Banco Santander Chile (BSAC) 2003 Q4 法說會逐字稿

Welcome to the Banco Santander Santiago fourth 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 at 011-562-647-6474.

For opening remarks and introductions, I will now turn the call over to Mr. Robert Morenoh. Please go ahead sir.

Good morning. Welcome to Banco Santander-Santiago's fourth quarter results conference call. I am Robert Morenoh, Manager of Investor Relations, and I am joined today by (inaudible), Manager of Strategic Planning.

Thank you for joining us to discuss the bank's fourth quarter and year-end results for 2003. Afterwards we will be happy to answer your question.

In 2003 net income totaled 206,975 million Chilean pesos, equivalent to 1.10 pesos per share and 1.90 dollars per ADR, increasing 30.3% when compared to 2002. Excluding one term merger costs last year, net income increased approximately 5% in 2003. In 2003 the bank improved all of its major leading ratios despite the fact in the first half of 2003 the bank was still immersed in the merger process.

Throughout the year the bank focused on increasing profitability by focusing on fee income, cost savings, and improving the asset and funding mix in order to minimize the negative effects of the strong fallen interest rates and inflation rates on the banks margins. As a result the bank's net interest margin remains stable at 4.5%. Fee income increased 12.5% and operating expenses decreased 13.6%.

This offset the 8.9% decrease in net interest income in the year. With these positive results, ROE reached 24.2% in 2003 compared to 18.9 in 2002. The efficiency ratio reached a record low 43.5% and the ratio of fees over cost also reached its maximum level at 44.7% in 2003. Most importantly the bank finished the year with a total market share of 33.5% of all profits in the Chilean banking system.

With 22.6% market share of loans, the bank was able to generate 24% of all net interest income, 26% of all fee income and just 19.6% of total costs. This clearly demonstrates the banks successful focus on profitability and shareholder value over simply balance sheet growth. The evolution of results in 2003 also showed a constant evolution of net income.

In the first half of the year the bank completed the merger with successful integration of systems and the revision of credit quality and the combined loan portfolio. Once these tasks were terminated, the bank experienced an important jump in net income despite lower interest rate and inflation rates.

This was especially true in the last quarter of this year. Net income for the fourth quarter of 2003 reached 65,852 million Chilean pesos, equivalent to 0.35 pesos per share and 0.61 dollars per ADR, an increase in 72.6% compared to merger adjusted net income of the fourth quarter of 2002. The banks ROE in the quarter reached 32.3%, an efficiency ratio of 42.4%.

As was the case in the rest of the year, the bank strategy of increasing fee income and focusing on cost savings coupled with lower provision expense and higher market related gains offset the adverse effects of negative inflation and lower interest rates. At the same time, the growth rate of consumer loans, demand deposit and mutual funds also accelerated benefiting the bank's net income.

Net financial income in the fourth quarter decreased 13.8% compared to the same quarter of 2002. In this same period average-earning assets decreased 10.5% and the banks net interest margin decreased 20 basis points to 4.7%. The fall in net interest margin was mainly due to the negative inflation rate and the low interest rate.

In the current quarter, the inflation rate was minus 0.15% compared to positive 1.76% in the same quarter of 2002, as the bank has a positive gap in inflation linked assets this resulted in a lower margin. For the year 2003, CPI inflation reached a record low 1.4%. It is expected that these low inflation levels and its effects over margins will continue throughout the first quarter of 2004.

The lower interest rates also placed pressure on margins, especially in the corporate banking segment. In the fourth quarter, the Chilean central bank reduced, again, the short term rate 50 basis points to 2.25% and an additional 50 basis points in January 2004 effecting margins as interest earning assets repriced at a lower rate and the spread earned over the banks non-interest bearing liabilities and capitals continues to contract.

But it is important to point out the bank has been actively defending the net interest margin by improving both its asset and funding mix. As a result, the bank's net interest margin increased from 4.2% in the third quarter 2003 to 4.7% in the last quarter of the year. Loans in Banefe, the bank's division for middle and lower income individuals and micro-businesses, increased 7% in the year in real term and 2.7% between the end of the third and fourth quarter of 2003, a 10.8% annualized rate.

At the same time, total consumer lending grew 8.5% in 12 months and grew at an annualized rate of 18.4% in the final quarter of the year. The funding mix also improved. Non-interest bearing liabilities increased 10.6% between the end of the third and fourth quarters. The ratio of average non-interest bearing demand deposits and equity of refunds to average interest earnings assets rose to 23.4% in the fourth quarter of 2003 compared to 18.5% at the end of last year. Overall, the bank's net interest margin for the full year remains stable at 4.5% despite low rates and inflation.

The bank also increased the gap between its net interest margin and the net interest margins of the Chilean banking industry. Fee income continues to be one of the main drivers of growth. Net fee income on an adjusted basis rose 12.5% compared to the fourth quarter of 2002. This rise in fee income was due to an increase in various business lines.

Compared to the fourth quarter of 2002, checking account fees were up 17.6%. Credit card fees rose 33.5%. ATM fees increased 9.5%. Financial advisory fees were up 13.3% and insurance brokerage fees grew 8.9%. This growth is a result of the continued focus on the sale and higher usage of fee intensive products throughout the year, especially credit card and insurance product in retail banking and new mutual funds and cash management services in corporate banking.

With this growth in fee income, the bank now leads the major Chilean banks in the fees over costs ratio. On a consolidated basis, this ratio reached 44.7% in 2003 and 46.2% on an unconsolidated basis compared to 32.6% for the Chilean banks as a whole.

The reduction of total operating expenses in the fourth quarter adjusting for the effects of the sale of C&R subsidiary reached 10.7% with a 4.8% decrease in personnel expenses and a 21% reduction in administrative costs. The main driver of the positive evolution of the banks cost structure continues to be the savings and synergies produced by the merger.

Total head count has decreased 15.7% since the beginning of the merger process. As the 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 1,200 basis points better than the banking sector ratio with a steady improvement in this indicator since the beginning of this year.

Regarding provisions, total provisions for loan losses decreased 14% compared to the fourth quarter of 2002. Improvement of the banks active quality was also apparent to the evolution of the risk index, which improved from 1.93% in the third quarter of 2003 to 1.88% in the fourth quarter of 2003.

The bank has also restructured its collection procedures to improve loan loss recovery levels. As a part of the process in the fourth quarter the bank sold a subsidiary, Cobranzas y Recaudaciones Limitada, that managed a loan loss recovery from former Banco Santiago, to an external company that former Banco Santander-Chile used for its recovery process. The bank's recovery efforts have now been fully centralized under the same external company.

During the quarter, loan loss recoveries increased 115.5% and 53.4% compared to the fourth quarter of 2002 and the third quarter of 2003 respectively. The bank recognized a large recovery in the real estate sector in December, which totaled 2,050 million Chilean pesos. Past due loan at December 31, 2003 decreased 7.6% compared to September 30, 2003 and the coverage ratio also improved to 99.1% of past due loans as of the end of the year compared to 94.3% as of September. With this positive evolution of net income, especially in the second half of 2003, the bank steadily improved its profitability levels.

As of December, the bank was once again leading the industry in terms of profitability after starting the year with ROE's close to the market average. In conclusion, despite 2003 being a merger period, the bank was able to achieve excellent indicators with a steady increase in core revenues. Fees rose continuously as various commercial efforts matured at a pace - faster pace than expected.

At the same time, cost savings from the merger exceeded our expectations. Passive quality indicators have also begin to improve after the thorough credit review in the first quarter, which had also permit the bank to increase more aggressively the loan portfolio in 2004. Margins were negatively affected by the decline in inflation and interest rates, but the evolution of margin has continued to out perform the rest of the banking system.

These trends we expect to continue in 2004 with a more positive macro environment and no more merger related distractions. This should also lead to stronger commercial activity and loan growth. The bank is already preparing for this higher growth scenario and will invest in branches and commercial executives accordingly.

For this reason, we are confident that Santiago is well positioned for growth in the coming quarters. At this time we will gladly answer any questions you may have.

Thank you. The question and answer session will be conducted electronically. [OPERATOR INSTRUCTIONS]. We'll go first to Jason Mollin of Bear Stearns.

Hi. Good morning. This is actually, Juan Pertita (ph) from Bear Stearns. I have two questions. The first is related to the performance in the fourth quarter of fee income. There was significant decline quarter over quarter, part of it you say it's due to lower mortgage fees but the decline was five billion versus the fees of 400 million less. So if you could explain that a little bit.

And also, if you could explain the accounting of the C&R subsidiary sale, why were fees and expenses reversed? And is there any other line item that was affected by this transaction? Thank you.

OK. Regarding the first question. If you adjust for the - between the third and fourth quarters of 2003, on an adjusted basis fees fell 7.7%. Part of this has to do with the fact that in banks in Chile there is insurance mortgage related fees that have some seasonality, and the big chunk of these fees are recognized in the third quarter and not so much in the fourth quarter.

That explains part of this fall. The other fall is also have to do with some one time extraordinary fees in the third quarter related to some financial advisory, in fact, financial advisory fees in the years have grown very strongly but they're very lumpy. So basically the fall between the third and fourth quarter is just seasonality and some lumpy fees that are recurring on a yearly basis but not so much on a quarter by quarter.

The good news is that the main fees, credit cards, insurance, not the mortgage but everything else, checking account, ATM's, all of that is upward trending on a quarterly sequential basis. Regarding the C&R, C&R was a small subsidiary. They basically had almost no book value. This company was in charge of the collections for former Banco Santiago, and the bank is somewhat merger related but the bank is in the process of reorganizing all its collections and centralizing all of them in external company. We outsource it to an external company that collects solely for the bank.

So the bank does this in order to, obviously, improve a loan asset recoveries. As you already saw this is happening in the quarter. So what happened is that this company basically had two line items, fee income, these are fees charged to clients for collection procedures, and costs. And as this company was sold, it was sold including all the results of the year and so in the fourth quarter this company doesn't exist so the results were zero. In the third quarter this company had a certain level of income from fees and expenses through costs. They are no longer there in the fourth quarter and that's why you have this fall in fees and in expenses between the third and fourth quarter.

So in order to clean that out, we just added back in so you get the real growth rates between the third and fourth quarter. OK. Going forward, the levels - the accounting levels you see of fees and of costs are the levels you should see going forward with growth or with the number of growths in the business. OK. I don't know if that's clear.

Yes. Thank you. If I could follow up just with your expectations for fee income growth in '04?

OK. We're not giving too much guidance in terms of exact numbers we budgeted, but the fee growth you saw in 2003 is something we want to improve on in 2004. We think there's a lot of room. Basically, one, because of the economy and as the economy improves, unemployment comes down, people start spending more.

One other main thing is, obviously, the credit cards. We're really putting a lot of emphasis on people using more of their credit cards, buying more. Second of all, the mutual fund industry after a very poor first half in 2003 has recovered greatly. Since March to December, mutual funds under management grew like 30%. So that's great.

Insurance, the bank is launching roughly two products per quarter, very simple, low cost insurance products. For example, in the summer we just launched something that you get coverage if you have a theft in your house. Very cheap and it covers any unfortunate incident. So the bank going forward we should see double-digit fee growth, at least that's what we're expecting.

Thank you.

[OPERATOR INSTRUCTIONS]. We'll go next to Yolanda Courtines of JP Morgan.

Good morning. I have a couple of questions. One is just if you could talk a little bit - I can see the progress that you're making on the asset side of the balance sheet. You're also seeing a little bit of improvement in funding mix. How much can Banefe contribute to improved funding costs going forward in terms of the debit card business? Or is that a marginal element?

And then just as a clarification on loan growth, one of the categories that grew the most were contingent loans. If you could just remind me again what that accounts for?

OK. Regarding Banefe, Banefe still in terms of funding is low in terms of the percentage of the non-interest bearing liability, but the growth rates have been actually very good there. So it - in terms of the absolute amount it's still low but in terms of growth I think we've seen interesting growth.

And going forward we think there's enormous potential for various reasons. One is that as the economy picks up and growth say four, five percent, the amount of bank authorization actually goes up more than that because Chile, as in many emerging markets, the income level distribution is a pyramid. So, when unemployment begins to go down and when the economy is growing four to five percent, the amount of people passing the threshold of becoming bank actually grows more than that.

That's why, basically, the consumer loans grow at a multiple over GDP. That is also true on the funding side, because as you know in Chile there are a lot of areas that are very well banked and they have this high penetration. But one area which is very low penetration is everything that's checking, debit cards, basically because of the pyramid of income levels.

So just to give you an example, debit cards in Chile in 1998 represented the amount of transactions and debit card was zero. The amount of debit card transactions in 2003 was roughly 25 million. OK? So you can see the growth rate the debit card transactions are increasing and this has a lot to do with increase in penetration in the Banefe segment. Also as the bank becomes more efficient you're also able to penetrate lower income segments because you're more efficient and Banefe is actually more efficient than the bank.

Banefe has efficiency levels less than 40%. So going forward we think that one of Banefe's main area's of interest isn't just consumer lending business, is getting a persons full banking business. So much on the asset side as the liability side. And the other thing, the contingent loan, the big thing with contingent loans is that a lot of them are basically - you are guaranteed for a lot of foreign trade operations.

So a lot of the bank's foreign trade business either goes to foreign trade loans or to the contingent loan, and that's why basically the bank has been deemphasizing the lending - pure lending point rates in order to increase the spread, is really trying to go through the guarantee side. Obviously we're trying to fund through other banks outside of Chile and we're just acting as a guarantor. That increases the overall spread of our foreign trade business and in fact our foreign trade business if you look at it in the balance sheet is plain and simple as following, but it includes what we're doing to the contingent loans is growing around 30%.

Also since the contingent loans are mainly in dollars, that also affects the growth rate between one quarter and another. But as I said, we're doing a lot more business of our foreign trade loan business through the contingent loan side and not through the foreign trade loan, basically as a way to increase the spread of that business.

Thank you.

So going forward you should see that growing. OK.

Great. Thanks.

[OPERATOR INSTRUCTIONS]. We'll go next to Louise Vayman (ph) of Credit Suisse First Boston.

Hi. Would you please elaborate a little bit on the nature of the increase for other operating expenses this quarter?

OK. Other operating expenses is a line item which mainly consists of expense related to our sales force. OK? So basically as we sold more consumer loans, a lot of this is done through our external sales force. Remember the bank has a very large external sales force, which basically they are all their income is variable. That's why this is considered other operating expense.

And as you sell more consumer loans, that item goes up accordingly. So going forward that is something you should relate to the growth of consumer lending.

So we should expect about the same level for the next quarter?

Yes. Yes.

OK. Thank you.

And Mr. Morenoh, it appears we have no further questions. I'll turn the conference back over to you for any additional or closing remarks.

Well, thank you all very much for taking time to participate in today's call. We look forward to speaking with you again soon. Have a very nice day.