happening with the new administration and that other banks seems to be getting out of this segment. And finally, in terms of your guidance, we noticed practically no changes in the presentation except for the net income. So should we expect this upward provision is coming from revenues, I don't know, from NII? How are you expecting the NIM expansion this year?

Hector Grisi

This is Hector Grisi. First of all, on interest rates, my belief is that we will want to see a couple of increases, maybe 25 basis points up to 50 basis points towards the end of the year, and maybe another increase of 25 basis points if inflation does not recede. I mean, we believe that that would be the scenario. And with that scenario, we will see great demand coming down and asset quality, unless consumer confidence comes down, given all what's going on. So is pretty soon to tell, I believe, and I wish I could tell you something more firm. But at this point, this is what we have been seeing. So far, I mean, demand has been strong, and people basically have enough trust to basically take some pickups on loans. You can see what's happening in the mortgages portfolio, in which we are having a really good dynamic. And we've been very disciplined in that product, and hopefully you'll see that it continues growing. So let's see what happens. I believe it's too soon to tell. In terms of your section question about government loans and the strong pace we have had, first of all, let me tell you that we continue to do that business on a very opportunistic base. What we do there is mainly we enter in situations in which we have opportunities to get payroll for transactional businesses that helps us in the operation of the bank, and helps us basically in different businesses. Other than that, we basically participate very little on that. On your question in terms of that if we see any problems, I don't think so, due to the fact that I've been in meetings with the officials with the new government, and they seem quite disciplined in the way they're going to manage themselves. So up to this point, I'm not concerned in any way, but we continue to watch things, and we'll keep you posted on what we see. I mean, what we have also is also we're very flexible in moving in that sector, and we're so light that I don't think we would affect the portfolio in any way. In terms of guidance, Didier, why don't you?

Didier Mena

Yes. Regarding NIM expansion, Ernesto, what we have conveyed previously that we expect this year 10 to 15 basis points expansion on NIM, and we confirmed that. Year-to-date, NIM has expanded 4 basis points, and we feel confident that we will achieve this NIM expansion for 2018. So that's basically -- or beyond that.

Operator

Our next question comes from Gabriel Nobrega with Citi. Please go ahead.

Gabriel Nobrega

I actually have a follow-up on your NIMs. Could you just remind us, how is the average duration of your assets and liabilities? And here I'm just trying to understand maybe trends for the next year, maybe if we see rates going up or down. I just want to understand what could happen to maybe your margins there. And I have another question. Seeing that we saw the cancellation of the Mexican airport, I just wanted to understand what could be the impact to your business. Do you expect maybe that you'll have to make increase in provisions? I understand that you do not have direct funding towards the airport, but I also understand that you're funding some of the construction companies. So I'm just trying to understand, amid all of these moving parts, what could be the impact to the bank, going forward. Thank you.

Didier Mena

On your first question, and I think it's important to understand the dynamics, of you know what happens when interest rates go up, and then what happens when interest rates come down. On the way up, what we've seen since the last quarter of 2015, that banks have benefited mostly, I would say, on the spreads that we make on deposits. Those banks that have more retail exposure, which pay lower interest to customers, have benefited most. On the asset side, the spreads have not expanded that much. So in other words, banks have, I would say, compete aggressively on pricing in certain products, but spreads have remained either unchanged or slightly up. So overall, NIMs have benefited from interest rate increases, but we've seen this dynamic.

On the way down, we think that we're not going to see a similar behavior of the banking industry. I would say that most likely, given that obviously the spreads on the deposits will reduced, I think that banks will have some pressure to increase the spreads on the asset side. So that will mitigate the impact of this reduction of interest rates. We remain asset sensitive in the sense that, when interest rates go up, our NIM expands. And given the structure of our balance sheet, we do not benefit as much as other banks. But still, we have a positive impact. Then on the airport, I don't know if, Hector, you would like to comment on that.

Hector Grisi

Sure, Didier. I mean, our exposure to the airport is really not material. We have no direct exposure to the airport itself. However, we don't have -- it's more indirect exposure of really -- so $62 million into 14 contractors for letters of credit, basically a satellite or performance of warranty the use of advanced payments to the construction. So in that sense, if the airport gets canceled, I mean, nothing happens because it's performance. And the construction company are performing very well in that sense, and there is a cancellation. So a normal [indiscernible] be less probably in December 2018 and the rest in March and in April of 2019. And none of them has been exercised, and most likely they will not renew it, given the consensus. So I don't think we're going to have a problem in any way.

Operator

Our next question comes from Jason Mollin with Scotiabank.

Jason Mollin

My question is a follow-up on the cancellation of the airport. I mean, yes, we understand that the exposure is not material or small, and only in terms of letters of credit to these construction companies. But can you comment on how this impacts the credibility of the country on economic growth, the outlook for growth in the banking sector, and specifically how Santander Mexico would look to balance what you just said is happening in terms of higher -- you may have higher rates, which can help margins but perhaps that could slow growth, perhaps that could cause more delinquency. How should we think about the balancing act, going forward? Or is it really the game remains the same in the way you've been talking about the outlook for Mexico hasn't changed?

Hector Grisi

So Jason, I think it's, in my opinion, too soon to tell. You cannot over-react to a situation like this in just 72 hours. We need to wait to see how the market develop, how the situation goes. As I was explaining before, let's see how consumer confidence reacts, and from there we will start taking decisions. I think we have a very good and flexible way of managing things over here, so if we really believe that the situation could be complicated, we can react fairly quickly. My sense is that, I mean, I believe that the impact in the airport is much more not the cancellation of the project but the way it was managed, and I believe that the new government, it will be learning how to manage the situation so hopefully we'll have a better outlook in the next few months. I mean, the size of the airport versus the size of the Mexican economy is not that meaningful. I mean, you're talking an economy that is $1.1 trillion of GDP versus a project that is $5 billion. So let's put things into perspective, and let's act calm and cool during this period, and to really manage things accordingly. I don't think that we are in the position to take measures at this point.

Rodrigo Brand

So just to add to what Hector said, just remember that our view, as Hector mentioned, and speaking of the conference, we already have a more modest view of the Mexican economy, not because of the airport but because we expect a deceleration in economic growth at the beginning of the year because of the change of administration. And we also included an additional increasing interest rate for this year.

So basically what we've seen is that, after this short-term announcement, most of the economic views have moved towards what we already set in our numbers, figures. And as Hector said, it's difficult to measure what happened just because of one decision. I think what is important for us is to wait and see what is included in the economic program for next year to see how the fiscal numbers look, to see how much sense they make, and they up in terms of revenues and expenditures. So just to add to what Hector said, this is too soon to expect. In the short-term, we already have this impact, deceleration of the Mexican economy in the short-term.

Didier Mena

And also just adding, complement what Hector and Rodrigo mentioned, I think that we've shared with most of you that, after the U.S. presidential elections, or even eight weeks before the U.S. presidential elections took place, the management committee of the bank started reviewing every exposure and how the bank was positioned relative to a potential challenging environment. Ever since we have remained very close to our clients, as a consequence of that, of the U.S. presidential elections, we visited 100% of our clients and understood exactly what were their exposures to critical variables, such as interest rates and FX. And we have continued to do so. So I think that the bank is in a very good standing regarding how to help our clients navigate to potential challenging environments, okay?

Jason Mollin

Maybe just a second question on the operations specifically. We saw an acceleration in mortgage growth, which was pretty impressive this quarter, as you talked about, the strongest quarter-on-quarter growth in the past three years. And this is on the back of your Hipoteca Plus product. I mean, we've been talking about competition in the sector, and Didier mentioned asset spreads have not gone up with higher rates. So I think we've seen lending spreads for mortgages and credit cards come down. So this seems like a pretty aggressive product, at least in terms of the headline lending rate, but of course your clients need to bring their business to the bank. If you can just talk about how you see that business, 20% of the book now, can that start to grow faster, or continue to grow faster than the other consumer segments? And where would you feel comfortable with that as a percentage of your loan book?

Hector Grisi

Look, I mean, I think it's a pretty good question. The thing is, I mean, the product in itself is actually quite good in the sense of basically turns these clients in our -- turns Santander for them in their number one bank, and they're bringing over the transactionality, payroll, payments and everything, and that basically is helping us out in order to be able to get the good rates.

We came out with a real aggressive rate of 8.59%, but the reality, the average of the portfolio, is over 10%, because, I mean, in order to achieve the 8.59%, you need to basically get to -- or to be able to comply with a lot of requisites that sometimes is complicated, to take both in -- to refer, I mean, people basically get the best rate possible from the market with us because we're able to deliver that, given on what we get. And at the end, I mean, the product itself is very, very profitable. And also, on the other side, we're hedging the portfolio, as we have seen that the rates have gone up. On the other side, Didier, I don't know if you'd like to comment.

Didier Mena

Yes. I think that the mortgage portfolio represents now 20.3% of our loan book. I think that around those numbers, Jason, we would feel comfortable. I think that the strategy that we are following, which to increasing exposure to individual clients in Mexico, part of it has -- it's like faster loan growth in individual loans, and the most relevant is mortgages. However, as we're experiencing, payroll loans are outpacing mortgage loan growth. And I think that we should -- we are expecting that to continue. So even though mortgages should continue accelerating, I think that the fact that other individual loan products, we're expecting them to grow faster. It will make that, the mortgage loan portfolio will be around 20 percentage, 20%, 21% contribution to our overall loan portfolio.

Operator

Our next question comes from Philip Finch with UBS.

Philip Finch

I also have two questions. The first one is regarding loan growth, which was really good at 10.9% in the third quarter. I was slightly surprised that you've maintained your loan growth guidance of 7% to 9% for the full year, so clearly this implies you're anticipating a slowdown in loan growth in the fourth quarter. So can you just elaborate any reason for this, or any particular segment that you might anticipate this? And the second question is on cost. You flagged consistently that that's the 3-year transformation program is going to keep costs elevated at around 14%. And this will probably continue into next year. The question is, come 2020 when this three-year program is finished, what cost growth can we assume? And I guess related to this, do you plan to amortize any costs related to the program? And if so, how much, and over how many years?

Didier Mena

Regarding our guidance from loan growth, it's not that we're expecting a slowdown in the fourth quarter of the year. I think that what we have conveyed in the past is that we feel very comfortable about the dynamics in certain loan categories, which is individual loans are in that case, SMEs and mid-market companies. The two segments that have volatility in their loan growth is both corporate and government loans. I think that we have continuously expressed the fact that we remain focused on profitability. In the last few quarters, we have been able to originate loans with good pricing. So in the case that, during the last quarter, competitors are more aggressive, or we don't have the opportunity to make good transactions out of these segments, then our loan volume will suffer that.

Just to highlight how volatile these two segments -- they have been over the last five quarters, if you turn to Page 8 of our presentation, you will see that corporate loans have flip-traded from the third quarter of last year, going from almost 86 billion, then down in the following quarter to almost 84 billion, then up to 91 billion, then down to 86 billion, then up to 97 billion. And that -- we see a very similar dynamic on government loans. So I think that what we're trying to convey is that those segments that are critical to us, very strategic to us, we are quite confident about the loan growth that we're experiencing. And in these two segments, we could see volatility. If these two segments continue with the same performance that we've seen in this quarter, then we'll surpass our guidance, okay? But if we experience volatility in these two segments, then we'll probably be in the guidance range that we provided.

Philip Finch

And the second question?

Didier Mena

On costs, we have conveyed a 12% to 14% growth for three years. That's '17, '18 and '19. Part of the expenses that we're seeing is it's actually amortized. It's in the depreciation and amortization line. That's why you see some return growth in that line item, okay? So what we should be expecting in 2020 is a contraction relative to the growth levels that we've seen. I wouldn't say that we will reduce these growth rate all the way down to inflation. I think it's going to be gradually coming down. One of the reasons that this cannot happen immediately is the depreciation and amortization line item, that some expenses that we are incurring are amortized through 3, 4 years, okay? So that's some component that will affect the expense growth over the next 2 to 3 years. So, overall, I would say that probably we should be expecting high single digits on 2020, and converging to inflation rate over the following two, three years.

Operator

Our next question comes from Arturo Langa with Itau BBA.

Arturo Langa

Also regarding the guidance provided, for the bottom line, you're expecting something close to 11% growth this year, which is revised. But so far, the 9 months bottom line has been growing higher than that, close to around 14% year-over-year. So on the bottom line, it would look that even this new revised guidance is a bit conservative, and I was wondering just if there's anything maybe related to inflation or taxes that you might be seeing in the fourth quarter that would explain this. And similar to that, I was wondering if on the macroeconomic side, there's anything in 2019 which we could already have a read-through, meaning, for example, I think the consensus is for inflation to start trending down mainly on gasoline prices, and if this would have any impact on what you expect for tax rates. And even on your revised GDP growth, what would this imply for loan growth next year if there would be a lower figure than the 9% to 11% that we're seeing for -- or expecting for this year. Those would be my two questions. Thank you.

Didier Mena

It's on the guidance that we provided. Yes, you are completely right in the sense that, year-to-date, net income has been growing close to 14%, and we're guiding 9% to 11%. I think that we're cautious in the potential impact on market-related income basically. We feel very confident on the other line items, and we're just cautious. The volatility that we are seeing over the last few days, we were just being cautious in that regard. That's basically the main driver behind it, okay?

Then, on inflation, I think that we're still seeing inflation around 5%, which is above the target that the Central Bank is aiming at. The depreciation of the Mexican peso over the last few days, that could put some additional pressure. So we're just waiting for how these dynamics play out in terms of the impact in our, say, tax rate, but we have conveyed in the past that still the core structure of our balance sheet, there's almost a one-to-one direct relationship between inflation and our tax rate. So when inflation goes up, our effective tax rate comes down almost one-to-one, okay? So what we should be expecting if inflation accelerates somehow, that should reduce our effective tax rate, okay?

Operator

Our next question comes from Carlos Macedo with Goldman Sachs.

Carlos Macedo

Couple of questions, though a lot of questions have been asked already. First, I'd like to go back to the margins. This quarter, a lot of growth, as you said in the government and corporate book. The loan-to-deposit ratio weakened largely on the back of lower demand deposits. And yet the margins were very solid. Could you talk about that in the very near-term? I know you said you're going to meet your margins guidance going into next quarter. Is this something -- NII, I'm sure that you guys are right there, but in terms of margins, is there something you could see some stuff -- some pain there given just the sudden change in mix of the book and how that could affect just the calculation of margins? Second, digitalization is -- certainly a lot of progress in the last year, as you show in one of the slides in your presentation. Just wondering where do you expect to get by the end of the transformation, the investment project that you're running? How do you expect the penetration to be? And how do you think that will affect your ability to generate more revenues? As you said, clients that are digitalized are 4 times more profitable than the ones that aren't.

Didier Mena

I think that there are some dynamics going on that impact our net interest income. You point out to slight deceleration in the bank deposits. That's more related to the corporate deposits. One of the anchor things that we're trying to achieve in this operational transformation is increasing our exposure to individual loans, okay -- sorry, to individuals. And we're seeing that in our deposits. If you look at how individuals contribute both to demand deposit and term deposits, we have seen that contribution going up significantly. In the first quarter of 2016, demand deposits coming from individuals represented 25.2%. Now it's 27.8%.

Now, on term deposits, individuals contributed in the first quarter of 2016 21.9%. now it's 31.8%. So even though you look at the overall demand deposits, showing that slide, sequential contraction, that's because of some corporates, at the end of the quarter, withdraw some deposits. So we don't see that impact in our net interest income. But most importantly, we are gaining exposure to individual deposits. Individual deposit growth is outpacing corporate deposit growth. That's one of the key things that we are trying to achieve. We obviously love this would happen faster, at a faster pace. But I think that the progress that we're making is quite good, but still we need to continue showing very consistent performance in these metrics so that our net interest margin will benefit from that. But most importantly, we will reduce the profitability gap that we have relative to our peers.

And let me share with you a very simple exercise that we've done, and you've seen updated information. If with the current mix that we have, we have the same, say, cost of deposits than Bancomer our ROE would be almost exactly the same as Bancomer. Bancomer reported 25.5%. You have seen the same cost of deposits that they have, and obviously this is very strong assumption, because they have that deposit cost because of the mix that they have, because of the exposure that they have for decades in individuals in Mexico. But my point is that the progress that we're making is in the right direction, and we'll make our net interest income more robust not only for this quarter, but on a very consistent basis.

Then, on digitalization, Hector, I don't know if you would like to comment on that.

Hector Grisi

Sure. Carlos, let me tell you, the digitalization, we have, as you know, we have been very aggressive towards basically [awarding] all our systems and everything in order to be able to use these as an extra channel for our clients basically to get their services and everything. What we believe is that, I mean, at the end, the market doesn't go fully digital. We believe in what we call an omni-channel strategy in which our clients want to become digital. They start to transact more with us. They start using us more for payments, for transferences, transfers, et cetera, but they also use the branches and they use our ATMs, and they use our contact center, okay? So what we believe is moving our clients towards this omni-channel strategy.

At the end, I believe we're going to be able to reach maybe close to 3 million digital clients in the bank. Our metric in order to -- is very [indiscernible] -- it's at least they have to do a transaction per month. Some other banks basically use different metrics in order to measure these. Our measure is quite [indiscernible], as I was telling you. But this has show us that, every time we turn a client into digital, they're starting using us more, and actually transactionality is growing.

So at the end, I believe that in 12 to 24 months, we're going to see the cost basis is going to get better to do that. But we don't have the exact numbers to tell you exactly how it's going to change, because at the beginning, we thought that these clients were going fully digital, and then we found out that, once they turn digital, is they're using us more. They started using the branches, as well. So this is basically a new way in which basically the behavior of our clients, and we will be basically managing that as we basically move forward in that. We're going to be coming out with our new digital platform toward the first half of the year, which is going to be, in my opinion, the state of the art. And we'll see how that basically works.

The other thing that we're doing is that, I mean, we're changing the processes within the bank to make them a lot easier, more quicker, and more reliable. And that basically is going to help us in the cost overall. But, as Didier was telling you, it's going to take us a little bit of time in order to be able to reach what we believe should be the best cost base, given the digital strategy that we're moving towards. I don't know if I was clear or not, or I confused you. I'll give a little bit more of explanation.

Didier Mena

Just probably adding to what Hector mentioned, we're seeing significant growth in detail transactions, but most importantly in [indiscernible] transactions. And I think that's going to be very relevant, going forward. Just a small fraction of our sales are digital. Having the usage of our mobile channel increasing the way it is increasing, I think that will help us drive sales of products through this channel more effectively.

Operator

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

Carlos Gomez

I have two questions. First, if you can confirm the low tax rate that we have seen this year, it's all related to inflation. And where you would expect your tax rate to be in the coming year and the coming years? The second is about the credit card business. I would notice that you have a pretty impressive 20% growth in fee income, although you only have a 3% growth in volumes. Is this sustainable, or is this something that's specific and we should expect lower growth, going forward?

Didier Mena

Hi, Carlos. Regarding the tax rate, what we are expecting this year is a tax rate close to 24% to 25%, and that is mainly as a consequence of the level of inflation that we're expecting. I would say that not 100% of the difference between the statutory tax rate and the effective tax rate, it has to stay with inflation. There are some tax strategies that we use that is not the most relevant part, but it provides some 50 to 100 basis points of benefit. Regarding the credit card business, we are seeing a very strong usage of our credit cards. It's, I would say, strategies that we're following are paying off. We are not seeing a similar expansion in our loan portfolio as we are experiencing. Clients are paying their balance in full. That percentage of clients paying their balance in full is increasing actually. So that's why you get to see a very modest growth in the overall credit card portfolio, but fees growing quite strongly as the customers are using more our credit cards.

Operator

Our next question comes from Gilberto Garcia with Barclays.

Gilberto Garcia

My question is a follow-up on the profits. My understanding of -- that you are focusing on clients and that has a lower cost, but are you seeing a more competitive environment for corporate deposits?

Rodrigo Lara

I think that on the corporate side is more competitive. I think it continues to be competitive, but I don't think that there's much an increased competition on that side. We are seeing some banking on the individual side, that they are starting to become more aggressive that what they used to be in the past, specifically HSBC. But other than that, I think that for some specific products, I would say that the competition remains strong. But it's not that it is that we're seeing a more stringent competition.

Operator

[Operator Instructions] The next question comes from Nicolas Riva with Bank of America.

Nicolas Riva

I have two questions. The first one, if you can discuss a bit the risks that you see in the new administration, for example if you see a risk of them introducing caps on interest rates on loans, just like we saw in other kind of left-leaning governments in Latin America, such as Argentina, in the past, or also using the government banks in a more active way, competing with the private central banks. And then, the second question, in terms of the potential issuance for bonds for next year, you recently issued the 2028s to [Indiscernible] as a tender offer on the 2024s, and it was basically extending the capital treatment on those. Next year you don't have any relevant maturities in U.S. dollars. And given where your capital is, is it fair to assume for next year no issuance at the [subordinate] level, and then potentially you could just issue at the senior level in order to fund the growth of your U.S. dollar portfolio?

Rodrigo Lara

I think -- your first question, I think from the developing markets perspective, what I've said, and what we have talked to them in several occasions, is that we do expect a more active role of the developing market in the system as a whole. But in general, what we think is that they would complement what we have already seen in the past few years in terms of guarantees. We don't think at this time that they will move towards like [first-floor] banks and be a direct competition to us. So I think this is something that we'll have to wait until the next budget is presented. But at this time, as I said, we don't see a more robust role, but not a very profound change in what they are doing right now. In terms of taxes, they haven't said anything in that sense. First of all, they have said that they don't [pretend] to introduce any new taxes. And also, they have said that they don't pretend to do any significant changes to what the banking system works right now. I think what is most important is to give them very short focus to what is discussed in Congress, but we don't think at this time, from the executive branch, a significant change in that sense.

Didier Mena

In regards to your second question on potential bond issuances, you are right in the sense that, with the exchange with the transaction that we did a little bit over a month ago, I think we've met the needs that we have. Regarding subordinated notes, I think that we shouldn't be expecting any other transaction coming soon. Regarding U.S. dollar-denominated issuances, over the last couple of years, our loans denominated in U.S. dollars have come down from roughly 15% of our loan portfolio a couple of years ago to roughly 10% in this quarter. So I think that with the U.S. dollar denominated funding that we have, we feel comfortable in that regard.

Operator

Thank you. Ladies and gentlemen, there are no further questions at this time. I will now turn the call back to Mr. Chavez for closing remarks. Thank you.

Hector Chavez

Thank you. Thank you very much for joining Santander Mexico on this call. We look forward to maintaining 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. And have a great day.

Operator

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