Banco Santander Chile (BSAC) 2003 Q2 法說會逐字稿

Good day everyone and welcome to the Banco Santander Second Quarter 2003 Earnings Conference Call. As a reminder today's call is being recorded. If you have not received a copy of today's release please call Desiree Soulodre at 011-562-647-6474. For opening remarks and introductions, I will now turn the call over to Mr. Raimundo Monge. Please go ahead Sir.

Good morning ladies and gentlemen. Welcome to Banco Santander-Chile second quarter results conference call. I am Raimundo Monge, Director of Corporate Strategy of the Bank and I am joined today by Robert Moreno, Investor Relation Manager. Thank you for joining us to discuss the bank's second quarter results and general outlook. After a brief review of the quarter and main highlights we will be happy to answer your questions. Net income for the second quarter of 2003 totaled Ch$50,948m equivalent to Ch$0.21 per share and US$0.40/ADR. Net income increased 25% compared to the first quarter of 2003 and was 24.1% lower than the net income in the second quarter of 2002. With the merger behind us the bank is increasingly focusing on fewer commercial activities and its core business strategy. The main drivers of growth in the current quarter and going forward revolve as we have stated before around three main points. First of all, the bank is proactively improving its asset and liability mix as a way to counteract the negative effect of the low interest rate environment. The bank is actually shifting asset mix away from low yielding corporate loans to high yielding retail segment. The bank has the largest client base and distribution network in the country with around $1.7m clients and 344 branches.

During the merger no branches has been closed, which has left most commercial spin intact. At the same time the bank has continued to place great emphasis on increasing the sale and usage of fee based products in both the retail and the corporate segments. Finally, the bank's efforts of intensifying the search for synergies have resulted in higher than expected cost to savings. These three measures together with an improving economic outlook should allow Santander-Chile to continue improving its overall performance in the coming quarters. In the second quarter one of the main drivers of bottom line growth was the 14.2% increase in net financial income compared to the first quarter of this year. This rise was mainly due to the increase in the bank's net interest margin that reached 5.0% compared to 4.3% in the previous quarter. The rise in the net interest margin was due to various factors; first of all in the second quarter of 2003 the inflation rate was higher than in the previous period. As the bank has the positive gap between its inflation [indexes] assets and liabilities the bank's margin were positively affected by these higher inflations. Secondly, the shift in the bank's asset mix and highest spread in corporate banking positively affected the evolution of the net interest margin despite the 2.5% reduction in interest-earning assets in the period. The average balance of higher-yielding consumer and leasing loans increased faster than the rest of the loan book. While the yield from commercial loans rose steeply in this period which, partly reflects the banks focus on increasing profitability in the corporate lending segment. Finally, the funding mix also improved. The average balance of non-interest bearing liabilities increased 4.7% in the second quarter compared to the first quarter. In the same period the ratio of non-interest bearing demand deposits and equity to interest earning assets increased from 18.6% in the first quarter to 20% in the second. This proactive management on the assets and liabilities mix has allowed the bank to outperform the market in terms of evolution of net interest margin. By mid year the banks net interest margin was 30 basis points higher than the average for the Chilean banking system. A reflection of Santander-Chile is focus on profitability over pure volume growth.

The second driver of the growth of the bank's profitability has being fee income. The bank's policy of improving the profitability of the corporate segment by placing greater emphasis on the cash management, on corporate and financial service has resulted in an increase in fee income in this segment. In retail banking Santander-Chile has successfully increased fee income by emphasizing the greater usage of the fee basis products. Net fee income rose 7.4% and 16.6% compared to the first quarter of this year and second quarter of 2002 respectively. Compared to the second quarter 2002, credit card fees rose 37.8% as a result of various successful client loyalty programs that have increased credit card usage. At the same time, ATM fees rose 24% reflecting greater usage of the bank ATM network as the total number of these devices has remained relatively constant in the last 12 months. The 45.4% rise in international businesses fees reflects the corporate segment strategy of focusing on a higher value-added advisory service while reducing low yielding foreign trade loans. Finally, the rise in insurance brokerage fees reflects the bank's effort of selling new insurance products through the branch network. During the quarter, the bank launched an innovative and attractively price helped the insurance products. The bank's strategy of steadily increasing fee income has also led the banks to outperform its peers in terms of the ratio of fee income over operating expenses, which reached 43.6% as of June 2003 compared to 32.1% for the Chilean financial system as a whole. In addition to higher margins and fee income the quick and successful integration process has resulted in an acceleration of the cost savings and synergies. In the second quarter, operating expenses decreased 12.4% compared to the second quarter 2002. This fall in expenses was led by the 14.4% reduction in personnel expense and a 14.8% fall in administrative costs. In 12 months, total headcount has decreased by 12.1%. As a result, the bank's efficiency ratio reached a record low level of 41.1% in the second quarter of 2003. Excluding amortization and depreciation, which are linked to the complete overhaul of the bank's core system done in the previous year, the efficiency ratio reached 34.8%. As you might be aware, Santander-Chile has nowadays probably one of the strongest system platforms among Latin American banks which should facilitate future growth and profitability. As a result of these possible evolutions of cost, the bank increased its leadership in terms of efficiency, even among Chile's highly efficient banking systems. On an unconsolidated basis, the bank's efficiency ratio was more than 1000 basis points better than the system's efficiency ratio, which was a steady improvement in this indicator since the beginning of the year. Asset quality remained relatively stable compared to the first quarter of 2003, total provisions decreased 12.2% compared to the first quarter of 2003. These were mainly due to a decrease in the provisions on charge-offs associated with the credit review of former Santiago's loan portfolio. But the loans of June 30, 2003, remained flat compared to March 31, 2003, and loans 30 days or more by view decreased 1.8% in the same period. The rise in the risk index from 1.84% as of March 31 to 1.94% as of June 30 was due in part to our 2.4 increase in loans rated B- C and D in this period which are the higher risk categories. At the same time, the higher risk index was also due to the decrease in large corporate lending, which in most cases are rated A, the lowest risk category. The coverage ratio of risk index reached a 114.3% as of June 30, 2003. The evolution of the bank's bidding income for the single quarter was also affected by the extraordinarily high mark-to-market gains produced last year when long and medium term interest rate fell sharply. As a result gain from mark-to-market of the bank's investment portfolio decreased 87.1% in the second quarter of 2003 compared to the second quarter of 2002.

With the merger behind us and the possible revolution of the net income in the second quarter of 2003, the bank has also increased its share of total net income in the Chilean finance system, which in many ways is our relevant market share. As of June, the bank was approximately 23% of total loans and assets, is generating 29% of all profits in the Chilean banking system. This clearly reflect the banks strategy of focusing on profitability over straight balance sheet growth targets. As a result, the bank's ROE reached 23.6% in the second quarter of 2003 and 20.2% in the first half of the year. This is 25% higher than the ROE for the Chilean financial system as a whole.

In conclusion, we believe the second quarter of 2003 marked the end of the merger integration period. The proactive assets and funding strategies have helped to boost spread. The bank has also experienced a steady increase in fee income in various segments and products. At the same time cost savings from the merger continue to exceed the market expectation.

Finally, all of this has been done without for going our conservative credit risk standards. For this reason we are confident that Santander-Chile now being able to increase the focus on pure commercial activities, should be well positioned for growth in the coming quarters. At this time, we will gladly answer whatever questions you might have.

Thank you gentlemen. At this time if you would like ask a question, please press the "" key followed by the digit "1" on your touchtone telephone. If you are using a speakerphone for today's conference, please make sure your mute button is turned off in order for your signal to reach our equipment. Once again if you would like to ask a question at this time, please press "" "1". We will pause for just a moment to give everyone a chance to signal.

We'll first go to Saul Martinez with Bear Stearns.

Hi, good morning gentlemen. My questions are regarding asset quality and provision levels going forward, as you indicated your risk and index and your past due loan ratio has been increasing steadily and you have credited that largely to the credit review process associated with the Santiago loan portfolio, what can we expect in terms of asset quality indicators going forward, specially considering that you are shifting towards higher risk assets, probably higher yielding asset? Is the level in 2Q more or less what we should expect going forward or should we see an improvement there? Related to that, I just wanted to get some sense in terms of provision levels going forward, and if we should expect that to decline or if we should expect that to remain more or less what we've seen in the second quarter?

Okay well -- your question basically addresses the two forces that will be shaping our provision expense. One is supposed to be [force] there is the conclusion of the credit review process, which allow us to have a what we believe is a fairly sound credit portfolio, loan portfolio. And the second trend, so accordingly after the conclusion of this process we should expect some decrease in the overall provisional level and in addition some decrease in the future [structure of] level an [asset quality] indicator as well. And the other trend is that we are going more into retail, which of course has higher margins, but in addition have higher risks. In the future is to -- probably the second quarter it feels it's a little bit higher than the average and actually what depends how fast we are having net growth in retail activities as compared to the overall growth over the loan book. So, we think we are approaching close to our historical standards of a net charge-off ratios of around 1% of total loans, and so we think that that should be going forward and the only change there could be if we are growing faster on the fewer retail activities, which of course convey higher risk. Again, when you are pursuing a profitability [preview] strategy, you accept a higher level of risk in it, as long as, it is much more than compensated with higher margin. So you really are focusing in the two lines and not simply focusing on an absolute provision levels or absolute risk levels, but in the correct equation decreases risk and profitability. So without giving any major focus for the future, we think that we should be approaching our pre-merger levels offer 1, 1.1% net of charges over total assets -- total loans.

Okay, so if I hear you correctly basically there are two counteracting trend, one is the positive -- the credit review process in that as you are growing in higher risk segment which should increase -- were to increase provisioning level. So going forward, you know, would we expect the second quarter to be a good barometer for what we would expect in terms of provisioning or should we expect that to dip a bit in the coming quarters?

Well it should be -- we are looking -- the net charge-off is slightly higher than the historical figures. But again it will depend on how rapidly we are growing the two commercial in the pure retail activity. But, to have a rough estimation that the second level provisioning level should be a good indicator of the future, with the caveat that if we grow much faster that provisioning levels should increase.

Okay. Thank you.

Once again ladies and gentlemen that is "" "1" for question. We will go next to Anne Coo (ph.) with Banc of America.

Yes good morning. There is a follow-up question on credit quality. Do you expect to go back to the coverage of reserves of back to loans above 100%, it has been on the 93-95 for the last two quarters. Thank you.

Okay, first of all technical consideration, the relevant coverage in Chile is associated with not with [inaudible] loan, but with a what is called the risk index and according to that methodology we have a 114% coverage and kind of below a 100% on that definition. Remember that in past due you have a lot of collateral good quality products that covers a -- its not a reflection of future losses and matter of fact we have like a two thirds of our past few loans are covered by good quality collateral. So better a indicator of a losses -- future losses is linked with the risk index methodology. In the future anyway we plan to increase the coverage in whatever of the two measures more in line with the risk [we might get it] and we take that process to be a by means of keeping a relatively high provisioning level as we talk before, but also because we expect the absolute level of a risk in it to decrease given that now all the asset quality complies with Santander internal credit guideline. So it will be a combination of a relatively high provisioning level as we talked before and a decrease in the absolute figure for a riskiness in it in the future.

Excellent thank you.

We will take our next question from Holena Kempo (ph.) with City Group (ph.).

Yes, Hi, actually I have two questions. Number one, I am wondering what you are expecting and in terms of further cost savings for the rest of the year and the second question is I know a lot of the smaller banks are competing very, very tough on the retail segment. I am wondering if what your strategy in that segment to, if you will do better than the smaller banks.

Okay. Related to future cost, it is a -- we are not giving forecast yet, but just to give you a sense of the direction, a little bit say, that in the second quarter, we were basically finishing the merger process. So from now on, people will start leaving -- I mean a number of peoples are very involved with fewer merger activities will start leaving the bank and accordingly we should expect that the trend that we saw in the second quarter should be sustainable in the future because now there are many people in the technical areas that are leaving the bank, and accordingly, we are also doing a number of things that are not strictly related to the merger, but is getting the best practices of both banks, both banks have good methods of controlling costs and some of the tricks were applied only in former Santander branches and some of the tricks were applied only in former Santiago branches. So now you can level that and get the best of the two banks. Something that is not interesting to you. And that is why we think cost savings should be a driving force in second half results and I am totally [inaudible].

Regarding competition in the retail as you mentioned we have seen an increase in the extent of competition and the way that Santander is focusing that is very simple. First it is that we have the clients, so most of our growth can be achieved with relatively low income cost in the sense that to get a new customer, unless you are willing to charge very little for your products, you have to invest a lot into attracting the client. We have, as I mentioned before, like 1.6m retail client. So that very much exemplifies [sunk] costs for the bank. I know focusing increasing cross selling standards and increase especially the usage of the products that they are actually held by our clients, which marginally is very profitable because you already have assumed most of the cost of bringing the client into the bank.

Again most banks are having a relatively seamless strategy in Chile, pursuing profitability by means of going down market. The thing is that we have a segmentation model that has been placed for now a 3 or 4 years both in San Diego and San Antonio on a standalone basis, which allow us to have relatively strong information on a customer-by-customer basis. So this process of going down market is very profitable, but it is a tricky to do because you can have an -- if you do it in the wrong way you can have an impact in your asset quality structure or in your cost structure. So up to now, in Santander and Santiago has been doing that for now 3 or 4 years. They have been able to do the process of increasing our presence in retail segment, but without compromising our asset quality structure and of course improving very steadily our efficiency rate. So we think there is a more competition, but at the same time we are a -- we think we have the advantage to be effective and to be competitive as anybody. Just to give any idea, remember that in the last 3 or 4 quarters we have been basically involved in merger -- in the merger of the two banks, which will [defense] a lot of instructions from the commercial input over the [scenes]. From the third quarter on, there will be a 100% focus on fuel commercial activities. Accordingly, they will have a lot of time to be in the street, go to the customers and doing business. The other thing is that just to give you an idea, with some of these new incomes our offering what we think are fairly attractive attention models and [wait] the deal with clients and what we are doing is to, for example, is Santander-Santiago Express. We are repositioning as a new distribution channel in Northern [inaudible] and new format of branches [inaudible] in order to have a competitive alternative, if these experiments to some extent is a success. So, we think we are doing the traditional things in many areas and keeping a very close eye to this new entrance, so that if the market goes in that direction we will be ready with new formats and new ways to relate with those clients.

Thank you.

We will take our next question from Sylvia Biggio with Goldman Sachs.

All of my questions have been answered. Thanks.

We will move on next to Cyla Paterson (ph.) with ING.

Yes, I am trying to a better sense of the sustainability of your current net interest margins and maybe you can sort of address that question in the context of or maybe how much of the improvement in net interest margin was the effect of say re-pricing of assets and liabilities versus strategy to shift the mix of earning assets and interest bearing liabilities.

Okay. Just to give idea what we have as mentioned before is a segmentation model that allow us to know very closely which is the amount of a what we call, net client contribution that is net interest margin plus fees minus provisions, we get with our clients. And there they -- it's fairly clear that the rewards of doing this shift is very high. For example in the corporate segment, we get a net client contribution of a 1.5 at most, whereas in the retail area we get up to even 12% or something like that. So, you have a factor of 5 times with the same amount of outstanding loans. So, the rewards are very high. It's simply that the process is tricky because of cost configuration is not very different to our 10,000 corporate clients and 1.7 repay client and secondly with your [asset quality] structure because of course, although we have constructed a provision, a feel that the risk in this could be higher than the average [inaudible] average there. So, the rewards are high and that's why we think that the shifting is a process that we are in the early stages because still a more than half of our loan book is into our corporate lending. So, we have to have a balanced earnings structure but of course we see a space to improve our presence in retail activity. In the quarter, I would say that the 5% margin probably is higher than the sustainable level in the 18 months -- in the future as we go forward. We have -- our forecast is that the -- that these margins of 5% are not sustainable in the short term. So, we think it's kind of an outliers(ph). I think [in one] of the case, we did 4.3% of the first quarter which worked the opposite in this medium [inaudible] trends of our net interest margin. So, we think it is sustainable. The bulk is by means of shift in the composition, I know the growth were charging being higher than the average, it was for -- I mean on a client-by-client basis it is very difficult for us to charge different than the rest of the market because we'll be outsized by many eager competitors. So, our increase in margins has a lot to do with change in the shift. We are a more retail-oriented franchise than the average for the system. And accordingly, we have specifically improved that shifting, of course taking care of costs and positioning levels, but probably not at the level that we saw in the second quarter; something in between the first and the second quarter net interest margin should be more sustainable, may be this margin the next three to four quarters.

Thank you.

We'll take a follow-up question from Saul Martinez with Bear Stearns.

Hi, I just have a very quick follow-up question. You said the coverage of your risk index was 114%, which is a good point, but I was just curious how was that evolved historically-- is that inline with your historical forms or did that come down over the last few quarters?

No, of course it has come down. When our pre-merger levels -- both the banks had done a risk index of 1.4 or less; now it's close to 1.9 and the absolute levels of provision are being fairly constant. So, it was higher but it was simply due to the point we said -- the relevant coverage is associated with the risk index and not necessarily with the capacity loans. So, what happen is that the historically our risk index has been in our terms slightly higher than our positive loans in the last three or four quarters has been the opposite and that trend we expect to be reversing, and I don't know how soon, but in the future because usually the risk index in our case, given that we are very conservative in terms of classification, etcetera, of loan, [inaudible] should be in a medium term -- a medium to long-term; they should be very similar. But in the short term they can diverge. So, the coverage was higher, but it seems that it's above 100% as it should be.

Okay, thank you.

And gentlemen it appears we have no further questions at this time.

Okay. Thank you all very much for taking the time to participate in today's call. We look forward to speaking with you again soon. Have a good day.

Once again this does concludes today's conference call. We thank you for your participation. You may now disconnect.