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Banco Santander (NYSE:SAN)
Q3 2019 Earnings Call
Nov 8, 2019, 3:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day everyone and welcome to Banco Santander Mexico's Third Quarter 2019 Earnings Conference Call. Today's call is being recorded and after the speakers' remarks, there will be a question-and-answer session.

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

Hector Chavez -- Managing Director, Investor Relations

Thank you. Good morning and welcome to our third quarter 2019 earnings conference call. We appreciate everyone's participation today. By now everyone should have access to our earnings press release and the presentation for today's call, both of which were distributed yesterday after the close of the market. Presenting on our call today will be Hector Grisi, Executive President and CEO; Didier Mena, our CFO; and Rodrigo Brand Executive Director of Public Affairs.

Following the review of this quarter results, they will be able 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.

Hector Grisi Checa -- Chief Executive Officer, Director, Executive President

Thank you, Hector. Good morning, everyone, and good afternoon to those of you in Europe. Thank you for joining our earnings call here in Mexico. We are nearing the end of the third and final year of our investment program focused on transforming our Bank from an operating and cultural standpoint. As we continue improving our performance in the third quarter, we demonstrated again that we are more client-focused organization, one that is making Santander, the primary bank of a growing number of loyal and digital customers.

At the same time we have remain focused on profitable lending. Importantly, we have not compromised on asset quality which improved year-on-year. Under our strategy, we continue attracting lower cost individual deposits while further enhancing our ability to to cross-sell products. Driving the loan book on the third quarter were mortgages, credit cards and payroll loans, as well as middle-market lending.

Net interest income along the higher -- with a higher fees generated by strong credit card usage once again drove our earnings and despite an uptick in our efficiency ratio and substantially higher effective tax rate, we delivered solid net income growth with our ROAE up slightly on a nine-month basis. Our parent company, Grupo Santander, has increased its ownership in our Bank to nearly 92%, which leaves 8% of ownership with minority shareholders. Our result in free float market cap is approximately $800 million with an average trading volume of $6 million per day[Phonetic]

Importantly, our Company remains part of Mexico IPC Index. With regard to our Investor Relations practice, we remain committed to direct and proactive communication with the investment community and to maintaining the same level of disclosure, transparency and access to management.

Going now to page 4, looking at Mexico's banking system, system loans were up nearly 8% year-on-year by the end of August. Although a slight uptick from the 7.5% growth seen in the prior quarter, this remain among the lowest level of loan growth during the past five years. System commercial loans increased 11% year-on-year as of August with sequential growth moderating to 1%. Year-on-year growth in consumer loans remained stable at 6.4% for the third consecutive quarter among the lowest growth level in the past 10 quarters.

On the other hand, we saw a slight pick up in the system deposit growth, up 7.3% year-on-year from 6.1% the prior year quarter. Although the local and global macroeconomic environments remain complex and challenging, we are somewhat encouraged by recent developments. Outside Mexico, Central Bank policies were more accommodative.

Following the two recent interest rate cuts we expect [Indecipherable] to lower rates among another 25 basis points before the end of the year, given current inflation expectations. A clear picture of government policy will also be supportive. Although we expect the economy to finish the year essentially flat, we forecast a GDP growth of just under 1% in 2020 and inflation to rise 10 basis points to 3.6%.

Due to lingering uncertainty, private sector investments remain depressed in Mexico while the government has been spending less. However, employment has been growing within all the sectors of the economy with exception of construction with contracted 10% year-on-year, rising employment levels coupled with falling inflation, which [Indecipherable] means the consumer has been holding up well.

Now, let's turn to slide 5 for an overview of Santander loan growth performance. Our loan book was relatively flat on at nearly MXN700 billion and up 2.5% year-on-year. Total loan growth continue to decelerate to nearly 3% year-on-year from 7% in the second quarter and 10% in the first quarter of this year. This slowdown was mainly related to softer growth in our commercial loans due to weaker demand and a strong competitive environment. By contrast, individual loan demand remained quite healthy. In this environment, high margin segments almost doubled total loan growth, accounting for nearly 55% of our loans and almost 70% of net interest income from loans.

For the full year, we are lowering our loan growth guidance to between 2% and 4% from our prior target of 4% to 6%, reflecting weak demand for corporate and government loans in according to environment and despite expectations that retail loans will continue to perform well.

Please turn to slide 6 for a closer look at our retail loan performance. Starting with consumer loans, our strategy remains prioritizing payroll loans over unsecured personal loans and leveraging our strong position in the middle market and SME segments. Payroll loans expanded 12% year-on-year compared with nearly 10% for the system, allowing us to gain 50 basis points in market share over the last 12 months. Since we began focusing on driving payroll loans in the first quarter of '17, this segment's contribution to consumer loan has increased from 53% to 62% and we have gained 180 basis points in market share.

Personal loans in turn declined close to 9% year-on-year. Credit card loan growth accelerated to 7% year-on-year from 5% in the second quarter of '19. Credit card usage remained strong at 11%, although a large percentage of our customers continued to pay balances in full. The solid performance in retail lending was mainly driven by the strategy of cross-selling products into our payroll and Hipoteca Plus customers while also supporting healthy asset quality and good levels of profitability.

Finally, mortgage loan growth was up over 7% year-on-year even after the sale of the MXN1 billion nonperforming loan portfolio in January. Organic mortgage origination remained strong at 12% year-on-year compared with 11% growth for the industry. This represented the fifth consecutive quarter of exceeding market growth in mortgage origination.

Our relatively strong performance in this category was mainly driven by our Hipoteca Plus product which accounted for 73% of total mortgage originations in this quarter. And in addition to cross-selling credit cards as I mentioned earlier, through Hipoteca Plus we were also attracting quality clients whom we are cross-selling other financial products and services and thus expanding our share wallet.

Please turn to slide number 7. As I noted before, our investments in becoming a more client-centric bank continue building our base of loyal and digital customers, which grew 27% and 51% respectively. The digitalization of our products and processes, the expansion and renewal of our ATM network and transformation to our new branch operating model all continue contributing to this growth.

Digital transactions, which not only significantly enhance our customers' experience but also drive loyalty, increased 600 basis points to nearly 19% of our total monetary transactions. Meanwhile, mobile transactions accounted for 86% of digital transactions, 19 BP higher than last year. As we added new convenient features to our mobile apps, our base of mobile customers also expanded, growing nearly 70% over the last last 12 months.

We have recently implemented a number of innovative services that are supporting the growth for loyal and digital customers. Last quarter we launched Santander TAP, which allows our customers to -- Eastern money transfer to our customers through WhatsApp or other social media regardless whether they already have an account in Santander or not. Since its launch Santander TAP has more than 150,000 active [Phonetic] customers.

During the year we transformed 880 branches under our new distribution network model which promotes the use of digital channels and self-service. In total, we now have 494 branches that have been converted. Also under this new model, branch managers are now responsible for the individual P&L and cost of risk.

We have also partnered with [Indecipherable] to implement a new service model that offers our customers special service points in several shopping malls owned by this company. In addition to the presence of a customer representative, we are installing full function ATMs in these locations. During this quarter, we opened the first Isla Financiera with plans to open a total of 1,539[Phonetic] cities in the coming months.

Also during the third quarter we announced a new strategic alliance with CONTPAQi, a leading supplier of accounting software for SMEs. With roughly 1 million SME customers our new partner has 35% market share. Through this alliance we aim to attract at least 100,000 new SMEs as customers which implies a growth of 50% in our current customer raised within the next four years.

With regards to our financial inclusion program Tuiio, at the end of the third quarter we had 70 branches across 15 states serving more than 70,000 customers and reaching a loan portfolio of MXN198 million. Since Tuiio started operating, more than half of these customers are using debit cards for the first time in their lives.

Now turning to slide 8, commercial loans remained flat year-on-year. The solid performance seen in the middle market loans was offset by a strong contraction in government lending. Corporate loans fell over 3% year-on-year given difficult comps and some prepayments while SMEs posted a nice 0.7% growth year-on-year. On a sequential basis, the contraction in the commercial book was mainly driven by lower balances in corporate lending and the contraction in SMEs and middle market loans. It is worth noting that this is the first time during the past four years that our middle market portfolio has contracted.

Moving on deposits on slide 9, we maintained our focus on increasing deposits from individuals relative to corporate deposits. Individual deposits were up 9% year-on-year as we continue making headway in attracting and retaining retail clients. This was the 11th consecutive quarter with individual deposits expanding faster than corporate deposit growth. But still high interest rates continue to support individual term deposits, up just 15% year-on-year and growing 10 percent points faster than individual demand deposits.

Overall, individuals gained 190 basis points share in total demand deposits and 300 basis points in total term deposits. This brought individual deposits nearly 32% of total deposits, up from 29% in the third quarter of '18% and 27% in the fourth quarter of '16 while we started to increase our focus on profitability. In contrast, corporate deposits, which in some cases we forego, contracted 2.9% year-on-year. In sum, total deposits were relatively stable year-on-year or declined 5% sequentially.

For the full year, we are revising down our guidance for total deposit growth to between flat and 2% from our prior target of 4% to 6%. This reflects continued good performance in individual deposits, partially offset by greater focus on profitability with regard to corporate deposits.

Before I turn over the call to Didier who will review our capital position, P&L and full year outlook, I would like to put out the third quarter performance into context. Although Mexico economic environment has remained challenging, we nevertheless continue attracting greater numbers of individual customers. Further, the strategic investments we have been making to drive customers' loyalty and digital transactions are starting to pay off. With the cost of our three-year investment plan soon behind us and a stronger franchise in place, we have set the stage to maintain profitable growth momentum in the coming years which we expect will be more supportive economic conditions in Mexico.

Thank you for your kind patience. With this Didier, please proceed.

Didier Mena Campos -- Chief Financial Officer

Thank you, Hector. Good morning, everybody. Turning to slide 10. We maintain a sound funding position with net loans-to-deposit at 99% and liquidity coverage of 180%, well above the regulatory threshold of 100%. We remain very comfortable with our debt profile with manageable debt maturities. Our capitalization ratio increased 87 basis points year-on-year to 16.9% while core Tier 1 capital was up 81 basis points, reaching 12.3% and Tier 1 stood at 13.6%.

As you can see on slide 11, net interest income increased 5% year-on-year. This good performance was supported by steady growth in high-margin loans despite the softer economic conditions. We maintain our focus on profitability across the balance sheet. Interest income from the loan portfolio was up nearly 8% year-on-year with net interest margin contracting 2 basis points sequentially. For the nine months, net interest margin expanded 21 basis points to 5.69%, benefiting from 65 basis points expansion in benchmark interest rate.

Moving down the P&L to slide 12, we continue generating solid growth in net fees, up just over 7% year-on-year. Credit cards were the main contributor to fee growth, driven by sustained higher usage levels, followed by financial advisory. Insurance also performed well, driven by strong cross-selling to our mortgage and payroll customers along with the performance of our digital car insurance platform Autocompara.

To turning to slide 13, gross operating income was up nearly 7% year-on-year, driven by strong performance in key areas of our business. Core earnings accounted for 95% of gross operating income while trading gains increased above our historical average levels of MXN600 million to MXN800 million a quarter, improved client trading activity to support [Phonetic] market making gains. Year-to-date we posted strong performance with gross operating income of nearly 9% despite the 8% decline in market-related income, once again underscoring the strength of our core earnings.

As you can see on slide 14, we delivered healthy asset quality with improvements across the board. These despite the current economic slowdown. Loan loss reserves were down nearly 7% year-on-year, reflecting a healthy loan book along with easier year-on-year comps. At last year we made additional provisions for our corporate finance loan. Sequentially, loan loss reserves were up 0.5% as provisions for consumer loans tend to be higher in the second half of the year due to back to school spending in August and September.

NPL ratios also remained healthy with the NPL ratio stable year-on-year at 2.33%, overall this is in line with system levels. Improvements in mortgage loans and to a lesser extent in credit card NPLs more than offset a 52 basis points increase in SME's NPLs which reflect weaker economic performance. However, at 2.52%, these NPLs remain at low levels.

This quarter, Nafinsa guarantees for SMEs reached 64% of the SME loan portfolio, up from 52% in the third quarter of last year. Commercial loan NPLs in turn were stable. This broad cost of risk down 15 basis points year-on-year to 2.62% in the quarter. Sequentially, cost of risk also showed a slight improvement, down 8 basis points. So although the economy is not growing, our asset quality remains healthy with cost of risk currently lower than our 2.8% to 3% guidance range.

As Hector noted earlier, overall we are seeing the consumer holding up, employment growing and real wages are rising. However, we are maintaining our guidance range as we expect increased loan loss provisions in the fourth quarter of this year as we undertake an annual recalibration of our mortgage loan loss provision model.

Now please turn to slide 15. As we complete our three-year investment plan to enhance our operating infrastructure and drive digitalization, administrative and promotional expenses increased over 9% year-on-year and 3% sequentially. Specifically, we recorded higher administrative and depreciation costs related to the investment program.

For the nine months, costs were up 9% year-on-year. In the near term, the execution of our operational transformation program continues to impact our efficiency ratio, which rose 93 basis points year-on-year to 45.1%. For the nine months, this ratio rose 10 basis points year-on-year to 44.7%. For the full year, we expect to meet the low end of our cost growth guidance range.

Moving down the P&L to profitability on slide 16, profit before taxes performed well, up 13% year-on-year for both the year and the nine months. Net income increased slightly over 8% year-on-year to MXN5.5 billion while our effective tax rate increased 320 basis points during the period. This resulted in a 9.5% increase in net income during the nine-month period, reaching MXN16.4 billion despite an overall weaker business environment.

For the full year, we're keeping our 5% to 7% net income guidance range, given the increase in provisions we just noted and softer NII growth following recent Central Bank's interest rate cuts. Return on average equity was 16.6%, slightly below the year-ago level and down 66 basis points sequentially, reflecting dividend payments made in the prior quarter. For the first nine months of the year, ROE was up 808 basis points to 16.5%. Although loan growth was mild, it was more concentrated in high-margin loans. This along with robust market related income generated a solid result in the face of the much higher effective tax rate.

Turning to guidance on our last slide, we continued executing well on our strategy, delivering another quarter of solid performance despite a still challenging macro environment. As we have mentioned during our remarks, although we are maintaining our net income expense and cost of risk guidance for the full year, we have revised downwards our targets for loan and deposit growth.

Our new loan growth target reflects weak demand for corporate and government loans in the current environment although we expect continued good performance in retail loans. On the deposit front, while we expect individual deposits to continue performing well, we also plan to maintain a heightened focus on profitability with respect to our corporate deposits.

In summary, we continue executing our strategy with focus and discipline, and we remain firmly on track to bring our three-year investment plan to a successful conclusion. By significantly enhancing the breadth of our products, digital offerings, distribution network and [Indecipherable] customer experience, we are attracting individual deposit at a solid pace and further strengthening customer loyalty. In addition to facilitating and driving cross-selling of products, we have built a much stronger franchise in what continues to be a challenging economic and market conditions.

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

Questions and Answers:

Operator

Thank you. [Operator Instructions] Our first question comes from the line of Jason Mollin with Scotiabank. Please proceed with your question.

Jason Mollin -- Scotiabank -- Analyst

Yes, hi. Thank you, Didier, Hector and Hector. My question, my first question is on the sensitivity of net interest income to Mexico's policy rate, if you can give us an update, you talked about that at the end of last quarter how the Bank is positioning itself, you talked about I believe one more cut this year, if you can talk about expectations for 2020 that would be helpful. Thanks.

Hector Grisi Checa -- Chief Executive Officer, Director, Executive President

Hi Jason, good to talk to you. We think that there is a -- there is -- it's highly likely that there is going to be an additional cut by the Central Bank so that we will probably have the policy rate ending up at 7.5%. There is still some debate whether the Central Bank would cut further this year. We think that it's only one additional cut so that we will bring throughout the year 50 basis points reduction, sorry, 75 basis points reduction throughout the year.

Regarding sensitivity, as we have mentioned in prior calls, these changes through time, contraction of 100 basis points in interest rates in a parallel shift implied close to MXN1 billion impact in net interest income. The way that we are positioning, we have continuously by fixed income securities in our asset and liability is strategy and that would provide certain cushion.

Obviously, banks will suffer from an increase in interest rates in the overall environment. We think that, you know, depending on how much rates are cut next year and the timing for that, we might see an impact of 10 to 15 basis points contraction in NIM for next year, but obviously that depends very much on timing of the cuts and the magnitude of those cuts. Okay?

Jason Mollin -- Scotiabank -- Analyst

That's helpful. As a follow-up, maybe what is the expectation for 2020, what's the base case scenario for rates next year?

Hector Grisi Checa -- Chief Executive Officer, Director, Executive President

Right now we have 50 basis points cut doing -- next year. However, it's very dependent to [Indecipherable] whether that in the coming months. As the Didier said, we are expecting one cut for the rest of the year and 50 basis points for the entire 2020.

Jason Mollin -- Scotiabank -- Analyst

Very helpful, thank you.

Operator

Thank you. Our next question comes from the line of Ernesto Gabilondo with Bank of America. Please proceed with your question.

Ernesto Gabilondo -- Bank of America Merrill Lynch -- Analyst

Hi, good morning, Hector and Didier, and thanks for the opportunity. My question is on your expenses line. We saw opex growth below your guidance for the year. I think this quarter was mainly explained by the global campaign to reduce costs, especially in advisory and personnel costs. So, do you still think there is chance to expect expenses growth slightly below your guidance this year and how much can opex drop next year as you will be ending the investment plan this year. Thank you.

Didier Mena Campos -- Chief Financial Officer

I think that we've been quite disciplined in executing our investment plan. You know, we think that it's likely given how we have controlled expenses during this year that we might end up on the low end of the range. We're quite a confident on that. And for next year, you know, what we have conveyed in the past is that we shouldn't be expecting a significant drop in the expense growth given the fact that there is certain expenses that are amortized.

If you look at the depreciation and amortization line, it has been growing close to 30%. So that -- even though that represents less than 10% of our overall expense base, that will put some pressure in terms of how fast we can reduce our expense rate. We think that probably, you know, something around 200 and 250 basis points above inflation, that will be be something that we should be aiming at.

Ernesto Gabilondo -- Bank of America Merrill Lynch -- Analyst

Perfect. Thank you. Just a quick question in provisions. Are you still expecting to create non-recurring provisions of MXN600 million related to the reincarnation of the internal mortgage model during the last quarter. I believe this kind of provision is considered non-recurring from what we have seen in Santander Chile. So, any comments here will be much appreciated.

Hector Grisi Checa -- Chief Executive Officer, Director, Executive President

Yeah, it's a reincarnation of our model. And, yes, you're pretty much right in the magnitude. We are expecting close to MXN600 million impact for that. And whether it's treated recurrent or non-recurrent, you know, I think that's we will have to discuss it with the banking commission, whether this might [Indecipherable] an extraordinary treatment for that. You know, the way we are seeing it is it's part of the business to recalibrate models.

Ernesto Gabilondo -- Bank of America Merrill Lynch -- Analyst

Perfect. Thank you very much.

Operator

Thank you. Our next question comes from the line of Jorge Kuri with Morgan Stanley. Please proceed with your question.

Jorge Kuri -- Morgan Stanley -- Analyst

Hi, good morning everyone. And so on trading gains this quarter, which were up quite a bit, is there new tolerance for risk, new instruments that you're using, does then the third quarter represent annual run rate for the Bank or was this extraordinary and you should go back to sort of like the MXN500 million per quarter that you've been reporting over the last couple of years? And then on 2020 loan growth, I think you said in the call that you're expecting 1% GDP growth in 2020. So in that scenario, is something similar to what you did this year to do 4% the correct expectation for 2020? Thank you.

Hector Grisi Checa -- Chief Executive Officer, Director, Executive President

Hi, Jorge. Regarding our trading gains, we haven't changed our strategy, the way we do trading. I think that the overall banking sector benefited this quarter from trading gains, given the dynamics in interest rates during the quarter. And just -- let me put in context, trading gains that happened this quarter, it represents 4.9% of our gross operating income.

It's differently on the high end of what we have historically done. But the average of this since we became a listed company, it's 4.1%. We have continuously guided that we should expect trading gains of MXN600 million to MXN800 million. So what you refer as MXN500 million on average that we have been reported recently, that has been below our guidance range and we have stated that in our calls.

If you look at the at nine months of the year, it's only -- trading gains, it's only 3.1% of gross operating profit. So that's well below our -- the average that we usually have in terms of the contribution, but it's within the range of MXN600 million to MXN800 million. Okay?

Then on loan growth, yes, we have -- we are guiding next year GDP growth to be 0.9%. So I think given the level of uncertainty that we have seen recently in the economy, I think it's still soon for us to provide any guidance for next year loan growth. My initial take would be if employment continues soft at it has been, you know, it has continuously -- it's still growing, but it has decelerated significantly, but if employment continues at those levels, then we think that loan demand for individual loans will continue as it has been the case over the last few months and I think that our loan portfolio reflects that.

In terms of individual loans, we reported a 7% loan growth year-on-year. So that's, in my opinion, the consequence of the dynamics in the economy. However, if you look at commercial loans, then there is another dynamic and we're seeing that economic activity is impacting more corporates and government loans and those are big ticket transactions. So, just gaining or losing one client in the quarter might impact the overall balance of our loan portfolio.

So just to summarize, I think that with a GDP growth of roughly 1% and given the underpenetration of the Mexican banking sector, we would expect loan growth to be faster than that, stronger than that and more lean on individual loans rather than commercial loans.

Jorge Kuri -- Morgan Stanley -- Analyst

Great, thanks for the detailed responses.

Operator

Thank you. Our next question comes from the line of Carlos Rivera with Barclays. Please proceed with your question.

Carlos Rivera -- Barclays PLC -- Analyst

Hi, good morning everyone and thanks for the opportunity to ask questions. So my question is regarding the loan growth guidance. Obviously no surprise given the economy that has been decelerating. I'm doing some numbers, I think the guidance implies basically no growth quarter-over-quarter in the loan portfolio at the low-end or 1.8% quarter-over-quarter growth at the high end. So more than trying to get the number exact right for this year, just wondering if there is any indication on your pipeline or where the economy might be hitting or these guidance basically reflects that conditions remain the same in Mexico where we have hopes, but not seeing -- it ends up actually picking up on materializing growth and we end up with a 0.5% [Phonetic] quarter-over-quarter, or you are starting to see some lines of growth and that's why you are a little bit positive on how the year might end up? Thank you.

Didier Mena Campos -- Chief Financial Officer

Hi, Carlos. I think that the dynamics that we see in the individual loans, we don't expect a significant slowdown in the fourth quarter. If you look at, for instance, mortgage loans, they are growing 7.4% year-on-year and sequentially 2.1%. Credit cards, very, very similar in that regard, growing year-on-year 7.2% and 2.6% sequentially. Consumer loans, mainly driven by payroll loans, are growing 12.1% year-on-year. The overall consumer loan portfolio has grown 5.9%.

So these individual loans represent 38% of our loan portfolio and that's growing I would say at these levels. So we expect that to continue. What is more certain is what will happen on the commercial loans and we see different dynamics there. In terms of mid-market companies, even though we reported a contraction in quarter-on-quarter, it's still growing close to 6% year-on-year.

So, if you look at the balance that we had in mid-market by the end of last year, we think that there is a chance that we will end growing that balance slightly, OK? So, literally we -- whether we end up either being on the high end of the range that we buy or be at the low end, [Indecipherable] what will happen on corporates and government loans and it's quite unpredictable what will happen there. Corporates have been more sensitive during the first quarters of this year. There was a shift in terms of how corporates were funding their needs and during the first half of the year, issuances in the -- debt issuances in the Mexican Stock Exchange were significantly down, close to 60% down in the first half.

Now, corporates have started moving to the local market. If you look at the first nine months, debt issuances in the local market, they are only 33% down. So it has picked up activity. So I think that we benefited during the first quarters of having corporates relying more on banks to finance their needs rather than tapping into the local market or international market.

So, I think that it's a combination of those two things, both with the market to be in more open, corporate financing themselves through the markets and requiring less debt. So, I think that it remains quite uncertain, the loan growth dynamic. But I think that there is more downside, in my opinion, associated more with corporate and government loans.

Carlos Rivera -- Barclays PLC -- Analyst

Okay. Understood, Thank you very much, Didier.

Operator

Thank you. Our next question comes from the line of Alonso Garcia with Credit Suisse. Please proceed with your question.

Alonso Garcia -- Credit Suisse -- Analyst

Good morning everyone and thank you for taking my question. My question is regarding fees. I mean, this year I see net fee growth has been well ahead of volume growth and even growth in loans to individuals as you have been acquiring more customers and including cross selling. So my question is, if we should expect this trend to continue to be the case in the years to come, or as loans pick up, should -- fees should grow more in tandem [Phonetic] with that. And also considering that sector wide, not really because of regulation or not only because the relation, but because of market pressure, considering the foreseeable threats from [Indecipherable] and so on, fees might be under some pressure. So I just want to hear your thoughts on [Indecipherable] going forward. Thank you.

Didier Mena Campos -- Chief Financial Officer

Hi, Alonso. I think that the dynamics supporting fee growth are associated with transactionality. So that explains more than, let's say, adjusting prices on products or services. If you look at how much of our clients are using their credit cards, the activity has increased at double digits. So the fact that credit cards are growing at that pace is just a consequence of our clients using more their cards and that is explained as well with the campaigns that we've or the programs that we are executing regarding loyalizing customers.

Also, insurance fees our also seen with our cross-selling efforts and our loyalty program. So -- and those two, the three items are the ones that are driving growth more over the last year. Regarding, let's say, regulatory risk, I think that would still -- we still have that risk. I think that -- at this time of last year, I think that the risk was much higher with how these banking fee proposal came up and I think that has been mitigated, but it's not gone at all.

I think that it has been more concentrated regarding transparency and how we disclose, what type of fees we charge to our customers and in providing all information on a timely basis rather than putting certain caps on the fees that we charge to our customers. So even though it's not gone, that risk I think has been mitigated. The involvement, both of the Central Bank and the Antitrust Commission, I think that have played a significant role in helping Congress understand the secondary effects of imposing fees and one of those secondary effects is that it might create at even higher concentration in the banking sector in Mexico.

Alonso Garcia -- Credit Suisse -- Analyst

Thank you very much for the clear answer.

Operator

Thank you. [Operator Instructions] Our next question comes from the line of Carlos Gomez with HSBC Global Asset Management. Please proceed with your question.

Carlos Gomez -- HSBC Global Asset Management -- Analyst

Hi, good morning. I have a question regarding your dividend distribution. You have obviously been accumulating capital because your profitability has remained high and loan growth is down. You have typically had a payout for around 50%, is that something that you might want to review and what would be your optimal level of capital at this point imply? Thank you.

Didier Mena Campos -- Chief Financial Officer

Hi, Carlos. You're right in the sense that we are accumulating capital and our policy is to pay out what is in excess of 11% Core Tier 1 ratio. In an environment where loan growth is soft as it is right now, that might imply our payout ratio higher than 50%, OK? This is something that -- there is a lag in terms of when we pay out dividends. It's obviously backward looking, so sort of -- the payment that we made in May was associated to the second half of last year earnings. So I think that there is a good chance that we will propose as management to the Shareholders' Meeting to increase the payout ratio as a consequence of building up capital. We think that 11% core Tier 1 provides enough cushion to whether any potential negative scenario in the economy or in the banking sector. So whatever we have in excess of 11%, I think that that would be a good guidance.

Carlos Gomez -- HSBC Global Asset Management -- Analyst

Would that be something to do for this calendar year or to propose for the following year?

Didier Mena Campos -- Chief Financial Officer

I think that be for the following year, given this lag in terms of when we pay dividends.

Carlos Gomez -- HSBC Global Asset Management -- Analyst

Very clear. Thank you so much.

Operator

[Operator Instructions] Thank you. That concludes our question-and-answer session for today. I'll now turn the floor back to Mr. Chavez for any final comments.

Hector Chavez -- Managing Director, Investor Relations

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

Operator

[Operator Closing Remarks]

Duration: 48 minutes

Call participants:

Hector Chavez -- Managing Director, Investor Relations

Hector Grisi Checa -- Chief Executive Officer, Director, Executive President

Didier Mena Campos -- Chief Financial Officer

Jason Mollin -- Scotiabank -- Analyst

Ernesto Gabilondo -- Bank of America Merrill Lynch -- Analyst

Jorge Kuri -- Morgan Stanley -- Analyst

Carlos Rivera -- Barclays PLC -- Analyst

Alonso Garcia -- Credit Suisse -- Analyst

Carlos Gomez -- HSBC Global Asset Management -- Analyst

More SAN analysis

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