Banco Santander Chile (BSAC) 2003 Q3 法說會逐字稿

Welcome to the Banco Santander Chile's third quarter 2003 earnings conference call. As a reminder, this call is being recorded. If you have not received a copy of today's release, please call Desiree Soulodre (ph) at 011-562-647-6474. For opening remarks and introduction, I will now turn the call over to Mr. Raimundo Monge (ph). Please go ahead sir.

Thank you very much. Good morning ladies and gentlemen. Welcome to Banco Santander Chile's third quarter results conference call. I am Raimundo Monge, Director of Corporate Strategy and Financial Planning of the bank, and I am joined today by Roberto Moreno, Investor Relations Manager. Thank you for joining us to discuss the bank's third quarter results. Afterwards, we will be happy to answer your questions.

Net income for the third quarter of 2003 totaled CLP 49.678b, increasing 44.6% compared to the third quarter of 2002, that is equivalent to CLP 0.26 per shares and 0.41 per ADR.

High fee income increased cost of savings and lower provisions more than offset the fall in net interest income during the quarter. Return over average capital and reserves in the period reached a solid 24.3%. The bank's net fee income rose 8.4% compared to the second quarter of 2002 and 9.9% compared to the second quarter of this year.

The bank has continued to place great emphasis on increasing the sale and usage of fee based products in both the retail and corporate segments. This strategy has been maturing at a more rapid pace than expected, as the bank has created innovative products and ideas that have had a strong response from our clients.

One of the important commercial activities launched in the quarter was a special promotion designed to increase the usage of credit cards by giving discounts on the purchase of gasoline during the weekend. In Chile, the acquisition of gas is usually paid for using checks or cash. Through this promotion, the bank has more than doubled the usage of credit cards on weekends and weekdays alike. Credit card fees increased 36.6% compared to the third quarter of last year.

The bank has also launched various simple and low cost insurance products in 2003 that has boosted the insurance brokerage fees. These include health insurance, credit card and check fraud insurance, and property and casualty insurance. As a result, the insurance brokerage fees increased 21.3% compared to the third quarter of 2002.

Finally, in mutual funds, the bank has recently launched Chile's first mutual fund denominated in [air loss] and the first fund with a guaranteed return. The higher yield of fixed income instruments and the recovery of the stock market have also fueled the growth of mutual funds. The bank has been proactively encouraging clients to invest in mutual funds instead of short-term deposits, as mutual funds offer better yield for the client and the banks generate fee income.

As a result, fee income from mutual funds under management increased 12.2% compared to the end of the second quarter 2003. And asset management fees rose 7.3% in the same period, reversing the negative tendency observed in the first half of the year.

The bank's strategy of steadily increasing fee income has improved the ratio of the fees over cost compared to its peers. On an unconsolidated basis, the ratio of fee income over operating expenses reached 0.6% as of September 2003, compared to 32.6% for the Chilean system as a whole.

The reduction of total operating expenses in the quarter, excluding one-time merger costs incurred in the third quarter of 2002, reached 17.3% with a 14.5% decrease in personnel expenses, and a 24.9% reduction in administrative costs. The main driver of this positive evolution of the Bank's cost structure continues to be the savings and synergies produced by the merger.

Total headcount has decreased 14% since the beginning of the merger process. The 2.1% rise in personnel expenses, compared to the end of the second quarter 2003, was mainly due to our one-time expense incurred in connection with the signing of a new collective bargaining agreement with the bank's main unions. These new agreements expire in the fourth quarter of 2007. In the process, the bank [standardized] benefit among former Santiago and Santander Chile employees, with no relevant increase in cost, while maintaining healthy labor relations with our employees and unions.

As I result of this positive evolution of costs, the bank continues to be a leader in efficiency in a highly efficient banking system. On an unconsolidated basis, the bank's efficiency ratio was 1,110 basis points better than the banking sector ratio, with a steady improvement in this indicator since the beginning of this year.

Total provision for loan losses decreased 33.2% compared to second quarter of 2002. This was mainly due to a decrease in provision, following the culmination of the credit review process during the merger and the asset quality indicators. Past due loans at September 30, 2003 remained flat compared to June 30, 2003. Loans over 30 days past due decreased 1.5% in the same period, and loans rated B minus, C and D, according to the Superintendence of Bank's rating system, also decreased 2.3% in the same period.

As a result, the past due loan ratio and the bank's risk index remains stable at 2.38% and 1.93% respectively, compared to the same indicators as of June 30, 2003. The coverage, with provisions of the risk index, reached 116% at the end of the third quarter, compared to 114% at the end of the second quarter of this year.

Net financial income in the third quarter decreased 15% compared to the third quarter of 2002 and net interest margin reached 4.2%. The fall in net financial income and margins was mainly due to an abnormally low inflation rate in the quarter. As the bank has the positive GAAP in US denominated assets which are linked to inflation, these resulted in a lower margin as the spread between this inflation adjusted assets and peso denominated liabilities consequently decreased.

The US GAAP resulted from the bank investing in liquid low-risk financial investments denominated in the US. Despite the fluctuation in the bank's inter quarter margins, as a result of the fluctuations of the inflation rate, the spread obtained for the upper price of the yield curve benefited by [higher] margins, as currently the yield curve has a steep, positive slope.

The bank net interest income in the quarter was also effected by the decrease in average earning assets. This was partially offset by an increase in high yield consumer lending. Loans in Banefe (ph) increased 2.7% compared to the end of the second quarter, and 5.3% in the last 12 months.

It is important to point out that, as a result of the improving asset mix, the steep yield curve and the better funding mix, the bank's net interest margin has remained relatively stable compared to last year, despite the low inflation and the interest rate environment.

The bank's net interest margin for the nine month period ended September 30, 2003 reached 4.5% compared to 4.6% in the same period of 2002. The evolution of the bank's margin compared to the rest of the banking sector has also been favorable. As of September 2003, the bank's margins were 24 basis points higher than the Chilean financial system, net financial margin on an unconsolidated basis.

With the positive evolution of net income in the second and third quarters of 2003, the bank has continued to improve its profitability levels, a market share of total banking profits. As of September, the bank was generating 31% of all profits in the Chilean banking industry. The bank's ROE is 35% higher than the average for the industry.

In conclusion, and following the trend of the second quarter, profitability levels continue to recover. In the quarter the bank is experiencing a steady increase in fee income in various segments and products, as various commercial efforts mature at a faster pace than what we expected. At the same time, cost savings for the merger continue to drive an important reduction in our cost base.

Asset quality again showed some improvement which was felt in the more normalized level of provision expenses.

Finally, the bank's margins were negatively effected by the temporarily decline in inflation and the decrease in average interest earning assets. But the evolution of margins has continued to outperform the rest of the banking system.

With the recovery of the economy and the stabilization of credit issues, the bank is now poised for a greater growth area. For this reason, we are confident that Santander Chile is well positioned for growth in the coming quarters.

At this time we will gladly answer any questions you might have.

Thank you. The question and answer session will be conducted electronically. If you would like to ask a question, you may do so by pressing the * key followed by 1 on your touch tone telephone. If you are on a speakerphone, please make sure that your mute function is turned off to allow your signal to reach our equipment. Once, again, if you do have a question please press *1 now. We will go first to Sylvia Biggio (ph) of Goldman Sachs.

Good morning. We saw a very meaningful drop in provisions this quarter to about 1.1% of average loans, which is basically the pre-merger levels for Santander Chile on a standalone basis. Do you think that is a provision rate that we should expect going forward, assuming that the economy will recover and by the next year it keeps growing?

Yes, we think that they were approaching our steady state level of provisions in this quarter. And from now on it will be a mixture of a better operational environment which should result in lower provisions required. But at the same time, a higher demand at the provision level due to the more retail composition of our loan mix.

So, at the end of the day, the [guidance] instructing, we should expect the level from now on around 1.1% of total loans as an ongoing steady state level of provisions.

Thank you Raimundo

And as a reminder, if you do have a question, please press *1 now. We will go next to Gustavo Guran (ph) of BBBA Banco (ph) Met.

Yes, good morning. Can you give us your expectations on the margin for the fourth quarter and what it should average in 2004? And then I have a follow-up question.

Okay, in terms of margin, as we discussed in the last conference call, the level of the second quarter was too high and the level of these quarters is too low. So the average, as we discussed before, has been around 4.5%. We expect that level to be relatively sustainable in the future because, although we have margin pressures due to the low inflation and low interest rate environment, the level of inflation, we saw this quarter, is abnormally low. It should increase in the last quarter and next year.

And at the same time, interest rates. Most economies expect them to be either stable or increasing in the next year. So that is why we think that, although we are still not giving any projections for 2004, a level of around 4.5-4.6% could be a good projection for the rest of the year, and that is an average.

Okay, very good. I know you have achieved dramatic progress on expense reductions from the merger but do you see further extending this in 2004? Can you give us an expense indication for next year, whether it is going to be down or flat compared to 2003?

Okay, two things. We are anticipating more long growth and more commercial activity in the year 2004 than in the year 2003. Remember that this year has been a merger period for Santander. So, although we have rushed things in order to have a very clean and very well executed merger, we have had a slowing down of commercial activity. Because people are being retrained in the new systems, in the new products, etc., which of course competes with their time. And they had less time able this year to do commercial activity.

And accordingly, in the year 2004, that constraint should not be present. In terms of cost savings, I would say that we have already advanced very much in, what we could call, the first stage of cost reductions. The more obvious type of reduction comes in after a merger, where you do not need to have all the systems area or two boards. A number of costs that you can relatively easily reduce.

And now we are entering into an ongoing process which is kind of cultural in Grupo Santander, of having a very streamlined operation. And there we have discovered a lot of space. So, although we should not expect the rate of decrease to be sustainable, we think we have enough space to sustain a level of efficiency. Probably beyond the level that we have observed during this year. Especially because, as compared to the average for the 2004 and the average for the year 2003, even though we finished the merger in the first half, the average will be better in 2004 than 2003.

But looking forward, we think that cost should be very much under control. Same with the number of people working in the bank. And the trick will be done by means of fully using our technological platform very easily. All the changes in the system have been finished and it will allow us to grow without any major constraint coming from the systems. This is very relevant if you are trying to grow more retail.

So, I think that customers should be given the good news in the next year. We do not expect a large increase in our cost base, except if we are seeing good opportunities on the commercial side that sometimes require some further investment.

Okay, thank you very much.

As a final reminder, if you do have a question, please press *1 now. We will go next to Assian Wodare (ph) of J. P. Morgan.

Hello, good morning. My question is with regard to fees. We are seeing a lot of good progress and it seems like you are going to achieve a 15% growth in 03 versus 02. What is the growth rate that you are expecting for next year in fees? And the second question is just with regards to demand deposits. If you can explain a little bit more what happened in the quarter with demand deposits? Thank you.

Okay. In terms of fees, we think we have positive news, and the outlook is increasingly rosier because we have launched a number of initiatives and they are paying back relatively rapidly. In the sense that, for example in credit cards. In credit cards, some people will say 'well but you have 36% of the plastic which is outstanding', which is true. But the fact is that less than 4% of the total transactions in Chile are done with credit cards.

So our real competition is coming from the use of cash and the use of checks. So that is why we think we have space to improve because it is a matter of changing the habits of our clients. Regardless of trying to increase our market share in terms of plastic, the real challenge there is usage. And if we analyze, we are focusing on five areas to boost our fee base. Each of them has its own logic and, accordingly, we think we have a big potential for growth.

How high can we grow in the year 2004 and the rest of the year? Probably we should expect some acceleration of the rate we are seeing during the year 2003, as many of these initiatives will be maturing. And we have a number of tricks in the bag here for the next year as well. So, I think that probably a two digit figure is a good bet for the year and for next year, something around that or slightly higher than that.

With high demand deposits, what happened is the following. That in February we had a fraud that was associated with a company called [Ingralink]. There arose a lot of concerns about the security of the mutual funds in terms of having difficulties, and there was a run against mutual funds. That money came into the banks, especially to the larger banks. I believe, in our case, we increased our market share in demand deposits.

But it was a [category] situation, and now that people are increasingly more confident of the solvency or the quality standards of the mutual fund industry, that money is going back to mutual funds as we saw. We increased by 12.2% our mutual fund volume. So the money that came flying to quality and looking for safety in the banks, is now moving back to funds.

So it is something quite normal with this unexpected event that happened at the beginning of the year, which is now starting to reverse.

Thank you Raimundo. Just one final question. With better prospects now on fees and also on provisions, what is the level of profitability that we might expect for next year?

We are just doing our calculations and our budget but I can answer you on the negative side. With this being a merger period and with the economy increasing, we really have no excuses to have a level of profitability lower than this year. So the answer is probably high on that average for 2003. How high, we are not able at this moment to comment.

Thank you very much.

We will go next to Gustavo Guran with a follow-up.

Yes, a question on loan growth. I know you have been running down your corporate portfolio and been conservative in many respects. But with the economy picking up, what do you expect your growth to be next year for the sector and for yourselves?

Okay, for the sector is anybody's guess but we are using as a parameter for our budget something around 5-6% real growth, which is like 9% nominal growth for the system as an average. With a higher growth in the retail related activities and a lower level, something around 3-4% in corporate activities.

This sticks very much with the strategy of the bank because, as you mentioned before, we have been trying to increase the profitability of our corporate activity. And in some cases, that requires reducing the total exposure with some clients which is counter intuitive but it is a fact.

So, looking forward, the bank does not have targets in terms of market share or even loan growth targets because our targets are expressed in terms of EPS growth, the ROE, efficiency and the relationship between fees and costs. Again, as the bank is organized, around classes of clients, what we have sure is that we will requiring area to area to increase the bottom line contribution.

If that can be achieved by means of loan growth, it is fine, and the other areas are more focused on fees and cash management. For example, large corporations, will be seen in non-lending activities. Whereas, in the retail activities, we are focusing more on lending activities.

So, bottom line, probably we should be growing around the average for the system. But, again, do not take my word because we do not have explicit targets in terms of loan growth. Loan growth is a result of the strategy and not the driver of the strategy. Profitability is our driver.

Right, fair enough. Thank you very much.

Mr. Monge there appears we have no further questions. I will turn the conference back over to you for any additional or closing remarks.

Okay. Well, thank you 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.

And that concludes today's conference. We thank you all for your participation. You may now disconnect your phone.