Good morning, and welcome to the Vanorte Fourth Quarter twenty nineteen Earnings Conference Call. All participants will be in listen only mode. After today's presentation, there will be an opportunity to ask questions. Please note that this event is being recorded. I would now like to turn the conference over to Ursula Wilhelm Nieto, Investor Relations.
Please go ahead. Thank you, Kate. Good morning, everybody. Thank you for being here with us. Welcome to Grupo Financiero van Norte's fourth quarter and full year twenty nineteen earnings call.
Today, the presentation may include forward looking statements that are subject to risks and uncertainties, which may cause actual results to differ materially. We ask you to take this into consideration. Marcos Ramirez, Chief Executive Officer, will provide an overview of the results. Thank you and I leave you to Marcos.
Thank you, Ursula. Good morning everybody. First, I want to wish you a very successful year. Thank you for listening to the conference call. We have a lot to tell you in this hour.
I will go over the results and Rafael Arana will add more color in some relevant areas and will share with you our 2020 outlook. Then we'll open for questions. We are pleased with the results achieved both in the quarter and throughout 2019. It was quite a challenging year that require a clear strategy to overcome the lack of growth in the country. Our strategy, I shared with you through the various meetings and calls that we had along the year, focused on improving return on assets, not necessarily by growing them, but by taking care of the funding costs and the risk associated with them.
The strategy paid off as reported earnings and profitability are strong and aligned to the goals set a year ago. It was not easy. We had to change course several times as things evolved differently than originally planned. In the end, this demonstrates the advantages of Vanorte. Its flexibility and diversification allows to adapt to changing conditions and still achieve a constant stream of earnings.
Now moving to the actual results, please turn to the Slide three as I review the fourth quarter first. As usual, it was the strongest quarter both in terms of growth and profitability ratios. Reported net income was ARS 9,000,000,000, resulting in earnings per share of ARS 3.12. Return on equity reached 19% and return on assets was 2.3%, expanding five basis points. The NIM of the banking business on Slide four expanded 30 basis points to 5.9%.
The funding cost was finally reached a more normalized level for Vanorte, as in December it reached 46% of the market rate, which is TIER as you know. Trading revenue on Slide four normalized from the high result book last quarter, ending at ARS $872,000,000, while net fees grew 33% and other income 3%. Expenses remained flat, ending in a cost to income ratio of 40.6%, up 40 basis points on a slightly reduced operating leverage. The loan book on Slide five was up 4%, supported by growth in all segments, excluding payroll loans, where usually there is lower demand at the end of the year. Credit quality was remarkable.
The NPL ratio declined 30 basis points to 1.7% as every loan segment showed improvements in delinquency ratios. Additionally, we reduced the balance of delinquent loans from homebuilders by MXN 1,100,000,000.0, partly by a write off of MXN €278,000,000 and partly by a loan sale transactions worth €643,000,000 The cost of risk of 2% was down 50 basis points on lower reserve requirements for deterioration. Reserve coverage strengthened at 138%. Now for the full year, reported earnings were MXN36.6 billion, 14% higher than last year, while recording earnings were ARS 35,300,000,000.0, up 17%. Return on equity reached 20.1%.
Moving to subsidiaries on Slide six, the bank earnings were MXN26.99 billion, percent higher. Insurance profits were MXN3.9 billion and grew 14%. Annuities reached MXN1 billion with earnings up 26%. Afore had a very good year with earnings up 28% at €1,600,000,000 Full year earnings and profitability ratios of the consolidated group were aligned along the goals committed with the market as you can see on Slide seven. Only loan growth came lower at 2% excluding the government book, but this was the result of our decision to improve risk adjusted profitability at the credit book, even if it broke down the loan balances at a time when the market was willing to lend at very thin spreads, as you remember.
At December, the capital adequacy ratio of the bank, shown on Slide eight, remained very strong at 18.6%, while the CET1 ratio was 12.7%. CAR, the capital adequacy ratio declined 180 basis points against the prior quarter as the bank streamed up of the holding company a dividend of COP 6,500,000,000.0. We maintain our commitment to manage the bank with a strong capital position, while maintaining an attractive dividend payout ratio at the holding company. Now I want to move to our outlook for the 2020. We are anticipating a recovery of the Mexican economy, mainly in investment.
In overview, at 0.8% GDP forecast will come from four sources. The first one, the 2019 transitory shocks are gone. The second, the fact that 2020 will no longer be a first year in the government, so we expect businessmen to reactivate several investment projects postponed. In our view, investment will be particularly boosted by the implementation of the Phase one of the National Infrastructure Plan as well as The U. S.
Ratification of the USMCA. The third one, the year 2020 is a leap year. This adds 26 basis points to the GDP. And therefore, we expect the state owned Pemex will increase crude oil production for the first time in more than a decade. Recall that credit in Mexico has been growing at a rate of 1.5 times nominal GDP growth, which we are expecting at around 4% and we plan to continue to take advantage of this and more.
With this, I conclude my comments and now I will pass the microphone to Rafael Arana, who will give you more details on some of the numbers of the quarter and will also share with you our financial targets for the year. Rafa, the microphone is all yours. Thank you, Ivan. Thank
you. I would like to go on if you could follow me please to Slide nine, where I think we could explain as Marcos mentioned at the beginning of the conference, what was exactly the strategy that we follow in order to face a quite a difficult market in the expansion of the credit growth, but how do we manage the funding cost of how now we are returning, as Marcos mentioned, to the original kind of very close to the original funding cost that Banorte has been able to sustain for several years. If you go to the graph to the right, you will see that when basically you will look at two very important numbers. The first one is what was the return that we were obtaining on the loan portfolio that was 8.6% before the integration of Interxiones with a cost of funds with against the reference of tier of 42 basis points. When we started the integration of Interxiones, we mentioned to you that the Interaciones funding cost was coming at a tier plus 20 basis points that we would really like to manage that down at the beginning to 40 basis to 46 basis points.
And then through the year, we committed to go lower than that. And you will see in the graph in the red line how this evolved through the year. But you can see on the line on the red line, the return the NIM for the loan portfolio went down from 8.6% in the third quarter of twenty eighteen. It starts to reducing drastically up to the first quarter of twenty nineteen that reached 7.7% of the return of the loan book. This was expected because of the funding cost of Interxiones and then also that we released Ps.
93,000,000,000 of funding cost that was coming from Interxiones at a very high cost. This not an easy task to do. But you can see on the second quarter of twenty nineteen, we start really to recover from that. And when you look at the numbers on the fourth quarter of twenty nineteen, we are now even better than the NIM that was before the integration of Interaciones with already a reduction in the interest rates. This was basically the strategy that Marcos described to you.
Now our funding cost is sitting now at close to 44 percent of TA. And I think we could lower that again to the 42% that we have been maintaining through the last three years before the integration. So this really shows exactly what was the strategy and how do we execute the strategy. The synergies on the funding cost now are sitting on 110 basis points less, much better than we anticipated. And this really allow us to if we move now to the graph to the left, to see the expansion of the margin of the bank that when we see the numbers in the third quarter that we start to reduce the net interest margin of the bank from 6.5 to 6.3%, but now we're back to 6.6% of the net interest margin of the bank.
If you just look at the numbers of December for the net interest margin of December of twenty eighteen, it was 5.4% and the numbers for the net interest margin on December for the bank is sitting at 5.9%. This give us a very important advantage to start the year with a difference of 50 basis points compared how we start the year in December of in January of twenty eighteen. So the strategy paid off. It was not an easy strategy to execute. Another very important thing to notice on this graph is that if you look at fourth quarter of twenty eighteen, basically the balance of the bank and the size of the loan book was almost the same after the integration.
There was almost no reduction in the size of the loan book, but the problem was not the size of the loan book, but the cost of the funding cost. So when you look at the numbers that we let go some of the government loans, it was basically to follow to continue to execute the strategy. We mentioned that it was much more profitable for the bank to continue to reduce the funding costs that go into a very aggressive pricing competition strategy that some of our competitors following this. This strategy paid off, as you can see on the margin, but it was difficult I think for the market to really understand how was the execution of this strategy. Now we can really show to you how this worked through the year.
And it was I think exactly what we promised to you about how we're going to be managing the assets on a very profitable way and not on a very aggressive growth strategy that will cost us yearly on the margin and on the net interest income. If now we move to the next point that I think is worth mentioning is aligned with this strategy of really keeping a very close eye on the profitability of the book on the funding side and on the pricing on the book of the loans. A very important achievement for the bank was that the net interest margin after provisions reached record levels for the bank through the year. And this is the results of very careful monitoring of credit risk and also the execution on the recovery side and basically on the origination. And a lot of the most of the internal models that have been developed in the last five years now are fully into execution and is delivering and is giving us a very good numbers on the origination risk for the bank.
Another very remarkable number is the return on assets. Return on assets on a recurring basis continues to expand and it really shows all what we have mentioned before, the funding strategy, the how do we have been managing the asset side, the origination side, the risk side. And now it's reaching at a point of 2.3% return on assets that is really the record for the bank. And at the same time, the cost of risk is close to 2%. That is also a very good number compared to the numbers that we have been having in past.
Another thing that I think is important to notice is that when we have a very extraordinary third quarter concerning the trading gains. There were some concerns about how we're to recover that for the fourth quarter. And the recovery really came from the recurring side of the business. If you look at in the third quarter of twenty nineteen, the trading gains reached €2,300,000,000 But if you look at how do we recover this from the fourth quarter, A portion of that comes from net from the interest income, other part comes from the net fees and another part from the recurring part of trading revenue. So a very important part of these numbers is that the recurring side of the business is again providing the revenues that we expect for the recurring side of the business to provide.
It has not been an easy year because of the lack of growth in the loan book, but I think we compensate that in a very important way by how do we manage the funding costs, how do we manage the risk side. And we have seen in the fourth quarter, as Marcos mentioned to you, an increase in the loan book, not just on the government book that I think we will see at projection for the year, but the commercial and corporate book, we expect also and I think it's remarkable to look at exactly like the corporate and the commercial book proceed through the year, facing a very strong contraction of the loan growth. If you look at the numbers that we have provided, if we could go on a line by line basis, even with a reduction in the loan book, the profitability of those business were above 16% for the year. And basically providing a lot of services to the companies are much better because we decided to keep the clients that we have been doing business for many years, providing much better services, fees went up, the margins went up and it was basically by providing a top of the line service and a top of the line capabilities to for these companies to manage.
So it was a difficult year as Marcos mentioned, but I think we really take advantage of the very loyal and very strong customer base that we have. We have all the levers and processes to really continue to reduce our funding costs. The risk side of the business will continue to be as I was taking care of all the pieces that we need in order to have a very good origination and recovery on the side. Some people are concerned about if this is sustainable or not. I think we have a much better models now.
We have a much better recovery process now at this point in time. And the way that we have been delivering in the consumer side by basically continue to do authorized or pre authorized credit, I think we will continue to provide good numbers through the year. If I now go to the guidance, and I think it was important for you to know why we are providing to you this guidance based upon what we achieved on past year. Loan growth we anticipate based upon the nominal GDP, if you multiply that by 1.8% to 2% that has been the case for Mexico in the past years, We could reach numbers from 6% to 8%. We continue to see expansion on the margin as I have mentioned to you.
We still see two percentage basis points lower on the overall funding cost for the bank. The expense line is going to be from 5% to 5.5%. And this is again, will put us on the line that we have been always inflation plus 150 basis points. It's also worth mentioning that even though we have been again very disciplined in expense line, we continue to invest on the technology side at the same pace that we have been investing in the past five years. The efficiency ratio will be reached from 38% to 39%.
Cost of risk will be from 1.9% to 2.2%. The tax rate 26% to 27%. And there has been some concerns about the reduction on tax rate. And this is a very simple explanation. In the past before the recovery of the assets of the homebuilders, we those were non deductible because we couldn't really apply any of the deductions of the losses of the homebuilders against any sales on investment projects or on the land that we possess.
Since we repossessed most of the land last year, now we are actively selling those projects and land. We achieved close to $800,000,000 of selling with a profit around $200,000,000 of that. So now we can apply those non deductible deduction in the past are deductible now. So you will continue to see a very balanced tax rates around 26% to 27% compared to the 27% to 28 that was in the past. And the reason for that was that part of the non the possibility of the investment projects on the homebuilder side.
That thing is now moving ahead and we will continue to have this normalized tax rate. Net income will be from 37.5% to 38.8%. We are aiming as we have been communicated to you to have double digit growth in the low teens and we think we can achieve this. Return on equity will move from 19.6% to 20.1%. There has also been some comments that in order for us to achieve the return on equity, we will be managing aggressively the capital in order to release that and achieve the return on equity.
As we have always committed to you, the return on equity that we are measuring and everything that we are providing to you in this guidance is based upon recurring earnings. We are not putting extraordinary earnings in order to achieve the return on equity. The return on equity should be achieved the same that the guidance that we are providing to you based upon recurrent earnings. GDP that we expect is 0.8% and inflation 3.5% and the reference rate is the average reference rate will be 6.5%. With this, I finish my comments and now it's open for questions.
Thank you, Rapha.
Will now begin the question and answer session. Our first question is from Jason Mollin from Scotiabank. Go ahead.
Thanks, Jason. I have two questions. My first is on the capitalization level and optimizing that and expected dividend payout, for instance, or buying back shares. Your CET1 is at 12.7%. I guess that's over 60% above the minimum.
Can you give us some guidelines and what you're anticipating in your return on equity outlook? And as a driver, my second question is related to that, you have a net interest margin outlook of an expansion of five to 15 basis points. Rafa, you were just explaining how you're working on the funding side and how positive the evolution has been there and that you expect that to continue. Can you talk a little bit on the loan yields and competition by segment to give us a sense of where you see that side of the equation and then moving? Thank you.
Thank you, Jason. The first one, we do not expect right now to change the dividend policy, but maybe in the future we will talk with all you guys if something changes, but right now. We feel comfortable with the level that we are paying. And the second, Rafa, please go ahead.
Yes.
As Marco said, I think it's worth to notice that as you mentioned, we always look at every single side of how do we make efficient for our shareholders the capital base. Yesterday, we asked for the Board to increment the size of the potential buybacks that we could do on the market just to have much more leeway on that part. But I think as Marco says, we are comfortable with our 50% dividend rate. We always see whatever comes and see what's better for the shareholders. At this point in time, we are contemplating also every single possibility to make this much more efficient for you.
But the return on equity that we will deliver will be basically, as I mentioned to you, on a recurring basis and also taking into account the same dividend policy that we have. On the second one that you mentioned, competition was very strong through the process of the hike in the interest rates, especially on the mortgage side and in the car loan side. That was a very strong competition with BBVA basically and also for Scotia. I think we did a very good job, the retail guys, product guys, the distribution guys. And that put also a very tight pressure on the margins, especially for this type of loans that are fixed rate loans.
Now that the interest rates are coming down, what you will see is now that expansion in the margin on those portfolios is already starting to happen. And that is part of how we are balancing out the reduction in the rates and also the expansion in the margin. If you look at the numbers of the fixed rate books that was basically the car loan books and the mortgage book and part of the payroll book, it was 170,000,000,000 three years ago, and now we are sitting on €290,000,000,000 of these fixed rate loans. So this is basically what is going to hold on the margin. Competition will continue to be strong as has been having in the past.
The only, I would say, irrational competition that we faced in the past and we let go that part of the some of the loans was in the government book that now is being much more normalized in the past two months. And now with the funding cost that we now have, if we would like to compete again aggressively in some of the special loans that we would like to keep. Now we are in a possibility to do so without affecting the profitability of the book.
That's helpful. Mean, even with declining rates, declining policy rates and market interest rates, your actions, you're stating that the asset sensitivity is actually broken down, meaning that you're liability sensitive and or you can manage the book and actually increase your margins with lower rates.
That's a
very different path than we've seen in the past.
Exactly right. I think the treasury has been doing an extremely good job on how we hedge now the coverage and the cost of the funding on the hedges.
Great. Thank you very much.
Our next question is from Thiago Batista from UBS. Go ahead.
Hi, guys. Thanks for the opportunity. I have two questions. The first one on the loan growth guidance that you gave about six percent and eight percent. Can you share with us the dynamics that you're expecting in terms of segments?
Which segments should lead this expansion if government will continue to impose tougher comps? So the main dynamics of the loan growth in 2020. The second one, if you can comment if you can share with us your perception about implementation of the CODI, the Cobre Gitao. I know that you are still in the first couple of months or even weeks, but how was this first phase of implementation of COGI? How were the factors of this by the clients?
So if you can share with us the main view about the COGI?
Thank you, Thiago. The loan growth is in corporate around 5%, in commercial around 10%, in government only 3%, automobile 13%, mortgage 11%, credit cards 12% and payroll loans 7%. The average of all these goes to 6% to 8%. And then about the CODI, Paco Marta will give us more color on that.
Hi, Thiago. Good morning.
We have we launched CODI according to the regulation in the last quarter of last year. We have now more than 50,000 customers using the solution with almost 30,000 transactions being processed through the platform. We don't expect this to affect in a negative way to the customer. More than that, it's another payment method that they have in both applications that we are offering now in both apps, mobile and mobile banking and the paper one. And so we are expecting to offer them a different payment method, not only for the persons, but also for persons doing business.
Thank you, Pierre. Thank you.
Our next question is from Gabriel Nobrega from Citibank. Go ahead.
Hi, everyone, and thank you for the opportunity to ask questions as well. Given your GDP guidance of 0.8% this year and also a slower economic backdrop for Mexico. Are you seeing any upticks in delinquency in your books? Is there anything worrying you now? And I'll make a second question afterwards.
Thank you.
On the and I would
say I will start on I think the credit guys, but I think if you look at the numbers for every one of the portfolios, the mortgage book, the credit card book, the car loan book, the payroll book, commercial, government have been at record lows on this. And this is really the execution of a very predictive models that the risk guys developed in the past years, extremely good execution on the recovery and anticipation side. And the origination process that we continue to deal basically we're on client base that has been the results. We are very vigilant and we'll continue to do so. The vintage the roll rates are looking good.
But as always, there's always a possibility to do so.
Mr. Carlos De Laixla will give us more color about that.
Hello, Gabriel. As Rafael mentioned, on the consumer portfolio, we still see good conditions. As you know, salaries have been behaving better than before and there's really no unemployment yet. So we're expecting that portfolio to continue in good form. On the commercial side and the corporate side, we've been very selective not just on the industries, but also on the geographies.
The country has been growing at different paces in the different areas. The North is still in relatively good terms. So we're very careful on choosing, as I said, the industry, but also the geographies. And we've been paying very close attention to the different projects that we're being involved in. So we're not expecting any particular increase in the cost of risk.
That's perfectly clear. Thank you. And as for my second question, it's actually on the fee income line. I understand that it increased well to some different quarter and it was also helped by the reversion on the insurance expenses side. But I just wanted to understand what are you expecting for 2020?
And are you beginning to see an increase of your loyal customers actually paying off? Thank you.
On the fee side, as you mentioned, and I think it's very good that you clarified the issues on the insurance side. I think that the basic banking fees went up 8% and that's the number that we should be really concentrating on that. I think that's the number that we should be looking also at least for the next year.
The insurance side, let
me just
clarify that. We did not reverse any provisions. What we just did was a reclassification. Maybe Fernando, the Head of the Business explained it in the third quarter. So he will explain to you what happened this quarter, so it's clear.
But from a net income and a revenue stand point, there was no effect at all.
That's right. In insurance remember that last time we explained that we were experiencing an increase in the loss ratio in a big account, And therefore, we decided to increase our provisions. But the way in which the statutory rules of the National Management Commission were not allowed to put it in the incurred but not reported reserve until we change the methodology in that reserve. Therefore, the only way in which we could put the reserve of these funds aside on a very caution way was to put it on the commissions, the provision on commissions to be paid to reinsurance. But once we obtain the new methodology being accepted by the insurance commissions, we just did what we just explained last quarter that once we had this authorization, we would move that reserve from that part of that was put in the commission side as a commission to be paid.
It was reclassified and it was put where it belongs once we have the authorization, which is in the incurred but not reported reserve. That's why there is no effect because of the renovation in the results of the insurance book. But this should be mentioned is what we said last time is that we are very conservative and we decided to put aside these funds and to keep observing the behavior of these very big accounts. And according to what happened, it will either be paid in losses or it will be released. At this point, we cannot tell, but that's
what happened. All right. That's perfectly clear, Thank you.
Thank you, Gabriel.
Our next question is from Nicolas Riva, Bank of America. Go ahead.
Yes, thanks for taking my question. I have a question on the fixed income side. We have seen so far this year a number of Latin banks coming to the market with senior bonds, banks in Brazil, in Chile and in Colombia. Last year, you issued the PURPS. If I look at your capital levels, it doesn't seem to be a need to issue Basel III bonds.
On the senior side, do you have any needs in terms of funding U. S. Dollar loans to issue senior bonds? Or what's your outlook in terms of potential bond issuance? Thanks.
Thank you. As you mentioned, we the strategy we have been following is to really eliminate all the Tier two unknown efficient notes that we had in the past. As you know, we have been doing some tender offers to our notes in the past month. What we would like to continue to do is to completely eliminate all the non efficient notes that we still have around $300,000,000 And also we have been seeing a very big opportunity in order to provide funds in dollar terms for some of our companies. So maybe we will we are always looking at other possibilities and opportunities, but I think there's still a possibility because we would like to continue to do some tender offers to the outstanding notes in the coming months.
Maybe we will like to go again into the market. It depends on the conditions and it's not that we need to do so. If we can make the balance sheet more efficient, we will go to the market in that part.
Okay. Thanks, Francois.
Thanks.
Our next question is from Alonso Garcia from Credit Suisse. Go ahead.
Good morning, everyone, and thank you for taking my question. I have actually some follow ups. First, in terms of loan growth, to clarify if guidance this year includes or not the government portfolio. And also, I mean, the 6% to 8% guidance of loan growth, it represents a meaningful pickup from current levels. So I wanted to check with you if you have observed since the last part of last year and the beginning of this year more appetite for trade already from corporates, from the commercial side?
Or what is making you comfortable that you can achieve that guidance? And
if
you expect that 6% to 8% to be in line with the system? Or would that represent, in your view, some market share gains? Thank
Thank you, Alonso. Yes, the guidance include the government portfolio. As I told you, so far, we are thinking in a 3% increase in the government portfolio. But Rene is going to talk a little bit about the corporate.
Alonso. This is Rene Pimentel in Corporate Banking. Basically last year was definitely as you know, a complicated, a very challenging year in terms of the loan portfolio. We received significant prepayments to our portfolio around MXN17 billion. So that's around 12% of the portfolio, which we had to compensate.
But we did see a significant pickup towards the end of the year and mainly had to do with a very strong pipeline that we had built throughout the year, which at the end with this lower cost of funds described by RAPA allowed us to participate in certain transactions, which we wouldn't have participated in early in the year. So this allowed us to grow quarter on quarter around 4%. We're continuing to see this dynamic in the first quarter. We believe that this 5% that Marcos mentioned is very much achievable. Also as a strategy, what we focused on last year is we launched a loan syndication desk, which we didn't have.
This has allowed us to distribute our risk better and enter transactions where we weren't players before, not only invited to loan syndications, but also leading transactions, which has enhanced our commission basis our commissions. And so we're very it was a challenging year, but we're very happy with the results. Our bottom line at the end of the year grew 16% as Rafa mentioned. So we were capable of maintaining the quality of our portfolio, which is going to be the focus for 2020. And with this momentum enhanced by the lower cost of funds, we believe that it's very much achievable.
Okay.
You very much. And just one final follow-up. In terms of capital, you mentioned that you were basically analyzing every single possibility in order to keep the structure optimal. But I want to check if this M and A is included in this sort of opportunity that you would be willing to look at or to consider to keep capital optimal? Thank you.
Thank you, Alonso. As we said, we will keep saying that we are open to all possibilities. And our duty is to see what's going on in the market. And then we are not the people who will decide. We will show all the possibilities and the assembly will say if they want to go ahead or not.
We don't have anything in the pipeline right now, but we want to maintain open that possibility as all of the others.
Understood. Thank you very much. Our
next question is from Geoffrey Elliott from Autonomous. Go ahead.
Hello. Thank you very much for taking the question. Can you, first of all, confirm on the NIM outlook, what the base for Are we looking at the bank NIM or the group NIM? And then is the base the full year 2019 figure or the 4Q figure?
And then I'll have a follow-up after that.
Orsula?
Yes. On the May to 15% expansion in the NIM that we cite in the expected numbers for 2020 is at the group level. But obviously, it has to flow really from the bank because that is where the let's say the credit business is. So you will also see movements in the name of the bank in the upward direction, but it will be reflected in the group. Ultimately, it's at the group level.
And the base is the twenty nineteen five point six or the 4Q five point seven or the December '9?
Well, the base is the 05/2007 quarter number because at the end of the day, we do report on a quarterly basis and that is what we follow with our investors. We cited the 5.9% December number because really we wanted to show you that the improvement is already evident there. And we are starting 2020 with a much stronger base of NIM than what we had in December 2018. But really for comparative purpose and for following results, you should look at the quarter numbers.
Got it. So the message is really the NIM expanded during Q4 December, you got to the 5.9%. And then I guess to get to the plus five to plus 15 basis points, you'd be a bit above the 5.7, but a little below the 5.9. That's kind of where you're expecting to track during 2020.
That's right. Our next question is from Arturo Langa from Itau BBA. Go ahead.
Hi, everybody. And thank you very much for taking my question as well. Just two brief questions. But on the risk management side, I believe that there is an implementation of a new accounting standard set to be in place by the CMBV around September. I think it's IFRS nine, I think, which I was wondering if that will have any effects, especially in the mortgage book.
And then my second question is regarding spreads. I think what we saw in the recent years is as interest rates went up above 8%, banks sort of absorbed or compressed their spreads. And I was just wondering how you see that coming on the way down. Would be my two questions. Thank you.
Thank you. The first one about the accountability, let's say, in the risk management, Delaisle is going to give some color. And the second one is very interesting, what's happening in these kind of countries with the spread when the rates go down. So I will ask Rafael to give us some light there.
Yes, Arturo. IFRS will start ruling in January of next year. And the overall effect that we estimate is about EUR 900,000,000, but that will impact our equity position. As for mortgages in particular, the impact will be around €200,000,000 But as I said, all those effects will go directly to equity.
On next questions about what you mentioned about the compression of the spreads, it was really as we mentioned at the beginning, a difficult process to sustain the profitability of the book, especially the mortgage book and the car loan book. I think the decision that the bank realizes that we were going to go for really top of the line clients in order to reduce the expected loss. And as you can see in the numbers for the pass through loans is around 1% for the mortgage book and for the car loans. So by having a very low expected loss, we were able to maintain the profitability of the portfolio. If you compare our numbers to the market numbers, we have around 200 basis points of difference compared to the market.
That's what's really sustained the profitability, the quality of the book because the prices in the market was really already set up by the competition. So really the strategy was to be able to compete with those prices with a much better risk in order to really keep the risk adjusted margin up. And I think the mortgage team and the car loans team and the distribution team did an extremely, extremely good job in this.
Perfect. Just to be completely clear, but the implementation of IFRS nine, you said January year. So just to be 100% clear, it's January 2021, right?
Yes, correct.
Okay. Thank you very much for your answers. It's very helpful.
Thank you, Arturo.
Our next question is from Yuri Fernandes from JPMorgan. Go ahead.
Thank you, gentlemen. I have a first question regarding the AFORE. It was a very good year. So if you can explain what drove the 28% increase in earnings? I saw here the AUM grew healthy 18%, but just checking if there is something else and how you see the results evolving this year.
And my second question is actually a follow-up on Jason's questions regarding the dividend policy. If I'm not mistaken, your policy today is from 16% to 50% of previous year earnings. And if that's the case, I'm having a hard time reaching the 19.6% to 20% ROE guidance you have. Because given like the 194,000,000,000 shareholders equity ex minorities you're posting, even at the top of your guidance, it's hard to reach the 20% ROE, if you keep the 50% policy. So just checking here if I'm missing something on the dividend on regarding the ROEs.
I was thinking also about the IFRS nine implementation, but given it's only going to take place in 2021, not sure if this will hit your equity in the end of twenty twenty, right? So just checking here because it's hard for me to reach the ROE guidance. Thank you.
Thank you, Yuri. You are right, it's not easy task. But first, the Afore
Well, with respect to the Afore, mean mainly what explains the results is the behavior of the asset markets. I mean we obtain a net a return more or less around 15% on the assets under management. So we have a very, very good year. Therefore, assets grew very strongly. And that's, I would say, main reason for the explanation of the result.
Actually, relative terms, we were also in very good shape because we were the second in terms of performance, we were the second player in the market. So we have the absolute that helped the whole industry, but also on the relative side, we had a very good year. So that's basically what explains the results for this year. That's why for the next I mean, for the current year, we do not expect such an important return on assets. We are expecting also a very difficult environment in the sense that we reduce the commissions that we charge on the assets under management eight basis points.
And therefore but also the industry as a whole reduce the commissions in a very important way and in a much important way that we observed in the past. So what will happen in the future with respect to that is hard to tell because certainly all of us facing this reduction in the commission, even though the assets under management are larger than we expected, I mean, and that we protected to some extent the income. It's going to be very interesting to see what will happen with competition, because since the reduction for all the players was significant, it's likely, but I cannot tell you uncertainty for certain that perhaps the commercial expense will be reduced and that will also determine what will happen at the very end with net earnings. So I think that that will determine it, we're working on that. And therefore, with a very conservative as well projection, we will not see a strong result in next year, but it will not be as bad as many may think because this reduction.
It will depend very strongly what will happen with the reaction of the other players. Thank you. Rafael?
I think what you mentioned is correct. I think Vano has been the past years a net generator of capital based upon the subsidiaries capacity to provide the dividends to the group and also the size of the growth of the loan book. If I I think what we the way because you're already considering the ex minority piece reaching the return on equity. I think in a way we think based upon what Rene told you about the corporate and things, I think even though we are looking at a six to eight loan growth and 1.8 GDP, We also are looking to see on the first quarter in order to see the possibilities of the managing of the capital to see what's really going to be the size of the loan growth. And I think we hope it could be a better a good surprise for the market, but we have to wait for the first quarter to really be much more precise about the capital management piece.
Thank you, Rafael. Thank you for the answers. Thank you.
You, Yuri.
Our next question is from Nia Aguirre from HSBC. Go ahead.
Thank you for taking my question. Congratulations on the results. I have three questions. First, in terms of composition of your loan book, how much exposure do you target for your government loans? Given that you want to grow government loans at about 3%, so there will be some dilution in terms of composition.
So what is the target for this year or the coming two, three years? Second question is on the fee regulation that we talked about last year. Are the discussions still going on? And can we expect any announcements in March? And lastly, now that we are already in 2020 and you will achieve your 2020 target, what should we expect for the coming three to five years?
Will your focus be on growth, on profitability, on dividends? What is it that you're planning for the bank in the medium term? Thank you so much.
Thank you, Nia. Let's go for the first one, the competition in loan book and the target for 2020.
Well, good morning, Neha, and thank you for your questions. For the government book, as Marcos mentioned, we expect to grow this book in 2020 around 2%. We really have no target in terms of market share or any of that because really there continues to be this drive to maintain profitability above anything else. So there is no rush to grow. We expect what we expect differently this year is that we should see a little bit more demand coming up in this market other than what we saw until 2019, where there was really no new demand of new financing.
It was all refinancing of existing assets. So this is one thing. In terms of deregulation
As we know so far, there is no regulation nothing in the Senate right now. So if something new arise, everybody will know. But so far, that's in a quiet period and we are working as normal. And the third one, what should we expect in the strategic growth and dividends, Rafa?
The strategy in growth, think, Michel, you said it perfectly. The best asset that the group has is the customer base that we have. We have a very large customer base that we have been working in the past more and more increasing the value and the relationship with these clients by releasing a lot of analytics and technology. And we are just beginning to do so. So in the next three years, you will see a lot of evolution in this part that will increase the lifetime value of our clients in a permanent and sustainable way in order to continue to achieve the metrics that we have provided the market in a recurrent basis.
On the dividend side, as we mentioned, our policy right now is up to 50% and we always are looking ways to keep our investors on the most comfortable way by really managing through the year the evolution of the capital base. And I think that will continue to be the case.
So should we consider this 20% ROE a sustainable level?
Yes. The 20% ROE based upon the similar conditions should be our aim.
Perfect. Thank you so much.
If I may just add a comment because we got a question online specifically again on the potential fee regulation just to clarify as we said that we are not foreseeing anything to change so far. So just to make it clear for the person who asked online. Our next question is from Claudia Benavente from Santander, Erbanco. Go ahead. Hi.
I only have a follow-up question regarding the capital level. I'm not sure what I'm missing, but if I use your guidance and in order to reach the maximum 20.1 ROE, you basically need your shareholders' equity in 2020 to remain unchanged. And for that to happen, you'll have to or increase the dividend payment or, I don't know, do a buyback program. So I'm not sure what's considered in the estimates to reach that 20%. Thank you.
Claudia, FRANCOIS
I think you said it. I think that's why we have opened the possibility of the buybacks. We have opened the possibility of additional dividends. And you also have seen in the past years that we have been buying portfolio, especially on the annuity side that has been provided extremely profitable for us. That's a number that when you look at the margins that provide on the annuities book, it has been going down because of the size of portfolio, but the profitability of the portfolios will continue to go up.
So we are always looking for opportunities. I think we will be continue to look at portfolios like we have been doing in the past and continue to manage the capital base as we have been doing in the past. I think it will be an unfair way to measure the bank to say that we are with our hands tied in order not to reach the best, the more efficient way to release capital to the market. But we are not like to play the game is to leverage the bank in order to really achieve the 20% return on equity. That should be attained as we have been doing in the past four years based upon recurrent growing sustainable earnings in that.
If an additional capital should be managed additional capital should be managed, we will do so.
No, no, I agree with your points. It's basically because I was looking to the past and you've been growing the shareholders' equity like by over 10% every single year. The only two years where it grew 4% was when there we saw an important increase on the dividend payments. So but yes, maybe buying portfolios could make sense. I was just trying to wonder what was the assumption that you had incorporated.
Thank you, Rolfo.
No, no. And thanks, Claudia. And I think that's the case, as you mentioned. And we are always on how we are efficient on a profitable base, how we look at a strong bank for our tenants of instruments that we have, but also not to be inefficient, but also not to be playing the leverage game.
Thanks. My next question is from Ernesto Gabilondo from Bank of America. Go ahead.
Hi, good morning Marcos, Rafa and good morning everybody. Sorry, I entered late to the call. But my question is on your cross selling ratio. I believe you have done a very good job in improving this ratio. But how much room do you see closer to the industry levels?
And what will be your strategy to cross sell banking products to the forest clients? And then my second question is when do you expect to provide medium term guidance?
Thank you, Ernesto. The second one, we will give it at the mid of this year, June, July around that. We are working obviously already on that. It's a continuation of the 2020. And the first one, the cross sell ratio first, the industry levels are totally different depending on how you compare and how you do the metrics.
So we compare with ourselves and with our methodology, I think it's different. And we are aiming to the 2,200,000,000.0 so far for the end of this year. And we will launch whatever it's going to be, as I told you, in July and for the next years.
Perfect. Thank you.
Cassie, I believe this was the last question that we had in the queue. Is that correct? Yes. Have no further questions over the phone in the queue at this time. So this concludes the question and answer session.
I'd like to turn the conference back over to Ursula Winjam Nieto for closing remarks.
Thank
you very much and see you in three months more. I hope with exciting news. Thank you very much.
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.